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The document describes the performance management system used by a firm of solicitors. It discusses how each divisional partner prepares budgets that are then amended by the senior partner without discussion. The Corporate partner is asked to explain a variance where staff costs exceeded budget but chargeable time was lower. She criticizes the system for focusing only on financial performance.

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0% found this document useful (0 votes)

160 views

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Uploaded by

Usama malik

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You are on page 1/ 352

Performance Pillar

P2 – Performance Management

P2 – Performance Management
26 May 2010 – Wednesday Afternoon Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, make
annotations on the question paper. However, you will not be allowed, under
any circumstances, to open the answer book and start writing or use your
calculator during this reading time.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

You will require graph paper for your answer to question 6.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 6.

Section B comprises 2 questions and is on pages 8 to 11.

Maths tables and formulae are provided on pages 13 to 16.

The list of verbs as published in the syllabus is given for reference on page
19.

Write your candidate number, the paper number and examination subject title
in the spaces provided on the front of the answer book. Also write your
contact ID and name in the space provided in the right hand margin and seal
to close.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2010

SECTION A – 50 MARKS

[Note: The indicative time for answering this section is 90 minutes.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

The budget for the production cost of a new product was based on the following assumptions:
(i) Time for the 1st batch of output = 10 hours
(ii) Learning rate = 80%
(iii) Learning will cease after 40 batches, and thereafter the time per batch will be the
same as the time of the final batch during the learning period, i.e. the 40th batch
(iv) Standard direct labour rate per hour = $12·00

An extract from the out-turn performance report based on the above budget is as follows:
Budget Actual Variance

Output (batches) 60 50 10 adverse

Direct labour hours 163·53 93·65 69·88 favourable

Direct labour cost $1,962 $1,146 $816 favourable

Further analysis has shown that, due to similarities between this product and another that was
developed last year, the rate of learning that should have been expected was 70% and that
the learning should have ceased after 30 batches. Other budget assumptions for the new
product remain valid.

Required:

(a) Prepare a revised out-turn performance report for the new product that

(i) shows the flexed budgeted direct labour hours and direct labour
cost based on the revised learning curve data, and

(ii) shows the variances that reconcile the actual results to your flexed
budget in as much detail as possible.
(7 marks)

(b) Explain why your report is more useful to the production manager than the
report shown above.
(3 marks)

Note: The learning index values for an 80% and a 70% learning curve are -0·3219 and
-0·5146 respectively.
(Total for Question One = 10 marks)

Performance Management 2 May 2010

Question Two

PQ manufactures and sells consumer electronics. It is constantly working to design the latest
gadgets and “must-haves” which are unique in the market place at the time they are
launched. The management of PQ are aware of the short product life cycles in this
competitive market and consequently use a market skimming pricing strategy at the
introduction stage.

Required:
Explain the changes that are likely to occur in the following items at the three later stages
in the product life cycle of a typical PQ product.

(i) Selling price

(ii) Production costs
(iii) Selling and marketing costs

(Total for Question Two = 10 marks)

Section A continues on page 4

TURN OVER

May 2010 3 Performance Management

Question Three

XY, a company that manufactures a range of timber products, is considering changing to a

just-in-time (JIT) production system.
Currently XY employs staff who are contracted to work and be paid for a total of 3,937·75
hours per month. Their labour efficiency ratio is 96% and, as a result, they are able to
produce 3,780 standard hours of output each month in normal working hours.
Overtime working is used to meet additional demand, though the management of XY try to
avoid the need for this because it is paid at a 50% premium to the normal hourly rate of $10
per hour. Instead, XY plan production so that in months of lower demand inventory levels
increase to enable sales demand to be met in other months. XY has determined that the cost
of holding inventory is $6 per month for each standard hour of output that is held in inventory.
XY has forecast the demand for its products for the next six months as follows:
Month Demand
(Standard
hours)
1 3,100
2 3,700
3 4,000
4 3,300
5 3,600
6 4,980

You may assume that all production costs (other than labour) are either fixed or are not driven
by labour hours worked, and that there is zero inventory at the start of month 1 and at the end
of month 6. Assume also that production and sales occur evenly during each month at
present, and that the minimum contracted hours will remain the same with the JIT system.

Required

(a) With the current production system,

(i) Calculate for each of the six months and the period in total, the total inventory
holding costs.
(ii) Calculate the total production cost savings made by changing to a JIT
production system.
(6 marks)

(b) Explain TWO other factors that should be considered by XY before

changing to a JIT production system.

(4 marks)

(Total for Question Three = 10 marks)

Performance Management 4 May 2010

Question Four

A firm of solicitors is using budgetary control during 2010. The senior partner estimated the
demand for the year for each of the firm’s four divisions: Civil, Criminal, Corporate, and
Property. A separate partner is responsible for each division.
Each divisional partner then prepared a cost budget based on the senior partner’s demand
estimate for the division. These budgets were then submitted to the senior partner for his
approval. He then amended them as he thought appropriate before issuing each divisional
partner with the final budget for the division. He did not discuss these amendments with the
respective divisional partners. Actual performance is then measured against the final budgets
for each month and each divisional partner’s performance is appraised by asking the
divisional partner to explain the reasons for any variances that occur.
The Corporate partner has been asked to explain why her staff costs exceeded the budgeted
costs for last month while the chargeable time was less than budgeted. Her reply is below:
“My own original estimate of staff costs was higher than the final budgeted costs shown on
my divisional performance report. In my own cost budget I allowed for time to be spent
developing new services for the firm’s corporate clients and improving the clients’ access to
their own case files. This would improve the quality of our services to clients and therefore
increase client satisfaction. The trouble with our present system is that it focuses on financial
performance and ignores the other performance indicators found in modern performance
management systems.”

Required:

(a) Discuss the present budgeting system and its likely effect on divisional partner
motivation.

(6 marks)

(b) Explain two non-financial performance indicators (other than client

satisfaction and service quality) that could be used by the firm.

(4 marks)

(Total for Question Four = 10 marks)

Section A continues on page 6

TURN OVER
May 2010 5 Performance Management
Question Five

LMN comprises three trading divisions plus a Head Office. There is a director for each trading
division and, in addition, there is a Managing Director who is based in Head Office. Divisional
directors are empowered to make decisions concerning the day to day operations of their
division and investment decisions requiring an initial investment up to $100,000. Investment
decisions involving greater initial expenditure must be authorised by the Managing Director.
Inter-divisional trading occurs between all of the trading divisions. The transfer prices are
determined by Head Office. Head Office provides services and facilities to each of the trading
divisions.
At the end of each month, the actual costs of Head Office are apportioned to the trading
divisions. Each Head Office cost is apportioned to the trading divisions using an appropriate
basis. The bases used are: number of employees; value of sales; capital invested; and
standard hours of service delivered.
The Head Office costs, together with the costs and revenues generated at divisional level, are
summarised in a divisional performance statement each month. The divisional directors are
not happy with the present performance statement and how it is used to appraise their
performance.

Required:
(a) Explain, using examples from the scenario, three issues that LMN should
consider when designing a new divisional performance statement.
(6 marks)

LMN is thinking of introducing Activity Based Costing at its Head Office to help with
the apportionment of all its costs to the divisions.

(b) Discuss the advantages of applying Activity Based Costing to apportion all
of the Head Office costs.
(4 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A

Section B starts on page 8

Performance Management 6 May 2010

This page is blank

TURN OVER

May 2010 7 Performance Management

SECTION B – 50 MARKS

[Note: The indicative time for answering this section is 90 minutes.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

RT produces two products from different quantities of the same resources using a just-in-time
(JIT) production system. The selling price and resource requirements of each of the products
are shown below:

Product R T

Unit selling price ($) 130 160

Resources per unit:

Direct labour ($8 per hour) 3 hours 5 hours

Material A ($3 per kg) 5 kgs 4 kgs

Material B ($7 per litre) 2 litres 1 litre

Machine hours ($10 per hour) 3 hours 4 hours

Market research shows that the maximum demand for products R and T during June 2010 is
500 units and 800 units respectively. This does not include an order that RT has agreed with
a commercial customer for the supply of 250 units of R and 350 units of T at selling prices of
$100 and $135 per unit respectively. Although the customer will accept part of the order,
failure by RT to deliver the order in full by the end of June will cause RT to incur a $10,000
financial penalty.
At a recent meeting of the purchasing and production managers to discuss the production
plans of RT for June, the following resource restrictions for June were identified:

Direct labour hours 7,500 hours

Material A 8,500 kgs
Material B 3,000 litres
Machine hours 7,500 hours

Performance Management 8 May 2010

Required:

(a) Assuming that RT completes the order with the commercial customer,
prepare calculations to show, from a financial perspective, the optimum
production plan for June 2010 and the contribution that would result from
adopting this plan.
(6 marks)

(b) Prepare calculations to show, from a financial perspective, whether RT should

complete the order from the commercial customer
(3 marks)

You have now presented your optimum production plan to the purchasing and
production managers of RT. During your presentation it became clear that the predicted
resource restrictions were rather optimistic. In fact the managers agreed that the
availability of all of the resources could be as much as 10% lower than their original
predictions.

(c) Assuming that RT completes the order with the commercial customer, and
using graphical linear programming, prepare a graph to show the optimum
production plan for RT for June 2010 on the basis that the availability of all
resources is 10% lower than originally predicted.
(11 marks)

(d) Discuss how the graph in your solution to (c) above can be used to help to
determine the optimum production plan for June 2010 if the actual
resource availability lies somewhere between the managers’ optimistic
and pessimistic predictions.
(5 marks)

(Total for Question Six = 25 marks)

Section B continues on page 10

TURN OVER
May 2010 9 Performance Management
Question Seven

H manufactures perfumes and cosmetics by mixing various ingredients in different processes,

before the items are packaged and sold to wholesalers. H uses a divisional structure with
each process being regarded as a separate division with its own manager who is set
performance targets at the start of each financial year which begins on 1 January.
Performance is measured using Return on Investment (ROI) based on net book value of
capital equipment at the start of the year. The company depreciates its capital equipment at
the rate of 20% per annum on a reducing balance basis. The annual depreciation is
calculated at the start of the financial year and one-twelfth of this annual amount is included
as monthly depreciation in the fixed overhead costs of each process. Output transferred from
one process to another is valued using transfer prices based on the total budgeted costs of
the process plus a mark-up of 15%.
Process B
This is the first process. Raw materials are blended to produce three different outputs, two of
which are transferred to Processes C and D respectively. The third output is accounted for as
a by-product and sold in the external market without further processing. The equipment used
to operate this process originally cost $800,000 on 1 January 2005.
The Process B account for April 2010 was as follows:
Litres $ Litres $
Opening WIP NIL NIL Normal Loss 3,000 3,000
Material W 10,000 25,000 By-product 5,000 5,000
Material X 5,000 10,000 Output to C 9,000 82,800
Material Y 12,000 24,000 Output to D 10,000 92,000
Direct labour 30,000 Closing WIP NIL NIL
Overhead 75,000
Profit & Loss 18,800

Totals 27,000 182,800 Totals 27,000 182,800

The material costs are variable per unit of input and direct labour costs are fixed in the short
term because employees’ contracts provide them with a six month notice period. Overhead
costs include a share of Head Office costs, and of the remaining overhead costs some vary
with the input volume of the process. The level of activity in April 2010 was typical of the
monthly volumes processed by the company.
Process C
This process receives input from Process B to which is added further materials to produce a
finished product that is sold in the external market at the budgeted selling price of $20 per
litre. The equipment used to operate this process originally cost $500,000 on 1 January 2008.

The Process C account for April 2010 was as follows:

Litres $ Litres $
Opening WIP 1,000 11,200 Normal Loss 3,000 1,500
Input from B 9,000 82,800 Abnormal Loss 1,500 750
Material Z 3,000 15,000 Output 7,500 150,000
Direct labour 20,000 Closing WIP 1,000 11,200
Overhead 50,000
Profit & Loss 15,550

Totals 13,000 179,000 Totals 13,000 179,000

The material costs are variable per unit of input and direct labour costs are fixed in the short
term because employees’ contracts provide them with a six month notice period. Overhead
costs include a share of Head Office costs, and of the remaining overhead costs some vary
with the input volume of the process. The level of activity that occurred in April 2010 was
typical of the monthly volumes processed by the company, and the opening and closing work
in process are identical in every respect. The process is regarded as an investment centre
and completed output and losses are valued at their selling prices. The manager of Process
C is concerned at the level of output achieved from the input volume and is considering

Performance Management 10 May 2010

investing in new equipment that should eliminate the abnormal loss. This would involve
investing $1,000,000 in new processing equipment on 1 January 2011; the existing
equipment would be sold on the same date at a price equal to its net book value.
Process D
This process receives input from Process B which is further processed to produce a finished
product that is sold in the external market at the budgeted selling price of $16 per litre. The
equipment used to operate this process originally cost $300,000 on 1 January 2000.
The Process D account for April 2010 was as follows:
Litres $ Litres $
Opening WIP 1,000 5,500 Normal Loss 1,000 3,000
Input from B 10,000 92,000 Output 9,000 144,000
Direct labour 30,000 Closing WIP 1,000 5,500
Overhead 30,000 Profit & Loss 5,000

Totals 11,000 157,500 Totals 11,000 157,500

Direct labour costs are fixed in the short term because employees’ contracts provide them
with a six month notice period. Overhead costs include a share of Head Office costs, and of
the remaining overhead costs some vary with the input volume of the process. The level of
activity in April 2010 was typical of the monthly volumes processed by the company, and the
opening and closing work in process are identical in every respect. The process is regarded
as an investment centre and completed output and losses are valued at their selling prices.
The manager of Process D believes that the transfer price from Process B is unfair because
the equivalent material could be purchased in the open market at a cost of $7·50 per litre.

Required

(a)
(i) Calculate the annualised Return on Investment (ROI) achieved by each
of the process divisions during April 2010.
(4 marks)

(ii) Discuss the suitability of this performance measure in the context of the
data provided for each process division.
(4 marks)
(b)
(i) Calculate the effect on the annualised Return on Investment in 2011 of
Process Division C investing in new capital equipment.
(4 marks)

(ii) Discuss the conflict that may arise between the use of NPV and ROI in
this investment decision.

(4 marks)

(c) Discuss the transfer pricing policy being used by H from the viewpoints of
the managers of Process Division B and Process Division D.
(9 marks)
(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

May 2010 11 Performance Management
Maths tables and formulae are on pages 13 to 16

Performance Management 12 May 2010

PRESENT VALUE TABLE

Present value of 1 unit of currency, that is 1 r 

n
where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

May 2010 13 Performance Management

Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1 (1 r )  n
each year for n years r

Periods Interest rates (r)

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

Performance Management 14 May 2010

FORMULAE

PROBABILITY

A  B = A or B. A  B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A  B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A  B) = P(A) + P(B) – P(A  B)

Rules of Multiplication
If A and B are independent:: P(A  B) = P(A) * P(B)
If A and B are not independent: P(A  B) = P(A) * P(B | A)

E(X) =  (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
x  fx
x  x (frequency distribution)
n f

Standard Deviation
( x  x ) 2  fx 2
SD  SD   x 2 (frequency distribution)
n f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
 w   1 

 Po 
Price: x 100
w

Q 
 w   1 
Quantity:
 Qo  x 100
w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

May 2010 15 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1  
r  [1  r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

LEARNING CURVE

Yx = aXb
where:
Yx = the cumulative average time per unit to produce X units;
a = the time required to produce the first unit of output;
X = the cumulative number of units;
b = the index of learning.

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 16 May 2010

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May 2010 17 Performance Management

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Performance Management 18 May 2010

LIST OF VERBS USED IN THE QUESTION REQUIREMENTS
A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.
It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION
Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

Level 2 - COMPREHENSION
What you are expected to understand. Describe Communicate the key features
Distinguish Highlight the differences between
Explain Make clear or intelligible/State the meaning or
purpose of
Identify Recognise, establish or select after
consideration
Illustrate Use an example to describe or explain
something
Level 3 - APPLICATION
How you are expected to apply your knowledge. Apply Put to practical use
Calculate Ascertain or reckon mathematically
Demonstrate Prove with certainty or to exhibit by
practical means
Prepare Make or get ready for use
Reconcile Make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table

Level 4 - ANALYSIS
How are you expected to analyse the detail of Analyse Examine in detail the structure of
what you have learned. Categorise Place into a defined class or division
Compare and contrast Show the similarities and/or differences
between
Construct Build up or compile
Discuss Examine in detail by argument
Interpret Translate into intelligible or familiar terms
Prioritise Place in order of priority or sequence for action
Produce Create or bring into existence

Level 5 - EVALUATION
How are you expected to use your learning to Advise Counsel, inform or notify
evaluate, make decisions or recommendations. Evaluate Appraise or assess the value of
Recommend Advise on a course of action

May 2010 19 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

May 2010

Wednesday Afternoon Session

Performance Management 20 May 2010

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO

Performance Pillar

P2 – Performance Management
P2 – Performance Management
23 May 2012 – Wednesday Afternoon Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 6.

Section B comprises 2 questions and is on pages 8 to 11.

Maths tables and formulae are provided on pages 13 to 16.

The list of verbs as published in the syllabus is given for reference on page
19.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2012

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

A company is developing a new product. During its expected life it is expected that 8,000
units of the product will be sold for $90 per unit.

The direct material and other non-labour related costs will be $45 per unit throughout the life
of the product.

Production will be in batches of 1,000 units throughout the life of the product. The direct
labour cost is expected to reduce due to the effects of learning for the first four batches
th
produced. Thereafter the labour cost will remain at the same cost per batch as the 4 batch.
The direct labour cost of the first batch of 1,000 units is expected to be $40,000 and a 90%
learning effect is expected to occur.

There are no fixed costs that are specific to the product.

Required:

(a)
(i) Calculate the average direct labour cost per batch of the first four batches.
(2 marks)
th
(ii) Calculate the direct labour cost of the 4 batch.
(2 marks)
(iii) Calculate the contribution earned from the product over its lifetime.

(2 marks)
Note: The learning index for a 90% learning curve = -0.152

Due to the low lifetime product volume of 8,000 units the company now believes that
learning may continue throughout its entire product life.

(b) Calculate the rate of learning required (to the nearest whole percentage)
to achieve a lifetime product contribution target of $150,000, assuming
that a constant rate of learning applies throughout the product’s life.

(4 marks)
(Total for Question One = 10 marks)

Performance Management 2 May 2012

Question Two

A small town with a population of 35,000 has a community library. The nearest alternative
library is 15 miles away. A further 20,000 people live within a ten mile radius of the town. Of
these, 5,000 people live nearer to the alternative library.

The library has 25,000 registered users and on average each of the registered users borrows
two books and one DVD every week. The library has 125,000 books and 50,000 DVDs on its
inventory lists, though this is constantly changing as old items are removed and new items
are added.

The library offers a variety of types of book and DVD in order to attract interest from a large
range of potential users, and for some of the more popular items it has more than one copy.

The library does not charge a fee to its users; it is funded by donations and by government.
However it does need to measure its performance and is considering the use of a Balanced
Scorecard.

Required:

(a) Explain the key features of the Balanced Scorecard approach to

performance measurement.
(4 marks)

(b) State TWO perspectives of the Balanced Scorecard and for EACH of
these, recommend with reasons, ONE performance measure that could
be used to measure the performance of the library.
(6 marks)

(Total for Question Two = 10 marks)

Section A continues on the next page

TURN OVER
May 2012 3 Performance Management
Question Three

A company has prepared the following summary from its functional budgets for the year
ended 30th September 2013.
$000 $000
Sales (100,000 units) 1,500

Opening inventory (zero units) nil

Production costs (115,000 units):

Direct materials 460
Direct labour 575
Variable overhead 115
Fixed overhead 230

1,380

Closing inventory (15,000 units) 180

Cost of Sales 1,200

Gross Profit 300

Other overhead costs 200

Net Profit 100

The directors of the company have now met to review the above statement. They have
decided to revise the budget as follows:
• Due to competition, reduce the selling price by $5 per unit and despite the reduction
in selling price the demand for the product will reduce to 90,000 units.

• Increase some of the unit production costs: direct labour by 10% and variable
overhead by 5%. No change is expected to any other costs.

• Reduce production to 100,000 units.

Required:

(a) Prepare a summary statement (in the same format as that shown above)
which clearly shows the effect of all of the changes proposed by the
directors of the company.
(6 marks)

(b) Discuss the motivational factors in involving functional managers in the

setting of functional budgets.
(4 marks)

(Total for Question Three = 10 marks)

Performance Management 4 May 2012

Question Four

A company has predicted its sales demand for each of the four quarters of 2013 as follows:
Quarter 1 2 3 4
Sales volume (units) 100,000 110,000 190,000 140,000

The company has a normal production capacity of 135,000 units per quarter without needing
to utilise any overtime working. However the capacity can be increased by up to 40% by
working overtime.
It is current company policy to manufacture units using a constant level production system.
This means that although the opening and closing levels of inventory for the year are zero
units there are increases and decreases in the quarterly inventory levels. On this basis the
selling price, variable production costs and contribution for 2013 are expected to be as
follows:
$ per unit
Selling price 90.00

Direct materials 30.00

Direct labour 35.00
Variable production overhead 10.00 75.00

Contribution 15.00

However, any overtime working will increase the unit direct labour cost by 50% and the unit
variable production overhead cost by 30% for those units produced during overtime working.
In addition, the company incurs a storage cost of $4 per unit per quarter for each item that is
held in inventory. These costs are not included in the production costs above.
The company is considering whether it should change to a just-in-time (JIT) production
system, but is concerned that due to the fluctuating levels of its sales demand this may not be
financially beneficial. If the company did change to a JIT production system:
• No inventory would be held.
• There would be no change in the behaviour of variable production costs.

Required:

(a) Calculate the cost of holding inventory (based on average inventory levels
in each of the quarters) for each of the quarters and the year in total under
the current production system. Assume that sales occur evenly during
each quarter.
(4 marks)

(b) Calculate the financial impact of changing to a JIT production system.

(6 marks)

(Total for Question Four = 10 marks)

TURN OVER
May 2012 5 Performance Management
Question Five

A company uses “total cost plus” pricing. Recent results show that profits are falling and that
the company is losing market share in what is becoming a very competitive market.

Required:

(a) Explain TWO disadvantages of “total cost plus” pricing.

(4 marks)

(b) Explain how target costing could be of benefit to the company.

(6 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A
Section B starts on page 8

Performance Management 6 May 2012

This page is blank

TURN OVER

May 2012 7 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

WRX manufactures three products using different quantities of the same resources. Details of
these products are as follows:
Product W R X
$/unit $/unit $/unit
Market selling price 90 126 150

Direct labour ($7/hour) 14 28 35

Material A ($3/kg) 15 12 21
Material B ($6/kg) 24 36 30
Variable overhead ($4/hour) 8 16 20
Fixed overhead 12 7 12
73 99 118

Profit 17 27 32

The management of WRX has predicted the demand for these products for July as follows:

Product W 500 units

Product R 800 units
Product X 1,600 units

These demand estimates do NOT include an order from a major customer to supply 400 units
per month of each of the three products, at a discount of $10 per unit from the market selling
price.

During July the management of WRX anticipate that there will be a shortage of material B,
and that only 17,500 kgs will be available.

It is not possible for WRX to hold inventory of any raw materials, work in progress or finished
products.

Performance Management 8 May 2012

Required:

(a) Prepare calculations to show the optimum product mix to maximise

WRX’s profit for July, assuming that the order with the major customer is
supplied in full.
(7 marks)

WRX has now realised that the contract with the major customer does not have
to be met in full for any of the three products. The customer will accept whatever
WRX is prepared to supply at the contracted prices but they will charge a
financial penalty if WRX does not supply them in full in July.

(b) Calculate the lowest value of the financial penalty that the major customer
would need to insert in the contract to ensure that WRX meets its order in
full in July.

(8 marks)

(c) Now that you have presented your answers to (a) and (b) above to the management
team of WRX, the production manager has advised that, due to holidays, the number of
direct labour hours available will be reduced to a total of 9,800 hours in July.

A decision has been made that WRX will fulfil its order with the major customer in full in
July, and it has been agreed that a linear programming model will be used to determine
the optimum usage of the resources that will be available after setting aside those
required for the major customer’s order.

Required:
(i) Identify the objective function and the constraints to be used in the linear
programming model to determine the optimum usage of the remaining
resources to maximise the company’s profits for July.
(6 marks)

(ii) The optimal solution has been determined as:

W 500 units
R 0 units
X 880 units

Explain which of the constraints you stated in (c)(i) are binding on the
solution. (You are not required to draw a graph.)
(4 marks)
(Total for Question Six = 25 marks)

Section B continues on the next page

TURN OVER

May 2012 9 Performance Management

Question Seven

The GHYD company comprises two divisions: GH and YD.

GH manufactures components using a specialised machine. It sells the same components

both externally and to YD. The variable costs of producing the component are as follows:

$/unit
Direct materials 25.00
Direct labour 35.00
Variable overhead 10.00
70.00

GH currently sells its components to the external market for $125 per unit.

GH also sells 4,000 components per month to YD. These are transferred at the same price as
the external selling price.

YD uses two of these components in each unit of its CX product. The current selling price of
the CX product is $375 per unit and at this selling price the demand for the CX is 2,000 units
per month. The variable costs of producing a unit of CX are as follows:

$/unit
Direct materials 35.00
Components transferred from GH @ $125 each 250.00
Direct labour 15.00
Variable overhead 10.00

At this level of activity the total monthly contribution earned by YD from the sale of the CX
product is $130,000.

An analysis of the demand for the CX product indicates that for every $25 increase in its
selling price the monthly demand would reduce by 500 units, and that for every $25 decrease
in its selling price demand would increase by 500 units.

