ACCA PROGRESS TEST

ACCA – PM
Performance
Management

September 2019 to June 2020

Time allowed
Reading and planning: 10 minutes
Writing: 3 hours

Answer ALL questions.

Do not open this paper until instructed by the supervisor.

This question paper must not be removed from the examination

hall.

Kaplan Publishing/Kaplan Financial

PM : PE R F OR MAN CE MA NA GE ME N T

© Kaplan Financial Limited, 2019

The text in this material and any others made available by any Kaplan Group company does not
amount to advice on a particular matter and should not be taken as such. No reliance should be
placed on the content as the basis for any investment or other decision or in connection with any
advice given to third parties. Please consult your appropriate professional adviser as necessary.
Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to
any person in respect of any losses or other claims, whether direct, indirect, incidental,
consequential or otherwise arising in relation to the use of such materials.
All rights reserved. No part of this examination may be reproduced or transmitted in any form or
by any means, electronic or mechanical, including photocopying, recording, or by any information
storage and retrieval system, without prior permission from Kaplan Publishing.

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FORMULAE
Learning curve

Y = axb

Where y = cumulative average time per unit to produce x units

a = Time taken for the first unit of output

x = The cumulative number of units produced

b = learning the index of learning (log LR/log 2)

LR = the learning rate as a decimal

Demand curve

P = a − bQ

Change in price
b=
Change in quantity

a = price when Q = 0

MR = a – 2bQ

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SECTION A

ALL 15 questions are compulsory and MUST be attempted

Each question is worth 2 marks

1 The following statements have been made about activity-based costing (ABC):

(1) ABC is an alternative costing system to traditional overhead absorption costing.

(2) ABC gives a more realistic picture of cost behaviour.
Which of the above statements is/are true?

A (1) only
B (2) only
C Neither (1) nor (2)
D Both (1) and (2)

2 MB manufactures a product that requires 3.75 hours per unit of machining time. Machine
time is a bottleneck resource, because there is a limited number of machines.

There are just seven machines, and each is available for up to 15 hours each day, five days a
week. The product has a selling price of $100 per unit, a direct material cost of $40 per unit,
a direct labour cost of $10 per unit and a factory overhead cost of $30 per unit. These costs
are based on a weekly production and sales volume of 140 units.
What is the throughput accounting ratio?
A 0.67
B 1.50
C 1.67
D 5.33

3 The following statements have been made about environmental internal failure costs:

(1) They are borne exclusively by the organisation.

(2) The aim in incurring them is to determine whether adverse impacts are being created
and whether environmental standards and internal policies are being complied with.
Which of the above statements is/are true?
A (1) only
B (2) only
C Neither (1) nor (2)
D Both (1) and (2)

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4 Z sells PCs that it purchases through a regional distributor. An extract from its budget for
the 4-week period ended 28 March 2014 shows that it planned to sell 600 PCs at a unit
price of $500, which would give a contribution to sales ratio of 25%.

Actual sales were 642 PCs at an average selling price of $465. The actual contribution to
sales ratio averaged 20%.
What is the sales price variance (to the nearest $1)?
A $22,470 (F)
B $1,470 (A)
C $1,470 (F)
D $22,470 (A)

5 Z sells PCs that it purchases through a regional distributor. An extract from its budget for
the 4-week period ended 28 March 2014 shows that it planned to sell 600 PCs at a unit
price of $500, which would give a contribution to sales ratio of 25%.

Actual sales were 642 PCs at an average selling price of $465. The actual contribution to
sales ratio averaged 20%.
What is the sales volume contribution variance (to the nearest $1) was:
A $5,050 (F)
B $5,150 (F)
C $5,250 (F)
D $5,350 (F)

6 A chemical flavouring, product C, is made by mixing together two materials. The standard
cost of a batch is as follows:

Material Kg per batch $ per kg $ per batch

L 300 1.30 390
H 500 2.82 1,410
–––– –––––
Input per batch 800 1,800

10% standard loss 80

––––
Output per batch 720
––––
For batch no. 1247, material input was 250.5 kg of L and 669.5 kg of H. Output from the
batch was 810 kg of product C.
What is the total material yield variance for the batch?
A $45 (A)
B $45 (F)
C $143.64 (A)
D $143.64 (F)

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7 What is an extranet?

