CIMA Practice Qns

Performance Pillar
P2 Performance Management
Wednesday 29 February 2012
Instructions to candidates
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, make
annotations on the question paper. However, you will not be allowed, under
any circumstances, to open the answer book and start writing or use your
calculator during this reading time.
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or subquestions).
ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.
You should show all workings as marks are available for the method you use.
ALL QUESTIONS ARE COMPULSORY.
Section A comprises 5 questions and is on pages 2 to 4.
Section B comprises 2 questions and is on pages 6 to 9.
Maths tables and formulae are provided on pages 11 to 14.
The list of verbs as published in the syllabus is given for reference on page
15.
Write your candidate number, the paper number and examination subject title
in the spaces provided on the front of the answer book. Also write your
contact ID and name in the space provided in the right hand margin and seal
to close.
Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.
DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO
TURN OVER
The Chartered Institute of Management Accountants 2012
SECTION A 50 MARKS
[You are advised to spend no longer than 18 minutes on each question in this
section.]
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 One
A company has developed a new product which it will launch next month. During the initial
production phase the company expects to produce 6,400 units in batches of 100 units. The
first batch to be produced is expected to require 25 hours of direct labour. The following
details are expected to apply throughout the initial production phase:
Direct material cost per unit is expected to be $4
Direct labour is to be paid $10 per hour
A 90% learning curve is expected to apply
Other variable costs are expected to be $2 per unit
Note: The learning index for a 90% learning curve is -0.1520
Required:
(a) Calculate the total variable cost of the 6,400 units of the new product.
(4 marks)
You have shown your calculation to the Finance Director who has now told you
that the company needs to achieve a total variable cost target of $45,000 for the
first 6,400 units in order to achieve its initial production phase profit target.
(b) Calculate the rate of learning at which the initial production phase profit
target would be achieved, assuming no other cost savings can be made.
(6 marks)
(Total for Question One = 10 marks)
Performance Management
March 2012
Question Two
SD manufactures and sells a small range of timber products. The main differences between
the products are their size and the type of timber used. SD prepares annual budgets and sets
a standard cost for each different product at the start of each year. Variance reports are
produced every month.
Recently, there have been significant differences between the actual costs and standard
costs of the products manufactured.
SD recently introduced a system of Kaizen Costing which has resulted in changes to the
methods used to manufacture the timber products.
Some of the directors have suggested that the use of standard costs as a means of
monitoring performance is no longer appropriate and that the monthly variance report is
meaningless.
Required:
(a)
Explain the principles of Kaizen Costing.

(4 marks)
(b)
Discuss how SD can use standard costing and variance analysis to

prepare meaningful reports when using Kaizen Costing.
(6 marks)
(Total for Question Two = 10 marks)
Question Three
MLC, which was established in 1998, manufactures a range of garden sheds and
summerhouses using timber purchased from a number of suppliers.
The recently appointed managing director has expressed increasing concern about the falling
sales volumes, rising costs and hence declining profits over the last two years.
Required:
Discuss how business process re-engineering could help to improve the profits
of MLC.
(Total for Question Three = 10 marks)
Section A continues on the next page

TURN OVER
March 2012
Question Four
A transport company is preparing its cost budgets for the coming year. It has been set both
social objectives and cost targets by the government which it must achieve in order to receive
a subsidy. Part of the subsidy is paid when acceptable budgets have been submitted to the
governments transport office and the balance is payable at the end of the year provided the
company has achieved its social objectives and cost targets.
The first draft of the cost budgets has been completed and submitted to the budget
committee.
Required:
Explain to the Board of Directors how (i) feedforward control and (ii) feedback control
should be used in the transport company. (You should use examples from the companys
budgeting system in your answer.)
(Total for Question Four = 10 marks)
Question Five
A college currently measures its performance by comparing its actual costs against its
budgeted costs for the year. Now that the college is facing increased competition from other
colleges and private education providers, one of its professors has suggested that it needs to
consider additional performance measures such as those indicated by the Balanced
Scorecard.
Required:
(a)
Explain the concepts of the Balanced Scorecard and how this approach to
performance measurement could be used by the college.
(6 marks)
(b)
Explain TWO non-financial measures (chosen from different perspectives

of the balanced scorecard) that the college could use to measure its
performance.
(4 marks)
(Total for Question Five = 10 marks)
(Total for Section A = 50 marks)
March 2012
End of Section A
Section B starts on page 6
TURN OVER
March 2012
SECTION B 50 MARKS
[You are advised to spend no longer than 45 minutes on each question in this section.]
ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

Question Six
JRL manufactures two products from different combinations of the same resources. Unit
selling prices and unit cost details for each product are as follows:
Product
J
$/unit
115
L
$/unit
120
Direct material A ($10 per kg)

Direct material B ($6 per kg)
Skilled labour ($14 per hour)
Variable overhead ($4 per machine hour)
Fixed overhead*
20
12
28
14
28
10
24
21
18
36
Profit
13
11
Selling price
*Fixed overhead is absorbed using an absorption rate per machine hour. It is an unavoidable
central overhead cost that is not affected by the mix or volume of products produced.
The maximum weekly demand for products J and L is 400 units and 450 units respectively
and this is the normal weekly production volume achieved by JRL. However, for the next four
weeks the achievable production level will be reduced due to a shortage of available
resources. The resources that are expected to be available are as follows:
Direct material A
Direct material B
Skilled labour
Machine time
900 kg
1,750 kg
1,250 hours
2,400 machine hours
March 2012
Required:
(a) Identify, using graphical linear programming, the weekly production
schedule for products J and L that will maximise the profits of JRL during the
next four weeks.
(15 marks)
(b) The optimal solution to part (a) shows that the shadow prices of skilled
labour and direct material A are as follows:
Skilled labour
Direct material A
$ Nil
$11.70
Explain the relevance of these values to the management of JRL.

(6 marks)
(c) Explain, using the graph you have drawn in part (a), how you would
calculate by how much the selling price of Product J could increase before
the optimal solution would change.
(4 marks)
(Total for Question Six = 25 marks)
Section B continues on page 8
TURN OVER
March 2012
Question Seven
HTL owns three hotels in different regions of the same country. The company uses the same
accounting policies and cost of capital of 10% per annum for all the hotels that it owns. All
rooms are sold on a bed and breakfast basis. The hotels are open for 365 days per year.
The restaurants provide breakfasts to hotel guests only. At all other times the restaurants are
available to hotel guests and the general public. Details for each hotel for the year ended 31
December 2011 are as follows:
Hotel
Number of bedrooms available
Northern
120
Southern
250
Eastern
135
% bedroom occupancy
80%
75%
60%
Regional Bedroom Market share %
15%
16%
5%
Restaurant capacity per day (meals)
100
120
85
Restaurant utilisation
60%
40%
60%
$000
$000
$000
3,328
876
4,204
8,500
776
9,276
2,365
837
3,202
832
1,100
576
4,200
7,400
4,400
Revenue:
Bedroom with breakfast
Restaurant
Total
Profit before tax
Net Assets at 31 December
An analysis of the costs incurred by each of the hotels for the year ended 31 December 2011
is as follows:
Hotel
Bed and breakfast related
Restaurant related
Total
Northern
$000
2,847
525
3,372
Southern
$000
7,231
945
8,176
Eastern
$000
2,082
544
2,626
It has also been noted that the restaurant related costs, capacity and utilisation information
does not include breakfasts.
Some of the following performance indicators have already been calculated:
Hotel
Return on Net Assets
Northern
20%
Southern
15%
Eastern
???
Residual Income ($000)
412
???
136
March 2012
Required:
(a)
Discuss the relative performance of the three hotels.
Note:
Your answer should include:
(b)
a review of the relative profits of the rooms and restaurants in each

hotel; and
calculations of the Return on Net Assets, Residual Income and other
performance measures that you think are appropriate.
(18 marks)
The Northern Hotel manager has investment decision authority. The manager is considering
investing $800,000 in the construction of a leisure facility at the hotel. The hotel has
permission to build the leisure facility, but will have to accept the terms of an agreement with
the local community before beginning its construction. The facility is expected to generate
additional annual profit for the hotel over the next five years as follows:
$000
110
120
155
145
130
2012
2013
2014
2015
2016
At the end of 2016 the facility will have to be sold to the local community for $550,000. If the
facility is built, it will be depreciated on a straight line basis over the 5 year period (i.e.
$50,000 per annum).
The investment has a positive net present value of $225,000 when discounted at the groups
cost of capital.
The manager of the hotel receives an annual bonus if the hotels Return on Net Assets is
maintained or improved. As stated in part (a) this was 20% for 2011 based on net assets at
the end of the year.
Required:
Discuss the effect of this investment on the future performance of the
Northern Hotel and whether, in the light of this, the hotel manager is likely
to proceed with the investment.
(7 marks)
(Total for Question Seven = 25 marks)
(Total for Section B = 50 marks)
March 2012
End of question paper

Maths tables and formulae are on pages 11 to 14
10
March 2012
PRESENT VALUE TABLE
Present value of 1 unit of currency, that is 1+ r

periods until payment or receipt.
)n where r = interest rate; n = number of
Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
4%
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
Interest rates (r)

5%
6%
0.952
0.943
0.907
0.890
0.864
0.840
0.823
0.792
0.784
0.747
0.746
0705
0.711
0.665
0.677
0.627
0.645
0.592
0.614
0.558
0.585
0.527
0.557
0.497
0.530
0.469
0.505
0.442
0.481
0.417
0.458
0.394
0.436
0.371
0.416
0.350
0.396
0.331
0.377
0.312
7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
Interest rates (r)

15%
16%
0.870
0.862
0.756
0.743
0.658
0.641
0.572
0.552
0.497
0.476
0.432
0.410
0.376
0.354
0.327
0.305
0.284
0.263
0.247
0.227
0.215
0.195
0.187
0.168
0.163
0.145
0.141
0.125
0.123
0.108
0.107
0.093
0.093
0.080
0.081
0.069
0.070
0.060
0.061
0.051
17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
March 2012
11
Cumulative present value of 1 unit of currency per annum, Receivable or Payable at the end of
each year for n years
Periods
(n)
1
2
3
4
5
1 (1+ r ) n
r
1%
0.990
1.970
2.941
3.902
4.853
2%
0.980
1.942
2.884
3.808
4.713
3%
0.971
1.913
2.829
3.717
4.580
4%
0.962
1.886
2.775
3.630
4.452
Interest rates (r)

5%
6%
0.952
0.943
1.859
1.833
2.723
2.673
3.546
3.465
4.329
4.212
7%
0.935
1.808
2.624
3.387
4.100
8%
0.926
1.783
2.577
3.312
3.993
9%
0.917
1.759
2.531
3.240
3.890
10%
0.909
1.736
2.487
3.170
3.791
6
7
8
9
10
5.795
6.728
7.652
8.566
9.471
5.601
6.472
7.325
8.162
8.983
5.417
6.230
7.020
7.786
8.530
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
11
12
13
14
15
10.368
11.255
12.134
13.004
13.865
9.787
10.575
11.348
12.106
12.849
9.253
9.954
10.635
11.296
11.938
8.760
9.385
9.986
10.563
11.118
8.306
8.863
9.394
9.899
10.380
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.244
8.559
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
16
17
18
19
20
14.718
15.562
16.398
17.226
18.046
13.578
14.292
14.992
15.679
16.351
12.561
13.166
13.754
14.324
14.878
11.652
12.166
12.659
13.134
13.590
10.838
11.274
11.690
12.085
12.462
10.106
10.477
10.828
11.158
11.470
9.447
9.763
10.059
10.336
10.594
8.851
9.122
9.372
9.604
9.818
8.313
8.544
8.756
8.950
9.129
7.824
8.022
8.201
8.365
8.514
Periods
(n)
1
2
3
4
5
11%
0.901
1.713
2.444
3.102
3.696
12%
0.893
1.690
2.402
3.037
3.605
13%
0.885
1.668
2.361
2.974
3.517
14%
0.877
1.647
2.322
2.914
3.433
Interest rates (r)

15%
16%
0.870
0.862
1.626
1.605
2.283
2.246
2.855
2.798
3.352
3.274
17%
0.855
1.585
2.210
2.743
3.199
18%
0.847
1.566
2.174
2.690
3.127
19%
0.840
1.547
2.140
2.639
3.058
20%
0.833
1.528
2.106
2.589
2.991
6
7
8
9
10
4.231
4.712
5.146
5.537
5.889
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.784
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
3.498
3.812
4.078
4.303
4.494
3.410
3.706
3.954
4.163
4.339
3.326
3.605
3.837
4.031
4.192
11
12
13
14
15
6.207
6.492
6.750
6.982
7.191
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.302
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.724
5.847
5.029
5.197
5.342
5.468
5.575
4.836
4.988
5.118
5.229
5.324
4.656
7.793
4.910
5.008
5.092
4.486
4.611
4.715
4.802
4.876
4.327
4.439
4.533
4.611
4.675
16
17
18
19
20
7.379
7.549
7.702
7.839
7.963
6.974
7.120
7.250
7.366
7.469
6.604
6.729
6.840
6.938
7.025
6.265
6.373
6.467
6.550
6.623
5.954
6.047
6.128
6.198
6.259
5.668
5.749
5.818
5.877
5.929
5.405
5.475
5.534
5.584
5.628
5.162
5.222
5.273
5.316
5.353
4.938
4.990
5.033
5.070
5.101
4.730
4.775
4.812
4.843
4.870
12
March 2012
FORMULAE
PROBABILITY
A B = A or B.
A B = A and B (overlap).
P(B | A) = probability of B, given A.
Rules of Addition
If A and B are mutually exclusive:
If A and B are not mutually exclusive:
P(A B) = P(A) + P(B)

P(A B) = P(A) + P(B) P(A B)
Rules of Multiplication
If A and B are independent:
If A and B are not independent:
P(A B) = P(A) * P(B)

P(A B) = P(A) * P(B | A)
E(X) = (probability * payoff)
DESCRIPTIVE STATISTICS
Arithmetic Mean
x =
x
n
x=
fx
f
(frequency distribution)
Standard Deviation
SD =
( x x ) 2
n
SD =
fx 2
x 2 (frequency distribution)
f
INDEX NUMBERS
Price relative = 100 * P1/P0
Price:
Quantity:
Quantity relative = 100 * Q1/Q0
P
w 1
Po
w
x 100
Q
w 1
Qo x 100
w
TIME SERIES
Additive Model
Series = Trend + Seasonal + Random
Multiplicative Model
Series = Trend * Seasonal * Random
March 2012
13
FINANCIAL MATHEMATICS
Compound Interest (Values and Sums)
Future Value S, of a sum of X, invested for n periods, compounded at r% interest
n
S = X[1 + r]
Annuity
Present value of an annuity of 1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:
PV =
1
1
1
r [1 + r ] n
Perpetuity
Present value of 1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
PV =
1
r
LEARNING CURVE
b
Yx = aX
where:
Yx = the cumulative average time per unit to produce X units;
a = the time required to produce the first unit of output;
X = the cumulative number of units;
b = the index of learning.
The exponent b is defined as the log of the learning curve improvement rate divided by log 2.
INVENTORY MANAGEMENT
Economic Order Quantity
2C o D
EOQ =
Ch
where:
Co
Ch
D
=
=
=
cost of placing an order

cost of holding one unit in inventory for one year
annual demand
14
March 2012
LIST OF VERBS USED IN THE QUESTION REQUIREMENTS

A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.
It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE
Level 1 - KNOWLEDGE
What you are expected to know.
Level 2 - COMPREHENSION
What you are expected to understand.
VERBS USED
DEFINITION
List
State
Define
Make a list of
Express, fully or clearly, the details/facts of
Give the exact meaning of
Describe
Distinguish
Explain
Communicate the key features

Highlight the differences between
Make clear or intelligible/State the meaning or
purpose of
Recognise, establish or select after
consideration
Use an example to describe or explain
something
Identify
Illustrate
Level 3 - APPLICATION
How you are expected to apply your knowledge.
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Level 4 - ANALYSIS
How are you expected to analyse the detail of
what you have learned.
Level 5 - EVALUATION
How are you expected to use your learning to
evaluate, make decisions or recommendations.
March 2012
Analyse
Categorise
Compare and contrast
Put to practical use

Ascertain or reckon mathematically
Prove with certainty or to exhibit by
practical means
Make or get ready for use
Make or prove consistent/compatible
Find an answer to
Arrange in a table
Construct
Discuss
Interpret
Prioritise
Produce
Examine in detail the structure of

Place into a defined class or division
Show the similarities and/or differences
between
Build up or compile
Examine in detail by argument
Translate into intelligible or familiar terms
Place in order of priority or sequence for action
Create or bring into existence
Advise
Evaluate
Recommend
Counsel, inform or notify

Appraise or assess the value of
Advise on a course of action
15
Performance Pillar
Management Level Paper
March 2012
16
March 2012
Performance Pillar
Examiners Answers
SECTION A
Answer to Question One
(a)
$
25,600
8,503
12,800
46,903
Direct material (6,400 units x $4)

Direct labour (see below)
Other variable costs (6,400 units x $2)
Direct labour:
The time taken is expected to be:
b
Y=ax = 25 x 64
batches
-0.1520
= 13.286 hours per batch, which is a total of 850.32 hours for 64
850.32 hours x $10 per hour = $8,503.20
(b)
Assuming no other cost savings can be made the direct labour cost would have to reduce by
$1,903 (i.e. the excess of cost above the target cost) to a total cost of $6,600 which is the
equivalent of 660 hours at $10 per hour.
660 hours in total represents an average time of 10.3125 hours per batch (660 / 64 batches)
Since the learning continued throughout the production of the 64 batches then this average
can be used to determine the rate of learning required to achieve the target variable cost.
64 batches of production represent 6 doublings of cumulative output therefore:
10.3125 / 25 = 0.4125
0.4125 = 0.8628
The learning rate at which the target variable cost would be achieved is 86.3%
March 2012
P2
Answer to Question Two
(a)
Kaizen Costing is a system of cost reduction based upon the concept of continuous review of
systems and procedures to identify and implement small incremental cost savings. It is used
in the production phase of a product and employees are both encouraged and empowered to
recommend changes that they believe will reduce costs without affecting the quality of
products or otherwise affect the customers perception of products
(b)
With regard to the use of standard costing and variance analysis, since Kaizen Costing is
based on the concept of continuous small improvements to reduce costs then the original
standard cost would no longer reflect the target that is achievable. Consequently the
measurement of performance against this target would be of limited usefulness.
In order to prepare meaningful reports SD would need to determine the extent of the
variances that have been caused by changes in the method of operations as a result of using
Kaizen Costing. These variances would be reported as planning variances and the remaining
cost differences would be reported as operational variances.
Although the managers of SD will have been involved in the Kaizen process it is important
that the variances between the target that the managers believed would now be achievable
and the actual results are reported separately. Then the managers can consider whether
these variances have arisen due to operational factors or due to over ambitious revised
targets. The variance between the original target and the new Kaizen target (the planning
variance) measures the extent to which it is believed that Kaizen techniques have reduced
SDs costs.
P2
March 2012
Answer to Question Three

Business process re-engineering involves examining business processes and making
substantial changes to the way in which an organisation operates. It requires the redesign of
how work is done through activities. A business process is a series of activities that are linked
together in order to achieve the desired objective. For example material procurement might
be viewed as a business process which could impact on the separate activities of production
scheduling, storing materials, processing purchase orders, inspecting materials and paying
suppliers.
The aim of business process re-engineering is to enhance organisational performance by
achieving improvements in business processes by focusing on simplification, improved
quality, enhanced customer satisfaction and cost reduction.
It may be that MLC needs to be able to reduce its selling prices in order to compete in the
market. This selling price reduction can only be sustained by a reduction in MLCs unit costs,
however such a reduction must not be achieved by compromising on quality.
Business Process re-engineering can be applied not only to manufacturing processes but
also to an extensive range of administrative activities. In the case of material handling MLC
might re-engineer the activity of processing purchase orders by collaboration with suppliers of
timber and other components for their products by integration of their production planning
system with that of their suppliers. This would enable purchase orders to be sent directly to
their suppliers thereby obviating the need for any intermediate administrative activity.
Additionally scheduled orders might be agreed with suppliers which would reduce the need to
hold inventories of timber and other components. In circumstances where suppliers are
working in close collaboration with MLC, it may be possible to roll the quality back down the
supply chain and agree quality control procedures with suppliers which would reduce the
need to inspect incoming deliveries of timber and components. Thus savings in material
handling costs could be achieved via reduced storage, processing and inspection costs. It
must be recognised that such costs do not add value to the final product and thus are of no
benefit to the customer.
In conclusion business process re-engineering may be useful to MLC because it may enable
them to identify cost savings that do not directly affect their products and so would not have
any effect on their customers perception of the quality or value of the products.
March 2012
P2
Answer to Question Four

Feedforward control systems are the comparison of draft plans with the objectives of the
company.
In the scenario the company has to produce budgets showing acceptable cost targets in order
to receive the first payment of its subsidy.
The first draft of the budget will need to be compared to the target costs that are acceptable to
the government office to ensure that the company qualifies for the subsidy. This comparison
process is the operation of a feedforward control system since the transport company will
have this cost target as one of its objectives. It may be that the first draft of the budget does
not achieve the required cost target. If this is the case then there will need to be revisions to
the budget perhaps by changing the method of providing the transport service so that the cost
target is achieved. Care must be taken however to ensure that the proposed budget changes
do not cause the company to fail to meet its social objectives.
Feedback control systems are the comparison of actual results against the budget that has
been approved. Thus in the context of the transport company a comparison of the actual
monthly costs can be made against the budgeted costs for that month.
As with any budget and actual comparison there may be an adverse or favourable variance. If
this is significant then further analysis may be required to determine its cause. This is
particularly important in the context of the transport company because failure to achieve the
cost target will result in not receiving the balance of the subsidy payment. If action is required
to reverse an adverse variance this will need to be done as soon as possible before the size
of the variance is too great to reverse before the end of the year. This comparison process is
feedback control.
Thus the difference between feedforward and feedback control systems is that feedforward
occurs in the budget setting stage whereas feedback control occurs during the year.
P2
March 2012
Answer to Question Five
(a)
The main concepts of the Balanced Scorecard are that an organisations performance should
not be measured on the basis of its financial results alone. Other key performance indicators
are relevant to an organisations success.
The balanced scorecard typically identifies four groups (or quadrants) of performance
indicator that would be suitable for most organisations, though each organisation is free to
determine the performance indicators that are most relevant to its own needs. The typical
quadrants are: customer perspective; internal business perspective; innovation and learning
perspective; and financial perspective.
Many people believe that success in the non-financial performance measures will lead to
success in the financial performance measures so that these other measures are leading
measures whereas the financial measures are lagging measures.
The college could use the balanced scorecard to measure its success in other areas of its
business. It is important for service businesses such as colleges to understand the wants of
its customers and thus measures connected with the customer perspective are important. The
college may discover that particular types of courses are demanded by their customers and
this may lead the college to develop new courses which can be measured using the
innovation and learning perspective.
The college can also look at how it operates its processes both in relation to its staff and its
customers. Improvements in these processes could be used to improve the financial results,
perhaps, because costs savings can be made.
(b)
The college could measure the number of new courses that it has provided to its customers
during the year. This measure relates to the innovation and learning perspective. The greater
the number of courses, the more choice it has provided to its customers and thus increased
its potential customer base.
The college could measure the time it takes for its staff to answer the telephone at the
administration office. This is a measure of the effectiveness of its internal business processes.
The longer it takes to answer the call the more likely is it that potential customers will be lost
because they do not want to wait. If waiting time is significant, the customer may also deter
others from making such calls thus losing the college even more business.
March 2012
P2
SECTION B
Answer to Question Six
(a)
See graph on separate sheet.
Workings for graph:
Iso contribution line:
41J + 47L = M
Constraints:
Material A
Material B
Skilled labour
Machine hours
Demand
Demand
2J + 1L 900
2J + 4L 1750
2J + 1.5L 1250
3.5J + 4.5L 2400
0
J
400
0
L
450
From the graph, it can be seen that the two binding constraints are those relating to Material
A and Material B. The solution (from the graph) is to produce 310 units of J and 280 units of
L. (A simplex solution shows the true optimum to be 308.333 units of J and 283.333 units of
L).
(b)
The shadow price equals the additional contribution that would be earned from one extra unit
of a scarce resource. In a situation such as this, where a number of resources are scarce, the
shadow price of any particular scarce resource will depend on whether or not the resource is
binding.
The shadow price for skilled labour is NIL because although there is a shortage of skilled
labour it does not have a constraining effect on output of JR as other resources are more
scarce.
Since material A is one of the binding constraints, if the availability of material A could be
increased by one unit, this would change the optimal plan. The increase in contribution as a
result of this change is the value of the shadow price of material A. The shadow price thus
represents the maximum premium that should be paid for an additional unit of material A.
(c)
If there was a change in the selling price of product J then assuming that there were no
changes to the unit costs of either product or to the selling price of product L this would result
in a change to their relative unit contributions. This would change the slope of the iso
contribution line, which may result in a different optimal solution.
In order to calculate by how much the selling price of product J would have to increase it
would be necessary to identify each of the extreme points of the feasible region and then
calculate the relative unit contributions of products J and L that would cause each of these
extreme points to be chosen in preference to the existing optimal solution.
P2
March 2012
Answer to Question Seven
(a)
Hotel
Return on Net Assets
Residual Income ($000)
Northern
20%
Southern
15%
Eastern
13%
412
360
136
All three hotels are making profits, though analysis shows that the Southern hotel is making a
loss on its restaurant operation which is having a negative effect on its overall performance.
If the Southern hotel restaurant costs were to be similar to those of the Northern hotel
restaurant (i.e. 60% of its revenue) then the profits of the Southern hotel would increase by
almost $480,000 which would increase its return on assets to 21% (1,580/7,400) and its
residual income would increase to $840,000.
The Southern hotel restaurant is of concern because it is loss making, this may be caused by
its poor utilisation even though its selling prices ($44 per meal) are similar to those of the
Northern hotel restaurant ($40 per meal) and the Eastern hotel restaurant ($45 per meal).
An analysis of the bed and breakfast room rates and room related costs is as follows:
Hotel
Room rates per night
Northern
$95
Southern
$124
Eastern
$80
Room and breakfast

