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 The overall performance was good. Several of the questions that appeared in the paper were similar in nature to the ones that appeared in the November paper. Candidates who revisited the November paper for revision purposes were therefore well rewarded. It is important that candidates continue to: Pay particular attention to the layout of answers Answer the question, not the question they would like to have been asked The following observations were made when reviewing the scripts: There still seems to be a knowledge gap relating to the exemption policy. Many attempts at Question 6 highlighted this point. The contents of previous PEGs had not been read and/or understood. 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 paper CO1 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 their student magazine, 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 give indications of 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 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 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 of the depth of answers required for discursive questions. 9. Candidates are advised to present answers in a clear and logical fashion i.e. with clear and legible handwriting and workings clearly referred to. 10. Candidates are advised to practice their hand writing, and ask a friend or colleague to confirm that he/she can read their attempt. 11. Do not write in red ink or pencil. 12. Do not write in the margin. 13. Ensure that you provide yourself with a scientific calculator. The Chartered Institute of Management Accountants 2014 Page 1

2 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 Required: Calculate the time required to produce the 128 th component. (3 marks) Calculate the value of any cost gap between the target cost of 128 components in total and the expected cost of 128 components in total. (3 marks) (c) Calculate the rate of learning required to close the cost gap you calculated in part in order to achieve the required profit margin of 20%. (4 marks) (Total for Question One = 10 marks) Rationale The question examines candidates knowledge and understanding of the learning curve. The learning outcomes tested are: B1(e) apply learning curves to estimate time and cost for new products and services. B1(h) explain how target costs can be derived from target prices and the relationship between target costs and standard costs. Suggested Approach Candidates needed to carefully read the information in the question. Part required candidates to calculate the time required to produce the 128 th component. In part candidates were required to calculate target and expected costs for all 128 components, to be able to derive a cost gap. Part (c) required candidates to adjust the calculated labour cost by the value of the cost gap to arrive at a target labour cost. The average time per component as a proportion of the time for the first component needed to be derived. The seventh root of this percentage showed the rate of learning required. The Chartered Institute of Management Accountants 2014 Page 2

3 Marking Guide Calculate cumulative average time for 128 components Calculate total time for 128 components Calculate cumulative average time for 127 components Calculate total time for 127 components Calculate total time for 128 th component Maximum for part Target cost $54,272 Labour $22, Other costs $33,920 Cost gap $2, (Own/figure but only if other costs are included) Maximum for part (c) Target labour cost $20,352 Target labour time 1, hours Cumulative average time 10.6 hours 10.6/ Taking the 7 th route 88% Maximum for part (c) Maximum marks awarded Marks 3 marks 3 marks 4 marks 10 marks Examiner s Comments All three parts of this question were answered well by most candidates. Common errors 1. Failing to multiply the average times per unit by the number of units produced i.e. 127 and Rounding-up too early which distorted the final answer 3. Part, showing an unrealistic cost gap e.g.$45,000 The Chartered Institute of Management Accountants 2014 Page 3

4 Question 2 Required: Explain TWO basic principles of Total Quality Management. (4 marks) Explain THREE changes required to PB s planning and control system to support the adoption of Kaizen costing concepts. (6 marks) (Total for Question Two = 10 marks) Rationale The question examines candidates knowledge and understanding of Total Quality Management and Kaizen costing when set in a car production environment. The learning outcome tested is B1(c) explain the concepts of continuous improvement and Kaizen costing that are central to total quality management. Suggested Approach Part required the explanation of two principles of Total Quality Management and did not require candidates to relate their answers to the scenario in the question. Part needed candidates to carefully read through the scenario in order to identify the changes required to PB s planning and control system. Candidates then needed to explain the specific changes required from the scenario and the Kaizen concepts that would be supported by the changes. Citing generic conditions without relevance to the situation described at PB would earn only limited marks. The Chartered Institute of Management Accountants 2014 Page 4

