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1 Donny Co (Jun 09)

The directors of Donny Co are reviewing the performance of two of its divisions. The following information is

available for the year ending 31 March 2009.

South division North division

$ 000 $ 000

Sales 50,000 3,200

Operating profit 700 840

Capital employed 3,500 4,000

South division is a food retailer that sells low priced food from a number of stores that are rented on short-term

contracts. North division sells luxury motor vehicles, which it manufactures in a fully automated production plant.

Required:

(a) Calculate the following performance measures for the two divisions:(i) Return on capital employed;

(2 marks)

(ii) Return on sales;(2 marks)

(iii) Asset turnover (based upon capital employed);(3 marks)

(iv) Residual income (using an imputed interest charge of 12% per annum).(3 marks)

(b) Suggest ONE reason for the differences between the two divisions in each of the following ratios:(i) Return on sales;(ii) Asset turnover.

(4 marks)

(c) Explain THREE benefits of using non-financial performance measures when measuring the performanceof an organisation.

(6 marks)

(20 marks)

2 Vin Co (Dec 09)

Vin Co operates a public bus service in a large city. Recently its bus service has been criticised for its poor level of

efficiency. The managers of Vin Co have decided to undertake a benchmarking exercise to assess the efficiency of

the bus service and have collected the following information.

Bus Operators Industry average statistics for the year ended 31 December 2008

Return on capital employed 12%

Return on sales 8%

Asset turnover 15 times

Average maximum capacity per bus 55 seats

Average bus occupancy (% of maximum capacity) 70% of capacity

Average bus km travelled per litre of fuel 525 km/litre

Average fuel consumption per passenger kilometre* 0005 litres per passenger km

Average number of fatalities per million passenger kilometres* 0035 fatalities per million passenger

kilometres

*A passenger kilometre equals one kilometre travelled by one passenger.

The management accountant of Vin Co has collected the following information for the year ending 31 December

2008.

Vin Co operating data for the year ended 31 December 2008

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Capital employed $4,000,000

Operating profit $600,000

Sales revenue $3,600,000

Number of buses in operation 40 buses

Total number of passenger seats available 1,920 seats

Total number of passenger kilometres travelled 39,000,000 passenger kilometresTotal bus kilometres travelled 3,250,000 kilometres

Fatalities 1

Total fuel consumed 764,705 litres

Required:

(a) Calculate the following ratios and other statistics for Vin Co for the year ended 31 December 2008.(i) Return on capital employed;(ii) Return on sales;(iii) Asset turnover;(iv) Average maximum capacity per bus;(v) Average bus occupancy as a percentage of maximum capacity;(vi) Average bus km travelled per litre of fuel;(vii) Average fuel consumption in litres per passenger kilometre;(viii) Average number of fatalities per million passenger kilometres.

(10 marks)

(b) Give two reasons apparent from your analysis why Vin Cos fuel consumption per passenger kilometreis higher than that of the industry average.

(2 marks)

(c) Benchmarking involves the establishment, through data gathering, of targets and comparators fromwhich an organisations relative level of performance can be measured. By the adoption of the best

practices identified, performance may be improved.

Explain the following types of benchmarking

(i) Internal benchmarking;(ii) Functional benchmarking;(iii) Competitive benchmarking;(iv) Strategic benchmarking.

(8 marks)

(20 marks)

3 Brainerd (Jun 08)

Brainerd is a passenger airline. In 2007 it was criticised in the press for the poor quality of the service that it

offered to passengers, particularly with regard to flight punctuality and the courtesy of its staff. In 2008 it spent

$220m on new aeroplanes and $10m on staff training in an attempt to improve its performance. Summarised

financial statements are given below.

Summarised income statement for the year ended 31 May2007 2008

$m $m

Revenue 1,800 1,850

Operating profit 180 175

Financing costs (32) (47)

Tax expense (44) (35)

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Profit for the period 104 93

Summarised statement of financial position as at 31 May

2007 2008

$m $m $m $m

Non-current assets (net) 1,200 1,400

Current assetsInventory 53 90

Receivables 22 25

Cash 64 32

1,339 1,547

Equity and reserves 585 615

Long-term liabilities

8% Debenture 2009 650 650

Bank loan 20 670 160 810

Current liabilities 84 122

Total equity and liabilities 1,339 1,547

Required:

(a) Calculate the following ratios for Brainerd for the years ending 31 May 2007 and 2008, clearly definingthe ratio you are calculating and showing the figures used in your calculations:

(i) Return on capital employed based upon closing capital employed;(ii) Operating margin (return on sales);(iii) Asset turnover;(iv) Current ratio; and(v) Capital gearing ratio.

