Paper P2 Performance Management Post Exam Guide May 2010 Exam. General Comments

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1 General Comments This was the first sitting for the new syllabus and the pass rate was comparable to the equivalent under the previous syllabus. The questions covered a large portion of the syllabus. The progressive nature of the P2 syllabus was evident, for example the inclusion of variances in Question 1 and limiting factors in Question 6. As might be expected, the paper examined key topics in the syllabus including transfer pricing within divisional structures, the learning curve, linear programming, budgetary control and aspects of performance measurement. The inclusion of these topics, which have been examined in both P1 and P2 in several previous papers over the last few years, would greatly advantage those students who had built a review of previous examination questions into their revision sessions. Close attention to previous s would also have helped candidates to understand the types of common error that have been noted in the past and the approach that is recommended for tackling different types of question. The changes to the paper s assessment strategy, that is the removal of the objective test questions and the fact that all questions were compulsory, exposed those candidates who had not studied and revised the entire syllabus, but instead hoped that their favourite topics would appear in the paper. The answers put forward by many candidates demonstrated a poor understanding of topics that would have been included in the Certificate level assessments. Limiting factors are a good example of this point. This once again highlights the point that has been raised on several previous occasions, that candidates who have been awarded exemptions from both the Certificate level and P1 should ensure they have a good understanding of all the topics included in the syllabus of those two papers before attempting P2. Candidates who passed P1 under the previous syllabus should also familiarise themselves with the new P1 syllabus because topics such as project appraisal and managing short term finance are now included in that syllabus and may be relevant for the purposes of assessment at Management level. It is disappointing to note once again that the quality of handwriting and presentation of discursive answers and the layouts for numerical answers fell short of the standard required. The end result is that markers are unable to award marks for illegible handwriting and figures that seem to be presented in a random fashion. Once again very few answers to discursive questions appeared to follow a structured answer plan. Another issue that seemed more noticeable this sitting was the poor interpretation of the verbs used in the questions. It is essential that candidates fully appreciate the meaning of words such as discuss, describe and explain. Examples of this misinterpretation of verbs will appear in the individual question reviews that follow. Candidates are reminded that the list of verbs and their definitions is published in the inside back cover of every CIMA examination paper. The Chartered Institute of Management Accountants Page 1

2 The following points should be noted by candidates when reflecting on the May 2010 P2 examination, and when preparing for future examinations. 1. Due to the progressive nature of the Performance Pillar, candidates sitting the P2 examination are advised to closely examine the syllabus of the Certificate level, particularly C01 and C03, 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 spend on each question to the marks available. Candidates should allow 1.8 minutes for one mark. 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 magazines which suggest the topics likely to be examined. 5. Candidates are advised to understand the rubric of the paper and plan their examination time accordingly. In particular, the P2 paper has no objective test questions and no optional questions. 6. Candidates should make full use of the 20 minutes allowed for reading and planning. 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 examinations candidates are advised to practise regularly using past CIMA examination questions and comparing their answers to the examiner s suggested answers. This will allow candidates to measure their own progress. Candidates will also gain an understanding of the correct layout for numerical questions and of the depth of answer required to discursive questions. 9. Candidates are advised to present answers in a clear and logical fashion, with clear and legible handwriting and clear references to workings. The Chartered Institute of Management Accountants 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 Number 1 Prepare a revised out-turn performance report for the new product that (i) (ii) shows the flexed budgeted direct labour hours and direct labour cost based on the revised learning curve data, and shows the variances that reconcile the actual results to your flexed budget in as much detail as possible. (7 marks) Explain why your report is more useful to the production manager than the report shown above. (3 marks) Note: The learning index values for an 80% and a 70% learning curve are and respectively. (Total for Question One = 10 marks) Rationale The question examines candidates understanding of learning curves and their interaction with budgets and variance analysis. Suggested Approach Calculate the total time for 30 batches Calculate the total time for 29 batches Calculate the time for the 30 th batch Calculate the total time for 50 batches and the associated labour cost Calculate the variances Prepare a revised out-turn performance report Explain why this report is more useful than the one provided in the question. Marking Guide Time for 30 th batch Total time for 50 batches Flexed budget direct labour cost Calculation of efficiency & rate variances ( each) Format Reasons Maximum marks awarded Marks 2 marks 2 marks 3 marks 10 marks The Chartered Institute of Management Accountants Page 3

