ACCA

Performance Management (PM)

CBE Final Mock – December

2022

Commentary, Marking scheme and

Suggested solutions

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 Commentary
Tutor guidance on improving performance in this exam

Section A & B
Make sure you answer ALL section A and B questions even if you have to guess. It is amazing how a 'lucky
guess' can generate the 50th mark – the one you need to pass – there is no negative marking so you have
nothing to lose. When you come across a question that you are finding difficult and is taking up valuable time
(questions 9–10, 15–17, 21–22 may fall into this category) then make sure that you answer the question
(however unconfident you are) and move on to other questions; you can come back to these questions at the
end of the exam if you have time.

Section C
Q31 Chocoholics Anonymous
This question covers some of the basics of the risk and uncertainty area of the syllabus. Part (a) could have been
answered in isolation. Part (c) involved calculation of expected values and as long as you correctly used the
answers you calculated in (b) you would have scored full marks for this element. Remember to show your
workings for part (b) and in this way you can pick up marks even if your answer is wrong. Part (d) was entirely
knowledge based

Q32 Wholesale Co (WC)

This is the style of performance measurement question that we have come to expect from this examiner with a
financial performance measure giving a misleading picture of a store's performance. Use a clear layout for your
calculations and headings to give a structure to your discussions and explanations. Make sure that you relate
your answers to the scenario set. The calculations are relatively straightforward, so you need to explain their
implications to score well.

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 Section A Solutions
1 The correct answer is: 2 only
The cost driver for quality inspections is likely to be either the number of units produced or the number of
batches produced, depending on whether quality inspection is linked to batches produced or total
production output. The batch size is not a factor that drives total inspection costs.
The costs of any management information system may exceed the benefits obtained: in such cases there
is no value in establishing and operating such a system. This applies to any cost and management
accounting system, not just ABC.
2 The correct answer is: Produce W, then Y, then X
W X Y
$ $ $
Selling price 200 150 150
Direct materials (41) (20) (30)
Throughput 159 130 120
Throughput per minute on bottleneck 159/9 130/10 120/7
=17.67 =13 =17.14
Rank 1 3 2

The question is asking, very clearly, for the throughput approach, yet the information given on
variable costs may lead you to think that the examiner probably required a contribution approach.
This is not the case, however, and you must base your answer on the concept of throughput, that is,
selling price less direct material costs, and not on contribution, which would have resulted in a
different ranking.
3 The correct answer is: 40,000
Breakeven point = Fixed costs/contribution per unit
Fixed costs can be determined using the High-low method
High output (200,000 units)
$1,600,000
Low output (120,000 units)
$1,100,000
Change in cost = $500,000
Change in output = 80,000 units
Of the change in cost we know that $100,000 is a step fixed cost so
Variable cost = $400,000/80,000 = $5
Budgeted fixed cost = $1,600,000 – 200,000  $5 = $600,000
Contribution per unit = $20 – $5 = $15
Breakeven point = $600,000/$15 = 40,000 units
4 The correct answer is: $102,000
$
Sales revenue ($300,000/6,000)  8,000 400,000
Less:
Variable costs (8,000  $28) (224,000)
Fixed costs (w1) (74,000)
Profit 102,000

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 Working
Fixed costs @ 7,500 units = $284,000 – (7,500  $28) = $74,000
Stepped increase in fixed costs occurs when production reaches 7,500 units, therefore the fixed costs at
8,000 units = $74,000. If you calculated the fixed costs at 6,000 units ($72,000) you failed to take into
account the step increase in fixed costs.
5 The correct answer is: $340
$
Materials 100
VC labour: $17  10 170
Variable overheads $3  10 30
Lost contn: $4  10 40
340
6 The correct answer is:
There has been significant investment in R&D
The product lifecycle is particularly short
When demand for a product is elastic a small change in price has a proportionally greater impact on the
quantity demanded. This means that increasing the selling price will cause the quantity to fall. Significant
economies of scale tend to favour a penetration pricing policy. High R&D costs and a short product
lifecycle would tend to favour a high initial price to enable the company to make returns from their
investment.
7 The correct answer is: Total contribution will double between the two output levels
The best way to approach a question like this is to make up some simple numbers. Let's assume selling
price per unit = $10, variable cost per unit = $4 and fixed costs are $10,000 per period.
Sales units 10,000 20,000
$ $
Sales revenue 100,000 200,000
Variable costs (40,000) (80,000)
Contribution 60,000 120,000
Fixed costs (10,000) (10,000)
Profit 50,000 110,000
Make sure that you read the question carefully and avoid confusion between per unit and total figures, for
example total fixed costs are the same at the two levels of output, but fixed costs per unit decline as
output increases.
8 The correct answers are:
Storing information long after it is needed
Information disseminated more widely than needed
The use of bar codes and scanners and employee time spent completing timesheets are examples of
direct data capture costs. Whereas, payroll department time spent completing timesheets is an example
of data processing costs.
9 The correct answer is: Y, X, Z.
The products must be ranked in order of their contribution per kg of direct material.
X Y Z
$ per unit $ per unit $ per unit
Selling price 75 95 96
Variable cost 34 41 45
Contribution 41 54 51
Kg of material used per unit 2 1 3
Contribution per kg $20.50 $54 $17
Ranking 2 1 3