A a system that enables the computer systems of two different organisations to

communicate with each other
B an intranet system that also provides access to certain selected external users
C the provision of IT services for a computer network by an external organisation
D a computer network that uses dedicated communications links for security purposes

8 The following statements have been made about incremental budgeting:

(1) It can be defined as a system of budgetary planning and control that measures the
additional costs that are incurred when there are unplanned extra units of activity.
(2) Incremental budgets review and, if necessary, revise the budget for the next quarter
to ensure that budgets remain relevant for the remainder of the accounting period.
Which of the above statements is/are true?
A (1) only
B (2) only
C Neither (1) nor (2)
D Both (1) and (2)

9 The following statements have been made about zero-based budgeting:

(1) It is a method of budgeting where an attempt is made to make the expenditure

under each cost heading as close to zero as possible.
(2) It is a method of budgeting whereby all activities are re-evaluated each time a budget
is formulated.
Which of the above statements is/are true?
A (1) only
B (2) only
C Neither (1) nor (2)
D Both (1) and (2)

10 Which of the following describes an expert system?

A a database built upon past knowledge and experience

B a powerful off-the-shelf solution
C an online library of operating advice and handy hints
D an application that carries out essential, routine processing of day-to-day transactional
data

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11 The following are measures gathered in the context of a balanced scorecard approach to
the provision of management information:

(i) Training days per employee

(ii) Percentage of revenue generated by new products and services
(iii) Labour turnover rate
Which of the following measures might be appropriate for monitoring the innovation and
learning perspective?
A (i), (ii) and (iii)
B (i) and (iii) only
C (ii) only
D (ii) and (iii) only

12 S Company has been investigating the time taken to produce one of its products, and found
that a 90% learning curve appears to be applicable. The time taken for the first unit is 7
hours.

What is the total time taken in hours for units 5 to 8 only?

A 17.078 hours
B 18.144 hours
C 19.590 hours
D 20.142 hours

13 A division of a company has capital employed of $2m and its return on capital is 12%. It is
considering a new project requiring capital of $500,000 and is expected to yield profits of
$90,000 per annum. The company’s interest rate is 10%.

If the new project is accepted, what will the residual income of the division?
A $40,000
B $80,000
C $30,000
D $330,000

14 The following statements have been made management control reports:

(1) Reports should not include information about uncontrollable items.

(2) Only encryption can be used to ensure the security of highly confidential information.
Which of the above statements is/are true?
A (1) only
B (2) only
C Both (1) and (2)
D Neither (1) nor (2)

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15 The following statements have been made about Transaction Processing Systems (TPS):

(1) TPS systems support structured decisions at operational and management control
levels.
(2) The failure of TPS systems can stop business from operating, as organisations rely
heavily on them.
Which of the above statements is/are true?
A (1) only
B (2) only
C Both (1) and (2)
D Neither (1) nor (2)

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SECTION B

All 15 questions are compulsory and MUST be attempted.

Each question is worth 2 marks.

The following scenario relates to questions 16–20

MOC makes and sells an executive game for two distinct markets in which it currently has a
monopoly. The fixed costs of production per month are $20,000, and variable costs per unit
produced, and sold, are $40. The monthly sales can be thought of as X, where X = X1 + X2, with X1
and X2 denoting monthly sales in their respective markets. Detailed market research has revealed
the demand functions in the markets to be as follows, with prices shown as P1 and P2:
Market 1: P1 = 55 − 0.05X1
Market 2: P2 = 200 − 0.2X2
The management accountant believes there should be price discrimination; the price is currently
$50 per game in either market.

16 What is the optimum price to charge in Market 1?

A $37.50
B $47.50
C $120
D $150

17 What is the optimum quantity to produce in Market 2?

A 120 units
B 150 units
C 400 units
D 500 units

18 The following statements have been made about price discrimination:

(1) Price discrimination should be used if a business wishes to discourage new entrants
into a market.
(2) Price discrimination can be difficult to implement in practice, because it relies for
success upon the continued existence of certain market conditions.
Which of the above statements is/are true?
A (1) only
B (2) only
C Neither (1) nor (2)
D Both (1) and (2)

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19 Some of MOC’s competitors are thinking of entering markets 1 and 2, and adopt a
penetration pricing strategy.

Which of the following statements is/are true?

(1) MOC may be forced to use going rate pricing to match the competitors’ prices in
order to remain competitive.
(2) Competition in these markets will drive down profit margin for all organisations and
probably drive MOC out of business.