Note: If P = a - bx then MR = a - 2bx

Performance Management 10 May 2012

Required:

(a)

(i) Calculate the selling price per unit of CX that would maximise the profits
generated by that product for the YD division.
(4 marks)

(ii) Calculate, based on the selling price you calculated in (a)(i) above, the
monthly contribution that CX would generate for:

• GHYD as a whole
• GH division
• YD division

Note: Your answer should show three separate amounts.

(6 marks)

(b) GHYD has now reviewed its transfer pricing policy and decided that all
transfer prices should be set so as to lead to optimal decision making for
the company as a whole. Assuming that the transfer price for the
component is changed to reflect this new policy:
(i) Calculate the selling price per unit of CX that would maximise the profits
earned by CX for the company as a whole. Note: you should assume
that there is sufficient capacity within the company.
(4 marks)

(ii) Calculate, based on the selling price you calculated in (b)(i) above, the
monthly contribution that CX would generate for:

• GHYD as a whole
• GH division
• YD division

Note: Your answer should show three separate amounts.

(3 marks)

(c) Discuss, using your answers to (a) and (b) above, the impact that
alternative transfer prices have on the divisional profits of GH and YD and
on the company as a whole.
(8 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 13 to 16

May 2012 11 Performance Management

This page is blank

Performance Management 12 May 2012

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

May 2012 13 Performance Management

CUMULATIVE PRESENT VALUE TABLE
Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

Performance Management 14 May 2012

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

May 2012 15 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

LEARNING CURVE
b
Yx = aX
where:
Yx = the cumulative average time per unit to produce X units;
a = the time required to produce the first unit of output;
X = the cumulative number of units;
b = the index of learning.

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 16 May 2012

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May 2012 17 Performance Management

This page is blank

Performance Management 18 May 2012

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

May 2012 19 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

May 2012

Wednesday Afternoon Session

Performance Management 20 May 2012

Performance Pillar

P2 – Performance Management
P2 – Performance Management
24 November 2010 – Wednesday Afternoon Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 6.

Section B comprises 2 questions and is on pages 8 to 11.

Maths tables and formulae are provided on pages 13 to 16.

The list of verbs as published in the syllabus is given for reference on page
19.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2010

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

The following variances have been calculated in respect of a new product:

Direct labour efficiency variance $14,700 Favourable

Direct labour rate variance $ 5,250 Adverse

The variances were calculated using standard cost data which showed that each unit of the
product was expected to take 8 hours to produce at a cost of $15 per hour. Actual output of
the product was 560 units and actual time worked in the manufacture of the product totalled
3,500 hours at a cost of $57,750.

However, the production manager now realises that the standard time of 8 hours per unit was
the time taken to produce the first unit and that a learning rate of 90% should have been
anticipated for the first 600 units.

Required:

(a) Calculate planning and operating variances following the recognition of the
learning curve effect.
(6 marks)
(b) Explain the importance of learning curves in the context of Target Costing.
(4 marks)
Note: The learning index for a 90% learning curve is -0.1520

(Total for Question One = 10 marks)

Performance Management 2 November 2010

Question Two

CAL manufactures and sells solar panels for garden lights. Components are bought in and
assembled into metal frames that are machine manufactured by CAL. There are a number of
alternative suppliers of these solar panels. Some of CAL’s competitors charge a lower price,
but supply lower quality panels; whereas others supply higher quality panels than CAL but for
a much higher price.
CAL is preparing its budgets for the coming year and has estimated that the market demand
for its type of solar panels will be 100,000 units and that its share will be 20,000 units (i.e.
20% of the available market). The standard cost details of each solar panel are as follows:
$ per unit
Selling price 60
Bought - in components (1 set) 15
Assembly & machining cost 25
Delivery cost 5 45
Contribution 15

An analysis of CAL’s recent performance revealed that 2% of the solar panels supplied to
customers were returned for free replacement, because the customer found that they were
faulty. Investigation of these returned items shows that the components had been damaged
when they had been assembled into the metal frame. These returned panels cannot be
repaired and have no scrap value. If the supply of faulty solar panels to customers could be
eliminated then, due to improved customer perception, CAL’s market share would increase to
25%.

Required:

(a) Explain, with reference to CAL, quality conformance costs and quality non-
conformance costs and the relationship between them.
(4 marks)

(b) Assuming that CAL continues with its present systems and that the
percentage of quality failings is as stated above:

(i) Calculate, based on the budgeted figures and sales returns rate, the
total relevant costs of quality for the coming year.

(4 marks)

(ii) Calculate the maximum saving that could be made by implementing

an inspection process for the solar panels, immediately before the
goods are delivered.
(2 marks)

(Total for Question Two = 10 marks)

Section A continues on page 4

TURN OVER

November 2010 3 Performance Management

Question Three

QW is a company that manufactures machine parts from sheet metal to specific customer
order for industrial customers. QW is considering diversification into the production of metal
ornaments. The ornaments would be produced at a constant rate throughout the year. It then
plans to sell these ornaments from inventory through wholesalers and via direct mail to
consumers.
Presently, each of the machine parts is specific to a customer’s order. Consequently, the
company does not hold an inventory of finished items but it does hold the equivalent of one
day’s production of sheet metal so as to reduce the risk of being unable to produce goods
demanded by customers at short notice. There is a one day lead time for delivery of sheet
metal to QW from its main supplier though additional supplies could be obtained at less
competitive prices.
Demand for these industrial goods is such that delivery is required almost immediately after
the receipt of the customer order. QW is aware that if it is unable to meet an order
immediately the industrial customer would seek an alternative supplier, despite QW having a
reputation for high quality machine parts.
The management of QW is not aware of the implications of the diversification for its
production and inventory policies.

Required

(a) Compare and contrast QW’s present production and inventory policy and
practices with a traditional production system that uses constant production
levels and holds inventory to meet peaks of demand.

(5 marks)

(b) Discuss the importance of a Total Quality Management (TQM) system in a

just-in-time (JIT) environment. Use QW to illustrate your discussion.

(5 marks)

(Total for Question Three = 10 marks)

Performance Management 4 November 2010

Question Four

DW, a transport company, operates three depots. Each depot has a manager who reports
directly to the Operations Director.
For many years the depot managers have been asked by the Operations Director to prepare
a budget for their depot as part of the company’s annual budgeting process. A new depot
manager has been appointed to the Southern region and he has concerns about the validity
of these annual budgets. He argues that they soon become out of date as operational
circumstances change. At a recent manager’s meeting he said, “They are restrictive. They do
not permit the depot managers to make decisions in response to operational changes, or
change working practices for next year until that year’s budget has been approved.”

Required:
(a) Explain the differences between the above annual budgeting system and a
rolling budget system.
(4 marks)

(b) Discuss how the Southern region depot manager could use a rolling budget
system to address his concerns.
(6 marks)

(Total for Question Four = 10 marks)

Section A continues on page 6

TURN OVER

November 2010 5 Performance Management

Question Five

XY provides accountancy services and has three different categories of client: limited
companies, self employed individuals, and employed individuals requiring taxation advice.
XY currently charges its clients a fee by adding a 20% mark-up to total costs. Currently the
costs are attributed to each client based on the hours spent on preparing accounts and
providing advice.
XY is considering changing to an activity based costing system. The annual costs and the
causes of these costs have been analysed as follows:

$
Accounts preparation and advice 580,000
Requesting missing information 30,000
Issuing fee payment reminders 15,000
Holding client meetings 60,000
Travelling to clients 40,000

The following details relate to three of XY’s clients and to XY as a whole:

Client XY
A B C
Hours spent on preparing accounts and
providing advice 1,000 250 340 18,000
Requests for missing information 4 10 6 250
Payment reminders sent 2 8 10 400
Client meetings held 4 1 2 250
Miles travelled to meet clients 150 600 0 10,000

Required:
Prepare calculations to show the effect on fees charged to each of these three clients of
changing to the new costing system.
(10 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A

Section B starts on page 8

Performance Management 6 November 2010

This page is blank

TURN OVER

November 2010 7 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

LM produces two products from different quantities of the same resources using a just-in-time
(JIT) production system. The selling price and resource requirements of each of these two
products are as follows:
Product L M
Unit selling price ($) 70 90

Variable costs per unit:

Direct labour ($7 per hour) 28 14
Direct material ($5 per kg) 10 45
Machine hours ($10 per hour) 10 20

Fixed overheads absorbed 12 6

Profit per unit 10 5

Fixed overheads are absorbed at the rate of $3 per direct labour hour.
Market research shows that the maximum demand for products L and M during December
2010 will be 400 units and 700 units respectively.
At a recent meeting of the purchasing and production managers to discuss the company’s
production plans for December 2010, the following resource availability for December 2010
was identified:
Direct labour 3,500 hours
Direct material 6,000 kg
Machine hours 2,000 hours

Required:

(a) Prepare calculations to show, from a financial perspective, the optimum

production plan for December 2010 and the contribution that would result
from adopting your plan.
(6 marks)

Performance Management 8 November 2010

(b) You have now presented your optimum plan to the purchasing and production
managers of LM. During the presentation, the following additional information became
available:

(i) The company has agreed to an order for 250 units of product M for a selling
price of $90 per unit from a new overseas customer. This order is in addition to
the maximum demand that was previously predicted and must be produced
and delivered in December 2010;

(ii) The originally predicted resource restrictions were optimistic. The managers
now agree that the availability of all resources will be 20% lower than their
original predictions.

Required:

Construct the revised resource constraints and the objective function to be used to
identify, given the additional information above, the revised optimum production plan
for December 2010.
(6 marks)

(c) The resource constraints and objective function requested in part (b) above have now
been processed in a simplex linear programming model and the following solution has
been printed:

Product L 400 Product L other value 0

Product M 194 Product M other value 506
Direct labour 312
Direct material ($) 1.22
Machine hours 312
Contribution ($) 10,934.00

Required:

Analyse the meaning of each of the above eight values in the solution to the problem.
Your answer should include a proof of the five individual values highlighted in bold.

(13 marks)

(Total for Question Six = 25 marks)

Section B continues on page 10

TURN OVER

November 2010 9 Performance Management

Question Seven

SWZ is a manufacturing company that has many trading divisions. Return on Investment
(ROI) is the main measure of each division’s performance. Each divisional manager’s salary
is linked only to their division’s ROI.

The following information summarises the financial performance of the S division of SWZ over
the last three years:
Year ending 31 October 2008 2009 2010
$000 $000 $000
Turnover 400 400 400
Cost of sales 240 240 240
Gross profit 160 160 160
Other operating costs 120 104 98
Pre-tax operating profit 40 56 62

Capital invested as at the end of the year 400 320 256

Other operating costs include asset depreciation calculated at the rate of 20% per annum on
a reducing balance basis.
The figures shown in the above table for the capital invested as at the end of the year is the
net book value of the division’s fixed assets.
All of the above values have been adjusted to remove the effects of inflation. There have
been no additions or disposals of fixed assets within the S division during this period.

Required

(a) Discuss the performance of the S division over the three year period.
(9 marks)

Performance Management 10 November 2010

The manager of the S division is now considering investing in a replacement machine. The
machine that would be replaced would be sold for its net book value which was $40,000 at 31
October 2010 and the new machine would cost $100,000. The new machine would have an
expected life of five years and would be depreciated using the same depreciation rates as the
existing machinery. The new machine would reduce the division’s cost of sales by 10%. At
the end of five years it would be sold for its net book value.
The divisional cost of capital is 8% per annum. The company has evaluated the investment
and correctly determined that it has a positive Net Present Value (NPV) of $24,536.

Required

(b) Prepare calculations to show why the manager of the S division is unlikely to
go ahead with the investment.
Ignore taxation.
(11 marks)

(c) Prepare calculations to show how the use of Residual Income (RI) as the
performance measure would have led to a goal congruent decision by the
manager of the S division in relation to the purchase of the replacement
machine.

Ignore taxation.
(5 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

November 2010 11 Performance Management

Maths tables and formulae are on pages 13 to 16

Performance Management 12 November 2010

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

November 2010 13 Performance Management

Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

Performance Management 14 November 2010

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑ f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

November 2010 15 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 16 November 2010

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November 2010 17 Performance Management

This page is blank

Performance Management 18 November 2010

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

November 2010 19 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

November 2010

Wednesday Afternoon Session

Performance Management 20 November 2010

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO

Performance Pillar

P2 – Performance Management
P2 – Performance Management
20 November 2013 – Wednesday Afternoon Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 6.

Section B comprises 2 questions and is on pages 8 to 11.

Maths tables and formulae are provided on pages 13 to 16.

The list of verbs as published in the syllabus is given for reference on page
19.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2013

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

PWR is a manufacturing company that is about to launch a new product: Product Z. Details of
the variable costs incurred in producing one unit of Product Z are as follows:

Labour $25 per hour

Materials $52 per unit
Variable overheads $5 per labour hour

Learning curve
Product Z is produced in batches of 10 units. The first batch of 10 units is expected to take
15 labour hours. There will be 95% learning curve that will continue until 64 batches have
been produced.

Note: The learning index for a 95% learning curve = -0.074

Required:

(a)
th
(i) Calculate the time required to produce the 64 batch of Product Z.

(3 marks)
th
(ii) Calculate the total variable cost of the 64 batch of Product Z.

(2 marks)

(b) Explain THREE conditions that must exist in the production process of
Product Z for the learning curve effect to be realised.
(5 marks)

(Total for Question One = 10 marks)

Performance Management 2 November 2013

Question Two

SXL is a specialist car manufacturer that produces various models of car. The organisation is
th
due to celebrate its 100 anniversary next year. To mark the occasion, SXL intends to
produce a sports car; the Model S. As this will be a special edition, production will be limited
to 1,000 Model S cars.
SXL is considering using a target costing approach and has conducted market research to
determine the features that consumers require in a sports car. Based on this market research
and knowledge of competitors’ products, SXL has decided to price the Model S at $19,950.
SXL requires an operating profit margin of 25% of the selling price of the car. Details for the
forthcoming year are as follows:
Forecast direct costs for a Model S car
Labour $5,000
Material $9,500

Forecast annual overhead costs

$ Cost driver
Production line cost 4,630,000 See note 1
Transportation costs 1,800,000 See note 2

Note 1
The production line that would be used for Model S has a capacity of 60,000 machine hours
per year. The production line time required for Model S is 6 machine hours per car. This
production line will also be used to make other cars and will be working at full capacity.

Note 2
Some models of cars are delivered to showrooms using car transporters. 60% of the
transportation costs are related to the number of deliveries made. 40% of the transportation
costs are related to the distance travelled.

The car transporters are forecast to make a total of 640 deliveries in the year and carry 10
cars each time. The car transporter will always carry its maximum capacity of 10 cars.

The total annual distance travelled by car transporters is expected to be 225,000km.

50,000km of this is for the delivery of Model S cars only. All 1,000 Model S cars that will be
produced will be delivered in the year using the car transporters.

Required:

(a)
(i) Calculate the forecast total cost of producing and delivering a Model S car
using activity based costing principles to assign the overhead costs.

(4 marks)

(ii) Calculate the value of any cost gap that currently exists between the forecast
total cost and the target total cost of a Model S car.

(2 marks)

(b) Explain TWO potential advantages to SXL of using target costing for the
Model S car.
(4 marks)
(Total for Question Two = 10 marks)

November 2013 3 Performance Management

Question Three

HRS is a food producer that makes low cost processed food that it sells to supermarkets.
HRS produces only one type of processed food product and production techniques have
remained largely unchanged for a number of years.
Over recent months, sales have been falling steadily. Consumer tastes are changing to
favour natural ingredients and supermarkets have reflected this in the products that they offer
for sale.
HRS is keen to address the decline in sales and recently held a meeting to discuss the
performance of the organisation. The Management Accountant suggested to the Managing
Director that the performance of HRS could be improved by implementing Total Quality
Management (TQM) principles and adopting Kaizen costing concepts. Currently the control
systems of HRS focus on material price and usage.
The Managing Director is sceptical of the Management Accountant’s suggestions and is
unclear as to whether they are suitable for the company.

Required:

(a) Explain TWO concepts of Kaizen costing.

(4 marks)

(b) Explain THREE conditions that must exist for TQM to be successfully
implemented at HRS.

(6 marks)

(Total for Question Three = 10 marks)

Section A continues on the opposite page

Performance Management 4 November 2013

Question Four

CHX is a retail bank. The lending division within CHX sells a loan product, Product L.
CHX is part owned by the Government and is required by the Government to produce ‘Low’
and ‘High’ gross profit forecast scenarios each year for comparison against actual
performance.
Gross profit is calculated as:
Total lending income less total funding cost
Total lending income = total average balance multiplied by customer lending rate
Total funding cost = total average balance multiplied by funding rate
In order to calculate the total average balance for the ‘Low’ and ‘High’ forecast scenarios,
CHX uses its actual total average balance from the previous year as a starting point.

Product L
Previous year actual total average balance $1,650m

‘High’ scenario assumptions

Total average balance (movement on previous year’s actual) +2%
Customer lending rate 8.8%
Funding rate 4.15%

‘Low’ scenario assumptions

Total average balance (movement on previous year’s actual) -25%
Customer lending rate See note
Funding rate 4.55%

Note: It is expected that during the year it will be necessary to lower the customer lending
rate in order to compete with other banks. Therefore it is expected, that under the ‘Low’
scenario, that the customer lending rate will be 7.90% on 40% of the total average balance
and 5.90% on the remainder of the total average balance.

Required:

(a) Produce calculations to determine the forecast gross profit for Product L,
under both the ‘Low’ forecast scenario and the ‘High’ forecast scenario.

(6 marks)

(b) Explain the potential advantages and disadvantages of the use of

spreadsheets by CHX in developing forecast scenarios.
(4 marks)

(Total for Question Four = 10 marks)

Section A continues on the next page

TURN OVER
November 2013 5 Performance Management
Question Five

HIJ is a cosmetics company that produces perfume. The perfume market is very competitive
and subject to frequent changes.
The finance team at HIJ prepare monthly rolling budgets as part of their planning and
management control process.
The data for the forthcoming new budget period are as follows:
The variable cost of producing a bottle of perfume is $21.
The planned selling price of a bottle of perfume is $45 and at this selling price the demand
for perfume is expected to be 125,000 bottles. Information from the marketing division at
HIJ suggests that for every $3 increase in the selling price the customer demand would
reduce by 10,000 bottles, and that for every $3 decrease in the selling price the customer
demand would increase by 10,000 bottles.
Note: If P = a - bx then MR = a - 2bx

Required:

(a) Calculate the revenue that HIJ would earn if the selling price of a bottle of
perfume was set so that profits would be maximised for the forthcoming
budget period.
(6 marks)

(b) Discuss the use of rolling budgets in the planning and management
control process at HIJ.
(4 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A
Section B starts on page 8

Performance Management 6 November 2013

This page is blank

November 2013 7 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

DLW is a company that builds innovative, environmentally friendly housing. DLW’s houses
use high quality materials and the unique patented energy saving technology used in the
houses has been the result of the company’s own extensive research in the area.
DLW is planning to expand into another country and has been asked by a prominent person
in that country for a price quotation to build them a house. The Board of Directors believes
that securing the contract will help to launch their houses in the country and have agreed to
quote a price for the house that will exactly cover its relevant cost.
The following information has been obtained in relation to the contract:
1. The Chief Executive and Marketing Director recently met with the potential client to
discuss the house. The meeting was held at a restaurant and DLW provided food and
drinks at a cost of $375.
2. 1,200 kg of Material Z will be required for the house. DLW currently has 550 kg of
Material Z in its inventory purchased at a price of $58 per kg. Material Z is regularly
used by DLW in its houses and has a current replacement cost of $65 per kg. The
resale value of the Material Z in inventory is $35 per kg.
3. 400 hours of construction worker time are required to build the house. DLW’s
construction workers are paid an hourly rate of $22 under a guaranteed wage
agreement and currently have spare capacity to build the house.
4. The house will require 90 hours of engineer time. DLW engineers are paid a monthly
salary of $4,750 each and do not have any spare capacity. In order to meet the
engineering requirement for the house, DLW can choose one of two options:

(i) Pay the engineers an overtime rate of $52 per hour to perform the additional work.

(ii) Reduce the number of engineers’ hours available for their existing job, the building of
Product Y. This would result in lost sales of Product Y.

Summary details of the existing job the engineers are working on:

Information for one unit of Product Y

Sales revenue $4,860
Variable costs $3,365

Engineers’ time required per unit 30 hours

5. A specialist machine would be required for 7 weeks for the house build. DLW have 4
weeks remaining on the 15 week specialist machine rental contract that cost $15,000.
The machine is currently not in use. The machine can be rented for an additional 15
weeks at a cost of $15,250. The specialist machine can only be rented in blocks of 15
weeks.
Alternatively, a machine can be purchased for $160,000 and sold after the work on the
house has been completed for $140,000.

Performance Management 8 November 2013

6. The windows required for the house have recently been developed by DLW and use
the latest environmentally friendly insulating material. DLW produced the windows at a
cost of $34,950 and they are currently the only ones of their type. DLW were planning
to exhibit the windows at a house building conference. The windows would only be
used for display purposes at the conference and would not be for sale to prospective
clients.
DLW has had assurances from three separate clients that they would place an order for
25 windows each if they saw the technology demonstrated at the conference. The
contribution from each window is $10,450. If the windows are used for the contract,
DLW would not be able to attend the conference. The conference organisers will
charge a penalty fee of $1,500 for non-attendance by DLW. The Chief Executive of
DLW can meet the clients directly and still secure the orders for the windows. The
meetings would require two days of the Chief Executive’s time. The Chief Executive is
paid an annual salary of $414,000 and contracted to work 260 days per year.

7. The house build requires 400kg of other materials. DLW currently has none of these
materials in its inventory. The total current purchase price for these other materials is
$6,000.

8. DLW’s fixed overhead absorption rate is $37 per construction worker hour.

9. DLW’s normal policy is to add a 12% mark-up to the cost of each house.

Required:
(a) Produce a schedule that shows the minimum price that could be quoted
for the contract to build the house.
Your schedule should show the relevant cost of each of the nine items
identified above. You should also explain each relevant cost value you
have included in your schedule and why any values you have excluded
are not relevant.
(17 marks)
(b) Explain TWO reasons why relevant costing may not be a suitable
approach to pricing houses in the longer term for DLW.
(4 marks)
(c) Recommend, with justifications, a pricing strategy for DLW to use to price
the innovative, environmentally friendly houses when they are launched in
the new country.

(4 marks)
(Total for Question Six = 25 marks)

Section B continues on the next page

TURN OVER

November 2013 9 Performance Management

Question Seven

CD is a producer of soft drinks. The company has two divisions: Division C and Division D.
Division C manufactures metal cans that are sold to Division D and also to external
customers. Division D produces soft drinks and sells them to external customers in the cans
that it obtains from Division C.
CD is a relatively new company. Its objective is to grow internationally and challenge the
existing global soft drinks producers. CD aims to build its brand based on the distinct taste of
its soft drinks.

Division C annual budget information $

Market selling price per 1,000 cans 130
Variable costs per can 0.04
Fixed costs 2,400,000
Net assets 4,000,000

Production capacity 40,000,000 cans

External demand for cans 38,000,000 cans
Demand from Division D 20,000,000 cans

Division D annual budget information $

Selling price per canned soft drink 0.50
Variable costs per canned soft drink (excluding the can) 0.15
Cost of a can (from Division C) At transfer price
Fixed costs 1,750,000
Net assets 12,650,000

Sales volume 20,000,000 canned soft drinks

Transfer Pricing Policy

Division C is required to satisfy the demand of Division D before selling cans externally.
The transfer price for a can is full cost plus 20%.

Performance Management Targets

Divisional performance is assessed on Return on Investment (ROI) and Residual Income (RI).
Divisional managers are awarded a bonus if they achieve the annual ROI target of 25%.
CD has a cost of capital of 7%.

Required:

(a) Produce a profit statement for each division detailing sales and costs,
showing external sales and inter-divisional transfers separately where
appropriate.
(6 marks)

(b) Calculate both the ROI and the RI for Division C and Division D.

(4 marks)

Performance Management 10 November 2013

The directors of CD are concerned about the future performance of the company and,
together with the divisional managers, have now agreed the following:

• A machine that would increase annual production capacity to 50,000,000 cans at Division
C will be purchased. The purchase of this machine will increase the net assets of
Division C by $500,000. Assume that there is no impact on unit variable costs or fixed
costs resulting from this purchase.

• Inter-divisional transfers will be priced at opportunity cost.

Required:

(c) Produce a revised profit statement for each division detailing sales and
costs, showing external sales and inter-divisional transfers separately
where appropriate.

(6 marks)

It has now been decided that inter-divisional transfers are not required to be
priced at opportunity cost.

(d) Calculate the minimum transfer price per can that Division C could charge
for the 20 million cans required by Division D in order for Division C to
achieve the target ROI.

(5 marks)

(e) Explain TWO non-financial measures that could also be used to monitor
the performance of the manager of Division D against the objectives of CD
company.

(4 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 13 to 16

November 2013 11 Performance Management

This page is blank

Performance Management 12 November 2013

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

November 2013 13 Performance Management

CUMULATIVE PRESENT VALUE TABLE
Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

Performance Management 14 November 2013

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑ f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

November 2013 15 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 16 November 2013

This page is blank

November 2013 17 Performance Management

This page is blank

Performance Management 18 November 2013

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

November 2013 19 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

November 2013

Wednesday Afternoon Session

Performance Management 20 November 2013

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO.

Performance Pillar

P2 – Performance Management
P2 – Performance Management
19 November 2014 – Wednesday Afternoon Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 7.

Section B comprises 2 questions and is on pages 8 to 11.

Maths tables and formulae are provided on pages 13 to 16.

The list of verbs as published in the syllabus is given for reference on page
19.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2014

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

PK is a large public company in the telecommunications sector. One of its main planning and
control tools is the preparation and use of traditional annual budgets. Whilst this may be
appropriate for the Sales and Manufacturing divisions, it draws criticisms from the directors of
divisions such as Training and Education, Advertising and Publicity, and Research and
Development who are responsible for large amounts of discretionary expenditure. These
directors have submitted a joint report to the Finance Director which suggests that Zero-
Based Budgeting (ZBB) should be used for their respective divisions.