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 10 The correct answer is: 5,000
To find the annual number of batches, the budgeted annual production in units for each product is divided
up by the batch size in units.
Budgeted number of batches
Product D (100,000/100) 1,000
Product R (100,000/50) 2,000
Product P (50,000/25) 2,000
5,000
11 The correct answer is: Maximise 10m + 15n
To derive the objective function it is necessary to calculate the contribution per unit. This is the selling
price less all variable costs.
M N
$ $
Selling price per unit 40 50
Less Material P @ $4 per kg (16) (12)
Material Q @ $5 per kg (10) (15)
Labour @ $8 per hour (4) (8)
Contribution per unit 10 15
12 The correct answer is: Proportion of reported crimes that are solved by the police service
The crime clear-up rate is a measure of how effective the police force has been.
The number of pupils taught per $1 and nursing costs per patient spent relates to inputs and outputs and
is a measure of efficiency for schools and hospitals respectively. Reducing the library budget is a
measure of economy.
13 The correct answer is $2.16m
$m
Current profit (($21m  16%) + $0.8m) 4.16
Imputed interest ($25m  8%) 2.00
Residual income 2.16
14 The correct answer is:
Flexibility
Innovation
Fitzgerald and Moon identified six dimensions of aspects of performance in a service business: financial
performance, competitiveness, quality, resource utilisation, flexibility and innovation.
15 The correct answer is: P = $100 – 0.02Q
P = a – Bq b = 3/150 = 0.02
When P = $60 and Q = 2000
60 = a – (0.02  2000)
60 = a – 40
a = 100
P = 100 – 0.02Q

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 Section B
16 The correct answer is: $8,400 adverse
Actual quantity Actual quantity
@ std mix @ actual mix Variance Std cost per kg Variance
kg $ $
A 80,000* 76,000 4,000 (F) 3.5 14,000 (F)
B 40,000** 44,000 4,000 (A) 5.6 22,400 (A)
120,000 120,000 Nil 8,400 (A)
*= (2.4/3.6)  120,000 = 80,000
** = (1.2/3.6)  120,000 = 40,000
17 The correct answer is: $5,040
Yield variance
Std quantity @ Actual quantity
std mix @ std mix Variance Std cost per kg Variance
kg $ $
A 79,200 80,000 800 (A) 3.5 2,800 (A)
B 39,600 40,000 400 (A) 5.6 2,240 (A)
118,800 120,000 1,200 (A) 5,040 (A)
Standard quantity = 33,000  3.6 kg = 118,800
18 The correct answer is: $13,440
Usage variance
Actual quantity Actual quantity
33,000 should use Did use Variance Std cost per kg Variance
kg $ $
A 79,200 76,000 3,200 (F) 3.5 11,200 (F)
B 39,600 44,000 4,400 (A) 5.6 24,640 (A)
118,800 120,000 13,440 (A)
Alternatively mix variance 8,400 adverse + yield variance 5,040 adverse = 13,440 adverse
19 The correct answers are:
Statement 1: Mix, yield and usage variances are still meaningful even in times of inflation.
Statement 5: The use of planning and operational variances will help to correct for unexpected changes
in inflation and to create meaningful materials cost variances that show how well costs have been
controlled.
Statement 1 is valid because mix, yield and usage variances are all primarily based on physical volumes.
Statements 2 & 3 would be valid if they said that the mix and yield were meaningful in times of inflation as
they are based on physical volumes. Statement 4 is not valid here because the inflation change is not
predictable. In order to use rolling budgets changes in inflation would need to be predicted in advance of
their occurrence.
Statement 5 is correct, using planning and operational variances allows managers to assess operational
performance after taking into account previously unknown, but uncontrollable information.
20 The correct answer is: Statements 1 and 3 only
Statement 2 is incorrect because the production manager, not the purchasing manager, would have
responsibility for these variances.