costs per night
$81
$106
$70
The differing prices being charged by the Northern and Southern hotels may be the effects of
the market in each of those areas as the price difference does not seem to have significantly
affected the market share achieved by each of the hotels (15% and 16% respectively). This
further suggests that the poor utilisation of the restaurant in the Southern hotel is not caused
by its prices. The Eastern hotel has a low market share and this might indicate that its room
rate is too high although its restaurant prices are similar to those of the Northern hotel
restaurant and it achieves the same 60% utilisation percentage so perhaps the lack of market
share is caused by other establishments that offer cheaper accommodation, perhaps as loss
leaders.
The hotels are not of the same size as measured by their number of bedrooms, so it is not fair
to compare them on the basis of their residual income values.
Overall the Northern hotel has the highest return on assets, and the Eastern hotel has the
lowest. The latter is caused by its poor occupancy rates which are related to its poor market
share. The performance of the Southern hotel would be much improved if it could take actions
to make its restaurant operation profitable.
(b)
The investment has a positive net present value and therefore will increase the value of the
Northern hotel and of HTL. It is therefore appropriate that the investment goes ahead.
However, since the bonus of the manager of the Northern hotel is determined by the hotels
Return on Assets, this must be considered to determine the likely action of the manager.
The net assets values of the new investment at the end of each of the next 5 years together
with the investment profits and the corresponding Return on Investment will be as follows:
March 2012
P2
2012
2013
2014
2015
2016
Incremental Net
Assets
$000
750
700
650
600
550
Incremental Profit
$000
RONA
%
110
120
155
145
130
14.7
17.1
23.8
24.2
23.6
The above calculations show that the investment yields a return in excess of the cost of
capital of 10% in all years. However, it is not until 2014 that it yields a return greater than the
current Return on Net Assets of 20%. This would mean that, in the first two years, the
investment would cause the hotels Return on Net Assets to be lower than its present level.
As a consequence the manager is unlikely to want to proceed with the investment because it
will adversely affect the bonus receivable in the immediate future.
Indicative workings
Number of room nights:
Northern Hotel: 120 x 80% x 365 days = 35,040
Number of restaurant meals:
Northern Hotel: 100 x 60% x 365 days = 21,900
Room rates per night:
Northern Hotel: $3,328,000 / 35,040 = $95
Room and breakfast costs per night:
Northern hotel: $2,847,000 / 35,040 = $81
Restaurant selling price per meal:
Northern hotel: $876,000 / 21,900 = $40
P2
March 2012
The Senior Examiner for P2 Performance Management offers to future candidates

and to tutors using this booklet for study purposes, the following background and
guidance on the questions included in this examination paper.
Section A Compulsory
Question One The question examines candidates knowledge and understanding of the
learning curve and how it links with target costing. The learning outcome tested is B1(e)
apply learning curves to estimate time and cost for new products and services.
Question Two The question examines candidates knowledge of Kaizen Costing and
performance reporting. The learning outcomes tested are B1(c) explain the concepts of
continuous improvement and Kaizen costing that are central to total quality management and
C2 (c) evaluate performance using fixed and flexible budget reports.
Question Three This question examines candidates knowledge of business process reengineering. The learning outcome tested is B1(g) explain how process re-engineering can be
used to eliminate non-value adding activities and reduce activity costs.
Question Four The question examines candidates understanding of feedforward control and
feedback control in the context of a transport company. The learning outcome tested is C1(a)
explain the concepts of feedback and feedforward control and their application in the use of
budgets for planning and control.
Question Five The question examines candidates knowledge of the Balanced Scorecard in
the context of a college. The learning outcome tested is C3(c) compare and contrast
traditional approaches to budgeting with recommendations based on the balanced scorecard.
Section B Compulsory
Question Six The question examines candidates knowledge and understanding of relevant
costs in the context of a scarce resource problem. It then tests candidates knowledge of the
sensitivity of their solution to an increase in the selling price of one of the products. The
learning outcomes tested are A1(a) discuss the principles of decision-making, including the
identification of relevant cash flows and their use alongside non quantifiable factors in making
rounded judgements and 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 and A2(c) discuss the meaning of optimal solutions and how linear
programming methods can be employed for profit maximising, revenue maximising and
satisfying objectives.
Question Seven The question examines candidates understanding of performance ratios,
investment decisions and the relationship between those decisions and performance
measurement. The learning outcomes tested are D1(a) discuss the use of cost, revenue,
profit and investment centres in devising organisation structure and in management control,
D2(c) discuss alternative measures of performance for responsibility centres and D3(a)
discuss the likely behavioural consequences of the use of performance metrics in managing
cost, profit and investment centres.
May 2012 examination
Examiners Answers
Note: Some of the answers that follow are fuller and more comprehensive than would be
expected from a well-prepared candidate. They have been written in this way to aid teaching,
study and revision for tutors and candidates alike.
These Examiners answers should be reviewed alongside the question paper for this
examination which is now available on the CIMA website at www.cimaglobal.com/p2papers
The Post Exam Guide for this examination, which includes the marking guide for each
question, will be published on the CIMA website by early August at
www.cimaglobal.com/P2PEGS
SECTION A
Rationale
The question examines candidates knowledge and understanding of the learning curve and
its application with a simple scenario. The learning outcome tested is B1 (e) apply learning
curves to estimate time and cost for new products and services.
Suggested Approach
Carefully read the data provided and recognise that 8 units is simply three doublings of the
first batch.
By use of the learning curve formula (or the traditional doubling approach) calculate the
average direct labour cost of the first four batches. This is followed by specific use of the
formula to calculate the cost of the fourth batch.
Part (a)(iii) involved using the answers from part (a)(i) and (a) (ii) and adding the sales and
other costs to calculate the contribution for the product over its short lifetime
Part (b) required understanding of the learning rate that would generate a contribution of
150 000.
The average cost per batch needed to be compared to the original cost, followed by the
calculation of the third root of this percentage to determine the rate of the learning required.
May 2012
P2
(a) (i)
Average cost for 4 batches:
b
y = ax
-0.152
y = $40,000 x 4
= $32,400
(a) (ii)
The total cost for the 4 batches = 4 x $32,400 = $129,600
Average cost for 3 batches:
b
y = ax
-0.152
y = $40,000 x 3
= $33,848
The total cost for 3 batches = 3 x $33,848 = $101,544
th
Cost for 4 batch = $28,056
(a) (iii)
Total labour cost over the products life = $129,600 + (4 x $28,056) =
Sales less non labour related cost over the products life = 8,000 x ($90 - $45) =
CONTRIBUTION
$241,824
$360,000
$118,176
(b)
In order to achieve a contribution of $150,000 the total labour cost over the products lifetime
would have to equal ($360,000 - $150,000) = $210,000
This equals an average batch cost of $210,000 / 8 = $26,250
This represents $26,250 / $40,000 = 65.625% of the cost of the first batch
8 batches represents 3 doublings of output
Therefore the rate of learning required =3 0.65625 = 86.9% = 87%
Rationale
The question tests learning outcome C3 (c) compare and contrast traditional approaches to
budgeting with recommendations based on the balanced scorecard.
The question examines candidates knowledge of the Balanced Scorecard in the context of a
community library, in particular the use of a non-financial performance indicators.
Suggested Approach
Carefully read the question and explain the key features of the balanced scorecard, followed
by the request to state two perspectives and recommend, with reasons, a relevant
performance indicator for each perspective.
(a)
The Balanced Scorecard can be used to measure the performance of an organisation.
Traditionally performance was measured only in financial terms, but it is now recognised that
financial measures alone are not enough, hence the development of the Balanced Scorecard.
P2
May 2012
There are different variations of the Balanced Scorecard that may be used since it facilitates
internal performance measurement and thus is designed by each organisation to meet their
requirements, however most Balanced Scorecards contain four perspectives. These are:
Customer perspective; Internal Business perspective; Innovation & Learning perspective;
Financial perspective. Each of these segments represents a different viewpoint on the
operation of the organisation. Each of these contributes to the success of the organisation, in
fact many argue that success in the first three of these perspectives leads to financial
success. The Balanced Scorecard develops strategies into operations.
(b)
Its customers would want to know that they can borrow the latest books and DVDs from the
library so as part of the Customer perspective a measure that could be used to monitor the
librarys success in this area would be the number of new items that had been added to the
library within a specified time period.
The library would also need to measure its own efficiency of operations, particularly as it
relies on government funding and donations. As part of the Internal Business perspective the
library can measure its speed in obtaining new titles. Recognising demand, identifying a
source, negotiating a price and placing an order all take time. The smaller the amount of time
taken the better will be the customer perception and the better value for money for the library.
May 2012
P2
Rationale
In part (a) the question tests learning outcome C2 (b) evaluate the consequences of what if
scenario and their impact on the master budget.
Part (b) tests learning outcome C3 (a) discuss the impact of budgetary control systems and
setting of standard costs on human behaviour, in particular, behavioural issues related to a
participative budget and its possible beneficial consequences for ownership and motivation.
Suggested Approach
Part (a)
Carefully understand the data provided, appreciate that a flexed budget was required and
confirm the format that was requested, as opposed to general budgeting issues.
Part (b)
Carefully read the question to confirm that motivational factors involving functional managers
needed to be discussed.
(a)
$000
$000
Sales (90,000 units)

Production costs (100,000 units):
Direct materials
Direct labour
Variable overhead
Fixed overhead
Inventory adjustment
400.00
550.00
105.00
230.00
1,285.00
128.50
Cost of Sales
1,156.50
Gross Profit
(256.50)
Other overhead costs
200.00
Net Loss
(456.50)
(b)
If functional managers are involved in setting their own functional budget then this should
have a positive motivational effect on their attempts to achieve it. These is because they will
own the budget and accept it as being a fair target, seeing it as a personal failure if they do
not achieve the target that they set (and therefore believed was achievable).
The difficulty with involving managers in the budget setting process is that if their performance
is to be measured by comparing the actual results with the budget they have set then they
may be tempted to set an easy budget by building in budget slack. This will prevent them from
performing as well as they might do if a harder, but fair and achievable, budget had been set
by someone else.
P2
May 2012
Rationale
The question tests learning outcome B1(b) evaluate the impacts of just-in-time production,
the theory of constraints and total quality management of efficiency inventory and cost.
Suggested Approach
Carefully read the data required to clarify the exact requirements.
Part (a) required the production of a table to identify the average inventory level for each
quarter and from these figures the quarterly holding cost could be calculated.
Part (b) required calculations to establish the financial impact of changing to a JIT production
system, in particular calculating the relevant overtime costs in quarters 3 and 4. The total
cost of a move to JIT then needed comparing with the answer to part (a).
(a)
Annual demand = 540,000 units. (Quarterly capacity of 135,000 units x 4 quarters = 540,000
so no overtime is required)
Current system Constant production
Quarter
Opening inventory
Production
Sales
Closing inventory
Average inventory
Inventory cost ($)
2
35,000
135,000
110,000
60,000
47,500
190,000
0
135,000
100,000
35,000
17,500
70,000
3
60,000
135,000
190,000
5,000
32,500
130,000
4
5,000
135,000
140,000
0
2,500
10,000
Total
400,000
(b)
JIT production system
Quarter
Overtime production
Lost sales
Additional cost ($)*
Lost contribution
2
0
3
54,000
1,000
1,107,000
15,000
4
5,000
Total
102,500
1,224,500
The change in profit would be a reduction of $824,500

* Additional Overtime cost per unit =
Direct labour $35 x 0.5 =
$17.50
Variable overhead $10 x 0.3 =
$ 3.00
$20.50
May 2012
P2
Rationale
The question tests learning outcome B1 (h) explain how target costs can be derived from
target prices and the relationship between target costs and standard costs.
Suggested Approach
Carefully read the scenario to understand why total cost plus pricing might be the reason for
the falling profits and loss of market share.
Part (b) required an explanation of target costing and how it could address the present
circumstances associated with the company.
(a)
Total Cost Plus pricing is a pricing technique based on determining the total cost of a product
or service and adding a profit percentage to that total cost to determine the selling price.
In a competitive environment any cost inefficiencies or the use of too great a profit percentage
will mean that the company is no longer able to compete and will start to lose its market
share. As this happens and output volumes fall, then the total unit cost will rise due to the
sharing of fixed costs among a smaller number of units. The total cost plus pricing formula will
then result in increased selling prices thereby reducing still further the companys ability to
compete.
Therefore one disadvantage of this approach to pricing is that it does not consider the nature
of the market and as a result can lead to loss of sales and of course profits.
A second disadvantage is that the company is not motivated to save cost because if it does
so this simply results in a lower selling price. Indeed if the market supports a total cost plus
price then by increasing costs the size of the profit is increased!
(b)
Target Costing is useful in a competitive market such as this where a company is not
dominant in the market and is forced to accept the market price for its products or services.
Thus Target Costing focuses on the achievement of a unit cost which will earn the company
the financial return that it requires.
The starting point for the operation of Target Costing is the unit selling price of the companys
product or service. From this is deducted the required profit (to yield the companys required
financial return) and the result is the target unit cost that is to be achieved. This target cost is
then compared with the expected unit cost to see if the target cost is already being met or if
the company needs to consider making changes which will result in a lowering of unit costs.
It may be that the effects of the learning and experience curves will reduce the present cost to
the level of the target cost; or it may be that the company can achieve other cost savings
provided they do not diminish the quality of the product or service as perceived by the
customer.
If these cost savings cannot be made the company may have to lower its required return from
the product or service or decide that it is not financially viable for it to sell this product or
service in the market.
Thus Target Costing would benefit this company by forcing it to consider its internal
processes and costs and to conduct these as efficiently as possible. If despite making these
P2
May 2012
as efficient as possible the required return from the product cannot be achieved, then the
company should cease to make a product that is not viable and therefore would be able to
focus its resources on alternative sources of income.
May 2012
P2
SECTION B
Rationale
The question tests learning outcomes 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 and A2 (c) discuss the meaning of optimal solutions
and how linear programming methods can be employed for profit maximising, revenue
maximising and satisfying objectives.
Suggested Approach
Carefully analyse the data to identify the variable costs related to each product unit.
Determine the ranking of each product, based on contribution per limiting factor and generate
the optimum product mix after removing the requirement of the order from the major
customer.
In part (b), a comparison was needed to evaluate the contribution that would have been
generated from the answer to part (a), and the contribution that would have been generated if
the major customer order was not satisfied in full. The comparison would reveal the value of
the financial penalty.
Part (c)(i) required the identification of the objective function and the constraints that would be
used in a linear programming model to determine the optimum usage of the resources to
maximise profits.
In part (c)(ii), explain which of the constraints are binding on the solution.
P2
May 2012
(a)
Product
Selling price
Variable costs
Contribution
Kgs of Material B
Contribution / kg of B
Ranking
W
$/unit
90
61
29
4
$7.35
nd
2
R
$/unit
126
92
34
6
$5.67
rd
3
X
$/unit
150
106
44
5
$8.80
st
1
The major customer order is for 400 units of each of W, R and X and therefore uses 6,000kgs
of material B (400 x (4+6+5)). This leaves 11,500 kgs of material B to be used for other sales.
Production plan:
Make (units)
Uses (kg of B)
500
2,000
250
1,500
1,600
8,000
Optimum plan (including major customer order) is therefore:

W
R
X
900 units
650 units
2,000 units
(b)
By completing the order for the major customer WRX is giving up sales of 550 units of R (800
250) to the full price market. These units would yield of a contribution of $34 each =
$18,700
In order to produce these units and thus not fulfil the major customer order in full WRX would
need to release 3,300 kg of material B from the major customer order (550 units x 6kgs per
unit). This material would be released as follows:
Major customer sales:
Product
Selling price
Variable costs
Contribution
Kgs of Material B
Contribution / kg of B
Ranking
W
$/unit
80
61
19
4
$4.75
nd
2
R
$/unit
116
92
24
6
$4.00
rd
3
X
$/unit
140
106
34
5
$6.80
st
1
Thus the additional contribution that can be earned and therefore the penalty value at which
WRX would decide not to supply the major customer order in full is $4,825 ($18,700 $13,875).
(c) (i)
The objective function (P) is to maximise 29w + 34r + 44x where
w = number of units of W
r = number of units of R
x = number of units of X
May 2012
P2
And the constraints are:

Material B: 4w + 6r + 5x <= 11,500
Direct labour: 2w + 4r + 5x <= 5,400
Demand W: 0 <= w <= 500
Demand R: 0 <= r <= 800
Demand x: 0 <= x <= 1600
(c) (ii)
Two constraints are binding:
Demand W because the optimal solution is to produce 500 units of W
Direct labour hours because the optimal solution uses 5,400 direct labour hours (500w uses
1,000 hours and 880 x uses 4,400 hours; total 5,400 hours)
P2
10
May 2012

Rationale
The question tests learning outcomes D3 (b) discuss the financial consequences of
alternative pricing strategies; A3 (a) apply an approach to pricing based on profit
maximisation in imperfect markets, A3 (a) discuss the impact of budgetary control systems
and setting of standard costs on human behaviour, and 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.
Suggested Approach
Carefully read the scenario to identify the selling and buying divisions and the relevant
quantities, variable costs and transfer prices. Using the formula provided calculate the selling
price that would maximise the profits generated by the YD division and use this figure to
calculate the contribution that CX would generate for each division and the company in total.
In part (b), use the data given in the question, and figures generated in part (a), taking careful
note of the principles associated with transfer pricing.
Part (c) required a discussion to describe the impact that alternative transfer prices have on
divisional and company profits.
(a) (i)
Currently the selling price is $375 and this gives demand of 2,000 units. For every $25
increase in selling price demand reduces by 500 units so if the price was increased by (4 x
$25) to $475 then demand would be zero.
Hence the price equation P = $475 0.05x
And therefore Marginal Revenue = $475 0.1x
Marginal cost = Variable cost = $310
So, equating marginal revenue and marginal cost gives:
475 0.1x = 310
0.1x = 165
X = 1,650
And thus selling price = $475 (0.05 x 1,650) = $392.50
(a) (ii)
This would yield a monthly contribution for YD as follows:
$/unit
Selling price
392.50
Variable cost
310.00
Contribution
82.50
Total monthly contribution: 1,650 units x $82.50
May 2012
11
136,125
P2
(b) (i)
From a company perspective optimal decision making will occur if the transfer price is at
company variable cost + any opportunity cost due to lost external sales.
It is stated that there is sufficient capacity within the company so no opportunity cost arises.
If the transfer price were to be at the variable cost of $70 per component this would change
YDs perspective of its own variable costs (which would now be $200 per unit) and lead it to a
different external price for its own product:
The price equation is unchanged P = $475 0.05x
And therefore Marginal Revenue = $475 0.1x
Marginal cost = Variable cost = $200
So, equating marginal revenue and marginal cost gives:
475 0.1x = 200
0.1x = 275
x = 2,750
And thus selling price = $475 (0.05 x 2750) = $337.50 per unit
(b) (ii)
This would yield a monthly contribution for YD as follows:
$/unit
337.50
140
60
137.50
Selling price
Component cost
Other Variable cost
Contribution
378,125
However, GH is no longer making any contribution on its internal sales
The monthly contribution of the GHYD company is now ($Nil +$378,125)
378,125
(c)
The original company contribution from the sale of CX was $350,000. ($220,000 +
$130,000).When the optimum price for the component was determined in part (a) above the
total company contribution decreased to $317,625 but as shown in part (b) above with an
internal transfer price based on company variable cost the total company contribution
increased to $378,125.
Clearly therefore the effect of the transfer price is to distort the decision making processes in
such a way as to not be beneficial to the company as a whole.
The use of a company variable cost as the transfer price yields a better result for the
company as a whole and also for YD. However the manager of GH will not be happy with this
transfer price because all of the additional contribution has accrued to YD and it is GH that
has forgone contribution on its internal sales. Thus while the transfer price should be set at
variable cost to enable the optimum decision to be made from a company perspective there
P2
12
May 2012
needs to be a separate transfer price paid by YD to GH (as a fixed cost element) to

compensate them for their lost contribution.
If the transfer price were to be the external price, but the decision in (ii) above were made on
a company optimisation basis then the company contribution from product CX would still be
$378,125 but it would be shared YD $75,625 and GH $302,500. This means that the
increased activity for YD reduces its contribution but increases that of GH. YD will not be
happy with this because their efforts result in a reduction of their divisional contribution. They
will therefore expect a transfer price that is lower than the external price because GH is not
giving up any external sales to meet the internal demand and consequently can only sell extra
units to YD.
Clearly it can be seen that different transfer prices have an effect on both the company
contribution and on the contributions of each division.
May 2012
13
P2
Performance Pillar
23 May 2012 Wednesday Afternoon Session
19.
to close.
TURN OVER
SECTION A 50 MARKS
section.]

Question One
A company is developing a new product. During its expected life it is expected that 8,000
units of the product will be sold for $90 per unit.
The direct material and other non-labour related costs will be $45 per unit throughout the life
of the product.
Production will be in batches of 1,000 units throughout the life of the product. The direct
labour cost is expected to reduce due to the effects of learning for the first four batches
th
produced. Thereafter the labour cost will remain at the same cost per batch as the 4 batch.
The direct labour cost of the first batch of 1,000 units is expected to be $40,000 and a 90%
learning effect is expected to occur.
There are no fixed costs that are specific to the product.
Required:
(a)
(i)
Calculate the average direct labour cost per batch of the first four batches.
(2 marks)
(ii)
th
Calculate the direct labour cost of the 4 batch.

(2 marks)
(iii)
Calculate the contribution earned from the product over its lifetime.
(2 marks)
Note: The learning index for a 90% learning curve = -0.152
Due to the low lifetime product volume of 8,000 units the company now believes that
learning may continue throughout its entire product life.
(b)
Calculate the rate of learning required (to the nearest whole percentage)
to achieve a lifetime product contribution target of $150,000, assuming
that a constant rate of learning applies throughout the products life.
(4 marks)
May 2012
Question Two
A small town with a population of 35,000 has a community library. The nearest alternative
library is 15 miles away. A further 20,000 people live within a ten mile radius of the town. Of
these, 5,000 people live nearer to the alternative library.
The library has 25,000 registered users and on average each of the registered users borrows
two books and one DVD every week. The library has 125,000 books and 50,000 DVDs on its
inventory lists, though this is constantly changing as old items are removed and new items
are added.
The library offers a variety of types of book and DVD in order to attract interest from a large
range of potential users, and for some of the more popular items it has more than one copy.
The library does not charge a fee to its users; it is funded by donations and by government.
However it does need to measure its performance and is considering the use of a Balanced
Scorecard.
Required:
(a)
Explain the key features of the Balanced Scorecard approach to

performance measurement.
(4 marks)
(b)
State TWO perspectives of the Balanced Scorecard and for EACH of

these, recommend with reasons, ONE performance measure that could
be used to measure the performance of the library.
(6 marks)
May 2012
TURN OVER
Question Three
A company has prepared the following summary from its functional budgets for the year
ended 30th September 2013.
$000
Sales (100,000 units)
Opening inventory (zero units)
Production costs (115,000 units):
Direct materials
Direct labour
Variable overhead
Fixed overhead
$000
1,500
nil
460
575
115
230
1,380
Closing inventory (15,000 units)
180
Cost of Sales
1,200
Gross Profit
300
Other overhead costs
200
Net Profit
100
The directors of the company have now met to review the above statement. They have
decided to revise the budget as follows:
Due to competition, reduce the selling price by $5 per unit and despite the reduction
in selling price the demand for the product will reduce to 90,000 units.
Increase some of the unit production costs: direct labour by 10% and variable
overhead by 5%. No change is expected to any other costs.
Reduce production to 100,000 units.
Required:
(a)
Prepare a summary statement (in the same format as that shown above)
which clearly shows the effect of all of the changes proposed by the
directors of the company.
(6 marks)
(b)
Discuss the motivational factors in involving functional managers in the

setting of functional budgets.
(4 marks)
May 2012
Question Four
A company has predicted its sales demand for each of the four quarters of 2013 as follows:
Quarter
Sales volume (units)
1
100,000
2
110,000
3
190,000
4
140,000
The company has a normal production capacity of 135,000 units per quarter without needing
to utilise any overtime working. However the capacity can be increased by up to 40% by
working overtime.
It is current company policy to manufacture units using a constant level production system.
This means that although the opening and closing levels of inventory for the year are zero
units there are increases and decreases in the quarterly inventory levels. On this basis the
selling price, variable production costs and contribution for 2013 are expected to be as
follows:
$ per unit
90.00
Selling price
Direct materials
Direct labour
Variable production overhead
30.00
35.00
10.00
Contribution
75.00
15.00
However, any overtime working will increase the unit direct labour cost by 50% and the unit
variable production overhead cost by 30% for those units produced during overtime working.
In addition, the company incurs a storage cost of $4 per unit per quarter for each item that is
held in inventory. These costs are not included in the production costs above.
The company is considering whether it should change to a just-in-time (JIT) production
system, but is concerned that due to the fluctuating levels of its sales demand this may not be
financially beneficial. If the company did change to a JIT production system:
No inventory would be held.

There would be no change in the behaviour of variable production costs.
Required:
(a)
Calculate the cost of holding inventory (based on average inventory levels

in each of the quarters) for each of the quarters and the year in total under
the current production system. Assume that sales occur evenly during
each quarter.
(4 marks)
(b)
Calculate the financial impact of changing to a JIT production system.

(6 marks)
TURN OVER
May 2012
Question Five
A company uses total cost plus pricing. Recent results show that profits are falling and that
the company is losing market share in what is becoming a very competitive market.
Required:
(a)
Explain TWO disadvantages of total cost plus pricing.

(4 marks)
(b)
Explain how target costing could be of benefit to the company.