The Finance Director has agreed to use the Research and Development division as a pilot for
ZBB for the next financial year.

Required:

Explain Zero-Based Budgeting and the main stages that would need to be
undertaken to introduce it into the Research and Development Division.

(Total for Question One = 10 marks)

Performance Management 2 November 2014

Question Two

CD manufactures and sells a number of products. All of its products have a life cycle of less
than one year. CD uses a four stage life cycle model (Introduction, Growth, Maturity and
Decline).

CD has recently developed an innovative product. It was decided that it would be

appropriate to adopt a market skimming pricing policy for the launch of the product.

However CD expects that other companies will try to join the market very soon.

This product is currently in the Introduction stage of its life cycle and is generating significant
unit profits. However, there are concerns that these current unit profits will not continue
during the other stages of the product’s life cycle.

Required:
Explain, with reasons, the changes, if any, to the unit selling price AND the unit
production cost that could occur when the product moves from the previous stage into
each of the following stages of its life cycle:
(i) Growth
(ii) Maturity

(Total for Question Two = 10 marks)

Section A continues on the next page

TURN OVER

November 2014 3 Performance Management

Question Three

A company is developing a new product. During its expected life, 16,000 units of the product
will be sold for $82 per unit.

Production will be in batches of 1,000 units throughout the life of the product. The direct
labour cost is expected to reduce due to the effects of learning for the first eight batches
produced. Thereafter, the direct labour cost will remain constant at the same cost per batch
th
as the 8 batch.

The direct labour cost of the first batch of 1,000 units is expected to be $35,000 and a 90%
learning effect is expected to occur.

The direct material and other non-labour related variable costs will be $40 per unit throughout
the life of the product.

There are no fixed costs that are specific to the product.

Required:

(a)
th
(i) Calculate the expected direct labour cost of the 8 batch.
(4 marks)
(ii) Calculate the expected contribution to be earned from the product over its
lifetime.

(2 marks)
Note: The learning index for a 90% learning curve = -0.152

It is now thought that a learning effect will continue for all of the 16 batches that will be
produced.

(b) Calculate the rate of learning required to achieve a lifetime product

contribution of $400,000, assuming that a constant rate of learning applies
throughout the product’s life.
(4 marks)
(Total for Question Three = 10 marks)

Section A continues on the opposite page

Performance Management 4 November 2014

Question Four

YY is a large banking organisation. It has a branch in most of the towns in the country in
which it operates. The bank’s business is mainly concerned with private individuals. It is a
very ‘traditional’ bank that offers only ‘over the counter’ services during limited opening hours.

At a recent board meeting, the directors of the bank stated that they were worried that the
bank was losing customers to the new style banks that offer a much more friendly service,
longer opening hours, internet banking and a diverse range of banking services.

It has now been decided that the bank will pursue strategies to achieve the goal of being
“The bank that people choose” and will use a balanced scorecard to monitor progress
towards that goal.

Required:
Produce, for each of the three non-financial perspectives of a balanced scorecard, an
objective and a performance measure that the bank could use. (In your answer you must
state each perspective, and the objective and performance measure for that perspective
and explain why they support the goal of YY becoming “The bank that people choose”.)

(Total for Question Four = 10 marks)

Section A continues on the next page

TURN OVER

November 2014 5 Performance Management

Question Five

A company sells three products: D, E and F. The market for the products dictates that the
numbers of products sold are always in the ratio of 3D:4E:5F.

Budgeted sales volumes and prices, and cost details for the previous period were as follows:

D E F
Sales units 300 400 500
Selling price per unit $80 $55 $70
Contribution to sales ratio 70% 65% 50%

The budgeted total fixed costs for that period were $31,200.

Required:

(a) Calculate for that period:

(i) the break-even sales revenue.

(ii) the volume of each product that would have needed to be sold if the
company had wanted to earn a profit of $29,520 in that period.
(6 marks)

The budget for the previous period was based on the company having a 20% share of the
total market of 6,000 units.

It has now been realised that the size of the market had been under-estimated. The actual
total market size for that period was 7,500 units.

During that period the company actually sold 1,740 units for a total of $109,500. Unit variable
costs were as expected but total fixed costs were 10% higher than budgeted.

The company reports variances using a standard marginal costing system.

Question Five continues on the next page

Performance Management 6 November 2014

Required:

(b) Calculate for the company for the previous period:

(i) The market size variance.

(ii) The market share variance.

(4 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A

Section B starts on page 8

TURN OVER

November 2014 7 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS
MARKS ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

AC manufactures three products, X, Y and Z using the same production line.

Details of the three products are shown below:

X Y Z
Selling price per unit $ 28.00 36.00 42.00
Variable cost per unit $ 12.00 10.00 21.50

Processing time per unit 2 hours 4 hours 2 hours

The production line has a capacity of 30,000 processing hours per month and is not used to
make any other products. The monthly demand for the products at the current selling prices
is as follows:

X: 8,000 units
Y: 6,000 units
Z: 6,000 units

No inventories are held.

Required:
(a) Calculate the optimum production plan and the resulting contribution per
month based on the above information.
(4 marks)

AC’s Managing Director has now completed a review of the market and has decided to
discontinue Product Y. It has been established that a new competitor has entered the market
with a product that is technically superior to Product Y. Also, the competitor seems to be
adopting a market penetration pricing policy and AC will not be able to match the low selling
price.

Performance Management 8 November 2014

The review established that for Product X the monthly demand would be 8,000 units at a
selling price of $28 per unit, and that for Product Z the monthly demand would be 6,000 units
at a selling price of $42 per unit. For both products, a reduction in the selling price of $1 per
unit would increase demand by 1,000 units and an increase in the selling price of $1 per unit
would reduce demand by 1,000 units. This relationship will exist for all levels of monthly
demand.

The current machinery necessitates that production runs must be for 1,000 units.

Required:

(b) Calculate the optimum monthly production plan and the resulting contribution.
(Note: the maximum processing time is 30,000 hours per month).
(8 marks)

A machine can be hired that would enable processing time to be increased to 60,000 hours
per month. The machine does not have to be set up for production runs of 1,000 units.

Required:

(c) Calculate the maximum amount per month that should be paid to hire the
machine.
Note: If P = a - bx then MR = a - 2bx
(8 marks)

The Production Director has suggested that the Managing Director was too hasty when
making the decision to discontinue Product Y and should have subjected Product Y to a
“value analysis” exercise.

Required:

(d) Discuss the view that subjecting Product Y to a value analysis exercise could
have led to that product not being discontinued.
(5 marks)

(Total for Question Six = 25 marks)

Section B continues on the next page

TURN OVER

November 2014 9 Performance Management

Question Seven

AA and BB are two divisions of the ZZ group. The AA division manufactures electrical
components which it sells to other divisions and external customers.

The BB division has designed a new product, Product B, and has asked AA to supply the
electrical component, Component A, that is needed in the new product. This will be a
completely new style of component. Each unit of Product B will require one Component A.
This component will not be sold by AA to external customers. AA has quoted a transfer price
to BB of $45 for each unit of Component A.

It is the policy of the ZZ group to reward managers based on their individual division’s return
on capital employed.

Details of the monthly production for each division are as follows:

AA division

Component A will be produced in batches of 1,000 units. The maximum

Output
capacity is 6,000 components per month.
Variable cost $15 per component
Fixed costs $50,000 (these are incurred specifically to produce Component A)

BB division

Product B will be produced in batches of 1,000 units. The maximum

Output
customer demand is 6,000 units of Product B per month.
Variable cost $9 per unit plus the cost of Component A
Fixed costs $75,000 (these are incurred specifically to produce Product B)

The relationship between monthly customer demand and the selling price of Product B is
shown below:

Demand Selling price per unit

1,000 units $120
2,000 units $110
3,000 units $100
4,000 units $90
5,000 units $80
6,000 units $67

Performance Management 10 November 2014

Required:

(a) Calculate, based on a transfer price of $45 per Component A, the

monthly profit that would be earned as a result of selling Product B by:

(i) BB division
(ii) AA division
(iii) ZZ group
(9 marks)

(b) Calculate the maximum monthly profit from the sale of Product B for the
ZZ group.
(4 marks)

(c) Calculate, using the marginal cost of Component A as the transfer price,
the monthly profit that would be earned as a result of selling Product B by:

(i) BB division
(ii) AA division
(iii) ZZ group
(5 marks)

(d) Discuss, using the above scenario, the problems of setting a transfer price and
suggest a transfer pricing policy that would help the ZZ group to overcome the
transfer pricing problems that it faces.

(7 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 13 to 16

November 2014 11 Performance Management

This page is blank

Performance Management 12 November 2014

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

November 2014 13 Performance Management

CUMULATIVE PRESENT VALUE TABLE
Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

Performance Management 14 November 2014

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

November 2014 15 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 16 November 2014

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November 2014 17 Performance Management

This page is blank

Performance Management 18 November 2014

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

November 2014 19 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

November 2014

Wednesday Afternoon Session

Performance Management 20 November 2014

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO

Performance Pillar

P2 – Performance Management
P2 – Performance Management
Thursday 29 August 2013

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 4.

Section B comprises 2 questions and is on pages 6 to 9.

Maths tables and formulae are provided on pages 11 to 14.

The list of verbs as published in the syllabus is given for reference on page
15.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2013

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

The standard selling price and costs per unit of a new product for the first period are shown
below:

$
Selling price 750
Materials 6 kg at $50 per kg 300
Labour (see below) 20 hours at $10 per hour 200
Variable overheads 25 machine hours at $4 per machine hour 100
Fixed overheads (see below) 120

Labour hours
The labour hours are the average labour hours per unit based on the budgeted output for the
period of 128 units and the assumption that a 90% learning curve will apply throughout the
period. The learning index for a 90% learning curve is -0.152.

Fixed overheads
The fixed overheads are specific fixed overheads for this product and the absorption rate was
based on the budgeted output for the period of 128 units.

Required:

(a) Calculate the sensitivity of the budgeted profit for the period for this
product to a change in the price per kg of materials.
(2 marks)
(b) Calculate the budgeted labour hours for the first unit of this product to be
produced.
(4 marks)

(c) Calculate the sensitivity of the budgeted profit for the period for this
product to a change in the rate of learning.

(4 marks)
Note: all workings must be shown.

(Total for Question One = 10 marks)

Performance Management 2 September 2013

Question Two

A factory uses a standard absorption costing system. The fixed production overhead
absorption rate is based on labour hours. Extracts from the budgeted and actual results for
the previous period are shown below:

Budget Actual
Output (units) 1,500 1,600
Fixed production overhead $300,000 $310,000
Labour hours 600 580

Required:

(a) Calculate:

(i) The fixed production overhead expenditure variance

(ii) The fixed production overhead volume variance

(3 marks)

The factory is thinking of introducing an activity based costing system. An analysis of the fixed
production overheads for the previous period showed that included in the budgeted fixed
production overheads of $300,000 was $72,000 for materials handling. Costs for materials
handling are incurred when materials are shipped from the storage area to the processing
plant. Further analysis revealed:

Budget Actual
Materials handling costs $72,000 $69,000
Number of material shipments 90 85
Total quantity of materials shipped 360 tonne 348 tonne

Required:

(b) Calculate using activity based costing principles:

(i) The materials handling shipment expenditure variance

(ii) The materials handling shipment efficiency variance

(7 marks)

(Total for Question Two = 10 marks)

Section A continues on the next page

TURN OVER

September 2013 3 Performance Management

Question Three

Required:

Discuss how activity based costing could improve the linkage between cost
control and responsibility accounting at each of the four levels of the activity
based costing hierarchy of activities.

(Total for Question Three = 10 marks)

Question Four

Required:

Compare and contrast feedforward and feedback controls by using a budgeting

system to explain your points.

(Total for Question Four = 10 marks)

Question Five

Many service organisations, for example banks, have outsourced their customer liaison and
support service operations to “inbound call centres”. Inbound call centres deal with product
support or information enquiries from customers.

Required:

Explain, in the context of the modern business environment, the advantages and
disadvantages of outsourcing customer liaison and product support to “inbound
call centres”.

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A. Section B starts on page 6

Performance Management 4 September 2013

This page is blank

September 2013 5 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

A company produces three products (X, Y and Z) from the same resources (but in different
quantities). Extracts from the original budget for Month 11 are shown below:

X Y Z
Selling price ($ per unit) 24 41 42
Total cost ($ per unit) 20 20 35
Labour hours per unit 0.5 1.5 1.5
Machine hours per unit 1 2 0.75
Production and sales (units) 10,000 6,000 10,000

Variable costs are 40% of the total cost of each unit.

Fixed costs are absorbed at the rate of 150% of variable costs based on the budgeted
production quantities as shown above.

It has now become known that during Month 11 essential maintenance work will have to be
carried out. This will limit the availability of resources to:

Labour hours: 12,500 hours

Machine hours: 30,000 hours

Required:

(a) Produce, using marginal costing principles, a columnar statement that

shows the profit maximising production plan for Month 11 and the resulting
profit or loss.

(9 marks)

(b) Calculate the three shadow prices for labour hours. Your answer must state the
range of labour hours that each shadow price covers.
(5 marks)

Question six continues on the opposite page

Performance Management 6 September 2013

Marketing intelligence has now revealed that a new competitor is about to enter the market in
Month 11 with a product that is much better than Product Y. It has therefore been decided
that production of Product Y will stop immediately. The competitor will also sell products that
will have an impact on the demand for Products X and Z.

Further work by the Marketing Department has revealed the relationships between the selling
price and the monthly demand for Product X, and also for Product Z, as shown in the table
below. There is no relationship between Product X and Product Z other than they use the
same resources. The products must be produced separately, each in batches of 1,000 units.

Selling price ($)

Demand (units) Product X Product Z
2,000 28 66
4,000 27 60
6,000 26 54
8,000 25 48
10,000 24 42
12,000 23 36
14,000 22 30
16,000 21 24

The table should be interpreted as follows:

If the selling price of Product X was set at $28 then up to 2,000 units could be sold. To sell
more than 2,000 units it would be necessary to reduce the price. For example, if the price was
reduced to $25 per unit up to 8,000 units could be sold. The only selling prices that would be
used are those shown in the table.

Required:

(i) The revised optimum production plan for Products X and Z.

(9 marks)
(ii) The total contribution that the plan in (c)(i) would earn.

(2 marks)

(Total for Question Six = 25 marks)

Section B continues on page 8

TURN OVER

September 2013 7 Performance Management

Question Seven

HPR harvests, processes and roasts coffee beans. The company has two divisions:
Division P is located in Country Y. It harvests and processes coffee beans. The
processed coffee beans are sold to Division R and external customers.
Division R is located in Country Z. It roasts processed coffee beans and then sells
them to external customers.
Countries Y and Z use the same currency but have different taxation rates.
The budgeted information for the next year is as follows:

Division P
Capacity 1,000 tonnes
External demand for processed coffee beans 800 tonnes
Demand from Division R for processed coffee beans 625 tonnes
External market selling price for processed coffee beans $11,000 per tonne
Variable costs $7,000 per tonne
Annual fixed costs $1,500,000

Division R
Sales of roasted coffee beans 500 tonnes
Market selling price for roasted coffee beans $20,000 per tonne

The production of 1 tonne of roasted coffee beans requires an input of 1.25 tonnes of
processed coffee beans. The cost of roasting is $2,000 per tonne of input plus annual fixed
costs of $1,000,000.

Transfer Pricing Policy of HPR

Division P must satisfy the demand from Division R for processed coffee beans before selling
any to external customers.

The transfer price for the processed coffee beans is variable cost plus 10% per tonne.

Taxation
The rate of taxation on company profits is 45% in Country Y and 25% in Country Z.

Performance Management 8 September 2013

Required:

(a)
(i) Produce statements that show the budgeted profit after tax for the next
year for each of the two divisions. Your profit statements should show
sales and costs split into external sales and internal transfers where
appropriate.

(8 marks)

(ii) Discuss the potential tax consequences of HPR’s current transfer pricing
policy.
(6 marks)

(b) Produce statements that show the budgeted contributions that would be
earned by each of the two divisions if HPR’s head office changed its policy
to state that transfers must be made at opportunity cost. Your statements
should show sales and costs split into external sales and internal transfers
where appropriate.
(6 marks)

(c) Explain TWO behavioural issues that could arise as a result of the head
office of HPR imposing transfer prices instead of allowing the divisional
managers to set the prices.

(5 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 11 to 14

September 2013 9 Performance Management

This page is blank

Performance Management 10 September 2013

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

September 2013 11 Performance Management

Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

Performance Management 12 September 2013

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:  Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

September 2013 13 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 14 September 2013

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

September 2013 15 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

September 2013

Performance Management 16 September 2013

Performance Pillar

P2 – Performance Management
P2 – Performance Management
Thursday 2 September 2010

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 7

Section B comprises 2 questions and is on pages 8 to 11.

Maths tables and formulae are provided on pages 13 to 16.

The list of verbs as published in the syllabus is given for reference on page
19.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2010

SECTION A – 50 MARKS

[Note: The indicative time for answering this section is 90 minutes.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

A company manufactures five products in one factory. The company uses a Just-in-Time (JIT)
production system. The company’s budgeted fixed costs for the next year are $300,000. The
table below summarises the budgeted sales and contribution details for the five products for
the next year.

Product A B C D E
Unit selling price ($) 40 15 40 30 20
Total sales ($000) 400 180 1,400 900 200
Contribution/sales ratio (%) 45 30 25 20 (10)

The following diagram has been prepared to summarise the above budget figures:

Multi-product breakeven chart

500
400
300
200
X
100
Profit / 0
Loss -100 0 500 1000 1500 2000 2500 3000 3500
($000) -200
-300
-400
Sales ($000)

After the diagram had been prepared, the Marketing Director has said that Products A and E
are complementary products. The budget assumes that there are no sales of Product A
without also selling Product E and no sales of Product E without selling Product A.

Performance Management 2 September 2010

Required:

(a)
(i) Explain TWO reasons why the chart does not provide a useful summary of the
budget data provided.
(4 marks)

(ii) Explain the meaning of point X on the chart.

(2 marks)

(b) Calculate the breakeven revenue for the next year using the budgeted sales
mix.

All workings must be shown.

(4 marks)

(Total for Question One = 10 marks)

TURN OVER
September 2010 3 Performance Management
Question Two

HT manufactures and sells consumer goods. The market in which it operates is highly
competitive and HT is constantly designing new products in order to maintain its market
share. The life cycle of products in the market is extremely short with all of the manufacturers
constantly introducing new products or variations on existing products.
Consumers consider two main factors when buying these products: price and quality. HT
uses a penetration pricing policy when launching its products and is always striving to
improve its quality from product design stage through to customer care. As a result it has a
15% market share, and its largest competitor has a 6% market share with around 30 other
companies sharing the remainder of the market.

Required:

(a) Compare and contrast:

• Costs of quality conformance; and

• Costs of quality non-conformance.
(3 marks)

(b) Discuss the relationship between quality conformance costs and product
selling prices in HT.
(4 marks)

(Total for Question Two = 10 marks)

Performance Management 4 September 2010

Question Three

ST is a distribution company which buys a product in bulk from manufacturers, repackages

the product into smaller packs and then sells the packs to retail customers. ST’s customers
vary in size and consequently the size and frequency of their orders also varies. Some
customers order large quantities from ST each time they place an order. Other customers
order only a few packs each time.

The current accounting system of ST produces very basic management information that
reports only the overall company profit. ST is therefore unaware of the costs of servicing
individual customers. However, the company has now decided to investigate the use of Direct
Customer Profitability Analysis (DCPA).

ST would like to see the results from a small sample of customers before it decides whether
to fully introduce DCPA.

The information for two customers, and for the whole company, for the previous period was
as follows:

Customer
B D Company
Factory contribution ($000) 75 40.5 450

Number of:
Packs sold (000) 50 27 300
Sales visits to customers 24 12 200
Orders placed by customers 75 20 700
Normal deliveries to customers 45 15 240
Urgent deliveries to customers 5 0 30

Activity costs: $000s

Sales visits to customers 50
Processing orders placed by customers 70
Normal deliveries to customers 120
Urgent deliveries to customers 60

Required

(a) Prepare a Direct Customer Profitability Analysis for each of the two customers.

(6 marks)

(b) Explain how ST could use DCPA to increase its profits.

(4 marks)

(Total for Question Three = 10 marks)

TURN OVER
September 2010 5 Performance Management
Question Four

CW is a retail company that operates five stores. Each store has a manager and there is also
a General Manager who reports directly to the Board of directors of the company.

For many years the General Manager has set the budgets for each store and the store
managers’ performances have been measured against their respective budgets even though
they did not actively participate in their preparation. If a store manager meets his budgeted
target then he is financially rewarded for his performance.

The company has recently appointed a new Finance Director who has questioned this
previous practice and suggested that each store manager should be involved in the
preparation of their own budget. The General Manager is very concerned about this. She
thinks that the store managers will overstate their costs and resource requirements in order to
make it easier for them to achieve their budget targets.

Required:
(a) Explain the problems that could arise, for planning and decision making
purposes within CW, if the store managers did overstate their budgeted costs
and resource requirements.
(4 marks)

(b) Discuss the behavioural issues that could arise if excess costs and
resources are removed from the store managers’ budgets.
(6 marks)

(Total for Question Four = 10 marks)

Performance Management 6 September 2010

Question Five

The following details show the direct labour requirements for the first six batches of a new
product that were manufactured last month:

Budget Actual
Output (batches) 6 6
Labour hours 2,400 1,950
Total labour cost $16,800 $13,650

The Management Accountant reported the following variances:

Total labour cost variance $3,150 favourable

Labour rate variance Nil
Labour efficiency variance $3,150 favourable

The Production Manager has now said that he forgot to inform the Management Accountant
that he expected a 90% learning curve to apply for at least the first 10 batches.

Required:
(a) Calculate planning and operational variances that analyse the actual
performance taking account of the anticipated learning effect.
(6 marks)

Note: The learning index for a 90% learning curve is -0.1520.

(b) Explain the differences between standard costing and target costing.

(4 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A

Section B starts on page 8

TURN OVER
September 2010 7 Performance Management
SECTION B – 50 MARKS

[Note: The indicative time for answering this section is 90 minutes.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

A manufacturer of electrical appliances is continually reviewing its product range and

enhancing its existing products by developing new models to satisfy the demands of its
customers. The company intends to always have products at each stage of the product life
cycle to ensure the company’s continued presence in the market.

Currently the company is reviewing three products:

Product K was introduced to the market some time ago and is now about to enter the
maturity stage of its life cycle. The maturity stage is expected to last for ten weeks. Each unit
has a variable cost of $38 and takes 1 standard hour to produce. The Managing Director is
unsure which of four possible prices the company should charge during the next ten weeks.
The following table shows the results of some market research into the level of weekly
demand at alternative prices:

Selling price per unit $100 $85 $80 $75

Weekly demand (units) 600 800 1,200 1,400

Product L was introduced to the market two months ago using a penetration pricing policy
and is now about to enter its growth stage. This stage is expected to last for 20 weeks. Each
unit has a variable cost of $45 and takes 1.25 standard hours to produce. Market research
has indicated that there is a linear relationship between its selling price and the number of
units demanded, of the form P = a - bx. At a selling price of $100 per unit demand is expected
to be 1,000 units per week. For every $10 increase in selling price the weekly demand will
reduce by 200 units and for every $10 decrease in selling price the weekly demand will
increase by 200 units.

Product M is currently being tested and is to be launched in ten weeks’ time. This is an
innovative product which the company believes will change the entire market. The company
has decided to use a market skimming approach to pricing this product during its introduction
stage.

The company currently has a production facility which has a capacity of 2,000 standard hours
per week. This facility is being expanded but the extra capacity will not be available for ten
weeks.

Performance Management 8 September 2010

Required:

(a)
(i) Calculate which of the four selling prices should be charged for
product K, in order to maximise its contribution during its maturity
stage;

(3 marks)

and as a result, in order to utilise all of the spare capacity from your
answer to (i) above,

(ii) Calculate the selling price of product L during its growth stage.

(6 marks)

(Total for requirement (a) = 9 marks)

(b) Compare and contrast penetration and skimming pricing strategies during
the introduction stage, using product M to illustrate your answer.

(6 marks)

(c) Explain with reasons, for each of the remaining stages of M’s product life
cycle, the changes that would be expected in the

(i) average unit production cost

(ii) unit selling price
(10 marks)

(Total for Question Six = 25 marks)

Section B continues on page 10

TURN OVER

September 2010 9 Performance Management

Question Seven

The Alpha group comprises two companies, X Limited and Y Limited both of which are
resident in a country where company profits are subject to taxation at 30%.

X Limited
X Limited has two trading divisions:

Consultancy division - provides consultancy services to the engineering sector.

Production division - assembles machinery which it sells to a number of industry sectors.

Many of the components used in these machines are purchased from Y Limited.

Y Limited
Y Limited manufactures components from raw materials many of which are imported. The
components are sold globally. Some of the components are sold to X Limited.

Financial results
The financial results of the two companies for the year ended 30 September 2010 are as
follows:

X Limited Y Limited
Consultancy division Production division
$000 $000 $000
External sales 710 1,260 400
Sales to X Limited 350
750

Cost of sales 240 900* 250

Administration costs 260 220 130
Operating profit 210 140 370
Capital employed 800 2,000 4,000

* includes the cost of components purchased from Y Limited

Required:
(a) Discuss the performance of each division of X Limited and of Y Limited using
the following three ratios:

(i) Return on Capital Employed (ROCE)

(ii) Operating Profit Margin
(iii) Asset Turnover
(9 marks)

Performance Management 10 September 2010

Transfer Prices
The current policy of the group is to allow the managers of each company or division to
negotiate with each other concerning the transfer prices.

