The following points should be noted by candidates when reflecting on the paper just taken, and when preparing for future CIMA examinations:

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1 General Comments It is disappointing to report that the overall performance was poor. The paper included topics that have appeared in several recent papers and candidates who had worked through these papers and suggested answers should have been well prepared. These topics include the learning curve, the balanced scorecard, ratio analysis, linear programming and activity based costing. The paper also included questions relating to topics that underlined the progressive nature of the syllabus, of which knowledge needed to be brought forward from previous studies. These topics included variance analysis, investment appraisal, and absorption costing. Many candidates demonstrated a shallow level of technical ability and poor exam technique when answering these questions. The answers submitted for the two questions in Section B were, in the main, poor. Linear programming is an important topic that is regularly tested but the answers submitted, particularly the construction of the graph, were poor (full details in the question 6 summary) The ratio analysis/investment appraisal question (question 7) contained no complex issues but a lot of answers were poorly constructed and lacked depth. The layout of answers was generally good but a large proportion of candidates do not present answers to quantitative questions that can be easily understood and marked. Figures are shown with no label or any form of identification; workings are sometimes so untidy that they cannot be understood, or workings are not shown at all. Other common issues relating to presentation of figures are that $ and signs are not included, rounding takes place far too early in a question, and a final answer is not always identified. It sometimes appears that candidates are challenging the markers to find the answer. The following observations were made when reviewing the scripts: The entire syllabus had not been studied; The progressive nature of the Performance Pillar had not been respected; Many candidates did not appear to be fully prepared for the exam; The content of previous PEGs had not been digested. The following points should be noted by candidates when reflecting on the paper just taken, and when preparing for future CIMA examinations: 1. Due to the progressive nature of the Performance Pillar, candidates sitting the P2 examination are advised to closely examine the syllabi of the Certificate Level subjects, particularly C01, and the P1 paper to ensure they have a thorough understanding of all the topics covered in those papers. Any identified knowledge gap must be addressed. 2. Candidates should always practise time management and relate the time they expend on each question to the marks available. A simple approach is to allow 1.8 minutes for one mark. This will avoid candidates failing to complete the paper. 3. Candidates are advised to read Financial Management magazine and Velocity e-newsletter, especially articles that relate to technical issues associated with the P2 syllabus. 4. Candidates should study and revise the entire syllabus and ignore suggestions put forward in accounting journals which suggest the topics likely to be examined. 5. Candidates are advised to understand the rubric of the paper and plan their attempts accordingly. 6. Candidates should make full use of the 20 minutes allowed for reading and planning. The Chartered Institute of Management Accountants 2013 Page 1

2 7. Answers to discursive questions should relate to the scenario in the question. On many occasions general answers are submitted that attract few marks. 8. In preparing for the exam, candidates are advised to practise regularly using past CIMA questions, comparing their answers to the examiner s suggested answers. The effort exerted undertaking this task will allow candidates to measure their own progress. Candidates will also gain an understanding of the correct layout for quantitative answers and of the depth of answers required to discursive questions. 9. Candidates are advised to present answers in a clear and logical fashion, for example clear and legible handwriting and workings clearly referred to. Blue or black ink only should be used and pencil should be used for diagrams only. 10. Do not write in red ink or pencil. There are also a number of common faults that need attention: Candidates: must be able to construct a neat, tidy and meaningful graph (Question 6) should not expend valuable time rewriting the question should clearly indicate if part of the answer to a question appears later in the answer book should only put forward the number of points or items that are requested (Question 5, Question 6 (c) ) should concentrate and practise the layout of answers to quantitative questions A weakness in basic mathematical techniques was also a worrying feature of this exam. The Chartered Institute of Management Accountants 2013 Page 2

