ACCA REVISION MOCK
Performance Management September 2016 QUESTION PAPER Please note that this exam is suitable for anyone sitting either the paper-based or the computer-based computer-based examination.
Time allowed 3 hours and 15 minutes
This paper is divided into three sections: Section A - All 15 questions are compulsory and MUST be attempted Section B - All 15 questions are compulsory and MUST be attempted Section C - BOTH questions are compulsory and MUST be attempted Formulae is on page 3 Do not open this paper until instructed by the supervisor. You must NOT write in your answer booklet until instructed by t he supervisor. Do NOT record any of your answers on the question paper. This question paper must not be removed from the examination hall.
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A C C A F 5 : P E R F O R M A N C E M A N A G E M E N T
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REVISION MOCK QUESTIONS
FORMULAE Learning curve
Y = axb Where y
= cumulative average time per unit to produce x units
a
= the time taken for the first unit of output
x
= the cumulative number of units produced
b
= the index of learning (log LR/log 2)
LR
= the learning rate as a decimal
Demand curve
P = a − bQ b=
Change in price Change in quantity
a = price when Q = 0 MR = a –2bQ
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A C C A F 5 : P E R F O R M A N C E M A N A G E M E N T
SECTION A ALL 15 questions are compulsory and must be attempted Each question is worth 2 marks 1
The target cost for a product has been calculated to be $60, which is 3% less than the actual cost currently achievable. The business Is considering providing some internal training to improve efficiency of labour and hence reduce the cost gap. The current material cost is $10 per unit and this will not change as efficiency changes. Labour rates are $8 per hour. How much of an efficiency improvement (measured by the % reduction in labour time per unit) will be necessary to remove the cost gap completely?
2
A
3.2%
B
3.6%
C
3.8%
D
4.1%
Company B uses an activity based costing system and manufactures three products, details of which are given below: Annual production (units) Batch size (units) Number of inspections per batch
Product X
Product Y
Product Z
160,000 100 3
200,000 50 4
100,000 25 6
Annual inspection costs amount to $150,000. What is the inspection cost per unit of Product Y closest to?
3
A
$0.23
B
$0.27
C
$0.33
D
$13.39
The following statements have been made about the advantages of using expected values: (1)
Calculations are relatively simple.
(2)
The information is reduced to a single number, resulting in easier decisions.
Which of the above statements is/are true?
4
A
(1) only
B
(2) only
C
Neither (1) nor (2)
D
Both (1) and (2) KAPLAN PUBLISHING
REVISION MOCK QUESTIONS
4
The following statements have been made about throughput accounting: (1)
Throughput accounting considers that the only variable costs in the short run are materials and components.
(2)
In throughput accounting, priority should be given to products that earn the largest throughput per unit.
Which of the above statements is/are true?
5
A
(1) only
B
(2) only
C
Neither (1) nor (2)
D
Both (1) and (2)
A product is manufactured by mixing two materials. The standard material cost per unit of the product is as follows: $ Material A
36 litres
@
$20
$720
Material B
24 litres
@
$15
$360
In January this year, the actual mix used was 2,460 litres of A, and 2,040 litres of B. The actual output was 90 units. What was the total material yield variance for January?
6
A
$16,200 (F)
B
$16,200 (A)
C
$32,400 (F)
D
$32,400 (A)
Catan Ltd produces four products as follows: Product
Brick
Lumber
Ore
Wool
$
$
$
$
10
25
40
60
Variable costs
6
18
20
50
Fixed costs
2
3
15
4
Profit per unit
2
4
5
6
Selling Price
In what order would the products usually be drawn in a multi-product profit-volume chart?
A
Brick, Lumber, Ore, Wool
B
Brick, Ore, Lumber, Wool
C
Ore, Brick, Lumber, Wool
D
Ore, Wool, Brick, Lumber
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7
The following statements have been made about the purposes of a standard costing system: (1)
A standard costing system is used to replace budgets and budgeting.
(2)
A standard costing system is used to simplify costing procedures.
Which of the above statements is/are true?