The manager of Y Limited charges the same price internally for its components that it charges
to its external customers. The manager of Y argues that this is fair because if the internal
sales were not made he could increase his external sales. An analysis of the market demand
shows that currently Y Limited satisfies only 80% of the external demand for its components.

The manager of the Production division of X Limited believes that the price being charged by
Y Limited for the components is too high and is restricting X Limited’s ability to win orders.
Recently X Limited failed to win a potentially profitable an order which it priced using its
normal gross profit mark-up. The competitor who won the order set a price that was less than
10% lower than X Limited’s price.

An analysis of the cost structure of Y Limited indicates that 40% of the cost of sales is fixed
costs and the remaining costs vary with the value of sales.

Required:

(b)
(i) Discuss how the present transfer pricing policy is affecting the
overall performance of the group.

(5 marks)

(ii) Explain, including appropriate calculations, the transfer price or

prices at which the components should be supplied by Y Limited
to X Limited.

(8 marks)

(c) The group Managing Director is considering relocating Y Limited to a

country that has a much lower rate of company taxation than that in its
current location.

Required:
Explain the potential tax consequences of the internal transfer pricing policy if Y
Limited were to relocate.
(3 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

September 2010 11 Performance Management
Maths tables and formulae are on pages 13 to 16

Performance Management 12 September 2010

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

September 2010 13 Performance Management

Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

Performance Management 14 September 2010

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent:: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑ f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

September 2010 15 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 16 September 2010

This page is blank

September 2010 17 Performance Management

This page is blank

Performance Management 18 September 2010

LIST OF VERBS USED IN THE QUESTION REQUIREMENTS
A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.

It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

September 2010 19 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

September 2010

Performance Management 20 September 2010

Performance Pillar

P2 – Performance Management
P2 – Performance Management
Wednesday 2 March 2011

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 5.

Section B comprises 2 questions and is on pages 6 to 9.

Maths tables and formulae are provided on pages 11 to 14.

The list of verbs as published in the syllabus is given for reference on page
15.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2011

SECTION A – 50 MARKS

[Note: The indicative time for answering this section is 90 minutes.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

The standard direct labour cost of one batch of 100 units of a product is $50.40. This
assumes a standard time of 4.2 hours, costing $12 per hour. The standard time of 4.2 direct
labour hours is the average time expected per batch based on a product life of 12,800 units or
128 batches. The expected time for the first batch was 20 hours and an 80% learning curve is
expected to apply throughout the product’s life.
The company has now completed the production of 32 batches of the product and the total
actual direct labour cost was $3,493. The following direct labour variances have also been
calculated:
Direct labour rate $85 Adverse
Direct labour efficiency $891 Adverse
Further analysis has shown that the direct labour efficiency variance was caused solely by the
actual rate of learning being different from that expected. However, the time taken for the first
batch was 20 hours as expected.

Required:

(a) Calculate the actual rate of learning that occurred.

(6 marks)

(b) Assuming that the actual rate of learning and the actual labour rate
continue throughout the life of the product, calculate the total direct labour
cost that the company will incur during the life of the product.

(4 marks)

(Total for Question One = 10 marks)

Performance Management 2 March 2011

Question Two

PR currently uses a constant flow production system to manufacture components for the
motor industry. The demand from the motor industry is higher in certain months of the year
and lower in others. PR holds inventory so that it can supply the components as they are
demanded. Increasingly, the costs to PR of holding inventory are having a significant effect on
its profits and the management of PR are considering changing the production system to one
that operates on a just-in-time (JIT) basis.

Required:

(a) Explain the concepts of a JIT production system.

(4 marks)

(b) Explain TWO reasons why the profit of PR may NOT increase as a result
of changing to a JIT production system.
(6 marks)
(Total for Question Two = 10 marks)

Question Three

A college is preparing its budget for 2012. In previous years the director of the college has
prepared the college budget without the participation of senior staff and presented it to the
college board for approval.
Last year the college board criticised the director over the lack of participation of his senior
staff in the preparation of the budget for 2011 and requested that for the 2012 budget the
senior staff were to be involved.

Required:
Discuss the potential advantages and disadvantages to the college of involving the
senior staff in the budget preparation process.

(Total for Question Three = 10 marks)

TURN OVER

March 2011 3 Performance Management

Question Four

KHL manufactures a single product and operates a budgetary control system that reports
performance using variances on a monthly basis. The company has an agreement with a
local supplier and calls off raw materials as and when required. Consequently there is no
inventory of raw materials.
The following details have been extracted from the budget working papers for 2011:
Annual Activity (units)
50,000 70,000 90,000
$000 $000 $000
Sales revenue 3,200 4,480 5,760

Direct materials (3 kgs per unit) 600 840 1,080

Direct labour (2 hours per unit) 1,000 1,400 1,800
Variable overhead (2 hours per unit) 400 560 720
Fixed overhead (2 hours per unit)* 600 600 600

*The fixed overhead absorption rate of $5 per hour was based on an annual budget of 60,000
units of the product being produced at a constant monthly rate throughout the year, with the
fixed overhead cost being incurred in equal monthly amounts.
The following actual performance relates to February 2011:
$ $
Sales revenue (5,700 units) 330,600

Direct materials (18,600 kgs) 70,680

Direct labour (11,500 hours) 128,800
Variable overhead (11,500 hours) 47,150
Fixed overhead absorbed 60,000
306,630
Finished goods inventory adjustment 15,000 291,630

Gross profit 38,970

Fixed overhead over-absorption 3,000

Profit 41,970

For February 2011 budgeted sales were 6,000 units, the selling price variance was $34,200
Adverse and the sales volume profit variance was $4,200 Adverse. The actual fixed
overhead incurred was $57,000.
Budgeted profit for February 2011 was $84,000.

Required:
Prepare a statement for February 2011 that reconciles the budgeted profit of
$84,000 with the actual profit of $41,970.
You should show the variances in as much detail as possible given the data
provided.
(Total for Question Four = 10 marks)

Performance Management 4 March 2011

Question Five

ZX is a new banking organisation which is about to open its first branches. ZX believes that it
needs to offer potential customers a new banking experience if it is to win customers from
other banks.
Whereas other banks have focused on interest rates and levels of bank charges, ZX believes
that quality and availability of service is an important factor in the choice made by customers.

Required:
Explain how Total Quality Management (TQM) would enable ZX to gain
competitive advantage in the banking sector.

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A

Section B starts on page 6

TURN OVER

March 2011 5 Performance Management

SECTION B – 50 MARKS

[Note: The indicative time for answering this section is 90 minutes.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

WZ is a manufacturing company with two factories. The company’s West factory currently
produces a number of products. Four of these products use differing quantities of the same
resources. Details of these four products and their resource requirements are as follows:

Product J K L M
$/unit $/unit $/unit $/unit
Selling price 56 40 78 96
Direct labour ($8 per hour) 20 16 24 20
Direct material A ($3 per litre) 6 3 0 9
Direct material B ($5 per kg) 10 0 15 20
Variable overhead (see note 1)
Labour related 1.25 1 1.50 1.25
Machine related 1.25 2 0.75 1

Total variable cost 38.50 22 41.25 51.25

Other data:
Machine hours per unit 5 8 3 4
Maximum demand per week 1,000 3,500 2,800 4,500

Notes
1. An analysis of the variable overhead shows that some of it is caused by the number of
labour hours and the remainder is caused by the number of machine hours.

2. Currently WZ purchases a component P from an external supplier for $35 per

component. A single unit of this component is used in producing N the company’s only
other product. Product N is produced in WZ’s other factory and does not use any of the
resources identified above. Product N currently yields a positive contribution. WZ could
manufacture the component in its West factory, but to do so would require: 1 hour of
direct labour, 0.5 machine hours, and 2 kgs of direct material B. WZ purchases 500
components per week. WZ could not produce the component in its other factory.

3. The purchasing director has recently advised you that the availability of direct materials
A and B is to be restricted to 21,000 litres and 24,000 kgs per week respectively. This
restriction is unlikely to change for at least 10 weeks. No restrictions are expected on
any other resources.

4. WZ does not hold inventory of either finished goods or raw materials.

Performance Management 6 March 2011

5. WZ has already signed a contract, which must be fulfilled, to deliver the following units
of its products each week for the next 10 weeks:

Product Contract units

J 100
K 200
L 150
M 250

These quantities are in addition to the maximum demand identified above.

Required:

(a) Calculate whether WZ should continue to purchase the component P or

whether it should manufacture it internally during the next 10 weeks.

(11 marks)

(b) Prepare a statement to show the optimum weekly usage of the West
factory’s available resources.

Note: You are NOT required to use linear programming.

(3 marks)
(c)

(i) Assuming no other changes, calculate the purchase price of the

component P at which your advice in part (a) above would change.
(4 marks)
(ii) Explain TWO non-financial factors that should be considered before
deciding whether or not to manufacture the component internally.
(4 marks)
(d) If you were to solve part (b) above using linear programming state the
following:
• The objective function
• The inequality for the material A constraint
• The inequality for the material B constraint
(3 marks)
(Total for Question Six = 25 marks)

Section B continues on page 8

TURN OVER

March 2011 7 Performance Management

Question Seven

The PZ Group comprises two companies: P Limited and Z Limited. Both companies
manufacture similar items and are located in different regions of the same country. Return on
Capital Employed (ROCE) is used as the group’s performance measure and is also used to
determine divisional managers’ bonuses. The results of the two companies and of the group
st
for the year ended 31 December 2010 and the balance sheets at that date are as follows:

P Limited Z Limited PZ Group

$000 $000 $000
Revenue 200,000 220,000 400,000
Cost of sales 170,000 160,000 310,000
Gross profit 30,000 60,000 90,000
Administration costs 10,000 30,000 40,000
Interest payable 10,000 ______ 10,000
Pre-tax profit 10,000 30,000 40,000

Non-current assets:
Original cost 1,000,000 1,500,000 2,500,000
Accumulated depreciation 590,400 1,106,784 1,697,184
Net book value 409,600 393,216 802,816

Net current assets 50,000 60,000 110,000

459,600 453,216 912,816

Non-current borrowings 150,000 150,000

Shareholders’ funds 309,600 453,216 762,816
Capital employed 459,600 453,216 912,816

Notes

1. During the year Z Limited sold goods to P Limited that had cost Z Limited $10,000. The
transactions relating to this sale have been eliminated from the PZ Group results stated
above.

2. Both companies use the group depreciation policy of 20% per annum on a reducing
balance basis for their non-current assets. Neither company made any additions or
disposals of non-current assets during the year.

Performance Management 8 March 2011

Required:
(a) Calculate the Return on Capital Employed (ROCE) ratios for each of the
two companies for the year and analyse these into their secondary ratio
components of:

(i) Pre-tax profit %

(ii) Asset Turnover
(3 marks)
(b)
(i) Calculate Z’s gross profit margin on its internal sales and compare this to
the gross profit margin on its external sales.
(4 marks)

(ii) Discuss the performance of the two companies EXCLUDING the effects
of the intra group transactions.
(11 marks)

Due to operational difficulties, the directors of the PZ Group are to impose a

transfer pricing policy.

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 11 to 14

March 2011 9 Performance Management

This page is blank

Performance Management 10 March 2011

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

March 2011 11 Performance Management

Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

Performance Management 12 March 2011

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent:: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑ f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

March 2011 13 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 14 March 2011

LIST OF VERBS USED IN THE QUESTION REQUIREMENTS
A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.

It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

March 2011 15 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

March 2011

Performance Management 16 March 2011

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO.

Performance Pillar

P2 – Performance Management
P2 – Performance Management
Wednesday 26 February 2014

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 7.

Section B comprises 2 questions and is on pages 8 to 11.

Maths tables and formulae are provided on pages 13 to 16.

The list of verbs as published in the syllabus is given for reference on page
19.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2014

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

WTI is planning to launch a new component. Production volume will be limited, with only 128
components to be produced in total.
WTI expects the manufacture of the first component to take 25 direct labour hours. It is
anticipated there will be a 90% learning curve that will continue until all 128 components have
been produced. Direct labour is paid at a rate of $15 per hour.
Non labour-related costs are expected to be $265 per component; this will apply to all 128
components produced. There are no product-specific fixed costs associated with this new
component.
WTI is going to use a target costing approach for the new component. Based on the market
research it has undertaken, WTI plans to sell the components for $530 each. WTI requires an
average profit margin of 20% of the selling price over the life of this new component.
Note: The learning index for a 90% learning curve = -0.152

Required:
th
(a) Calculate the time required to produce the 128 component.
(3 marks)

(b) Calculate the value of any cost gap between the target cost of 128
components in total and the expected cost of 128 components in total.

(3 marks)

(c) Calculate the rate of learning required to close the cost gap you
calculated in part (b) in order to achieve the required profit margin of 20%.

(4 marks)

(Total for Question One = 10 marks)

Performance Management 2 March 2014

Question Two

PB is a car production company. PB uses a system of standard costing to set its budgets.
Budgets are set annually by the Finance department and approved by the Board of Directors
of PB. The Finance department prepares variance reports each month for review at the
Board of Directors meeting, where actual performance is monitored by comparison to
budgeted figures.
A new Finance Director has recently joined PB from a competitor organisation where there
was a Total Quality Management culture. The new Finance Director of PB is keen to discuss
the implementation of Kaizen costing at the next meeting of the Board of Directors. The new
Finance Director would like to review the current planning and control system at PB with a
view to making changes so that it could support Kaizen costing concepts.

Required:

(a) Explain TWO basic principles of Total Quality Management.

(4 marks)

(b) Explain THREE changes required to PB’s planning and control system to
support the adoption of Kaizen costing concepts.
(6 marks)

(Total for Question Two = 10 marks)

Section A continues on the next page

TURN OVER

March 2014 3 Performance Management

Question Three

APZ has recently opened a fast-food restaurant in a small town. Fast-food restaurants are
characterised by their quick food service.
The fast-food restaurant market in the town is dominated by a small number of long
established restaurants. APZ is seeking to grow its business and attract the town’s residents
with its burger meals.
The performance report for the first month of business is to be presented at the restaurant’s
monthly management meeting.
A draft of the performance report for the first month of business is reproduced below:

Budget Actual Variance

Sales (number of meals) 6,000 5,400 (600)
$ $ $
Revenue 45,000 40,365 (4,635)
Variable costs 26,400 24,632 1,768
Fixed costs 5,250 4,950 300
Profit 13,350 10,783 (2,567)

The management accountant at APZ has realised that the size of the fast-food market that
was used to derive the budget number of meals to be sold has been over-estimated. The
management accountant has calculated the value of the sales volume contribution planning
variance to be $2,480 adverse.

Required:

(a)

(i) Prepare a revised budget based on the new estimate of the market.

(3 marks)

(ii) Prepare a performance report for the month based on a flexed budget.

(3 marks)

(b) Explain TWO non-financial measures that APZ could use to monitor the
performance of the new fast-food restaurant.

(4 marks)

(Total for Question Three = 10 marks)

Performance Management 4 March 2014

Question Four

SAF is about to launch a new model of smart phone, Product Z. Product Z is the company’s
first smart phone and features unique technology developed by SAF. SAF expects the
unique technology and exclusive design to attract both new and existing SAF customers.
Given the unique nature of this smart phone, SAF has no experience of the price demand
relationship of this product. However, based on experience from previous products, it expects
that during the product’s introductory phase, at a selling price of $200, the demand would be
20,000 units per month. For every $32.50 increase in selling price the monthly demand would
reduce by 2,500 units, and for every $32.50 decrease in selling price the monthly demand
would increase by 2,500 units.
The variable costs of production for one unit of Product Z are as follows:
Direct materials $85
Direct labour $56
Variable overhead $20
SAF is planning an advertising campaign during the introductory phase of product Z. The
total cost of the advertising campaign is yet to be finalised with the advertising agency.
However, after deducting the cost of this advertising, the Managing Director requires a
minimum profit of $2,500,000 for the introductory phase.
Note: the introductory phase of Product Z is expected to have a duration of three months.
There are no other specific fixed costs associated with Product Z.

Required:

(a) Calculate the maximum cost of the advertising campaign in order to

achieve the Managing Director’s profit requirement for the introductory
phase of Product Z.

Note: The company will set the price for a unit of Product Z to maximise
profit during the introductory phase.

If P = a - bx then MR = a - 2bx
(6 marks)

(b) Explain TWO reasons why it may not be appropriate to set the
introductory price of Product Z using the assumptions contained in the
profit-maximisation model you used in part (a).
(4 marks)

(Total for Question Four = 10 marks)

Section A continues on the next page

TURN OVER

March 2014 5 Performance Management

Question Five

TES operates a chain of health clubs in its home country. Managers at health clubs receive a
quarterly bonus if their health club achieves or exceeds ALL of the following financial targets:
ROCE 8% (based on net assets)
Asset turnover 40%
Operating profit margin 20%

Summary actual performance for Quarter 3 of the current year for Health Club E is detailed
below:
Quarter 3
Revenue $36,000
Staff costs $12,000
Other fixed costs $22,000
Net assets $110,000
Number of customers 600

The quarterly financial targets are set by the head office finance team and all health clubs are
given the same target. TES is currently forecasting the performance of its health clubs in
Quarter 4.

TES will use the following information to forecast the performance of each of its health clubs
in Quarter 4:
• The average revenue per customer will increase by 10% on Quarter 3.
• Customer numbers will increase by 5% on Quarter 3.
• Staff costs and net assets are expected to remain at the same level as Quarter 3.
• Other fixed costs are expected to decrease by 5% on Quarter 3.
• Staff and other costs are fixed (they are not related to the number of customers).

Required:

(a) Prepare calculations to show whether the manager of Health Club E is

expected to receive the bonus in Quarter 4 based on the forecast
performance.

Note: you should calculate operating profit margin, ROCE and asset turnover
for Quarter 4.

(6 marks)

Performance Management 6 March 2014

The manager of Health Club E is dissatisfied with the quarterly bonus system and does not
perceive it to be fair. The manager argues that the financial targets are based on a national
view of all TES health clubs and do not take account of specific local circumstances. For
example, Health Club E is located in a less affluent area of the country. The manager of
Health Club E would like to see participation from health club managers in the development of
quarterly financial targets.

(b) Discuss the potential impact for TES of involving the health club
managers in the production of their quarterly financial targets.

(4 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A

Section B starts on page 8

TURN OVER

March 2014 7 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

GF is a company that manufactures clothes for the fashion industry. The fashion industry is
fast moving and consumer demand can change quickly due to the emergence of new trends.
GF manufactures three items of clothing: the S, the T and the B using the same resources but
in different amounts.
Budget information per unit is as follows:
S T B
$ $ $
Selling price 250 40 100
2
Direct materials ($20 per m ) 100 10 30
Direct labour ($12 per hour) 36 12 27
Variable overhead ($3 per machine hour) 9 3 6.75

Total fixed costs are $300,000 per month.

Included in the original budget constructed at the start of the year, was the sales demand for
the month of March as shown below:
S T B
Demand in March (units) 2,000 6,000 4,000

After the original budget had been constructed, items of clothing S, T and B have featured in
a fashion magazine. As a result of this, a new customer (a fashion retailer), has ordered
1,000 units each of S, T and B for delivery in March. The budgeted demand shown above
does not include this order from the new customer.
In March there will be limited resources available. Resources will be limited to:
2
Direct materials 14,500 m
Direct labour 30,000 hours
There will be no opening inventory of material, work in progress or finished goods in March.

Performance Management 8 March 2014

Required:

(a) Produce a statement that shows the optimal production plan and the
resulting profit or loss for March.

Note: you should assume that the new customer’s order must be supplied
in full.
(10 marks)

(b) Explain TWO issues that should be considered before the production
plan, that you produced in part (a), is implemented.
(4 marks)

The Board of Directors have now addressed the shortage of key resources at GF to ensure
that production will meet demand in April. The production plan for the month of April is
shown below:
S T B
Production (units) 4,000 5,000 4,000

Required:
(c) For April,

(i) Calculate the breakeven sales revenue for the given product mix in the
production plan.
(4 marks)
(ii) Calculate the margin of safety percentage.

(2 marks)

(iii) Explain THREE limitations of breakeven analysis for GF.

(5 marks)
(Total for Question Six = 25 marks)

Section B continues on the next page

TURN OVER

March 2014 9 Performance Management

Question Seven

SBA is a company that produces televisions and components for televisions. The company
has two divisions, Division S and Division B.
Division S manufactures components for televisions. Division S sells components to division
B and to external customers. Division B uses five of the components in each of the
televisions that it manufactures, and sells televisions directly to external customers.

Division S
Budgeted variable manufacturing cost per component: $
Direct material 14
Direct labour 18
Variable overhead 12

The following information relating to next year is also available:

Fixed costs $560,000
Production capacity 175,000 components
External demand 150,000 components
Potential demand from Division B 80,000 components
The anticipated external market price for a component is $50.

Division B $
Sales price 450
Budgeted variable manufacturing cost per television
Direct material 40
Direct labour 62
Variable overhead 16

In addition to the variable costs above, each television produced needs five components
Fixed costs are budgeted to be $1,460,000 for next year. Annual sales of televisions are
expected to be 16,000 units.
Transfer Pricing Policy
Transfer prices are set at opportunity cost.
Division S must satisfy the demand of Division B before selling components externally.
Division B is allowed to purchase components from Division S or from external suppliers.

Performance Management 10 March 2014

Required:

(a) Assuming that Division B buys all the components it requires from
Division S:

Produce a profit statement for each division detailing sales and costs,
showing external sales and internal company transfers separately where
appropriate.

(7 marks)

(b) A specialist external supplier has approached Division B and offered to

supply 80,000 components at a price of $42 each. The components fulfil
the same function as those manufactured by Division S. The manager of
Division B has accepted the offer and has agreed to buy all the
components it requires from this supplier.

(i) Produce a revised profit statement for each division and for the total SBA
company.

(6 marks)

Division S has just received an enquiry from a new customer for the production
of 25,000 components. The manager of Division S requires a total profit for the
year for the division of $450,000.

(ii) Calculate the minimum price per component to sell the 25,000
components to the new customer that would enable the manager of
Division S to meet the profit target.

Note: this order will have no effect on the divisional fixed costs and no
impact on the 150,000 components Division S sells to its existing external
customers at $50 per component. Division B will continue to purchase the
80,000 components it requires from the specialist external supplier.
(4 marks)

(c) Discuss the potential implications for SBA of outsourcing the production
of one type of component that it manufactures.

(8 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 13 to 16

March 2014 11 Performance Management

This page is blank

Performance Management 12 March 2014

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

March 2014 13 Performance Management

CUMULATIVE PRESENT VALUE TABLE
Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

Performance Management 14 March 2014

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑ f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

March 2014 15 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 16 March 2014

March 2014 17 Performance Management
Performance Management 18 March 2014
LIST OF VERBS USED IN THE QUESTION REQUIREMENTS
A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.
It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

March 2014 19 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

March 2014

Performance Management 20 March 2014

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO.

Performance Pillar

P2 – Performance Management
P2 – Performance Management
21 May 2014 – Wednesday Afternoon Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 9.

Section B comprises 2 questions and is on pages 10 to 13.

Maths tables and formulae are provided on pages 15 to 18.

The list of verbs as published in the syllabus is given for reference on page
19.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2014

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

A company has produced the following performance report for April. The budget shown in the
report was based on an original assumption that the total market size for April would be 40
million units. Since the performance report was produced, more accurate market size
information has become available. The actual market size for April was lower than estimated
at 37.5 million units.

Budget Actual Variance

Sales and
2,000,000 1,650,000 (350,000)
production units

Budget Actual Variance

$000 $000 $000
Revenue 7,000 5,643.0 (1,357.0)
Variable costs 4,220 3,580.5 639.5
Fixed costs 1,050 1,100.0 (50.0)
Profit 1,730 962.5 (767.5)

Required:

(a) Produce a statement that reconciles budget profit to actual profit for April in as much
detail as possible.
(6 marks)
(b) Discuss the advantages and disadvantages of your statement with regard to
responsibility accounting.
(4 marks)

(Total for Question One = 10 marks)

Performance Management 2 May 2014

Question two is on the next page

TURN OVER

May 2014 3 Performance Management

Question Two

SVC is a car manufacturer. SVC is planning the development of a prototype hydrogen

powered car, the Model Q. The prototype Model Q car will have a limited production run of
250 cars. To ensure that the Model Q is ready by SVC’s stated deadline, production will take
place over the course of one month. Details for the development and production of the
prototype Model Q are shown below.
Note: a prototype is defined as a preliminary version of a vehicle from which other forms may
be developed.

Forecast development cost $6,500,000

Forecast design cost $1,300,000
Forecast manufacturing costs
Material cost $25,500 per car
Variable production overhead cost $780 per car (this is not related to labour hours)

Direct labour $60 per hour (see note 2 below)

Direct labour
SVC plans to hire a team of 12 specialist production staff. The specialist production staff will
be paid a premium on their basic hourly rate of pay dependent on the total number of labour
hours required to produce all 250 prototype Model Q cars as follows:
Total labour hours Premium on basic hourly labour rate
0 – 2,000 35%
2,001 – 2,500 30%
2,501 – 3,000 25%
3,001 – 3,500 20%
More than 3,500 0%
The premium on the basic hourly labour rate will be applicable to all labour hours during
production.

Learning curve
It is estimated that the manufacture of the first car will take 13 labour hours. There is
expected to be a 95% learning curve that will continue until 128 cars have been produced.
th
Thereafter, each car will take the same time to produce as the 128 .
Notes:
1. The learning index for a 95% learning curve = -0.074

2. The hourly direct labour rate stated above under ‘Forecast manufacturing cost’ is
inclusive of a premium on the basic hourly labour rate, which has been calculated
assuming that each of the 250 cars takes the same time to produce as the first.

Performance Management 4 May 2014

Required:

(a) Calculate the total labour cost of producing 250 cars.

