ACCA F5 Performance Management - 2010 - Study text

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Answers

(b)

Direct labour rate variance $

8,200 hours should cost (× $12)

98,400

They did cost 101,600

Direct labour rate variance 3,200

(A)

Direct labour efficiency variance hours

2,000 units should take (× 4 hours)

8,000

They did take 8,200

Efficiency variance in hours 200

(A)

Standard cost per labour hour $12

Direct labour efficiency variance in $ $2,400

(A)

Planning variance $

Standard cost of 2,000 units:

Original (ex ante) standard (2,000 × 3 hours × $15)

90,000

Revised (ex post) standard (2,000 × 4 hours × $12)

96,000

Total planning variance 6,000

(A)

The planning variance can be analysed into:

 a planning variance caused by a change in the time for each unit. This is (4

hours – 3 hours) = 1 hour per unit (A)

 a planning variance caused by a change in the rate per hour. This is ($15 –

$12) = $3 per hour (F).

(Note: A planning variance is adverse if the ex ante standard is too optimistic

and favourable if it over-estimates costs).

However, there are two ways of analysing the total planning variance:

 Efficiency planning variance = 2,000 units × 1 hour per unit (A) × $15 per

hour = $30,000 (A)

 Labour rate planning variance = 2,000 units × 4 hours per unit × $3 per

hour (F) = $24,000 (F)

 Alternatively:

 Efficiency planning variance = 2,000 units × 1 hour per unit (A) × $12 per

hour = $24,000 (A)

 Labour rate planning variance = 2,000 units × 3 hours per unit × $3 per

hour (F) = $18,000(F).

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Summary $

Original standard cost of 2,000 units 90,000

Efficiency planning variance 30,000

(A)

Rate per hour planning variance 24,000

(F)

Revised standard cost of 2,000 units 96,000

Operational variances

Direct labour rate 3,200

(A)

Direct labour efficiency 2,400

(A)

Actual direct labour cost 101,600

41 Size and share

The budgeted sales volume for the company was 120,000 units and the budgeted

market size was 600,000 units. The budgeted market share was therefore 20%.

Sales price variance $

114,000 units should sell for (× $10)

1,140,000

They did sell for (× $10.50)

1,197,000

Sales price variance 57,000

(F)

The standard contribution per unit is $6 (= $10 – $4).

The sales volume variance could be calculated, but this is unnecessary since

Market size variance units

Budgeted market size 600,000

Actual market size 550,000

Difference 50,000

Budgeted market share 20%

Market sze varance in units 10,000

(A)

Standard contribution per unit $6

Market size variance in $ contribution $60,000

(A)

Market share variance units

Expected share of market for actual market size

(20%× 550,000 units)

110,000

Actual sales volume 114,000

Market share variance in units 4,000

(F)

Answers

Standard contribution per unit $6

Market share variance in $ contribution $24,000 (F)

Summary $

Budgeted contribution (120,000 × $6)

720,000

Sales price variance 57,000

(F)

Market size variance 60,000

(A)

Market share variance 24,000

(F)

Actual contribution (114,000 × $6.50)

741,000

Sales prices were higher than expected but the total market size was smaller than

budgeted. There may be some connection between higher sales prices and the

smaller-than-expected market size.

The company has achieved a market share of 20.7% (114,000/550,000) which is

above the budgeted market share. This has resulted in higher sales volume to offset

partially the decline in the size of the market.

In summary, actual contribution was more than budget due to higher sales prices

and a good market share, but the company may be concerned about the effect of

higher sales prices on the market size in the future and the possibility that the

market may continue to decline in the future..

42 Learning curve variance

Note: This answer uses rounding for some of the calculations, and your answer may

differ from the one provided here due to rounding differences.

The expected learning rate is 85%.

The cumulative average time per unit produced is therefore ax

where b = log 0.85/log 2.

Log 0.85/log 2 = - 0.0758/0.3010 = - 0.2518

Therefore the cumulative average time per unit = a/x

0.2518

In this example, x = 7, and x

0.2518

= 1.63228.

Expected

cost per

unit

Expected

cost in total

(7 units)

$ $

Direct labour $30,000/ 1.63228 18,379 128,653

Labour-related other costs $2,000/1.63228 1,225 8,575

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Expected cost Actual cost Variance

$ $

Direct materials (14,000 × 7)

98,000

95,000 3,000 (F)

Direct labour 128,653

160,000 31,347 (A)

Other costs: 8,575 + (3,000 × 7)

29,575

29,400 175 (F)

The variances show a large adverse labour cost variance. Since the labour rate

variance is $0, the entire variance must be an adverse efficiency variance.

However the variance is calculated on the assumption that the learning rate should

be 85%. Unless there are obvious reasons for inefficiency, it would seem that the

learning rate is not as good as 85% but it could be difficult to establish the cause if

the variance is investigated.

43 Balanced

(a) The four perspectives for performance targets and measuring performance in

a balanced scorecard approach are:

(1) a customer perspective: identifying what customers value most

(2) an internal systems perspective: identifying the processes that must be

performed with excellence to satisfy customers

(3) an innovation and learning perspective: what must the organisation do

to innovate or add to its knowledge and experience

(4) a financial perspective.

