Management Accounting

Transcription

1 Management Accounting 2 nd Year Examination August 2015 Solutions & Marking Scheme & Examiner s Comments Page 1 of 33

2 NOTES TO USERS ABOUT THESE SOLUTIONS The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding possible answers to questions in our examinations. Although they are published by us, we do not necessarily endorse these solutions or agree with the views expressed by their authors. There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative answers will be marked on their own merits. This publication is intended to serve as an educational aid. For this reason, the published solutions will often be significantly longer than would be expected of a candidate in an examination. This will be particularly the case where discursive answers are involved. This publication is copyright 2015 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, Page 2 of 33

3 Accounting Technicians Ireland 2 nd Year Examination: Autumn 2015 Paper: MANAGEMENT ACCOUNTING Monday 17 August p.m. to 5.30 p.m. INSTRUCTIONS TO CANDIDATES In this examination paper the symbol may be understood and used by candidates in Northern Ireland to indicate the UK pound sterling and the symbol may be understood by candidates in the Republic of Ireland to indicate the Euro. Answer ALL THREE questions in Section A and ANY TWO of the three questions from Section B. If more than the required number of questions is answered, then only the requisite number, in the order filed, will be corrected. Candidates should allocate their time carefully. All figures should be labelled, as appropriate, e.g. s, units etc. Answers should be illustrated with examples, where appropriate. Question 1 begins on Page 2 overleaf. Note: Examinees are permitted to use terminology of either International Accounting Standards (I.A.S s) or Financial Reporting Standards (F.R.S s) where appropriate (e.g. Receivables/Debtors) when preparing management accounting statements. SECTION A Page 3 of 33

4 Answer All Questions QUESTION 1 (Compulsory) Pricewell plc. has produced the following budgeted figures for one of its products the Seagem. per unit Selling Price 45 Direct Material 15 Direct Lab our 10 Variable Production Overhead 9 Fixed Production Overhead Budgeted Output 40,000 per month 10,000 units per month The following are the levels of activity for January and February January February Production units 12,000 13,000 Sales units 10,500 11,500 Opening inventory at the start of January was 500 units. Note: Actual prices and costs were the same as budgeted for January and February. Page 4 of 33

5 Required: (a) Calculate the standard contribution and standard profit per unit. 4 Marks (b) Prepare a profit statement for each month (separately) on each of the following basis: (i) Absorption Costing (ii) Marginal Costing 12 Marks (c) Prepare a reconciliation of the difference in profit reported in the profit statements prepared in part (b) above. 2 Marks (d) Clearly explain the reason for the difference in reported profit under the two methods. 2 Marks Total: 20 Marks Page 5 of 33

6 QUESTION 2 (Compulsory) (a) Dearing plc. provides the following information in relation to its inventory of Raw material Q and Work-in-progress. Raw Material Q 01 August Received 1, per kg 10 August Issued to production 800 kg 16 August Received 1, per kg 23 August Received per kg 28 August Issued to production 1,500 kg Required: Prepare a statement showing the amount charged to production and the cost of the inventory of raw materials held after each inventory transaction using each of the following methods of inventory costing: (i) First In, First Out (FIFO) (ii) Last In, First Out (LIFO) (iii) Weighted Average (AVG) 12 Marks (b) Dearing plc. is planning to launch a new product next year and budgets to use 55,000 units of a special material. The material will be used at an even rate throughout the year. The purchasing manager has decided he is going to place orders for 2,200 units at regular intervals during the year. The costs associated with the material are as follows: 1. Purchase Price 2.75 per unit. 2. Ordering costs 15 per order. 3. Holding costs 1.00 per unit per year. Required: (i) Calculate the ordering and holding costs based on the suggested order quantity of 2,200 units per order. 4 Marks (ii) Calculate and explain the Economic Order Quantity. 4 Marks Total: 20 Marks Page 6 of 33

7 QUESTION 3 (Compulsory) Sandown plc. has provided the following projected information: Year 1 Year 2 Sales units Sales units Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 5,000 6,500 7,000 8,000 8,500 Unit cost of production / Material X 8 3per litre 24 Material Y 5 4 per litre 20 Direct labour 18 Variable Overhead The selling price is expected to be 100 per unit. - Sales costs are estimated to be 4% of projected sales revenue. - The inventory of finished goods at the start of quarter 1, year 1 is expected to be 1,000 units. - The inventory of finished goods held at the end of each quarter is projected to be 30% of the following quarter s sales volume. - Administration costs are estimated to be 3,000 per month in quarter 1 of year 1 rising by 500 per quarter from quarter 2 onwards. The company s budget manual requires each of the following preliminary budgets to be prepared in advance of preparing the company s overall budget: (i) Sales volume and sales revenue budget (ii) Production volume budget (iii) Purchases volume and purchases cost budget for each of raw materials X and Y (iv) Selling & administration overheads budget (v) Labour budget (vi) Variable overhead budget Page 7 of 33