8
A
(1) only
B
(2) only
C
Neither (1) nor (2)
D
Both (1) and (2)
The following statements have been made about the purposes of flexible budgeting: (1)
Flexible budgeting is a reporting system where the planned level of activity is adjusted to the latest forecast level of activity.
(2)
Its purpose is to break down the budget into variable per unit and fixed costs components, so that at any level of activity, a budget may be created and then mapped against the actuals at that level of activity so as to provide a ‘like for like’ comparison.
Which of the above statements is/are true?
9
A
(1) only
B
(2) only
C
Neither (1) nor (2)
D
Both (1) and (2)
A business that uses the throughput contribution measure to optimise the use of a bottleneck resource has decided on the four steps it should take to determine the best production plan. It has already identified the bottleneck. The following are all steps needed to be taken to determine the best production: (1)
Allocate the bottleneck resource.
(2)
Calculate throughput contribution per bottleneck hour for each product.
(3)
Rank the product.
(4)
Calculate throughput contribution per unit for each product.
Which of the following represents the correct sequence?
6
A
(1), (2), (3), (4)
B
(3), (2), (4), (1)
C
(2), (1), (4), (3)
D
(4), (2), (3), (1)
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REVISION MOCK QUESTIONS
10
The following statements have been made about activity-based budgeting (ABB): (1)
ABB is especially useful when an organisation has a significant level of overheads.
(2)
ABB should not be used in a Total Quality Management environment.
Which of the above statements is/are true?
11
12
A
(1) only
B
(2) only
C
Neither (1) nor (2)
D
Both (1) and (2)
In a responsibility accounting system, which TWO of the following costs are least likely to appear on the performance report for the divisional manager of a production department?
(1)
Machine rental costs
(2)
Lost contribution due to machine breakdown
(3)
Compulsory machine testing costs.
(4)
Machinery repairs
A
(1) and (2)
B
(1) and (3)
C
(2) and (3)
D
(2) and (4)
Archer Co has two divisions, A and B. Both divisions have a current return on investment of 12%. Each division is currently considering the following separate projects: Division A
Division B
Capital required for the project
$35 million
$29 million
Sales generated by project
$15 million
$12 million
Net Profit margin
30%
19%
Cost of capital
8%
8%
If Residual Income is used as the basis for the investment decision, which division(s) would choose to invest in the project?
A
Division A only
B
Division B only
C
Both Division A and Division B
D
Neither Division A nor Division B
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13
The following statements have been made about Value For Money (VFM) as a public sector objective: (1)
VFM is considered to be the best combination of services from the least amount of resources taking into account the 3Es: Economy, Efficiency and Effectiveness.
(2)
The key to effectiveness is in finding an optimum pattern of spending to achieve a given objective.
Which of the above statements is/are true?
14
A
(1) only
B
(2) only
C
Both (1) and (2)
D
Neither (1) nor (2)
Bradley Ltd produces two products, Pinky and Perky. These account for 60% and 40% of the total sales dollars of Bradley Ltd respectively. As a percentage of sales dollars, variable costs are 60% for Pinky and 85% for Perky. Total fixed costs are $150,000. There are no other costs. What is Bradley’s breakeven revenue?
15
A
$312,500
B
$350,000
C
$450,000
D
$500,000
The following statements have been made about performance analysis in the public sector: (1)
In the public sector, there is no single, straightforward way of measuring success.
(2)
Unlike private companies, public sector organisations cannot make their own strategic decisions in isolation.
Which of the above statements is/are true?
8
A
(1) only
B
(2) only
C
Both (1) and (2)
D
Neither (1) nor (2)
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REVISION MOCK QUESTIONS
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
Chemistry Magic produces mathematics text books for use in schools. The production of textbooks involves many complexities, and production is very labour-intensive. Due to a lack of recent investment, the printing machines are obsolete and break down often. A new version of the text book has just been finalised. The following standard cost estimates have been made for the first batch to be manufactured in Month 1. Standard costs for the batch
$ 500 labour hours @ $8 per hour
4,000
55 units of direct materials @ $100 per unit
5,500
Variable overhead 500 hours @ $15 per hour
7,500 –––––– 17,000
–––––– From experience the firm knows that labour will benefit from a learning effect and labour times will be reduced. This is expected to approximate to an 80% learning curve. The actual production for the first six months was as follows:
16
Month 1
20 batches
Month 2
30 batches
Month 3
25 batches
Month 4
24 batches
Month 5
33 batches
Month 6
28 batches
What is the labour time taken to produce the last batch in month 6?