(b)

A professional football club

Here are some suggestions

Customer perspective

Customers value:

 results, winning

 an enjoyable time at football matches: being entertained (for example, with

food and drink).

Targets for performance might be:

 the size of attendances at matches

 results (points, position in the league table, promotion)

 revenue from catering: number of meals sold before matches.

Internal processes perspective

Processes that must be excellent to support customer expectations might

include ticket selling, getting customers into the ground quickly on match

days, catering efficiency, effective security and policing, and so on.

Targets for performance might be:

Answers

 number of season ticket sales

 targets for number of spectators per minute going through each turnstile

 speed of producing meals in the catering area

 number of incidents and police arrests on match days.

Innovation and learning perspective

Value can be created by developing well-trained footballers through coaching

and training, and possibly selling them in the transfer market to make profits.

Targets for performance might be:

 average fitness levels for players

 average number of hours of training each week per player

 revenue from transfers

Financial perspective

Presumably, the football club will be expected to make profits for its owners.

Targets for performance might be profits each year, and return on investment.

Subsidiary financial targets might be average wages per player, and revenue

from sponsorship deals.

44 Pyramid

(a) The performance pyramid describes a view that all measures of performance

for an organisation should be linked and consistent with each other. There is a

hierarchy of suitable measures of performance, with performance measures at

lower levels in the hierarchy (or pyramid) supporting performance measures

at a higher level.

(1) At the bottom of the pyramid, there are operational performance

measures, relating to external effectiveness and internal efficiency.

(2) Operational performance measures support higher-level measures that

should relate to quality, delivery, production or service cycle time and

waste.

(3) These measures of performance support measures of performance at an

even higher level in the pyramid, relating to customer satisfaction,

flexibility and productivity.

(4) These measures of performance support measures relating to market

satisfaction and financial performance.

(5) Together, measures of market satisfaction and financial performance

support the achievement of the organisation’s objectives.

The performance pyramid recognises that external and market measures of

performance are as important as financial performance and internal efficiency

in achieving the long-term objectives of the organisation.

(b) Dimensions of performance in service industries may be measured primarily

by:

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(1) financial performance and

(2) competitiveness.

These should be supported by performance in four other dimensions:

(1) service quality

(2) flexibility

(3) resource utilisation and

(4) innovation.

45 Three services

(a) Workings

Revenue:

Service A contract customers: 350,000 × 60% × $9 × 1.03 = $1,946,700

Service A non-contract customers: 350,000

× 40% × $9 × 1.30 × 1.03 =

$1,687,140

Service B contract customers: 250,000

× 60% × $15 × 1.03 = $2,317,500

Service B non-contract customers: 250,000

× 40% × $15 × 1.50 × 1.03 =

$2,317,500

Service C contract customers: 20,000

× 80% × $300 × 1.03 = $4,944,000

Service C non-contract customers: 20,000

× 20% × $300 × 1.20 × 1.03 =

$1,483,200

Salaries: $45,000

× 85 employees × 1.05 = $4,016,250

Sundry operational costs: $4,000,000

×1.05 = $4,200,000

Fuel

Services A and B: 400 km × 50 vehicles × 300 days × $0.40 = $2,400,000

Service C: 600 km

× 18 vehicles × 300 days × $0.80 = $2,592,000

Budgeted income statement for the year to 31st December Year 2

Service

Total

Revenue: $

$ $

Contract customers 1,946,700

2,317,500

4,944,000 9,208,200

Non-contract

customers

1,687,140

2,317,500

1,483,200 5,487,840

Total revenue 3,633,840

4,635,000

6,427,200 14,696,040

Costs:

Salaries

4,016,250

Fuel:

Answers

Services A and B

2,400,000

Service C

2,592,000

4,992,000

Sundry operational costs

4,200,000

Total costs

13,208,250

Net profit

1,487,790

(b) Vehicle utilisation

There is no information about weight carried, only about distance travelled.

All vehicles were used for 300 days in the year. Presumably, vehicles might be

used for 365 days per year, indicating an overall utilisation ratio for all

vehicles of 82.2%.

Other utilisation measure: a revenue measure might be used as an indication

of the utilisation of vehicles.

Services A and B

Service C

Revenue per vehicle ($8,268,840/50)

($6,427,200/18)

$165,377

$357,067

Kilometres travelled each year might also be a measure of utilisation:

 Service A and B vehicles travel on average (400 × 300) = 120,000 kilometres

each year.

 Service C vehicles travel on average (600 × 300) = 180,000 kilometres each

year.

46 Private medical practice

Workings

Total number of patients per year = 5 doctors × 18 patients per day × 5 days per

week

× 46 weeks per year = 20,700.