(6 marks)
End of Section A
May 2012
This page is blank
TURN OVER
May 2012
SECTION B 50 MARKS

Question Six
WRX manufactures three products using different quantities of the same resources. Details of
these products are as follows:
W
$/unit
90
R
$/unit
126
X
$/unit
150
Direct labour ($7/hour)

Material A ($3/kg)
Material B ($6/kg)
Variable overhead ($4/hour)
Fixed overhead
14
15
24
8
12
73
28
12
36
16
7
99
35
21
30
20
12
118
Profit
17
27
32
Product
Market selling price
The management of WRX has predicted the demand for these products for July as follows:
Product W
Product R
Product X
500 units
800 units
1,600 units
These demand estimates do NOT include an order from a major customer to supply 400 units
per month of each of the three products, at a discount of $10 per unit from the market selling
price.
During July the management of WRX anticipate that there will be a shortage of material B,
and that only 17,500 kgs will be available.
It is not possible for WRX to hold inventory of any raw materials, work in progress or finished
products.
May 2012
Required:
(a)
Prepare calculations to show the optimum product mix to maximise

WRXs profit for July, assuming that the order with the major customer is
supplied in full.
(7 marks)
WRX has now realised that the contract with the major customer does not have
to be met in full for any of the three products. The customer will accept whatever
WRX is prepared to supply at the contracted prices but they will charge a
financial penalty if WRX does not supply them in full in July.
(b)
Calculate the lowest value of the financial penalty that the major customer
would need to insert in the contract to ensure that WRX meets its order in
full in July.
(8 marks)
(c)
Now that you have presented your answers to (a) and (b) above to the management
team of WRX, the production manager has advised that, due to holidays, the number of
direct labour hours available will be reduced to a total of 9,800 hours in July.
A decision has been made that WRX will fulfil its order with the major customer in full in
July, and it has been agreed that a linear programming model will be used to determine
the optimum usage of the resources that will be available after setting aside those
required for the major customers order.
Required:
(i)
Identify the objective function and the constraints to be used in the linear
programming model to determine the optimum usage of the remaining
resources to maximise the companys profits for July.
(6 marks)
(ii)
The optimal solution has been determined as:

W 500 units
R
0 units
X 880 units
Explain which of the constraints you stated in (c)(i) are binding on the
solution. (You are not required to draw a graph.)
(4 marks)
Section B continues on the next page

TURN OVER
May 2012
Question Seven
The GHYD company comprises two divisions: GH and YD.
GH manufactures components using a specialised machine. It sells the same components
both externally and to YD. The variable costs of producing the component are as follows:
Direct materials
Direct labour
Variable overhead
$/unit
25.00
35.00
10.00
70.00
GH currently sells its components to the external market for $125 per unit.
GH also sells 4,000 components per month to YD. These are transferred at the same price as
the external selling price.
YD uses two of these components in each unit of its CX product. The current selling price of
the CX product is $375 per unit and at this selling price the demand for the CX is 2,000 units
per month. The variable costs of producing a unit of CX are as follows:
Direct materials
Components transferred from GH @ $125 each
Direct labour
Variable overhead
$/unit
35.00
250.00
15.00
10.00
At this level of activity the total monthly contribution earned by YD from the sale of the CX
product is $130,000.
An analysis of the demand for the CX product indicates that for every $25 increase in its
selling price the monthly demand would reduce by 500 units, and that for every $25 decrease
in its selling price demand would increase by 500 units.
Note: If P = a - bx then MR = a - 2bx
10
May 2012
Required:
(a)
(i)
Calculate the selling price per unit of CX that would maximise the profits
generated by that product for the YD division.
(4 marks)
(ii)
Calculate, based on the selling price you calculated in (a)(i) above, the
monthly contribution that CX would generate for:
GHYD as a whole
GH division
YD division
Note: Your answer should show three separate amounts.

(6 marks)
(b)
GHYD has now reviewed its transfer pricing policy and decided that all
transfer prices should be set so as to lead to optimal decision making for
the company as a whole. Assuming that the transfer price for the
component is changed to reflect this new policy:
(i)
Calculate the selling price per unit of CX that would maximise the profits
earned by CX for the company as a whole. Note: you should assume
that there is sufficient capacity within the company.
(4 marks)
(ii)
Calculate, based on the selling price you calculated in (b)(i) above, the
monthly contribution that CX would generate for:
GHYD as a whole
GH division
YD division
Note: Your answer should show three separate amounts.

(3 marks)
(c)
Discuss, using your answers to (a) and (b) above, the impact that
alternative transfer prices have on the divisional profits of GH and YD and
on the company as a whole.
(8 marks)

May 2012
11
This page is blank
12
May 2012
PRESENT VALUE TABLE

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
4%
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
Interest rates (r)

5%
6%
0.952
0.943
0.907
0.890
0.864
0.840
0.823
0.792
0.784
0.747
0.746
0705
0.711
0.665
0.677
0.627
0.645
0.592
0.614
0.558
0.585
0.527
0.557
0.497
0.530
0.469
0.505
0.442
0.481
0.417
0.458
0.394
0.436
0.371
0.416
0.350
0.396
0.331
0.377
0.312
7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
Interest rates (r)

15%
16%
0.870
0.862
0.756
0.743
0.658
0.641
0.572
0.552
0.497
0.476
0.432
0.410
0.376
0.354
0.327
0.305
0.284
0.263
0.247
0.227
0.215
0.195
0.187
0.168
0.163
0.145
0.141
0.125
0.123
0.108
0.107
0.093
0.093
0.080
0.081
0.069
0.070
0.060
0.061
0.051
17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
May 2012
13
CUMULATIVE PRESENT VALUE TABLE

Periods
(n)
1
2
3
4
5
1 (1+ r ) n
r
1%
0.990
1.970
2.941
3.902
4.853
2%
0.980
1.942
2.884
3.808
4.713
3%
0.971
1.913
2.829
3.717
4.580
4%
0.962
1.886
2.775
3.630
4.452
Interest rates (r)

5%
6%
0.952
0.943
1.859
1.833
2.723
2.673
3.546
3.465
4.329
4.212
7%
0.935
1.808
2.624
3.387
4.100
8%
0.926
1.783
2.577
3.312
3.993
9%
0.917
1.759
2.531
3.240
3.890
10%
0.909
1.736
2.487
3.170
3.791
6
7
8
9
10
5.795
6.728
7.652
8.566
9.471
5.601
6.472
7.325
8.162
8.983
5.417
6.230
7.020
7.786
8.530
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
11
12
13
14
15
10.368
11.255
12.134
13.004
13.865
9.787
10.575
11.348
12.106
12.849
9.253
9.954
10.635
11.296
11.938
8.760
9.385
9.986
10.563
11.118
8.306
8.863
9.394
9.899
10.380
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.244
8.559
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
16
17
18
19
20
14.718
15.562
16.398
17.226
18.046
13.578
14.292
14.992
15.679
16.351
12.561
13.166
13.754
14.324
14.878
11.652
12.166
12.659
13.134
13.590
10.838
11.274
11.690
12.085
12.462
10.106
10.477
10.828
11.158
11.470
9.447
9.763
10.059
10.336
10.594
8.851
9.122
9.372
9.604
9.818
8.313
8.544
8.756
8.950
9.129
7.824
8.022
8.201
8.365
8.514
Periods
(n)
1
2
3
4
5
11%
0.901
1.713
2.444
3.102
3.696
12%
0.893
1.690
2.402
3.037
3.605
13%
0.885
1.668
2.361
2.974
3.517
14%
0.877
1.647
2.322
2.914
3.433
Interest rates (r)

15%
16%
0.870
0.862
1.626
1.605
2.283
2.246
2.855
2.798
3.352
3.274
17%
0.855
1.585
2.210
2.743
3.199
18%
0.847
1.566
2.174
2.690
3.127
19%
0.840
1.547
2.140
2.639
3.058
20%
0.833
1.528
2.106
2.589
2.991
6
7
8
9
10
4.231
4.712
5.146
5.537
5.889
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.784
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
3.498
3.812
4.078
4.303
4.494
3.410
3.706
3.954
4.163
4.339
3.326
3.605
3.837
4.031
4.192
11
12
13
14
15
6.207
6.492
6.750
6.982
7.191
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.302
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.724
5.847
5.029
5.197
5.342
5.468
5.575
4.836
4.988
5.118
5.229
5.324
4.656
7.793
4.910
5.008
5.092
4.486
4.611
4.715
4.802
4.876
4.327
4.439
4.533
4.611
4.675
16
17
18
19
20
7.379
7.549
7.702
7.839
7.963
6.974
7.120
7.250
7.366
7.469
6.604
6.729
6.840
6.938
7.025
6.265
6.373
6.467
6.550
6.623
5.954
6.047
6.128
6.198
6.259
5.668
5.749
5.818
5.877
5.929
5.405
5.475
5.534
5.584
5.628
5.162
5.222
5.273
5.316
5.353
4.938
4.990
5.033
5.070
5.101
4.730
4.775
4.812
4.843
4.870
14
May 2012
FORMULAE
PROBABILITY
A B = A or B.
Rules of Addition
P(A B) = P(A) + P(B)

P(A B) = P(A) + P(B) P(A B)
P(A B) = P(A) * P(B)

P(A B) = P(A) * P(B | A)
Arithmetic Mean
x =
x
n
x=
fx
f
Standard Deviation
SD =
( x x ) 2
n
SD =
fx 2
f
INDEX NUMBERS
Price:
Quantity:
P
w 1
Po
w
x 100
Q
w 1
Qo x 100
w
TIME SERIES
Additive Model
May 2012
15
n
S = X[1 + r]
Annuity
PV =
1
1
1
r [1 + r ] n
Perpetuity
PV =
1
r
LEARNING CURVE
b
Yx = aX
where:
2C o D
EOQ =
Ch
where:
Co
Ch
D
=
=
=

annual demand
16
May 2012
This page is blank
May 2012
17
This page is blank
18
May 2012

LEARNING OBJECTIVE
Level 1 - KNOWLEDGE
VERBS USED
DEFINITION
List
State
Define
Make a list of
Describe
Distinguish
Explain

purpose of
consideration
something
Identify
Illustrate
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Level 4 - ANALYSIS
May 2012
Analyse
Categorise

practical means
Find an answer to
Arrange in a table
Construct
Discuss
Interpret
Prioritise
Produce

between
Build up or compile
Advise
Evaluate
Recommend

19
Performance Pillar
May 2012
Wednesday Afternoon Session
20
May 2012
September 2012 examination
Examiners Answers
question, will be published on the CIMA website by early October at
SECTION A
Rationale
The question examines candidates knowledge and understanding of the learning curve and
its application with a simple scenario. The learning outcome tested is B1 (e) apply learning
curves to estimated time and cost for new products and services.
Suggested Approach
Carefully read the data provided and recognise that the four figures required are simply a
doubling of the time for the first batch. By use of the simpler doubling approach, or by use of
the more complex learning curve formula, calculate the average time per batch for all 4 levels
of production and multiply the resultant figures by the number of batches.
Part (b) involved using the answer from part (a) to calculate the approximate break-even level
of sales of the product. (Only an approximate figure could be calculated as the direct labour
cost per unit constantly reduces whilst a learning curve is in existence.)
Part (c) required understanding of the workings of the learning curve in that labour cost per
unit will increase (and the break-even point will also increase) if the rate of learning moves
from 80% to 90%.
September 2012
P2
(a)
No of units
100
200
400
800
1,600
3,200
6,400
No of
batches
1
2
4
8
16
32
64
Average direct labour

cost
$6,000
$4,800
$3,840
$3,072
$2,457.60
$1,966.08
$1,572.86
Total direct
labour cost
$6,000
$9,600
$15,360
$24,576
$39,321.60
$62,914.56
$100,663.30
Ans (i)
Ans (ii)
Ans (iii)
Ans (iv)
(b)
No of units
Sales
Direct material and other
non-labour related costs
Direct labour cost
Fixed cost
Total costs
(Loss)
3,200
$
224,000
144,000
6,400
$
448,000
288,000
62,914.56
60,000
266,914.56
(42,914.56)
100.663.30
60,000
448,663.30
(663.30)
As can be seen from the table above the breakeven point seems to be slightly above 6,400
units.
(c)
If the rate of learning were to be 90% instead of 80% this means that the labour time
(and hence labour cost) per unit would reduce more slowly. Assuming that all other
data remained unchanged then costs would be higher and hence the break-even level
of sales would also be higher.
Rationale
The question examines candidates knowledge of the Balanced Scorecard in the context of a
passenger transport company. The learning outcome tested in C3 (c) compare and contrast
traditional approaches to budgeting with recommendations based on the balanced scorecard.
Suggested Approach
Carefully read the scenario provided to identify relevant information. Use the information
provided to explain the balanced scorecard and how it could be used by the transport
company, including an explanation of two measures, from different perspectives, that the
company would use.
(a)
P2
The Balanced Scorecard can be used to measure the performance of an organisation.

Traditionally, performance was only measured in financial terms, but it is now
recognised that financial measures alone are not enough; hence the development of
the Balanced Scorecard.
September 2012
There are different variations of the Balanced Scorecard that may be used since it
facilitates internal performance measurement and thus is designed by each
organisation to meet their requirements. However, most Balanced Scorecards contain
four perspectives. These are: Customer perspective; Internal Business perspective;
Innovation & Learning perspective and Financial perspective. Each of these
perspectives represents a different but equally important viewpoint on the operation of
the organisation. Each of these contribute to the success of the organisation, in fact
many argue that success in the first three of these perspectives leads to financial
success that can be measured by an increase in profits. By measuring its performance
from all of these different perspectives CX can identify the things that it does well and
the things that it needs to improve if it is to improve its performance and hence its
profits. For example CX may discover that it needs to change the frequency of its bus
services at certain times of the day; or on some of its routes. This understanding of
cause and effect can lead CX towards improved profits and long term success.
(b)
CX could use the Balanced Scorecard to measure the performance of each of its
routes by recognising that there are a number of different measures that can be used to
measure performance.
For example CX could measure the capacity utilisation of each of its buses at different
times of the day and on different days of the week. This could be a measure of both
customer satisfaction (customer perspective) (because if the buses are too full
passengers may have to stand or wait for the next service) or of the companys
efficiency (internal business perspective) in operating the appropriate frequency of
buses to match customer demand.
Another measure that CX could use would be the number of breakdowns of buses.
This would be a measure of CXs internal business processes to ensure that
preventative maintenance avoids unnecessary breakdowns.
September 2012
P2
Rationale
In part (a) the question tests learning outcome C1 (b) explain the concept of responsibility
accounting and its importance in the construction of functional budgets that support the
overall master budget.
Suggested Approach
Part (a) Carefully read and understand the data provided, confirm your knowledge of budgets,
standard costs and flexible budgeting and explain the links between them.
Part (b) Carefully read the question and then discuss the importance of your answer to (a),
particularly how the use of planning and operational variances is important for management
control.
(a)
An original budget is determined by predicting the expected level of activity and using
standard costs to determine the expected variable cost for that level of activity. To this
would then be added the expected fixed cost.
Standard costs are based on estimated resource requirements and the expected price
of those resources for each unit. These values are then multiplied by the expected
activity level to determine the expected variable cost of that level of activity.
Budgets are a statement of the total costs, revenues and resource requirements
expected for the budgeted level of activity. It is this budget that is approved by the
Board of Directors and used as the basis of comparison with actual results. However, it
is most likely that the actual level of activity will differ from that budgeted. In such
circumstances a simple comparison between the actual results and the original budget
would be both meaningless and unfair because some of the costs and the revenues
vary with the level of activity. In order to make a fair comparison flexible budgeting must
be used.
Flexible budgeting recognises that, within the original budget, there are some costs and
revenues that are affected by the level of activity (variable) and others that are not
affected by activity levels (fixed). Using this analysis it is possible to produce a flexible
budget showing the expected costs and revenues of the actual activity level. This can
then be compared with the actual costs and the differences (variances) used as a
measure of performance.
(b)
P2
In order to fairly measure performance actual activity must be compared with the
original budget to understand why the actual activity level differed from those budgeted;
and actual costs and revenues should be compared with the flexible budget to fairly
measure the actual costs and revenues against those expected for the actual activity
achieved. Thus it is important to understand the appropriate uses of each of the original
and flexed budget and how standard costs are used to compile the original budget and
assist in the preparation of the flexed budget for cost comparison purposes.
September 2012
Rationale
The question examines candidates knowledge of quality costs and the reporting of quality
costs. The learning outcome tested is B1 (d) prepare cost of quality reports.
Suggested Approach
Part (a) carefully read the scenario to identify the relevant data. Identify which category of
quality cost each item should be placed. Calculate the correct number of faulty and returned
units and evaluate these numbers. Present the numbers calculated in a traditional quality
cost report.
Parts (b) compare the new total quality cost figure with the quality cost figure in the question
i.e. before the proposed changes had been evaluated. Recommend if the company should
accept the proposal both from a financial and a non-financial perspective.
(a)
Statement of expected quality costs
Prevention costs
Appraisal costs
External failure costs (note 1)
Internal failure costs (note 2)
Total
$
500,000
30,000
286,880
332,045
1,148,925
Note 1
Customer demand = 24,000 units, however 13% of the units delivered are rejected by
customers so 24,000 units = 87% of the units despatched to customers.
The number of units despatched to customers is therefore 24,000 / 0.87 = 27,586 units. This
means that 3,586 units have to be replaced. The variable cost of producing these units is $75
per unit and there is a redelivery cost of $5 per unit so the total variable cost is 3,586 x $80 =
$286,880
Note 2
Since 10% of the items manufactured are discovered to be faulty before they are despatched
then 27,586 units represents 90% of the items tested before despatch so the initial production
= 27,586 / 0.9 = 30,651 units. Thus 3,065 units are produced and rejected. These have a
variable production cost of $75 per unit = $229,875.
The cost of the components included in the units produced is 30,651 units x $30 = $919,530
Since 10% of the components bought are damaged prior to their use then the cost of these
damaged components = $919,530 x 10/90 = $102,170
Thus the total Internal Failure Cost = $229,875 + $102,170 = $332,045
(b)
On purely financial grounds the company should not accept the proposal because there
is an increase of $163,040 in quality costs. However there may be other factors to
consider as the company may enhance its reputation as a company that cares about
quality products and this may increase the companys market share. On balance the
company should accept the proposal to improve its long-term performance.
September 2012
P2
Rationale
This question examines candidates knowledge of the product life cycle and how unit selling
prices are likely to change as the product moves through the product 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 understand the pricing strategy chosen for this product. This
company has elected to adopt a market skimming policy which implies that the product is
unique and will initially be made in small volumes.
Describe the likely effects on unit selling prices (gradual reductions) and why these would be
expected.
The company has just launched an innovative new product using a market skimming pricing
policy. This means that the selling price of the product is high and thus the product is only
available to a small segment of the market that can afford to pay the high price for something
that is unique and innovative.
There are four stages to the product life cycle: Introduction, Growth, Maturity and Decline.
In the Introduction stage the product is unique and hence the company can charge a high
price. However the companys competitors will buy the product and carry out reverse
engineering to see how it works and how they can develop their own similar, but different
product. The competitors will be particularly attracted by the high unit selling price which
should result in high unit profit. However, the company will seek to avoid this competition by
lowering its selling price towards the end of the Introduction stage to deter competitors from
entering the market and also to make its product more affordable to the wider market.
In the Growth stage the company will maintain its lower selling price to continue to attract new
purchasers of the product. If competitors have entered the market there may need to be
further reductions in selling price to maintain the growth unless the original product can be
differentiated in other ways.
In the Maturity stage the selling price of the product is likely to be stable but may be reduced
still further, possibly by short term one-off offers or discounts for multiple purchases so that
the product continues to be financially viable for as long as possible.
In the Decline stage the product may continue to be sold provided its margin is positive. If it is
not then the product may be bundled with other products or sold for less than its unit cost in
order to clear the companys inventory of what has become an obsolete product.
P2
September 2012
SECTION B
Rationale
The question examines candidates knowledge and understanding of relevant costs in the
context of a contract for a new customer. The learning outcomes tested are (part a) A1 (c)
discuss the particular issues that arise in pricing decisions and the conflict between marginal
cost principles and the need for full recovery of all costs; (part b) A1(a), discuss the principles
of decision-making including the identification of relevant cash flows and their use alongside
non-quantifiable factors in making rounded judgments.
Suggested Approach
Carefully read the question to identify the resources needed, and their relevant costs, to
satisfy the contract.
Prepare a statement that adopts relevant costing principles to show the relevant costs of the
contract. Explain each relevant cost that has been included in the statement and explain why
any values you have excluded are not relevant.
Part (b) discuss problems that could possible arise as a result of setting the price for the
contract using a relevant costing approach.
(a)
Material D
Components
Direct labour
Specialist machine
Machine operating costs
Supervision
Development time
General fixed overhead
Total relevant cost
Note
1
2
3
4
5
6
7
8
$
1,520
49,920
11,050
10,000
12,000
500
NIL
NIL
84,990
Notes:
1. Material D is in regular use by CDF and must be replaced. Consequently its relevant
value is its replacement cost. The historical cost is not relevant because it is a past
cost and the resale value is not relevant because CDF is not going to sell it because
the material is in regular use.
2. CDF could obtain the components externally at a cost of $15 each which totals
$60,000 or they could be obtained from RDF. The transfer price from RDF is ($8 +
30%) + 20% = $12.48 per component. Thus the internal cost to CDF is $12.48 x 4000
= $49,920. The opportunity cost to RDF is not relevant to CDF because from CDFs
viewpoint the relevant cost is the price they have to pay to their supplier. Since this is
lower than the external buying price the relevant cost for the contract is $49,920.
3. The employees in department W will continue to paid for their full hours regardless of
how the work is completed because they are working at 100% capacity. Therefore
their cost is irrelevant. The choice is between using employees from department Z at
a cost of $15 per hour (total $12,750) or engaging sub-contract workers at a cost of
$13 per hour (total $11,050). Since the use of sub-contract employees is the cheaper
option this is the relevant cost.
September 2012
P2
4. CDF has a number of options: (a)If the machine were to be hired it would have a cost
of $15,000; (b) if the machine were bought and then sold at the end of the work it
would have a net cost of $20,000; or (c) if the machine were bought and then
modified to avoid the need to buy the other machine it would have a net cost of
$10,000 ( $50,000 plus $5,000 modifications less $45,000 cost of another machine).
Thus the most economic approach is buy the machine and then modify it so the
relevant cost is $10,000.
5. The machine operating costs are future costs of doing the work and therefore are
relevant.
6. The supervisors salary is irrelevant, but the bonus needs to be included because it is
dependent on this work and therefore is relevant.
7. The development time has already been incurred. Therefore it is a past cost and not
relevant.
8. General fixed overhead costs and their absorption are not relevant because they will
be incurred whether the work goes ahead or not. Depreciation is also not relevant
because it is an accounting entry based on the historical purchase of assets. It is not
affected by the work being considered.
(b)
Two main issues arise when pricing work based on relevant costs:
Profit reporting; and

Pricing of future work.
With regard to profit reporting, the decision as to whether to proceed with the work will
have been based on the use of relevant costs, but the routine reporting of the profit
from the work will be based on the companys normal accounting system. Since this
system will be based on total cost, it is probable that the costs of the work reported will
be greater than its relevant cost. Consequently the amount of profit reported to have
been made on this order will be lower than expected and may even be a loss. This may
cause difficulties for the manager who accepted the work as as an explanation will be
required of the reasons why there is such a difference in profit.
With regard to the pricing of future work the difficulty lies in increasing the price for
similar items for the same customer in future. Once a price is set, customers tend to
expect that any future items will be priced similarly. However, where a special price has
been offered based on relevant cost because of the existence of spare capacity the
supplier would not be able to continue to price on that basis as it does not recover its
long term total costs. There may also be difficulties created by this method of pricing as
other customers are being charged on a full cost basis and if they were to discover that
a lower price was offered to a new customer they would feel that their loyalty was being
penalised.
P2
September 2012

Rationale
The question examines candidates understanding of performance ratios, investment
appraisal and break-even analysis.
The learning outcomes tested are; part (a) and part (b) D2(c) discuss alternative measures of
performance for responsibility centres, Part (c) 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 constrains and linear programming methods are
needed to identify optimal solution.
Suggested Approach
Part (a) establish the age of the assets of KL, and re-calculate the depreciation of HJ using
the depreciation policy used by KL. Re draft the profit and loss and balance sheet extract
using the new depreciation figure, and re-calculate the ratios requested.
Parts (b) calculate for KL only, and using the new figures from part (a) the break even sales
value in 2013. Re-calculation of the fixed cost being the most important aspect of this part of
the question.
Parts (c) complete an investment appraisal summary to establish whether or not KL should
replace its existing non-current asset. (c)(ii) discuss, with supporting figures, the effect on the
breakeven sales value in 2013.
(a)
An analysis of KLs non-current assets shows that they are four years old:
$000
Cost
1,800
Depreciation @ 25% in year 1
450
1,350
337
1,013
253
760
190
570

as shown in the question
If the non-current assets of HJ are depreciated at the rate of 25% on a reducing balance basis
(i.e. the same method as is used by KL) and its assets aged forward to year 4 then its
depreciation charge for the year will be $211,000 (see below) thus increasing its profits to
$469,000; and its non-current asset value will reduce by $967,000 so that its capital employed
is $833,000.
As a result of these changes to HJs results its revised ratios (and the original ratios of KL for
ease of comparison) would be:
ROCE
Operating Profit margin
Asset Turnover
September 2012
469 / 833
469 / 1,600
1,600 / 833
HJ
56.30%
29.31%
1.92
P2
HJ depreciation
Original cost
$000
2,000
500
1,500
375
1,125
281
844
211
633

(b)
KLs contribution to sales ratio is $590,000 / $990,000 = 59.6%

KLs fixed costs (excluding depreciation) are $280,000 ($200,000 + $80,000).
If KL continues to use the same method of depreciation in 2012 and 2013 then its
depreciation charge in 2012 will be 25% of $570,000 = $142,500; and in 2013 it will be
25% of $427,500 ($570,000 - $142,500) = $106,875.
Thus for 2013 KLs fixed costs including depreciation are $386,875 ($280,000 +
$106,875)
The break-even sales value is therefore: $386,875 / 0.596 = $649,119.
(c)
(i)
The effect of the investment in the new equipment is to change the cost structure.
Fixed costs (excluding depreciation) are to increase by 30% this equals
($390,000 - $190,000) x 30% = $60,000
Variable costs are to decrease by 20% this equals
$400,000 x 20% = $80,000
Thus there is a net cash inflow from cost savings of $20,000 per annum
The present value of these future cost savings when discounted at 10% per annum for
5 years is
$20,000 x 3.791 = $75,820
The residual value of the equipment in five years time is $285,000, this has a present
value of $285,000 x 0.621 = $176,985
Since the capital cost is $1.2m less the trade in of $427,500 there is a negative NPV of
$519,695.
As a result KL would not wish to replace its equipment.
(ii)
P2
If KL replaces its non-current assets with new equipment that has a cost of $1.2m then
this will also cause a significant increase in the depreciation charge for the year. The
depreciation charge for 2013 would be $300,000 whereas the depreciation on the
existing equipment would only be $106,875. This is an increase of $193,125. In
addition the other fixed costs are expected to increase by $60,000 (see(c) (i)).
10
September 2012
The fixed costs for 2013 will now be $200,000 + 80,000 + 60,000 + 300,000 =
$640,000.
Variable production costs are expected to reduce by 20% (see (b) above) which will
improve the contribution to sales ratio from 59.6% (590/990) to 67.7% (670/990).
If the investment goes ahead the breakeven sales value for 2013 will be $640,000/ .677
= $945,668
Without the investment the breakeven sales value is $649,119 (see (b) above).
This means that KL would need to increase its sales by 45.7% in order to break-even.
September 2012
11
P2
Performance Pillar
Thursday 30 August 2012
15.
to close.
TURN OVER
SECTION A 50 MARKS
section.]