5 Marking Guide Get it right first time (or zero defects target) Continuous improvement Maximum for part Marks for each. if just named 4 marks Kaizen costing description Change in target cost reduction targets not cost control Change in frequency of standard setting - cost reduction targets set monthly not annually Change in comparator compare target Kaizen costs to actual cost reduction not actual cost to static annual budget Other comment relevant to scenario Maximum for part Maximum marks awarded 6 marks 10 marks The Chartered Institute of Management Accountants 2014 Page 5

6 Examiner s Comments Generally the quality of the answers submitted was poor. In part a large number of candidates wrote all they knew about TQM, and in part, wrote all they knew about Kaizen Costing rather than answering the question. Common Errors Part 1. Describing the characteristics of TQM rather than the principles 2. Making the incorrect assumption that TQM related solely to the product or service being offered by the organisation rather than to every aspect of the organisation 3. Giving a lengthy answer which was not in proportion to the marks available 4. Incorrectly describing characteristics of J.I.T. Part 5. Writing at great length about value analysis and function analysis 6. Giving a full description of target costing 7. Ignoring the specific requirements (i.e. planning and control) and giving a detailed description of Kaizen costing. The Chartered Institute of Management Accountants 2014 Page 6

7 Question 3 Required: (i) Prepare a revised budget based on the new estimate of the market. (ii) Prepare a performance report for the month based on a flexed budget. (3 marks) (3 marks) Explain TWO non-financial measures that APZ could use to monitor the performance of the new fast-food restaurant. (4 marks) (Total for Question Three = 10 marks) Rationale The question examines candidates knowledge and understanding of flexible budgets and the use of nonfinancial performance indicators. The learning outcomes tested are: C2(c) evaluate performance using fixed and flexible budget reports. C3 discuss the role of non-financial performance indicators. Suggested Approach Part (i) required candidates to use the value of the sales volume contribution planning variance, the budget sales volume and standard contribution in order to calculate a revised budget sales volume. Substituting the values of the budget sales volume, standard contribution and the sales volume contribution planning variance into the variance formula and re-arranging the equation gave candidates the value of the revised budget sales volume. This figure needed to be used to revise the revenue and variable cost budgets. Part (ii) required candidates to use the value of the actual sales volume to produce a flexed budget. Part required an explanation of TWO non-financial measures that APZ could use to monitor the performance of the new fast-food restaurant. Candidates could have chosen a number of non-financial measures, but the information in the scenario needed to be used to explain the relevance of their chosen measure to the performance of the new fast-food restaurant. The Chartered Institute of Management Accountants 2014 Page 7

8 Marking Guide Marks (i) Sales 5,200 units Standard contribution = $3.10 Sales revenue $39,000 Variable costs $22,880 Maximum for part (i) (ii) Layout (three columns: Flexed budget, Actual and Variance) Flexed budget for 5,400 units Variances 4 x s (Flexed v Actual) Maximum for part (ii) 3 marks 3 marks Relevant non-financial measures Explanation of relevance to APZ Maximum for part per relevant measure per explanation for each 4 marks Maximum marks awarded 10 marks Examiner s Comments A mixed set of attempts with many candidates being unsure what was required in parts a (i) and a (ii). Common Errors Part a (i) 1. Not really understanding what was required and completely ignoring the variance that was given to establish the flexed budget number of units Part a (ii) 2. Assuming that the request for a performance report required a written description of a(i) 3. Calculating the flexed figures incorrectly 4. Not fully understanding what was required and giving some figures under a heading of part a Part 5. The questions asked for non-financial measures, but many candidates put forward financial measures such as profit per customer 6. Not relating the performance measures to the two objectives included in the scenario 7. Putting forward measures that would be difficult to measure e.g. the company should establish if the customers are happy. Also, how tidy is the restaurant?, is not a measure 8. Many candidates wasted valuable time in describing the balanced scorecard 9. Submitting up to six measures when only two were required The Chartered Institute of Management Accountants 2014 Page 8