A (1) only
B (2) only
C Neither (1) nor (2)
D Both (1) and (2)

20 MOC is thinking of leaving markets 1 and 2 and entering overseas markets 3 and 4. In
market 3, it would initially charge low prices so as to gain rapid market share while demand
is relatively elastic. In market 4, it would initially charge high prices so as to earn maximum
profits while demand is relatively inelastic.

Which price strategy would MOC use in each market?

A Penetration pricing in market 3 and price skimming in market 4
B Price discrimination in market 3 and penetration pricing in market 4
C Price skimming in market 3 and penetration pricing in market 4
D Price skimming in market 3 and price discrimination in market 4

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The following scenario relates to questions 21–25

JAY Manufacturing operates a marginal costing system and budgets to make and sells 10,000 units
of a single product every period.
The standard cost and revenue per unit are as follows:
$
Selling price 400
Direct material A 5 kg at $25 per kg 125
Direct material B 3 kg at $22 per kg 66
Direct labour 3 hours at $10 per hour 30
Variable overheads 3 hours at $7 per hour 21
––––
Standard contribution 158
––––
The mix of materials can be varied and therefore the material usage variance can be sub-divided
into mix and yield variances.
For the period under review, the actual results were as follows:
Production and sales 9,000 units
$
Sales revenue 4,455,000
Material cost A – 35,000 kg 910,000
B – 50,000 kg 1,050,000
Labour cost 30,000 hours 385,000
Variable overhead 230,000

21 What is the material mix variance?

A $36,250 F
B $36,250 A
C $54,375 F
D $54,375 A

22 What is the material yield variance?

A $203,125 F
B $203, 125 A
C $310,375 F
D $310,375 A

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23 What is the sales volume variance?

A $158,000 F
B $158,000 A
C $855,000 F
D $855,000 A
Additional information
The general market prices at the time of purchase for material A and material B were $21 per kg
and $19 per kg respectively. There were no opening or closing inventories during the period.

24 What is the operational price variance for Material A?

A $81,000 A
B $175,000 F
C $175,000 A
D $180,000 A

25 What is the operational price variance for Material B?

A $81,000 A
B $100,000 A
C $175,000 A
D $180,000 A

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The following scenario relates to questions 26–30

Solid Ltd has been asked to provide a quotation for an engineering project that will take one year
to complete. An analysis of the project has already been completed and the following resource
requirements have been identified:
A specialised machine will be required for a total of 10 weeks. It can be hired in from a reputable
supplier, who would guarantee its availability when it is required, for $2,500 per week. The
machinery has a running cost of $720 per week. This cost is incurred by the user of the machine. It
is company policy to depreciate non-current assets by 25% per year on a reducing balance basis.
The company has already incurred expenditure of $25,000 in analysing the resource requirements
of the project.

26 What is the relevant cost of hiring and running the machine for the engineering project?

A $7,200
B $25,000
C $32,200
D $32,825
Additional information
Skilled labour would be required for a total of 9,000 hours during the year. The labour required
could be recruited at an hourly rate of $12. Alternatively some of the employees currently
working on other projects within the company could be transferred to this project. Their hourly
rate is $10 per hour. If these existing employees were to be transferred to this project then they
would need to be replaced on their existing project work. Replacements for their existing project
work would cost $11 per hour.

27 What is the relevant cost of skilled labour?

A $90,000
B $99,000
C $108,000
D $189,000
Additional information
The project would need to be supervised and it is estimated that there would be a total of 500
hours of supervision required during the year. One of the existing supervisors could undertake
this work, but if he did so he would have to work a total of 300 hours overtime during the year to
carry out the supervision on this project as well as his existing duties. The supervisor earns a
salary of $50,000 per year for working 2,000 hours and is not paid for overtime work. If this
project goes ahead the supervisor will be paid a bonus of $500, which would not be paid if the
project is not undertaken.

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28 What is the relevant cost of supervision?

A $0
B $500
C $50,000
D $50,500
Additional information
The direct materials required for the project are Materials A and B. With regards to Material A,
the total amount required for the project would have to be purchased at a cost of $15,000.
The total amount of Material B required would be 10,000 square metres. The company purchased
25,000 square metres of this material for a project two years ago at a total cost of $100,000. The
earlier project used 20,000 square metres of the material and the remainder is currently held in
inventory. The company does not foresee any other use for this material in the future and could
sell it for $2 per square metre. The current purchase price of the material is $5 per square metre.