8 Required: a) Describe the content of and relationship between each of the preliminary budgets (i) to (iii) mentioned above, in the context of the overall company budget. 9 Marks b) Prepare quarterly budgets for items (i) to (vi) mentioned above and the annual budgeted statement of profit. 11Marks Total: 20 Marks Page 8 of 33

9 SECTION B Answer any two of the following questions QUESTION 4 You have been asked by your manager to assist with the induction of a new member of the finance team. After a number of days, the new person approached you with a number of queries about the differences between the following terms which they have heard being used, but which they don t understand: (i) The break-even point and the margin of safety. (ii) A cost pool and a cost driver. (iii) A sunk cost and a differential cost. (iv) An ideal standard and an attainable standard. (v) Job costing and contract costing. Conscious of the importance placed upon clear guidance by your manager, and in order to provide documentation for future reference, you decide that the best approach is for you to provide a written explanation of each term. Required: Prepare brief notes which explain the difference between any four of the five above terms. (Each part carries equal marks) Total 20 Marks Page 9 of 33

10 QUESTION 5 Turnbull plc. is a manufacturing company which produces three products. The following information has been provided by the company. Product Product Product Oasis Dune Sand Sales units 12,000 22,000 8,000 / / / Selling price per unit Variable cost per unit Allocated fixed production overheads 24,000 46,000 38,000 General overheads of 84,000 are apportioned between the products, on the basis of sales volume. The company has been given the opportunity to produce an enhanced version of their existing Sand product, which will be called Sand D. The details relating to this proposed contract are as follows: 1. The proposed selling price is 17 per unit. 2. Budgeted sales volume is 1,200 units. 3. Variable costs will increase by 4 per unit, because of additional labour costs incurred as a result of overtime. 4. Production of each unit of Sand D requires 1 kg of material Dust. This material is already used in the production of Product Dune. Turnbull plc holds 6,500 kgs of material Dust in stock. 5. Additional data relating to material Dust which may be relevant is as follows: per kg Purchase cost 5 Replacement cost 3 Net realisable value 2 6. The total fixed production overheads are expected to increase by 10% if Sand D is produced. Page 10 of 33

11 Required: (a) Prepare a statement showing the net profit or net loss for each existing product line and for the company as a whole. 6 Marks (b) Prepare a statement showing the profit / loss associated with the proposed contract to produce Sand D. 6 Marks (c) Prepare a memorandum to the company s management team: (i) outlining the advantages of using marginal costing for decision-making; (ii) advising whether, on financial grounds alone, the company should undertake the proposed contract; (iii) outlining any non-financial factors which the company should consider in deciding whether or not to undertake the proposed contract. 8 Marks Total: 20 Marks Page 11 of 33

12 QUESTION 6 The following information relates to Template plc. a manufacturing business, which is considering the introduction of a piece-work incentive scheme in one of its departments, which has 4 employees. Current Payroll Basic working week Over-time premium Normal grade A pay rate is Normal grade B pay rate is 36 hours 20% of normal pay grade / 20 per hour / 22 per hour EMPLOYEE NORMAL HOURS WORKED NORMAL PAY GRADE NORMAL UNITS PRODUCED 1 40 A B B A 140 Piecework Incentive Scheme Proposal Under the proposed incentive scheme, the standard time allowance would be 20 minutes per unit. The piecework rate would be based on grade B labour rates, with a standard piecework enhancement of 5%. All employees would receive the same piecework rate. Required: a) Outline the purpose of an incentive scheme. b) Calculate the normal pay due to each employee on current payroll terms. 4 Marks 4 Marks Page 12 of 33

13 c) Calculate a standard piecework rate on the basis of the proposed incentive scheme. 4 Marks d) Calculate the normal pay due to each employee under the terms of the proposed incentive scheme. 4 Marks e) List four benefits of having an employee evaluation process in place. 4 Marks Total: 20 Marks END OF PAPER Page 13 of 33