(6 marks)

(b) Discuss life cycle costing, using the information given about the Model Q car to illustrate
your discussion.
(4 marks)

(Total for Question Two = 10 marks)

TURN OVER

May 2014 5 Performance Management

Question Three

NJ assembles and sells racing bicycles.

In an attempt to improve profit, during the latest year NJ reduced the training it provided to its
manufacturing staff.
The following actual selling price and cost information is available for the latest year:

$ per bicycle
Selling price 1350
Frame cost 820
Other material cost 85
Assembly cost 100
Delivery cost 15
Contribution 330

Annual quality cost information for the latest year

Inspection costs (manufacturing) $2,300,000

Staff training costs $780,000

Total cost of dismantling and $200

reassembling per bike (this includes the
collection cost of the faulty bicycle at $20)

Estimated market size (number of 2,500,000

bicycles)

Additional information for the latest year

• 3,000 completed bicycles were found to have a faulty frame before delivery to the
customer. Each faulty frame had to be replaced and the bicycle had to be reassembled.
NJ is unable to recover the cost of faulty frames from the supplier as the supplier has
gone into liquidation.
• NJ had to replace 1,500 bicycles that had already been delivered to customers due to a
failure of the frame.
• The management team at NJ estimated that its market share fell to 8% from a forecast
8.5% due to adverse consumer reaction as a result of criticism in the bicycle racing
press.

Required:

(a) Prepare a cost of quality report for NJ for the latest year under appropriate headings.
(6 marks)

(b) Discuss, using the above information, the relationship between conformance
costs and non-conformance costs.
(4 marks)

(Total for Question Three = 10 marks)

Performance Management 6 May 2014

Question Four

AST is a grocery and general merchandise retail group. AST has supermarkets located in
most towns and cities in its home country. Over the last few years, profits have fallen and
AST has recognised that it has paid insufficient attention to customer care.
AST has now realised the importance of the customer experience at its supermarkets. In an
attempt to earn the loyalty of its customers, AST has introduced a loyalty card scheme that
rewards customers with discount vouchers based on their spend and buying patterns at
supermarkets.
The management of AST is considering the introduction of a balanced scorecard approach to
manage the performance of its stores.

Required:

Recommend an objective and a suitable performance measure for each of three non-
financial perspectives of a balanced scorecard that AST could use to support its new
strategy of improving the customer experience.

Note: in your answer you should state three perspectives and then recommend with
reasons an objective and a performance measure for each one of your three
perspectives.

(Total for Question Four = 10 marks)

Section A continues on the next page

TURN OVER

May 2014 7 Performance Management

Question Five

PTP produces two products from different combinations of the same resources. Details of the
selling price and costs per unit for each product are shown below:

Product E Product M
$ $
Selling price 175 125
Material A ($12 per kg) 60 24
Material B ($5 per kg) 10 15
Labour ($20 per hour) 40 20
Variable overhead ($7 per machine hour) 14 28

The fixed costs of the company are $50,000 per month.

PTP aims to maximise profits from production and sales. The production plan for June is
currently under consideration.
The following resources are available in June:
Material A 4,800kg
Material B 3,900kg
Labour 2,500 hours
Machine hours 5,000 hours

Required:
(a)
(i) Identify the objective function and the constraints to be used in a linear programming
model to determine the optimum production plan for June.
(3 marks)

The solution to the linear programming model shows that the only binding constraints in June
are those for Material A and Material B.

(ii) Produce, using simultaneous equations, the optimum production plan and resulting
profit for June. (You are NOT required to draw or sketch a graph.)
(5 marks)

Based on the optimal production plan for June, the management accountant at PTP has
determined that the shadow price for Material A is $7 per kg.

(b) Explain the meaning of the shadow price for Material A.

(2 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

Performance Management 8 May 2014

End of Section A

Section B starts on page 10

TURN OVER

May 2014 9 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

BON Group is a magazine publishing company. It comprises a number of different divisions,

each publishing magazines in a different sector. Many of its magazines are the most popular
titles in their specialist interest group. BON Group is a profitable company and is one of the
largest publishing companies in its country based on staff numbers and magazine circulation.
BON Group is now considering entering into the home decoration print magazine market with
its new title ‘Y Magazine’. The home decoration print magazine market is very competitive
with a number of well established titles already being published by BON Group’s competitors.
Y Magazine would be published monthly. The management of BON Group is initially
considering the following market research-derived information to determine the selling price of
Y Magazine.
If the selling price of Y Magazine is $3.99, the monthly demand for the magazine is expected
to be 60,000 copies. For every $0.50 increase in the selling price, this demand would reduce
by 10,000 copies. For every $0.50 decrease in the selling price, this demand would increase
by 10,000 copies.
Forecast variable cost per copy of Y Magazine:
$
Paper 0.83
Ink See note 1
Machine cost 0.22
Other variable cost 0.15

Note 1: Each Y Magazine needs 0.2 litres of ink. However 10% of the ink input to the printing
process is wasted. Ink costs $5.40 per litre.

Required:

(a) Calculate the total monthly contribution that would be earned by Y Magazine.
Note: assume that BON Group will set the selling price so that profits would be maximised.
If P = a - bx then MR = a - 2bx
(7 marks)

Performance Management 10 May 2014

BON Group has commissioned an advertising campaign to launch Y Magazine. This will
invalidate the previous price and demand relationship. The price of Y Magazine has been set
at full cost plus a mark-up of 20%. In month 1, BON Group now expects to sell 50,000 copies
of the magazine to new customers at this price.
The management of BON Group wishes to calculate the total profit for first three months of Y
Magazine. The following information is available:
• After their first month of purchase, BON Group expects 90% of all new customers to
purchase Y Magazine for a second consecutive month. After the second month of
purchase, BON Group expects to retain 85% of these remaining customers in
subsequent months.
• As the magazine circulation area increases, sales to additional new customers in
months 2 and 3 will be 20% and 30% of the month 1 sales figure respectively.
• Fixed overhead costs are apportioned by BON Group to magazines based on sales
volume. Total budgeted annual fixed overhead is $18,000,000 and total budgeted
annual magazine sales, including Y Magazine, is 12,000,000 copies.
• The sales price of Y Magazine will remain unchanged throughout the first three
months.

Required:

(b) Produce a statement that shows the total profit for the first three months of
Y Magazine.
(6 marks)

(c) Calculate the percentage of new customers that need to purchase Y Magazine for a
second consecutive month in order to achieve a three-month profit of $100,000.
(4 marks)

(d) Discuss the suitability of market skimming and penetration pricing as alternative pricing
strategies for the introduction of Y Magazine.
(8 marks)

(Total for Question Six = 25 marks)

Section B continues on the next page

TURN OVER

May 2014 11 Performance Management

Question Seven

BLR provides vehicle maintenance services through its chain of garages. Each garage
operates as an investment centre.
Garage managers are targeted on Return on Capital Employed (ROCE) and receive a bonus
if their garage generates an annual ROCE of 15% or more.
At the start of this year, garage managers were informed that each garage would now receive
an apportionment of the BLR head office fixed overhead costs. Head office costs are
calculated as 7% of sales revenue and are included in Other operating costs. BLR head
office stated that target ROCE would remain at 15% for each of its garages.
The following is a summary performance report for Garage A and Garage B:

Garage A Garage B
This year Last year This year Last year
$000 $000 $000 $000
Sales revenue 1,300.0 1,200.0 550.0 500.0
Material costs 190.0 180.0 80.0 75.0
Staff costs 355.0 350.0 150.0 150.0
Other operating costs 531.0 460.0 258.5 180.0
Profit 224.0 210.0 61.5 95.0

Capital employed 1,600 1,500 400 600

The capital employed figures in the above table are the net book value of the non-current
assets of each garage at the end of the year.

Performance Management 12 May 2014

Required:

(a) Explain ONE advantage and ONE disadvantage of each BLR garage being charged an
apportionment of BLR head office costs.
(4 marks)
(b) Discuss, using the information in the scenario, the advantages and disadvantages of
using ROCE to determine manager bonuses.
(9 marks)

Now using Residual Income (RI) to assess the performance of garage managers:
(c) Discuss the advantages and disadvantages of using RI instead of ROCE to determine
garage managers’ bonuses.
Note: BLR has a cost of capital of 8%.
(8 marks)

BLR has a Total Quality Management (TQM) culture and, to support this culture, Head
Office proposes to measure garage performance against a competitor instead of
against a pre-determined internal standard. The management of BLR has chosen to
benchmark performance against NKR. NKR is a successful private company that
operates a network of similar sized garages to BLR.

Required:

(d) Discuss the suitability and the feasibility of benchmarking the performance of BLR
against that of NKR.
(4 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 15 to 17

May 2014 13 Performance Management

This page is blank

Performance Management 14 May 2014

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

May 2014 15 Performance Management

CUMULATIVE PRESENT VALUE TABLE
Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

Performance Management 16 May 2014

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

May 2014 17 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 18 May 2014

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

May 2014 19 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

May 2014

Wednesday Afternoon Session

Performance Management 20 May 2014

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO

Performance Pillar

P2 – Performance Management
P2 – Performance Management
21 November 2012 – Wednesday Afternoon Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 6.

Section B comprises 2 questions and is on pages 8 to 11.

Maths tables and formulae are provided on pages 13 to 16.

The list of verbs as published in the syllabus is given for reference on page
19.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2012

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

A company has developed a new product. The following information was prepared by the
trainee accountant for presentation at the first performance review meeting for the new
product.

Standard labour wage rate $12 per labour hour

Standard labour hours per unit 25 hours
Output to date 32 units
Actual labour hours worked 460 hours
Labour efficiency variance $4,080 favourable

The Management Accountant pointed out that this analysis ignored the learning curve and
that 25 hours was the time taken for the first unit. The Management Accountant said that a
better representation of the performance would be obtained by splitting the variance into
planning and operating elements and calculated them to be as shown below:

Labour efficiency planning variance $4,320 favourable

Labour efficiency operating variance $240 adverse

Required:

(a) Calculate the learning rate that the Management Accountant assumed
when recalculating the variances.
(6 marks)
(b) Explain TWO reasons why it is important for production planning and
control purposes to identify the learning curve.

(4 marks)
(Total for Question One = 10 marks)

Performance Management 2 November 2012

Question Two

A newly formed engineering company has just completed its first three months of trading. The
company manufactures only one type of product. The external accountant for the company
has produced the following statement to present at a meeting to review performance for the
first quarter.

Performance report for the quarter ending 31 October 2012

Budget Actual Variance

Sales units 12,000 13,000 1,000
Production units 14,000 13,500 (500)

$000 $000 $000 $000 $000

Sales 360 385 25
Direct materials 70 69 1
Direct labour 140 132 8
Variable production overhead 42 43 (1)
Fixed production overhead 84 85 (1)
Inventory adjustment (48) (12) (36)
Cost of sales 288 317 (29)
Gross profit 72 68 (4)

The external accountant has stated that he values inventory at the budgeted total production
cost per unit.

Required:

(a) Produce an amended statement for the quarter ending 31 October 2012
that is based on a flexed budget.
(6 marks)

(b) Explain ONE benefit and ONE limitation of the statement you have
produced.

(4 marks)

(Total for Question Two = 10 marks)

Section A continues on the next page

TURN OVER

November 2012 3 Performance Management

Question Three

KL is a transport company that has recently won a five-year government contract to provide
rail transport services. The company appointed a new Director to take responsibility for the
government contract. She has worked in various positions in other rail transport companies
for a number of years. She has put together a team of managers by recruiting some of her
former colleagues and some of KL’s current managers.
The contract stipulates that the company should prepare detailed budgets for its first year of
operations to show how it intends to meet the various operating targets that are stated in the
contract. The new Director is undecided about whether she should prepare the budgets
herself or whether she should involve her management team, including the newly recruited
managers, in the process.

Required:
Produce a report, addressed to the new Director, that discusses participative
budgeting.

Note: your report must

• explain TWO potential benefits and TWO potential disadvantages of

involving the new and existing managers in the budget setting process.

• provide a recommendation to the new Director.

(10 marks)

(Total for Question Three = 10 marks)

Performance Management 4 November 2012

Question Four

A manufacturing company is reviewing its progress towards meeting its objective of having a
reputation for producing high quality products. Extracts from the company’s records for each
of the years ended 30 September 2011 and 2012 are shown below.

2012 2011
% of units rejected by customers 12% 20%
% of units rejected before delivery 12% 3%

Costs as % of revenue
Raw material inspection 8% 3%
Direct material 18% 20%
Direct labour 13% 12%
Training 8% 4%
Preventative machine maintenance 8% 2%
Machine breakdown maintenance 5% 10%
Finished goods inspection 7% 1%

Required:

(a) Explain each of the four quality cost classifications using examples from
the above data.
(4 marks)

(b) Discuss, using the above data, the relationship between conformance
costs and non-conformance costs and its importance for this company.

(6 marks)

(Total for Question Four = 10 marks)

Section A continues on the next page

TURN OVER

November 2012 5 Performance Management

Question Five

CDE has recently won a contract to supply a component to a major car manufacturer that is
about to launch a new range of vehicles. This is a great success for the design team of CDE
as the component has many unique features and will be an important feature of some of the
vehicles in the range.
CDE is currently building a specialised factory to produce the component. The factory will
start production on 1 January 2013. There is an expected demand for 140,000 units of the
component in 2013.
Forecast sales and production costs for 2013:
Quarter 1 2 3 4
Sales (units) 19,000 34,000 37,000 50,000

$ $ $ $
Variable production cost per unit 60 60 65 70

Fixed production overheads for the factory are expected to be $2.8 million in 2013.

A decision has to be made about the production plan. The choices are:

Plan 1: Produce at a constant rate of 35,000 units per quarter

Inventory would be used to cover fluctuations in quarterly demand. Inventory holding costs
will be $13 per unit and will be incurred quarterly based on the average inventory held in each
of the four quarters.

Plan 2: Use a just-in-time (JIT) production system

The factory would be able to produce 36,000 units per quarter in ‘normal’ time and up to a
further 20,000 units in ‘overtime’. However, each unit produced in ‘overtime’ would incur
additional costs equal to 40% of the forecast variable production cost per unit for that quarter.

Required:

(a) Produce calculations using the above data to show which of the two plans
would incur the lowest total cost in 2013.
(6 marks)

(b) Explain TWO reasons why the decision about the production plan should not
be based on your answer to part (a) alone.

(4 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A
Section B starts on page 8

Performance Management 6 November 2012

This page is blank

TURN OVER

November 2012 7 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

Scenario for parts (a) and (b)

Company WX manufactures a number of finished products and two components. Three
finished products (P1, P2, and P3) and two components (C1 and C2) are made using the
same resources (but in different quantities). The components are used internally by the
company when producing other products but they are not used in the manufacture of P1, P2
or P3.
Budgeted data for December for P1, P2, P3, C1 and C2 are as follows:

P1 P2 P3 C1 C2
Units demanded 500 400 600 250 150
$/unit $/unit $/unit $/unit $/unit
Selling price 155 125 175 - -
Direct labour ($10/hour) 25 15 30 10 15
Direct material ($50/kg) 10 20 20 5 10
Variable production overhead 10 15 20 10 20
($40/machine hour)
Fixed production overhead 50 30 60 20 30
($20/labour hour)
Gross profit 60 45 45 - -

Further information for December:

Direct labour: 4,300 hours are available.

Direct material: 420 kgs are available.

Machine hours: no restrictions apply.

Components: C1 and C2 are readily available from external suppliers for $50 and $80 per
unit respectively. The external suppliers are reliable and the quality of the components is
similar to that of those manufactured by the company.

Required:

(a) Produce calculations to determine the optimal production plan for P1, P2, P3, C1
and C2 during December.
Note: it is not possible to produce partly finished units or to hold inventory of any of
these products or components.
(10 marks)

Performance Management 8 November 2012

(b) There is a possibility that more of the direct material may become available during
December. The shadow price per kg of the direct material has been calculated to
be $200, $187.50 and $175 depending on how much extra becomes available.

Required:
Explain the shadow prices of $200, $187.50 and $175 for the direct material.
Your answer should show the changes to the resource usage and the production
plan for each of the shadow prices.

(6 marks)

Scenario for parts (c) and (d)

Company YZ manufactures products L, M and N. These products are always sold in the ratio
9L:6M:5N. The budgeted sales volume for December is a total of 14,000 units. The budgeted
sales volumes, selling price per unit and variable cost per unit for each of the products are
shown below:

L M N
Sales budget (units) 6,300 4,200 3,500

$ $ $
Selling price per unit 300 600 230
Variable cost per unit 100 300 50

The budgeted fixed costs of the company for December are $2.7 million.

Required:

(c) Calculate the number of units of each product that must be sold for
Company YZ to break even in December given the current sales mix ratio.

(4 marks)

(d) The Sales Manager has now said that to be able to sell 6,300 units of
product L in December it will be necessary to reduce the selling price of
product L.

Calculate the sensitivity of Company YZ’s total budgeted profit for

December to a change in the selling price per unit of product L.
(5 marks)
(Total for Question Six = 25 marks)

Section B continues on the next page

TURN OVER
November 2012 9 Performance Management
Question Seven

Scenario for part (a)

The OB group has two divisions: the Optics Division and the Body Division. The Optics
Division produces optical devices, including lenses for cameras. The lenses can be sold
directly to external customers or they can be transferred to the Body Division where they are
sold with a camera body as a complete camera.

Optics Division
The relationship between the selling price of a lens and the quantity demanded by external
customers is such that at a price of $6,000 there will be no demand but demand will increase
by 600 lenses for every $300 decrease in the price. The variable cost of producing a lens is
$1,200. The fixed costs of the division are $12 million each year. The Optics Division has the
capacity to satisfy the maximum possible demand if required.

Body Division
After the lens has been included with a body to make a complete camera the relationship
between selling price and demand is such that at a price of $8,000 there will be no demand
for the complete camera but demand will increase by 300 complete cameras for every $100
decrease in the price. The Body Division has annual fixed costs of $15 million and has the
capacity to satisfy the maximum possible demand if required. The total variable costs of a
camera body and packaging it with a lens are $1,750 (this does not include the cost of a
lens).

Note: If P = a – bx then Marginal Revenue (MR) will be given by MR = a – 2bx.

Required:

(a) Calculate the total revenue that would be generated by the complete
cameras if:

(i) the Manager of the Optics Division set the transfer price of a lens equal
to the selling price which would be set to maximise profits from the sale
of lenses to external customers;

(ii) the transfer price of a lens was set to maximise the profits of the OB
group from the sale of complete cameras.

(10 marks)

Scenario for parts (b) and (c)

The FF group is a divisionalised company that specialises in the production of processed fish.
Each division is a profit centre. The Smoke Division (SD) produces smoked fish. The
Packaging Division (PD) manufactures boxes for packaging products.

Smoke Division (SD)

The Manager of SD has just won a fixed price contract to supply 500,000 units of smoked fish
to a chain of supermarkets. This will fully utilise the capacity of SD for the next year. Budget
details for the next year are:

Variable cost per unit $12.00 (excluding the box)

Fixed costs $6.0 million
Revenue $13.5 million
Output 500,000 units of smoked fish

Each unit of smoked fish requires one box.

Performance Management 10 November 2012

Packaging Division (PD)
The Packaging Division has agreed to supply 500,000 boxes to SD at the same price that it
sells boxes to external customers. Budget details for PD (including the order from SD) for the
next year are:

Variable production cost $1.40 per box

Fixed costs $2.4 million
Output 4.48 million boxes
Capacity 4.50 million boxes

Company Policy
It has been announced today that FF will be introducing a new performance appraisal system.
The Divisional Managers will only be paid a bonus if the profit of their division is at least 12%
of assets consumed during the next year. The value of the assets consumed is assumed to
be the same as the fixed costs.

Required:

(b) Calculate, following the change to the company policy:

(i) the minimum price per box that PD would be willing to charge;

(3 marks)

(ii) the maximum price per box that SD would be willing to pay.
(4 marks)

(Total for part (b) = 7 marks)

(c) The Manager of SD is unhappy about paying the same price per box as
an external customer and thinks that transfer prices should be set using
an opportunity cost-based approach.

Discuss the view that transfer prices should be set using opportunity
cost. You should use the data from the FF group to illustrate your
answer.
(8 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 13 to 16

November 2012 11 Performance Management

This page is blank

Performance Management 12 November 2012

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

November 2012 13 Performance Management

CUMULATIVE PRESENT VALUE TABLE
Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

Performance Management 14 November 2012

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑ f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

November 2012 15 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 16 November 2012

This page is blank

November 2012 17 Performance Management

This page is blank

Performance Management 18 November 2012

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

November 2012 19 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

November 2012

Wednesday Afternoon Session

Performance Management 20 November 2012

Performance Pillar

P2 – Performance Management
P2 – Performance Management
Thursday 1 September 2011

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 5.

Section B comprises 2 questions and is on pages 6 to 9.

Maths tables and formulae are provided on pages 11 to 14.

The list of verbs as published in the syllabus is given for reference on page
15.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2011

SECTION A – 50 MARKS

[Note: The indicative time for answering this section is 90 minutes.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

HZ is reviewing the selling price of one of its products. The current selling price of the product
is $45 per unit and annual demand is forecast to be 130,000 units at this price. Market
research shows that the level of demand would be affected by any change in the selling price.
Detailed analysis of this research shows that for every $1 increase in selling price, annual
demand would reduce by 10,000 units and that for every $1 decrease in selling price, annual
demand would increase by 10,000 units.
A forecast of the costs that would be incurred by HZ in respect of this product at differing
activity levels is as follows:

Annual production and 100,000 160,000 200,000

sales (units)
$000 $000 $000
Direct materials 280 448 560
Direct labour 780 1,248 1,560
Variable overhead 815 1,304 1,630
Fixed overhead 360 360 360

The company seeks your help in determining the optimum selling price to maximise its profits.

Required:

(a) Calculate the optimum forecast annual profit from the product.
(6 marks)
(b) Explain the effect on the optimal price and quantity sold of independent
changes to:

(i) the direct material cost per unit;

(2 marks)

(ii) the annual fixed overhead cost.

(2 marks)

(Total for Question One = 10 marks)

Note : If Price (P) = a - bx then Marginal Revenue = a - 2bx

Performance Management 2 September 2011

Question Two

DTG is a management accounting consultancy that specialises in providing services to small

businesses that do not have in-house expertise in management accounting techniques. Its
clients vary in size and operate in many different sectors including manufacturing, retail and
service industries. Although they are different, all clients require similar services most of
which are provided by DTG’s team of employed accountants and support staff. Occasionally
DTG will engage the services of specialists on a one-off contract basis to help to solve the
problem faced by a particular client.

Before accepting clients, DTG will meet with them to discuss their requirements and to agree
the basis of their fees.

DTG has an ongoing relationship with many of its clients. This level of involvement within the
client’s business enables DTG to foresee potential problems for the client and offer further
services. This works well for the clients and particularly well for DTG who gain a considerable
number of new assignments in this way.

New clients tend to be initially for “one-off” assignments. Working with new clients requires
time and effort to be invested to become familiar with the client’s business and procedures.
DTG hopes to form a relationship and attract more assignments and referrals from each client
it works with.

Required:

Explain how Customer Life Cycle costing could be used by DTG.

(Total for Question Two = 10 marks)

Question Three

In order to compete globally many companies have adopted Kaizen Costing. Consequently
they are changing their performance measurement systems and are abandoning standard
costing systems as they think traditional standard costing and variance analysis is of little use
in the modern environment.

Required:
Discuss why Kaizen Costing could be more useful for performance
measurement than standard costing and variance analysis in such companies.

(Total for Question Three = 10 marks)

TURN OVER
September 2011 3 Performance Management
Question Four

GRV is a chemical processing company that produces sprays used by farmers to protect their
crops. One of these sprays is made by mixing three chemicals. The standard material cost
details for 1 litre of this spray is as follows:
$
0.4 litres of chemical A @ $30 per litre 12.00
0.3 litres of chemical B @ $20 per litre 6.00
0.5 litres of chemical C @ $15 per litre 7.50
Standard material cost of 1 litre of spray 25.50

During August GRV produced 1,000 litres of this spray using the following chemicals:
600 litres of chemical A costing $18,000
250 litres of chemical B costing $8,000
500 litres of chemical C costing $8,500

You are the Management Accountant of GRV and the Production Manager has sent you the
following e-mail:
I was advised by our purchasing department that the worldwide price of chemical B had
risen by 50%. As a result, I used an increased proportion of chemical A than is
prescribed in the standard mix so that our costs were less affected by this price
change.

Required:
(a) Calculate the following operational variances:
(i) direct material mix and
(3 marks)

(ii) direct material yield

(2 marks)

(b) Discuss the decision taken by the Production Manager.

(5 marks)

(Total for Question Four = 10 marks)

Performance Management 4 September 2011

Question Five

ZJET is an airline company that operates both domestically and internationally using a fleet of
20 aircraft. Passengers book flights using the internet or by telephone and pay for their flights
at the time of booking using a debit or credit card.
The airline has also entered into profit sharing arrangements with hotels and local car hire
companies that allow rooms and cars to be booked by the airline’s passengers through the
airline’s web site.
ZJET currently measures its performance using financial ratios. The new Managing Director
has suggested that other measures are equally important as financial measures and has
suggested using the Balanced Scorecard.

