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Performance Pillar P2 - Performance Management 21 May 2014 - 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 subquestions). 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. 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. P2 - Performance Management DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO. 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 2,000,000 1,650,000 (350,000) 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) Sales and production units 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 1350 820 85 100 15 330 Selling price Frame cost Other material cost Assembly cost Delivery cost Contribution Annual quality cost information for the latest year Inspection costs (manufacturing) Staff training costs $2,300,000 $780,000 Total cost of dismantling and reassembling per bike (this includes the collection cost of the faulty bicycle at $20) $200 Estimated market size (number of bicycles) 2,500,000 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 nonfinancial 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 $ 175 60 10 40 14 Selling price Material A ($12 per kg) Material B ($5 per kg) Labour ($20 per hour) Variable overhead ($7 per machine hour) Product M $ 125 24 15 20 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 periods until payment or receipt. )n where r = interest rate; n = number of Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1% 0.990 0.980 0.971 0.961 0.951 0.942 0.933 0.923 0.914 0.905 0.896 0.887 0.879 0.870 0.861 0.853 0.844 0.836 0.828 0.820 2% 0.980 0.961 0.942 0.924 0.906 0.888 0.871 0.853 0.837 0.820 0.804 0.788 0.773 0.758 0.743 0.728 0.714 0.700 0.686 0.673 3% 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 0.623 0.605 0.587 0.570 0.554 4% 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676 0.650 0.625 0.601 0.577 0.555 0.534 0.513 0.494 0.475 0.456 Interest rates (r) 5% 6% 0.952 0.943 0.907 0.890 0.864 0.840 0.823 0.792 0.784 0.747 0.746 0705 0.711 0.665 0.677 0.627 0.645 0.592 0.614 0.558 0.585 0.527 0.557 0.497 0.530 0.469 0.505 0.442 0.481 0.417 0.458 0.394 0.436 0.371 0.416 0.350 0.396 0.331 0.377 0.312 7% 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 0.475 0.444 0.415 0.388 0.362 0.339 0.317 0.296 0.277 0.258 8% 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.270 0.250 0.232 0.215 9% 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356 0.326 0.299 0.275 0.252 0.231 0.212 0.194 0.178 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.149 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 11% 0.901 0.812 0.731 0.659 0.593 0.535 0.482 0.434 0.391 0.352 0.317 0.286 0.258 0.232 0.209 0.188 0.170 0.153 0.138 0.124 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.287 0.257 0.229 0.205 0.183 0.163 0.146 0.130 0.116 0.104 13% 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295 0.261 0.231 0.204 0.181 0.160 0.141 0.125 0.111 0.098 0.087 14% 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270 0.237 0.208 0.182 0.160 0.140 0.123 0.108 0.095 0.083 0.073 Interest rates (r) 15% 16% 0.870 0.862 0.756 0.743 0.658 0.641 0.572 0.552 0.497 0.476 0.432 0.410 0.376 0.354 0.327 0.305 0.284 0.263 0.247 0.227 0.215 0.195 0.187 0.168 0.163 0.145 0.141 0.125 0.123 0.108 0.107 0.093 0.093 0.080 0.081 0.069 0.070 0.060 0.061 0.051 17% 0.855 0.731 0.624 0.534 0.456 0.390 0.333 0.285 0.243 0.208 0.178 0.152 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.043 18% 0.847 0.718 0.609 0.516 0.437 0.370 0.314 0.266 0.225 0.191 0.162 0.137 0.116 0.099 0.084 0.071 0.060 0.051 0.043 0.037 19% 0.840 0.706 0.593 0.499 0.419 0.352 0.296 0.249 0.209 0.176 0.148 0.124 0.104 0.088 0.079 0.062 0.052 0.044 0.037 0.031 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 0.135 0.112 0.093 0.078 0.065 