9 Question 4 Required: Calculate the maximum cost of the advertising campaign in order to achieve the Managing Director s profit requirement for the introductory phase of Product Z. Note: The company will set the price for a unit of Product Z to maximise profit during the introductory phase. If P = a - bx then MR = a - 2bx (6 marks) Explain TWO reasons why it may not be appropriate to set the introductory price of Product Z using the assumptions contained in the profit-maximisation model you used in part. (4 marks) (Total for Question Four = 10 marks) Rationale The question examines candidates knowledge and understanding of pricing based on profit maximisation in imperfect markets. The learning outcome tested is A3 apply an approach to pricing based on profit maximisation in imperfect markets. Suggested Approach Part required candidates to use the relevant formulae to calculate the price at which profit would be maximised. Candidates then needed to use this price along with the associated demand and variable costs per unit to calculate the contribution. Candidates needed to note the length of the introductory phase. To calculate the maximum cost of the advertising campaign, three months contribution needed to be calculated and the required profit subtracted from this. Part required an explanation of two reasons why it may not be appropriate to set the introductory price of Product Z using the assumptions contained in the profit-maximisation model. Candidates needed to give specific reasons appropriate to the circumstances detailed in the scenario that may result in the assumptions used not being relevant. The Chartered Institute of Management Accountants 2014 Page 9

10 Marking Guide p = x MC = MR: x = 11,500 P = $ Revenue 3 months Introductory Per unit $ units phase $ ,500 10,712,250 Material 85 34,500 2,932,500 Labour 56 34,500 1,932,000 Variable overhead 20 34, ,000 5,554,500 Contribution 5,157,750 Advertising costs 2,657,750 (balancing figure) 3 month profit target 2,500,000 Marks Maximum for part Previous price and demand relationship may not be relevant Advertising and uniqueness will also impact demand Prices and costs are estimates Other relevant comment including suggested price strategies Maximum for part Maximum marks awarded 6 marks for each of any two reasons 4 marks 10 marks Examiner s Comments The main body of candidates earned most of the marks available for part, but some candidates struggled a little with part. Common Errors Part 1. Some candidates simply presented numerous figures with no supporting descriptions 2. Most candidates were able to calculate the selling price that maximised the profit but were then unable to complete the question and calculate the maximum amount that could be spent on advertising 3. Making silly mathematical errors that led to an answer that was not possible in the context of the question. E.g. $53 million could be expended on advertising Part 4. Many candidates simply described market skimming and market penetration and did not relate their descriptions to the question 5. Some answers were far too lengthy for the marks available 6. Many candidates did not relate their answer to the question, in particular the profit-maximising formula The Chartered Institute of Management Accountants 2014 Page 10

11 Question 5 Required: Prepare calculations to show whether the manager of Health Club E is expected to receive the bonus in Quarter 4 based on the forecast performance. Note: you should calculate operating profit margin, ROCE and asset turnover for Quarter 4. (6 marks) Discuss the potential impact for TES of involving the health club managers in the production of their quarterly financial targets. (4 marks) (Total for Question Five = 10 marks) Rationale The question examines candidates knowledge and understanding of projected performance evaluation using ratio analysis and the impact of involving staff in financial target setting in a health club environment. The learning outcomes tested are: C2 evaluate projected performance using ratio analysis. C3 discuss the impact of budgetary control systems and setting of standard costs on human behaviour. Suggested Approach Part required candidates to read the scenario carefully and to understand the adjustments required to Quarter 3 data to project Quarter 4 figures. Candidates then needed to calculate the required ratios using Quarter 4 figures and finally give a conclusion stating whether the health club manager would be expected to receive a bonus. Part required a discussion of the potential impact for TES of involving the health club managers in the production of their quarterly financial targets. Advantages and disadvantages were required, referring to the specific circumstances in the scenario. The scenario stated the financial targets are based on a national view of all TES health clubs. Candidates were required to use this information when explaining the impact of the manager s involvement. The Chartered Institute of Management Accountants 2014 Page 11