14 2 nd Year Examination: August 2015 Management Accounting Suggested Solutions and Examiner s Comments Students please note: These are suggested solutions only; alternative answers may also be deemed to be correct and will be marked on their own merits. Statistical Analysis By Question Question No Average Mark (%) Nos. Attempting Statistical Analysis - Overall Pass Rate 60% Average Mark 83% Range of Marks Nos. of Students and over 45 Total No. Sitting Exam 288 Total Absent 30 Total Approved Absent 4 Total No. Applied for Exam 322 Page 14 of 33

15 General Comments: This paper was divided into two sections A and B, each section consisting of three questions. All three questions in section A were compulsory and candidates had a choice of two out of three questions from section B. All of the questions carried 20 marks each. Five out of the six questions were mainly computational with some narrative elements whilst question 4 was all narrative. All of the areas examined are key elements of the syllabus and given the depth of their coverage in the study text, past exam papers, sample papers and additional sample questions they should not have created any difficulty. In order to perform well in this paper, question practice is essential. All of the areas examined are key elements of the syllabus and are well covered in the study text, past exam papers, sample papers and additional sample questions. There was a vast improvement in the presentation and quality of answers, for this paper in comparison with previous papers. However, care should be taken with presentation particularly questions 1, 3 and 5 where students were producing statements for each month/product rather than incorporating all within the one statement. Page 15 of 33

16 Examiner s Comments on Question One This question was compulsory and tested the candidate s knowledge of absorption and marginal costing systems. There was a very obvious improvement in the candidates understanding of those two costing systems when compared to previous papers. Answers were clearly presented and well labelled. Part (a) of the question required the calculation of standard contribution and profit per unit. This part was well answered but in some cases candidates could not distinguish between the two. Part (b) required a profit statement for two months using the two costing systems. Although a vast improvement was evidenced since previous papers, some candidates are still failing to identify opening and closing inventories and the under/over absorption of fixed production overhead. Additionally, some students lost valuable time by setting out four separate statements, one for each month under each basis of costing rather than incorporating the two months within the one presentation. SOLUTION 1: (a) Total Marks Allocated Selling Price 45 Direct Material 15 Direct Labour 10 Variable Production Overheads 9 34 Contribution 11 2 Fixed Production Overheads(W1) 4 Profit per unit 7 2 (b) (i) Absorption Costing January February Total Marks Allocated Revenue 472, ,500 1 Opening Inventory 19,000 76,000 1 Cost of production 456, ,000 1 Closing Inventory (76,000) (133,000) 1 Cost of Sales 399, ,000 Profit 73,500 80,500 Over Absorption 8,000 12,000 2 Adjusted Profit 81,500 92,500 1 Page 16 of 33

17 (ii) Marginal Costing January February Total Marks Allocated Revenue 472, ,500 1 Opening Inventory 17,000 68,000 1 Cost of Production 408, ,000 1 Closing Inventory (68,000) (119,000) 1 Variable Cost of Sales 357, ,000 Contribution 115, ,500 Fixed Cost 40,000 40,000 1 Profit 75,500 86,500 (c) Reconciliation of Profit January Absorption Costing 81,500 Marginal Costing 75,500 Difference 6,000 Total Marks Allocated units Opening Inventory 500 Closing Inventory 2,000 1,500 x 4 6,000 1 February Absorption Costing 92,500 Marginal Costing 86,500 Difference 6,000 units Opening Inventory 2,000 Closing Inventory 3,500 x 4 1,500 6,000 1 Page 17 of 33

18 (d) The reason for the difference in profit is due to the difference in the valuation of inventory. For example in January the difference is 6,000.This is due to the fact that in absorption 6,000 worth of the fixed overhead is not written off but instead is carried forward to February. This does not happen in marginal costing as fixed overheads are not included in inventory valuation. 2 Marks WORKINGS: Working 1: Production overhead cost per unit 40,000 10,000 units = 4 per unit Working 2 : Production cost per unit Direct materials 15 Direct Labour 10 Variable Production Overheads 9 Marginal Costing CPU 34 Fixed Production Overhead 4 Absorption Costing CPU 38 Working 3 : Opening and closing inventories in units January February units units Opening Inventory 500 2,000 Production 12,000 13,000 12,500 15,000 Sales 10,500 11,500 Closing inventory 2,000 3,500 Page 18 of 33