0.054 0.045 0.038 0.031 0.026 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 each year for n years Periods (n) 1 2 3 4 5 1 (1+ r ) n r 1% 0.990 1.970 2.941 3.902 4.853 2% 0.980 1.942 2.884 3.808 4.713 3% 0.971 1.913 2.829 3.717 4.580 4% 0.962 1.886 2.775 3.630 4.452 Interest rates (r) 5% 6% 0.952 0.943 1.859 1.833 2.723 2.673 3.546 3.465 4.329 4.212 7% 0.935 1.808 2.624 3.387 4.100 8% 0.926 1.783 2.577 3.312 3.993 9% 0.917 1.759 2.531 3.240 3.890 10% 0.909 1.736 2.487 3.170 3.791 6 7 8 9 10 5.795 6.728 7.652 8.566 9.471 5.601 6.472 7.325 8.162 8.983 5.417 6.230 7.020 7.786 8.530 5.242 6.002 6.733 7.435 8.111 5.076 5.786 6.463 7.108 7.722 4.917 5.582 6.210 6.802 7.360 4.767 5.389 5.971 6.515 7.024 4.623 5.206 5.747 6.247 6.710 4.486 5.033 5.535 5.995 6.418 4.355 4.868 5.335 5.759 6.145 11 12 13 14 15 10.368 11.255 12.134 13.004 13.865 9.787 10.575 11.348 12.106 12.849 9.253 9.954 10.635 11.296 11.938 8.760 9.385 9.986 10.563 11.118 8.306 8.863 9.394 9.899 10.380 7.887 8.384 8.853 9.295 9.712 7.499 7.943 8.358 8.745 9.108 7.139 7.536 7.904 8.244 8.559 6.805 7.161 7.487 7.786 8.061 6.495 6.814 7.103 7.367 7.606 16 17 18 19 20 14.718 15.562 16.398 17.226 18.046 13.578 14.292 14.992 15.679 16.351 12.561 13.166 13.754 14.324 14.878 11.652 12.166 12.659 13.134 13.590 10.838 11.274 11.690 12.085 12.462 10.106 10.477 10.828 11.158 11.470 9.447 9.763 10.059 10.336 10.594 8.851 9.122 9.372 9.604 9.818 8.313 8.544 8.756 8.950 9.129 7.824 8.022 8.201 8.365 8.514 Periods (n) 1 2 3 4 5 11% 0.901 1.713 2.444 3.102 3.696 12% 0.893 1.690 2.402 3.037 3.605 13% 0.885 1.668 2.361 2.974 3.517 14% 0.877 1.647 2.322 2.914 3.433 Interest rates (r) 15% 16% 0.870 0.862 1.626 1.605 2.283 2.246 2.855 2.798 3.352 3.274 17% 0.855 1.585 2.210 2.743 3.199 18% 0.847 1.566 2.174 2.690 3.127 19% 0.840 1.547 2.140 2.639 3.058 20% 0.833 1.528 2.106 2.589 2.991 6 7 8 9 10 4.231 4.712 5.146 5.537 5.889 4.111 4.564 4.968 5.328 5.650 3.998 4.423 4.799 5.132 5.426 3.889 4.288 4.639 4.946 5.216 3.784 4.160 4.487 4.772 5.019 3.685 4.039 4.344 4.607 4.833 3.589 3.922 4.207 4.451 4.659 3.498 3.812 4.078 4.303 4.494 3.410 3.706 3.954 4.163 4.339 3.326 3.605 3.837 4.031 4.192 11 12 13 14 15 6.207 6.492 6.750 6.982 7.191 5.938 6.194 6.424 6.628 6.811 5.687 5.918 6.122 6.302 6.462 5.453 5.660 5.842 6.002 6.142 5.234 5.421 5.583 5.724 5.847 5.029 5.197 5.342 5.468 5.575 4.836 4.988 5.118 5.229 5.324 4.656 4.793 4.910 5.008 5.092 4.486 4.611 4.715 4.802 4.876 4.327 4.439 4.533 4.611 4.675 16 17 18 19 20 7.379 7.549 7.702 7.839 7.963 6.974 7.120 7.250 7.366 7.469 6.604 6.729 6.840 6.938 7.025 6.265 6.373 6.467 6.550 6.623 5.954 6.047 6.128 6.198 6.259 5.668 5.749 5.818 5.877 5.929 5.405 5.475 5.534 5.584 5.628 5.162 5.222 5.273 5.316 5.353 4.938 4.990 5.033 5.070 5.101 4.730 4.775 4.812 4.843 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: If A and B are not mutually exclusive: P(A B) = P(A) + P(B) P(A B) = P(A) + P(B) - P(A B) Rules of Multiplication If A and B are independent: If A and B are not independent: P(A B) = P(A) * P(B) P(A B) = P(A) * P(B | A) E(X) = (probability * payoff) DESCRIPTIVE STATISTICS Arithmetic Mean x = x n x= fx f (frequency distribution) Standard Deviation SD = ( x x ) 2 n SD = fx 2 x 2 (frequency distribution) f INDEX NUMBERS Price relative = 100 * P1/P0 Price: Quantity: Quantity relative = 100 * Q1/Q0 P w 1 Po w x 100 Q w 1 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: PV = 1 1 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: PV = 1 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 Ch D = = = cost of placing an order cost of holding one unit in inventory for one year annual demand Performance Management 18 May 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 Level 1 - KNOWLEDGE What you are expected to know. Level 2 - COMPREHENSION What