29 What is the relevant cost of material B?

A $0
B $25,000
C $35,000
D $50,000

30 Which TWO of the following statements relating to relevant cost concepts in decision
making are correct?

(1) Materials can never have an opportunity cost whereas labour can.
(2) The annual depreciation charge is not a relevant cost.
(3) Fixed costs would have a relevant cost element if a decision causes a change in their
total expenditure.
(4) Materials already held in inventory never contribute to relevant cost.

A (1) and (3)

B (1) and (4)
C (2) and (3)
D (3) and (4)

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SECTION C

Both questions are compulsory and MUST be attempted

31 SCRUM
Scrum Ltd produces two products, the Webb and the Ellis. Budgeted data relating to these
products on a per unit basis for August 2016 are as follows:
Webb Ellis
Selling price $150 $100
Materials $80 $30
Salesmen’s commission $30 $20
Each unit of product incurs costs of machining and assembly. The total capacity available in
August 2016 is budgeted to be 700 hours of machining and 1,000 hours of assembly, the
cost of this capacity being fixed at $7,000 and $10,000 respectively for the month,
whatever the level of usage made of it. The number of hours required in each of these
departments to complete one unit of output is as follows:
Webb Ellis
Machining 1 hour 2 hours
Assembly 2.5 hours 2 hours
In the market Scrum operates in, selling prices are fixed by European Union directives. The
permitted output of either product in August is 400 units (i.e. Scrum Ltd may produce a
maximum of 800 units of product). At the present controlled selling prices, the demand for
the products exceeds this considerably.
The graph on the following page has been correctly drawn.

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SCRUM LTD
Ellis units

500
2.5W + 2E = 1,000

D
400 E = 400

300
W = 400

200

100
W + 2E = 700

C Webb units

0
100 200 300 400 500 600 700 800

Required:
(a) Calculate Scrum’s optimal production plan for August 2016, and the profit earned.
(10 marks)
(b) Calculate the shadow price of an extra hour of machining, and the shadow price of
an extra hour of assembly. In each case, assume that the capacity of the other
department is not altered and the maximum output continues to apply. (6 marks)
An external contractor has offered to supply an extra 100 machine hours provided that they
are paid double the normal rate of $10 per machine hour, at $20 per machine hour.
Required:
(c) Briefly discuss whether Scrum should accept the offer of additional machine hours
at double the normal rate. (4 marks)
(Total: 20 marks)

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32 BWEALTH
BWealth Ltd provides a fee-based, high quality financial planning and personalised
investment service to ‘high net worth’ retired individuals, as well as to trusts, charities and
small businesses.
BWealth employees work to enhance the income of the business’ long-term investors. The
industry BWealth operates in is becoming more and more competitive. The Managing
Partner feels that promotion of new investment products to BWealth’s clients would be
likely to upset their generally conservative nature and, as a result, the business has been
managed with similar products for the last couple of years.
The last two years of financial results are shown below:
2016 2015
Turnover ($000) 1,001 950
Net profit ($000) 198 190
Average debtor/trade receivables days
(industry average 20 days) 19 days 21 days
Average cash balances ($000) 20 19
BWealth operates in a country where the average rate of inflation is around 3% per annum.

Required:
(a) Assess the financial performance of BWealth using the information given above.
(7 marks)
During the early part of 2009, BWealth employed a newly qualified management
accountant. He quickly became concerned about the potential performance of the
business, and to investigate his concerns, he started to gather data to measure some non-
financial measures of success. The data he has gathered is shown below:
Internal Business Processes
2016 2015
Error rates in jobs done 15% 9%
Average job completion time 7 weeks 9 weeks

Customer Knowledge
2016 2015
Number of customers 1,210 1,432
Average fee levels ($) 549 450
Market Share 12% 19%

Learning and Growth

2010 2009
Percentage of revenue from non-core work 4% 5%
Industry average of the proportion of revenue
from non-core work in similar practices 30% 25%
Employee retention rate. 60% 80%

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Notes
1 Error rates measure the number of jobs with mistakes made by staff as a proportion
of the number of clients serviced.
2 Core work is defined as being investment management. Non-core work is defined
primarily as estate planning and retail banking. Non-core work is traditionally high
margin work.

