The papers submitted by many candidates were good but some well documented weaknesses once again appeared.

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1 Paper P Performance Management May 011 Exam General Comments The overall performance was a little disappointing, especially as the paper contained topics that had been tested in several recent papers such as transfer pricing, the product life cycle, performance measures in the service sector, costing techniques and variance analysis. The inclusion of variance analysis and NPV calculations reinforced the progressive nature of this syllabus. It is also an important reminder to candidates who are sitting this paper for the first time, having gained exemptions from the Certificate Level Fundamentals of Management Accounting, and P1, that they must ensure they identify any knowledge gaps. The papers submitted by many candidates were good but some well documented weaknesses once again appeared. Firstly, the answers to discursive questions were weak, for two main reasons. It is apparent that very few candidates take the time to plan their answers. The result is a disorganised answer and the duplication of points. The second reason, once again, is the poor interpretation of verbs used in questions. For example candidates must understand the difference between list and discuss. It is also important to highlight once again the extremely poor presentation of answers both for discursive and for quantitative answers. The quality of handwriting was so poor in some cases that marks simply could not be awarded. Many candidates exhibited bad habits including: writing in the margins, failing to use any form of punctuation and not indicating the part of the question being attempted. The layout of answers to quantitative questions was particularly disappointing. Many figures appeared with no title or description, and with no apparent indication to where or what they related. Workings were not referred to, or did not appear at all. When reviewing the attempts at this paper it is clear that many candidates had not: studied the entire syllabus practised using past P questions learned from the content of previous PEGs. The following points should be noted by candidates when reflecting on the paper just taken, and when preparing for future CIMA examinations. The list is virtually the same as the one contained in the previous PEGs, which unfortunately confirms that the same problems still exist. 1. Due to the progressive nature of the Management Accounting Pillar candidates sitting the P 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.. 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 P syllabus.. 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 0 minutes allowed for reading and planning. The Chartered Institute of Management Accountants Page 1

2 Paper P Performance Management May 011 Exam 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 questions and the depth of answers required for discursive questions. 9. Candidates are advised to present answers in a clear and logical fashion e.g. clear and legible handwriting and workings clearly referred to. A number of common faults also need attention: 1. Many candidates expend valuable time in writing out the question at the start of their answer. This is not necessary.. Many candidates include facts stated in the question within their answer as if they are putting forward new information. 3. When answering a question the effort expended should be related to the marks available.. If a question asks for, say, three items to be put forward, do not waste valuable time in putting forward more items. Only three items will be marked. 5. Clearly indicate to the marker if part of the answer to a question appears later in the answer booklet ( e.g. see page 1 for part b ) The Chartered Institute of Management Accountants Page

3 Paper P Performance Management May 011 Exam 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 (i) Calculate the total variable cost per unit. ( marks) (ii) Calculate the selling price of the product that will maximise the company s profits. Note: If Price (P) = a - bx then Marginal Revenue = a - bx ( marks) Explain TWO reasons why the company might decide NOT to use this optimum selling price. ( marks) (Total for Question One = 10 marks) Rationale Question One examines candidates knowledge and understanding of product pricing using the economist s pricing model and the limitations as to its use. The learning outcome examined is A3 apply an approach to pricing based on profit maximisation in imperfect markets. Suggested Approach Carefully read the data provided to identify the unit variable cost and the relationship between unit selling price and demand. Calculate the selling price at which there is zero demand. Construct the selling price equation and hence the marginal revenue equation. Equate marginal cost and marginal revenue to determine the output level at which profit is maximised. Use the price equation to determine the selling price at which the optimum output level will be demanded. Identify and explain two reasons why the company might not use this optimum price. Marking Guide Calculate the variable cost per unit Determine the selling price equation Calculate the optimum selling price per unit Explain two reasons why the company might not use this optimum price (two marks each) Maximum marks awarded Marks 10 marks The Chartered Institute of Management Accountants Page 3

4 Paper P Performance Management May 011 Exam Examiner s Comments It was surprising, even disappointing, to find that many candidates were not able to apply the high low technique to calculate the total variable cost of the unit. This is one of the most basic, but important, tools that should be in the armoury of all management accounting students, and should have been knowledge brought forward from the foundation stage. Part (ii) was generally answered well, but a significant number of candidates made an error when calculating the selling price that would maximise the company s profit, and put forward an answer that could not be possible in the context of the question. Candidates are advised to sensibilise their answers, and if the error cannot be found clearly indicate to the marker that you are aware that the answer is incorrect. The situation described above was compounded in part when candidates attempted to explain figures that were completely incorrect. Example 1 - explaining an optimum selling price of $5 Example discussing an output figure of 3.3 million units Common Errors 1. unable to apply the high-low technique (part (i)). incorrectly believing that the total variable cost was simply the sum of the direct material and direct labour 3. unable to calculate the selling price that would maximise the company s profits. (part (ii)). submitting reasons in part that did not relate to the figure calculated in part (ii) 5. unclear workings 6. submitting lengthy answers when addressing part that were disproportionate to the marks available The Chartered Institute of Management Accountants Page