(10 marks)

(b) Explain the meaning of ANY THREE of the above ratios and suggest one possible cause, apparent fromthe question, of changes in performances revealed by each of your chosen ratios.

(6 marks)

(c) Give TWO reasons why it would be important for Brainerd to use non-financial measures in assessing itsperformance.

(4 marks)

(20 marks)

4 Rothstein Co (Jun 11)

Rothstein Co uses ratio analysis and industry average data to monitor its performance. The following data relates

to its performance over the last two years.

Company and industry average data for the year ended 31 March 2010.

Ratio Rothstein Co Industry average

Return on capital employed 35% 20%

Return on sales 15% 15%

Asset turnover 233 133

Current ratio 12 21

Capital gearing (debt to equity) 115% 50%

Interest cover 14 8

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Financial results for Rothstein Co for the year ended 31 March 2011.

Income statement for the year ended 31 March 2011

$ 000

Sales revenue 12,000

Operating costs 10,250

Operating profit 1,750Finance costs 150

Tax expense 120

Profit for the year 1,480

Statement of financial position as at 31 March 2011

$ 000 $ 000

Non-current assets 4,000

Current assets

Inventories 1,120

Trade receivables 980

Cash 810

2,910

Total assets 6,910

Equity and liabilities

Equity

Share capital 1,000

Retained earnings 987

1,987

Non-current liabilities 2,500

Current liabilities

Trade payables 1,123

Tax payable 1,300

2,423

Total equity and liabilities 6,910

Required:

(a) Explain briefly the meaning of the following accounting ratios:(i) Return on capital employed;(ii) Return on sales;(iii) Asset turnover;(iv) Current ratio;(v) Capital gearing;(vi) Interest cover.

(6 marks)

(b) Comment upon the performance of Rothstein Co relative to the industry average for the year ended 31March 2010 under the following headings:

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(i) Profitability;(ii) Liquidity;(iii) Gearing.

(7 marks)

(c) Calculate the following ratios for Rothstein Co for the year ended 31 March 2011:(i)

Return on capital employed;

(ii) Return on sales;(iii) Asset turnover;(iv) Current ratio;(v) Acid test;(vi) Capital gearing;(vii) Interest cover.

(7 marks)

(20 marks)

5 The Carbone Co (Dec 10)

The Carbone Co is a courier business. It delivers parcels in the Republic of Zedland. Parcels are collected by its fleet

of vehicles and are sorted at one of its five depots before delivery to customers. Its delivery network covers all themajor cities in Zedland, but it does not deliver to the 40% of the population who live in rural areas. The vast

majority of its business involves the bulk collection and delivery of packages between large businesses located in

Zedlands major cities. Carbone Co is a listed company and its objectives are to earn a competitive rate of return

for its shareholders and to provide a first class service for its customers.

Carbone Cos major competitor is the state owned Zedland postal service (ZPS). ZPS is a non profit -seeking

organisation responsible for universal mail and parcel collection and delivery in Zedland. The Zedland government

requires ZPS to provide a low cost collection and delivery service for all of Zedlands population and for its

revenues to cover its costs which include an imputed interest charge on capital employed of 4% per annum. ZPS

collects and delivers letters and parcels through its network of 14,000 offices located in every city, town and village

in Zedland. Deliveries are made at least once every day to every part of Zedland at a government fixed price of

$025 per letter and $400 per kg for a parcel. These prices have not increased in the last five years.Thegovernment refuses to allow ZPS to close any of its network of offices because they are also used to distribute

government pension payments.

Both organisations have recently published their results for the most recent year. Details are given below:

Carbone Co ZPS

Sales revenue $400 million $123,000 million

Operating profit $80 million $38 million

Capital employed $300 million $1,000 million

Investors required rate of return 14% pa 4% pa

Number of parcels delivered 10,000 million parcels 20,000 million parcels

Total weight of parcels delivered in the year 80,000 million kg 27,000 million kg

Number of letters delivered 0 60,000 million letters

Total item kilometres (note 1) 376,000 million item km 9,000,000 million item kmAverage number of parcels undelivered

at the end of each day 50 million parcels 110 million parcels

Notes

1. An item kilometre is a single kilometre travelled by either a letter or a parcel.

2. Parcel deliveries for both businesses are spread evenly over a 365 day year.

On seeing these results the leader of the Zedland government claimed that they showed the gross inefficiency of

ZPSs management.