Required:
(a) Discuss how the Balanced Scorecard differs from traditional financial
performance measurement.
(4 marks)

(b) Explain THREE non-financial performance measures (ONE from EACH of

THREE different perspectives of the Balanced Scorecard) that ZJET could
use as part of its performance measurement process.
(6 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A

Section B starts on page 6

TURN OVER

September 2011 5 Performance Management

SECTION B – 50 MARKS

[Note: The indicative time for answering this section is 90 minutes.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

WTL manufactures and sells four products: W, X, Y, and Z from a single factory. Each of the
products is manufactured in batches of 100 units using a just-in- time manufacturing process
and consequently there is no inventory of any product. This batch size of 100 units cannot be
altered without significant cost implications. Although the products are manufactured in
batches of 100 units, they are sold as single units at the market price. WTL has a significant
number of competitors and is forced to accept the market price for each of its products. It is
currently reviewing the profit it makes from each product, and for the business as a whole,
and has produced the following statement for the latest period:

Product W X Y Z Total
Number of:
units sold 100,000 130,000 80,000 150,000
Machine hours 200,000 195,000 80,000 300,000 775,000
Direct labour hours 50,000 130,000 80,000 75,000 335,000
$ $ $ $ $
Sales 1,300,000 2,260,000 2,120,000 1,600,000 7,280,000
Direct materials 300,000 910,000 940,000 500,000 2,650,000
Direct labour 400,000 1,040,000 640,000 600,000 2,680,000
Overhead costs 400,000 390,000 160,000 600,000 1,550,000
Profit /(Loss) 200,000 (80,000) 380,000 (100,000) 400,000

WTL is concerned that two of its products are loss making and has carried out an analysis of
its products and costs. This analysis shows:

1. The sales of each product are completely independent of each other.

2. The overhead costs have been absorbed into the above product costs using an
absorption rate of $2 per machine hour.
3. Further analysis of the overhead cost shows that some of it is caused by the number
of machine hours used, some is caused by the number of batches produced and
some of the costs are product specific fixed overheads that would be avoided if the
product were discontinued. Other general fixed overhead costs would be avoided
only by the closure of the factory. Details of this analysis are as follows:

$000 $000
Machine hour related 310
Batch related 230
Product specific fixed overhead:
Product W 500
Product X 50
Product Y 100
Product Z 50 700
General fixed overhead 310
1,550

Performance Management 6 September 2011

Required:

(a) Prepare a columnar statement that is more useful for decision making
than the profit statement prepared by WTL. Your statement should also
show the current total profit for the business.
(8 marks)

(b) Prepare a report to the Board of WTL that:

(i) Explains why your statement is suitable for decision making;

(4 marks)
(ii) Advises WTL which, if any, of its four products should be
discontinued in order to maximise its company profits.
(4 marks)
(c) Calculate the break even volume (in batches) for Product W.

(4 marks)
(d) Explain how WTL could use Value Analysis to improve its profits.

(5 marks)
(Total for Question Six = 25 marks)

Section B continues on page 8

TURN OVER

September 2011 7 Performance Management

Question Seven

TY comprises two trading divisions. Both divisions use the same accounting policies. The
following statement shows the performance of each division for the year ended 31 August:
Division T Y
$000 $000
Sales 3,600,000 3,840,000
Variable Cost 1,440,000 1,536,000
Contribution 2,160,000 2,304,000
Fixed Costs 1,830,000 1,950,000
Operating Profit 330,000 354,000

Capital Employed 3,167,500 5,500,000

Division Y manufactures a single component which it sells to Division T and to external

customers. During the year to 31 August Division Y operated at 80% capacity and produced
200,000 components. 25% of the components were sold to Division T at a transfer price of
$15,360 per component. Division T manufactures a single product. It uses one of the
components that it buys from Division Y in each unit of its finished product, which it sells to an
external market.

Investment by Division T
Division T is currently operating at its full capacity of 50,000 units per year and is considering
investing in new equipment which would increase its present capacity by 25%. The machine
has a useful life of three years. This would enable Division T to expand its business into new
markets. However, to achieve this it would have to sell these additional units of its product at
a discounted price of $60,000 per unit. The capital cost of the investment is $1.35bn and the
equipment can be sold for $400m at the end of three years.
Division T believes that there would be no changes to its cost structure as a result of the
expansion and that it would be able to sell all of the products that it could produce from the
extra capacity. It is company policy of TY that all divisions use a 10% cost of capital to
evaluate investments.

Performance Management 8 September 2011

Required:
(a) Prepare an analysis of the sales made by Division Y for the year ended 31
August to show the contribution earned from external sales and from
internal sales.

(3 marks)
(b) Assuming that the current transfer pricing policy continues,

(i) Evaluate, using NPV, the investment in the new equipment from
the perspective of Division T;
(8 marks)

(ii) Evaluate, using NPV, the investment in the new equipment from the
perspective of TY.

Ignore taxation and inflation.

(4 marks)

(c) Discuss the appropriateness of the current transfer pricing policy from the
perspective of EACH of the divisional managers AND the company as a
whole.
(10 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 11 to 14

September 2011 9 Performance Management

This page is blank

Performance Management 10 September 2011

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

September 2011 11 Performance Management

CUMLATIVE PRESENT VALUE TABLE

Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

Performance Management 12 September 2011

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent:: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑ f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

September 2011 13 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 14 September 2011

LIST OF VERBS USED IN THE QUESTION REQUIREMENTS
A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.

It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

September 2011 15 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

September 2011

Performance Management 16 September 2011

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO

Performance Pillar

P2 – Performance Management
P2 – Performance Management
Thursday 30 August 2012

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 5.

Section B comprises 2 questions and is on pages 6 to 9.

Maths tables and formulae are provided on pages 11 to 14.

The list of verbs as published in the syllabus is given for reference on page
15.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2012

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

A company is developing a new product. During its expected life it is forecast that 6,400 units
of the product will be sold for $70 per unit.
The direct material and other non-labour related costs are expected to be $45 per unit
throughout the life of the product.
Production is expected to be in batches of 100 units throughout the life of the product. The
direct labour cost is expected to reduce due to the effects of learning throughout the life of the
product. The total direct labour cost of the first batch of 100 units is expected to be $6,000
and an 80% learning effect is expected to occur.
Fixed costs specific to this product are expected to be $60,000 in total for the life of the
product.
Note: The value of the learning index for an 80% learning curve is -0.3219

Required:

(a) Calculate the total direct labour cost of the first:

(i) 800 units

(ii) 1,600 units
(iii) 3,200 units
(iv) 6,400 units
(4 marks)

(b) Apply the results from part (a) to advise the company management of the
approximate break-even level of sales of the product.
(3 marks)

(c) Explain the effect on the break-even level of sales if the rate of learning
was 90%. (No calculations are required.)
(3 marks)
(Total for Question One = 10 marks)

Performance Management 2 September 2012

Question Two

CX is a passenger transport company which is seeking to improve its profits. It operates a

number of bus routes within a 10 mile radius of a city centre. It operates a fleet of 100 buses,
each of which has a capacity of 50 persons, throughout the day, seven days per week. The
frequency of buses on each of its routes varies from a minimum of one to a maximum of four
per hour during the day and evening.
The passengers who use the buses are a mix of adults and children. Some routes are busier
than others and, at certain times, some passengers have to stand on the bus as there are
insufficient seats available.
The directors of CX are considering how best to measure the performance of each of the
routes that they operate and it has been suggested that they should use a Balanced
Scorecard approach.

Required:

(a) Explain how the Balanced Scorecard could be used by CX to improve its
profits.
(4 marks)

(b) Explain TWO performance measures, each from a different perspective of

the Balanced Scorecard, that CX could use to measure the performance
of its routes. (You must state the perspective to which each of your
measures relates.)
(6 marks)

(Total for Question Two = 10 marks)

Question Three

Required:

(a) Explain the links between budgets, standard costs and flexible budgeting.

(6 marks)

(b) Discuss the importance of your answer to (a) for management control.

(4 marks)

(Total for Question Three = 10 marks)

Section A continues on the next page

TURN OVER
September 2012 3 Performance Management
Question Four

A company manufactures a single product. The selling price, production cost and contribution
per unit for this product for 2013 have been predicted as follows:

$ per unit
Selling price 90.00
Direct materials (components) 30.00
Direct labour 35.00
Variable overhead 10.00 75.00
Contribution 15.00

The company has forecast that demand for the product during 2013 will be 24,000 units.
However to satisfy this level of demand, production of 35,294 units will be required because:

• 15% of the items delivered to customers (4,235 units) will be rejected as faulty and
will require free replacement. The cost of delivering the replacement item is $5 per
unit;
• 20% of the items manufactured (7,059 units) will be discovered to be faulty before
they are despatched to customers.

In addition, before production commences, 10% of the components that the company
purchases are damaged while in storage.

As a consequence of all of the above, total quality costs for the year amount to $985,885.

The company is now considering the following proposal:

1. Spending $30,000 per annum on a quality inspector which would reduce the
percentage of faulty items delivered to customers to 13%; and
2. Spending $500,000 per annum on training courses for the production workers which
management believes will reduce and sustain the level of faulty production to 10%.

Required:

(a) Prepare a statement that shows the quality costs that the company would
expect to incur if it accepted the above proposal. Your answer should
clearly show the costs analysed using the four recognised quality cost
headings.
(7 marks)

(b) Recommend with reasons, whether or not the company should accept the
proposal.
(3 marks)

(Total for Question Four = 10 marks)

Performance Management 4 September 2012

Question Five

A company has carried out extensive product research and as a result has just launched a
new innovative product unlike anything else that is currently available on the market. The
company has launched this product using a market skimming pricing policy.
The market in which it operates is highly competitive and historically success has been
achieved by being the first to market with new products. Only a small number of companies
have survived in the market and those that remain are constantly aiming to develop new
products either by improving those already in the market or by extensive product research.

Required:
Explain, with reasons, the changes that the company may need to make to the
unit selling price of the product as it moves through each of the four stages of its
product life cycle.
(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A

Section B starts on page 6

TURN OVER

September 2012 5 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

CDF is a manufacturing company within the DF group. CDF has been asked to provide a
quotation for a contract for a new customer and is aware that this could lead to further orders.
As a consequence, CDF will produce the quotation by using relevant costing instead of its
usual method of full cost plus pricing.
The following information has been obtained in relation to the contract:
Material D
40 tonnes of material D would be required. This material is in regular use by CDF and has a
current purchase price of $38 per tonne. Currently, there are 5 tonnes in inventory which cost
$35 per tonne. The resale value of the material in inventory is $24 per tonne.

Components
4,000 components would be required. These could be bought externally for $15 each or
alternatively they could be supplied by RDF, another company within the DF manufacturing
group. The variable cost of the component if it were manufactured by RDF would be $8 per
unit, and RDF adds 30% to its variable cost to contribute to its fixed costs plus a further 20%
to this total cost in order to set its internal transfer price. RDF has sufficient capacity to
produce 2,500 components without affecting its ability to satisfy its own external customers.
However in order to make the extra 1,500 components required by CDF, RDF would have to
forgo other external sales of $50,000 which have a contribution to sales ratio of 40%.

Labour hours
850 direct labour hours would be required. All direct labour within CDF is paid on an hourly
basis with no guaranteed wage agreement. The grade of labour required is currently paid $10
per hour, but department W is already working at 100% capacity. Possible ways of
overcoming this problem are:
• Use workers in department Z, because it has sufficient capacity. These workers are
paid $15 per hour.
• Arrange for sub-contract workers to undertake some of the other work that is
performed in department W. The sub-contract workers would cost $13 per hour.

Specialist machine
The contract would require a specialist machine. The machine could be hired for $15,000 or it
could be bought for $50,000. At the end of the contract if the machine were bought, it could
be sold for $30,000. Alternatively it could be modified at a cost of $5,000 and then used on
other contracts instead of buying another essential machine that would cost $45,000.
The operating costs of the machine are payable by CDF whether it hires or buys the machine.
These costs would total $12,000 in respect of the new contract.

Supervisor
The contract would be supervised by an existing manager who is paid an annual salary of
$50,000 and has sufficient capacity to carry out this supervision. The manager would receive
a bonus of $500 for the additional work.

Performance Management 6 September 2012

Development time
15 hours of development time at a cost of $3,000 have already been worked in determining
the resource requirements of the contract.

Fixed overhead absorption rate

CDF uses an absorption rate of $20 per direct labour hour to recover its general fixed
overhead costs. This includes $5 per hour for depreciation.

Required:

(a) Calculate the relevant cost of the contract to CDF. You must present your
answer in a schedule that clearly shows the relevant cost value for each of the
items identified above. You should also explain each relevant cost value you
have included in your schedule and why any values you have excluded are not
relevant.

Ignore taxation and the time value of money.

(19 marks)

(b) Discuss TWO problems that can arise as a result of setting prices using
relevant costing.
(6 marks)

(Total for Question Six = 25 marks)

Section B continues on page 8

TURN OVER

September 2012 7 Performance Management

Question Seven

HJ and KL are two companies that operate in the same industry sector. Details for the two
companies for the year ended 31 December 2011 are as follows:

HJ KL
$000 $000
Revenue 1,600 990
Cost of sales:
Variable production costs 400 400
Fixed production costs (including
depreciation see Note 3) 800 390
1,200 790
Gross profit 400 200
Administration costs (fixed) 120 80
Operating profit 280 120

Non-current assets:
Cost 2,000 1,800
Depreciation (see below) 400 1,230
1,600 570
Net current assets 200 150
Capital employed 1,800 720

Performance measures
Return on Capital Employed (ROCE) 15.56% 16.67%

Operating profit margin 17.50% 12.12%

Asset turnover 0.89 1.38

Notes

1. Assume that the non-current assets of both companies are all used in their manufacturing
processes.

2. The two companies use different depreciation policies: HJ depreciates its non-current
assets using straight-line depreciation at the rate of 20% of cost with no residual value;
whereas KL uses the reducing balance method of depreciation at the rate of 25% per
annum.

3. Included in the fixed costs of the year ended 31 December 2011 is depreciation of
$400,000 for HJ and $190,000 for KL.

4. Each company purchased all of its non-current assets in the month the company was
formed. Neither company has purchased or disposed of any non-current assets since
their original purchase.

HJ has undertaken a benchmarking exercise. The Managing Director (MD) of HJ has been
asked to explain the company’s results compared to those of KL. The MD says the
differences are because of HJ’s depreciation policy and the age of the company’s assets.

Performance Management 8 September 2012

Required:

(a) Calculate the THREE revised performance ratios of HJ after adjusting its
results to align the age of its assets and its depreciation policy with that of
KL.

(9 marks)

(b) Calculate, for KL only, the break-even sales value in 2013 assuming that
there are no changes to its cost and selling price structure or to its mix of
sales, there are no purchases or disposals of non-current assets and that
the existing depreciation policy continues to be applied.
(4 marks)

The directors of KL are now considering replacing its non-current assets with new equipment
that will be fully operational from 1 January 2013. The manufacturer of the new equipment
has offered to accept the company’s old equipment as a trade in at its net book value at 31
December 2012 of $427,500. If this offer is not accepted KL does not expect to be able to
dispose of the old equipment for ANY value at any time in the future.

The new equipment:

• Has a cost of $1.2million before any trade in value is deducted;

• Increases the fixed production cost (excluding depreciation) by 30% per annum;
• Reduces the variable production cost per unit by 20%;
• Has a life of five years, a residual value after five years of $285,000 and is to be
depreciated using the same depreciation method that is currently being used for the
existing equipment;

Assume that

• There is no change to the unit selling price or demand for KL’s product;
• KL’s cost of capital for this type of investment is 10% per annum.

Required:

Ignore taxation and inflation.

(6 marks)

(ii) Discuss the effect on the break-even sales value in 2013 of investing in
the new equipment. Your answer should be supported by appropriate
calculations.
(6 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

September 2012 9 Performance Management

End of question paper

Maths tables and formulae are on pages 11 to 14

Performance Management 10 September 2012

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

September 2012 11 Performance Management

Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

Performance Management 12 September 2012

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑ f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

September 2012 13 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 14 September 2012

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

September 2012 15 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

September 2012

Performance Management 16 September 2012

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO

Performance Pillar

P2 – Performance Management

P2 – Performance Management
Wednesday 27 February 2013

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

Graph paper will be required for this examination and should be provided on
your desk.
ALL answers must be written in the answer book or on the graph paper
provided. Answers written on the question paper will not be submitted for
marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 6.

Section B comprises 2 questions and is on pages 8 to 11.

Maths tables and formulae are provided on pages 13 to 16.

The list of verbs as published in the syllabus is given for reference on page
19.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2013

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

A company has developed a new product that has a short life cycle. Information about the
product is as follows:

Selling price and product life cycle

The product will have a life cycle of 4,000 units. It is estimated that the first 3,500 units will be
sold for $215 each. The product will then enter the “decline” stage of its life cycle when the
selling price will be reduced.

Production and costs

The product will be produced in batches of 100 units.

Labour will be paid at $24 per hour. Other variable costs will be $6,000 per batch. Fixed costs
will total $130,000. These costs will apply throughout the product’s life.

Learning curve
The first batch will take 500 labour hours to produce. There will be a 90% learning curve that
will continue until 32 batches have been produced. Every batch produced above this level of
nd
output will take the same amount of labour time as the 32 batch.

Note: The learning index for a 90% learning curve = -0.152

Required:
nd
(a) Calculate the time taken for the 32 batch.
(4 marks)

(b) Calculate the selling price of the final 500 units that will allow the
company to earn a total profit of $150,000 from the product
(6 marks)
(Total for Question One = 10 marks)

Performance Management 2 March 2013

Question Two

ZZ manufactures and sells electronic personal grooming and beauty products. The products
are sold throughout the world and 90% of ZZ’s total revenue comes from export sales. The
production takes place in one factory. Materials are sourced from a variety of suppliers.
The company is keen to build a reputation for quality and gives a five year guarantee with all
of its products. The Managing Director of ZZ recently issued a memo to all of the company’s
managers which stated “My objective for the forthcoming year is to reduce our quality costs in
each of the primary activities in our value chain”.

Required:

(a) State the primary activities in the value chain of a manufacturing company.

(2 marks)

(b) Explain, by giving examples, how each of the FOUR types of quality cost
could be reduced. You should identify in which primary activity each one of
your examples would occur in ZZ’s value chain.
(8 marks)

(Total for Question Two = 10 marks)

Section A continues on the next page

TURN OVER

March 2013 3 Performance Management

Question Three

PQ is a building supplies retailer that operates a chain of shops throughout the country. The
company has grown rapidly but profits have started to fall. The company has an excellent
Inventory Procurement and Management System but the accounting systems are very poor.
A management accountant has recently been appointed to help improve decision making
within the company.
The company sells building supplies, ranging from bags of nails and screws to pre-packed
kitchen units, to a wide range of customers including home owners and professional builders.
The company offers a free delivery service on all orders totalling over $100.
Within each shop there are specialist sections that have skilled staff to offer help and advice
to customers. Examples include:
• The “Design Station” which offers free advice on kitchen and bathroom installation
and design.
• The “Cutting Bay” which cuts timber to customers’ specific requirements. There is no
charge for this service.

Other areas of the shop are “help yourself” where customers select their requirements from
racked displays of products and then pay at the check-out points.
The recently appointed management accountant was shocked to discover that the company’s
pricing policy is to add a 100% mark-up to the bought in cost of all products. The
management accountant has suggested that the mark-up should not be the same for all
products because certain products and certain types of customer will be more costly to sell
and service respectively. The management accountant has suggested that an activity based
costing system should be introduced to allow Direct Product Profitability and Customer
Profitability Analyses to take place.

Required:

(a) Explain how the allocation and absorption of costs differs in activity based
costing compared to traditional absorption costing.
(4 marks)

(b) Explain how activity based costing could help to increase the profits of PQ.

(6 marks)

(Total for Question Three = 10 marks)

Section A continues on the opposite page

Performance Management 4 March 2013

Question Four

XXX uses a standard marginal costing system. Data relating to Y, the only product that it
manufactures are as follows:
Standard cost per unit of Y $
Materials 6 kg @ $10 per kg 60
Labour 5 hours @ $9 per hour 45
Variable overhead 6 machine hours @ $5 per machine hour 30
Total variable production cost 135

Based on the above standard cost data the following out-turn performance report was
produced for February:
Budget Actual
Output (units) 1,100 1,100
$ $
Materials 66,000 69,240
Labour 49,500 57,820
Variable overheads 33,000 35,000
Total variable costs 148,500 162,060

The Production Director has criticised the above report because “It does not give me the
information I need to be able to make informed decisions. It tells me that the costs were
higher but I need to be able to identify areas of responsibility”.
You have been asked to provide a statement that is better suited to the needs of the
Production Director. You have obtained the following information:
Materials: 5,770 kg were purchased and used.
Labour: The standard rate of $9 per hour had not been updated to incorporate a 5% pay rise.
The 5,900 hours that were paid included 460 hours of idle time.
Variable overhead: 6,400 machine hours were used.

Required:

Prepare a statement that reconciles the budget variable production cost with the
actual variable production cost. Your statement should show the variances in as
much detail as possible.

(Total for Question Four = 10 marks)

Section A continues on the next page

TURN OVER

March 2013 5 Performance Management

Question Five

The Pathology Laboratory service of the County Hospital provides diagnostic services to
support the care provided by the County Hospital, local General Practitioners, other hospitals
and healthcare providers. The importance of the work done by the Pathology Laboratory was
summarised by the Head of the laboratory:

"Over 70% of diagnostic and treatment decisions made by doctors are based on
medical laboratory test results. Without our work, doctors would not be able to confirm
their diagnosis. Laboratory results give us the ability to identify diseases in their earliest
stages so that we have a better chance of treating people effectively. The types of tests
performed by our highly-trained staff encompass the entire spectrum of human
disease, from routine diagnostic services to clinical laboratories that specialise in bone
marrow transplants. The laboratories provide over four million tests each year,
providing doctors with the information needed for diagnosis and treatment of all kinds of
condition. Our vision is to continually improve the efficiency of the laboratory to ensure
the best economic approach to patient care.”
The management team of the County Hospital has decided that the use of the balanced
scorecard should be cascaded down to departmental level. Consequently, departmental
managers have been given the task of designing a balanced scorecard for their departments.

Required:

Recommend an objective and a suitable performance measure for each of three

non-financial perspectives of a balanced scorecard that the Pathology
Laboratory could use.

Note: in your answer you should state three perspectives and then recommend
an objective and a performance measure for each one of your three
perspectives.

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A

Section B starts on page 8

Performance Management 6 March 2013

This page is blank

March 2013 7 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

THS produces two products from different combinations of the same resources. Details of the
products are shown below:
E R
per unit per unit
Selling price $99 $159
Material A ($2 per kg) 3 kgs 2 kgs
Material B ($6 per kg) 4 kgs 3 kgs
Machining ($7 per hour) 2 hours 3 hours
Skilled labour ($10 per hour) 2 hours 5 hours
Maximum monthly demand (units) unlimited 1,500

THS is preparing the production plan for next month. The maximum resource availability for
the month is:
Material A 5,000 kgs
Material B 5,400 kgs
Machining 3,000 hours
Skilled labour 4,500 hours

Required:

(a) Identify, using graphical linear programming, the optimal production plan for
products E and R to maximise THS’s profit in the month.

(13 marks)

Question six continues on the opposite page

Performance Management 8 March 2013

The Production Manager has now been able to source extra resources:

• An employment agency would supply skilled labour for a monthly fee of $1,000 and
$14 per hour worked;
• A machine that has the same variable running costs per hour as the current
machinery can be leased. The leased machine would be able to run for 2,000
hours per month.

Required:

(b) Calculate the maximum amount that should be paid next month to lease
the machine. (Note: you should assume that a contract has already been
signed with the employment agency.)

(8 marks)

(c) Explain TWO major factors that should be considered before deciding to lease
the machine. (Note: you should assume that the data supplied is totally
accurate.)
(4 marks)

(Total for Question Six = 25 marks)

Section B continues on page 10

TURN OVER

March 2013 9 Performance Management

Question Seven

CNJ operates a chain of fitness clubs. The clubs are structured into two divisions, the
Eastern division and the Western division. Each division has a Managing Director who is
responsible for revenue, cost and investment decisions at their clubs. A bonus is awarded
each year to the Managing Director that generates the higher Return on Capital Employed
(ROCE).
The following summary information shows the results of the divisions for the past two years:

Year ending 31st December 2012 2011

Eastern Western Eastern Western
$000 $000 $000 $000
Revenue 1,800 2,480 1,900 2,250
Staff costs 1,150 1,430 1,180 1,310
Other operating costs 460 675 500 620
Operating profit 190 375 220 320
Capital employed 500 900 750 1,200

Average number of members 6,790 9,300 7,150 8,420

Notes:
1. Revenue is comprised largely of income from membership fees.
2. CNJ uses net book value of non-current assets as the capital employed. The capital
employed figures in the above table are the net book value of the non-current assets
of each division at the end of the year.
3. Non-current assets are depreciated on a straight line basis over a period of five years
and are assumed to have no residual value. There were no additions or disposals of
non-current assets during the years 2011 and 2012.
4. Both divisions have a cost of capital of 15%.
5. Ignore taxation and inflation.

Required:

(a) Discuss the relative performance of the two divisions using Return on
Capital Employed and other performance measures that you think are
appropriate.

(15 marks)

Performance Management 10 March 2013

Investigations by CNJ’S audit team have revealed that at the end of 2011 the Managing
Director of the Western Division rejected the opportunity to acquire a new building and
equipment to set up a new fitness club at a total cost of $800,000. The building could have
been purchased for $350,000 and for the purpose of this evaluation it is assumed that it would
have held that value for five years and that no depreciation would have been charged on the
building. The new equipment would have cost $450,000 and would have been depreciated in
accordance with CNJ’s policy over five years. The investment would have taken place on 1
January 2012.
The forecast annual profit and number of members for the proposed new club were as
follows:
$000
Revenue 675
Staff costs 371
Other operating costs 160 (including depreciation of the equipment)
Operating profit 144

Average number of members 2,200

It is CNJ’s policy that investments of this type should be appraised over five years using net
present value.

Required:

(b)

(i) Calculate the net present value of the investment. Ignore taxation and inflation.

(4 marks)

(ii) Explain, using appropriate calculations based on the Western Division

and the rejected investment, the limitations of ROCE as a divisional
performance measure.

Note: you can assume that the actual figures for the Western Division for
2012 were the same as those budgeted. Therefore when the decision
about the new club was being made the Managing Director based the
decision on the figures for the investment and the 2012 results for the
Western Division.