Required:
(b) Briefly explain why non financial information is likely to give a better indication of
the likely future success of the business than the financial information given in a).
(3 marks)
(c) Assess the performance of the business with comments on all non-financial aspects
separately, as well as a concluding comment on the overall performance of the
business. (10 marks)
(Total: 20 marks)

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 ACCA

PM

Performance Management
September 2019 to June 2020

Progress Test – Answers

To gain maximum benefit, do not refer to these answers

until you have completed the progress test questions
and submitted them for marking.
PM : PE R F OR MAN CE MA NA GE ME N T

© Kaplan Financial Limited, 2019

The text in this material and any others made available by any Kaplan Group company does not
amount to advice on a particular matter and should not be taken as such. No reliance should be
placed on the content as the basis for any investment or other decision or in connection with any
advice given to third parties. Please consult your appropriate professional adviser as necessary.
Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to
any person in respect of any losses or other claims, whether direct, indirect, incidental,
consequential or otherwise arising in relation to the use of such materials.
All rights reserved. No part of this examination may be reproduced or transmitted in any form or
by any means, electronic or mechanical, including photocopying, recording, or by any information
storage and retrieval system, without prior permission from Kaplan Publishing.

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SECTION A

1 D
Both statements are true. Statement (2) is true, because costs collected into cost pools
tend to behave in the same way, as they have the same cost driver.

2 B
The throughput per factory hour = ($100 – $40)/3.75 hours = $16
Factory costs per factory hour = ($10 + $30)/3.75 hours = $10.67
Throughput accounting ratio = Throughput per factory hour/cost per factory hour =
$16/$10.67 = 1.5

3 A
Statement (2) describes environmental appraisal costs.

4 D
Sales price variance
$
Std selling price 500
Actual selling price 465
––––
Sales price variance 35 (A)
× Actual no of units sold × 642
––––––
22,470
––––––

5 C
Sales volume contribution variance
Units
Budgeted quantity sold 600
Actual quantity sold 642
––––
Sales volume variance in units 42 (F)
× Std contribution per unit (25% × $500) × $125
––––––
$5,250 (F)
––––––

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6 A
920 kg input should yield (× 720/800) 828 kg
but did yield 810 kg
––––––
Yield variance in kg 18 kg (A)
× standard price per kg × $2.50
––––––
Yield variance $45 (A)
––––––
7 B
An extranet is similar to an intranet, with the exception that access to the system is
provided to some external users as well as to employees of the organisation. Answer A
describes electronic data interchange (EDI) and answer C describes outsourcing.

8 C
Incremental budgeting uses the current period’s results as a base and adjusts this to allow
for any known changes, including the cost increases caused by extra planned units of
activity. Statement (1) is therefore incorrect. Statement (2) is also incorrect and a poor
attempt at defining a rolling budget system, where an extra quarter is added to the end of
the budget when the most recent quarter has expired.

9 B
A zero based budgeting system begins each budget from scratch every time. All
expenditure on the activity must be justified from zero and the method of carrying out each
activity must be re-evaluated as if it were being carried out for the first time.

10 A
An expert system simulates the problem-solving techniques of human experts, by applying
human expertise and knowledge to a range of specific problems about a particular area of
expertise.

11 A
Any of these measures could be suitable:
(i) Setting a performance target for training days per employee. In principle, the more
training days an employee receives, the more knowledgeable and skilful he or she
becomes.
(ii) A target for the percentage of total sales revenue earned from new products focuses
on innovation. The higher the target percentage, the more innovative the
organisation might be with new product development.
(iii) Labour turnover rate could be a suitable target. The rate at which staff leave and are
replaced provides a measure of the loss of existing employee skills, and possibly also
the recruitment of new staff with new ideas.

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12 B
Average time for first 1 unit = 7 hours
Average time for first 2 units = 0.9 × 7 = 6.3 hours
Average time for first 4 units = 0.92 × 7 = 5.67 hours
Average time for first 8 units = 0.93 × 7 = 5.103 hours
Hours
Total time for first 4 units = 4 × 5.67 = 22.680
Total time for first 8 units = 8 × 5.103 = 40.824
∴ Total time for units 5 to 8 = 18.144

13 B
Original profit = $2,000,000 × 12% = $240,000
New profit = $240,000 + $90,000 = $330,000
New capital employed = $2,000,000 + $500,000 = $2,500,000

Residual income = $330,000 – (10% × $2,500,000) = $80,000

14 D
Neither statement is true. Uncontrollable information can still be reported; Other
procedures, such as firewalls and passwords, can be used to ensure the security of highly
confidential information.