A
63.34 hours
B
66.25 hours
C
140.07 hours
D
280.84 hours
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A C C A F 5 : P E R F O R M A N C E M A N A G E M E N T
17
The following statements have been made about the appropriateness of the use of the learning curve model in Chemistry Magic: (1)
The learning effect is limited in Chemistry Magic, because the machines break down often.
(2)
The learning curve effect will take longer to reach a plateau because of the complexities of the production process.
Which of the above statements is/are true?
18
A
(1) only
B
(2) only
C
Both (1) and (2)
D
Neither (1) nor (2)
Chemistry Magic is considering the implementation of a new budgeting system. At present, the firm uses an incremental budgeting system but is considering changing to an activitybased budgeting (ABB) system, or perhaps a flexible budgeting system. Which of the following statements regarding the benefits of such a change are correct?
(1)
ABB would draw attention to the costs of overhead activities.
(2)
ABB would recognise that it is activities which drive overhead costs.
(3)
ABB would ensure that the budget is continuously updated by adding a new budget period once the most recent budget period has ended.
(4)
Flexible budgeting would recognise different cost behavior patterns and so would take into account the organisation’s overall strategy during the budget process.
19
A
(1) and (2) only
B
(1), (2) and (4) only
C
(3) and (4)
D
(1), (2), (3) and (4).
Which of the following statements regarding the drawbacks of Activity-Based Budgeting are correct?
10
(1)
A considerable amount of time and effort might be needed to establish the key activities and their cost drivers.
(2)
It could be argued that in the short-term many overhead costs are not controllable and do not vary directly with changes in the volume of activity for the cost driver.
(3)
There may not be suitably trained staff available to implement the change successfully.
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REVISION MOCK QUESTIONS
20
(4)
The cost of the new ABB system should be evaluated against the perceived benefits. Benefits may be difficult to quantify and therefore a rigorous investment appraisal of the project may be difficult to prepare.
A
(1) and (2) only
B
(1), (2) and (4) only
C
(3) and (4)
D
(1), (2), (3) and (4)
Chemistry Magic is suffering from declining sales and is predicted to make a loss in the next year. As a result, management have identified a number of possible actions: (1)
Shut down the company and sell off all its assets
(2) (3)
Undertake a major upgrade to the printing machines costing $4.5 m Undertake a minor upgrade to the printing machines costing $2 m
The upgrades are predicted to have variable results and the probability of good results after a major upgrade is 0.8, whereas the probability of good results after a minor upgrade is 0.7. Shut down and sell
$5m
Good results $10m Major upgrade Poor results $7m Good results $8m
Minor upgrade
Poor results $8m
Which decision should the company make?
A
Shutdown and sell
B
Undertake the major upgrade
C
Undertake the minor upgrade
D
Undertake the major upgrade if results are good
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The following scenario relates to questions 21-25
Rosca Coffee Company operates a chain of coffee shops which are located in prime high street locations, motorway service stations, railway stations and airports. The company has expanded rapidly since its first shop was opened five years ago, taking advantage of the growing consumer demand for this product. The business offers a wide range of coffees and also serves pastries, cakes and sandwiches. Rosca Coffee has taken the lead from some of its competitors and has a number of contracts with large businesses which involve catering from breakfast and afternoon meetings. These businesses are offered a credit period by Rosca Coffee. The business is facing a growing amount of competition and an economic downturn is predicted. As a result, Rosca Coffee would like to carry out a full financial and non-financial review in order to ensure that the company’s success to date is maintained. The following financial information is available: Current year
Previous year
($000)
($000)
3,670.1
3,001.2
Gross profit
975.3
744.4
Net profit
622.7
457.4
Inventory
296.5
175.3
Trade receivables
744.1
642.5
Trade payables
552.7
402.3
1,060.7
884.4
Other current liabilities
566.9
604.3
Finance cost
406.4
354.5
Sales revenue
Cash
Some industry average ratios for the current year are as follows: Current ratio
1.6
Quick ratio
1.5
Receivables collection period
90 days
Payables payment period
60 days
Interest cover
1.1 times
Gross profit margin
22.4%
Net profit margin
13.4%
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REVISION MOCK QUESTIONS
21
The following statements have been made about the company’s profitability: (1)
The growth in Gross Profit Margin shows that the company is getting better at controlling its cost of sales, and/or improving its sales.