5 Paper P Performance Management May 011 Exam Question For each of the (i) (ii) Growth; and Maturity stages of the new product s life cycle explain the likely changes that will occur in the unit selling prices AND in the unit production costs, compared to the preceding stage. (Total for Question Two = 10 marks) Rationale Question Two examines candidates knowledge of the product life cycle and how unit selling prices and unit production costs are likely to change as the product moves through its life cycle. The learning outcome examined is B1 (i) discuss the concept of life cycle costing and how life cycle costs interact with marketing strategies at each stage of the life cycle. Suggested Approach Carefully read the scenario and determine the pricing strategy for the product. Since PT is using a skimming policy this implies that the product is unique and will originally be made in small volumes. Describe the likely effects on (i.e. reductions in) unit selling prices and why these would be expected. Describe the likely changes in unit production costs and why these would occur. Marking Guide Explain the effect on unit selling prices for each of the maturity and growth stages of the product life cycle Explain the effect on unit production costs for each of the maturity and growth stages of the product life cycle Maximum marks awarded Marks marks Examiner s Comments It was surprising to note that many candidates were not fully conversant with the characteristics of a market skimming pricing policy. Also a significant number of candidates incorrectly believed that R&D, advertising, distribution and promotion costs were production costs. Some answers were extremely good with these answers relating closely to the scenario in the question. Common Errors 1. confusing market skimming with a penetration policy. wasting valuable time describing the introduction and decline stages of the product life cycle 3. confusing the words cost and price. putting forward descriptions relating to total production costs rather than unit production costs. 5. incorrectly stating that when the product moves to the growth stage a penetration pricing policy is adopted (the two approaches to pricing have completely different characteristics). The Chartered Institute of Management Accountants Page 5

6 Paper P Performance Management May 011 Exam Question 3 Explain how JYT could use Target Costing AND Kaizen Costing to improve its future performance. Your answer should include an explanation of the differences between Target Costing and Kaizen Costing. (Total for Question Three = 10 marks) Rationale Question Three examines candidates knowledge of Target Costing and Kaizen Costing and the differences between them. The learning outcomes examined are B1 (h) explain how target costs can be derived from target prices and the relationship between target costs and standard costs B1 (c) explain the concepts of continuous improvement and Kaizen costing that are central to total quality management. Suggested Approach Explain Target Costing and how it operates. Explain Kaizen Costing and how it operates. Explain the differences between them. Marking Guide Explain Target Costing and how it operates Explain Kaizen Costing and how it operates Explain the differences between Target Costing and Kaizen Costing Maximum marks awarded Marks 10 marks Examiner s Comments Many candidates were able to describe Target Costing, but were not able to correctly explain Kaizen Costing, and were not able to describe how either technique could improve the future performance of the company. The descriptions of Kaizen Costing put forward by many candidates were simply detailed descriptions of JIT and TQM. (The April 011 issue of Financial Management contained an article about Kaizen Costing and Target Costing). Common Errors 1. unable to describe Kaizen Costing. unable to explain the differences between the two costing systems 3. submitting answers that were disproportionate to the marks available (in some cases up to five pages for this 10 mark question). failing to plan the answer, which resulted in duplication of several points The Chartered Institute of Management Accountants Page 6

7 Paper P Performance Management May 011 Exam Question Calculate the following operational variances based on the revised market details: (i) (ii) The total sales mix profit margin variance The total sales volume profit variance ( marks) ( marks) Explain, using the above scenario, the importance of calculating planning and operational variances for responsibility centres. (6 marks) (Total for Question Four = 10 marks) Rationale Question Four examines candidates understanding of sales variances, and planning and operating variances in the context of responsibility accounting. The learning outcome examined is C (c) evaluate performance using fixed and flexible budget reports. Suggested Approach Carefully read the data provided to identify the standard sales proportions. Calculate the standard sales mix for the actual sales volume. Compare the actual sales of each product with the standard mix and value the differences. Explain the concept of control and the use of planning and operating variances to separate the controllable and non-controllable elements of a variance. Use the market size data provided to explain the use of planning and operating variances. Marking Guide Calculate the sales mix profit margin variance Calculate the sales volume profit variance Explain the concept of control and the use of planning and operating variances Apply the concept of control to the scenario Maximum marks awarded Marks 10 marks Examiner s Comments The attempts at both parts of were extremely poor. Variance analysis is one of the main pillars upon which management accounting is built, and again emphasises that while variance analysis does not explicitly appear in the P syllabus, it can be assessed at this level due to the progressive nature of the syllabus. The answers to part were also poor and clearly demonstrated that many candidates did not understand planning and operational variances. Many of the answers to part did not relate to the scenario in the question or to the variances calculated in part. The Chartered Institute of Management Accountants Page 7