4 Examiner s Comments Answers were rather disappointing, especially since the calculations required to flex the budget and the calculation of two basic variances relate to the C01 syllabus. Part asked the candidate to prepare a revised out-turn performance report which required the budgeted hours to be flexed in relation to the actual output, while also recognising that the learning curve rate had changed. Part simply asked for an explanation of why the new report is more useful to management. Common Errors 1. Poor presentation of figures 2. Inability to make simple calculations relating to the learning curve 3. Inability to calculate the labour rate and efficiency variances 4. Failure to flex the budgeted labour hours to the allowance for an output of 50 batches 5. Failure to put forward acceptable benefits of the reconstructed report The Chartered Institute of Management Accountants Page 4

5 Question 2 Explain the changes that are likely to occur in the following items at the three later stages in the product life cycle of a typical PQ product. (i) (ii) (iii) Selling price Production costs Selling and marketing costs (Total for Question Two = 10 marks) Rationale The question examines candidates understanding of the changes in costs and selling prices during the life cycle of a product. Suggested Approach Identify the remaining stages of the product s life cycle and for each of these explain the changes in selling price and costs that are likely to occur. Marking Guide Selling price changes Production cost changes Selling & marketing cost changes Marks 4 marks 3 marks 3 marks (All of the above per phase except selling price in the growth phase - 2 marks) Maximum marks awarded 10 marks Examiner s Comments Overall the answers put forward were good, and a pass mark for this question was achieved by the vast majority of candidates. The main error lay in candidates wasting valuable time explaining the introductory phase of the product life cycle and also describing the market skimming approach to selling. These descriptions were not requested and earned no marks. Some students constructed their answers in the form of bullet points which reduced the number of marks that could be awarded. The question asked candidates to explain the changes and so a fuller answer was required. This demonstrates the need for candidates to understand the meaning of the verbs used. Common Errors 1. Describing the introductory phase of the product life cycle and the market skimming approach to pricing 2. Poor presentation of answers in terms of handwriting and layout 3. Not being aware of the various stages of the product life cycle 4. Wasting valuable time by including detailed charts to support answers The Chartered Institute of Management Accountants Page 5

6 Question 3 (i) (ii) With the current production system, Calculate for each of the six months and the period in total, the total inventory holding costs. Calculate the total production cost savings made by changing to a JIT production system. (6 marks) Explain TWO other factors that should be considered by XY before changing to a JIT production system. (4 marks) (Total for Question Three = 10 marks) Rationale The question examines candidates knowledge of alternative production systems and their costs. Suggested Approach Calculate the inventory at the end of each month Calculate the average inventory and its cost for each month Determine the months in which overtime would be required and its cost Compare the total costs of each production method Explain other factors to be considered before changing to a JIT production system Marking Guide Average inventory figures (units) Average inventory figures( cost) Overtime hours Adjustment for 96% efficiency Cost comparison Explanation of 2 factors (up to 2 marks each) Marks 2 marks 4 marks Maximum marks 10 Examiner s Comments Few candidates earned the full six marks available for part. The most common fault was that candidates calculated the holding cost on the month-end inventory levels instead of using the average inventory for each month. The presentation of the numerical answers was extremely poor in some cases, which disadvantaged candidates because marks cannot be awarded for answers that cannot be deciphered. A clear layout is The Chartered Institute of Management Accountants Page 6

7 essential. Part was generally well answered, but many candidates described several factors associated with JIT, instead of only two as requested. Putting forward additional items did not earn additional marks but took up valuable time. Common Errors 1. Calculating the inventory cost of month-end inventory figures instead of using the average inventory figure 2. Failing to adjust the overtime hours for the 96% efficiency level when calculating the overtime cost 3. Putting forward more than two factors relating to JIT The Chartered Institute of Management Accountants Page 7

8 Question 4 Discuss the present budgeting system and its likely effect on divisional partner motivation. (6 marks) Explain two non-financial performance indicators (other than client satisfaction and service quality) that could be used by the firm. (4 marks) (Total for Question Four = 10 marks) Rationale The question examines candidates understanding of budgeting systems and performance indicators in a service environment. Suggested Approach Read the scenario carefully and identify the problems inherent in the current budgeting system. Discuss each of these problems in the context of divisional manager motivation. Explain two non-financial performance indicators that the firm could use. Marking Guide Up to two marks per point Issues include: Wasted time Being ignored Involvement v pseudo involvement Not motivated to achieve Deliberately failing Maximum 2 marks per point Marks 6 marks Explain two indicators relevant to the scenario (2 marks each) 4 marks Maximum marks awarded 10 The Chartered Institute of Management Accountants Page 8