Question One
A company is developing a new product. During its expected life it is forecast that 6,400 units
of the product will be sold for $70 per unit.
The direct material and other non-labour related costs are expected to be $45 per unit
throughout the life of the product.
Production is expected to be in batches of 100 units throughout the life of the product. The
direct labour cost is expected to reduce due to the effects of learning throughout the life of the
product. The total direct labour cost of the first batch of 100 units is expected to be $6,000
and an 80% learning effect is expected to occur.
Fixed costs specific to this product are expected to be $60,000 in total for the life of the
product.
Note: The value of the learning index for an 80% learning curve is -0.3219
Required:
(a)
Calculate the total direct labour cost of the first:

(i)
(ii)
(iii)
(iv)
800 units
1,600 units
3,200 units
6,400 units
(4 marks)
(b)
Apply the results from part (a) to advise the company management of the
approximate break-even level of sales of the product.
(3 marks)
(c)
Explain the effect on the break-even level of sales if the rate of learning
was 90%. (No calculations are required.)
(3 marks)
September 2012
Question Two
CX is a passenger transport company which is seeking to improve its profits. It operates a
number of bus routes within a 10 mile radius of a city centre. It operates a fleet of 100 buses,
each of which has a capacity of 50 persons, throughout the day, seven days per week. The
frequency of buses on each of its routes varies from a minimum of one to a maximum of four
per hour during the day and evening.
The passengers who use the buses are a mix of adults and children. Some routes are busier
than others and, at certain times, some passengers have to stand on the bus as there are
insufficient seats available.
The directors of CX are considering how best to measure the performance of each of the
routes that they operate and it has been suggested that they should use a Balanced
Scorecard approach.
Required:
(a)
Explain how the Balanced Scorecard could be used by CX to improve its

profits.
(4 marks)
(b)
Explain TWO performance measures, each from a different perspective of

the Balanced Scorecard, that CX could use to measure the performance
of its routes. (You must state the perspective to which each of your
measures relates.)
(6 marks)
Question Three
Required:
(a)
Explain the links between budgets, standard costs and flexible budgeting.
(6 marks)
(b)
Discuss the importance of your answer to (a) for management control.

(4 marks)
September 2012
TURN OVER
Question Four
A company manufactures a single product. The selling price, production cost and contribution
per unit for this product for 2013 have been predicted as follows:
Selling price
Direct materials (components)
Direct labour
Variable overhead
Contribution
$ per unit
90.00
30.00
35.00
10.00
75.00
15.00
The company has forecast that demand for the product during 2013 will be 24,000 units.
However to satisfy this level of demand, production of 35,294 units will be required because:
15% of the items delivered to customers (4,235 units) will be rejected as faulty and
will require free replacement. The cost of delivering the replacement item is $5 per
unit;
20% of the items manufactured (7,059 units) will be discovered to be faulty before
they are despatched to customers.
In addition, before production commences, 10% of the components that the company
purchases are damaged while in storage.
As a consequence of all of the above, total quality costs for the year amount to $985,885.
The company is now considering the following proposal:
1. Spending $30,000 per annum on a quality inspector which would reduce the
percentage of faulty items delivered to customers to 13%; and
2. Spending $500,000 per annum on training courses for the production workers which
management believes will reduce and sustain the level of faulty production to 10%.
Required:
(a)
Prepare a statement that shows the quality costs that the company would
expect to incur if it accepted the above proposal. Your answer should
clearly show the costs analysed using the four recognised quality cost
headings.
(7 marks)
(b)
Recommend with reasons, whether or not the company should accept the
proposal.
(3 marks)
September 2012
Question Five
A company has carried out extensive product research and as a result has just launched a
new innovative product unlike anything else that is currently available on the market. The
company has launched this product using a market skimming pricing policy.
The market in which it operates is highly competitive and historically success has been
achieved by being the first to market with new products. Only a small number of companies
have survived in the market and those that remain are constantly aiming to develop new
products either by improving those already in the market or by extensive product research.
Required:
Explain, with reasons, the changes that the company may need to make to the
unit selling price of the product as it moves through each of the four stages of its
product life cycle.
End of Section A
TURN OVER
September 2012
SECTION B 50 MARKS

Question Six
CDF is a manufacturing company within the DF group. CDF has been asked to provide a
quotation for a contract for a new customer and is aware that this could lead to further orders.
As a consequence, CDF will produce the quotation by using relevant costing instead of its
usual method of full cost plus pricing.
The following information has been obtained in relation to the contract:
Material D
40 tonnes of material D would be required. This material is in regular use by CDF and has a
current purchase price of $38 per tonne. Currently, there are 5 tonnes in inventory which cost
$35 per tonne. The resale value of the material in inventory is $24 per tonne.
Components
4,000 components would be required. These could be bought externally for $15 each or
alternatively they could be supplied by RDF, another company within the DF manufacturing
group. The variable cost of the component if it were manufactured by RDF would be $8 per
unit, and RDF adds 30% to its variable cost to contribute to its fixed costs plus a further 20%
to this total cost in order to set its internal transfer price. RDF has sufficient capacity to
produce 2,500 components without affecting its ability to satisfy its own external customers.
However in order to make the extra 1,500 components required by CDF, RDF would have to
forgo other external sales of $50,000 which have a contribution to sales ratio of 40%.
Labour hours
850 direct labour hours would be required. All direct labour within CDF is paid on an hourly
basis with no guaranteed wage agreement. The grade of labour required is currently paid $10
per hour, but department W is already working at 100% capacity. Possible ways of
overcoming this problem are:
Use workers in department Z, because it has sufficient capacity. These workers are
paid $15 per hour.
Arrange for sub-contract workers to undertake some of the other work that is
performed in department W. The sub-contract workers would cost $13 per hour.
Specialist machine
The contract would require a specialist machine. The machine could be hired for $15,000 or it
could be bought for $50,000. At the end of the contract if the machine were bought, it could
be sold for $30,000. Alternatively it could be modified at a cost of $5,000 and then used on
other contracts instead of buying another essential machine that would cost $45,000.
The operating costs of the machine are payable by CDF whether it hires or buys the machine.
These costs would total $12,000 in respect of the new contract.
Supervisor
The contract would be supervised by an existing manager who is paid an annual salary of
$50,000 and has sufficient capacity to carry out this supervision. The manager would receive
a bonus of $500 for the additional work.
September 2012
Development time
15 hours of development time at a cost of $3,000 have already been worked in determining
the resource requirements of the contract.
Fixed overhead absorption rate
CDF uses an absorption rate of $20 per direct labour hour to recover its general fixed
overhead costs. This includes $5 per hour for depreciation.
Required:
(a)
Calculate the relevant cost of the contract to CDF. You must present your
answer in a schedule that clearly shows the relevant cost value for each of the
items identified above. You should also explain each relevant cost value you
have included in your schedule and why any values you have excluded are not
relevant.
Ignore taxation and the time value of money.
(19 marks)
(b)
Discuss TWO problems that can arise as a result of setting prices using
relevant costing.
(6 marks)
Section B continues on page 8
TURN OVER
September 2012
Question Seven
HJ and KL are two companies that operate in the same industry sector. Details for the two
companies for the year ended 31 December 2011 are as follows:
HJ
$000
1,600
KL
$000
990
400
400
800
1,200
400
120
280
390
790
200
80
120
2,000
400
1,600
200
1,800
1,800
1,230
570
150
720
Performance measures
Return on Capital Employed (ROCE)
15.56%
16.67%
Operating profit margin
17.50%
12.12%
0.89
1.38
Revenue
Cost of sales:
Variable production costs
Fixed production costs (including
depreciation see Note 3)
Gross profit
Administration costs (fixed)
Operating profit
Non-current assets:
Cost
Depreciation (see below)
Net current assets
Capital employed
Asset turnover
Notes
1. Assume that the non-current assets of both companies are all used in their manufacturing
processes.
2. The two companies use different depreciation policies: HJ depreciates its non-current
assets using straight-line depreciation at the rate of 20% of cost with no residual value;
whereas KL uses the reducing balance method of depreciation at the rate of 25% per
annum.
3. Included in the fixed costs of the year ended 31 December 2011 is depreciation of
$400,000 for HJ and $190,000 for KL.
4. Each company purchased all of its non-current assets in the month the company was
formed. Neither company has purchased or disposed of any non-current assets since
their original purchase.
HJ has undertaken a benchmarking exercise. The Managing Director (MD) of HJ has been
asked to explain the companys results compared to those of KL. The MD says the
differences are because of HJs depreciation policy and the age of the companys assets.
September 2012
Required:
(a)
Calculate the THREE revised performance ratios of HJ after adjusting its

results to align the age of its assets and its depreciation policy with that of
KL.
(9 marks)
(b)
Calculate, for KL only, the break-even sales value in 2013 assuming that
there are no changes to its cost and selling price structure or to its mix of
sales, there are no purchases or disposals of non-current assets and that
the existing depreciation policy continues to be applied.
(4 marks)
The directors of KL are now considering replacing its non-current assets with new equipment
that will be fully operational from 1 January 2013. The manufacturer of the new equipment
has offered to accept the companys old equipment as a trade in at its net book value at 31
December 2012 of $427,500. If this offer is not accepted KL does not expect to be able to
dispose of the old equipment for ANY value at any time in the future.
The new equipment:
Has a cost of $1.2million before any trade in value is deducted;

Increases the fixed production cost (excluding depreciation) by 30% per annum;
Reduces the variable production cost per unit by 20%;
Has a life of five years, a residual value after five years of $285,000 and is to be
depreciated using the same depreciation method that is currently being used for the
existing equipment;
Assume that
There is no change to the unit selling price or demand for KLs product;
KLs cost of capital for this type of investment is 10% per annum.
Required:
(c)
(i)
Recommend, based on Net Present Value, whether or not KL should

replace its existing non-current assets.
Ignore taxation and inflation.
(6 marks)
(ii)
Discuss the effect on the break-even sales value in 2013 of investing in

the new equipment. Your answer should be supported by appropriate
calculations.
(6 marks)
September 2012

10
September 2012
PRESENT VALUE TABLE

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
4%
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
Interest rates (r)

5%
6%
0.952
0.943
0.907
0.890
0.864
0.840
0.823
0.792
0.784
0.747
0.746
0705
0.711
0.665
0.677
0.627
0.645
0.592
0.614
0.558
0.585
0.527
0.557
0.497
0.530
0.469
0.505
0.442
0.481
0.417
0.458
0.394
0.436
0.371
0.416
0.350
0.396
0.331
0.377
0.312
7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
Interest rates (r)

15%
16%
0.870
0.862
0.756
0.743
0.658
0.641
0.572
0.552
0.497
0.476
0.432
0.410
0.376
0.354
0.327
0.305
0.284
0.263
0.247
0.227
0.215
0.195
0.187
0.168
0.163
0.145
0.141
0.125
0.123
0.108
0.107
0.093
0.093
0.080
0.081
0.069
0.070
0.060
0.061
0.051
17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
September 2012
11
Periods
(n)
1
2
3
4
5
1 (1+ r ) n
r
1%
0.990
1.970
2.941
3.902
4.853
2%
0.980
1.942
2.884
3.808
4.713
3%
0.971
1.913
2.829
3.717
4.580
4%
0.962
1.886
2.775
3.630
4.452
Interest rates (r)

5%
6%
0.952
0.943
1.859
1.833
2.723
2.673
3.546
3.465
4.329
4.212
7%
0.935
1.808
2.624
3.387
4.100
8%
0.926
1.783
2.577
3.312
3.993
9%
0.917
1.759
2.531
3.240
3.890
10%
0.909
1.736
2.487
3.170
3.791
6
7
8
9
10
5.795
6.728
7.652
8.566
9.471
5.601
6.472
7.325
8.162
8.983
5.417
6.230
7.020
7.786
8.530
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
11
12
13
14
15
10.368
11.255
12.134
13.004
13.865
9.787
10.575
11.348
12.106
12.849
9.253
9.954
10.635
11.296
11.938
8.760
9.385
9.986
10.563
11.118
8.306
8.863
9.394
9.899
10.380
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.244
8.559
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
16
17
18
19
20
14.718
15.562
16.398
17.226
18.046
13.578
14.292
14.992
15.679
16.351
12.561
13.166
13.754
14.324
14.878
11.652
12.166
12.659
13.134
13.590
10.838
11.274
11.690
12.085
12.462
10.106
10.477
10.828
11.158
11.470
9.447
9.763
10.059
10.336
10.594
8.851
9.122
9.372
9.604
9.818
8.313
8.544
8.756
8.950
9.129
7.824
8.022
8.201
8.365
8.514
Periods
(n)
1
2
3
4
5
11%
0.901
1.713
2.444
3.102
3.696
12%
0.893
1.690
2.402
3.037
3.605
13%
0.885
1.668
2.361
2.974
3.517
14%
0.877
1.647
2.322
2.914
3.433
Interest rates (r)

15%
16%
0.870
0.862
1.626
1.605
2.283
2.246
2.855
2.798
3.352
3.274
17%
0.855
1.585
2.210
2.743
3.199
18%
0.847
1.566
2.174
2.690
3.127
19%
0.840
1.547
2.140
2.639
3.058
20%
0.833
1.528
2.106
2.589
2.991
6
7
8
9
10
4.231
4.712
5.146
5.537
5.889
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.784
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
3.498
3.812
4.078
4.303
4.494
3.410
3.706
3.954
4.163
4.339
3.326
3.605
3.837
4.031
4.192
11
12
13
14
15
6.207
6.492
6.750
6.982
7.191
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.302
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.724
5.847
5.029
5.197
5.342
5.468
5.575
4.836
4.988
5.118
5.229
5.324
4.656
7.793
4.910
5.008
5.092
4.486
4.611
4.715
4.802
4.876
4.327
4.439
4.533
4.611
4.675
16
17
18
19
20
7.379
7.549
7.702
7.839
7.963
6.974
7.120
7.250
7.366
7.469
6.604
6.729
6.840
6.938
7.025
6.265
6.373
6.467
6.550
6.623
5.954
6.047
6.128
6.198
6.259
5.668
5.749
5.818
5.877
5.929
5.405
5.475
5.534
5.584
5.628
5.162
5.222
5.273
5.316
5.353
4.938
4.990
5.033
5.070
5.101
4.730
4.775
4.812
4.843
4.870
12
September 2012
FORMULAE
PROBABILITY
A B = A or B.
Rules of Addition
P(A B) = P(A) + P(B)

P(A B) = P(A) + P(B) P(A B)
P(A B) = P(A) * P(B)

P(A B) = P(A) * P(B | A)
Arithmetic Mean
x =
x
n
x=
fx
f
Standard Deviation
SD =
( x x ) 2
n
SD =
fx 2
f
INDEX NUMBERS
Price:
Quantity:
P
w 1
Po
w
x 100
Q
w 1
Qo x 100
w
TIME SERIES
Additive Model
September 2012
13
n
S = X[1 + r]
Annuity
PV =
1
1
1
r [1 + r ] n
Perpetuity
PV =
1
r
LEARNING CURVE
b
Yx = aX
where:
2C o D
EOQ =
Ch
where:
Co
Ch
D
=
=
=

annual demand
14
September 2012

LEARNING OBJECTIVE
Level 1 - KNOWLEDGE
VERBS USED
DEFINITION
List
State
Define
Make a list of
Describe
Distinguish
Explain

purpose of
consideration
something
Identify
Illustrate
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Level 4 - ANALYSIS
September 2012
Analyse
Categorise

practical means
Find an answer to
Arrange in a table
Construct
Discuss
Interpret
Prioritise
Produce

between
Build up or compile
Advise
Evaluate
Recommend

15
Performance Pillar
September 2012
16
September 2012
November 2012 examination
Examiners Answers
question, will be published on the CIMA website by early February at
SECTION A
Rationale
The question examines candidates knowledge, understanding and application of variance
analysis linked to the learning curve. The learning outcome tested is B1 (e), apply learning
curves to estimate time and cost for new products and services.
Suggested Approach
Carefully read and absorb the data provided, and by use of either the labour efficiency
planning variance, or the labour efficiency operating variance, calculate the revised standard
time to produce 32 units. The next step needed a calculation to arrive at the average time
per unit, and express this as a percentage of the time for the first unit (25 hours). Then, by
recognising that the number of doublings is five, take the fifth root of the percentage earlier
calculated to arrive at the expected learning rate.
Part (b) requested you to explain two reasons why it is important for production and control
purposes to identify the learning curve, such as scheduling, control and resourcing.
(a)
The planning variance is $4,320. This represents 360 hours. Therefore the revised
standard time to produce 32 units is (25*32) - 360 = 440 hours.
The cumulative average standard time per unit is 440/32 = 13.75 hours per unit
November 2012
P2
The time for the first unit was 25 hours.

The cumulative average time per unit for the first 32 units as a percentage of the time
for the first unit is 55%.
32 units is 5 doublings of output (2, 4, 8, 16, 32) and therefore 55% is the fifth root of
the learning rate
Therefore the expected learning rate was 88.7%
(b)
The identification of the learning curve is important because of its impact on the time
taken to produce the output. This has implications in many areas of production planning
and control:
Scheduling: it is important to know the expected time that the output will take so that
realistic schedules can be produced. This is important for meeting deadlines and also
for effective utilisation of resources (for example preventing under utilisation of
capacity).
Resources: production planning is needed to ensure that sufficient resources are
available (e.g. materials). If the workers can work faster because of the learning curve it
is important that the resources they need are available.
Control: if the learning curve is not identified, the efficiency variance is of little use for
control purposes. The impact of the learning curve will hide the true picture of the
labour efficiency variance because the standard will be unrealistic if it is based on the
time taken for the first unit to be produced.
Note: the question asked for two reasons. Marks were awarded for reasons other than
those shown above.
Rationale
The question examines candidates knowledge and understanding of a flexed budget. The
learning outcome tested is C2 (c), evaluate performance using fixed and flexible budget
reports.
Suggested Approach
Carefully read and digest the relevant information and produce an amended statement that
includes a flexed budget column. The variance column would now compare the flexed
budget with the actual column.
Part (b) asked for an explanation of a benefit and a limitation of the statement produced in
part (a).
P2
November 2012
(a)
Performance report for the quarter ending October 2012
Budget
Sales units
Production units
Sales
Direct materials
Direct labour
Variable overhead
Fixed overhead
Cost of sales
Gross Profit
(b)
Actual
Variance
12,000
14,000
$000
360
70
Flexed
Budget
13,000
13,500
$000
390
67.5
13,000
13,500
$000
385
69
$000
140
42
84
(48)
288
72
135
40.5
84
(12)
315
75
132
43
85
(12)
317
68
5
1.5
A
A
3
2.5
1
0
2
7
F
A
A
A
A
The original statement compared budgeted revenues and costs with actual revenues
and costs. The resulting variances offer little insight into why the differences occurred.
For effective performance review and control it is important the figures are compared
on a like for like basis: there is little point in comparing the actual costs of producing
13,500 units with the budgeted costs of producing 14,000 units. Therefore it is
important that volume differences are taken out: this is the reason for flexing the
budget.
The flexible budget does not offer enough detail for responsibility and control. The
variances are total variances and do not point to areas of individual responsibility. For
example the total direct materials variance could be made up of a price variance and a
usage variance. These variances will be the responsibility of different managers within
the company.
November 2012
P2
Rationale
The question examines candidates knowledge of participative budgeting. The learning
outcome tested is C3 (a), discuss the impact of budgetary control systems and setting of
standard costs on human behaviour.
Suggested Approach
Carefully read the scenario to identify the circumstances associated with the introduction of a
participative budget. A report addressed to the new Director was required that needed to
contain specific items such as potential benefits and disadvantages of involving new
managers in this budget setting process. Finally the question asked for a recommendation to
the new Director relating to the introduction of a participative budget.
REPORT
To: Managing Director
From: XX
Subject: Participative budgeting.
Date: November 2012
Introduction
The following report identifies two advantages and two disadvantages of involving managers
in the setting of budgets.
Advantages
1) If managers are involved in setting budgets then the budgets may be more relevant to the
business because the manager will have specialist knowledge of their area of the
business and they can incorporate this into their budgets. As a result the budgets will
provide a more realistic target and are a better indicator of likely results which can then
be used in strategic planning and decision making with a view to meeting the terms of the
contract.
2) If managers are involved in the budget setting process then they are likely to take
ownership of the budget and feel that failing to achieve it is a personal failure. This means
that managers will be motivated to achieve the targets they have set and agreed, and
consequently the target is more likely to be achieved than one that is simply handed to
them without their involvement.
3) The new managers may gain valuable knowledge of the business by working closely with
the existing managers when preparing the budgets. The existing managers may have
detailed knowledge of current operations and the availability of resources that are of
benefit for the new contract.
Disadvantages
1) The managers may deliberately set themselves targets that are easier to achieve by the
inclusion of budgetary slack. This may result in the companys performance being lower
than it would have been had more difficult targets been imposed on the managers.
However targets are set in the contract.
2) Some of the managers may have less experience than others in managing passenger
transport operations. Consequently they may not understand the relationships that exist
between different budgets and the impact that one has on the other and they may take
decisions in their own area that are detrimental to another area of the business and to the
company as a whole.
P2
November 2012
Recommendation
It is important that the managers work together as a team to prepare the companys budgets.
In this way they can share their expertise and produce a set of budgets that are realistic and
for the benefit of the company as a whole. In this way it is generally agreed that manager
involvement in the budget setting process is likely to lead to better budgets and better
performance.
Rationale
The question examines candidates knowledge and understanding of quality costs. The
learning outcome tested is B1 (d), prepare cost of quality reports.
Suggested Approach
Part (a) required an explanation of each of the four quality cost classifications using examples
from the scenario.
Part (b) required a discussion, using data from the scenario, to describe the relationship
between conformance costs and non-conformance costs and its importance to this company.
(a)
Prevention costs are costs that are incurred in order to prevent poor quality.
Examples from the data provided are expenditure on staff training and preventative
maintenance.
Appraisal costs are costs incurred to measure or appraise the quality of the items
produced. An example from the data provided is finished goods inspection cost.
Internal failure costs are costs that are incurred in rejecting or correcting faulty goods
where the quality failure is discovered before the item is despatched to the customer.
An example from the data provided would be the costs related to the goods that are
rejected before delivery.
External failure costs are costs that are incurred as a result of customers rejecting
goods that have been delivered to them. In the data provided there are goods that have
been rejected by customers. The costs associated with these rejects would include
collection and re-delivery costs and the loss of customer goodwill.
(b)
Conformance costs are prevention and appraisal costs. Non-conformance costs are
internal and external failure costs. The relationship is that higher conformance costs
should in the long run lead to lower non-conformance costs.
In the data provided it can be seen that costs incurred on prevention and appraisal
costs were a greater percentage of turnover in 2012 compared to 2011 and as a result
the level of external failures reduced. This would improve the perception of the
company in the market.
It can also be seen that the level of failures identified before despatch increased. This
could be because of the greater expenditure on appraisal costs. However it would
appear that there are far too many rejects being manufactured and that the company
needs to work towards improving the quality of its manufacturing processes rather than
relying on quality inspections to identify sub-standard production. The company should
work towards designing quality in as opposed to inspecting poor quality out.
November 2012
P2
Rationale
The question examines candidates knowledge of J.I.T. and the impact of its application
compared to a traditional stock control system. The learning outcome tested is B1(b),
evaluate the impacts of just-in-time production, the theory of constrains and total quality
management on efficiency, inventory and cost.
Suggested Approach
Part(a) Carefully understand the details contained in the scenario and produce two plans
which would identify which method of stock control/management would incur the lowest total
cost.
A full costing approach could have been adopted, but the approach which made the most
economical use of time was an incremental approach. Careful presentation of the figures
was essential for this part of the question.
Part (b) asked candidates to explain two reasons why the decision reached in part (a) should
not be based on this answer alone. (The marking schemes accommodated the answer given
in part (a) in that reasons could be accepted for either eventuality).
(a)
Quarter
Production level using JIT (units)
Incremental production compared
to constant level production
Standard unit variable production cost
Incremental production cost $
(excluding overtime)
Overtime production (units)
Overtime unit premium $
Overtime production cost $
Total incremental production cost
1
19,000
(16,000)
2
34,000
(1,000)
3
37,000
2,000
4
50,000
15,000
$60
$60
$65
$70
(960,000)
(60,000)
(960,000)
(60,000)
130,000
1,000
26.00
26,000
156,000
1,050,000
14,000
28.00
392,000
1,442,000
Net incremental production cost $578,000

Inventory costs saved by JIT system:
Units
Opening inventory
Production
Sales
Closing inventory
average inventory
Holding cost $
1
0
35,000
19,000
16,000
8,000
2
16,000
35,000
34,000
17,000
16,500
3
17,000
35,000
37,000
15,000
16,000
4
15,000
35,000
50,000
0
7,500
104,000
214,500
208,000
97,500
Total holding cost = $624,000

Therefore overall there is a saving of $46,000 by changing to a JIT system.
P2
November 2012
(b)
On the basis of the above calculations CDE should change to a JIT production system
but there are other factors that should be considered:
How long is the contract? What will the demand be for next year and subsequent years
given the important features of the component? It would be foolish to make the decision
based only on the first years forecast if this is to be a long term contract. A full
investment appraisal should be undertaken and the decision should be based on the
net present value of the relevant cash flows.
Overtime will be needed in the final two quarters. Given the rising costs and the
overtime premium, can alternative methods of production be found? What will be the
impact of the overtime working on the workforce?
In a JIT production system there will be no inventory and consequently there is no
margin for errors in production. Consequently CDE may need to invest in quality control
systems in order to ensure that the units produced are of the appropriate quality.
Note: the question asked for two factors. Marks were awarded to
other relevant comments.
November 2012
P2
SECTION B
Rationale
The question examines candidates knowledge and understanding of limiting factors, aspects
associated with limiting factors, such as make v buy, and break even analysis. The learning
outcomes tested are: part (a) A2 (b), apply and interpret variable/fixed cost analysis in
multiple product contexts to break-even analysis and product mix decisions, including
circumstances where there are multiple constrains and linear programming methods needed
to identify optimal solutions; part (b) A2(c), discuss the meaning of optimal solutions and
demonstrate how linear programming methods can be employed for profit maximising,
revenue maximising and satisfying objective; parts (c) and (d), A2(d), analyse the impact of
uncertainty and risk on decision models based on CPV analysis.
Suggested Approach
Part (a) carefully read the question to fully understand the details provided and what was
required. The first step was to establish the limiting factor and then construct a table to allow
the company to arrive at a production plan that would maximise the companys profit. It was
important that products C1 and C2 were treated in exactly the same way as the treatment for
products P1, P2 and P3.
Part (b) required a sound understanding of shadow pricing, before addressing the figures
given in the question.
Part (c) required an understanding of breakeven analysis when faced with products which are
sold in a specific ratio.
Part (d) used the same scenario as part (c) but required the ability to calculate the sensitivity
of one of the products. Part (d) was not reliant on the completion of part (c).
(a)
Resource requirements for internal production of all units demanded:
P1 (500 units)
P2 (400 units)
P3 (600 units)
C1 (250 units)
C2 (150 units)
Total
Available
Direct
labour
(hours)
1,250
600
1,800
250
225
4,125
4,300
Direct
materials
(kg)
100
160
240
25
30
555
420
As can be seen the direct materials are the scarce resource so the ranking is based on
the contribution per kg of direct materials.
P2
November 2012
Selling price /
Purchase cost
Direct material ($50/kg)
Variable overhead
($40 / machine hour)
Contribution / unit
Direct material / unit
Contribution / kg ($)
Ranking
Uses (kgs)
(b)
P1
$/unit
155
P2
$/unit
125
P3
$/unit
175
C1
$/unit
50
C2
$/unit
80
25
10
15
20
30
20
10
5
15
10
15
75
187.5
th
4
137
54.8
20
105
262.5
nd
2
600
240
10
110
550
st
1
500
100
10
25
250
rd
3
250
25
20
35
175
th
5
1
0.2
If there was an extra 0.2 kgs of direct material then the production of P2 would increase
by 1 unit and the production of C2 would reduce by 1 unit with a resulting increase in
contribution of $40, thus the shadow price of the next 0.2kgs of direct material is $200
per kg.
Then, until the demand for P2 is fully satisfied the shadow price would be $187.5 per kg
provided it could be purchased in multiples of 0.4kgs. The demand for P2 would be fully
satisfied once a further 105.2kgs had been obtained ((400 units 137 units) x 0.4kg).
Thereafter any further materials would be used to produce C2 so the shadow price
would reduce to $175 per kg.
(c)
Consider a bundle of products in the mix 9L:6M:5N

L
Sales mix
Selling price per unit

Variable cost per unit
Contribution per unit
Total contribution
M
6
N
5
Total
1 bundle
$
300
100
200
1,800
$
600
300
300
1,800
$
230
50
180
900
4,500
Number of bundles needed to break even = 2,700,000/4,500 = 600

Therefore the sales plan to break even is 5,400L, 3,600M and 3,000N
(d)
Sales budget (units)
Total contribution
Fixed costs
Profit
L
6,300
$
200
1,260,000
M
4,200
$
300
1,260,000
N
3,500
$
180
630,000
Total
3,150,000
2,700,000
450,000
Contribution from L can drop by $450,000.