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Patients

Total

Adults

Children

65 years and over

20,700

(45%) = 9,315

(25%) = 5,175

(30%) = 6,210

Treatment

None: 20%

1,863.0

1,035.0

1,242

Minor: 70%

6,520.5

3,622.5

4,347

Major: 10%

931.5

517.5

621

Revenue:

Adults, no treatment: 1,863 × $50 = $93,150

Adults, minor treatment: 6,520.5

× $200 = $1,304,100

Adults, major treatment: 931.5

× $600 = $558,900

Children, no treatment: 1,035

× $30 = $31,050

Children, minor treatment: 3,622.5

× $120 = $434,700

Children, major treatment: 517.5

× $280 = $144,900

65 years and over, no treatment: 1,242

× $30 = $37,260

65 years and over, minor treatment: 4,347

× $120 = $521,640

65 years and over, major treatment: 621

× $280 = $173,880.

Budgeted income statement for the year to […]

Adults

Childre

Aged 65

years

and over

Total

Revenue: $

$ $

No treatment 93,150

31,050

37,260 161,460

Minor treatment 1,304,100

434,700

521,640 2,260,440

Major treatment 558,900

144,900

173,880 877,680

Total revenue 1,956,150

610,650

732,780 3,299,580

Costs:

Salaries

Doctors (5 × $240,000)

1,200,000

Assistants (5 × $100,000)

500,000

Administrators (2 × $80,000)

160,000

1,860,000

Bonus

93,000

1,953,000

Materials costs

414,300

Other costs

733,600

Total costs

3,100,900

Net profit

198,680

Answers

47 Train times

Northern Region Southern Region

Inter-

city

services

Suburban

services

Inter-

city

services

Suburban

services

Target for completion on

time 90%

95%

90% 95%

Actual % on time 82.7%

73.8%

88.3% 91.9%

% not on time, but less than

5 minutes late 7.3%

12.9%

5.6% 4.0%

% between 5 and 10

minutes late

6.0%

10.6%

2.2% 2.9%

% cancelled 3.2%

1.2%

0.1% 0.5%

99.2%

98.5%

96.2% 99.3%

Over 10 minutes late

(balance)

0.8%

1.5%

3.8% 0.7%

100.0%

100.0% 100.0%

Assessment of performance

Neither region has achieved its target for journeys completed on time, although

Southern Region appears to be closer to achieving its targets.

Most of the late-completed journeys were completed within ten minutes of the

scheduled time.

Northern Region has a fairly large proportion of cancelled trains – certainly much

higher than Southern Region. However, Southern Region has a comparatively high

proportion of inter-city journeys finishing over ten minutes late.

The managers of the two regions should be asked to provide a report on these

aspects of performance.

48 Growth objective

Sales

Sales growth: Year 2 compared with Year 1 20.0%

Sales growth: 1

six months of Year 2 compared with 1

six months of

Year 1

28.1%

Sales growth: 2

six months of Year 2 compared with 2

six months

of Year 1 5.0%

Sales increased by 20% in Year 2 compared with Year 1. However, the strong

growth in sales occurred in the first six months of the year (28% compared with the

Paper F5: Performance management

same period in Year 1). In the second half of the year, sales growth compared with

the same period in Year 1 was down to 5%. There is insufficient information to

judge whether the growth in sales revenue is slowing down or coming to an end.

Net profit

There was no increase in net profit between Year 1 and Year 2. The increase in sales

(20%) is offset by an increase of 30.4% in operating costs and some interest charges.

In terms of annual net profit, the business is therefore not growing.

If a part-time employee is the equivalent of 50% of a full-time employee, there were

415 equivalent full time employees in Year 1 (260 + 50% × 310). There were 565

equivalent full time employees in Year 2 (318 + 50% × 494). Sales revenue per

equivalent full-time employee was therefore $62,651 in Year 1 and $55,221 in Year 2.

This fall in employee productivity is one reason for the failure to achieve growth in

the annual net profit.

Investment

The investment in non-current assets has risen by just 5%, but the investment in

working capital has doubled. The increase in net assets has been almost entirely

financed by borrowing. (Presumably, this means that most of the profits earned in

Year 1 have been paid in taxation or distributed as dividends to shareholders.)

It is difficult to draw definite conclusions from the limited amount of data, but

management should be concerned about a 100% increase in working capital, when

the increase in annual sales is only 20%. Could there be large quantities of unsold

inventory as a result of the decline in sales growth in the second half of the year?

It is not clear why it was considered necessary to borrow $9,000,000 when increases

in non-current assets have been only $1,300,000. It would appear that the new

borrowing might be financing unnecessary working capital investment, and not

investment in non-current assets for longer-term development.

On the other hand, investment in non-current assets will probably need to exceed

5% per year (by a large amount) if the company is to achieve significant long-term

growth in its business.

Product range/new product sales

The data about new products is difficult to interpret, because there is no information

about the total size of the product portfolio and no information about whether the

new products sold well or badly.

49 Responsibility

(a) We are told that decisions about capital investment and borrowing are taken

at head office. It would therefore be appropriate to look at the performance of

the division over which the managing director has control – sales revenue and

operating costs, but not depreciation or interest.

ACCA F5 Performance Management - 2010 - Study text - Emile Woolf Publishing

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