3 Section A 50 marks ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS ARE AVAILABLE FOR THE METHOD YOU USE. Question 1 (a) Calculate the time taken for the 32 nd batch. (4 marks) (b) Calculate the selling price of the final 500 units that will allow the company to earn a total profit of $150,000 from the product (6 marks) (Total for Question One = 10 marks) Rationale The question examines candidates knowledge, understanding and application of the learning curve when establishing the total cost of a product. The learning outcome tested is B1 (e) apply learning curves to estimate time and cost for new products and services. Suggested Approach Candidates needed to carefully read and absorb the data provided and use the learning curve formula provided to establish the time taken to produce the 32 nd batch. Part (b) required candidates to use the data provided in the question, together with the output from part (a), to calculate the selling price of the final 500 units that would allow a certain level of profit to be earned. Marking Guide (a) Calculate the cumulative average time for 31 batches Calculate the cumulative average time for 32 batches Calculate the total time for 31 batches Calculate the total time for 32 batches Calculate the time for the 32 nd batch Marks (b) Calculate the total labour hours for 40 batches Calculate the total labour cost for 40 batches Calculate the total cost for 40 batches Calculate the revenue from 3,500 units Calculate the revenue needed for the final 500 units Establish the selling price per unit Maximum marks awarded 10 marks Examiner s Comments Most candidates made a good attempt at both parts of this question. There was a good understanding of the topic, the workings of the formula and how the outcome of the calculations in part (a) could be used to arrive at a unit selling price for the final 500 units. The Chartered Institute of Management Accountants 2013 Page 3

4 Common Errors 1. Accurately building a total cost for the first 32 batches (3,200 units) but incorrectly assuming the total amount was 35 batches (3,500 units) 2. Submitting answers that were not realistic. Example 1: suggesting the selling price for each unit in the final 500 was $0.55. Example 2: suggesting a unit selling price of $3,576 (as the product is in its decline stage it must be below $215) 3. Failing to answer the question and giving the total sales value for 500 units as the final answer 4. Calculating the figures for 32 and 33 batches rather than 31 and 32 batches respectively (part b) 5. Incorrect rounding and rounding too early. If the cumulative average times for 31 and 32 units were rounded to 297 and 295 hours and these figures were carried through to part (b), it would result in a selling price of $77.59 instead of $ The Chartered Institute of Management Accountants 2013 Page 4

5 Question 2 (a) State the primary activities in the value chain of a manufacturing company. (2 marks) (b) Explain, by giving examples, how each of the FOUR types of quality cost could be reduced. You should identify in which primary activity each one of your examples would occur in ZZ s value chain. (8 marks) (Total for Question Two = 10 marks) Rationale The question examines candidates knowledge and understanding of the value chain associated with a manufacturing company, and how the value chain relates to the four types of quality cost. The learning outcome tested is B1 (j), discuss the concept of the value chain and the management of contribution/profit generated throughout the value chain. Suggested Approach Carefully read the question and understand the scenario to which the question relates. In part (a) candidates simply had to state the primary activities in the value chain of a manufacturing company. Part (b) required candidates to identify the four types of quality cost and explain how each type of cost could be reduced. Candidates also needed to identify the primary activity in the value chain to which each item of quality cost related. Marking Guide Marks (a) Identify the primary activities of the value chain 2 (b) For each quality cost: Stated quality cost 0.5 Matching to an activity in the value chain 0.5 Explanation for how Four items required (4 x 2) 8 Maximum marks awarded 10 marks Examiner s Comments The answers to both parts were generally poor. Both the value chain and aspects of quality costs sit within the P2 syllabus, but many candidates seemed confused when the two topics were linked together. In part (b) many candidates ignored the question and simply wrote all they knew about the four types of quality cost. Common Errors 1. Part (a) ignoring the word state and fully describing the primary activities of the value chain. This expended valuable time 2. Completely mis-reading the question in part (b) and explaining the primary activities of the value chain The Chartered Institute of Management Accountants 2013 Page 5

6 3. Incorrectly identifying the primary activity of the value chain for each of type of quality cost 4. Failing to put forward any cost reductions 5. Submitting impractical ideas of how to reduce cost.e.g. Cut out the number of inspections Tell the warehouse staff to be more careful The Chartered Institute of Management Accountants 2013 Page 6