9 Examiner s Comments Most answers clearly demonstrated the issue relating to the verbs used in the questions. This question asked candidates to discuss the present budgetary system. Most candidates did no more than describe and gave a full description of top down, bottom up and participative budgets. Many candidates simply re-wrote most of the question and then finished their answer with one short sentence containing the word motivation. Part asked candidates to explain two non-financial performance indicators not associated with client satisfaction (for instance, repeat business) and service quality. A significant number of candidates simply gave a bullet point as their answer e.g. number of cases won. This type of answer does not address the requirement to explain. Common Errors Part 1. No clear answer plan 2. Detailed answers describing the current system 3. No reference to motivational issues Part 4. Suggesting client satisfaction performance measures such as referrals and repeat business 5. Simply stating a performance measure with no explanation 6. Suggesting more than two performance measures Both parts 7. Poor presentation of answers and poor hand writing The Chartered Institute of Management Accountants Page 9

10 Question 5 Explain, using examples from the scenario, three issues that LMN should consider when designing a new divisional performance statement. (6 marks) LMN is thinking of introducing Activity Based Costing at its Head Office to help with the apportionment of all its costs to the divisions. Discuss the advantages of applying Activity Based Costing to apportion all of the Head Office costs. (4 marks) (Total for Question Five = 10 marks) Rationale The question examines candidates knowledge of performance measurement in organisation structures where costs are apportioned and managers do not have full control over decisions. Suggested Approach Read the scenario carefully; identify the accounting methods being used and how these might affect performance measurement. Discuss the difficulties caused by the accounting system and related policies. Discuss the advantages of using Activity Based Costing to apportion costs. Marking Guide Marks Up to two marks per point Issues include: Problems with head office costs Issues associated with transfer pricing Controls over investments Responsibility accounting and control Maximum 2 marks per point 6 marks Two advantages relevant to the scenario Overall cost savings Divisional external pricing Fairer method of apportioning costs 2 marks per advantage 4 marks Maximum marks awarded 10 The Chartered Institute of Management Accountants Page 10

11 Examiner s Comment The main theme of the question, and the issue on which answers needed to focus, related to control. Answers needed to explain that, with the current system, the directors were being held responsible for elements of performance that were not within their control. Far too many candidates put forward general answers such as the directors should be consulted when a new statement is designed. Such answers attracted no marks. Part called for candidates to quickly confirm that they knew the basics of ABC, and then to explain how ABC could assist when apportioning Head Office costs. Far too many answers simply stated: The apportionment will be better if the company uses ABC. Candidates needed to explain why it would be better to use ABC, for example to assist in identifying unnecessary costs. Common Errors Part 1. No clear answer plan 2. Not answering the question set and submitting long, general answers 3. Repeating the question in the form of an answer Part 4. Submitting bullet points or short sentences, and therefore failing to discuss the advantages of applying ABC Both parts 5. Poor presentation of answers, especially poor handwriting The Chartered Institute of Management Accountants 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 (c) (d) Assuming that RT completes the order with the commercial customer, prepare calculations to show, from a financial perspective, the optimum production plan for June 2010 and the contribution that would result from adopting this plan. (6 marks) Prepare calculations to show, from a financial perspective, whether RT should complete the order from the commercial customer (3 marks) Assuming that RT completes the order with the commercial customer, and using graphical linear programming, prepare a graph to show the optimum production plan for RT for June 2010 on the basis that the availability of all resources is 10% lower than originally predicted. (1s) Discuss how the graph in your solution to (c) above can be used to help to determine the optimum production plan for June 2010 if the actual resource availability lies somewhere between the managers optimistic and pessimistic predictions. (5 marks) (Total for Question Six = 25 marks) Rationale This question examines candidates understanding of limiting factor decision making and of how those decisions would be affected if the resource restrictions were to change. Suggested Approach Calculate the resources required for the total demand and identify the limiting factor. Rank the products according to their contribution per unit of the limiting factor and prepare an optimum production plan. Calculate the financial viability of the contract. Calculate the pessimistic levels of resource availability. Prepare a graph to determine the revised optimum production plan. Explain the effect on the plan if resource quantities were less restricted. The Chartered Institute of Management Accountants Page 12