15 B
Statement (1) describes Management Information Systems; a TPS usually operates at
operational level.

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SECTION B

16 B
Profit will be maximised when marginal revenue = marginal costs. In each market, marginal
costs = $40
Market 1
MR = 55 − 0.1X1
So that:
55 − 0.1X1 = 40
X1 = 150
P1 = 55 − 0.05X1
when: X1 = 150
P1 = $47.50

17 C
Market 2
MR = 200 − 0.4X2
So that:
200 − 0.4X2 = 40
X2 = 400

18 B
Statement (1) is not true: a price penetration strategy should be used if a business wishes to
discourage new entrants into a market.

19 A
Statement (2) is not true: competition at this price will drive down MOC’s profit margins but
the company may be able to sustain low margins in the short term to try and hold onto its
customer base. As MOC has had such a strong monopoly of the market, it should already
have sufficient economies of scale to be able to withstand the lower profit margins for
longer than the competitor.

20 A

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21 C

Mix variance

Note: A method is not specified. We recommend you use the individual units method as it
is quicker and easier than the weighted average price method. However, if you prefer the
weighted average price method, the total result will be the same.

Material Standard Actual Difference @ Variance

mix mix Standard
price
000s 000s 000s $000
A 53.125 35 18.125 F $25 453.125 F
B 31.875 50 18.125 A $22 398.75 A
85 85 Nil 54.375 F
Standard mix of A : B is 5 kg : 3 kg
Hence, standard mix of actual input is:
5
A = 85 × = 53.125
8

3
B = 85 × = 31.875
8

22 D

Yield variance
Standard yield from actual input 85,000 kg ÷ 8 kg pu 10,625 units
Actual yield (output) 9,000 units
–––––––
1,625 units
@ Standard Material Price per unit of output
(5 kg × $25) + (3 kg × $22) $191
–––––––
Variance $310,375 A
–––––––

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23 B

Sales Volume variance

AQSM 9,000 units × $158/unit = 1,422,000

158,000 A
BQSM 10,000 units × $158/unit = 1,580,000
where SM = Standard Contribution per unit

Standard contribution per unit

$
Selling price 400
Material A 5 kg × $25 (125)
Material B 3 kg × $22 (66)
Direct labour 3 hr × $10 (30)
Variable overhead 3 hr × $7 (21)
––––
Contribution 158
––––

24 C

Material A operational price variance

$
AQRSP
35,000 kg × $21/kg = 735,000
AQAP $175,000 A
= 910,000 Price

25 B

Material B operational price variance

$
AQRSP
50,000 kg × $19/kg = 950,000
AQAP $100,000 A
= 1,050,000 Price

26 C
Relevant cost of specialised machine = 2,500 ×10, so $25,000, plus machinery running cost
$720 × 10 weeks = $7,200.
Depreciation is not a relevant cash outflow.
The already incurred expenditure of $25,000 in analysing the resource requirements of the
project is a sunk cost.

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27 B
External project labour: 9,000 hours × $12 £108,000
External replacement labour 9,000 hours × $11 £99,000
The existing hourly rate is irrelevant, as the company would continue to pay its existing
employees regardless of the decision. The relevant cost is the lower cost option: $99,000.

28 B
Existing salaries is not an incremental cost, therefore irrelevant. Overtime would not be
paid in cash, therefore irrelevant. Bonus of $500 is cash, incremental (only paid if the
project goes ahead), and future, therefore a relevant cost of $500.

29 C
The historical cost of $100,000 is irrelevant (= a sunk cost). Remainder of material currently
held in inventory: 5,000 metres. There is no other use for this material so the relevant cost
is the foregone contribution this would otherwise bring, at $2/metre: $10,000
Add: 5,000 metres purchased on open market @ $5 a metre $25,000
Total relevant cost of material B $35,000

30 C
Statement (1) is incorrect. Materials can often have an opportunity cost.
Statement (2) is correct – depreciation is never relevant, as it is not a cash cost.
The key issue in statement (3) is that a cost is relevant if the decision leads to a future
incremental cash flow. Statement (3) effectively says this in the phrase ‘a change in their
total expenditure’.
Statement (4) is incorrect: materials already held in inventory can be sold, using them will
have a relevant cost – the benefit foregone by using them rather than selling them. Thus,
statement 4 is incorrect and choice 3 is the correct answer.