The contribution per unit, and therefore selling price per unit, can fall by $450,000/6,300 =
$71.43 per unit.
The current selling price per unit is $300.
Therefore the sensitivity is $71.43/$300 = 23.8%
November 2012
P2

Rationale
The question examines candidates understanding of transfer pricing, the calculation of the
maximum profit for a division and the company as a whole, and a discussion on transfer
pricing using opportunity cost. The learning outcomes tested are: part (a) and part(c), D3(c),
discuss the likely consequences of different approaches to transfer pricing for divisional
decision making and group profitability, the motivation of divisional management and the
autonomy of individual divisions.
Part (b), D2(b), prepare and discuss revenue and cost information in appropriate formats for
profit and investment centre managers taking due account of cost viability, attributable costs,
controllable costs, and identification of appropriate measures of profit centre contribution.
Suggested Approach
Part (a)(i) Carefully digest the details in the question and calculate the revenue generated by
the complete cameras when viewed by the Optics divisional manager.
The main aim was to calculate the selling price the Optics division would transfer the optical
device to the Body division.
Part (a)(ii) a required similar calculations but the transfer price needed to generate the
maximum profit for the OB group.
Part (b) considered the transfer of items between two divisions of the same company and
required calculations to address the two situations described in the questions.
Part (c) required a discussion relating to the use of opportunity costs as a basis for transfer
pricing.
All parts of this question required answers to relate to the scenarios in the question.
(a)
(i)
Optics division Price equation is P = 6,000 0.5x

Profit maximised when MC = MR
1,200 = 6,000 x
x = 4,800
Therefore P = 6,000 2,400 = $3,600
Body Division Price equation is P = 8,000 (1/3)x
Profit maximised when MC = MR
The marginal cost for the complete camera will be 1,750 + 3,600 = 5,350
5,350 = 8,000 (2/3)x
(2/3)x = 2,650
x = 3,975
P = 8,000 (1/3)3,975
P = $6,675
Revenue generated by the complete cameras = 3,975 * $6,675 = $26,533,125
P2
10
November 2012
(ii)
If the transfer price was set to maximise the profits of the group it would be $1,200 and
the marginal cost of a complete camera would be $2,950
MC = MR
2,950 = 8,000 (2/3)x
(2/3)x = 5,050
x = 7,575
P = 8,000 (1/3)7,575
P = $5,475
Revenue generated by the complete cameras = 7,575 * $5,475 = $41,473,125
(b)
(i)
Return required by PD = $2.4m * 12% = $288,000

Therefore total contribution needed = $2,688,000
Total contribution = (x 1.40) * 4,480,000
2,688,000 = (x 1.40) * 4,480,000
x 1.40 = 2,688,000/4,480,000 = 0.60
Therefore the minimum selling price per box that PD would be willing to charge is
$2.00.
(ii)
Return required by SD = $6m * 12% = 720,000

Total contribution needed = $6,720,000
6,720,000 = 13,500,000 (x * 500,000)
x*500,000 = 6,780,000
x = 13.56
The maximum variable cost that would allow SD to earn a return of 12% is $13.56. The
variable costs from within SD are $12.00 and therefore the maximum that it would be
willing to pay for a box is $1.56
(c)
The possible extreme transfer prices are:

Marginal cost: no reward is given to the supplying division. This method could be
acceptable to the supplying division if there was spare capacity but there would be a
reluctance to trade at this price because of the lack of a reward. Under this system PD
would supply the boxes to SD at $1.40 each. However PD is operating very close to
capacity and if demand from external customers increased the opportunity cost would
be the external sales that would be forgone.
Market price: this should be used if there is a perfectly competitive market. The selling
division will, if operating efficiently, be expected to earn a profit and the buying division
should be happy to buy at this price as the only alternative is the open market. The
price should be reduced for any internal savings. This is what PD wants to do (charge
SD the external selling price).
November 2012
11
P2
Using opportunity cost as the transfer price would enable the above extremes to be
recognised. Therefore the view of the Manager of SD is worthy of support. If PD can
sell all of its output externally then the opportunity cost would be the selling price.
Consequently PD should not be penalised by having to accept a lower price from SD. If
there is spare capacity then SD should be allowed to benefit and could then be charged
just the marginal cost.
However the performance appraisal will have an impact on the behaviours of the
managers and their willingness to trade must be considered. One solution to this could
be to use a dual pricing system.
P2
12
November 2012
Performance Pillar
21 November 2012 Wednesday Afternoon Session
19.
to close.
TURN OVER
SECTION A 50 MARKS
section.]

Question One
A company has developed a new product. The following information was prepared by the
trainee accountant for presentation at the first performance review meeting for the new
product.
Standard labour wage rate
Standard labour hours per unit
Output to date
Actual labour hours worked
Labour efficiency variance
$12 per labour hour

25 hours
32 units
460 hours
$4,080 favourable
The Management Accountant pointed out that this analysis ignored the learning curve and
that 25 hours was the time taken for the first unit. The Management Accountant said that a
better representation of the performance would be obtained by splitting the variance into
planning and operating elements and calculated them to be as shown below:
Labour efficiency planning variance
Labour efficiency operating variance
$4,320 favourable
$240 adverse
Required:
(a)
Calculate the learning rate that the Management Accountant assumed

when recalculating the variances.
(6 marks)
(b)
Explain TWO reasons why it is important for production planning and

control purposes to identify the learning curve.
(4 marks)
November 2012
Question Two
A newly formed engineering company has just completed its first three months of trading. The
company manufactures only one type of product. The external accountant for the company
has produced the following statement to present at a meeting to review performance for the
first quarter.
Performance report for the quarter ending 31 October 2012
Sales units
Production units
Budget
12,000
14,000
$000
Sales
Direct materials
Direct labour
Fixed production overhead
Cost of sales
Gross profit
$000
360
70
140
42
84
(48)
Actual
13,000
13,500
$000
Variance
1,000
(500)
$000
385
$000
25
1
8
(1)
(1)
(36)
(29)
(4)
69
132
43
85
(12)
288
72
317
68
The external accountant has stated that he values inventory at the budgeted total production
cost per unit.
Required:
(a) Produce an amended statement for the quarter ending 31 October 2012
that is based on a flexed budget.
(6 marks)
(b) Explain ONE benefit and ONE limitation of the statement you have
produced.
(4 marks)
TURN OVER
November 2012
Question Three
KL is a transport company that has recently won a five-year government contract to provide
rail transport services. The company appointed a new Director to take responsibility for the
government contract. She has worked in various positions in other rail transport companies
for a number of years. She has put together a team of managers by recruiting some of her
former colleagues and some of KLs current managers.
The contract stipulates that the company should prepare detailed budgets for its first year of
operations to show how it intends to meet the various operating targets that are stated in the
contract. The new Director is undecided about whether she should prepare the budgets
herself or whether she should involve her management team, including the newly recruited
managers, in the process.
Required:
Produce a report, addressed to the new Director, that discusses participative
budgeting.
Note: your report must
explain TWO potential benefits and TWO potential disadvantages of

involving the new and existing managers in the budget setting process.
provide a recommendation to the new Director.

(10 marks)
November 2012
Question Four
A manufacturing company is reviewing its progress towards meeting its objective of having a
reputation for producing high quality products. Extracts from the companys records for each
of the years ended 30 September 2011 and 2012 are shown below.
% of units rejected by customers

% of units rejected before delivery
2012
12%
12%
2011
20%
3%
Costs as % of revenue
Raw material inspection
Direct material
Direct labour
Training
Preventative machine maintenance
Machine breakdown maintenance
Finished goods inspection
8%
18%
13%
8%
8%
5%
7%
3%
20%
12%
4%
2%
10%
1%
Required:
(a)
Explain each of the four quality cost classifications using examples from
the above data.
(4 marks)
(b)
Discuss, using the above data, the relationship between conformance

costs and non-conformance costs and its importance for this company.
(6 marks)
TURN OVER
November 2012
Question Five
CDE has recently won a contract to supply a component to a major car manufacturer that is
about to launch a new range of vehicles. This is a great success for the design team of CDE
as the component has many unique features and will be an important feature of some of the
vehicles in the range.
CDE is currently building a specialised factory to produce the component. The factory will
start production on 1 January 2013. There is an expected demand for 140,000 units of the
component in 2013.
Forecast sales and production costs for 2013:
Quarter
Sales (units)
Variable production cost per unit
1
19,000
2
34,000
3
37,000
4
50,000
$
60
$
60
$
65
$
70
Fixed production overheads for the factory are expected to be $2.8 million in 2013.
A decision has to be made about the production plan. The choices are:
Plan 1: Produce at a constant rate of 35,000 units per quarter
Inventory would be used to cover fluctuations in quarterly demand. Inventory holding costs
will be $13 per unit and will be incurred quarterly based on the average inventory held in each
of the four quarters.
Plan 2: Use a just-in-time (JIT) production system
The factory would be able to produce 36,000 units per quarter in normal time and up to a
further 20,000 units in overtime. However, each unit produced in overtime would incur
additional costs equal to 40% of the forecast variable production cost per unit for that quarter.
Required:
(a) Produce calculations using the above data to show which of the two plans
would incur the lowest total cost in 2013.
(6 marks)
(b) Explain TWO reasons why the decision about the production plan should not
be based on your answer to part (a) alone.
(4 marks)
End of Section A
November 2012
This page is blank
TURN OVER
November 2012
SECTION B 50 MARKS

Question Six
Scenario for parts (a) and (b)
Company WX manufactures a number of finished products and two components. Three
finished products (P1, P2, and P3) and two components (C1 and C2) are made using the
same resources (but in different quantities). The components are used internally by the
company when producing other products but they are not used in the manufacture of P1, P2
or P3.
Budgeted data for December for P1, P2, P3, C1 and C2 are as follows:
Units demanded
Selling price
Direct material ($50/kg)
($40/machine hour)
Fixed production overhead
($20/labour hour)
Gross profit
P1
500
$/unit
155
25
10
10
P2
400
$/unit
125
15
20
15
P3
600
$/unit
175
30
20
20
C1
250
$/unit
10
5
10
C2
150
$/unit
15
10
20
50
30
60
20
30
60
45
45
Further information for December:

Direct labour: 4,300 hours are available.
Direct material: 420 kgs are available.
Machine hours: no restrictions apply.
Components: C1 and C2 are readily available from external suppliers for $50 and $80 per
unit respectively. The external suppliers are reliable and the quality of the components is
similar to that of those manufactured by the company.
Required:
(a) Produce calculations to determine the optimal production plan for P1, P2, P3, C1
and C2 during December.
Note: it is not possible to produce partly finished units or to hold inventory of any of
these products or components.
(10 marks)
November 2012
(b) There is a possibility that more of the direct material may become available during
December. The shadow price per kg of the direct material has been calculated to
be $200, $187.50 and $175 depending on how much extra becomes available.
Required:
Explain the shadow prices of $200, $187.50 and $175 for the direct material.
Your answer should show the changes to the resource usage and the production
plan for each of the shadow prices.
(6 marks)
Scenario for parts (c) and (d)

Company YZ manufactures products L, M and N. These products are always sold in the ratio
9L:6M:5N. The budgeted sales volume for December is a total of 14,000 units. The budgeted
sales volumes, selling price per unit and variable cost per unit for each of the products are
shown below:
Sales budget (units)
Selling price per unit

L
6,300
M
4,200
N
3,500
$
300
100
$
600
300
$
230
50
The budgeted fixed costs of the company for December are $2.7 million.
Required:
(c) Calculate the number of units of each product that must be sold for
Company YZ to break even in December given the current sales mix ratio.
(4 marks)
(d) The Sales Manager has now said that to be able to sell 6,300 units of
product L in December it will be necessary to reduce the selling price of
product L.
Calculate the sensitivity of Company YZs total budgeted profit for

December to a change in the selling price per unit of product L.
(5 marks)
November 2012
TURN OVER
Question Seven
Scenario for part (a)
The OB group has two divisions: the Optics Division and the Body Division. The Optics
Division produces optical devices, including lenses for cameras. The lenses can be sold
directly to external customers or they can be transferred to the Body Division where they are
sold with a camera body as a complete camera.
Optics Division
The relationship between the selling price of a lens and the quantity demanded by external
customers is such that at a price of $6,000 there will be no demand but demand will increase
by 600 lenses for every $300 decrease in the price. The variable cost of producing a lens is
$1,200. The fixed costs of the division are $12 million each year. The Optics Division has the
capacity to satisfy the maximum possible demand if required.
Body Division
After the lens has been included with a body to make a complete camera the relationship
between selling price and demand is such that at a price of $8,000 there will be no demand
for the complete camera but demand will increase by 300 complete cameras for every $100
decrease in the price. The Body Division has annual fixed costs of $15 million and has the
capacity to satisfy the maximum possible demand if required. The total variable costs of a
camera body and packaging it with a lens are $1,750 (this does not include the cost of a
lens).
Note: If P = a bx then Marginal Revenue (MR) will be given by MR = a 2bx.
Required:
(a)
Calculate the total revenue that would be generated by the complete

cameras if:
(i)
the Manager of the Optics Division set the transfer price of a lens equal
to the selling price which would be set to maximise profits from the sale
of lenses to external customers;
(ii)
the transfer price of a lens was set to maximise the profits of the OB
group from the sale of complete cameras.
(10 marks)
Scenario for parts (b) and (c)

The FF group is a divisionalised company that specialises in the production of processed fish.
Each division is a profit centre. The Smoke Division (SD) produces smoked fish. The
Packaging Division (PD) manufactures boxes for packaging products.
Smoke Division (SD)
The Manager of SD has just won a fixed price contract to supply 500,000 units of smoked fish
to a chain of supermarkets. This will fully utilise the capacity of SD for the next year. Budget
details for the next year are:
Fixed costs
Revenue
Output
$12.00 (excluding the box)

$6.0 million
$13.5 million
500,000 units of smoked fish
Each unit of smoked fish requires one box.

10
November 2012
Packaging Division (PD)

The Packaging Division has agreed to supply 500,000 boxes to SD at the same price that it
sells boxes to external customers. Budget details for PD (including the order from SD) for the
next year are:
Variable production cost
Fixed costs
Output
Capacity
$1.40 per box

$2.4 million
4.48 million boxes
4.50 million boxes
Company Policy
It has been announced today that FF will be introducing a new performance appraisal system.
The Divisional Managers will only be paid a bonus if the profit of their division is at least 12%
of assets consumed during the next year. The value of the assets consumed is assumed to
be the same as the fixed costs.
Required:
(b)
Calculate, following the change to the company policy:

(i)
the minimum price per box that PD would be willing to charge;

(3 marks)
(ii)
the maximum price per box that SD would be willing to pay.

(4 marks)
(Total for part (b) = 7 marks)
(c)
The Manager of SD is unhappy about paying the same price per box as
an external customer and thinks that transfer prices should be set using
an opportunity cost-based approach.
Discuss the view that transfer prices should be set using opportunity
cost. You should use the data from the FF group to illustrate your
answer.
(8 marks)

November 2012
11
This page is blank
12
November 2012
PRESENT VALUE TABLE

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
4%
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
Interest rates (r)

5%
6%
0.952
0.943
0.907
0.890
0.864
0.840
0.823
0.792
0.784
0.747
0.746
0705
0.711
0.665
0.677
0.627
0.645
0.592
0.614
0.558
0.585
0.527
0.557
0.497
0.530
0.469
0.505
0.442
0.481
0.417
0.458
0.394
0.436
0.371
0.416
0.350
0.396
0.331
0.377
0.312
7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
Interest rates (r)

15%
16%
0.870
0.862
0.756
0.743
0.658
0.641
0.572
0.552
0.497
0.476
0.432
0.410
0.376
0.354
0.327
0.305
0.284
0.263
0.247
0.227
0.215
0.195
0.187
0.168
0.163
0.145
0.141
0.125
0.123
0.108
0.107
0.093
0.093
0.080
0.081
0.069
0.070
0.060
0.061
0.051
17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
November 2012
13

Periods
(n)
1
2
3
4
5
1 (1+ r ) n
r
1%
0.990
1.970
2.941
3.902
4.853
2%
0.980
1.942
2.884
3.808
4.713
3%
0.971
1.913
2.829
3.717
4.580
4%
0.962
1.886
2.775
3.630
4.452
Interest rates (r)

5%
6%
0.952
0.943
1.859
1.833
2.723
2.673
3.546
3.465
4.329
4.212
7%
0.935
1.808
2.624
3.387
4.100
8%
0.926
1.783
2.577
3.312
3.993
9%
0.917
1.759
2.531
3.240
3.890
10%
0.909
1.736
2.487
3.170
3.791
6
7
8
9
10
5.795
6.728
7.652
8.566
9.471
5.601
6.472
7.325
8.162
8.983
5.417
6.230
7.020
7.786
8.530
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
11
12
13
14
15
10.368
11.255
12.134
13.004
13.865
9.787
10.575
11.348
12.106
12.849
9.253
9.954
10.635
11.296
11.938
8.760
9.385
9.986
10.563
11.118
8.306
8.863
9.394
9.899
10.380
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.244
8.559
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
16
17
18
19
20
14.718
15.562
16.398
17.226
18.046
13.578
14.292
14.992
15.679
16.351
12.561
13.166
13.754
14.324
14.878
11.652
12.166
12.659
13.134
13.590
10.838
11.274
11.690
12.085
12.462
10.106
10.477
10.828
11.158
11.470
9.447
9.763
10.059
10.336
10.594
8.851
9.122
9.372
9.604
9.818
8.313
8.544
8.756
8.950
9.129
7.824
8.022
8.201
8.365
8.514
Periods
(n)
1
2
3
4
5
11%
0.901
1.713
2.444
3.102
3.696
12%
0.893
1.690
2.402
3.037
3.605
13%
0.885
1.668
2.361
2.974
3.517
14%
0.877
1.647
2.322
2.914
3.433
Interest rates (r)

15%
16%
0.870
0.862
1.626
1.605
2.283
2.246
2.855
2.798
3.352
3.274
17%
0.855
1.585
2.210
2.743
3.199
18%
0.847
1.566
2.174
2.690
3.127
19%
0.840
1.547
2.140
2.639
3.058
20%
0.833
1.528
2.106
2.589
2.991
6
7
8
9
10
4.231
4.712
5.146
5.537
5.889
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.784
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
3.498
3.812
4.078
4.303
4.494
3.410
3.706
3.954
4.163
4.339
3.326
3.605
3.837
4.031
4.192
11
12
13
14
15
6.207
6.492
6.750
6.982
7.191
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.302
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.724
5.847
5.029
5.197
5.342
5.468
5.575
4.836
4.988
5.118
5.229
5.324
4.656
7.793
4.910
5.008
5.092
4.486
4.611
4.715
4.802
4.876
4.327
4.439
4.533
4.611
4.675
16
17
18
19
20
7.379
7.549
7.702
7.839
7.963
6.974
7.120
7.250
7.366
7.469
6.604
6.729
6.840
6.938
7.025
6.265
6.373
6.467
6.550
6.623
5.954
6.047
6.128
6.198
6.259
5.668
5.749
5.818
5.877
5.929
5.405
5.475
5.534
5.584
5.628
5.162
5.222
5.273
5.316
5.353
4.938
4.990
5.033
5.070
5.101
4.730
4.775
4.812
4.843
4.870
14
November 2012
FORMULAE
PROBABILITY
A B = A or B.
Rules of Addition
P(A B) = P(A) + P(B)

P(A B) = P(A) + P(B) P(A B)
P(A B) = P(A) * P(B)

P(A B) = P(A) * P(B | A)
Arithmetic Mean
x =
x
n
x=
fx
f
Standard Deviation
SD =
( x x ) 2
n
SD =
fx 2
f
INDEX NUMBERS
Price:
Quantity:
P
w 1
Po
w
x 100
Q
w 1
Qo x 100
w
TIME SERIES
Additive Model
November 2012
15
n
S = X[1 + r]
Annuity
PV =
1
1
1
r [1 + r ] n
Perpetuity
PV =
1
r
LEARNING CURVE
b
Yx = aX
where:
2C o D
EOQ =
Ch
where:
Co
Ch
D
=
=
=

annual demand
16
November 2012
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November 2012
17
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18
November 2012

LEARNING OBJECTIVE
Level 1 - KNOWLEDGE
VERBS USED
DEFINITION
List
State
Define
Make a list of
Describe
Distinguish
Explain

purpose of
consideration
something
Identify
Illustrate
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Level 4 - ANALYSIS
November 2012
Analyse
Categorise

practical means
Find an answer to
Arrange in a table
Construct
Discuss
Interpret
Prioritise
Produce

between
Build up or compile
Advise
Evaluate
Recommend

19
Performance Pillar
November 2012
20
November 2012
November 2013 examination
Examiners Answers
question, will be published on the CIMA website by early February at
SECTION A
Rationale
The question examines candidates knowledge and understanding of the learning curve.
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 the question and use the information to relate their
answers to the scenario. In part (a) candidates needed to calculate the time required to
th
produce the 64 batch and the variable cost. The time for batch number 64 was required;
candidates then needed to apply the variable costs to calculate the cost of the batch rather
than the cost of a unit.
In part (b) candidates were required to give three conditions that must exist in the production
process of Product Z for the learning curve effect to be realised. Full explanations, relating
the conditions to Product Z production, were needed to score the highest marks.
(a) (i)
Cumulative average time for first 64 batches
b
y = ax
a = 15 hours
x = 64
b = -0.074
y = 11.03 hours
Total time for first 64 batches

11.03 hours * 64 = 705.92 hours
Cumulative average time for first 63 batches
b
y = ax
a = 15 hours
x = 63
b = -0.074
y = 11.04 hours
Total time for first 63 batches

11.04 hours * 63 = 695.52 hours
Time for batch 64 = 705.92 - 695.52 = 10.40 hours
(ii)
Labour
Material
Variable overhead
$
260
520
52
Total variable cost
832
Working
1
2
3
Workings
1 10.40 hours x $25 per hour
2
$52 * 10 units per batch
10.40 hours x $5 per hour
(b)
In order for the learning curve effect to be realised at PWR a number of conditions must be
satisfied.
The production process must be labour intensive. The Product Z production process should
have direct involvement from the companys labour force rather than being largely automated.
The process must be labour intensive in order for the learning curve effect to apply.
The production process should be complex in its composition. Complicated production
processes will allow scope for learning. This seems to be the case for Product Z with the first
batch expected to take 15 hours.
P2
November 2013
The production process should be continuous without extended stoppage periods. The
reduction in production time stated by the learning curve effect can only be achieved if
production occurs without significant breaks. A prolonged stoppage in production risks the
learning from previous units being lost and production time increasing back towards the time
for the first unit.
There should be a low turnover of production labour. A high number of production staff
leaving the organisation will mean that new staff need to be employed. These new staff
members will have no experience of the production at PWR and consequently take a longer
time to produce units than more experienced PWR employees. The steady state production
time per unit of Product Z will be achieved once all production staff have sufficient experience
to realise the learning effect.
November 2013
P2