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 21 The correct answer is: $13,700
1st calculate total time 30 units
b = log 0.8/log 2
Y = 3,000  30 – 0.322 = – 0.322
= 1,003.4 a = 3000
Total time = 1,003.4  30 = 30,102 hours × = 30
2nd calculate total time 29 units
Y = 3,000  29 – 0.322
= 1,014.4
Total time = 1,014.4  29 = 29,417.6 hours
Time for 30th item = 30,102 – 29,417.6 = 684.4 hours
Cost of 30th item = 684.4 hours  $20 = $13,688 so $13,700 to the nearest $100
22 The correct answer is: 60%
Cumulative number of seats Cumulative total hours Cumulative average hours per
produced unit
1 4,000 4,000
2 4,000  r
4 4,000  r2
4,000  r3
8
16 8,294.4 518.4

518.4 = 4,000  r4
So 518.4 / 4,000 = r4
0.1296 = r4
r = 4th root of 0.1296 = 0.6 ie 60%
23 The correct answers are:
Improvements in staff training
A change in the design of the unit leading to a higher than expected time being taken for the 1st unit, but
the same total time for the first sixteen.
A lower learning rate (eg 60%) means a faster degree of learning. This could be explained by better staff
training or more time to make the first unit, but the same total time for 16 unit, as it means they got faster
quicker. All of the other factors would lead to a slower degree of learning.
24 The correct answer is: 1 only
When an organisation is structured into divisions, there will almost inevitably be some transfer of goods or
services between divisions, for which transfer prices are required.
Internal transfers may be preferred to external purchases because the company will have better control
over any output quality from Division A and the scheduling of production and deliveries, however it will
also depend on capacity available.
Internal transfers may not be preferred if the opportunity cost of producing the item is high.
25 The correct answer is: Decision packages
Cost drivers are associated with ABC.
Continuous improvement is associated with TQM. Shadow prices relate to linear programming.

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 26 The correct answer is: $350
Target cost : $500  0.7 = $350
% $
Selling price 100 500
Target cost β (70) (350)
Target profit 30 150
27 The correct answer is: $64.50
$
Standard parts ($120  0.75  0.4) 36
Bespoke parts ($120  0.25  0.95) 28.50
Total revised cost 64.50
28 The correct answer is: Redesign the lawnmower
Product redesign may mean that the lawnmower can be manufactured more cheaply, without affecting
the functionality. Increasing the amount of skilled labour and using additional bespoke components would
actually increase the cost gap. Raising the selling price is never a suitable strategy to close the cost gap
as the price has been set with reference to the market, what consumers are prepared to pay for and how
many of the product they are likely to buy, given its specifications.
29 The correct answer is: It will be included because it is a cost of bringing the RLM to market
Lifecycle costing looks at all of the expected costs and revenues over the entire life of the product. This
includes any R&D costs which have already been incurred. Relevant costing would ignore any past R&D
expenditure, classifying it as a sunk cost.
30 The correct answer is: 1 and 3
Financial returns can be improved over the lifecycle of a new product by minimising the breakeven time,
minimising the time to get a new product to market and maximising the length of the product lifecycle.

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 Section C

31 Chocoholics Anonymous
Marking scheme
Marks
(a) 1st manager
– risk averse ½
– maximin ½
– explanation 1
2nd manager
– risk seeker ½
– maximax ½
– explanation 1
4
(b) Calculation of each profit value (1 mark each) 9

(c) Each expected value (1 mark each) 3

Selection of highest EV 1 4

(d) Limitations (1 mark per point) ie long run average, ignores risk, Max 3
dependant on probabilities, only used in repeated decisions
20

Suggested solution
(a) The first manager is risk averse. They wish to sign up to a capacity of 2,000 as this has the
highest minimum return (17,500) of the three options. They will not wish to sign up to a level more
than this as the lowest possible returns are below 17,500. This is known as a maximin decision.
The second manager is a risk seeker. They want the best possible return regardless of the risk
involved. The highest possible return is at 3,000 boxes where there is the chance of a $38,000
return. This is known as a maximax decision.
(b)
Order quantity
Demand p 1,000 2,000 5,000
(boxes)
1,000 0.2 23,000 (W1) 11,000 (W2) (25,000) (W4)
2,000 0.5 23,000 (W1) 46,000 (W3) 10,000 (W5)
5,000 0.3 23,000 (W1) 46,000 (W3) 115,000 (W6)

(W1) Contribution = $23 / unit  1,000 units sold = $23,000

(W2) Contribution of $23  1,000 units – costs of 1,000 extra items bought not sold
(23,000 – (1,000  $12))
(W3) $23  2,000
(W4) $23  1,000 – 4,000  $12
(W5) $23  2,000 – 3,000  $12
(W6) $23  5,000

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 (c)
Order quantity
Demand p 1,000 2,000 5,000
(boxes)
1,000 0.2 4,600 2,200 (5,000)
2,000 0.5 11,500 23,000 5,000
5,000 0.3 6,900 13,800 34,500
EV 23,000 39,000 34,500
An order quantity of 2,000 should be placed in order to maximise profit.
(d) The limitations of expected values are that it ignores the risk associated with each possibility. It
is essentially just a long run average, the expected value may not even be a possibility that
exists.
Expected values are heavily dependent on probability estimates.
Expected values are also inappropriate for one-off decisions. They are used when there is
some past experience of an area and as such are then able to apply probabilities to the various
outcomes.