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SECTION C

31 SCRUM
(a) The constraints are plotted on the graph as follows:
Machining constraint: If W = 0, E = 350 and if E = 0, W = 700
Assembly constraint: If W = 0, E = 500 and if E = 0, W = 400
Output of Webb units constraints: W = 400
Output of Ellis units constraints: E = 400
Feasible region = OABC
Solve for the optimum production plan
B is the optimum point in the graph, where 200 Webb units and 250 Ellis units should
be output. This can be read from the graph, or solved using simultaneous equations
as follows:
2.5 W + 2E = 1,000 (1)
W + 2E = 700 (2)
Subtract equation (2) from equation (1): 1.5 W = 300 so W = 200
Substituting in equation (1): 2.5 × 200 + 2E = 1,000 so 2E = 500 and E = 250.
At the optimum point B, the output mix is as follows:
200 units of Webb at a contribution of $40 per unit $8,000
250 units of Ellis at a contribution of $50 per unit $12,500
Total Contribution $20,500
Less Fixed Costs ($7,000 + $10,000) $17,000
Profit 3,500
(b) Machining capacity
If we obtain additional machine hours, the line W + 2E = 700 will shift upwards. If one
extra machine hour is obtained, the constraints W + 2E = 700 and 2.5W + 2E will still
be binding, and the new optimal plan can be determined by solving the following
equations:
W + 2E = 701 (revised machining constraint)
2.5W + 2E = 1,000 (unchanged assembly constraint)
The values for W and E when the above equations are solved are W = 199.33 and
E = 250.83. Therefore Ellis is increased by 0.83 units and Webb is reduced by
0.67 units and the change in contribution will be as follows:
Increase in contribution from Ellis: (0.83 × $50) = $41.50
Decrease in contribution from Webb (0.67 × $40) = ($26.80)
Net increase in contribution = $14.70
Hence the value of an extra hour of machining is $14.70 per hour.

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Assembly capacity
With an additional hour of assembly capacity, the new optimal plan will be given by
the solution of the following equations:
W + 2E = 700 (unchanged machining constraint)
2.5W + 2E = 1,001 (revised assembly constraint)
The values for W and E when the above equations are solved are W = 200.67 and
E = 249.67. Therefore Webb is increased by 0.67 units and Ellis is reduced by
0.33 units and the change in contribution will be as follows:
Increase in contribution from Webb: (0.67 × $40) = $26.80
Decrease in contribution from Ellis (0.33 × $50) = ($16.50)
Net increase in contribution = $10.30
Hence the value of an extra hour of assembly is $10.30 per hour.
(c) The shadow price represents the maximum premium above the normal rate a
business should be willing to pay for more of a scarce resource. It is equal to the
increased contribution that can be gained from gaining that extra resource.
The shadow price of a machine hour is $14.70 per hour. The external contractor has
offered to supply each hour at a cost of $20 – a premium of $10.00 per machine
hour. Therefore, the offer seems acceptable.