you are expected to understand. VERBS USED DEFINITION List State Define Make a list of Express, fully or clearly, the details/facts of Give the exact meaning of Describe Distinguish Explain Communicate the key features Highlight the differences between Make clear or intelligible/State the meaning or purpose of Recognise, establish or select after consideration Use an example to describe or explain something Identify Illustrate Level 3 - APPLICATION How you are expected to apply your knowledge. Apply Calculate Demonstrate Prepare Reconcile Solve Tabulate Level 4 - ANALYSIS How are you expected to analyse the detail of what you have learned. Level 5 - EVALUATION How are you expected to use your learning to evaluate, make decisions or recommendations. May 2014 Analyse Categorise Compare and contrast Put to practical use Ascertain or reckon mathematically Prove with certainty or to exhibit by practical means Make or get ready for use Make or prove consistent/compatible Find an answer to Arrange in a table Construct Discuss Interpret Prioritise Produce Examine in detail the structure of Place into a defined class or division Show the similarities and/or differences between Build up or compile Examine in detail by argument Translate into intelligible or familiar terms Place in order of priority or sequence for action Create or bring into existence Advise Evaluate Recommend Counsel, inform or notify Appraise or assess the value of Advise on a course of action 19 Performance Management Performance Pillar Management Level Paper P2 - Performance Management May 2014 Wednesday Afternoon Session Performance Management 20 May 2014 Performance Pillar P2 - Performance Management Wednesday 29 February 2012 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 subquestions). 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. 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. P2 - Performance Management DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO 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 $/unit 115 L $/unit 120 Direct material A ($10 per kg) Direct material B ($6 per kg) Skilled labour ($14 per hour) Variable overhead ($4 per machine hour) Fixed overhead* 20 12 28 14 28 10 24 21 18 36 Profit 13 11 Selling price *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 Direct material B Skilled labour Machine time Performance Management 900 kg 1,750 kg 1,250 hours 2,400 machine hours 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 Direct material A $ Nil $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 Number of bedrooms available Northern 120 Southern 250 Eastern 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 3,328 876 4,204 8,500 776 9,276 2,365 837 3,202 832 1,100 576 4,200 7,400 4,400 Revenue: Bedroom with breakfast Restaurant Total Profit before tax Net Assets at 31 December An analysis of the costs incurred by each of the hotels for the year ended 31 December 2011 is as follows: Hotel Bed and breakfast related Restaurant related Total Northern $000 2,847 525 3,372 Southern $000 7,231 945 8,176 Eastern $000 2,082 544 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 Return on Net Assets Northern 20% Southern 15% Eastern ??? 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: (b) 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) 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: $000 110 120 155 145 130 2012 2013 2014 2015 2016 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 periods until payment or receipt. )n where r = interest rate; n = number of Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1% 0.990 0.980 0.971 0.961 0.951 0.942 0.933 0.923 0.914 0.905 0.896 0.887 0.879 0.870 0.861 0.853 0.844 0.836 0.828 0.820 2% 0.980 0.961 0.942 0.924 0.906 0.888 0.871 0.853 0.837 0.820 0.804 0.788 