(2)
The Gross Profit Margin for the current year is not as favourable as the industry average.
Which of the above statements is/are true?
22
23
A
(1) only
B
(2) only
C
Both (1) and (2)
D
Neither (1) nor (2)
Which of the following statements regarding the company’s liquidity is/are correct? (1)
The company’s liquidity has improved year-on-year.
(2)
The company’s ability to recover its debts on a timely basis is improving
(3)
The company is not as quick as collecting debtors debts as the industry average
(4)
The company’s payable payment period has risen since last year.
A
(1) and (2) only
B
(1), (2) and (4) only
C
(3) and (4)
D
(1), (2), (3) and (4)
Rosca is trying to choose between a balanced scorecard approach and the use of a Fitzgerald and Moon Building Blocks model. Which of the following statements regarding Fitzgerald and Moon’s Building Blocks model are correct?
(1)
The model includes financial as well as non-financial measures.
(2)
It is a performance measurement framework particularly suitable for service organisations.
(3)
All key determinants of success in performance will be measured.
(4)
The determinants of performance are quality, innovation, resource utilization and competitiveness.
A
(1) and (2) only
B
(1), (2) and (3) only
C
(1) and (4)
D
(1), (2), (3) and (4)
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24
An extract from the company’s balanced scorecard is included below: Current year
Previous year
1,243,000
912,000
% of customers who complained
17%
8%
% returning customers
43%
64%
11 minutes
3 minutes
33%
11%
% of staff time spent on training
2%
10%
% of revenue from new products
2%
33%
Customer perspective:
Number of customers
Internal perspective:
Time between taking order and customer receiving their order Staff turnover per year Innovation and learning:
Which of the following statements about the results published in the ‘Customer Perspective’ quadrant are correct?
(1)
The increase in customer numbers may have contributed towards the increase in sales revenue and profit.
(2)
The business is struggling to maintain customer loyalty.
(3)
Customer complaints have more than doubled year on year.
(4)
High staff turnover and increased waiting times would have impacted on the customer complaints increase.
25
A
(1) and (2) only
B
(1), (2) and (3) only
C
(1) and (4)
D
(1), (2), (3) and (4)
The following statements have been made about the results published in the ‘Innovation and learning’ quadrant for Rosca: (1)
Poorly trained staff will not be able to provide a high quality service and morale may fall if staff feel their training needs are not being met.
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REVISION MOCK QUESTIONS
(2)
The percentage of revenue from new products has fallen from 33% to only 2%. average.
Which of the above statements is/are true?
A
(1) only
B
(2) only
C
Both (1) and (2)
D
Neither (1) nor (2)
The following scenario relates to questions 26-30
Dragon Ltd manufactures three products: the Ego, the Bling and the Out. Currently, sales, cost and selling price details and processing time requirements are as follows: Ego
Bling
Out
Annual Sales (units)
6,000
6,000
750
Selling Price in $
20.00
31.00
39.00
Maximum demand at current selling price
11,000
8,000
2,000
Total Unit cost (*)
18.00
24.00
30.00
1
1
2
Processing time required per unit (hours)
(*) Fixed manufacturing overheads are absorbed into unit costs by a charge of 200% of variable cost. Dragon Ltd is working at full capacity (13,500 processing hours per year), and this procedure fully absorbs the fixed manufacturing overhead. Processing time can be switched from one product line to another, and selling prices (on a cost-plus basis) are not to be altered. 26
In what order should the products be manufactured, assuming that the company wants to maximize profits?