12 Marking Guide Marks The asset turnover should read times or 37.8% Profit $8.68K (must have sales less staff costs and other costs) Profit margin 20.9% Quarterly ROCE 7.9% Asset turnover times Decision Workings: Revenue per customer $66 Revenue $41,580 Other costs $20,900 Maximum for part Accuracy / specialist involvement of health club manager Potential lack of knowledge of wider market or strategic knowledge Budgetary slack or bias Other relevant comment Maximum for part Maximum marks awarded 6 marks 4 marks 10 marks Examiner s Comment Most candidates did not experience any problems with either part of this question. Common Errors Part 1. Making silly mathematical errors 2. Calculating the profit for quarter 4 incorrectly Part 3. Some candidates presented their answers in the form of bullet points The Chartered Institute of Management Accountants 2014 Page 12

13 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 Required: Produce a statement that shows the optimal production plan and the resulting profit or loss for March. Note: you should assume that the new customer s order must be supplied in full. (10 marks) (c) Explain TWO issues that should be considered before the production plan, that you produced in part, is implemented. For April, (4 marks) (i) Calculate the breakeven sales revenue for the given product mix in the production plan. (ii) Calculate the margin of safety percentage. (iii) Explain THREE limitations of breakeven analysis for GF. (4 marks) () (5 marks) (Total for Question Six = 25 marks) Rationale The question examines candidates knowledge and understanding of a limiting factor situation to maximise company profit along with aspects of breakeven and margin of safety analysis. The learning outcomes tested are: Part A2, 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 A1, discuss the principles of decision-making including the identification of relevant cash flows and their use alongside non-quantifiable factors in making rounded judgements. Part (c) A2(d), analyse the impact of uncertainty and risk on decision models based on CVP analysis Suggested Approach Part Candidates needed to read the question carefully to understand what was required and produce calculations to establish the limiting factor. A calculation of the contribution per unit of limiting factor for each product was needed in order rank the products and then a production plan produced, incorporating the additional order from the main customer. Based on this production plan the resultant profit could be calculated. The Chartered Institute of Management Accountants 2014 Page 13

14 Part Candidates needed to relate their explanation to the scenario and give answers that were specific to GF and the market it was operating in. Part (c) A suggested approach was for candidates to calculate a weighted average C/S ratio to enable a calculation of the breakeven revenue. The margin of safety calculation required the use of the calculated breakeven revenue. Finally, limitations of breakeven analysis in this specific scenario needed to be explained by candidates. Marking Guide Establish material required Establish labour required Confirm material is constraint Contribution per unit Material required per unit Contribution per unit of material Rank Material remaining after new order Production in units (excluding order) Total production in units Contribution for total production Final profit Maximum for part Does not take account of change in market Optimal plan for GF operations only Reduced material availability affect on price Maximum for part (c)(i) Total contribution for production plan Total revenue C/S ratio Breakeven revenue Maximum for part (c)(i) (c)(ii) Margin of safety percentage Marks 10 marks for each of any two issues 4 marks 4 marks (I mark only for margin of safety in $ or incorrect denominator) (c)(iii) Assumption of stated mix in changing fashion industry Linear relationship assumed over the range Fixed costs assumed to constant Maximum for part (c)(iii) Maximum marks awarded for each of any three limitations 5 marks 25 marks The Chartered Institute of Management Accountants 2014 Page 14

15 Examiner s Comments The answers put forward by many candidates contained numerous errors, which was surprising for such a straightforward topic that has been tested on numerous occasions in the past. Common Errors Part 1. Failing to include the new, one-off, order when establishing the scarce resource 2. Ranking the products based on: contribution as an absolute number profit as an absolute number profit per unit of limiting factor 3. Calculating the contribution for each product incorrectly, mainly by ignoring the variable overhead 4. Correctly ranking the products but completely ignoring, or forgetting, the note to the question which stated you should assume that the new customer s order must be supplied in full. This action resulted in an incorrect production plan 5. Some candidates omitted to calculate the resulting profit from the production plan 6. Submitting an extremely poor layout that was difficult to follow Part 7. Some candidates incorrectly believed this part of the question related to motivation (?) Part (c) (i) 8. Silly mathematical errors 9. Inability to calculate a breakeven sales revenue 10. Showing the answer in units Part (c) (ii) 11. Submitting an answer that could not possibly be correct e.g. 539% Part (c) (iii) 12. Failing to put forward a meaningful or complete point e.g. variable costs will not change. Does this mean per unit or in total? 13. Putting forward points that related to part The Chartered Institute of Management Accountants 2014 Page 15