32 Wholesale Co (WC)
Marking scheme
Marks
(a) (i) Calculations: ROI, Gross profit margin, net profit margin, % Max 5
change in sales, distribution costs. (1 mark each)
ROI comment 2
Sale revenue comment 1
Gross profit margin comment 1
Comparison to other branches comment 1
Overheads comment 1
Employee numbers comment 1
Distribution costs comment 1
Net profit comment 1
Maximum 9 marks for comments

13

(ii) Conclusion on performance 2 2

(b) Timing of decision problem 1

Revenue acceleration 1
Delay of cost (1 per example) 2
Manipulation of accounting policies 1
5
20

Suggested solution
(a) (i) Calculation of performance measures
20X5 20X6 20X7 20X8
ROI (net profit/net assets  100%) 13.0% 17.5% 16.7% 20.0%
Gross profit margin (gross profit/sales  100%) 40% 35% 35% 30%
Net profit margin (net profit/sales  100%) 6.5% 7.0% 5.6% 4.7%
Change in sales – 0% –10% –5.6%
Distribution costs as % of sales 10% 9% 8.3% 8.2%

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 ROI
The target ROI is 15% and this has been achieved every year apart from 20X5. This looks
impressive but it is not due to increasing profits. Net assets have fallen in value each year due
to depreciation. It is this fall which has compensated for the fall in net profits and enabled the
target ROI to be achieved.
Change in sales
The market in which WC operates has been growing steadily but sales revenues have been
declining in store E. This is a worrying sign and indicates that store E is either failing to compete
effectively or is reducing selling prices.
Gross profit margin
WC's stores typically generate a 40% gross profit margin and this has only been achieved by
store E in 20X5. This could be due to reduced selling prices or an increase in the cost of sales, for
example increased labour costs. As sales revenue has fallen, it looks like sales prices have
been reduced in an effort to improve sales.
Comparisons to other branches
Store E has not managed to maintain the 40% profit margin enjoyed by other stores or increase
sales in an expanding industry. This could be due to the management of E or it could be as a
result of geographical differences. Such differences between the stores' local market conditions
should be considered when drawing conclusions on the performance of an individual store.
Overheads
Overheads have fallen year on year and this is usually considered to be positive, especially as
sales have fallen. However, the cost cutting could have damaged customers' experiences in the
store and contributed to the decline in sales. This could be linked to a reduction in employee
numbers.
Employee numbers
The number of employees has fallen year on year. It could be that employee numbers have
reduced as sales have declined, or it could be that due to lower staff numbers customers have
sought alternative suppliers, who can offer better customer service.
Distribution costs
Distribution costs would be expected to fall as sales fall. However, distribution costs as a
proportion of sales has also declined from 10% to 8.2%. This may have been accompanied by a
fall in reliability of delivery, which could have contributed to a reduction in sales. In the modern
business environment many companies are seeking to reduce their inventory holding, meaning
they need to be able to depend on wholesale suppliers.
Net profit margin
Even though overheads have been reduced, net profit margin has fallen since 20X6. This is again
primarily due to the fall in gross margin.
(a) (ii) Conclusion
The positive ROI information fails to reflect the true performance of store E. Profitability and
sales revenue have declined and it seems hard to justify awarding a bonus to the manager of
store E based on an inappropriate performance measure.
(b) The manager's aim would be to just hit the target 15% each year rather than exceed the target in one
year and fail to meet it in another.
The manager would not have been awarded a bonus in 20X5 because ROI was below the target. In
order to gain the bonus in 20X5 they would have had to manipulate the results so that $2,000 less
profit was made in 20X6 and more in 20X5.

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 Manipulation methods
Accelerate revenue by allocating sales made early in 20X6 to 20X5. This could be achieved by
dating an invoice when an order is received in late 20X5 but not actually sending it to the customer
until delivery is made in 20X6.
Delay costs by not recording suppliers' invoices until 20X6, even though goods were received in
20X5.
Manipulate provisions and accruals so that less costs are charged in 20X5.
Manipulate accounting policies such as inventory values or depreciation charges so that more
profit is made in 20X5. For example, closing inventory could be overstated.

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