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Required:

(a) Calculate the following ratios and statistics for both Carbone Co and ZPS(i) Residual income;

(3 marks)

(ii) Return on sales;(2 marks)

(iii) Average distance travelled per item;(2 marks)

(iv) Average weight per parcel;(2 marks)

(v) Average time (in days) taken to deliver a parcel.(3 marks)

(b) Briefly explain three differences between Carbone Co and ZPS that make it difficult to compare theirrelative performances.

(6 marks)

(c) Explain, in general terms, the difference that may exist between assessing the performance of amanager and assessing the performance of the organisation the manager works for.

(2 marks)

(20 marks)

6 Kint Co (Dec 08)

Kint Co manufactures shoes. The shoes are sold to large retailers who insist upon the highest standard of quality.

The shoes have to be manufactured to precise dimensions and to be dyed to an exact colour shade. Below is a list

of expenses incurred in the last month:

$ Notes

Customer complaints department 3,456 $2,000 fixed costs per month

Finished goods inspection 3,588

Shade matching 1,479 required for all batches

Quality control system development 5,110

Operative training 1,500

Rework 8,850 direct costs only

Machine maintenance 850 routine servicing

Goods inwards inspection 600

Compensation payments to customers for defective goods 4,600

Pre-despatch failure analysis 3,877 variable cost

The production director attended a course on total quality management (TQM) recently and was told that quality

initiatives could save money.

Required:

(a) Define the following costs of quality(i) Prevention costs;(ii) Appraisal costs;(iii) Internal failure costs;(iv) External failure costs.

(8 marks)

(b) Categorise the expenses from the month into the four categories of quality cost given in (a).(5 marks)

(c) Failure analysis has revealed that 70% of defects can be traced to a machine in the moulding department.

The production director has found a new type of machine that is 100% reliable and will save 70% of

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external and internal failure costs. The machine would cost $60,000 more per year to hire than the

existing machine. Running costs would remain unchanged. Additional staff costs would be $1,000 per

month.

Required:

Calculate and recommend whether Kint Co should hire the new machine.

(7 marks)(20 marks)

7 Jun 07

You are an accounting technician in the administration department of a small manufacturing company. Your

manager, who is not an accountant, is about to attend a meeting and is unsure of the meaning of several items

that appear on the agenda.

Required:

Produce notes on any TWO of the following three items to help your manager understand their meaning:

(i) The balanced scorecard and its perspectives on performance;(ii) Total quality management (TQM) and the costs of quality;(iii) Benchmarking (including internal, competitive, functional and strategic benchmarking).

Note: each of the areas you select will be worth 10 marks.(20 marks)

8 Nicholson (Dec 07)

Nicholson sells mobile telephones. It supplies its customers with telephone handsets and wireless telephone

connections. Customers pay an annual fee plus a monthly charge based on calls made. The company has recently

employed a consultant to install a balanced scorecard system of performance measurement and to benchmark the

results against those of Nicholsons competitors. Unfortunately the consultant was called away before the work

was finished. You have been asked to complete the work. The following data is available:

Nicholson Operating data for the year ended 30 November 2007

Sales attributable to new products $8 million

Average capital employed $192 million

Profit before interest and tax $48 millionAverage number of customers 1,960,000

Number of telephones returned for repair 10,000

Number of bill queries 12,000

Number of customer complaints 21,600

Number of customers lost 117,600

Average number of bill queries unresolved at the end of each day 118

Average number of telephones unrepaired at the end of each day 804

Required:

(a) Calculate the following ratios and other statistics for Nicholson for the year ended 30 November 2007:(i) Return on capital employed;(ii) Return on sales (net profit percentage);(iii)

Asset turnover;

(iv) Annual number of complaints per thousand customers;(v) Percentage of customers lost per annum;(vi) Average time to resolve billing queries;(vii) Average wait for a telephone repair;(viii) Percentage of sales attributable to new products.

(12 marks)

(b) The following information is for the mobile phone industry for the year ended 30 November 2007.