16 Question 7 Required: Assuming that Division B buys all the components it requires from Division S: Produce a profit statement for each division detailing sales and costs, showing external sales and internal company transfers separately where appropriate. A specialist external supplier has approached Division B and offered to supply 80,000 components at a price of $42 each. The components fulfil the same function as those manufactured by Division S. The manager of Division B has accepted the offer and has agreed to buy all the components it requires from this supplier. (i) Produce a revised profit statement for each division and for the total SBA company. Division S has just received an enquiry from a new customer for the production of 25,000 components. The manager of Division S requires a total profit for the year for the division of $450,000. (7 marks) (6 marks) (ii) Calculate the minimum price per component to sell the 25,000 components to the new customer that would enable the manager of Division S to meet the profit target. Note: this order will have no effect on the divisional fixed costs and no impact on the 150,000 components Division S sells to its existing external customers at $50 per component. Division B will continue to purchase the 80,000 components it requires from the specialist external supplier. (4 marks) (c) Discuss the potential implications for SBA of outsourcing the production of one type of component that it manufactures. (8 marks) (Total for Question Seven = 25 marks) Rationale The question examines candidates knowledge and understanding of transfer pricing together with the implications of outsourcing. The learning outcomes tested are: Part & D3, discuss the typical consequences of a divisional structure for performance measurement as divisions compete or trade with each other. Part (c) B1(j), discuss the concept of the value chain and the management of contribution/profit generated throughout the chain. The Chartered Institute of Management Accountants 2014 Page 16

17 Suggested Approach For part, carefully read and understand the data provided and assemble the figures to show the profitability of two divisions, with Division S supplying to a Division B. Part (i) carefully read the information in the question and use the appropriate figures in calculating the profit for each division and the total SBA company. Part (ii) a target profit of $450,000 was required. Candidates should firstly adjust this figure for the contribution from the existing external demand. Divide the resulting figure by the 25,000 components to give a required contribution per unit. The contribution per unit should then be added to the variable cost per unit. Part (c) required a discussion of potential implications for SBA of outsourcing the production of one type of component that it manufactures; candidates were required to explain potential positive and negative implications for SBA. Marking guide External sales from S External sales from B Internal sales from S to B Variable costs S Division Variable costs B Division Transfers from S to B (i.e. costs to B) Fixed costs (both divisions) (i) External sales from S External sales from B Variable costs S Division Variable costs B Division Cost of purchases from specialist B Division Fixed costs (both divisions) Total company sales Total company variable costs Total company fixed costs (ii) Additional contribution required Contribution per component Existing variable cost Fixed minimum price per component (c) Outsourcing description Cost saving Flexibility Loss of control Choice of supplier Issue of spare capacity at SBA Other relevant comment Positive implications MAX 4, negative implications MAX 4. Maximum marks awarded Marks 3 marks 7 marks 6 marks 4 marks 8 marks 25 marks The Chartered Institute of Management Accountants 2014 Page 17

18 Examiner s comments Most candidates made a good attempt at this question, which closely resembled a question from the November 2013 paper. Common Errors Part 1. Extremely poor layout of answers 2. Figures shown with no supporting details or workings 3. Failing to ensure that the internal sales figure from division S was identical to the cost of internal purchases made by Division B 4. Not understanding the principles associated with transfer pricing Part (i) A repeat of items 1, 2 and 3 above Part (c) 5. Only putting one point forward, whereas the question was worth eight marks 6. Not fully explaining a point made 7. Introducing a point that was not in the scenario e.g. moving production to another country, and then building the entire answer on this point. The Chartered Institute of Management Accountants 2014 Page 18