8 Paper P Performance Management May 011 Exam Common Errors 1. unable to calculate the variances. incorrectly showing the mix variance as the volume variance, and vice versa 3. incorrectly showing an adverse variance as a favourable variance, and vice versa. not relating answers to the scenario in the question 5. showing variances as a percentage 6. not showing a $ or sign before the variance (a minor but important point) The Chartered Institute of Management Accountants Page 8

9 Paper P Performance Management May 011 Exam Question 5 Explain why non-financial performance measures are important in the service sector. ( marks) Recommend, with reasons, TWO non-financial performance measures that SFG could use to evaluate the performance of the hotel managers. ( marks) (c) Explain why, and how, non-controllable costs should be shown on the profit reports. ( marks) (Total for Question Five = 10 marks) Rationale Question Five examines candidates knowledge of non-financial performance measures and the reporting of non-controllable costs. The learning outcomes examined are C3 discuss the role of non financial performance indicators and C1 (c) identify controllable and uncontrollable costs in the context of responsibility accounting and why uncontrollable costs may or may not be allocated to responsibility centres. Suggested Approach Explain the role of non-financial performance measures in the service sector. Using the scenario, identify and recommend with reasons two non-financial measures that SFG could use. Explain controllable and non-controllable costs and why and how they should be shown on profit reports. Marking Guide Explain the importance of non-financial performance measures Identify and explain two non-financial performance measures that could be used by the hotel ( marks each) (c) Explain why non-controllable costs should be shown Explain how non-controllable costs should be shown Maximum marks awarded Examiner s Comment Marks 10 marks Very few candidates correctly interpreted what was required for part. Most candidates simply discussed issues such as customer satisfaction, whereas the main thrust related to the short-term nature of financial measures at the expense of long-term non-financial issues. The Chartered Institute of Management Accountants Page 9

10 Paper P Performance Management May 011 Exam Part was generally well answered but part (c) was poorly answered. Part (c) asked candidates to explain why, and how, non-controllable costs should be shown on profit reports. However, many candidates simply changed the emphasis and stated non-controllable cost should not be shown on the profit reports, and then went on to explain the reasons for this statement. This is a common fault and should be avoided i.e. changing the question. Common Errors 1. misunderstanding what was required (part ). not relating performance measures to the scenario in the question i.e. the hotel industry (part ) 3. restating the question (part (c)). assuming non-controllable costs were simply Head Office costs. Some costs that fall into this category can be directly related to a division, although the expenditure, for whatever reason, is controlled by the Head Office 5. putting forward up to five measures when only two were requested. 6. confusing the service sector with not-for-profit organisations The Chartered Institute of Management Accountants Page 10

11 Paper P Performance Management May 011 Exam SECTION B 50 MARKS ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS WORTH 5 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS ARE AVAILABLE FOR THE METHOD YOU USE. Question 6 Prepare, in an appropriate format, a columnar statement that will help the managers of the hotel to plan for next year. Your statement should show the hotel s activities by season and in total. (18 marks) (i) (ii) Identify, based on your statement, the actions that the managers could take to maximise the profit of the hotel for next year. (3 marks) Explain TWO factors that the managers should consider before implementing the actions you identified in (i). ( marks) (Total for Question Six = 5 marks) Rationale Question Six examines candidates knowledge and understanding of relevant costs in the context of a closure decision. The learning outcome examined is A 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. Suggested Approach Carefully read the scenario to identify the relevant costs and their causes. Prepare a statement that uses marginal costing principles to show the relevant costs and revenues for each part of the hotel s operations for each season as well as in total. Identify the activities/seasons that have a negative contribution and recommend actions to the managers. Explain other factors that should be considered. The Chartered Institute of Management Accountants Page 11