Rationale
The question examines candidates knowledge and understanding of target costing.
The learning outcome tested is B1(h), explain how target costs can be derived from target
prices and the relationship between target costs and standard costs.
Suggested Approach
It was important for candidates to carefully read the question in order to calculate the cost of
producing and delivering a Model S car. Part (a) required candidates to use the cost driver
information in the notes to calculate both the production line and delivery cost for a Model S
car.
In part (b) candidates should use the information in the question, for example highlighting the
limited production numbers of Model S and the importance of using target costing to achieve
the required profit figures.
(a) (i)
Forecast cost
Labour
5,000
Material
9,500
Overhead
791.75
Total cost
15,291.75
Workings
$4,630,000 / 60,000 annual production line machine hours = $77.17 per machine
hour
$77.17 x 6 machine hours for a Model S = $463
Transportation cost
60% delivery related = $1,080,000
40% distance travelled related = $720,000
$1,080,000 / 640 deliveries = $1,687.50 per delivery
$1,687.5 / 10 cars = $ 168.75 per car
$720,000 / 225,000km = $3.20 per km travelled
$3.20 x 50,000km = $160,000
$160,000 / 1,000 Model S cars = $160 per car
(ii)
Target selling price
Profit margin
Target cost
Forecast cost
$
19,950
25%
14,962.50
15,291.75
Cost gap
329.25
P2
November 2013
(b)
A target costing approach for the Model S car has significant potential advantages for
planning and control at SXL. Model S is a special edition and production numbers will be
limited. As such, it is important that revenues and costs are carefully planned to ensure
Model S generates the required profit over its short production life.
Target costing is a market focussed approach that bases the target price on customer
requirements to achieve a specified level of demand. This market led and price driven
approach offers a greater degree of accuracy in profit planning.
The majority of manufacturing cost for model S will be committed at the design stage.
Adopting target costing enables cost reductions to be planned before costs are committed
whilst ensuring the product still fits the requirements of the customer.
The team based approach to target costing requires staff from all departments at SXL
involved in the Model S project to input into the process to close the cost gap. Cost savings
are sought in the production of Model S together with transportation efficiency savings in the
achievement of the target cost.
Examiners Note: candidates were required to explain only two advantages.
November 2013
P2
Rationale
The question examines candidates knowledge and understanding of Kaizen costing and
Total Quality Management principles when set in a food 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 (a) required the explanation of two concepts of Kaizen costing and did not require
candidates to relate their answers to the scenario in the question.
Part (b) needed candidates to carefully read through the scenario in order to identify the
conditions that must exist for TQM to be successfully implemented at HRS. Citing generic
conditions without relevance to the situation described at HRS would earn only limited marks.
(a)
Kaizen costing is a system of cost reduction based upon attaining incremental cost reductions
by making small changes in the product or the method of operations.
Kaizen costing is a system of cost reduction rather than cost control. Kaizen goals are often
updated monthly and targets set based on achievement of a cost reduction.
Kaizen costing is based on the assumption that the manufacturing process is always able to
improve. Perfection is never achieved and the organisation should continually seek to
improve its processes and production conditions.
Examiners Note: only two concepts are required by the question.
(b)
In order for Total Quality Management to be successfully implemented at HRS, the whole
organisation must adopt a quality culture. This includes the managing director of HRS. It is
imperative that the managing director adopts and espouses the principles of Total Quality
Management as the companys ethos will dictate to what extent the philosophy is committed
to by the employees of HRS.
HRS must get much closer to its customers. HRSs supermarket customers have reduced
their purchases as consumer tastes have changed. HRS must foster and deepen its
relationship with supermarkets to understand the customer requirements.
HRS should seek continuous improvement in its production, processes and employees.
Production techniques have remained largely unchanged at HRS and production is limited to
one type of product. HRS must aim to meet the quality requirements of its customers and not
be satisfied with current production techniques.
P2
November 2013
Rationale
The question examines candidates knowledge and understanding of what if scenarios and
the use of spreadsheets in facilitating these analyses.
The learning outcome tested is C2(b) evaluate the consequences of what if scenarios and
their impact on the master budget.
Suggested Approach
Part (a) required candidates to read the question carefully to understand the method to
calculate gross profit. A clear layout and methodical approach to calculations were required
to ensure all information in the scenario was incorporated.
Part (b) required an explanation of potential advantages and disadvantages of the use of
spreadsheets in developing forecast scenarios. The wording of the requirement should be
noted as it was the advantages and disadvantages of the use of spreadsheets that was
required and not answers focussing on advantages and disadvantages of developing the
scenarios.
(a)
High scenario
Total average balance
Customer lending rate
Lending income
Funding rate
Funding cost
Gross profit
Product L
$1,683m
8.80%
$148.104m
4.15%
$69.845m
$78.260m
Low scenario
Total average balance
(7.9%*0.4+5.9%*0.6)
Lending income
Funding rate
Funding cost
Gross profit
Product L
$1,237.5m
6.70%
$82.913m
4.55%
$56.306m
$26.607m
(b)
Scenario analysis using spreadsheets offers users a high degree of flexibility. By splitting the
spreadsheet into input, processing and output areas, assumptions can be managed and held
separately. This functionality is useful in CHX as a number of key assumptions in the high
and low scenarios differ from those in the base case, and the spreadsheet allows their effect
to be measured easily.
The flexible nature of the spreadsheet also allows different scenarios to be readily developed.
The spreadsheet used for the base scenario can be used to develop high and low scenarios
as the processing and output areas and the lending income and cost calculations for CHX,
will stay the same and only assumptions in the input area will change.
November 2013
P2
However, inaccuracies are potentially difficult to detect in spreadsheets. A developer entering

complex formulae into the spreadsheet could make a mistake. As the error in the formula is
held in the processing area of the spreadsheet it may not be detected by other users and go
unnoticed. The implications of inaccuracies in forecast scenarios are obviously significant for
THX, a bank that is part owned by the government.

Rationale
The question examines candidates knowledge and understanding of pricing based on profit
maximisation in imperfect markets and the use of rolling budgets.
The learning outcomes tested are:
Part (a) A3(a) apply an approach to pricing based on profit maximisation in imperfect
markets.
Part (b) C3(d) discuss the criticisms of budgeting, particularly from the advocates of beyond
budgeting techniques.
Suggested Approach
Part (a) required candidates to use the relevant formulae to calculate the price at which profit
would be maximised. Candidates should note the requirement to calculate the revenue and
use the profit maximising price and associated demand to calculate the total revenue.
Part (b) required a discussion of the use of rolling budgets in the planning and management
control process at HIJ. This required candidates to discuss advantages and disadvantages of
the budgeting approach at HIJ. The frequent changes in the perfume market should have
been noted and linked to the advantage of rolling budgets in these specific circumstances.
(a)
To calculate the marginal revenue function the demand function must first be established.
P = a bx
b = 3 / 10,000 = 0.0003
45 = a - 0.0003*125,000. Therefore, a = 82.50
P = 82.50 0.0003x
MR = a 2bx, MR = 82.50 2*0.0003x
Profit is maximised when MR = MC
MC = $21
21 = 82.50 2*0.0003x. Therefore x = 102,500
Substitute the value of x into the demand function to get price
82.50 0.0003*102,500 = $51.75
Revenue = $51.75 * 102,500 = $5,304,375
P2
November 2013
(b)
Rolling budgets are updated each period, usually a month, adding a further month on to the
end of the forecast period, usually one year, when the current month has expired. Rolling
budgets in HIJ will mean that the frequent changes in the perfume market can be reflected in
the companys financial plans. This results in performance management against more
meaningful budgets and management able to take better-informed decisions.
However, rolling budgets are time-consuming to prepare. Rather than preparing a fixed
budget once for use throughout the following year, a rolling budget is revised each month with
an additional month added to the forecast period once the current one has elapsed. The
budget process will require a significant amount of administration and input from finance and
other department staff.
November 2013
P2
SECTION B
Rationale
The question examines candidates knowledge and understanding of pricing strategies and of
relevant costing in the production of a minimum price quotation.
Part (a) A1(a), 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 (b) A1(c), discuss the particular issues that arise in pricing decisions and the conflict
between marginal cost principles and the need for full recovery of all costs incurred.
Part (c) A3(b), discuss the financial consequences of alternative pricing strategies.
Suggested Approach
Part (a)
Carefully read the question to understand the relevant cost impact of each item of
information. For each item, 1 to 9, candidates were required to show the relevant cost along
with an explanation of their treatment of the costs. A clear layout and full explanation of cost
treatment were required.
Part (b)
Candidates needed to explain two reasons why relevant costing may not be a suitable
approach to pricing houses in the longer term and relate their explanation to the scenario.
Part (c)
Justified recommendations were required. The recommendation must be specific and
relevance to the innovative environmentally friendly houses produced by DLW explained.
Explanations of unrelated pricing strategies would not earn marks.
(a)
$
Food and drink at meeting
Material Z
Construction workers
Engineers
Specialist machine
Windows
Other materials
Fixed overhead
Profit margin
Total relevant cost
78,000
4,485
15,250
1,500
6,000
105,235
Note
1
2
3
4
5
6
7
8
9
Notes
1) The food and drink costs are sunk. The meeting with the client has already occurred and
therefore the costs not relevant.
P2
10
November 2013
2) Material Z is regularly used by DLW. The 550kg currently in inventory will need to be
replaced and therefore should be valued at replacement cost. $65 x 550kg = $35,750
The remaining 650kg required for the contract is not owned by DLW and therefore will need to
be purchased at the replacement cost. $65 x 650 = $42,250.
Total relevant cost $78,000
3) The construction workers have spare capacity to complete the work and are employed under
a guaranteed wage agreement. Construction workers will be paid whether or not they work
on the contract; therefore the cost is not relevant.
4) Engineers are salaried and this is not an incremental cost. However, they are currently at full
capacity and do not have time within their normal hours to complete the 90 of hours work
required. The engineers additional time should be valued at opportunity cost.
If overtime is paid, the cost would be 90 hours x $52 = $4,680
Alternatively, switching engineers from their existing job:
90 hours / 30 hours to produce a unit = 3 units valued at contribution per unit $1,495 =
$4,485.
The lower cost of the two options is $4,485 and this is the relevant cost.
5) The first rental period is part way through and the payment of $15,000 has already been
made. Therefore, this is a sunk cost and not relevant. In order to obtain the machine for the
required seven week period another 15 week standard rental agreement would have to be
entered into, therefore the relevant cost is $15,250.
If the machine was to be purchased, the relevant cost would be $20,000 (sales price less
resale value). The lower relevant cost of the two options is to rent the machine for another
rental period, $15,250.
6) The cost to produce the windows has already been incurred and is therefore sunk and not
relevant.
If DLW use the windows for the build and miss the conference the sales will not be lost. The
chief executive will visit the clients at a later date to secure the sales; therefore there is no
incremental loss in contribution. The chief executives time is not relevant as he is paid an
annual salary and would receive this irrespective of the visit to the clients.
However, should the windows be used for the build, DLW would not be able to attend the
conference and be liable to pay the non-attendance fee of $1,500.
Total relevant cost $1,500
7) 400kg of other materials are required for the house build. The incremental cost is $6,000.
8) Fixed costs are not relevant as they will be incurred irrespective of whether the contract is
taken or not.
9) Profit mark-up is not relevant as DLW is producing a minimum price quotation to exactly cover
the relevant cost.
November 2013
11
P2
(b)
When quoting a minimum price for the contract, relevant costing principles are being used.
Only relevant costs i.e. those that change as a direct result of the contract decision are
included in the quoted cost.
The minimum price will result in DLW making neither a profit nor a loss. This is not a
sustainable pricing policy in the longer term as it does not include a contribution to the fixed
costs of the organisation.
Relevant costing does not include a profit margin. This is not suitable for DLW in the longer
term as the company is planning to expand into different countries and investors will also
require a return on their investment.
(c)
Market skimming would be a suitable pricing strategy to launch the houses in the new
country. Market skimming charges a high price for the product initially where the product is
unique and there are significant barriers to entry for competitors. The price is reduced as new
competitors enter the market with a similar product. The strategy aims to maximise the profit
from the product.
The high quality materials and unique energy saving technology used in the houses should
command high prices from customers keen to have a house with this technology. The house
that consumers are willing to pay a high price for, together with the barrier to competitors of
the new energy saving technology, make DLWs product suited to the market skimming
pricing strategy. This market skimming approach will allow DLW to recover the research and
development costs incurred to develop the energy saving technology.
P2
12
November 2013

Rationale
The question examines candidates knowledge and understanding of transfer pricing together
with financial and non-financial divisional performance measures.
Part (a) & (c) D3(b), discuss the typical consequences of a divisional structure for
performance measurement as divisions compete or trade with each other.
Part (b) D2(c) discuss alternative measures of performance for responsibility centres.
Part (d) D3(a) discuss the likely behavioural consequences of the use of performance metrics
in managing cost, profit and investment centres.
Part (e) C3(b) discuss the role of non-financial performance indicators.
Suggested Approach
For parts (a) and (c), candidates needed to carefully read and understand the data provided
and assemble the figures to show the profitability of two divisions, with Division C supplying to
Division D.
Part (b): candidates needed to carefully read the information in the question and use the
appropriate figures to calculate the required performance measures
Part (d): a target ROI of 25% was required. Candidates needed to use their knowledge of the
ROI formula to substitute in known values to arrive at a required revenue figure. The value of
the external sales could then be taken from this figure to leave the required value of the
internal sales.
Part (e) required an explanation of TWO non-financial measures that could also be used to
monitor the performance of the manager of Division D against the objectives of CD company.
A number of non-financial measures could have been suggested, but candidates needed to
read the requirement carefully and explain the relevance of their chosen measure to the
objectives of CD company.
November 2013
13
P2
(a)
C
$
D
$
Working
Sales
Internal
External
Variable costs
Cans
Internal
External
2,400,000
2,600,000
10,000,000
5,000,000
10,000,000
1
2
2,400,000
3
4
3,000,000
Fixed costs
2,400,000
1,750,000
Profit
1,000,000
2,850,000
Other variable
1,600,000
Workings
1)
2)
3)
4)
5)
Transfer price: $0.04 + ($2,400,000 / $40,000,000) = $0.10 * 1.2 = $0.12

Internal transfers 20,000,000 cans at $0.12
External sales by division C 20,000,000 cans at $0.13
External sales by division D 20,000,000 canned drinks at $0.50
As per Division C internal sales revenue
Division C variable cost 40,000,000 cans at $0.04
Division D variable cost 20,000,000 canned drinks at $0.15
(b)
ROI
RI
P2
C
$1,000,000/$4,000,000 =
25%
$1,000,000 ($4,000,000
x 7%) = $720,000
14
D
$2,850,000/$12,650,000 =
23%
$2,850,000 ($12,650,000 x
7%) = $1,964,500
November 2013
(c)
C
$
D
$
Working
Sales
Internal
External
Variable costs
Cans
Internal
External
1,520,000
3,900,000
10,000,000
5,420,000
10,000,000
1
2
1,520,000
3
4
3,000,000
Fixed costs
2,400,000
1,750,000
Profit
1,020,000
3,730,000
2,000,000
Other variable
Workings
1)
8,000,000 cans at $0.13 opportunity cost

12,000,000 cans at $0.04 variable cost
2)
30,000,000 cans at $0.13

20,000,000 canned drinks at $0.50
3)
As per Division C internal sales revenue
4)
50,000,000 cans at $0.04
5)
20,000,000 canned drinks at $0.15
(d)
ROI = profit / net assets.
Target ROI required is 25%.
25% = profit / 4,500,000, rearranging the formula gives profit = $1,125,000
Profit = Contribution fixed costs, here fixed costs = $2,400,000. Therefore:
Contribution = $1,125,000 + $2,400,000 = $3,525,000
Contribution = revenue variable cost. Here variable cost = $2,000,000. Therefore:
Revenue = $5,525,000
Revenue = Internal sales + external sales. External sales = 30,000,000 * $0.13. Therefore:
November 2013
15
P2
Internal sales required = $1,625,000

20,000,000 internal sales. Transfer price should be set at a minimum of $0.08
Alternative solution
Profit requirement: 25% * (4,000,000 + 500,000) = $1,125,000
Therefore, additional $1,125,000 $1,020,000 = $105,000 profit required
Total transfer price: $1,520,000 + $105,000 = $1,625,000
20,000,000 internal sales. Transfer price should be set at a minimum of $0.08
(e)
Brand awareness percentage. One of CDs stated objectives is to grow its business
internationally. A measure of CDs presence in the other countries is brand awareness by
consumers. A high brand awareness by consumers could be a lead indicator of increasing
sales revenues.
Taste test results from comparison with main competitors. CD aims to grow its brand
based on the distinctive taste of its product. A key indicator of potential future success is the
measure of consumer preference.
A sample of consumers could be offered the CD soft drink along with that of a competitor.
The proportion of sampled consumers selecting the CD soft drink in the taste tests could then
measure consumer preference. If consumers favour the taste of the CD drink over
competitors, potentially sales revenue will increase as consumers make CDs product their
soft drink of choice.
P2
16
November 2013
Performance Pillar
20 November 2013 Wednesday Afternoon Session
19.
to close.
TURN OVER
SECTION A 50 MARKS
section.]

Question One
PWR is a manufacturing company that is about to launch a new product: Product Z. Details of
the variable costs incurred in producing one unit of Product Z are as follows:
Labour
$25 per hour
Materials
$52 per unit
Variable overheads
$5 per labour hour
Learning curve
Product Z is produced in batches of 10 units. The first batch of 10 units is expected to take
15 labour hours. There will be 95% learning curve that will continue until 64 batches have
been produced.
Required:
(a)
(i)
th
Calculate the time required to produce the 64 batch of Product Z.

(3 marks)
(ii)
th
Calculate the total variable cost of the 64 batch of Product Z.

(2 marks)
(b)
Explain THREE conditions that must exist in the production process of

Product Z for the learning curve effect to be realised.
(5 marks)
November 2013
Question Two
SXL is a specialist car manufacturer that produces various models of car. The organisation is
th
due to celebrate its 100 anniversary next year. To mark the occasion, SXL intends to
produce a sports car; the Model S. As this will be a special edition, production will be limited
to 1,000 Model S cars.
SXL is considering using a target costing approach and has conducted market research to
determine the features that consumers require in a sports car. Based on this market research
and knowledge of competitors products, SXL has decided to price the Model S at $19,950.
SXL requires an operating profit margin of 25% of the selling price of the car. Details for the
forthcoming year are as follows:
Forecast direct costs for a Model S car
Labour
Material
$5,000
$9,500
Forecast annual overhead costs

Production line cost
Transportation costs
$
4,630,000
1,800,000
Cost driver
See note 1
See note 2
Note 1
The production line that would be used for Model S has a capacity of 60,000 machine hours
per year. The production line time required for Model S is 6 machine hours per car. This
production line will also be used to make other cars and will be working at full capacity.
Note 2
Some models of cars are delivered to showrooms using car transporters. 60% of the
transportation costs are related to the number of deliveries made. 40% of the transportation
costs are related to the distance travelled.
The car transporters are forecast to make a total of 640 deliveries in the year and carry 10
cars each time. The car transporter will always carry its maximum capacity of 10 cars.
The total annual distance travelled by car transporters is expected to be 225,000km.
50,000km of this is for the delivery of Model S cars only. All 1,000 Model S cars that will be
produced will be delivered in the year using the car transporters.
Required:
(a)
(i)
Calculate the forecast total cost of producing and delivering a Model S car
using activity based costing principles to assign the overhead costs.
(4 marks)
(ii)
Calculate the value of any cost gap that currently exists between the forecast
total cost and the target total cost of a Model S car.
(2 marks)
(b)
Explain TWO potential advantages to SXL of using target costing for the
Model S car.
(4 marks)
November 2013
Question Three
HRS is a food producer that makes low cost processed food that it sells to supermarkets.
HRS produces only one type of processed food product and production techniques have
remained largely unchanged for a number of years.
Over recent months, sales have been falling steadily. Consumer tastes are changing to
favour natural ingredients and supermarkets have reflected this in the products that they offer
for sale.
HRS is keen to address the decline in sales and recently held a meeting to discuss the
performance of the organisation. The Management Accountant suggested to the Managing
Director that the performance of HRS could be improved by implementing Total Quality
Management (TQM) principles and adopting Kaizen costing concepts. Currently the control
systems of HRS focus on material price and usage.
The Managing Director is sceptical of the Management Accountants suggestions and is
unclear as to whether they are suitable for the company.
Required:
(a)
Explain TWO concepts of Kaizen costing.

(4 marks)
(b)
Explain THREE conditions that must exist for TQM to be successfully

implemented at HRS.
(6 marks)
Section A continues on the opposite page
November 2013
Question Four
CHX is a retail bank. The lending division within CHX sells a loan product, Product L.
CHX is part owned by the Government and is required by the Government to produce Low
and High gross profit forecast scenarios each year for comparison against actual
performance.
Gross profit is calculated as:
Total lending income less total funding cost
Total lending income = total average balance multiplied by customer lending rate
Total funding cost = total average balance multiplied by funding rate
In order to calculate the total average balance for the Low and High forecast scenarios,
CHX uses its actual total average balance from the previous year as a starting point.
Product L
$1,650m
Previous year actual total average balance

High scenario assumptions
Total average balance (movement on previous years actual)
Funding rate
+2%
8.8%
4.15%
Low scenario assumptions

Total average balance (movement on previous years actual)
Funding rate
-25%
See note
4.55%
Note: It is expected that during the year it will be necessary to lower the customer lending
rate in order to compete with other banks. Therefore it is expected, that under the Low
scenario, that the customer lending rate will be 7.90% on 40% of the total average balance
and 5.90% on the remainder of the total average balance.
Required:
(a)
Produce calculations to determine the forecast gross profit for Product L,

under both the Low forecast scenario and the High forecast scenario.
(6 marks)
(b)
Explain the potential advantages and disadvantages of the use of

spreadsheets by CHX in developing forecast scenarios.
(4 marks)

TURN OVER
November 2013
Question Five
HIJ is a cosmetics company that produces perfume. The perfume market is very competitive
and subject to frequent changes.
The finance team at HIJ prepare monthly rolling budgets as part of their planning and
management control process.
The data for the forthcoming new budget period are as follows:
The variable cost of producing a bottle of perfume is $21.
The planned selling price of a bottle of perfume is $45 and at this selling price the demand
for perfume is expected to be 125,000 bottles. Information from the marketing division at
HIJ suggests that for every $3 increase in the selling price the customer demand would
reduce by 10,000 bottles, and that for every $3 decrease in the selling price the customer
demand would increase by 10,000 bottles.
Required:
(a)
Calculate the revenue that HIJ would earn if the selling price of a bottle of
perfume was set so that profits would be maximised for the forthcoming
budget period.
(6 marks)
(b)
Discuss the use of rolling budgets in the planning and management

control process at HIJ.
(4 marks)
End of Section A
November 2013
This page is blank
November 2013
SECTION B 50 MARKS

Question Six
DLW is a company that builds innovative, environmentally friendly housing. DLWs houses
use high quality materials and the unique patented energy saving technology used in the
houses has been the result of the companys own extensive research in the area.
DLW is planning to expand into another country and has been asked by a prominent person
in that country for a price quotation to build them a house. The Board of Directors believes
that securing the contract will help to launch their houses in the country and have agreed to
quote a price for the house that will exactly cover its relevant cost.
The following information has been obtained in relation to the contract:
1.
The Chief Executive and Marketing Director recently met with the potential client to
discuss the house. The meeting was held at a restaurant and DLW provided food and
drinks at a cost of $375.
1,200 kg of Material Z will be required for the house. DLW currently has 550 kg of
Material Z in its inventory purchased at a price of $58 per kg. Material Z is regularly
used by DLW in its houses and has a current replacement cost of $65 per kg. The
resale value of the Material Z in inventory is $35 per kg.
400 hours of construction worker time are required to build the house. DLWs
construction workers are paid an hourly rate of $22 under a guaranteed wage
agreement and currently have spare capacity to build the house.
The house will require 90 hours of engineer time. DLW engineers are paid a monthly
salary of $4,750 each and do not have any spare capacity. In order to meet the
engineering requirement for the house, DLW can choose one of two options:
2.
3.
4.
(i)
Pay the engineers an overtime rate of $52 per hour to perform the additional work.
(ii)
Reduce the number of engineers hours available for their existing job, the building of
Product Y. This would result in lost sales of Product Y.
Summary details of the existing job the engineers are working on:
5.
Information for one unit of Product Y

Sales revenue
Variable costs
$4,860
$3,365
Engineers time required per unit
30 hours
A specialist machine would be required for 7 weeks for the house build. DLW have 4
weeks remaining on the 15 week specialist machine rental contract that cost $15,000.
The machine is currently not in use. The machine can be rented for an additional 15
weeks at a cost of $15,250. The specialist machine can only be rented in blocks of 15
weeks.
Alternatively, a machine can be purchased for $160,000 and sold after the work on the
house has been completed for $140,000.
November 2013
6.
The windows required for the house have recently been developed by DLW and use
the latest environmentally friendly insulating material. DLW produced the windows at a
cost of $34,950 and they are currently the only ones of their type. DLW were planning
to exhibit the windows at a house building conference. The windows would only be
used for display purposes at the conference and would not be for sale to prospective
clients.
DLW has had assurances from three separate clients that they would place an order for
25 windows each if they saw the technology demonstrated at the conference. The
contribution from each window is $10,450. If the windows are used for the contract,
DLW would not be able to attend the conference. The conference organisers will
charge a penalty fee of $1,500 for non-attendance by DLW. The Chief Executive of
DLW can meet the clients directly and still secure the orders for the windows. The
meetings would require two days of the Chief Executives time. The Chief Executive is
paid an annual salary of $414,000 and contracted to work 260 days per year.
7.
The house build requires 400kg of other materials. DLW currently has none of these
materials in its inventory. The total current purchase price for these other materials is
$6,000.
8.
DLWs fixed overhead absorption rate is $37 per construction worker hour.
9.
DLWs normal policy is to add a 12% mark-up to the cost of each house.
Required:
(a)
Produce a schedule that shows the minimum price that could be quoted
for the contract to build the house.
Your schedule should show the relevant cost of each of the nine items
identified above. You should also explain each relevant cost value you
have included in your schedule and why any values you have excluded
are not relevant.
(17 marks)
(b)
Explain TWO reasons why relevant costing may not be a suitable

approach to pricing houses in the longer term for DLW.
(4 marks)
(c)
Recommend, with justifications, a pricing strategy for DLW to use to price

the innovative, environmentally friendly houses when they are launched in
the new country.
(4 marks)
TURN OVER
November 2013
Question Seven
CD is a producer of soft drinks. The company has two divisions: Division C and Division D.
Division C manufactures metal cans that are sold to Division D and also to external
customers. Division D produces soft drinks and sells them to external customers in the cans
that it obtains from Division C.
CD is a relatively new company. Its objective is to grow internationally and challenge the
existing global soft drinks producers. CD aims to build its brand based on the distinct taste of
its soft drinks.
Division C annual budget information