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Industry average statistics Mobile Telephones

Annual number of complaints per 1,000 customers 5Percentage of customers lost per annum 3%Average time to resolve billing queries 14 daysAverage wait for a telephone repair 2 daysPercentage of sales attributable to new products 20%

Return on capital employed 15%Return on sales (net profit percentage) 5%Asset turnover 3 times

Required:

Using the industry average information and your answer to part (a), discuss the performance of

Nicholson in the year ending 30 November 2007 under the four balanced scorecard headings of:

(i) financial success;(ii) customer satisfaction;(iii) process efficiency; and(iv) organisational learning and growth.

Note: state any assumptions that you make.

(8 marks)

(20 marks)

9 Lewisville (Jun 06)

Lewisville is a town with a population of 100,000 people. The town council of Lewisville operates a bus service

which links all parts of the town with the town centre. The service is non profit seeking and its mission statement is

to provide efficient, reliable and affordable public transport to all the citizens of Lewisville. Attempting to achieve

this mission often involves operating services that would be considered uneconomic by private sector bus

companies, due either to the small number of passengers travelling on some routes or the low fares charged. The

majority of the town council members are happy with this situation as they wish to reduce traffic congestion and

air pollution on Lewisvilles roads by encouraging people to travel by bus rather than by car.

However, one member of the council has recently criticised the performance of the Lewisville bus service as

compared to those operated by private sector bus companies in other towns. She has produced the following

information:

Lewisville Bus Service

Summarised Income and Expenditure Account

Year ending 31 March 2006

000 000

Passenger fares 1,200

Staff wages 600

Fuel 300

Depreciation 280

1,180

Surplus 20

Summarised Balance Sheet as at

31 March 2005.

000 000

Fixed assets (net) 2,000

Current assets

Stock 240

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Cash 30

270

Less creditors due within one year 60

Net current assets 210

Total assets less liabilities 2,210

Ordinary share capital (1 shares) 2,000

Reserves 210

2,210

Operating Statistics for the year ended

31 March 2006

Total passengers carried 2,400,000 passengers

Total passenger miles travelled 4,320,000 passenger miles

Private sector bus companies

Industry average ratios

Year ended 31 March 2006.

Return on capital employed 10%

Return on sales (net margin) 30%

Asset turnover 033 times

Average cost per passenger mile 374p

Required:

(a) Calculate the following ratios for the Lewisville bus service(i) Return on capital employed (based upon opening investment);(ii) Return on sales (net margin);(iii) Asset turnover;(iv)

Average cost per passenger mile.

(4 marks)

(b) Explain the meaning of each ratio you have calculated. Discuss the performance of the Lewisville busservice using the four ratios.

(10 marks)

(c) Another council member suggests that the performance of the bus service should be assessed on the

basis of economy, effectiveness and efficiency.

Required:

Explain the meaning of the following terms in the context of performance measurement and suggest a measure

of each one appropriate to a bus service.

(i) Economy;(ii) Effectiveness;(iii) Efficiency.

(6 marks)

(20 marks)

10 Neeskens division (Dec 06)

A large multinational company uses return on investment (ROI) to measure the performance of its divisions.

Divisional managers have control over divisional revenues, and are given limited control over costs. Cash, land and

buildings are managed by group head office. Divisional managers have control over all other divisional assets and

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liabilities. Head office has a required rate of return of 15% for all divisions. Details of the performance of the

Neeskens Division are given below.

Neeskens division profit and loss account

Year ended 30 September 2006

000

Sales 7,500

Cash operating costs (3,600)Depreciation: land and buildings (40)

Depreciation: plant and machinery (300)

Apportioned head office cost (1,500)

Divisional profit 2,060

Neeskens division balance sheet as at

30 September 2005 (extract)

000 000

Fixed assets (net book value)

Land and buildings 2,000Plant and machinery 13,200

15,200

Current assets

Stock 1,200

Debtors 1,400

Cash 500

3,100

Less creditors due within one year

Trade creditors (1,400)

Net current assets 1,700

Net Assets 16,900

Required:

(a) Calculate both the controllable and traceable return on investment (based upon opening investment)for the Neeskens division for the year ended 30 September 2006.

(6 marks)

(b) Calculate traceable residual income (based upon opening investment) for Neeskens division for the yearended 30 September 2006 and briefly explain what it means.

(4 marks)

(c) Explain the difference between controllable and traceable return on investment. Why is the differenceimportant?

(6 marks)

(d) Give two advantages of residual income as a measure of divisional performance.(4 marks)

(20 marks)