ACCA P5

ACCA Paper P5: Advanced Performance Management – Mock Exam 1

James Kwan @ Singapore Accountancy Academy May 2009

Section A – BOTH questions are compulsory and MUST be attempted

1. Durham Ltd provides advisory services to home computer customers. Three types of advisor are employed offering advice by telephone, written/e-mail replies and home visits respectively. Appendix 1.1 shows sundry statistics for the past 12 month period for Durham Ltd and also for two competitor companies A and B.

Additional information relating to Durham Ltd for the past 12 month period is as follows:

(i) Home visit travel and remedial work hours are not charged directly to customers.

(ii) All service workers incur some “idle time” which is not charged directly to customers.

(iii) A number of customers pay a fixed annual fee of �100 for the advisory service. This entitles them to 24 hour priority access to the service and a maximum of five hours of advice without further charge.

Appendix 1.1 shows the total hours of advice (both budget and actual) taken up by customers. Assume that no customer requires more than the five hoursallowable.

(iv) All other time for the advisory service and home visits is billed to customers at �20 per hour.

(v) The budgeted wage rate per hour for advisory service staff is �8. This was also the actual rate paid.

(vi) Sundry operating expenses (other than advisor wages) were budgeted at �950,000. Actual operating expenses incurred were �1,000,000.

Actual information for the period under review for competitor companies A and B is as follows:

(i) Similar policies to those used by Durham Ltd are operated with regard to idle time, home visit travel and remedial hours.

(ii) Fixed annual fee advisory service schemes, similar to that of Durham Ltd, are operated. The annual fee charged per customer by company A and company B is �75 and �100 respectively.



(iii) Other revenue and cost information is as follows:

Company A Company B� �

Total revenue (excluding annual fee income):Enquiry advice 756,180 1,266,000Home visits 87,500 810,000Total wage costs 720,000 1,099,000Sundry operating expenses 650,000 1,250,000

Required:

(a)(i) Prepare budgeted and actual profit and loss accounts for the 12 month periodunder review for Durham Ltd and also actual profit and loss accounts forcompanies A and B. (8 marks)

(ii) Discuss the financial performance of Durham Ltd, incorporating details ofrelative customer billing rates, company service wage rates and annualagreement advice “level of uptake” in your answer. (12 marks)

(b) Comment on the performance of Durham Ltd, incorporating relevant percentage and ratio statistics in the context of each of the following:

(i) Competitiveness;(ii) Quality;(iii) Resource utilisation. (15 marks)

(c) Outline the main concepts of open and closed systems and how they relate to large companies. (5 marks)

(Total: 40 marks)





2(a) A balanced scorecard approach combines financial measures with operational measures, organizational innovation measures and customer service measures to provide management with comprehensive information to assist strategic policy formulation and achievement.

Required:

(i) Discuss the types of information that would be required by managers implementing the balanced scorecard approach. Provide examples to illustrate your answers.

(ii) Identify and comment on three specific examples of performance measures ofuse in a service industry. (10 marks)

(b) Briefly outline what you understand by the Performance Pyramid as a performance measure. (10 marks)

(20 marks)



Section B – TWO questions ONLY to be attempted

3. A sports complex includes an ice rink and a swimming pool in its facilities. The ice rink is used for skating and for curling which became more popular after the 1998 Winter Olympics. The swimming pool is used for leisure purposes and as a venue for swimming competitions. The sports complex management is concerned at falling profit levels which are due to falling revenue and rising costs.

A proposal to change, and hence improve, the method used for heating thewater in the swimming pool is currently being investigated as part of a quality improvement programme.

A survey of the complex has been carried out at a cost of $30,000 to check energy usage. This has shown that the heat removed from the ice rink in keeping the ice temperature regulated to the required level for good ice conditions could beused to heat the swimming pool. At present the heat removed in the regulationof ice temperature is not utilised and is simply vented into the atmosphere outside the complex.

The following additional information is available:

(i) The expected costs for the ice rink heat extraction for the year ended 31 May 2009 are $120,000. It is estimated that due to rising prices, this cost will increase by 10% during the year to 31 May 2010. Heat extracted totalled 500,000 units of heat during the year to 31 May 2009 and this figure is expected to apply for the year to 31 May 2010.

(ii) The water in the swimming pool is currently heated by a separate system which is also used for a range of other heating purposes in the sportsc omplex. In the year ended 31 May 2009 the swimming pool share of the system had operating costs of $150,000 using 200,000 units of heat. This was made up of 70% variable avoidable cost and 30% which is a share of general fixed overhead. On average all such costs will increase by 10% through price changes in the year to 31 May 2010.

(iii) In order to utilise the heat extracted from the ice rink for heating thewater in the swimming pool, equipment would be hired at a cost of$75,000 per annum. This equipment would be supervised by an employeewho is currently paid a salary of $15,000 for another post in the year ended 31 May 2009 and who would be retiring if not given this post. His salary for the year to 31 May 2010 would be $17,500. His previous post would not be filled on his retirement. It is anticipated that this system would help to improve the ice quality on the rink.



(iv) Only part of the heat extracted from the ice rink could be recoveredfor use in heating the water in the swimming pool using the new equipment. The current most likely estimate of the recovery level is 25% of the heat extracted from the ice rink.

If the quantity of heat available was insufficient for the heating of the swimming pool, any balance could continue to be obtained from the existing system.

Required:

(a) Prepare an analysis for the year to 31 May 2010 to show whether the sports complex should proceed with the heat recovery proposal on financial grounds where a 25% level of recovery applies. Explain any assumptions made and give reasons for the figures used in or omitted from your calculations. (11 marks)

(b) Calculate the percentage level of heat recovery from the ice rink at which the sports complex management will be indifferent to the proposed changes on financial grounds for the year ended 31 May 2010. (9 marks)

Note: You may ignore the time value of money. (20 marks)



4(a)(i) Explain the concept of life cycle costing and give reasons why it may be important to use it. (3 marks)

(ii)Discuss the difficulties of using life cycle costing techniques in an organization with a heavy reliance on periodic reporting. (5 marks)

(b) It is just as important for an organization to determine how individual customers or groups of customers differ in terms of their profitability to the organization as it is to determine the relative profitability of products. Briefly explain how this can be done.

(5 marks)

(c) Contingency theory has frequently been used to explain variations in the functioning of organisations. It has also been criticized on a number of grounds, including whether sufficient attention has been paid to people and culture.

Explain the main criticisms of contingency theory. (7 marks)

(20 marks)

5(a) “Just dismantling the budgeting system will not be effective unless the changes in management principles and practices are seen as an integrated approach with as much emphasis on the ‘soft’ cultural issues (such as empowerment) as on the ‘hard’ process issues (such as management reporting).”

Jeremy Hope and Robin Fraser (1999)

(i) Briefly explain the principles and practices highlighted by Hope and Fraser in “managing without budgets”. (4 marks)

(ii) Discuss how the private sector would benefit from the use of the Beyond Budgeting model. (4 marks)

(iii) Describe the problems faced by the public sector in applying the Beyond Budgeting model. (4 marks)

(b) Discuss ways in which benchmarking may be used by an organization a part of a performance measurement and improvement focus. (8 marks)

(20 marks)

END OF PAPER

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ACCA P5