ACCA MA Performance measurement: practice questions with answers

Question 1

The Western division of Halcombe Group currently earns an annual profit of $360,000 on capital employed of $2,400,000. The group's cost of capital is 11%. The divisional manager is considering a project requiring additional capital employed of $500,000, which would increase annual divisional profit by $65,000. Which of the following statements is correct?

1. A Divisional ROI would rise from 15.0% to 17.7%, and divisional residual income would rise by $10,000
2. B Divisional ROI would fall from 15.0% to 14.7%, but divisional residual income would rise by $10,000
3. C Divisional ROI would fall from 15.0% to 14.7%, and divisional residual income would fall by $10,000
4. D Divisional ROI would fall from 15.0% to 13.0%, but divisional residual income would rise by $65,000

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Answer: B. - Current ROI = $360,000 / $2,400,000 = 15.0%
- ROI with project = $425,000 / $2,900,000 = 14.7% (falls)
- Project RI = profit − imputed interest = $65,000 − (11% × $500,000) = $65,000 − $55,000 = $10,000 (divisional RI rises)

The project earns 13.0%, more than the 11% cost of capital, so it benefits the group. A manager judged on ROI might reject it because it dilutes divisional ROI (dysfunctional behaviour); residual income gives a decision consistent with group interests.

Question 2

Ravensworth Council runs a public library service and uses value for money measures (economy, efficiency and effectiveness). Which of the following is a measure of efficiency?

1. A Average price paid per new book compared with the publisher's list price
2. B Percentage of residents who say the library helped them improve their reading skills
3. C Number of book loans per librarian hour worked
4. D Percentage of library users who found the item they were looking for

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Answer: C. - Economy: spending less; acquiring inputs of appropriate quality at the lowest cost (price paid per book).
- Efficiency: getting more out of what goes in; the relationship between outputs and inputs (loans per librarian hour, cost per loan).
- Effectiveness: spending wisely; the extent to which outputs achieve objectives (improved literacy, users finding what they need).

Question 3

The Larchmont Hotel has 120 rooms and was open every day in June (30 days). It sold 2,808 room-nights in June and earned room revenue of $356,616. What were the hotel's room occupancy rate and its revenue per available room-night (RevPAR) for June?

1. A Occupancy 78.0%; RevPAR $127.00
2. B Occupancy 78.0%; RevPAR $99.06
3. C Occupancy 22.0%; RevPAR $99.06
4. D Occupancy 78.0%; RevPAR $2,971.80

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Answer: B. - Available room-nights = 120 rooms × 30 nights = 3,600
- Occupancy = 2,808 / 3,600 = 78.0% (a measure of capacity utilisation)
- RevPAR = 356,616 / 3,600 = $99.06 per available room-night

RevPAR combines occupancy with price: it equals average revenue per occupied room-night ($127.00) × occupancy (78%).

Question 4

Marlowe Home Stores, a chain of furniture and homeware shops, has set objectives at different levels of the organisation. Which of the following is an operational objective?

1. A To become the leading home furnishing retailer in the region within the next five years
2. B To restock any shelf that has run empty within 30 minutes of it being reported, on every shift
3. C To increase the kitchenware department's share of total group sales by 3 percentage points next year
4. D To achieve a return on capital employed of at least 15% for the group as a whole each year

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Answer: B. Objectives form a hierarchy that flows from the mission:

| Level | Set by | Time scale | Example |
|---|---|---|---|
| Strategic | Senior management | Long term, whole organisation | Regional market leadership; group ROCE of 15% |
| Tactical | Middle management | Medium term, departments or divisions | Kitchenware share of sales up 3 points next year |
| Operational | Junior managers and supervisors | Short term, day-to-day | Restock empty shelves within 30 minutes |

Performance measures at each level should support the level above, so that achieving operational targets helps achieve tactical objectives and, in turn, the strategic objectives.

Question 5

Calder Water supplies water to households in one region. A government regulator limits Calder's annual price increases to the rate of inflation minus 1%, and sets minimum standards for water quality, supply interruptions and response times to customer complaints. Which of the following statements about measuring the performance of Calder's managers is correct?

1. A Calder's profit growth gives a complete measure of its managers' performance, because the same price cap applies to every water company
2. B Because the regulator sets the prices, revenue is fully controllable by Calder's managers and should be their main performance target
3. C Regulation is an internal factor that the managers can control, so it does not need to be considered when assessing their performance
4. D Because prices are capped, profit depends mainly on cost control, so performance should also be judged against the regulator's service standards

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Answer: D. Government regulation is an external influence on performance. For a regulated monopoly such as a water company:

- Prices are restricted (here to inflation minus 1%), so managers have little control over revenue per customer. Profit can be improved mainly by controlling costs and improving efficiency.
- Service standards set by the regulator (water quality, interruptions, complaint response times) become key performance indicators. Cutting costs in ways that breach them could lead to penalties.
- A good performance measurement system therefore combines financial measures with non-financial measures linked to the regulator's standards, and distinguishes factors managers can control from those imposed externally.

Question 6

Corland Pens is carrying out a value analysis of its premium fountain pen. The pen has a gold-plated clip that adds nothing to how well the pen writes, but market research shows that customers value it because it makes the pen look prestigious and is a symbol of status. Which type of value does the gold-plated clip mainly provide?

1. A Esteem value
2. B Use value
3. C Cost value
4. D Exchange value

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Answer: A. Value analysis examines every feature of a product to see whether its cost can be reduced without reducing its value to the customer. It considers four aspects of value:

| Type of value | Meaning |
|---|---|
| Cost value | the cost of producing and selling the item |
| Exchange value | the market value of the item |
| Use value | what the item does: its function |
| Esteem value | the prestige the customer attaches to the item |

A feature with high esteem value, like the gold-plated clip on a premium pen, may be worth keeping even though it adds no use value, because removing it could reduce the price customers will pay.