A
Ego, Bling, Out
B
Bling, Out, Ego
C
Out, Bling, Ego
D
Bling, Ego, Out
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A C C A F 5 : P E R F O R M A N C E M A N A G E M E N T
27
Which of the following statements regarding shadow prices are correct?
(1)
With shadow prices, we are trying to work out how much better off we would be as a result of having one more unit of a particular scarce resource (materials or labour, for example).
(2)
A shadow price analysis helps management in deciding whether a struggle to uplift a constraint is worthwhile or not.
28
(3)
With a shadow price analysis, improvement does not only mean an increase in revenue or contribution, but can also mean a decrease in costs.
(4)
Non-critical constraints will have zero shadow prices as slack exists already.
A
(1) and (2) only
B
(1), (2) and (3) only
C
(1) and (4)
D
(1), (2), (3) and (4)
A review of Dragon’s selling prices is in progress, and it has been estimated that, for each product in 2016, an increase in the selling price would result in a fall in demand at the rate of 2,000 units for an increase in $1. Similarly, a decrease in $1 would increase demand by 2,000 units. An extract of a study on Dragon’s products price/demand relationships reads as follows: Ego
Bling
Out
Selling Price
Estimated
Selling Price
Estimated
Selling Price
Estimated
($)
Demand
($)
Demand
($)
Demand
24.50
2,000
34.00
2,000
39.00
2,000
23.50
4,000
33.00
4,000
38.00
4,000
22.50
6,000
32.00
6,000
37.00
6,000
It is Dragon’s intention to invest heavily in new production facilities that will lift the current restriction on processing hours, and to adopt a price penetration policy in 2016. What is the best selling price for the ‘Ego’ in 2016?
16
A
$15.75
B
$21.50
C
$25.00
D
$27.75
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REVISION MOCK QUESTIONS
29
A review of Dragon’s selling prices is in progress, and it has been estimated that, for each product in 2016, an increase in the selling price would result in a fall in demand at the rate of 2,000 units for an increase in $1. Similarly, a decrease in $1 would increase demand by 2,000 units. An extract of a study on Dragon’s products price/demand relationships reads as follows: Ego
Bling
Out
Selling Price
Estimated
Selling Price
Estimated
Selling Price
Estimated
($)
Demand
($)
Demand
($)
Demand
24.50
2,000
34.00
2,000
39.00
2,000
23.50
4,000
33.00
4,000
38.00
4,000
22.50
6,000
32.00
6,000
37.00
6,000
It is Dragon’s intention to invest heavily in new production facilities that will lift the current restriction on processing hours, and to adopt a price penetration policy in 2016. What is the best selling price for the ‘Bling’ in 2016?
30
A
$15.75
B
$21.50
C
$25.00
D
$27.75
Dragon uses cost-plus pricing. Which of the following statements regarding cost-plus pricing are correct?
(1)
Marginal cost-plus pricing should be only used for short term decision making.
(2)
Full cost-plus pricing requires the budgeted level of output to be determined at the outset.
(3)
Cost-plus pricing is a strategically focused approach, as it accounts for external factors.
(4)
Cost-plus pricing requires that the profit mark-up applied by an organisation is fixed.
A
(1) and (2) only
B
(1), (2) and (3) only
C
(1) and (4)
D
(1), (2), (3) and (4)
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SECTION C Both questions are compulsory and MUST be attempted 31
The government of the country of Exland provides a free national health service for its population. Public spending on healthcare has increased significantly over the past five years. The government is keen to assess the benefits of such spending by looking at how well the local hospital trusts can convert the increased resources into improved outcomes. Each hospital trust has the following objectives for 2016: To deliver excellence for patients
To be one of the best hospitals in the country, providing outstanding healthcare. To meet patient expectations by achieving waiting time targets. To support patient choice through a comprehensive range of services. To deliver excellence for staff
To ensure a high quality working life. To treat each other with respect, fairness and dignity. To support the training needs and development of staff. To deliver excellence for the national health service
To work with other organisations to ensure the most effective local service is available within the available financial resources. To lead the way in controlling costs and increasing efficiency in the use of its resources. In the past, there have been difficulties measuring performance in this sector and, as a result, it is felt that a more formal value for money framework should be implemented. Required:
(a)
Discuss the performance analysis problems that may arise as a result of the local hospital trust being given a number of non-quantifiable objectives, as stated above. (4 marks)
(b)
Explain how the government may determine if the local hospital trusts are effective (6 marks) in providing value for money (VFM).