0.773 0.758 0.743 0.728 0.714 0.700 0.686 0.673 3% 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 0.623 0.605 0.587 0.570 0.554 4% 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676 0.650 0.625 0.601 0.577 0.555 0.534 0.513 0.494 0.475 0.456 Interest rates (r) 5% 6% 0.952 0.943 0.907 0.890 0.864 0.840 0.823 0.792 0.784 0.747 0.746 0705 0.711 0.665 0.677 0.627 0.645 0.592 0.614 0.558 0.585 0.527 0.557 0.497 0.530 0.469 0.505 0.442 0.481 0.417 0.458 0.394 0.436 0.371 0.416 0.350 0.396 0.331 0.377 0.312 7% 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 0.475 0.444 0.415 0.388 0.362 0.339 0.317 0.296 0.277 0.258 8% 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.270 0.250 0.232 0.215 9% 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356 0.326 0.299 0.275 0.252 0.231 0.212 0.194 0.178 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.149 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 11% 0.901 0.812 0.731 0.659 0.593 0.535 0.482 0.434 0.391 0.352 0.317 0.286 0.258 0.232 0.209 0.188 0.170 0.153 0.138 0.124 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.287 0.257 0.229 0.205 0.183 0.163 0.146 0.130 0.116 0.104 13% 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295 0.261 0.231 0.204 0.181 0.160 0.141 0.125 0.111 0.098 0.087 14% 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270 0.237 0.208 0.182 0.160 0.140 0.123 0.108 0.095 0.083 0.073 Interest rates (r) 15% 16% 0.870 0.862 0.756 0.743 0.658 0.641 0.572 0.552 0.497 0.476 0.432 0.410 0.376 0.354 0.327 0.305 0.284 0.263 0.247 0.227 0.215 0.195 0.187 0.168 0.163 0.145 0.141 0.125 0.123 0.108 0.107 0.093 0.093 0.080 0.081 0.069 0.070 0.060 0.061 0.051 17% 0.855 0.731 0.624 0.534 0.456 0.390 0.333 0.285 0.243 0.208 0.178 0.152 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.043 18% 0.847 0.718 0.609 0.516 0.437 0.370 0.314 0.266 0.225 0.191 0.162 0.137 0.116 0.099 0.084 0.071 0.060 0.051 0.043 0.037 19% 0.840 0.706 0.593 0.499 0.419 0.352 0.296 0.249 0.209 0.176 0.148 0.124 0.104 0.088 0.079 0.062 0.052 0.044 0.037 0.031 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 0.135 0.112 0.093 0.078 0.065 0.054 0.045 0.038 0.031 0.026 March 2012 11 Performance Management Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of each year for n years Periods (n) 1 2 3 4 5 1 (1+ r ) n r 1% 0.990 1.970 2.941 3.902 4.853 2% 0.980 1.942 2.884 3.808 4.713 3% 0.971 1.913 2.829 3.717 4.580 4% 0.962 1.886 2.775 3.630 4.452 Interest rates (r) 5% 6% 0.952 0.943 1.859 1.833 2.723 2.673 3.546 3.465 4.329 4.212 7% 0.935 1.808 2.624 3.387 4.100 8% 0.926 1.783 2.577 3.312 3.993 9% 0.917 1.759 2.531 3.240 3.890 10% 0.909 1.736 2.487 3.170 3.791 6 7 8 9 10 5.795 6.728 7.652 8.566 9.471 5.601 6.472 7.325 8.162 8.983 5.417 6.230 7.020 7.786 8.530 5.242 6.002 6.733 7.435 8.111 5.076 5.786 6.463 7.108 7.722 4.917 5.582 6.210 6.802 7.360 4.767 5.389 5.971 6.515 7.024 4.623 5.206 5.747 6.247 6.710 4.486 5.033 5.535 5.995 6.418 4.355 4.868 5.335 5.759 6.145 11 12 13 14 15 10.368 11.255 12.134 13.004 13.865 9.787 10.575 11.348 12.106 12.849 9.253 9.954 10.635 11.296 11.938 8.760 9.385 9.986 10.563 11.118 8.306 8.863 9.394 9.899 10.380 7.887 8.384 8.853 9.295 9.712 7.499 7.943 8.358 8.745 9.108 7.139 7.536 7.904 8.244 8.559 6.805 7.161 7.487 7.786 8.061 6.495 6.814 7.103 7.367 7.606 16 17 18 19 20 14.718 15.562 16.398 17.226 18.046 13.578 14.292 14.992 15.679 16.351 12.561 13.166 13.754 14.324 14.878 11.652 12.166 12.659 13.134 13.590 10.838 11.274 11.690 12.085 12.462 10.106 10.477 10.828 11.158 11.470 9.447 9.763 10.059 10.336 10.594 8.851 9.122 9.372 9.604 9.818 8.313 8.544 8.756 8.950 9.129 7.824 8.022 8.201 8.365 8.514 Periods (n) 1 2 3 4 5 11% 0.901 1.713 2.444 3.102 3.696 12% 0.893 1.690 2.402 3.037 3.605 13% 0.885 1.668 2.361 2.974 3.517 14% 0.877 1.647 2.322 2.914 