19 Working 4: Under/over absorption of overheads January February Overhead absorbed (12,000 unit x 4) (13,000 units x 4) 52,000 48,000 Actual overhead 40,000 40,000 Over absorbed 8,000 12,000 Examiner s Comments on Question Two This question was compulsory and tested the candidate s knowledge of inventory management. Part (a) of the question required candidates to calculate the amount charged to production and the value of closing inventory using FIFO, LIFO and AVG. This part of the question was very well answered with many candidates gaining almost full marks. Part (b) of the question required candidates to calculate ordering costs and holding costs, and to explain and calculate the EOQ. Most candidates did not know how to calculate or explain the EOQ. Equally most did not understand how to calculate holding costs (i.e. an average amount is held in stores over the year). This is consistent with my comments for previous papers. SOLUTION 2 (a) i. First In, First Out (FIFO) Method FIFO Method Date Qty. kg Received Issued Balance Valu e per kg Total value Qty. kg Value per kg Total value / 23 Aug , ,000 1, , , Aug. 19, ,600 1, , ,000 1,500 14, ,000 4 marks Qty. kg Value per kg Total value 01 Aug. 1, ,000 1, , Aug , , Aug. 1, ,400 1, , ,600 13,000 Page 19 of 33

20 (a) ii. Last In, First Out (LIFO) Method LIFO Method Date Qty. kg Received Issued Balance Valu e per kg Total value Qty. kg Value per kg Total value / 23 Aug , ,000 1, , , Aug. 19, , ,550 1,500 14, , ,600 4,450 4 marks Qty. kg Value per kg Total value 01 Aug. 1, ,000 1, , Aug , , Aug. 1, ,400 1, , ,600 13,000 Page 20 of 33

21 (a) iii. Weighed Average (AVG) Method (b) Average Method Date Qty. kg Received Issued Balance Valu e per kg Total value Qty. kg Value per kg Total value / 28 Aug. 1, , ,750 4 marks Qty. kg Value per kg Total value 01 Aug. 1, ,000 1, , Aug , , Aug. 1, ,400 1, , ,600 1, , Aug , ,000 1, , ,600 2, ,000 Order Cost 55,000 = 25 orders 2, x 15 = marks Holding Cost 2,200 2 = 1,100 x 1 = 1,100 2 marks Page 21 of 33

22 EOQ = 2 x 15 x 55, = 1,284 units 2 marks This is the order quantity that minimises ordering and holding costs. Examiner s Comments on Question Three This question was compulsory and tested the candidate s knowledge of budgetary planning and control. Part (a) of the question required candidates to explain the interrelationship between certain budgets. The standard of answers was mixed. Many candidates scored full marks whilst others seemed to have experience difficulty with this part. Part (b) of this question required candidates to prepare quarterly budgets. The standard of answers showed a vast improvement from the May 2015 paper. However, as mentioned in previous reports, some students wasted time by setting out four separate budgets, one for each quarter rather than incorporating all four quarters within the one budget. 2 marks SOLUTION 3 (a) Content of named budgets and relationship between them. (i) (ii) The sales volume and sales revenue budget expresses in volume and value the total anticipated sales for the budget period. The sales budget may be constructed on the basis of information from specific products, market areas or by periods. The sales budget uses the sales volume projections and the expected selling price to obtain the total sales revenue by budget period. 3 marks The production volume and production cost budget expresses forecast production in units for each budget period and considers inventory-holding requirements and sales budgets. The production budget is calculated by taking the budgeted sales volume and adjusting this for planned opening and closing finished goods inventory levels. The sales and the production budgets are inter-dependent and to ensure business success, these should be aligned. 3 marks (iii) Once the sales and production budgets have been decided, the costs of various inputs to production should be calculated. The purchases budget calculates the raw materials required to be purchased in order to service the requirements of the production budget, after making allowance for opening and closing materials inventory. After the purchases budget has been quantified in terms of cost, the impact on payables may also be established. 3 marks Page 22 of 33

23 (b) Preparation of budgets (i) Sales volume and sales revenue budget Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Marks Allocated Budgeted sales units 5,000 6,500 7,000 8,000 1 Budgeted selling price per unit Budgeted sales revenue 500, , , ,000 1 (ii) Production budget Year 1 Year 2 Total Marks Allocated Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 units units units units units Opening inventory 1,000 1,950 2,100 2,400 Budgeted production (Bal. figure) 5,950 6,650 7,300 8,150 2 Less closing inventory (1,950) (2,100) (2,400) (2,550) Budgeted sales 5,000 6,500 7,000 8,000 8,500 Page 23 of 33