(c)
Discuss the potential conflicts that may arise as a result of the local hospital trusts (4 marks) having multiple objectives. The population of Exland can also pay for private healthcare. Health Solutions (HS) owns and runs twenty private hospitals, all of which are located close to one of Exland’s major cities. Each hospital is treated as an investment centre. Summary financial information is given below for one of the hospitals, the Alice Fisher Hospital.
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REVISION MOCK QUESTIONS
Summary hospital financial statements for the year to 31 December Statement of financial position
Statement of profit or loss
$000
$000
Non-current assets
2,400
Revenue
7,300
Current assets
1,000
Operating costs
6,800
Total assets
3,400
Operating profit
500
Interest paid
320
Profit before tax
180
Divisional equity
1,500
Long-term borrowings
900
Current liabilities
1,000
Total
equity liabilities
and
3,400
The cost of capital for the hospital is estimated at 11% each year. The Alice Fisher hospital has a target return on investment (ROI) of 15%. Required:
(d)
Calculate the divisional return on investment (ROI) and the divisional residual income (RI). Based on the figures calculated, briefly comment on the performance of the (6 marks) hospital. (Total: 20 marks)
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A C C A F 5 : P E R F O R M A N C E M A N A G E M E N T
32
The Jolly Fish Company Ltd (JFC) manufactures speciality fish pies, which it sells in bulk to delicatessen shops. The only variable cost is raw material, which consists mainly of three types of raw fish as well as other lower value ingredients. The standard cost of the raw fish used in the manufacture of each 100 kgs of speciality fish pie is as follows: Raw material
Type A Type B Type C Total input Normal loss 20% of input Output
Kilograms
Standard price per kilogram
25 60 40 125 (25) 100
$2 $3 $4
In preparing its budget for 2016, JFC assumed that there would be a market in the UK for 125,000 kilograms of fish pie, and that JFC’s product would have a 40% share of its market. The budget also assumed a selling price of $6 per kilogram for JFC’s product. However, during 2016, JFC and its competitors were adversely affected by diminishing consumer confidence in fish products after a rumour about high levels of mercury making seafood unsafe. The actual total market size was only 110,000 kilograms of fish pie and JFC sold only 33,000 kilograms of its product. JFC’s managing director recently explained how his company attempted to respond to the difficulties it faced in 2016: ‘First, we reduced our selling price from $6 to $5.90 per kg; this was a modest price reduction in comparison with those of our smaller competitors. Second, we took advantage of falling market prices for some of the types of fish we use as a raw material for our product. With benefit of hindsight, we should perhaps have done more to increase consumers’ confidence in the safety of fish products in general and our own product in particular.’ The actual raw materials used by JFC in 2016 were as follows: Raw material
Type A Type B Type C Total
Kilograms
Actual price per kilogram
8,800 19,200 12,000 40,000
$1.70 $3 $4
JFC never keeps any opening or closing inventory of its raw materials or finished products. Required: (a)
Calculate the following variances for JFC Ltd: (i)
Raw materials price
(ii)
Raw materials mix
(iii)
Raw materials yield
(iv)
Sales price
(v)
Sales volume
(11 marks)
(b)
Break down the sales volume variance into market share and market size variances. (3 marks)
(c)
Critically evaluate the performance of the JFC company in 2011, supporting your answer by reference to the variances you have calculated. (6 marks) (Total: 20 marks)
20
KAPLAN PUBLISHING