13 Marking Guide Marks Identify limiting factor 2 marks Ranking based on contribution per labour hour Production plan 2 marks Contribution Recognising shortfall in units to external market Calculation Comparison (c) Identifying resource constraints and constructing equations 4 marks Constructing equations for demand constraints Plotting constraints s 3 marks Identifying feasible regain Stating solution 2 marks (d) per point s Points include Most binding constraints Shifts to the right Parallel to existing constraint Material A becomes binding No change to labour, others have no effect 5 marks Maximum mark awarded 25 Examiner s Comment Part was simply a limiting factor question and the majority of candidates gained most of the marks on offer. The main reason for forgoing marks was poor presentation of answers which made it difficult for markers to identify the relevant figures. (An article relating specifically to this topic appeared recently in Financial Management magazine.) The attempts for part were generally good but shorter, quicker methods were available compared to those used by candidates. Part (c) was similar to a question that appeared in the November 2009 P2 paper and those candidates who had reviewed that paper and the relevant post examination guide would have easily understood what was required. Many candidates earned only half the available marks due to a number of issues including poorly constructed graphs, presenting only an inaccurate sketch graph, and not putting forward a final answer. The question asked candidates to show the optimum production plan. Many candidates interpreted this request by simply drawing an arrow to indicate the maximum position, rather than setting down the figures in the answer book, or writing them on the graph paper. Many of the graphs submitted were poorly constructed; the lines and the axes were not labelled and the graphs were very untidy. Part (d) was generally poorly answered. Again a similar question was included within a previous paper. The Chartered Institute of Management Accountants Page 13

14 Common Errors Part 1. Poor layout 2. Not stating the value of the maximum contribution Part 3. Using overly complicated methods Part (c) 4. Poorly constructed graphs 5. Failure to submit a final answer 6. Including incorrect demand constraints Part (d) 7. Failure to address the specific question requirement The Chartered Institute of Management Accountants Page 14

15 Question 7 (i) (ii) (i) (ii) Calculate the annualised Return on Investment (ROI) achieved by each of the process divisions during April (4 marks) Discuss the suitability of this performance measure in the context of the data provided for each process division. (4 marks) Calculate the effect on the annualised Return on Investment in 2011 of Process Division C investing in new capital equipment. (4 marks) Discuss the conflict that may arise between the use of NPV and ROI in this investment decision. (4 marks) (c) Discuss the transfer pricing policy being used by H from the viewpoints of the managers of Process Division B and Process Division D. (9 marks) (Total for Question Seven = 25 marks) Rationale The question examines candidates understanding of process accounting and ability to identify the data relevant to measure divisional performance. It then tests candidates knowledge of Return on Investment (ROI) and how ROI is affected by investment decisions and transfer pricing within a divisionalised structure. Suggested Approach Identify the data relevant to the calculations of ROI, perform those calculations based on the monthly data and annualise the results. Read the scenario carefully and identify the key factors that will influence ROI, discussing them in the context of the scenario. Calculate the ROI of Division C for next year if no investment is made. Evaluate the effect of the investment on the results of Division C for next year and calculate the resulting ROI. Discuss the conflict between ROI and NPV. Discuss the effects of the transfer pricing policy on the decisions and reported performance of the divisions. Relate the discussions to the scenario; an answer that merely gives a text book description of the issues will not earn sufficient marks to pass. The Chartered Institute of Management Accountants Page 15

16 Marking Guide Marks Calculations of monthly ROI ( each) 3 marks Calculation of annualised ROI Discussion 4 marks Calculation of ROI if no investment If investment is undertaken: Calculation of revised sales Calculation of revised depreciation Calculation of ROI Discussion 4 marks (c) Up to 2 marks per point discussed maximum 9 marks Maximum marks awarded 25 marks Examiner s Comments This question called for candidates to select the data required to address the questions. This was not, as it first appeared to be, a process costing question. Rather it was a question relating to divisional performance measurement in a process costing setting. It was disappointing that many candidates incorrectly identified a profit as a loss and vice versa. This error had an adverse effect on the calculations in (i) and on the discussions in other parts of the question. Some candidates also used total cost figures instead of profits. Both errors indicate a lack of basic accounting skills. Common Errors Part a (i) 1. Incorrectly showing profits as losses and vice versa when calculating the ROI 2. Using the total costs as profits 3. Not annualising the figures 4. Calculating an incorrect asset net book value Part a (ii) 5. Discussing general/non relevant issues Part b (i) 6. Poor attempts at the calculations Part b (ii) 7. Discussing the advantages and disadvantages of NPV (which the question did not ask for) 8. Making no comparison between NPV and ROI in the context of the question. Part (c) 9. Incorrect interpretation of the verb discuss 10. Simply rewriting the transfer details relating to Divisions B and D and not answering the question. The Chartered Institute of Management Accountants Page 16

17 11. Describing Process Division B as loss-making rather than profit-making. The Chartered Institute of Management Accountants Page 17