7 Question 3 (a) (b) Explain how the allocation and absorption of costs differs in activity based costing compared to traditional absorption costing. (4 marks) Explain how activity based costing could help to increase the profits of PQ. (6 marks) (Total for Question Three = 10 marks) Rationale The question examines candidates knowledge and understanding of how traditional absorption and allocation of costs differs from activity based costing, and of how ABC could help increase a company s profit. The learning outcome tested is B1 (l), analyse direct customer profitability and extend this analysis to distribution channel profitability through the application of activity-based costing ideas. Suggested Approach Candidates needed to carefully read and understand the setting for this question. In part (a) candidates simply needed to explain how absorption and allocation of costs differs in activity based costing compared to traditional absorption costing. In part (b) candidates were required to explain how the introduction of ABC could help to increase the profits of the company. An understanding of ABC related to Direct Product Profitability and Customer Profitability was required. Marking Guide Marks (a) Explain allocation and absorption of costs 2 Explain activity based costing 2 (The explanations needed to explain how the two approaches differed) 4 (b) The answer must relate to the increasing of profits Aspects of Direct Product Profitability Up to 3 Aspects of Customer Profitability Analysis Up to 3 Other relevant points Up to 3 9 marks available but a maximum of 6 Maximum marks awarded 10 marks Examiner s Comments The answers to both parts were extremely poor. In part (a) most candidates were unable to describe traditional absorption costing and activity based costing (ABC) and were therefore not able to explain the difference. This is worrying as traditional absorption costing is one of the most basic and fundamental aspects of Management Accounting and is associated with many other topics within the syllabi such as establishing selling prices. In part (b) of the question candidates were directed by the scenario narrative to describe Direct Product The Chartered Institute of Management Accountants 2013 Page 7

8 Profitability (DPP) and Customer Profitability Analysis (CPA). However most of the answers did not relate to these techniques but simply described general selling price issues. Common Errors Part (a) 1. Believing traditional absorption costing related to variable costs 2. Believing the use of traditional absorption costing resulted in costs being spread evenly over the products 3. Completely unable to describe Activity Based Costing 4. Believing ABC is another name for marginal costing Part (b) 5. Failing to mention DPP or CPA 6. Putting forward general aspects of pricing 7. Believing the introduction of ABC will allow the company to reduce the selling price of every product 8. Failing to mention or discuss the main thrust of the question i.e. how ABC could help to increase the profits of PQ. The Chartered Institute of Management Accountants 2013 Page 8

9 Question 4 Prepare a statement that reconciles the budget variable production cost with the actual variable production cost. Your statement should show the variances in as much detail as possible. (Total for Question Four = 10 marks) Rationale The question examines candidates knowledge, understanding and application of variance analysis. The learning outcome tested is C2 (c), evaluate performance using fixed and flexible budget reports. Suggested Approach Carefully read and understand the level of variance analysis required to reconcile the budgeted variable cost with the actual variable cost. A clearly labelled statement displaying the variances was required. Marking Guide Marks Planning variance (labour rate) 2 Material price 1 Material usage 1 Labour rate 1 Labour idle time 1 Labour efficiency 2 Variable overhead expenditure Variable overhead efficiency 1 1 Maximum marks awarded 10 marks Examiner s Comments Most of the attempts were extremely poor and would indicate that candidates had only a basic knowledge of variances. In most cases the variances submitted were incorrect and the variances were not shown in a statement, but appeared randomly over the page. Common Errors 1. Only putting forward the top level variances 2. Naming the variances incorrectly 3. Not labelling the variances 4. Showing a favourable variance as adverse and vice versa 5. Submitting a written description of the variances. This was not required 6. Failing to recognise that there was a planning variance 7. Failing to submit any form of reconciliation statement 8. Extremely poor presentation of figures The Chartered Institute of Management Accountants 2013 Page 9