(6 marks)
(Total for requirement (b) = 10 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 13 to 16

March 2013 11 Performance Management

This page is blank

Performance Management 12 March 2013

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

March 2013 13 Performance Management

Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

Performance Management 14 March 2013

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑ f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

March 2013 15 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 16 March 2013

This page is blank

March 2013 17 Performance Management

This page is blank

Performance Management 18 March 2013

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

March 2013 19 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

March 2013

Performance Management 20 March 2013

Performance Pillar

P2 – Performance Management
P2 – Performance Management
25 May 2011 – Wednesday Afternoon Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 6.

Section B comprises 2 questions and is on pages 8 to 11.

Maths tables and formulae are provided on pages 13 to 16.

The list of verbs as published in the syllabus is given for reference on page
19.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2011

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

WX is reviewing the selling price of one of its 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)
Note: If Price (P) = a - bx then Marginal Revenue = a - 2bx

(b) Explain TWO reasons why the company might decide NOT to use this
optimum selling price.
(4 marks)
(Total for Question One = 10 marks)

Performance Management 2 May 2011

Question Two

PT manufactures and sells a number of products. All of its products have a life cycle of six
months or less. PT uses a four stage life cycle model (Introduction; Growth; Maturity; and
Decline) and measures the profits from its products at each stage of their life cycle.
PT has recently developed an innovative product. Since the product is unique it was decided
that it would be launched with a market skimming pricing policy. However PT expects that
other companies will try to enter the market very soon.
This product is generating significant unit profits during the Introduction stage of its life cycle.
However there are concerns that the unit profits will reduce during the other stages of the
product’s life cycle.

Required:
For each of the

(i) Growth; and

(ii) Maturity stages of the new product’s life cycle

explain the likely changes that will occur in the unit selling prices AND in the
unit production costs, compared to the preceding stage.

(Total for Question Two = 10 marks)

Section A continues on page 4

TURN OVER
May 2011 3 Performance Management
Question Three

JYT manufactures and sells a range of products. It is not dominant in the market in which it
operates and, as a result, it has to accept the market price for each of its products. The
company is keen to ensure that it continues to compete and earn satisfactory profit at each
stage throughout a product’s life cycle.

Required:

Explain how JYT could use Target Costing AND Kaizen Costing to improve its
future performance.

Your answer should include an explanation of the differences between Target

Costing and Kaizen Costing.

(Total for Question Three = 10 marks)

Performance Management 4 May 2011

Question Four

A company produces and sells DVD players and Blu-ray players.

Extracts from the budget for April are shown in the following table:

Sales Selling price Standard cost

(players) (per player) (per player)
DVD 3,000 $75 $50
Blu-ray 1,000 $200 $105

The Managing Director has sent you a copy of an e-mail she received from the Sales
Manager. The content of the e-mail was as follows:
We have had an excellent month. There was an adverse sales price variance on the
DVDs of $18,000 but I compensated for that by raising the price of Blu-ray players.
Unit sales of DVD players were as expected but sales of the Blu-rays were exceptional
and gave a total sales volume profit variance of $19,000. I think I deserve a bonus!
The Managing Director has asked for your opinion on these figures. You obtained the
following information:
Actual results for April were:

Sales Selling price

(players) (per player)
DVD 3,000 $69
Blu-ray 1,200 $215

The total market demand for DVD players was as budgeted but as a result of distributors
reducing the price of Blu-ray discs the total market for Blu-ray players grew by 50% in April.
The company had sufficient capacity to meet the revised market demand for 1,500 units of its
Blu-ray players and therefore maintained its market share.

Required:

(a) Calculate the following operational variances based on the revised market
details:

(i) The total sales mix profit margin variance

(2 marks)

(ii) The total sales volume profit variance

(2 marks)

(b) Explain, using the above scenario, the importance of calculating planning
and operational variances for responsibility centres.
(6 marks)
(Total for Question Four = 10 marks)

TURN OVER

May 2011 5 Performance Management

Question Five

SFG is a national hotel group that operates more than 100 hotels. The performance of the
manager of each hotel is evaluated using financial measures.
Many of the hotel’s managers are not happy. They believe that there can be conflict between
good performance and achieving short-term profits. They are also unhappy that their profit
reports include a share of head office costs and other costs that they cannot control.

Required:

(a) Explain why non-financial performance measures are important in the

service sector.
(2 marks)

(b) Recommend, with reasons, TWO non-financial performance measures

that SFG could use to evaluate the performance of the hotel managers.

(4 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A

Section B starts on page 8

Performance Management 6 May 2011

This page is blank

TURN OVER

May 2011 7 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

The management of a hotel is planning for the next year. The hotel has 100 bedrooms. The
price of a room night includes breakfast for the guests. Other services (a snack service and a
bar and restaurant) are available but are not included in the price of the room night. These
additional services are provided to hotel guests only.
For planning purposes the hotel divides the year (based on 360 days) into three seasons:
peak, mid and low.
Details of the hotel and its services and forecasts for the next year are given below.
1. Seasons, room charges, room occupancy, guests per room and room revenue
The hotel charges a price per room per night (including breakfast) irrespective of the number
of guests per room. The price charged is different in each of the seasons.
Season Peak Mid Low
Number of days 90 120 150
Price charged per room per night ($) 100.00 80.00 55.00
Hotel room occupancy % 95 75 50
Average number of guests per room 1.8 1.5 1.2
Total room revenue ($) 855,000 720,000 412,500

2. Guest related costs

The hotel incurs some costs, including providing breakfast, that are directly related to the
number of guests in the hotel. These are $12 per guest per night in all seasons.
3. Room related costs
The hotel incurs some costs that are directly related to the number of rooms occupied. These
include cleaning and laundry costs of $5 per occupied room per night regardless of season.
There are also power and lighting costs of $3 in the peak season, $4 in the mid season and
$6 in the low season per occupied room per night.
4. Hot snacks
The hotel offers a 24 hour hot snacks service to the guests. Past records show that this
service has been used by 30% of its guests in the mid and low seasons but only 10% in the
peak season. It is forecast that the average spend per guest per night will be $10. The hotel
earns a 30% gross contribution from this income.
The hotel employs a cook on a salary of $20,000 per year to provide this service. All of the
costs for the hot snacks service, except for the cook’s salary, are variable. The cook could be
made redundant with no redundancy costs.
5. Restaurant & Bar
Past records show that the usage of the restaurant and bar is seasonal. The restaurant and
bar are particularly popular with the hotel’s business guests. The forecast usage is shown
below.
Season Daily demand
Peak 30% of hotel guests spend an average of $15 each
Mid 50% of hotel guests spend an average of $20 each
Low 70% of hotel guests spend an average of $30 each

Performance Management 8 May 2011

The hotel earns a 25% gross contribution from this income and employs two chefs on a
combined salary of $54,000 per year to provide this facility. All of the costs in the restaurant
and bar, except for the salaries of the chefs, are variable.
The two chefs could be made redundant with no redundancy costs.
6. General hotel costs.
These include the costs of reception staff, the heating and lighting of the common areas and
other facility related costs. The forecast costs for next year are:

Peak season $300,000

Mid season $400,000
Low season $500,000

These costs could be reduced by 75% if the hotel were to close temporarily for one or more
seasons of the year.
There are also some costs that are incurred by the hotel and can only be avoided by its
permanent closure. These are estimated to $200,000 for next year.

Required:

(a) Prepare, in an appropriate format, a columnar statement that will help the
managers of the hotel to plan for next year. Your statement should show
the hotel’s activities by season and in total.
(18 marks)

(b)

(i) Identify, based on your statement, the actions that the managers could take to
maximise the profit of the hotel for next year.
(3 marks)

(ii) Explain TWO factors that the managers should consider before implementing
the actions you identified in (b)(i).
(4 marks)

(Total for Question Six = 25 marks)

Section B continues on page 10

TURN OVER

May 2011 9 Performance Management

Question Seven

The DE Company has two divisions. The following statement shows the performance of each
division for the year ended 30 April 2011:
D E
$000 $000
Sales 500,200 201,600
Variable cost 380,400 140,000
Contribution 119,800 61,600
Fixed costs 30,000 20,000
Operating profit 89,800 41,600

Division E manufactures just one type of component. It sells the components to external
customers and also to Division D. During the year to 30 April 2011, Division E operated at its
full capacity of 140,000 units. The transfer of 70,000 units to Division D satisfied that division’s
total demand for that type of component. However the external demand was not satisfied. A
further 42,000 components could have been sold to external customers by Division E at the
current price of $1,550.
The current policy of the DE Company is that internal sales should be transferred at their
opportunity cost. Consequently during the year, some components were transferred to
Division D at the market price and some were transferred at variable cost.

Required:

(a) Prepare an analysis of the sales made by Division E that shows clearly, in
units and in $, the internal and external sales made during the year.

(3 marks)

(b) Discuss the effect of possible changes in external demand on the profits
of Division E, assuming the current transfer pricing policy continues.
(6 marks)

Performance Management 10 May 2011

Division E is considering investing in new equipment which would reduce its unit variable
costs by 20% and increase its capacity by 10% for each of the next five years. The capital
cost of the investment is $120m and the equipment would have no value after five years. The
DE company and its divisional managers evaluate investments using net present value (NPV)
with an 8% cost of capital.
External annual demand for the next five years will continue to be 112,000 components at
$1,550 each but the DE Company will insist that the internal annual demand for 70,000
components must be satisfied.

Required:

(c) Assuming that the current transfer pricing policy continues:

(i) Evaluate the investment from the perspective of the manager of Division E.

(6 marks)

(ii) Evaluate the investment from the perspective of the DE Company.

(4 marks)

Note: Ignore inflation and taxation.

(d) Explain TWO factors that should be considered when designing divisional
performance measures.
(6 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 13 to 16

May 2011 11 Performance Management

This page is blank

Performance Management 12 May 2011

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

May 2011 13 Performance Management

Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

Performance Management 14 May 2011

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑ f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

May 2011 15 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 16 May 2011

This page is blank

May 2011 17 Performance Management

This page is blank

Performance Management 18 May 2011

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

May 2011 19 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

May 2011

Wednesday Afternoon Session

Performance Management 20 May 2011

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO

Performance Pillar

P2 – Performance Management
P2 – Performance Management
22 May 2013 – Wednesday Afternoon Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 5.

Section B comprises 2 questions and is on pages 6 to 9.

Maths tables and formulae are provided on pages 11 to 14.

The list of verbs as published in the syllabus is given for reference on page
15.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2013

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

A tree farm supplies shrubs to two customers. Each shrub has a selling price of $60. It costs
$25 to grow a shrub and get it to the point of sale. Additional costs incurred by the farm are
$100 per order fulfilled and delivery costs of $500 per order delivered.

Details of two of the farm’s customers (B and C) for the previous period are as follows:

Customer B Customer C
Shrubs purchased 960 650
Discount allowed 15% 20%
Orders fulfilled 8 (each for 120 shrubs) 10 (each for less than 100 shrubs)
Deliveries made 8 0

Customers are given a 15% discount on orders for 100 shrubs or more.

Customer C is given a 20% discount for collecting the shrubs using its own transport.

Required:

Evaluate the two customers. (Your answer should include customer profitability
statements and appropriate measures.)

(Total for Question One = 10 marks)

Performance Management 2 May 2013

Question Two

A new product has a budgeted total profit of $75,000 from the first 64 units. The time taken to
produce the first unit was 225 hours. The labour rate is $40 per hour. A 90% learning curve is
expected to apply indefinitely.
Note: The learning index for a 90% learning curve is -0.152

Required:
Calculate the sensitivity of the budgeted total profit from the first 64 units to
independent changes in:
(i) The labour rate
(ii) The learning rate.

(Total for Question Two = 10 marks)

Question Three

PP is a telecoms provider. It has been operating for five years and has experienced good
results; profits have increased by an average of 15% each year. It is accepted within the
company that this success has been the result of the continuous stream of new and varied
‘cutting edge’ products that PP offers. The Research and Development Division has enjoyed
the freedom of working with the directive of “Be creative”.
The Director of the Research and Development Division of PP is not happy. At a recent board
meeting she said:
“The Research and Development Division is finding it extremely difficult to maintain its current
levels of achievement. The Division is suffering from a lack of funds as a result of PP’s
budgeting system. We receive an uplift of 5% each year from the previous year’s budget. This
does not provide the necessary funds or freedom to be able to keep the company ahead of
the competition. I would like to see incremental budgeting replaced by zero based budgeting
in my division”.

Required:
Discuss the potential disadvantages of implementing zero based budgeting for
the allocation of funds to the Research and Development Division from the
perspective of the Director of Research and Development.

(Total for Question Three = 10 marks)

Section A continues on the next page

TURN OVER

May 2013 3 Performance Management

Question Four

The owner, Z, of a business has been attending a course on scenario planning and decision
making. As a result of that advice the owner has produced, by using cost volume and profit
analysis, 12 scenarios for a new product that the business will launch in the near future.
There are four possible marketing packages that could be used (A, B, C or D) and there are
three possible market conditions (poor, average or good) that could be encountered. The Net
Present Value of the cash flows resulting from each of the scenarios is shown in the table
below.

Marketing package
Market A B C D
conditions $000 $000 $000 $000
Poor 180 230 220 190

Average 190 200 210 275

Good 550 260 210 500

Unfortunately Z missed the session on how to deal with risk and uncertainty. He has sent the
above table to the tutor for the course and has asked for help. The tutor replied “I will send
you some notes. Based on your table you will need the methods in the section on
‘Uncertainty’. If you can estimate the probability of each type of market condition occurring
you need ‘Risk based methods’. However, whichever method you use, your decision will be
influenced by your attitude.”

Required:

Note: calculations are NOT required.

Explain FOUR methods that could help Z to decide which marketing package to
choose. Your answer should include THREE methods to deal with uncertainty,
ONE method to deal with risk, and an explanation of the “attitude” that would be
associated with the decision maker using each of the four methods.

(Total for Question Four = 10 marks)

Section A continues on the next page

TURN OVER
Performance Management 4 May 2013
Question Five

The modern dynamic business environment has been described as a “buyer’s market” in
which companies must react to the rapidly changing characteristics of the market and the
needs of customers. Many managers have criticised traditional forms of budgeting for being
too restrictive and for being of little use for performance management and control.

Required:
Explain how the principles of “Beyond Budgeting” promote a cultural framework
that is suitable for the modern dynamic business environment.

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A
Section B starts on page 6

TURN OVER

May 2013 5 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

A company manufactures three products D, E and F which use the same resources (but in
different amounts). In addition to these resources each unit of Product F uses a component
which the company currently purchases from an external supplier for $80. The demand for the
products in Month 1 and the details per unit of the three products are as shown below:

D E F
Demand (units) 2,400 2,200 3,000
$ $ $
Selling price 112 136 153
Component 80
Direct materials ($4 per kg) 12 16 12
Skilled labour ($16 per hour) 16 24 8
Unskilled labour ($12 per hour) 18 12 9
Variable overhead ($3 per machine hour) 12 12 9

The fixed costs of the company are $150,000 per month.

The company has reverse engineered the component and has realised that it could make the
component in-house. The cost of making a component is shown below:

$
Direct materials ($4 per kg) 12
Skilled labour ($16 per hour) 16
Unskilled labour ($12 per hour) 3
Variable overhead ($3 per machine hour) 6

There would be no incremental fixed costs incurred as a result of making the component in-
house.
In Month 1 the maximum availability of skilled labour is 5,400 hours but all other resources
are readily available.

The company bases all short term decisions on profit maximisation.

Performance Management 6 May 2013

Required:

(a) Calculate the optimum production plan for Month 1 and the resulting
profit. (Note: The company would either buy the component or make it in-
house; it would not do a mixture of the two options.)
(11 marks)

For legal reasons it will not be possible to produce Product F in Month 2.

Demand for products D and E will be 3,000 units each in Month 2. No inventories can be
held.

The availability of resources in Month 2 is as follows:

Direct materials 16,000 kg

Skilled labour 5,400 hours
Unskilled labour 5,000 hours
Machine hours 19,600 hours

Required:
(b)
(i) Identify the objective function and the constraints to be used in a linear
programming model to determine the optimum production plan for Month
2.
(4 marks)

(ii) The solution to the linear programming model shows that the only binding
constraints in Month 2 are those for skilled labour and unskilled labour.

Produce, using simultaneous equations, the optimum production plan and

resulting profit for Month 2. (You are NOT required to draw or sketch a
graph.)

(4 marks)

(c) It has now been decided that Product F will be redesigned. A team will be
formed with representatives from various departments in the company to
undertake a Value Analysis exercise on Product F.

Required:
Describe the stages involved in a Value Analysis exercise.
(6 marks)
(Total for Question Six = 25 marks)

Section B continues on the next page

TURN OVER

May 2013 7 Performance Management

Question Seven

S Division and R Division are two divisions in the SR group of companies. S Division
manufactures one type of component which it sells to external customers and also to R
Division.
Details of S Division are as follows:
Market price per component $200
Variable cost per component $105
Fixed costs $1,375,000 per period
Demand from R Division 20,000 components per period
Capacity 35,000 components per period

R Division assembles one type of product which it sells to external customers. Each unit of
that product requires two of the components that are manufactured by S Division.
Details of R Division are as follows:
Selling price per unit $800
Variable cost per unit:
Two components from S 2 @ transfer price
Other variable costs $250
Fixed costs $900,000 per period
Demand 10,000 units per period
Capacity 10,000 units per period

Group Transfer Pricing Policy

Transfers must be at opportunity cost.

R must buy the components from S.
S must satisfy demand from R before making external sales.

Performance Management 8 May 2013

Required:

(a) Calculate the profit for each division if the external demand per period for
the components that are made by S Division is:

(i) 15,000 components

(ii) 19,000 components
(iii) 35,000 components
(12 marks)

(b) Calculate the financial impact on the Group if R Division ignored the
transfer pricing policy and purchased all of the 20,000 components that it
needs from an external supplier for $170 each. Your answer must
consider the impact at each of the three levels of demand (15,000, 19,000
and 35,000 components) from external customers for the component
manufactured by S Division.
(6 marks)

(c) The Organisation for Economic Co-operation and Development (OECD)

produced guidelines with the aim of standardising national approaches to
transfer pricing. The guidelines state that where necessary transfer prices
should be adjusted using an “arm’s length” price.

Required:

Explain:
(i) An “arm’s length” price
(ii) The THREE methods that tax authorities can use to determine an
“arm’s length” price
(7 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 11 to 14

May 2013 9 Performance Management

This page is blank

Performance Management 10 May 2013

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

May 2013 11 Performance Management

CUMULATIVE PRESENT VALUE TABLE
Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

Performance Management 12 May 2013

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑ f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

May 2013 13 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 14 May 2013

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

May 2013 15 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

May 2013

Wednesday Afternoon Session

Performance Management 16 May 2013

Performance Pillar

P2 – Performance Management
P2 – Performance Management
23 November 2011 – Wednesday Afternoon Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 4.

Section B comprises 2 questions and is on pages 6 to 9.

Maths tables and formulae are provided on pages 11 to 14.

The list of verbs as published in the syllabus is given for reference on page
15.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2011

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

A company has developed a new product. Details are as follows:

Selling price and product life cycle

The product will have a life cycle of 10,000 units. It is estimated that the first 9,000 units will
be sold for $124 each and then the product will enter the “decline” stage of its life cycle. It is
difficult to forecast the selling price for the 1,000 units that will be sold during this stage.

Costs
Labour will be paid at $12 per hour. Other variable costs will be $38 per unit. Fixed costs will
total $80,000 over the life cycle of the product. The labour rate and both of these costs will not
change throughout the product’s life cycle.

Learning curve
The first batch of 100 units will take 1,500 labour hours to produce. There will be an 85%
learning curve that will continue until 6,400 units have been produced. Batches after this level
th
will each take the same amount of time as the 64 batch. The batch size will always be 100
units.

Required:

Calculate

(a) the cumulative average time per batch for the first 64 batches
(2 marks)
th
(b) the time taken for the 64 batch

(3 marks)

(c) the average selling price of the final 1,000 units that will allow the
company to earn a total profit of $100,000 from the product
(5 marks)
(Total for Question One = 10 marks)

Note: The learning index for an 85% learning curve is -0.2345

Ignore the time value of money.

Performance Management 2 November 2011

Question Two

SF manufactures and sells a limited range of flat pack furniture. Due to the standardisation of
its products, SF uses a standard costing system to monitor its performance. At the start of
each financial year the company directors agree a set of standard costs for each of the
company’s products. Monthly variance reports are discussed at each monthly board meeting.
A few months ago the Production Director attended a conference on World Class
Manufacturing and was very interested in a presentation on Kaizen Costing. The presenter
illustrated how the use of Kaizen Costing had enabled her company to reduce its unit
manufacturing costs by 20%.

Required:

(a) Explain the principles of Kaizen Costing.

(4 marks)

(b) Discuss how Kaizen Costing conflicts with SF’s current performance
reporting procedures.
(6 marks)

(Total for Question Two = 10 marks)

Question Three

LCG was established in 1998 and manufactures a range of garden tables and chairs which it
makes from timber purchased from a number of suppliers.
The recently appointed Managing Director has expressed increasing concern about the
trends in falling sales volumes, rising costs and hence declining profits over the last two
years. There is general agreement amongst the managers of LCG that these trends are the
result of the increased intense competition that has emerged over the last two years. LCG
continues to have a reputation for high quality but this quality is now being matched by the
competition.
The competitors are taking LCG’s share of the market by selling equivalent products at lower
prices. It is thought that in order to offer such low prices the production costs of the
competitors must be lower than LCG’s.

Required:
Discuss how LCG could improve its sales volumes, costs and profits by using (i)
value analysis and (ii) functional cost analysis.

(Total for Question Three = 10 marks)

TURN OVER
November 2011 3 Performance Management
Question Four

WX, a consultancy company, is preparing its budgets for the year to 31 December 2012. The
directors of the company have stated that they would like to reduce the company’s overdraft
to zero by 30 June 2012 and to have a positive cash balance of $145,000 by the end of the
year. In addition, the directors would like to achieve a 20% growth in sales revenue compared
to 2011 and a pre-tax profit of $180,000 for the year.

Required:

Illustrate the differences between feedforward control and feedback control

using the above information about WX’s cash budget.

(Total for Question Four = 10 marks)

Question Five

An airline company has operated short haul passenger and cargo flights to various
destinations from a busy airport for several years. Its competitive advantage has been the fact
that it offers low ticket prices to passengers. It now faces increased competition on a number
of its routes.
The company currently monitors its performance using financial measures. These financial
measures have served it well in the past, but a new director has suggested that non-financial
measures may also be used to provide a better indication of overall performance. She has
suggested that the company should consider using the Balanced Scorecard.

Required:

(a) Explain the concepts of the Balanced Scorecard and how it could be used
by the airline company.
(6 marks)

(b) Explain TWO non-financial measures that the airline company could use
to monitor its performance.
(4 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A
Section B starts on page 6

Performance Management 4 November 2011

This page is blank

TURN OVER

November 2011 5 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

RFT, an engineering company, has been asked to provide a quotation for a contract to build a
new engine. The potential customer is not a current customer of RFT, but the directors of RFT
are keen to try and win the contract as they believe that this may lead to more contracts in the
future. As a result they intend pricing the contract using relevant costs.
The following information has been obtained from a two-hour meeting that the Production
Director of RFT had with the potential customer. The Production Director is paid an annual
salary equivalent to $1,200 per 8-hour day.
110 square metres of material A will be required. This is a material that is regularly used by
RFT and there are 200 square metres currently in inventory. These were bought at a cost of
$12 per square metre. They have a resale value of $10.50 per square metre and their current
replacement cost is $12.50 per square metre.
30 litres of material B will be required. This material will have to be purchased for the contract
because it is not otherwise used by RFT. The minimum order quantity from the supplier is 40
litres at a cost of $9 per litre. RFT does not expect to have any use for any of this material that
remains after this contract is completed.
60 components will be required. These will be purchased from HY. The purchase price is $50
per component.
A total of 235 direct labour hours will be required. The current wage rate for the appropriate
grade of direct labour is $11 per hour. Currently RFT has 75 direct labour hours of spare
capacity at this grade that is being paid under a guaranteed wage agreement. The additional
hours would need to be obtained by either (i) overtime at a total cost of $14 per hour; or (ii)
recruiting temporary staff at a cost of $12 per hour. However, if temporary staff are used they
will not be as experienced as RFT’s existing workers and will require 10 hours supervision by
an existing supervisor who would be paid overtime at a cost of $18 per hour for this work.
25 machine hours will be required. The machine to be used is already leased for a weekly
leasing cost of $600. It has a capacity of 40 hours per week. The machine has sufficient
available capacity for the contract to be completed. The variable running cost of the machine
is $7 per hour.
The company absorbs its fixed overhead costs using an absorption rate of $20 per direct
labour hour.

Performance Management 6 November 2011

Required:

(a) Calculate the relevant cost of building the new engine.

You should present your answer in a schedule that clearly shows the
relevant cost value for each of the items identified above. You should also
explain each relevant cost value you have included in your schedule and
why the values you have excluded are not relevant.
(13 marks)

(b) HY, the company that is to supply RFT with the components that are
required for this contract, is another company in the same group as RFT.
Each component is being transferred to RFT taking account of HY’s
opportunity cost of the component. The variable cost that will be incurred
by HY is $28 per component.

Discuss the factors that would be considered by HY to determine the

opportunity cost of the component.
(5 marks)

(c) When there is no external market for the item being supplied between
divisions of a company the transfer price is often based on the supplying
division’s cost.

(i) Illustrate, using a numerical example, the performance measurement

problem that can arise when using a transfer price based on actual cost.