24 (iii) Purchases budget Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Marks Allocated Budgeted production units 5,950 6,650 7,300 8,150 Material X volume (@ 8 litres per unit) 47,600 ltr. 53,200 ltr. 58,400 ltr. 65,200 ltr. Material X cost (@ 3 per litre) 142,800 / 159,600 / 175, ,600 1 Material Y volume (@ 5 litres per unit) 29,750 ltr. 33,250 ltr. 36,500 ltr. 40,750 ltr. Material Y cost (@ 4 per litre) 119, , , ,000 1 (iv) Selling & administration overhead budgets Quarter 1 / Quarter 2 / Quarter 3 / Quarter 4 / Total Marks Allocated Budgeted sales revenue 500, , , ,000 Sales costs (4% sales revenue) 20,000 26,000 28,000 32,000 Administration costs 9,000 9,500 10,000 10,500 1 (v) Labour budget Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Marks Allocated Budgeted production units 5,950 6,650 7,300 8,150 Direct labour cost per unit / Budgeted total ddirect labour cost / 107, , , ,700 1 Page 24 of 33

25 (vi) Variable Overhead Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Marks Allocated Budgeted production units 5,950 6,650 7,300 8,150 Variable overhead per unit / Variable overhead cost / 71,400 79,800 87,600 97,800 1 Budgeted Statement of Profit Total Marks Allocated Sales 2,650,000 Cost of sales Opening Inventory 74,000 Production 2,075,700 Less Closing Inventory (188,700) 1,961,000 Gross Profit 689,000 Less Sales costs 106,000 Administration costs 39, ,000 Net Profit 544,000 2 Page 25 of 33

26 Examiner s Comments on Question Four This question was optional and tested the candidate s knowledge of and differences between certain management accounting terms. This question was exceptionally well answered with candidates demonstrating a very strong knowledge of the management accounting terms asked. SOLUTION 4: The break-even point and the margin of safety The breakeven point is the number of sales units (or revenue) at which a product does not make a profit or a loss. It can be found by dividing fixed costs by contribution per unit. The margin of safety is the difference between the breakeven sales and the actual sales as a percentage of actual sales. Cost pools and cost drivers 5 marks A cost pool is the total of all costs associated with a particular business activity. Activity costs are itemized for company leaders to use in making financial decisions. Under ABC the areas where the overheads were caused is the cost pools. A cost driver is the measure of activity which causes overhead costs. In ABC products consume activities and activities consume resources. A cost driver is any factor which causes a change in the cost of an activity. A sunk cost and differential cost A sunk cost is a past cost. It is a cost that has already been incurred and is not relevant for decision making. 5 marks A differential cost is a future cost that will increase as a result of the decision at hand.. It is a relevant cost for decision making. 5 marks An ideal standard and an attainable standard An ideal standard is a standard that is set on the assumption that working conditions are perfect. They do not allow for obstacles that will be encountered during production such as wastage etc. An attainable standard is a standard that is set which allows for problems encountered during production. 5 marks Job costing and contract costing Job costing is used for calculating the cost of a small job like making a specific type of product. For instance, if you receive an order to make 20 tables, you will use job costing. This type of job is usually completed in a short period of time. Page 26 of 33

27 Contract costing is used for calculating the cost of large projects such as building a bridge and usually takes more than one year to complete. 5 marks Examiner s Comments on Question Five This question was optional and tested the candidate s knowledge of decision making. Part (a) required candidates to prepare a statement of profit/loss for three product lines. Candidates seemed to have difficulty with the allocation of overheads based on sales volume. Other than this difficulty, this part of the question was answered very well. Part (b) required candidates to decide whether a new product line should be introduced. In order to perform well in this part of the question, candidates required knowledge of the relevant cost rules relating to decision making, particularly in relation to material, labour and overhead costs. Once again, this question proved very unpopular with candidates. Many did not attempt it. This area of the syllabus is covered in depth in the study text and it also features in my sample papers. It will become a regular question in future exam papers in light of the new syllabus requirements. SOLUTION 5: Workings Working 1: Apportionment of general overheads Oasis Dune Sand Sales volume 12,000 22,000 8,000 Apportioned 84,000 / 42,000 x 12,000 84,000 / 42,000 x 22,000 84,000 / 42,000 x 8,000 general overheads = 24,000 = 44,000 = 16,000 (a) Profit / Loss Statement Oasis Dune Sand Total / / / / Sales revenue 144, , , ,000 Page 27 of 33