10 Question 5 Recommend an objective and a suitable performance measure for each of three nonfinancial perspectives of a balanced scorecard that the Pathology Laboratory could use. Note: in your answer you should state three perspectives and then recommend an objective and a performance measure for each one of your three perspectives. (Total for Question Five = 10 marks) Rationale This question examines candidates knowledge and understanding of the non-financial perspectives of the balanced scorecard. The learning outcome tested is C3 (c), compare and contrast traditional approaches to budgeting with recommendations based on the balanced scorecard. Suggested Approach Candidates needed to read the question carefully and understand the context in which this question is set. An objective and suitable performance measure was required for each of the three non-financial perspectives. Marking Guide For each of the three non-financial perspectives: Marks Identify the perspective 0.5 Identify an objective 1.0 Identify a performance measure 1.0 Explain a how and a why Three perspectives x 3.5 marks maximum 10 marks Maximum marks awarded 10 marks Examiner s Comments Some good answers were submitted but a significant number of candidates encountered difficulties when applying the balanced scorecard to the scenario. This topic has been tested regularly during the past few sittings and a study of past questions and answers should have assisted candidates when preparing for this exam. Common Errors 1. Failing to read the question and fully describing the financial perspective 2. Failing to identify a specific objective and a performance measure for each perspective (this was clearly stated in the question) 3. Putting forward a performance measure that did not relate to the objective 4. Putting forward a statement that was simply a description of the perspective and which loosely contained an objective and a performance measure, but these were not identified as such 5. Putting forward unrealistic objectives e.g. to become the best pathology laboratory in the world 6. Putting forward weak objectives for which it was difficult to establish a performance measure The Chartered Institute of Management Accountants 2013 Page 10

11 Example 1 We need to find out if customers/employees are happy Example 2 We need to measure how quickly patients get better 7. Labelling the perspectives incorrectly 8. Putting forward performance measures that did not relate to the scenario e.g. increase the number of bus routes The Chartered Institute of Management Accountants 2013 Page 11

12 SECTION B 50 MARKS ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS ARE AVAILABLE FOR THE METHOD YOU USE. Question 6 (a) Identify, using graphical linear programming, the optimal production plan for products E and R to maximise THS s profit in the month. (13 marks) (b) Calculate the maximum amount that should be paid next month to lease the machine. (Note: you should assume that a contract has already been signed with the employment agency.) (8 marks) (c) Explain TWO major factors that should be considered before deciding to lease the machine. (Note: you should assume that the data supplied is totally accurate.) (4 marks) (Total for Question Six = 25 marks) Rationale The question examines candidates knowledge and understanding of linear programming. The learning outcomes tested are: Part (a) A2 (b), interpret variable/fixed cost analysis in multiple product contexts to break-even analysis and product mix decision making, including circumstances where there are multiple constraints and linear programming methods are needed to identify optimal solutions. Part (b) & (c) A2 (a), discuss the meaning of optimal solutions and how linear programming methods can be employed for profit maximising, revenue maximising and satisfying objectives. Part (b) required candidates to understand and evaluate the position if skilled labour and machine hours were not constrained. Part (c) required candidates to identify and explain two major factors that should be considered before deciding to lease the machine. Suggested Approach Candidates needed to read the question carefully and gain a full understanding of the data presented and the specific requirements of each part of the question. Part (a) required the construction of a graph to identify the optimal production plan, which would include the following actions. Define the unknown Formulate the constraints Formulate the objective function The Chartered Institute of Management Accountants 2013 Page 12

13 Graph the constraints and objective function Manipulate the objective function to find the optimal feasible solution. Marking Guide Marks (a) Formulation of 5 constraints 5 Plotting of 5 constraints 5 Identify and plot the objective function 2 Identify the optimal point 1 Max 13 marks (b) New production plan due to extra labour 1 Extra cost for 500 agency hours 1 Contribution from new plan 1 Production plan with hire of machine 1 Hours required for new plan 1 Contribution from new plan 2 Maximum that should be paid next month to lease the machine 1 Max 8 marks (c) Explanation of two major factors (2 x 2 marks) Max 4 marks Maximum marks awarded 25 marks The Chartered Institute of Management Accountants 2013 Page 13

14 Examiner s Comments This question tested a candidate s knowledge and understanding of linear programming, a subject that is regularly tested. Most candidates performed well on part (a) but very few were able to construct an answer for part (b). In fact, more than half of the candidates did not make any attempt at this part. In part (a) the task of the markers was made difficult by the poor quality of the graphs (see comments below). A proportion of candidates did not attempt a graph and assumed that the question could be solved using the approach that would apply if there was a single limiting factor. Common Errors Part (a) 1. Poorly constructed graphs due to the following reasons: A poor choice of scale some graphs fitted into a quarter of the sheet of graph paper, whereas others depicted lines disappearing outside the graph paper Lines drawn without a ruler Lines not identified An incorrect feasible region marked on the graph Many of these points would not have lost marks, but one of the aims of a management accountant is to present accounting information that is easily understood by non-accountants 2. Presentation of a quickly drawn sketch of the graph and not drawn to scale 3. No indication of the optimum point 4. When constructing the objective function many candidates used the selling price of the two products rather than the contributions 5. Guessing the optimum point rather than using an iso-contribution line or solving the equations at each of the points in the feasible region Part (b) It is difficult to identify any common errors. There was no consistent error in the attempts put forward. Part (c) 6. Numerous figures with no identification which seriously hindered the markers 7. Putting forward factors that were answered by the information in the question 8. Suggesting factors that did not specifically relate to the scenario in the question The Chartered Institute of Management Accountants 2013 Page 14