12 Paper P Performance Management May 011 Exam Marking Guide Calculate guest related costs Calculate room costs Calculate snack contribution Calculate restaurant contribution Calculate fixed costs Calculate and present hotel results Identify actions to improve the profits (c) Explain two factors to be considered before implementing the actions identified Maximum marks awarded Marks marks Examiner s Comments A relatively straight forward question, which simply required a number of basic calculations, and arranging the figures in the most appropriate manner. Most candidates attained a high mark but easy marks were lost due to poor presentation of the figures (see below for more details) The attempts for parts (i) and (ii) were generally good but many candidates did not comment on the figures they had produced in part but instead gave generic answers that could have applied to many similar situations. Common Errors Part 1. failure to show workings. untidy statements, many with no total column 3. within the same statement some figures were shown in full, whereas others were to the nearest thousand. incorrectly including both the spend and the gross margin in the statement for the hot snacks and the restaurant 5. incorrectly adopting a relevant costing approach and completely ignoring all the fixed costs 6. incorrectly attempting to apportion the $00,000 hotel annual fixed costs 7. not even preparing a statement Parts (i) and (ii) 8. putting forward minor, irrelevant actions 9. not putting forward actions that related to figures produced in part 10. not relating part (ii) to part (i), as requested The Chartered Institute of Management Accountants Page 1

13 Paper P Performance Management May 011 Exam Question 7 (c) Prepare an analysis of the sales made by Division E that shows clearly, in units and in $, the internal and external sales made during the year. (3 marks) Discuss the effect of possible changes in external demand on the profits of Division E, assuming the current transfer pricing policy continues. Assuming that the current transfer pricing policy continues: (6 marks) (i) Evaluate the investment from the perspective of the manager of Division E. (6 marks) (ii) Evaluate the investment from the perspective of the DE Company. ( marks) Note: Ignore inflation and taxation. (d) Explain TWO factors that should be considered when designing divisional performance measures. (6 marks) (Total for Question Seven = 5 marks) Rationale Question Seven examines candidates understanding of transfer pricing and its impact on divisional performance measurement and on decision making. The learning outcomes examined are D 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, D3 (c) discuss the likely consequences of different approaches to transfer pricing for divisional decision making, divisional and group profitability, the motivation of divisional management and the autonomy of individual divisions and D (c) discuss alternative measures of performance for responsibility centres. Suggested Approach Carefully read the scenario to identify the selling and buying divisions. Identify the quantities being sold internally and externally by the supplier division. Identify the transfer pricing policy Prepare a table summarising the sales of the selling division. Test the effect of an increase in the selling division s external demand on the transfer price used for the internal sales by changing the data provided. Discuss the effect of the change in the external demand. Determine the costs and benefits to Division E of investing in the new equipment and evaluate them using net present value. Make an appropriate recommendation. Determine the benefits to the company from the investment and evaluate them using net present value. Make an appropriate recommendation. Explain two key factors to consider when designing divisional performance measures. The Chartered Institute of Management Accountants Page 13

14 Paper P Performance Management May 011 Exam Marking Guide Show an analysis of the sales in units and value Explain the effect of capacity availability and external demand on the transfer price Explain the effect on the profit of different transfer prices (c) Calculate the cost saving that will be made by Division E Calculate the net present value of the investment and advise Division E Calculate the cost saving to the company Calculate the net present value of the investment and advise the company (d) Explain two factors to be considered when designing divisional performance measures (3 marks each) Maximum marks awarded Marks marks Examiner s Comments Overall the attempts were poor, especially for parts (c) (i) and (c) (ii). Part was generally well answered but the answers to the discursive parts and (d) were weak. Questions relating to transfer pricing have appeared quite regularly at recent sittings and each time the marks have been disappointing. It leads one to suppose that many candidates do not understand this area of the syllabus and ignore it in their revision programme. Common Errors Part Part 1. Not answering the question and giving profit/ contributions in addition to sales in units and $. The question did not ask for an alternative transfer system to be put forward and described (e.g. dual pricing) 3. Incorrectly suggesting that E s external customer might seek an alternative supplier. The question asked for a discussion, not a series of statements showing profit and losses for changes in external demand. Part (c)(i) 5. Failing to show an incremental position i.e. showing the profits with and without the investment 6. Submitting figures that were not explained 7. Not submitting figures for a net present value calculation 8. Failure to show any workings or failure to refer to workings. Part (c)(ii) 9. Failing to use the figures in c(i) when tackling c(ii), plus, points 6,7,and 8 from c(i) Part (d) 10. Putting forward up to six factors when only two were requested 11. Submitting lengthy answers that were disproportionate to the marks available The Chartered Institute of Management Accountants Page 1

15 Paper P Performance Management May 011 Exam 1. Concentrating on motivational issues and ignoring more obvious factors such as fairness, goal congruency, easy to calculate and understand, and including only items that are within a divisional manager s control The Chartered Institute of Management Accountants Page 15