Marking scheme
Marks
(a) Identify feasible region 2
Solving W = 200 and E = 250 (OFR available) 2
Identify optimum point (B) on the graph 2
Total contribution calculation 2
Total profit calculation 2
(b) Revised machining constraint 1
W = 199.33 OFR 0.5
E = 250.83 OFR 0.5
Calculation of shadow price OFR 1
Revised assembly constraint 1
W =200.67 OFR 0.5
E = 249.67 OFR 0.5
Calculation of shadow price OFR 1
(c) Definition of shadow price : a PREMIUM 1
Difference with shadow price calculated in b) 1
Conclusion – OFR applies 2
––––
Total 20
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32 BWEALTH
(a) Assessment of financial performance
There are various financial observations that can be made from the data:
– Turnover is up by over 5%. This is higher than the rate of inflation, and the sign
of a growing business.
– The main weakness identified in the financial results is that the net profit
margin has fallen from 20% to 19.8%, suggesting that cost control may be
getting worse or fee levels are being competed away.
– Profit is up 4.2%. In absolute terms profits are impressive, given that the
market is becoming more and more competitive.
– Average cash balances are up 5% – indicating improved liquidity. Positive cash
balances are always welcome in a business.
– Average debtors days are down by 2 days – indicating improved efficiency in
chasing up outstanding debts. It is noticeable that BWealth’s days are lower
than the industry average indicating strong working capital management. The
only possible concern may be that the company is being particularly aggressive
in chasing up outstanding debts.
Overall, with a possible concern about margins and low growth, the business looks in
good shape and would appear to have a healthy future.
(b) The traditional performance measure for a business is of course financial, but one
problem is that the financial measures relate to the past. Another is that the financial
accounting model does not adequately consider the value to BWealth of its
intangible assets such as a happy and loyal customer base, results-oriented, well
trained and efficient staff and good quality services. Good results in these measures
can lead to a good financial performance: for example if a business delivers good
quality to its customers then this could lead to more custom at higher prices in the
future.
Specifically, BWealth’s information relates to the non-financial measures within a
balanced scorecard. ‘Internal business processes’ are a measure of BWealth’s
internal efficiency; ‘Customer knowledge’ measure how well the business is dealing
with its external customers. A good performance here is very likely to lead to more
custom in the future.
‘Learning and growth’ measures that way the business develops. Non-core work
would be reflected here along with indicators of staff retention. Again this is much
more focused on the future than the present. Measuring performance by way of
non-financial means is much more likely to give an indication of the future success of
a business.

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(c) The extra non-financial information gives much greater insight into key operational
issues within the business and paints a bleaker picture for the future.
Internal business processes
Error rates
Error rates for jobs done are up from 9% to 15%. This is probably a result of reducing
turnaround times to improve delivery on time percentages. This is critical, as users
expect the accounts to be correct. Errors could lead to problems for clients with the
Inland Revenue, bankers, etc. What is worse, BWealth could be sued if clients lose
out because of such errors. One could say that errors are unlikely to be revealed to
clients. Businesses rarely advertise mistakes that have been made. They should of
course put mistakes right immediately.
Customer Knowledge
Client retention
The number of clients has fallen dramatically – this is alarming and indicates a high
level of customer dissatisfaction. In this industry, one would normally expect a high
level of repeat business. Clearly existing clients are not happy with the service
provided.
Average fees
It would appear that the increase in revenue is thus due to a large increase in
average fees rather than extra clients – average fee is up from $450 to $549, an
increase of 22%. This could explain the loss of clients in itself, however there could be
other reasons.
Market share
The result of the above two factors is a fall in market share from 19% to 12%. Looking
at revenue figures one can estimate the size of the market as having grown from $5m
to $8.3m, an increase of 66%. Compared to this, BWealth’s figures are particularly
worrying. The firm should be doing much better and looks to being left behind by
competitors.
Learning and Growth
Non-core services
The main weakness of the firm seems to be is its lack of non-core services offered.
The industry average revenue from non-core work has increased from 25% to 30%
but BWealth’s figures have dropped from 5% to 4%. It would appear that most clients
are looking for their advisers to provide a wider range of products but BWealth is
ignoring this trend.
Employee retention
Employee turnover is up, indicating that the staff are dissatisfied. Continuity of staff
at a client is important to ensure a quality service. Conservative clients may resent
revealing personal financial details to a variety of different people each year. Staff
turnover is possibly a result of extra pressure to complete jobs more quickly without
the satisfaction of a job well done. Also, staff may realise that the lack of range of
services offered by the firm will limit their own experience and career paths.

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Conclusion
In conclusion, the financial results do not show the full picture. The firm has
fundamental weaknesses that need to be addressed if it is to grow into the future. At
present it is being left behind by a changing industry and changing competition. It is
vital that BWealth reassesses its attitude and ensures that the firm has a better fit
with its business environment.
In particular, BWealth should seek to develop complementary services and reduce
errors on existing work.

Marking scheme
Marks
(a) Turnover growth 2
Profitability 2
Cash position 2
Debtor management 1
(b) Any valid point worth 1 mark, up to a maximum of 3 3
(c) Comment on error rates 1
Comment on client retention 1
Comment on average fees 1
Comment on market share 1
Comment on non-core services 1
Comment on employee retention 1
Any other valid comment 1 mark, maximum 2 marks 2
Conclusion 2
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Total 20
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