Market selling price per 1,000 cans
Variable costs per can
Fixed costs
Net assets
$
130
0.04
2,400,000
4,000,000
Production capacity
External demand for cans
Demand from Division D
40,000,000 cans
38,000,000 cans
20,000,000 cans
Division D annual budget information

Selling price per canned soft drink
Variable costs per canned soft drink (excluding the can)
Cost of a can (from Division C)
Fixed costs
Net assets
$
0.50
0.15
At transfer price
1,750,000
12,650,000
Sales volume
20,000,000 canned soft drinks
Transfer Pricing Policy

Division C is required to satisfy the demand of Division D before selling cans externally.
The transfer price for a can is full cost plus 20%.
Performance Management Targets
Divisional performance is assessed on Return on Investment (ROI) and Residual Income (RI).
Divisional managers are awarded a bonus if they achieve the annual ROI target of 25%.
CD has a cost of capital of 7%.
Required:
(a)
Produce a profit statement for each division detailing sales and costs,
showing external sales and inter-divisional transfers separately where
appropriate.
(6 marks)
(b)
Calculate both the ROI and the RI for Division C and Division D.
(4 marks)
10
November 2013
The directors of CD are concerned about the future performance of the company and,
together with the divisional managers, have now agreed the following:
A machine that would increase annual production capacity to 50,000,000 cans at Division
C will be purchased. The purchase of this machine will increase the net assets of
Division C by $500,000. Assume that there is no impact on unit variable costs or fixed
costs resulting from this purchase.
Inter-divisional transfers will be priced at opportunity cost.
Required:
(c)
Produce a revised profit statement for each division detailing sales and
costs, showing external sales and inter-divisional transfers separately
where appropriate.
(6 marks)
It has now been decided that inter-divisional transfers are not required to be
priced at opportunity cost.
(d)
Calculate the minimum transfer price per can that Division C could charge
for the 20 million cans required by Division D in order for Division C to
achieve the target ROI.
(5 marks)
(e)
Explain TWO non-financial measures that could also be used to monitor

the performance of the manager of Division D against the objectives of CD
company.
(4 marks)

November 2013
11
This page is blank
12
November 2013
PRESENT VALUE TABLE

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
4%
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
Interest rates (r)

5%
6%
0.952
0.943
0.907
0.890
0.864
0.840
0.823
0.792
0.784
0.747
0.746
0705
0.711
0.665
0.677
0.627
0.645
0.592
0.614
0.558
0.585
0.527
0.557
0.497
0.530
0.469
0.505
0.442
0.481
0.417
0.458
0.394
0.436
0.371
0.416
0.350
0.396
0.331
0.377
0.312
7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
Interest rates (r)

15%
16%
0.870
0.862
0.756
0.743
0.658
0.641
0.572
0.552
0.497
0.476
0.432
0.410
0.376
0.354
0.327
0.305
0.284
0.263
0.247
0.227
0.215
0.195
0.187
0.168
0.163
0.145
0.141
0.125
0.123
0.108
0.107
0.093
0.093
0.080
0.081
0.069
0.070
0.060
0.061
0.051
17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
November 2013
13

Periods
(n)
1
2
3
4
5
1 (1+ r ) n
r
1%
0.990
1.970
2.941
3.902
4.853
2%
0.980
1.942
2.884
3.808
4.713
3%
0.971
1.913
2.829
3.717
4.580
4%
0.962
1.886
2.775
3.630
4.452
Interest rates (r)

5%
6%
0.952
0.943
1.859
1.833
2.723
2.673
3.546
3.465
4.329
4.212
7%
0.935
1.808
2.624
3.387
4.100
8%
0.926
1.783
2.577
3.312
3.993
9%
0.917
1.759
2.531
3.240
3.890
10%
0.909
1.736
2.487
3.170
3.791
6
7
8
9
10
5.795
6.728
7.652
8.566
9.471
5.601
6.472
7.325
8.162
8.983
5.417
6.230
7.020
7.786
8.530
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
11
12
13
14
15
10.368
11.255
12.134
13.004
13.865
9.787
10.575
11.348
12.106
12.849
9.253
9.954
10.635
11.296
11.938
8.760
9.385
9.986
10.563
11.118
8.306
8.863
9.394
9.899
10.380
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.244
8.559
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
16
17
18
19
20
14.718
15.562
16.398
17.226
18.046
13.578
14.292
14.992
15.679
16.351
12.561
13.166
13.754
14.324
14.878
11.652
12.166
12.659
13.134
13.590
10.838
11.274
11.690
12.085
12.462
10.106
10.477
10.828
11.158
11.470
9.447
9.763
10.059
10.336
10.594
8.851
9.122
9.372
9.604
9.818
8.313
8.544
8.756
8.950
9.129
7.824
8.022
8.201
8.365
8.514
Periods
(n)
1
2
3
4
5
11%
0.901
1.713
2.444
3.102
3.696
12%
0.893
1.690
2.402
3.037
3.605
13%
0.885
1.668
2.361
2.974
3.517
14%
0.877
1.647
2.322
2.914
3.433
Interest rates (r)

15%
16%
0.870
0.862
1.626
1.605
2.283
2.246
2.855
2.798
3.352
3.274
17%
0.855
1.585
2.210
2.743
3.199
18%
0.847
1.566
2.174
2.690
3.127
19%
0.840
1.547
2.140
2.639
3.058
20%
0.833
1.528
2.106
2.589
2.991
6
7
8
9
10
4.231
4.712
5.146
5.537
5.889
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.784
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
3.498
3.812
4.078
4.303
4.494
3.410
3.706
3.954
4.163
4.339
3.326
3.605
3.837
4.031
4.192
11
12
13
14
15
6.207
6.492
6.750
6.982
7.191
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.302
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.724
5.847
5.029
5.197
5.342
5.468
5.575
4.836
4.988
5.118
5.229
5.324
4.656
4.793
4.910
5.008
5.092
4.486
4.611
4.715
4.802
4.876
4.327
4.439
4.533
4.611
4.675
16
17
18
19
20
7.379
7.549
7.702
7.839
7.963
6.974
7.120
7.250
7.366
7.469
6.604
6.729
6.840
6.938
7.025
6.265
6.373
6.467
6.550
6.623
5.954
6.047
6.128
6.198
6.259
5.668
5.749
5.818
5.877
5.929
5.405
5.475
5.534
5.584
5.628
5.162
5.222
5.273
5.316
5.353
4.938
4.990
5.033
5.070
5.101
4.730
4.775
4.812
4.843
4.870
14
November 2013
FORMULAE
PROBABILITY
A B = A or B.
Rules of Addition
P(A B) = P(A) + P(B)

P(A B) = P(A) + P(B) P(A B)
P(A B) = P(A) * P(B)

P(A B) = P(A) * P(B | A)
Arithmetic Mean
x =
x
n
x=
fx
f
Standard Deviation
SD =
( x x ) 2
n
SD =
fx 2
f
INDEX NUMBERS
Price:
Quantity:
P
w 1
Po
w
x 100
Q
w 1
Qo x 100
w
TIME SERIES
Additive Model
November 2013
15
n
S = X[1 + r]
Annuity
PV =
1
1
1
r [1 + r ] n
Perpetuity
PV =
1
r
LEARNING CURVE
b
Yx = aX
where:
2C o D
EOQ =
Ch
where:
Co
Ch
D
=
=
=

annual demand
16
November 2013
This page is blank
November 2013
17
This page is blank
18
November 2013

LEARNING OBJECTIVE
Level 1 - KNOWLEDGE
VERBS USED
DEFINITION
List
State
Define
Make a list of
Describe
Distinguish
Explain

purpose of
consideration
something
Identify
Illustrate
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Level 4 - ANALYSIS
November 2013
Analyse
Categorise

practical means
Find an answer to
Arrange in a table
Construct
Discuss
Interpret
Prioritise
Produce

between
Build up or compile
Advise
Evaluate
Recommend

19
Performance Pillar
November 2013
20
November 2013
Performance Pillar
Wednesday 26 February 2014
19.
to close.
DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO.
TURN OVER
SECTION A 50 MARKS
section.]

Question One
WTI is planning to launch a new component. Production volume will be limited, with only 128
components to be produced in total.
WTI expects the manufacture of the first component to take 25 direct labour hours. It is
anticipated there will be a 90% learning curve that will continue until all 128 components have
been produced. Direct labour is paid at a rate of $15 per hour.
Non labour-related costs are expected to be $265 per component; this will apply to all 128
components produced. There are no product-specific fixed costs associated with this new
component.
WTI is going to use a target costing approach for the new component. Based on the market
research it has undertaken, WTI plans to sell the components for $530 each. WTI requires an
average profit margin of 20% of the selling price over the life of this new component.
Required:
(a)
th
Calculate the time required to produce the 128 component.

(3 marks)
(b)
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 (b) in order to achieve the required profit margin of 20%.
(4 marks)
March 2014
Question Two
PB is a car production company. PB uses a system of standard costing to set its budgets.
Budgets are set annually by the Finance department and approved by the Board of Directors
of PB. The Finance department prepares variance reports each month for review at the
Board of Directors meeting, where actual performance is monitored by comparison to
budgeted figures.
A new Finance Director has recently joined PB from a competitor organisation where there
was a Total Quality Management culture. The new Finance Director of PB is keen to discuss
the implementation of Kaizen costing at the next meeting of the Board of Directors. The new
Finance Director would like to review the current planning and control system at PB with a
view to making changes so that it could support Kaizen costing concepts.
Required:
(a)
Explain TWO basic principles of Total Quality Management.

(4 marks)
(b)
Explain THREE changes required to PBs planning and control system to

support the adoption of Kaizen costing concepts.
(6 marks)
TURN OVER
March 2014
Question Three
APZ has recently opened a fast-food restaurant in a small town. Fast-food restaurants are
characterised by their quick food service.
The fast-food restaurant market in the town is dominated by a small number of long
established restaurants. APZ is seeking to grow its business and attract the towns residents
with its burger meals.
The performance report for the first month of business is to be presented at the restaurants
monthly management meeting.
A draft of the performance report for the first month of business is reproduced below:
Sales (number of meals)

Revenue
Variable costs
Fixed costs
Profit
Budget
6,000
$
45,000
26,400
5,250
13,350
Actual
5,400
$
40,365
24,632
4,950
10,783
Variance
(600)
$
(4,635)
1,768
300
(2,567)
The management accountant at APZ has realised that the size of the fast-food market that
was used to derive the budget number of meals to be sold has been over-estimated. The
management accountant has calculated the value of the sales volume contribution planning
variance to be $2,480 adverse.
Required:
(a)
(i)
Prepare a revised budget based on the new estimate of the market.

(3 marks)
(ii)
Prepare a performance report for the month based on a flexed budget.

(3 marks)
(b)
Explain TWO non-financial measures that APZ could use to monitor the
performance of the new fast-food restaurant.
(4 marks)
March 2014
Question Four
SAF is about to launch a new model of smart phone, Product Z. Product Z is the companys
first smart phone and features unique technology developed by SAF. SAF expects the
unique technology and exclusive design to attract both new and existing SAF customers.
Given the unique nature of this smart phone, SAF has no experience of the price demand
relationship of this product. However, based on experience from previous products, it expects
that during the products introductory phase, at a selling price of $200, the demand would be
20,000 units per month. For every $32.50 increase in selling price the monthly demand would
reduce by 2,500 units, and for every $32.50 decrease in selling price the monthly demand
would increase by 2,500 units.
The variable costs of production for one unit of Product Z are as follows:
Direct materials
$85
Direct labour
$56
Variable overhead
$20
SAF is planning an advertising campaign during the introductory phase of product Z. The
total cost of the advertising campaign is yet to be finalised with the advertising agency.
However, after deducting the cost of this advertising, the Managing Director requires a
minimum profit of $2,500,000 for the introductory phase.
Note: the introductory phase of Product Z is expected to have a duration of three months.
There are no other specific fixed costs associated with Product Z.
Required:
(a)
Calculate the maximum cost of the advertising campaign in order to

achieve the Managing Directors 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)
(b)
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 (a).
(4 marks)

TURN OVER
March 2014
Question Five
TES operates a chain of health clubs in its home country. Managers at health clubs receive a
quarterly bonus if their health club achieves or exceeds ALL of the following financial targets:
ROCE
Asset turnover
Operating profit margin
8% (based on net assets)

40%
20%
Summary actual performance for Quarter 3 of the current year for Health Club E is detailed
below:
Revenue
Staff costs
Other fixed costs
Net assets
Number of customers
Quarter 3
$36,000
$12,000
$22,000
$110,000
600
The quarterly financial targets are set by the head office finance team and all health clubs are
given the same target. TES is currently forecasting the performance of its health clubs in
Quarter 4.
TES will use the following information to forecast the performance of each of its health clubs
in Quarter 4:
The average revenue per customer will increase by 10% on Quarter 3.

Customer numbers will increase by 5% on Quarter 3.
Staff costs and net assets are expected to remain at the same level as Quarter 3.
Other fixed costs are expected to decrease by 5% on Quarter 3.
Staff and other costs are fixed (they are not related to the number of customers).
Required:
(a)
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)
March 2014
The manager of Health Club E is dissatisfied with the quarterly bonus system and does not
perceive it to be fair. The manager argues that the financial targets are based on a national
view of all TES health clubs and do not take account of specific local circumstances. For
example, Health Club E is located in a less affluent area of the country. The manager of
Health Club E would like to see participation from health club managers in the development of
quarterly financial targets.
(b)
Discuss the potential impact for TES of involving the health club
managers in the production of their quarterly financial targets.
(4 marks)
End of Section A
TURN OVER
March 2014
SECTION B 50 MARKS

Question Six
GF is a company that manufactures clothes for the fashion industry. The fashion industry is
fast moving and consumer demand can change quickly due to the emergence of new trends.
GF manufactures three items of clothing: the S, the T and the B using the same resources but
in different amounts.
Budget information per unit is as follows:
S
$
250
100
36
9
Selling price
2
Direct materials ($20 per m )
Direct labour ($12 per hour)
T
$
40
10
12
3
B
$
100
30
27
6.75
Total fixed costs are $300,000 per month.

Included in the original budget constructed at the start of the year, was the sales demand for
the month of March as shown below:
S
2,000
Demand in March (units)
T
6,000
B
4,000
After the original budget had been constructed, items of clothing S, T and B have featured in
a fashion magazine. As a result of this, a new customer (a fashion retailer), has ordered
1,000 units each of S, T and B for delivery in March. The budgeted demand shown above
does not include this order from the new customer.
In March there will be limited resources available. Resources will be limited to:
2
Direct materials
14,500 m
Direct labour
30,000 hours
There will be no opening inventory of material, work in progress or finished goods in March.
March 2014
Required:
(a)
Produce a statement that shows the optimal production plan and the
resulting profit or loss for March.
Note: you should assume that the new customers order must be supplied
in full.
(10 marks)
(b)
Explain TWO issues that should be considered before the production

plan, that you produced in part (a), is implemented.
(4 marks)
The Board of Directors have now addressed the shortage of key resources at GF to ensure
that production will meet demand in April. The production plan for the month of April is
shown below:
S
4,000
Production (units)
T
5,000
B
4,000
Required:
(c)
For April,
(i)
Calculate the breakeven sales revenue for the given product mix in the
production plan.
(4 marks)
(ii)
Calculate the margin of safety percentage.

(2 marks)
(iii)
Explain THREE limitations of breakeven analysis for GF.

(5 marks)
TURN OVER
March 2014
Question Seven
SBA is a company that produces televisions and components for televisions. The company
has two divisions, Division S and Division B.
Division S manufactures components for televisions. Division S sells components to division
B and to external customers. Division B uses five of the components in each of the
televisions that it manufactures, and sells televisions directly to external customers.
Division S
Budgeted variable manufacturing cost per component:
Direct material
Direct labour
Variable overhead
$
14
18
12
The following information relating to next year is also available:

Fixed costs
Production capacity
External demand
Potential demand from Division B
The anticipated external market price for a component is $50.
$560,000
175,000 components
150,000 components
80,000 components
Division B
Sales price
Budgeted variable manufacturing cost per television
Direct material
Direct labour
Variable overhead
$
450
40
62
16
In addition to the variable costs above, each television produced needs five components
Fixed costs are budgeted to be $1,460,000 for next year. Annual sales of televisions are
expected to be 16,000 units.
Transfer Pricing Policy
Transfer prices are set at opportunity cost.
Division S must satisfy the demand of Division B before selling components externally.
Division B is allowed to purchase components from Division S or from external suppliers.
10
March 2014
Required:
(a)
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.
(7 marks)
(b)
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.
(6 marks)
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.
(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)

March 2014
11
This page is blank
12
March 2014
PRESENT VALUE TABLE

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
4%
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
Interest rates (r)

5%
6%
0.952
0.943
0.907
0.890
0.864
0.840
0.823
0.792
0.784
0.747
0.746
0705
0.711
0.665
0.677
0.627
0.645
0.592
0.614
0.558
0.585
0.527
0.557
0.497
0.530
0.469
0.505
0.442
0.481
0.417
0.458
0.394
0.436
0.371
0.416
0.350
0.396
0.331
0.377
0.312
7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
Interest rates (r)

15%
16%
0.870
0.862
0.756
0.743
0.658
0.641
0.572
0.552
0.497
0.476
0.432
0.410
0.376
0.354
0.327
0.305
0.284
0.263
0.247
0.227
0.215
0.195
0.187
0.168
0.163
0.145
0.141
0.125
0.123
0.108
0.107
0.093
0.093
0.080
0.081
0.069
0.070
0.060
0.061
0.051
17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
March 2014
13

Periods
(n)
1
2
3
4
5
1 (1+ r ) n
r
1%
0.990
1.970
2.941
3.902
4.853
2%
0.980
1.942
2.884
3.808
4.713
3%
0.971
1.913
2.829
3.717
4.580
4%
0.962
1.886
2.775
3.630
4.452
Interest rates (r)

5%
6%
0.952
0.943
1.859
1.833
2.723
2.673
3.546
3.465
4.329
4.212
7%
0.935
1.808
2.624
3.387
4.100
8%
0.926
1.783
2.577
3.312
3.993
9%
0.917
1.759
2.531
3.240
3.890
10%
0.909
1.736
2.487
3.170
3.791
6
7
8
9
10
5.795
6.728
7.652
8.566
9.471
5.601
6.472
7.325
8.162
8.983
5.417
6.230
7.020
7.786
8.530
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
11
12
13
14
15
10.368
11.255
12.134
13.004
13.865
9.787
10.575
11.348
12.106
12.849
9.253
9.954
10.635
11.296
11.938
8.760
9.385
9.986
10.563
11.118
8.306
8.863
9.394
9.899
10.380
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.244
8.559
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
16
17
18
19
20
14.718
15.562
16.398
17.226
18.046
13.578
14.292
14.992
15.679
16.351
12.561
13.166
13.754
14.324
14.878
11.652
12.166
12.659
13.134
13.590
10.838
11.274
11.690
12.085
12.462
10.106
10.477
10.828
11.158
11.470
9.447
9.763
10.059
10.336
10.594
8.851
9.122
9.372
9.604
9.818
8.313
8.544
8.756
8.950
9.129
7.824
8.022
8.201
8.365
8.514
Periods
(n)
1
2
3
4
5
11%
0.901
1.713
2.444
3.102
3.696
12%
0.893
1.690
2.402
3.037
3.605
13%
0.885
1.668
2.361
2.974
3.517
14%
0.877
1.647
2.322
2.914
3.433
Interest rates (r)

15%
16%
0.870
0.862
1.626
1.605
2.283
2.246
2.855
2.798
3.352
3.274
17%
0.855
1.585
2.210
2.743
3.199
18%
0.847
1.566
2.174
2.690
3.127
19%
0.840
1.547
2.140
2.639
3.058
20%
0.833
1.528
2.106
2.589
2.991
6
7
8
9
10
4.231
4.712
5.146
5.537
5.889
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.784
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
3.498
3.812
4.078
4.303
4.494
3.410
3.706
3.954
4.163
4.339
3.326
3.605
3.837
4.031
4.192
11
12
13
14
15
6.207
6.492
6.750
6.982
7.191
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.302
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.724
5.847
5.029
5.197
5.342
5.468
5.575
4.836
4.988
5.118
5.229
5.324
4.656
4.793
4.910
5.008
5.092
4.486
4.611
4.715
4.802
4.876
4.327
4.439
4.533
4.611
4.675
16
17
18
19
20
7.379
7.549
7.702
7.839
7.963
6.974
7.120
7.250
7.366
7.469
6.604
6.729
6.840
6.938
7.025
6.265
6.373
6.467
6.550
6.623
5.954
6.047
6.128
6.198
6.259
5.668
5.749
5.818
5.877
5.929
5.405
5.475
5.534
5.584
5.628
5.162
5.222
5.273
5.316
5.353
4.938
4.990
5.033
5.070
5.101
4.730
4.775
4.812
4.843
4.870
14
March 2014
FORMULAE
PROBABILITY
A B = A or B.
Rules of Addition
P(A B) = P(A) + P(B)

P(A B) = P(A) + P(B) P(A B)
P(A B) = P(A) * P(B)

P(A B) = P(A) * P(B | A)
Arithmetic Mean
x =
x
n
x=
fx
f
Standard Deviation
SD =
( x x ) 2
n
SD =
fx 2
f
INDEX NUMBERS
Price:
Quantity:
P
w 1
Po
w
x 100
Q
w 1
Qo x 100
w
TIME SERIES
Additive Model
March 2014
15
n
S = X[1 + r]
Annuity
PV =
1
1
1
r [1 + r ] n
Perpetuity
PV =
1
r
LEARNING CURVE
b
Yx = aX
where:
2C o D
EOQ =
Ch
where:
Co
Ch
D
=
=
=

annual demand
16
March 2014
March 2014
17
18
March 2014

LEARNING OBJECTIVE
Level 1 - KNOWLEDGE
VERBS USED
DEFINITION
List
State
Define
Make a list of
Describe
Distinguish
Explain

purpose of
consideration
something
Identify
Illustrate
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Level 4 - ANALYSIS
March 2014
Analyse
Categorise

practical means
Find an answer to
Arrange in a table
Construct
Discuss
Interpret
Prioritise
Produce

between
Build up or compile
Advise
Evaluate
Recommend

19
Performance Pillar
March 2014
20
March 2014
March 2014 examination
Examiners Answers
question, will be published on the CIMA website by early April at
SECTION A
Rationale
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 (a) required
th
candidates to calculate the time required to produce the 128 component.
In part (b) 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.
(a)
Cumulative average time for first 128 components
b
y = ax
a = 25 hours
x = 128
b = -0.152
y = 11.96 hours
Total time for first 128 components

11.96 hours * 128 = 1,530.88 hours
Cumulative average time for first 127 components
b
y = ax
a = 25 hours
x = 127
b = -0.152
y = 11.97 hours
Total time for first 127 components

11.97 hours * 127 = 1,520.19 hours
Time for component 128 = 1,530.88 1,520.19 = 10.69 hours
(b)
Sales price
Required margin
Target cost
Labour 11.96 hours*$15
Other costs
Expected cost
Cost gap
Average for 128 components

$
Total 128 components

$
530
20%
424
54,272
179.40
265
444.40
22,963.20
33,920
56,883.20
20.40
2,611.20
(c)
Cost gap = $2,611.20
Target labour cost: $22,963.20 - $2,611.20 = $20,352
Target labour hours: $20,352 / $15 = 1,356.8
Target cumulative average time per component: 1,356.8 / 128 components = 10.6 hours
Target learning rate: 10.6 hours / 25 hours ^(1/7) = 88%
March 2014
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 (a) 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 (b) needed candidates to carefully read through the scenario in order to identify the
changes required to PBs 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.
(a)
Total Quality Management has two basic principles: get it right first time and continuous
improvement.
Get it right first time essentially equates to aiming for a zero-defect target. This principle is
based on the premise that prevention costs are less than the cost of correction.
The principle of continuous improvement is based on the idea that, although the ideal state
may never be achieved, it is the aim. A target of zero defects may not be achievable.
However, the principle of never being satisfied until this is achieved will engender the correct
behaviour of continually seeking to improve.
(b)
Kaizen costing is a system of cost reduction rather than cost control and is based upon
attaining incremental cost reductions by making continuous small changes in the product or
the method of operations.
As Kaizen costing is a system of cost reduction, PB would require different target information
than at present. Rather than setting a budget based on standard costs, the target would be
the Kaizen cost.
Cost analysis in Kaizen costing requires the comparison of target Kaizen costs to actual cost
reductions. The performance reporting in PB would need to change from the current system
of comparing actual costs to budget costs to accommodate this.
Kaizen costing sets and applies cost reduction targets monthly. The current system of setting
targets (currently the annual budget at PB) once per year needs to change to accommodate
more frequent target setting.
March 2014
Rationale
The question examines candidates knowledge and understanding of flexible budgets and the
use of non-financial performance indicators.
C2(c) evaluate performance using fixed and flexible budget reports.
C3(b) discuss the role of non-financial performance indicators.
Suggested Approach
Part (a) (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 (a) (ii) required candidates to use the value of the actual sales volume to produce a
flexed budget.
Part (b) 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.
(a) (i)
Budget
Standard
Revised
Budget
5,200
Sales revenue
7.50
39,000
Variable costs
4.40
22,880
Fixed costs
5,250
Profit
10,870
Standard contribution: $7.50 - $4.40 = $3.10 per

meal
Sales volume contribution planning variance = $2,480 Adverse
Sales volume contribution planning variance = (Budget sales - revised budget sales) * standard contribution
(2,480) = (6,000 - x) * 3.10
Revised budget sales = 5,200 meals
Alternatively: $2,480 / $3.10 = 800. 6,000 800 = 5,200 revised budget sales
March 2014
(ii)
Budget
Standard
Flexed
Budget
Actual
Variance
5,400
5,400
Sales revenue
7.50
40,500
40,365
(135)
Variable costs
4.40
23,760
24,632
(872)
Fixed costs
5,250
4,950
300
Profit
11,490
10,783
(707)
(b)
Speed of food delivery. Customers at fast food restaurants expect their food order to be
served quickly. If APZ is to be successful, it must achieve fast food delivery. Therefore a
measure of time from customer order to food service is a key metric to monitor in ascertaining
the restaurants success at this requirement.
Number of repeat customers. APZ operates in a small town that offers a number of other
choices of fast food restaurant to its residents. If APZ is to establish itself and grow market
share, the restaurant needs to develop a loyal customer base. Number of repeat customers
is a measure that could indicate the sustainability of the business and future financial
success.
March 2014
Rationale
The question examines candidates knowledge and understanding of pricing based on profit
maximisation in imperfect markets.
The learning outcome tested is A3(a) apply an approach to pricing based on profit
maximisation in imperfect markets.
Suggested Approach
Part (a) 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 (b) 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.
(a)
To calculate the marginal revenue function the demand function must first be established.
P = a bx
b = 32.5 / 2,500 = 0.013
200 = a - 0.013*20,000, therefore, a = 460
P = 460 0.013x
MR = a 2bx, MR = 460 2*0.013x
Profit is maximised when MR = MC
MC = $85 + $56 + $20 = 161
161 = 460 2*0.013x, therefore x = 11,500.
Substitute the value of x into the demand function to get price
460 0.013*11,500 = $310.50
March 2014
Introductory phase three months
3*11,500 = 34,500 units