15 Question 7 (a) (b) (i) Discuss the relative performance of the two divisions using Return on Capital Employed and other performance measures that you think are appropriate. (15 marks) Calculate the net present value of the investment. Ignore taxation and inflation. (4 marks) (ii) Explain, using appropriate calculations based on the Western Division and the rejected investment, the limitations of ROCE as a divisional performance measure. Note: you can assume that the actual figures for the Western Division for 2012 were the same as those budgeted. Therefore when the decision about the new club was being made the Managing Director based the decision on the figures for the investment and the 2012 results for the Western Division. (6 marks) (Total for requirement (b) = 10 marks) (Total for Question Seven = 25 marks) Rationale The question examines candidates knowledge and understanding of performance measurement and aspects of capital investment, including calculations and a discussion of Return on Capital Employed. The learning outcomes tested are: Part (a) D2 (b), discuss revenue and cost information in appropriate formats for profit and investment centre managers, taking due account of cost variability, attributable costs, controllable costs and identification of appropriate measures of profit centre contribution. Part (b) D3 (a), discuss the likely behavioural consequences of the use of performance metrics in managing cost, profit and investment centres. Suggested Approach Candidates needed to carefully read the question to gain a full understanding of what was required. Part (a) required candidates to compare the performance of two divisions for two accounting periods, and comment on the performances by use of appropriate measures e.g. ROCE Part (b)(i) required candidates to calculate the net present value of the investment described in the scenario. Part (b)(ii) required a comparison of the ROCE of one of the divisions before and after the investment, and a discussion of the results. The Chartered Institute of Management Accountants 2013 Page 15

16 Marking Guide Marks (a) ROCE calculations 2 Calculations of other measures (6 x 1 mark) 6 Discussion of performance (2 x 4 marks) 8 Max 15 marks (b)(i) Investment 0.5 Cash inflows 1.5 Sale of assets 1.0 Correct use of discount factors 1.0 Max 4 marks (b)(ii) Decision based on NPV calculations 1 Comparison of ROCE, year on year 1 Change in profit 1 Calculation of ROCE with investment 1 Decision by divisional manager 1 General comments about ROCE Up to 2 Maximum marks awarded Max 6 marks 25 marks Examiner s Comments This was a straightforward question that tested ratio analysis and aspects of investment appraisal. Some good answers were submitted but many of the attempts at part (a) lacked depth and imagination. Part (b)(i) tested investment appraisal and part (b)(ii) tested investment appraisal linked to ROCE. Unfortunately most of the attempts were weak and it was clear that many candidates had not considered investment appraisal to be part of the P2 syllabus. Common Errors Part (a) 1. Only calculating the ROCE and constructing the entire answer on this one ratio 2. Calculating the asset turnover ratio but calling it the ROCE. The discussions were therefore meaningless 3. Building an answer simply on the figures given in the question e.g. revenue had increased 4. Calculating the ratios incorrectly 5. Failing to mention the age of the assets of each division and completely ignoring depreciation when explaining why the ROCE had improved year-on-year 6. Explaining in detail the weaknesses of ROCE. This was not requested in the question Part (b)(i) 7. Extremely poor layout of answers 8. No attempt made to discount the figures but still labelling the answer as net present value 9. Ignoring the adjustment that needed to be made for depreciation 10. Failing to include the $350k sale price for the building in year Figures displayed with no label or identification Part (b)(ii) 12. Submitting purely narrative answers which included no figures from the scenario The Chartered Institute of Management Accountants 2013 Page 16

17 13. Submitting incorrect calculations 14. Failing to show the ROCE with and without the investment The Chartered Institute of Management Accountants 2013 Page 17