3.433 Interest rates (r) 15% 16% 0.870 0.862 1.626 1.605 2.283 2.246 2.855 2.798 3.352 3.274 17% 0.855 1.585 2.210 2.743 3.199 18% 0.847 1.566 2.174 2.690 3.127 19% 0.840 1.547 2.140 2.639 3.058 20% 0.833 1.528 2.106 2.589 2.991 6 7 8 9 10 4.231 4.712 5.146 5.537 5.889 4.111 4.564 4.968 5.328 5.650 3.998 4.423 4.799 5.132 5.426 3.889 4.288 4.639 4.946 5.216 3.784 4.160 4.487 4.772 5.019 3.685 4.039 4.344 4.607 4.833 3.589 3.922 4.207 4.451 4.659 3.498 3.812 4.078 4.303 4.494 3.410 3.706 3.954 4.163 4.339 3.326 3.605 3.837 4.031 4.192 11 12 13 14 15 6.207 6.492 6.750 6.982 7.191 5.938 6.194 6.424 6.628 6.811 5.687 5.918 6.122 6.302 6.462 5.453 5.660 5.842 6.002 6.142 5.234 5.421 5.583 5.724 5.847 5.029 5.197 5.342 5.468 5.575 4.836 4.988 5.118 5.229 5.324 4.656 7.793 4.910 5.008 5.092 4.486 4.611 4.715 4.802 4.876 4.327 4.439 4.533 4.611 4.675 16 17 18 19 20 7.379 7.549 7.702 7.839 7.963 6.974 7.120 7.250 7.366 7.469 6.604 6.729 6.840 6.938 7.025 6.265 6.373 6.467 6.550 6.623 5.954 6.047 6.128 6.198 6.259 5.668 5.749 5.818 5.877 5.929 5.405 5.475 5.534 5.584 5.628 5.162 5.222 5.273 5.316 5.353 4.938 4.990 5.033 5.070 5.101 4.730 4.775 4.812 4.843 4.870 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: If A and B are not mutually exclusive: P(A B) = P(A) + P(B) P(A B) = P(A) + P(B) - P(A B) Rules of Multiplication If A and B are independent: If A and B are not independent: P(A B) = P(A) * P(B) P(A B) = P(A) * P(B | A) E(X) = (probability * payoff) DESCRIPTIVE STATISTICS Arithmetic Mean x = x n x= fx f (frequency distribution) Standard Deviation SD = ( x x ) 2 n SD = fx 2 x 2 (frequency distribution) f INDEX NUMBERS Price relative = 100 * P1/P0 Price: Quantity: Quantity relative = 100 * Q1/Q0 P w 1 Po w x 100 Q w 1 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: PV = 1 1 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: PV = 1 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 Ch D = = = cost of placing an order cost of holding one unit in inventory for one year annual demand Performance Management 14 March 2012 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 Level 1 - KNOWLEDGE What you are expected to know. Level 2 - COMPREHENSION What you are expected to understand. VERBS USED DEFINITION List State Define Make a list of Express, fully or clearly, the details/facts of Give the exact meaning of Describe Distinguish Explain Communicate the key features Highlight the differences between Make clear or intelligible/State the meaning or purpose of Recognise, establish or select after consideration Use an example to describe or explain something Identify Illustrate Level 3 - APPLICATION How you are expected to apply your knowledge. Apply Calculate Demonstrate Prepare Reconcile Solve Tabulate Level 4 - ANALYSIS How are you expected to analyse the detail of what you have learned. Level 5 - EVALUATION How are you expected to use your learning to evaluate, make decisions or recommendations. March 2012 Analyse Categorise Compare and contrast Put to practical use Ascertain or reckon mathematically Prove with certainty or to exhibit by practical means Make or get ready for use Make or prove consistent/compatible Find an answer to Arrange in a table Construct Discuss Interpret Prioritise Produce Examine in detail the structure of Place into a defined class or division Show the similarities and/or differences between Build up or compile Examine in detail by argument Translate into intelligible or familiar terms Place in order of priority or sequence for action Create or bring into existence Advise Evaluate Recommend Counsel, inform or notify Appraise or assess the value of Advise on a course of action 15 Performance Management Performance Pillar Management Level Paper P2 - Performance Management March 2012 Performance Management 16 March 2012