28 Variable cost 108, ,000 56, ,000 Contribution 36, , , ,000 Fixed Costs Allocated fixed production overheads 24,000 46,000 38, ,000 Apportioned General Overheads 24,000 44,000 16,000 84,000 Net Profit / (Loss) (12,000) 86,000 82, ,000 6 marks (b) Proposed contract Sand D product Incremental revenue / / Sales revenue 1,200 units x 17 per unit 20,400 Incremental Costs Variable cost 7 per unit original variable cost + 4 per unit additional labour cost x 1,200 units 13,200 Additional materials cost 3 replacement cost 3,600 Fixed overheads Increase 108,000 x 10% 10,800 Total (27,600) Net loss (7,200) 6 marks (c) MEMORANDUM To: Management Team From: Student Date: x/ x/ xx Re: (i) Marginal costing for decision making Page 28 of 33

29 (ii) Proposed Contract financial decision & non-financial factors Marginal costing for decision making Marginal costing focuses on separating variable costs and fixed costs and assists in focusing on relevant costs to provide more relevant information. Marginal costing recognises that, as fixed costs are committed and cannot be avoided, they are largely irrelevant to many decision-making situations. Marginal costing avoids arbitrary allocations, apportionments and the use of pre-determined overhead absorption rates, which can be misleading in decision-making scenarios. Profit calculations are not dependent upon changes in inventory levels. Holding inventory is normal in most businesses (other than service businesses), where production is at a different rate to sales. Differing costing approaches will result in different inventory valuations. This can result in differing profit figures when the inventory level changes during a reporting period. Marginal costing charges fixed costs to the period in which they are incurred and does not incorporate fixed costs in inventory costs, which results in profits reported relative to sales. A marginal cost represents the most relevant cost for short-term tactical decisions, such as pricing. In a scenario where a manager is seeking to make the best use of resources, as fixed costs are treated as committed and unchanging, so the marginal cost, sales revenue and contribution are the key issues. In these circumstances, the selection of the alternative which maximises contribution is the correct decision rule. Where sales volumes are declining but production volume is sustained, marginal costing provides an early profit warning, as opposed to other methods such as absorption costing. Marks Allocated 3 marks Proposed Contract financial decision On financial grounds alone, it does makes sense to proceed with the proposed contract, as the calculations show that doing so will result in a loss. Marks Allocated 2 marks Proposed Contract non-financial factors Other considerations which the company should consider before accepting this contract include: Impact on other existing Delta sales and customers; Impact on other product revenues and costs; Consideration of overhead cost drivers to identify cost allocations, particularly general overheads; Page 29 of 33

30 Consideration of variable and fixed costs split; Other uses and returns for product omega; Future potential contracts from the same source. Marks Allocated 3 marks Page 30 of 33

31 Examiner s Comments on Question Six This question was optional and tested the candidate s knowledge of employee incentive schemes. This question was very popular and was exceptionally well answered with many students gaining full marks. Part (a) required an understanding of the purpose of an incentive scheme. This part was well answered with students demonstrating an in depth knowledge of those types of schemes. Part (b) was again very well answered and required the calculation of normal pay due to employees without an incentive scheme. Part (c) required the calculation of a standard piecework rate and this was required to be used in part (d) to calculate the pay due to employees under a proposed incentive scheme. SOLUTION 6: (a) Incentive schemes are a means of remuneration which relate payment to output. The aims of such schemes are to benefit employees by providing an opportunity to increase earnings, while encouraging performance and providing for increased productivity, which may result in reduced cost per unit. Incentive Schemes can be based upon individual performance or aimed at incentivising groups of employees. Incentive schemes should be based on efficient working methods following comprehensive work studies and may be financial or non-financial in nature. Marks Allocated 4 marks (b) Normal pay on current payroll terms Employee Calculation / Total Marks Allocated Employee (20+20%) Employee (22+20%) Page 31 of 33

32 Employee Employee (20+20%) (c) Standard piecework rate Standard weekly pay (Grade B) Standard weekly production 36 hours = 2,160 minutes / units 2 Basic piecework rate 7.33 per unit Incentive element 5% 0.37 Standard Incentive piecework rate (d) Normal pay under the proposed incentive scheme / Total Marks Allocated Employee units x ,386 1 Employee units x ,232 1 Employee units x ,463 1 Employee units x ,078 1 Page 32 of 33

33 (e) Benefits of having an employee evaluation in place (i) Improve morale. (ii) Reduce labour turnover. (iii) Increase productivity. (iv) Reduce friction and frustration. (v) Enhance communication between managers and employees. (vi) Instill a higher level of accountability for performance. Marks Allocated 4 marks Page 33 of 33