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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