(3 marks)

(ii) Explain how using standard costs rather than actual costs as the basis of
the transfer price would solve the problem identified in (i) above.
(4 marks)
(Total for Question Six = 25 marks)

Section B continues on page 8

TURN OVER

November 2011 7 Performance Management

Question Seven

SHG manufactures and installs heating systems for commercial customers. SHG commenced
trading in 1990. At first, all operations were confined to the northern region but since 2006
SHG has expanded its operations into the southern region. In May 2009 the directors of SHG
decided to adopt a divisionalised structure in order to facilitate better management control of
SHG’s operations. SHG created two divisions, the Northern division and the Southern
division.
The following information is available:
1. Net assets of SHG as at 31 May were as follows:
2011 2010 2009
Division Northern Southern Northern Southern Northern Southern
$m $m $m $m $m $m
Non-current 78.75 146.25 72.45 134.55 70.00 130.00
assets (net book
value)
Net current 47.25 87.75 46.55 86.45 42.00 78.00
assets
Net assets 126.00 234.00 119.00 221.00 112.00 208.00
Non-current 15.05 27.95 10.50 19.50
assets acquired
in year

Notes:
There were no disposals of non-current assets during the above periods.
Depreciation is charged at 10% per annum on a reducing balance basis in respect of all non-
current assets held at the end of the year.
2. For the years ended 31 May 2010 and 2011, turnover and operating cashflows were as
follows:
Division 2011 2010
$m $m
Turnover:
Northern 168 148
Southern 240 220

Operating cash flows:

Northern 42 37
Southern 60 55

3. Each division has a target return on capital employed (ROCE) of 20% on average capital
employed throughout each year. The managers of both divisions are entitled to receive
an annual bonus under a management incentive scheme if the target rate of ROCE is
achieved for their division.
NOTE: Ignore Taxation and Inflation

Performance Management 8 November 2011

Required:

(a)

(i) Calculate the Return on Capital Employed (ROCE) (using average capital
employed) achieved by each division during the years ended 31 May 2010
and 31 May 2011.
(7 marks)

(ii) Calculate (1) the asset turnover and (2) the profit/sales % achieved by
each division during the years ended 31 May 2010 and 31 May 2011.

(4 marks)
(iii) Discuss the relative performances of the two divisions.
(4 marks)

(b) SHG realises that its present performance reporting system does not highlight quality
costs. The reports contain the information below, but the directors require this to be
reported in an appropriate format.
The following information is available in respect of the year ended 31 May 2011:
1. Production data:

Units requiring rework 1,500

Units requiring warranty repair service 1,800
Design engineering hours 66,000

Inspection hours (manufacturing) 216,000

2. Cost data:
$
Design engineering cost per hour 75

Inspection cost per hour (manufacturing) 40

Rework cost per heating system unit reworked (manufacturing) 3,000
Customer support cost per repaired unit (marketing) 200
Transportation costs per repaired unit (distribution) 240
Warranty repair costs per repaired unit 3,200

3. Staff training costs amounted to $150,000 and additional product testing costs were
$49,000.

4. The marketing director has estimated that sales of 1,400 units were lost as a result of
bad publicity in trade journals. The average contribution per heating system unit is
estimated at $6,000.

Required:

Prepare a cost of quality report for SHG that shows its costs of quality (using
appropriate headings) for the year ended 31 May 2011.
(10 marks)
(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

November 2011 9 Performance Management

End of question paper

Maths tables and formulae are on pages 11 to 14

Performance Management 10 November 2011

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

November 2011 11 Performance Management

CUMULATIVE PRESENT VALUE TABLE
Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

Performance Management 12 November 2011

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑ f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

November 2011 13 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 14 November 2011

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

November 2011 15 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

November 2011

Wednesday Afternoon Session

Performance Management 16 November 2011

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO.

Performance Pillar

P2 – Performance Management
P2 – Performance Management
Thursday 28 August 2014

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 7.

Section B comprises 2 questions and is on pages 8 to 11.

Maths tables and formulae are provided on pages 15 to 18.

The list of verbs as published in the syllabus is given for reference on page
19.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2014

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

QLJ is planning to expand its product range by producing two new products: Product X and
Product Y.
Product X and Product Y will be produced from different combinations of the same resources.
Only products X and Y use these resources. Details of the estimated selling price and cost
per unit for each product are shown below:

Product X Product Y
$ $
Selling price 229 260
Material A ($8 per kg) 40 16
Material B ($20 per kg) 20 60
Labour ($25 per hour) 75 100
Variable overhead ($16 per machine hour) 32 48

The total fixed costs of producing X and Y will be $70,000 per month.
The management accountant at QLJ is in the process of producing a linear programming
model to determine the optimal monthly production plan for the two new products. The
management accountant has established that the following resources are available in each
month and has produced the following graph (on page 3):

Resources available

Material A 10,150 kg
Material B 5,500 kg
Labour 8,400 hours

Performance Management 2 September 2014

Linear programming graph for Products X and Y

The objective of QLJ is to earn the maximum total profit possible per month from the
production of products X and Y.

Required:

(a) Interpret the graph to determine the optimum monthly production plan and
the maximum total profit per month from products X and Y.
Note: You are required to use simultaneous equations to determine the exact
quantities of Product X and Product Y to be produced.
(6 marks)
(b) Calculate the minimum change in the selling price of Product X that would
cause the optimum production plan to change to Point B shown on the
graph.
(4 marks)

(Total for Question One = 10 marks)

TURN OVER

September 2014 3 Performance Management

Question Two

A company has recently launched a new product. The following information is available for
the first month of production:

Budget Actual Variance

Production volume (units) 300 256 44 A
Direct material cost ($) 11,400 10,500 900 F
Direct labour cost ($) 15,000 4,000 11,000 F
Variable overhead cost ($) 6,000 1,750 4,250 F
Fixed costs ($) 125,000 115,000 10,000 F

The standard labour cost per unit of $50 that was used to calculate the budgeted labour cost
was made up of 2 hours at $25 per hour. However this ignored the impact of a learning curve
which was expected to apply for the first 300 units produced. The learning rate was expected
to be 90%.
The variable overhead absorption rate is based on direct labour hours.
The actual rate of pay during the month was $25 per labour hour.
Note: The learning index for a 90% learning curve = -0.152.

Required:

(a)
(i) Prepare a performance report for the first month of production taking into
account the learning effect.
(4 marks)

(ii) Calculate the labour efficiency planning variance for the first month of
production.
(2 marks)

(b) Calculate the actual rate of learning that occurred during the first month of
production assuming that the actual time taken to produce the first unit
was 2 hours.
(4 marks)

(Total for Question Two = 10 marks)

Performance Management 4 September 2014

Question Three

JMM is a car manufacturer. It is a relatively new company and the directors are keen to
establish a reputation for high quality. The management of JMM recognises the need to
establish a culture of Total Quality Management (TQM) at the company.
The management accounting team at JMM has collected the following actual information for
the most recent quarter of the current year:

Cost data
$
Customer support centre cost per hour 58
Equipment testing cost per hour 30
Manufacturing rework cost per car 380
Warranty repair cost per car 2,600

Volume and activity data

Cars requiring manufacturing rework 800 cars

Cars requiring warranty repair 650 cars
Customer support centre time 500 hours
Production line equipment testing time 400 hours

Additional information
JMM undertook a quality review of its existing suppliers during the quarter at a cost of
$60,000.
Due to the quality issues in the quarter, the car production line experienced periods of
unproductive 'down time' which cost $375,000.

Required:

(a) Produce a Cost of Quality report for JMM using the four recognised quality
cost headings.
(6 marks)
(b) Explain how a Cost of Quality report would support the development of a
TQM culture at JMM.
(4 marks)

(Total for Question Three = 10 marks)

TURN OVER

September 2014 5 Performance Management

Question Four

TSH provides courses for students who are studying for accountancy examinations. The
accountancy education sector is extremely competitive; it is dominated by a small number of
national organisations but there is also a large number of smaller regional training providers.
The majority of TSH students are part-time students and fit their studies around their
employment. TSH has developed a reputation for understanding its students’ needs and
delivering a high quality service that meets their requirements.
TSH has grown in recent years from a small regional company to a position where it now has
colleges in several of the country’s large cities. The company directors now wish TSH to
grow further and have implemented a strategy to achieve the objective of becoming “the
largest accountancy study provider in the country”.
TSH’s board of directors currently uses financial reports to monitor the company’s
performance but are thinking about implementing a Balanced Scorecard approach to
performance management.

Required:

(a) Explain the disadvantages of using financial performance indicators alone to

assess performance.
(4 marks)

(b) Explain TWO non-financial performance measures, each from a different

perspective of the Balanced Scorecard, which TSH could use to measure the
performance of the business against the new strategy. (You must state the
perspectives that your measures relate to and explain why the measures would
be effective.)
(6 marks)

(Total for Question Four = 10 marks)

Performance Management 6 September 2014

Question Five

PBB is a toy manufacturer and retailer. PBB sells toys to consumers through its large
network of retail outlets in its home country and via the company’s website.
PBB purchases the materials and components that it needs to manufacture toys from a
number of different suppliers. All of the purchases are delivered to PBB’s raw material store at
its factory and are held there until they are needed for production.
Finished toys are transported from the factory to PBB’s retail outlets by PBB’s fleet of
vehicles. The vehicles follow the same schedule each week irrespective of the load they are
carrying. Finished toys that are destined for sale via the company’s website are transported to
PBB’s distribution centre.
PBB has recently won the contract to manufacture and sell a new toy. The new toy, Toy Z, is
a doll based on a character from a very popular international children’s film. PBB is free to set
the selling price of Toy Z as it sees fit, but must pay a royalty fee of 15% of the selling price to
the film company. PBB intends to sell Toy Z through its network of retail outlets.
PBB plans to adopt a target costing approach for Toy Z. Market research has determined
that the selling price will be $25 per Toy Z. PBB requires a profit margin of 25% of the selling
price of Toy Z.

The forecast costs per Toy Z are:

$
Component A 2.15
Component B 1.75
Other materials see note below for additional information
Labour (0.4 hours at $15 per hour) 6.00
Product-specific production overhead cost 1.89
Product-specific selling and distribution cost 2.38

Note: Each Toy Z requires 0.6kg of ‘other materials’. These ‘other materials’ are purchased
from a supplier at a cost of $4 per kg and 4% of all materials purchased are found to be
substandard.

Required:

(a) Calculate the cost gap that exists between the forecast total cost per unit and
the target cost per unit of Toy Z.
(3 marks)

(b) Discuss how PBB could reduce costs in THREE primary activities in its value
chain.
(7 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

End of Section A. Section B starts on page 8

September 2014 7 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

PPP is a theme park. The following information is available for the forthcoming month:

Forecast daily ticket sales and prices

Ticket Price per

sales ticket

Pre-booked Discounted Ticket 1,500 $29

Standard Ticket 8,000 $39
Premium Family Ticket
(admits 4 people) 675 $185

The theme park will be open for 30 days in the month.

Costs
Variable costs per person per day are forecast to be $12.50.
Fixed costs for the month are forecast to be $6,500,000.
Pricing information
The sales of pre-booked discounted tickets and standard tickets will be restricted to 1,500 and
8,000 per day respectively for the forthcoming month. It is forecast that all of these tickets will
be sold.
A Premium Family Ticket admits four people to the theme park and allows them to go to the
front of the queues in the theme park. The price of a Premium Family Ticket has been set at
$185 in order to maximise the profit from the sale of these tickets for the month. Market
information shows that for every $5 increase in the selling price of a Premium Family Ticket
the demand would reduce by 25 tickets, and that for every $5 decrease in the selling price the
demand would increase by 25 tickets.
The theme park has adequate capacity to accommodate any level of demand for Premium
Family Tickets. It is to be assumed that four people would always be admitted on every
Premium Family Ticket sold.
Sales of the different ticket types are independent of each other.
Equipment hire
PPP is considering hiring some automated ticket reading equipment for the forthcoming
month. The hire of this equipment would increase fixed costs by $250,000 for the month.
However, variable costs per person would be reduced by 8% during the period of the hire.

Performance Management 8 September 2014

Required:

(a) Calculate the financial benefit of hiring the equipment for the forthcoming month
given its impact on variable cost and therefore the price charged for Premium Family
Tickets.
Note: If P = a - bx then MR = a - 2bx

(13 marks)

It has now been realised that a competing theme park is planning to offer discounted
ticket prices during the forthcoming months. It is thought that this will reduce the
demand for PPP’s Standard Tickets. PPP will not be able to reduce the price of the
Standard Tickets for the forthcoming month.

(b) Discuss the sensitivity of the decision to hire the equipment to a change in the
number of Standard Tickets sold per day. (Note: your answer should include
the calculation of the sensitivity).
(4 marks)

PPP produces an annual budget. The annual budget includes details of budgeted ticket sales
volumes, revenues and costs for each month. Each month PPP compares actual
performance against the budget for that month.
At the start of every month, PPP conducts a review of its competitors to produce a revised
forecast for ticket sales. This revised sales forecast is used to devise pricing policies and
promotional campaigns to ensure that budgeted targets are met.

Required:

(c) Compare and contrast the use of feedforward control and feedback control, using
the information given above about PPP to illustrate your answer.
(8 marks)

(Total for Question Six = 25 marks)

Section B continues on the next page

TURN OVER

September 2014 9 Performance Management

Question Seven

MNP is a divisionalised organisation. Some of the divisions are in overseas countries.

Divisional performance is assessed by the trend in the Return on Capital Employed (ROCE)
and the Residual Income (RI) generated by each division based on their year-end values.

The following summary financial information is available for Division M:

Year ending 31st August 2014 2013 2012

$000 $000 $000
Revenue 6,450 6,200 6,000
Direct costs 1,070 1,040 1,000
Gross profit 5,380 5,160 5,000
Other operating costs 3,350 3,600 3,800
Operating profit 2,030 1,560 1,200
Capital employed as at the year end 3,200 4,000 5,000

MNP has a cost of capital of 5% per annum.

The figures shown above for the capital employed are the net book values of the division’s
non-current assets.

Other operating costs include depreciation.

There have been no additions or disposals of non-current assets within Division M during the
three year period. No additions or disposals are expected in 2015.

For the year ending 31 August 2015 it is expected that the revenues and costs (excluding
depreciation) will be the same as those in 2014.

Required:

(a) Calculate for Division M the Return on Capital Employed (ROCE) and the
Residual Income (RI) for:

(i) 2014
(ii) 2015
(4 marks)

Performance Management 10 September 2014

The board of directors of MNP have identified what they believe is a profitable project. The
project would require a capital investment of $2,000,000. The details of the project are as
follows:

Annual revenue $750,000

Annual costs (excluding depreciation) $225,000
Non-current assets $2,000,000
Life of the project 5 years

The new assets would be depreciated in the same way as all other assets in MNP. At the end
of the project the new assets would have no resale value.
The board of MNP have suggested that Division M should undertake the project but the
manager of Division M is reluctant to do so.

Required:

(b) Calculate the forecast ROCE and RI for Division M for the year ending 31 August
2015 if the project is undertaken by Division M. (Assume that the project started on
1 September 2014).

(6 marks)

(c) Discuss, using appropriate calculations based on the above scenario, why the use
of ROCE and RI as performance measures can cause incorrect capital investment
decisions to be taken.

(8 marks)

The project would enable MNP to produce components that could be used by several of the
divisions in the manufacture of their products. However the Board are aware that the setting
of international transfer prices can be problematic and that transfer prices can be disputed by
taxation authorities.

(d) Explain how international transfer prices should be set to avoid taxation disputes.
(Your answer should explain each of the three acceptable methods.)

(7 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 15 to 18

September 2014 11 Performance Management

This page is blank

Performance Management 12 September 2014

This page is blank

September 2014 13 Performance Management

This page is blank

Performance Management 14 September 2014

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

September 2014 15 Performance Management

Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

Performance Management 16 September 2014

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:  Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

September 2014 17 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 18 September 2014

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

September 2014 19 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

September 2014

Thursday

Performance Management 20 September 2014

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO

Performance Pillar

P2 – Performance Management
P2 – Performance Management
Wednesday 29 February 2012

Instructions to candidates

You are allowed three hours to answer this question paper.

You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).

ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 5 questions and is on pages 2 to 4.

Section B comprises 2 questions and is on pages 6 to 9.

Maths tables and formulae are provided on pages 11 to 14.

The list of verbs as published in the syllabus is given for reference on page
15.

Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

TURN OVER

 The Chartered Institute of Management Accountants 2012

SECTION A – 50 MARKS

[You are advised to spend no longer than 18 minutes on each question in this
section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question One

A company has developed a new product which it will launch next month. During the initial
production phase the company expects to produce 6,400 units in batches of 100 units. The
first batch to be produced is expected to require 25 hours of direct labour. The following
details are expected to apply throughout the initial production phase:
• Direct material cost per unit is expected to be $4

• Direct labour is to be paid $10 per hour

• A 90% learning curve is expected to apply

• Other variable costs are expected to be $2 per unit

Note: The learning index for a 90% learning curve is -0.1520

Required:

(a) Calculate the total variable cost of the 6,400 units of the new product.
(4 marks)
You have shown your calculation to the Finance Director who has now told you
that the company needs to achieve a total variable cost target of $45,000 for the
first 6,400 units in order to achieve its initial production phase profit target.

(b) Calculate the rate of learning at which the initial production phase profit
target would be achieved, assuming no other cost savings can be made.

(6 marks)
(Total for Question One = 10 marks)

Performance Management 2 March 2012

Question Two

SD manufactures and sells a small range of timber products. The main differences between
the products are their size and the type of timber used. SD prepares annual budgets and sets
a standard cost for each different product at the start of each year. Variance reports are
produced every month.
Recently, there have been significant differences between the actual costs and standard
costs of the products manufactured.
SD recently introduced a system of Kaizen Costing which has resulted in changes to the
methods used to manufacture the timber products.
Some of the directors have suggested that the use of standard costs as a means of
monitoring performance is no longer appropriate and that the monthly variance report is
meaningless.

Required:

(a) Explain the principles of Kaizen Costing.

(4 marks)

(b) Discuss how SD can use standard costing and variance analysis to
prepare meaningful reports when using Kaizen Costing.
(6 marks)

(Total for Question Two = 10 marks)

Question Three

MLC, which was established in 1998, manufactures a range of garden sheds and
summerhouses using timber purchased from a number of suppliers.
The recently appointed managing director has expressed increasing concern about the falling
sales volumes, rising costs and hence declining profits over the last two years.

Required:

Discuss how business process re-engineering could help to improve the profits
of MLC.

(Total for Question Three = 10 marks)

Section A continues on the next page

TURN OVER

March 2012 3 Performance Management

Question Four

A transport company is preparing its cost budgets for the coming year. It has been set both
social objectives and cost targets by the government which it must achieve in order to receive
a subsidy. Part of the subsidy is paid when acceptable budgets have been submitted to the
government’s transport office and the balance is payable at the end of the year provided the
company has achieved its social objectives and cost targets.
The first draft of the cost budgets has been completed and submitted to the budget
committee.

Required:

Explain to the Board of Directors how (i) feedforward control and (ii) feedback control
should be used in the transport company. (You should use examples from the company’s
budgeting system in your answer.)

(Total for Question Four = 10 marks)

Question Five

A college currently measures its performance by comparing its actual costs against its
budgeted costs for the year. Now that the college is facing increased competition from other
colleges and private education providers, one of its professors has suggested that it needs to
consider additional performance measures such as those indicated by the Balanced
Scorecard.

Required:

(a) Explain the concepts of the Balanced Scorecard and how this approach to
performance measurement could be used by the college.
(6 marks)

(b) Explain TWO non-financial measures (chosen from different perspectives

of the balanced scorecard) that the college could use to measure its
performance.
(4 marks)

(Total for Question Five = 10 marks)

(Total for Section A = 50 marks)

Performance Management 4 March 2012

End of Section A

Section B starts on page 6

TURN OVER

March 2012 5 Performance Management

SECTION B – 50 MARKS

[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS
ARE AVAILABLE FOR THE METHOD YOU USE.

Question Six

JRL manufactures two products from different combinations of the same resources. Unit
selling prices and unit cost details for each product are as follows:

Product J L
$/unit $/unit
Selling price 115 120

Direct material A ($10 per kg) 20 10

Direct material B ($6 per kg) 12 24
Skilled labour ($14 per hour) 28 21
Variable overhead ($4 per machine hour) 14 18
Fixed overhead* 28 36

Profit 13 11

*Fixed overhead is absorbed using an absorption rate per machine hour. It is an unavoidable
central overhead cost that is not affected by the mix or volume of products produced.
The maximum weekly demand for products J and L is 400 units and 450 units respectively
and this is the normal weekly production volume achieved by JRL. However, for the next four
weeks the achievable production level will be reduced due to a shortage of available
resources. The resources that are expected to be available are as follows:

Direct material A 900 kg

Direct material B 1,750 kg
Skilled labour 1,250 hours
Machine time 2,400 machine hours

Performance Management 6 March 2012

Required:

(a) Identify, using graphical linear programming, the weekly production

schedule for products J and L that will maximise the profits of JRL during the
next four weeks.

(15 marks)

(b) The optimal solution to part (a) shows that the shadow prices of skilled
labour and direct material A are as follows:

Skilled labour $ Nil

Direct material A $11.70

Explain the relevance of these values to the management of JRL.

(6 marks)

(c) Explain, using the graph you have drawn in part (a), how you would
calculate by how much the selling price of Product J could increase before
the optimal solution would change.
(4 marks)

(Total for Question Six = 25 marks)

Section B continues on page 8

TURN OVER
March 2012 7 Performance Management
Question Seven

HTL owns three hotels in different regions of the same country. The company uses the same
accounting policies and cost of capital of 10% per annum for all the hotels that it owns. All
rooms are sold on a “bed and breakfast” basis. The hotels are open for 365 days per year.
The restaurants provide breakfasts to hotel guests only. At all other times the restaurants are
available to hotel guests and the general public. Details for each hotel for the year ended 31
December 2011 are as follows:

Hotel Northern Southern Eastern

Number of bedrooms available 120 250 135

% bedroom occupancy 80% 75% 60%

Regional Bedroom Market share % 15% 16% 5%

Restaurant capacity per day (meals) 100 120 85

Restaurant utilisation 60% 40% 60%

$000 $000 $000

Revenue:
Bedroom with breakfast 3,328 8,500 2,365
Restaurant 876 776 837
Total 4,204 9,276 3,202

Profit before tax 832 1,100 576

Net Assets at 31 December 4,200 7,400 4,400

An analysis of the costs incurred by each of the hotels for the year ended 31 December 2011
is as follows:

Hotel Northern Southern Eastern

$000 $000 $000
Bed and breakfast related 2,847 7,231 2,082
Restaurant related 525 945 544
Total 3,372 8,176 2,626

It has also been noted that the restaurant related costs, capacity and utilisation information
does not include breakfasts.

Some of the following performance indicators have already been calculated:

Hotel Northern Southern Eastern

Return on Net Assets 20% 15% ???

Residual Income ($000) 412 ??? 136

Performance Management 8 March 2012

Required:

(a) Discuss the relative performance of the three hotels.

Note:
Your answer should include:

• a review of the relative profits of the rooms and restaurants in each

hotel; and
• calculations of the Return on Net Assets, Residual Income and other
performance measures that you think are appropriate.
(18 marks)

(b) The Northern Hotel manager has investment decision authority. The manager is considering
investing $800,000 in the construction of a leisure facility at the hotel. The hotel has
permission to build the leisure facility, but will have to accept the terms of an agreement with
the local community before beginning its construction. The facility is expected to generate
additional annual profit for the hotel over the next five years as follows:

$000
2012 110
2013 120
2014 155
2015 145
2016 130

At the end of 2016 the facility will have to be sold to the local community for $550,000. If the
facility is built, it will be depreciated on a straight line basis over the 5 year period (i.e.
$50,000 per annum).

The investment has a positive net present value of $225,000 when discounted at the group’s
cost of capital.

The manager of the hotel receives an annual bonus if the hotel’s Return on Net Assets is
maintained or improved. As stated in part (a) this was 20% for 2011 based on net assets at
the end of the year.

Required:
Discuss the effect of this investment on the future performance of the
Northern Hotel and whether, in the light of this, the hotel manager is likely
to proceed with the investment.

(7 marks)

(Total for Question Seven = 25 marks)

(Total for Section B = 50 marks)

March 2012 9 Performance Management

End of question paper

Maths tables and formulae are on pages 11 to 14

Performance Management 10 March 2012

PRESENT VALUE TABLE

(
Present value of 1 unit of currency, that is 1+ r )−n where r = interest rate; n = number of
periods until payment or receipt.

Periods Interest rates (r)

March 2012 11 Performance Management

Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
1− (1+ r ) − n
each year for n years r

Periods Interest rates (r)

Performance Management 12 March 2012

FORMULAE

PROBABILITY

A ∪ B = A or B. A ∩ B = A and B (overlap).
P(B | A) = probability of B, given A.

Rules of Addition
If A and B are mutually exclusive: P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)

Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
If A and B are not independent: P(A ∩ B) = P(A) * P(B | A)

E(X) = ∑ (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean
∑x ∑ fx
x = x= (frequency distribution)
n ∑f

Standard Deviation
∑( x − x ) 2 ∑ fx 2
SD = SD = − x 2 (frequency distribution)
n ∑ f

INDEX NUMBERS

Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

P 
∑ w ∗  1 

 Po 
Price: x 100
∑w

Q 
∑ w ∗  1 
Quantity:
 Qo  x 100
∑w

TIME SERIES

Additive Model
Series = Trend + Seasonal + Random

Multiplicative Model
Series = Trend * Seasonal * Random

March 2012 13 Performance Management

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)

Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]

Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:

1 1 
PV = 1 − 
r  [1 + r ] n 

Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

2C o D
EOQ =
Ch

where: Co = cost of placing an order

Ch = cost of holding one unit in inventory for one year
D = annual demand

Performance Management 14 March 2012

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

March 2012 15 Performance Management

Performance Pillar

Management Level Paper

P2 – Performance Management

March 2012

Performance Management 16 March 2012

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