Per unit $
Revenue
310.50
3 months
units
34,500
85
56
20
34,500
34,500
34,500
Material
Labour
Variable overhead
Introductory
phase $
10,712,250
2,932,500
1,932,000
690,000
5,554,500
Contribution
5,157,750
Maximum advertising costs (balancing figure)
2,657,750
Three month profit target
2,500,000
(b)
The relationship between price and demand for product Z is an estimate. It is improbable that
relationships between price and demand for previous products at SAF are going to be
relevant for product Z. The new and innovative design of the Z is likely to mean that demand
for the product will be highly inelastic and potentially differ from the relationship observed with
previous products.
Price will not be the only factor affecting the demand for product Z. The significant advertising
and marketing campaign together with the unique nature of the product are likely to attract
consumers and impact demand. SAF must look to the external market to set a price for the
launch and establish a pricing strategy for the life of product Z as competitors launch rival
products.
March 2014
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.
C2(a) evaluate projected performance using ratio analysis.
C3(a) discuss the impact of budgetary control systems and setting of standard costs on
human behaviour.
Suggested Approach
Part (a) 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 (b) 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
managers involvement.
(a)
Q4
Working
$000
Revenue
41.58
Less:
Staff costs
12.00
Other costs
20.90
Profit
8.68
Net assets
110
Number of customers
630
Profit margin
20.9%
Quarterly ROCE
7.9%
Asset turnover
37.8%
March 2014
Workings
1
Q3 average revenue per customer = $36,000 / 600 = $60

Increase of 10%: $60 * 1.1 = $66
Customer numbers: 600 * 1.05 = 630
Revenue = 630 * $66 = $41,580
Q3 other costs $22,000 * 0.95 = $20,900
Based on the forecast performance in quarter 4, only one of the three financial targets will be
achieved. Therefore a bonus will not be awarded to the manager of health club E.
(b)
The managers involvement with setting the quarterly financial target could mean that the
target will be more accurate and realistic. This is because the managers will be close to the
operations of the health clubs and will be able to use their specialist knowledge to advise on
regional variations to targets. For example, a national assumption of an increase of 10% in
average revenue per customer may not be appropriate for health club E and should not
automatically be factored in to target setting. This involvement of managers could result in
more accurate forecast information that can be used by the finance team in devising the
financial targets.
However, it is possible that the input of the managers may result in unrealistic financial
targets. The managers may attempt to influence the targets in order to attain a bonus more
easily. The health club managers may also not have an overall picture of the health club
market or TESs strategic outlook.
March 2014
SECTION B
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.
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) A1(a), 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 (a)
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.
Part (b)
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.
(a)
S
Material m per unit
0.5
1.5
Labour hours per unit
2.25
Demand - budget and order (units)
Total
Available
3,000
7,000
5,000
Material m required
15,000
3,500
7,500
26,000
14,500
Labour hours required
9,000
7,000
11,250
27,250
30,000
Production is constrained by material availability
10
March 2014
250
40
100
Direct materials ($X per m )
100
10
30
Direct labour ($X per hour)
36
12
27
6.75
105
15
36.25
Material m per unit
0.5
1.5
Contribution per
2
material m
21
30
24.17
Rank
3rd
1st
2nd
Selling price
2

2
After new customer order (7,000 m of material required) 7,500 m of material are available
New customer order (units)

Material required m
Production (units)
Material required m
Production plan (units)
1,000
1,000
1,000
5,000
500
1,500
6,000
3,000
3,000
4,500
1,000
7,000
4,000
Total
7,000
7,500
Sales revenue
250,000
280,000
400,000
930,000
Direct material
100,000
70,000
120,000
290,000
Direct labour
36,000
84,000
108,000
228,000
Variable overhead
9,000
21,000
27,000
57,000
105,000
105,000
145,000
355,000
Contribution
Fixed cost
300,000
Profit
55,000
March 2014
11
(b)
The optimal production plan is based on demand assumptions that were budgeted at the start
of the year. This may not consider the latest external demand as a result of the feature in the
fashion magazine. This is not considered in the budget as it was prepared at the start of the
year before the fashion magazine feature was published.
The optimal production plan is based on the most effective use of resources at GF and not on
the requirements of its customers. Optimal profit based on the constraints GF is under is
generated by producing 1,000 units of S, 7,000 units of T and 4,000 units of B (including the
order from the new customer). This does not consider a potential change in the market.
Based on the budget constructed at the start of the year, demand for 12,000 units of clothing
2
was anticipated requiring 19,000m of material. The order from the new customer has now
2
increased this figure to 26,000m . The availability of material, now in March, is limited to
2
2
14,500m . The reduced availability of material may also affect the price per m , the
assumptions on material price should also be updated.
Note, only two issues are required.
(c) (i)
The breakeven point is achieved when GF make neither a profit nor a loss. At the breakeven
point the contribution generated by the sales will exactly match the value of the fixed costs.
Based on the product mix for April, GF will break even at a revenue of $750,000.
Production (units)
Revenue
Contribution
4,000
5,000
4,000
1,000,000
200,000
400,000
420,000
75,000
145,000
Total contribution
640,000
Total revenue
1,600,000
Weighted average C/S ratio
40%
Fixed costs
300,000
Breakeven
revenue
750,000
(ii)
The margin of safety is the difference between the sales revenue for the production plan and
the sales revenue at the breakeven point. The margin of safety is 53%.
Margin of safety =
Sales revenue - breakeven revenue

Sales revenue
1,600,000 750,000
1,600,000
53%
12
March 2014
(iii)
1) The analysis assumes that the products will be sold in the stated mix. This may not be
the case for GF as the fashion market can change quickly and consumer demands
cannot be predicted exactly. Changes in relative demand for the different products are
not accommodated in the breakeven analysis.
2) Breakeven analysis assumes that costs and revenues display a linear relationship over
the production range in question. This may not be the case for a number of reasons. For
example, unit production time may be impacted by the learning curve effect. This
assumption provides an overly simplified view of the cost and revenue relationships and
impacts the accuracy of the resulting calculation.
3) Fixed costs are assumed to be constant over the entire production range in question. For
example, an increase in fixed costs due to production facility expansion is not considered
in the analysis. The breakeven revenue is what is required to generate contribution
equivalent to a given fixed cost only.
March 2014
13

Rationale
The question examines candidates knowledge and understanding of transfer pricing together
with the implications of outsourcing.
Part (a) & (b) D3(b), 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.
Suggested Approach
For part (a), 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 (b) (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 (b) (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.
(a)
S
$
B
$
3,850,000
4,750,000
7,200,000
8,600,000
7,200,000
0
7,700,000
3,850,000
Working
Sales
Internal
External
Variable costs
Components
Internal
External
1
2
3
4
[MMU1]
Other variable
1,888,000
Fixed costs
560,000
1,460,000
Profit
340,000
2,000
14
March 2014
Workings
1)
55,000 components at $50 opportunity cost
25,000 components at $44 marginal cost
2)
95,000 components at $50

16,000 units at $450
3)
As per division S internal sales revenue
4)
5)
16,000 units at $118
(b) (i)
S
$
B
$
SBA
$
Working
Sales
Internal
External
Variable costs
Components
Internal
External
7,500,000
7,200,000
14,700,000
7,500,000
7,200,000
14,700,000
0
6,600,000
0
3,360,000
0
9,960,000
1,888,000
1,888,000
560,000
1,460,000
2,020,000
[MMU2]
Other variable
Fixed costs
Profit
Workings
1)
340,000
492,000
832,000
150,000 components at $50 market price

16,000 units at $450
2)

3)
16,000 units at $118
(b) (ii)
Profit requirement $
Remaining production capacity
Additional contribution required $
Contribution per component $
Variable cost $
Sell externally per component $
March 2014
450,000
25,000
110,000
4.40
44
48.40
15
=175,000 - 150,000
=450,000 - 340,000
=110,000/25,000
= 44 + 4.40
(c)
Many organisations have taken the decision to outsource the manufacture of their
components rather than produce internally. The primary driver for these decisions is financial
competitiveness. Lower cost, and in some cases lower taxation rate economies, may offer
cheaper production and allow the organisation to focus on its core activities.
An external supplier may be able to offer SBA the same component at a lower cost than it is
currently incurring internally. SBA would be able to make direct cost savings together with
possible fixed production cost savings.
The external supplier could also potentially provide a higher degree of flexibility than the
internal manufacturing division. Specialist component manufacturers may utilise the latest
technology in production without SBA bearing the investment risk but benefiting from the
more efficient manufacturing methods.
When selecting an external company to produce components, SBA must consider the choice
of supplier carefully to ensure the product is in line with its requirements.
A potential loss of control is another consideration, as the two organisations will have differing
priorities and objectives. A close relationship is required between the two organisations so
that there is knowledge of lead times and the demand cycle at SBA.
Outsourcing the manufacture of components will result in spare capacity at SBA. Can this be
utilised or can cost savings be achieved through redundancy and decommissioning?
16
March 2014
Performance Pillar
21 May 2014 Wednesday Afternoon Session
19.
to close.
TURN OVER
SECTION A 50 MARKS
section.]

Question One
A company has produced the following performance report for April. The budget shown in the
report was based on an original assumption that the total market size for April would be 40
million units. Since the performance report was produced, more accurate market size
information has become available. The actual market size for April was lower than estimated
at 37.5 million units.
Budget
Actual
Variance
2,000,000
1,650,000
(350,000)
Budget
Actual
Variance
$000
$000
$000
Revenue
7,000
5,643.0
(1,357.0)
Variable costs
4,220
3,580.5
639.5
Fixed costs
1,050
1,100.0
(50.0)
Profit
1,730
962.5
(767.5)
Sales and
production units
Required:
(a) Produce a statement that reconciles budget profit to actual profit for April in as much
detail as possible.
(6 marks)
(b) Discuss the advantages and disadvantages of your statement with regard to
responsibility accounting.
(4 marks)
May 2014
Question two is on the next page
TURN OVER
May 2014
Question Two
SVC is a car manufacturer. SVC is planning the development of a prototype hydrogen
powered car, the Model Q. The prototype Model Q car will have a limited production run of
250 cars. To ensure that the Model Q is ready by SVCs stated deadline, production will take
place over the course of one month. Details for the development and production of the
prototype Model Q are shown below.
Note: a prototype is defined as a preliminary version of a vehicle from which other forms may
be developed.
Forecast development cost
$6,500,000
Forecast design cost
$1,300,000
Forecast manufacturing costs

Material cost
$25,500 per car
Variable production overhead cost
$780 per car (this is not related to labour hours)
Direct labour
$60 per hour (see note 2 below)
Direct labour
SVC plans to hire a team of 12 specialist production staff. The specialist production staff will
be paid a premium on their basic hourly rate of pay dependent on the total number of labour
hours required to produce all 250 prototype Model Q cars as follows:
Total labour hours
Premium on basic hourly labour rate
0 2,000
35%
2,001 2,500
30%
2,501 3,000
25%
3,001 3,500
20%
More than 3,500
0%
The premium on the basic hourly labour rate will be applicable to all labour hours during
production.
Learning curve
It is estimated that the manufacture of the first car will take 13 labour hours. There is
expected to be a 95% learning curve that will continue until 128 cars have been produced.
th
Thereafter, each car will take the same time to produce as the 128 .
Notes:
1. The learning index for a 95% learning curve = -0.074
2. The hourly direct labour rate stated above under Forecast manufacturing cost is
inclusive of a premium on the basic hourly labour rate, which has been calculated
assuming that each of the 250 cars takes the same time to produce as the first.
May 2014
Required:
(a) Calculate the total labour cost of producing 250 cars.
(6 marks)
(b) Discuss life cycle costing, using the information given about the Model Q car to illustrate
your discussion.
(4 marks)
TURN OVER
May 2014
Question Three
NJ assembles and sells racing bicycles.
In an attempt to improve profit, during the latest year NJ reduced the training it provided to its
manufacturing staff.
The following actual selling price and cost information is available for the latest year:
$ per bicycle
1350
820
85
100
15
330
Selling price
Frame cost
Other material cost
Assembly cost
Delivery cost
Contribution
Annual quality cost information for the latest year

Inspection costs (manufacturing)
Staff training costs
$2,300,000
$780,000
Total cost of dismantling and

reassembling per bike (this includes the
collection cost of the faulty bicycle at $20)
$200
Estimated market size (number of

bicycles)
2,500,000
Additional information for the latest year
3,000 completed bicycles were found to have a faulty frame before delivery to the
customer. Each faulty frame had to be replaced and the bicycle had to be reassembled.
NJ is unable to recover the cost of faulty frames from the supplier as the supplier has
gone into liquidation.
NJ had to replace 1,500 bicycles that had already been delivered to customers due to a
failure of the frame.
The management team at NJ estimated that its market share fell to 8% from a forecast
8.5% due to adverse consumer reaction as a result of criticism in the bicycle racing
press.
Required:
(a) Prepare a cost of quality report for NJ for the latest year under appropriate headings.
(6 marks)
(b) Discuss, using the above information, the relationship between conformance
costs and non-conformance costs.
(4 marks)
May 2014
Question Four
AST is a grocery and general merchandise retail group. AST has supermarkets located in
most towns and cities in its home country. Over the last few years, profits have fallen and
AST has recognised that it has paid insufficient attention to customer care.
AST has now realised the importance of the customer experience at its supermarkets. In an
attempt to earn the loyalty of its customers, AST has introduced a loyalty card scheme that
rewards customers with discount vouchers based on their spend and buying patterns at
supermarkets.
The management of AST is considering the introduction of a balanced scorecard approach to
manage the performance of its stores.
Required:
Recommend an objective and a suitable performance measure for each of three nonfinancial perspectives of a balanced scorecard that AST could use to support its new
strategy of improving the customer experience.
Note: in your answer you should state three perspectives and then recommend with
reasons an objective and a performance measure for each one of your three
perspectives.
TURN OVER
May 2014
Question Five
PTP produces two products from different combinations of the same resources. Details of the
selling price and costs per unit for each product are shown below:
Product E
$
175
60
10
40
14
Selling price
Material A ($12 per kg)
Material B ($5 per kg)
Labour ($20 per hour)
Product M
$
125
24
15
20
28
The fixed costs of the company are $50,000 per month.

PTP aims to maximise profits from production and sales. The production plan for June is
currently under consideration.
The following resources are available in June:
Material A
4,800kg
Material B
3,900kg
Labour
2,500 hours
Machine hours
5,000 hours
Required:
(a)
(i)
Identify the objective function and the constraints to be used in a linear programming
model to determine the optimum production plan for June.
(3 marks)
The solution to the linear programming model shows that the only binding constraints in June
are those for Material A and Material B.
(ii)
Produce, using simultaneous equations, the optimum production plan and resulting
profit for June. (You are NOT required to draw or sketch a graph.)
(5 marks)
Based on the optimal production plan for June, the management accountant at PTP has
determined that the shadow price for Material A is $7 per kg.
(b) Explain the meaning of the shadow price for Material A.

(2 marks)
May 2014
End of Section A
TURN OVER
May 2014
SECTION B 50 MARKS

Question Six
BON Group is a magazine publishing company. It comprises a number of different divisions,
each publishing magazines in a different sector. Many of its magazines are the most popular
titles in their specialist interest group. BON Group is a profitable company and is one of the
largest publishing companies in its country based on staff numbers and magazine circulation.
BON Group is now considering entering into the home decoration print magazine market with
its new title Y Magazine. The home decoration print magazine market is very competitive
with a number of well established titles already being published by BON Groups competitors.
Y Magazine would be published monthly. The management of BON Group is initially
considering the following market research-derived information to determine the selling price of
Y Magazine.
If the selling price of Y Magazine is $3.99, the monthly demand for the magazine is expected
to be 60,000 copies. For every $0.50 increase in the selling price, this demand would reduce
by 10,000 copies. For every $0.50 decrease in the selling price, this demand would increase
by 10,000 copies.
Forecast variable cost per copy of Y Magazine:
$
Paper
0.83
Ink
See note 1
Machine cost
0.22
Other variable cost
0.15
Note 1: Each Y Magazine needs 0.2 litres of ink. However 10% of the ink input to the printing
process is wasted. Ink costs $5.40 per litre.
Required:
(a) Calculate the total monthly contribution that would be earned by Y Magazine.
Note: assume that BON Group will set the selling price so that profits would be maximised.
If P = a - bx then MR = a - 2bx
(7 marks)
10
May 2014
BON Group has commissioned an advertising campaign to launch Y Magazine. This will
invalidate the previous price and demand relationship. The price of Y Magazine has been set
at full cost plus a mark-up of 20%. In month 1, BON Group now expects to sell 50,000 copies
of the magazine to new customers at this price.
The management of BON Group wishes to calculate the total profit for first three months of Y
Magazine. The following information is available:
After their first month of purchase, BON Group expects 90% of all new customers to
purchase Y Magazine for a second consecutive month. After the second month of
purchase, BON Group expects to retain 85% of these remaining customers in
subsequent months.
As the magazine circulation area increases, sales to additional new customers in
months 2 and 3 will be 20% and 30% of the month 1 sales figure respectively.
Fixed overhead costs are apportioned by BON Group to magazines based on sales
volume. Total budgeted annual fixed overhead is $18,000,000 and total budgeted
annual magazine sales, including Y Magazine, is 12,000,000 copies.
The sales price of Y Magazine will remain unchanged throughout the first three
months.
Required:
(b) Produce a statement that shows the total profit for the first three months of
Y Magazine.
(6 marks)
(c) Calculate the percentage of new customers that need to purchase Y Magazine for a
second consecutive month in order to achieve a three-month profit of $100,000.
(4 marks)
(d) Discuss the suitability of market skimming and penetration pricing as alternative pricing
strategies for the introduction of Y Magazine.
(8 marks)
TURN OVER
May 2014
11
Question Seven
BLR provides vehicle maintenance services through its chain of garages. Each garage
operates as an investment centre.
Garage managers are targeted on Return on Capital Employed (ROCE) and receive a bonus
if their garage generates an annual ROCE of 15% or more.
At the start of this year, garage managers were informed that each garage would now receive
an apportionment of the BLR head office fixed overhead costs. Head office costs are
calculated as 7% of sales revenue and are included in Other operating costs. BLR head
office stated that target ROCE would remain at 15% for each of its garages.
The following is a summary performance report for Garage A and Garage B:
Garage A
Garage B
This year
Last year
This year
Last year
$000
$000
$000
$000
Sales revenue
1,300.0
1,200.0
550.0
500.0
Material costs
190.0
180.0
80.0
75.0
Staff costs
355.0
350.0
150.0
150.0
Other operating costs
531.0
460.0
258.5
180.0
Profit
224.0
210.0
61.5
95.0
Capital employed
1,600
1,500
400
600
The capital employed figures in the above table are the net book value of the non-current
assets of each garage at the end of the year.
12
May 2014
Required:
(a) Explain ONE advantage and ONE disadvantage of each BLR garage being charged an
apportionment of BLR head office costs.
(4 marks)
(b) Discuss, using the information in the scenario, the advantages and disadvantages of
using ROCE to determine manager bonuses.
(9 marks)
Now using Residual Income (RI) to assess the performance of garage managers:
(c) Discuss the advantages and disadvantages of using RI instead of ROCE to determine
garage managers bonuses.
Note: BLR has a cost of capital of 8%.
(8 marks)
BLR has a Total Quality Management (TQM) culture and, to support this culture, Head
Office proposes to measure garage performance against a competitor instead of
against a pre-determined internal standard. The management of BLR has chosen to
benchmark performance against NKR. NKR is a successful private company that
operates a network of similar sized garages to BLR.
Required:
(d) Discuss the suitability and the feasibility of benchmarking the performance of BLR
against that of NKR.
(4 marks)

May 2014
13
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14
May 2014
PRESENT VALUE TABLE

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
4%
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
Interest rates (r)

5%
6%
0.952
0.943
0.907
0.890
0.864
0.840
0.823
0.792
0.784
0.747
0.746
0705
0.711
0.665
0.677
0.627
0.645
0.592
0.614
0.558
0.585
0.527
0.557
0.497
0.530
0.469
0.505
0.442
0.481
0.417
0.458
0.394
0.436
0.371
0.416
0.350
0.396
0.331
0.377
0.312
7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
Interest rates (r)

15%
16%
0.870
0.862
0.756
0.743
0.658
0.641
0.572
0.552
0.497
0.476
0.432
0.410
0.376
0.354
0.327
0.305
0.284
0.263
0.247
0.227
0.215
0.195
0.187
0.168
0.163
0.145
0.141
0.125
0.123
0.108
0.107
0.093
0.093
0.080
0.081
0.069
0.070
0.060
0.061
0.051
17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
May 2014
15

Periods
(n)
1
2
3
4
5
1 (1+ r ) n
r
1%
0.990
1.970
2.941
3.902
4.853
2%
0.980
1.942
2.884
3.808
4.713
3%
0.971
1.913
2.829
3.717
4.580
4%
0.962
1.886
2.775
3.630
4.452
Interest rates (r)

5%
6%
0.952
0.943
1.859
1.833
2.723
2.673
3.546
3.465
4.329
4.212
7%
0.935
1.808
2.624
3.387
4.100
8%
0.926
1.783
2.577
3.312
3.993
9%
0.917
1.759
2.531
3.240
3.890
10%
0.909
1.736
2.487
3.170
3.791
6
7
8
9
10
5.795
6.728
7.652
8.566
9.471
5.601
6.472
7.325
8.162
8.983
5.417
6.230
7.020
7.786
8.530
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
11
12
13
14
15
10.368
11.255
12.134
13.004
13.865
9.787
10.575
11.348
12.106
12.849
9.253
9.954
10.635
11.296
11.938
8.760
9.385
9.986
10.563
11.118
8.306
8.863
9.394
9.899
10.380
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.244
8.559
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
16
17
18
19
20
14.718
15.562
16.398
17.226
18.046
13.578
14.292
14.992
15.679
16.351
12.561
13.166
13.754
14.324
14.878
11.652
12.166
12.659
13.134
13.590
10.838
11.274
11.690
12.085
12.462
10.106
10.477
10.828
11.158
11.470
9.447
9.763
10.059
10.336
10.594
8.851
9.122
9.372
9.604
9.818
8.313
8.544
8.756
8.950
9.129
7.824
8.022
8.201
8.365
8.514
Periods
(n)
1
2
3
4
5
11%
0.901
1.713
2.444
3.102
3.696
12%
0.893
1.690
2.402
3.037
3.605
13%
0.885
1.668
2.361
2.974
3.517
14%
0.877
1.647
2.322
2.914
3.433
Interest rates (r)

15%
16%
0.870
0.862
1.626
1.605
2.283
2.246
2.855
2.798
3.352
3.274
17%
0.855
1.585
2.210
2.743
3.199
18%
0.847
1.566
2.174
2.690
3.127
19%
0.840
1.547
2.140
2.639
3.058
20%
0.833
1.528
2.106
2.589
2.991
6
7
8
9
10
4.231
4.712
5.146
5.537
5.889
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.784
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
3.498
3.812
4.078
4.303
4.494
3.410
3.706
3.954
4.163
4.339
3.326
3.605
3.837
4.031
4.192
11
12
13
14
15
6.207
6.492
6.750
6.982
7.191
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.302
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.724
5.847
5.029
5.197
5.342
5.468
5.575
4.836
4.988
5.118
5.229
5.324
4.656
4.793
4.910
5.008
5.092
4.486
4.611
4.715
4.802
4.876
4.327
4.439
4.533
4.611
4.675
16
17
18
19
20
7.379
7.549
7.702
7.839
7.963
6.974
7.120
7.250
7.366
7.469
6.604
6.729
6.840
6.938
7.025
6.265
6.373
6.467
6.550
6.623
5.954
6.047
6.128
6.198
6.259
5.668
5.749
5.818
5.877
5.929
5.405
5.475
5.534
5.584
5.628
5.162
5.222
5.273
5.316
5.353
4.938
4.990
5.033
5.070
5.101
4.730
4.775
4.812
4.843
4.870
16
May 2014
FORMULAE
PROBABILITY
A B = A or B.
Rules of Addition
P(A B) = P(A) + P(B)

P(A B) = P(A) + P(B) P(A B)
P(A B) = P(A) * P(B)

P(A B) = P(A) * P(B | A)
Arithmetic Mean
x =
x
n
x=
fx
f
Standard Deviation
SD =
( x x ) 2
n
SD =
fx 2
f
INDEX NUMBERS
Price:
Quantity:
P
w 1
Po
w
x 100
Q
w 1
Qo x 100
w
TIME SERIES
Additive Model
May 2014
17
n
S = X[1 + r]
Annuity
PV =
1
1
1
r [1 + r ] n
Perpetuity
PV =
1
r
LEARNING CURVE
b
Yx = aX
where:
2C o D
EOQ =
Ch
where:
Co
Ch
D
=
=
=

annual demand
18
May 2014

LEARNING OBJECTIVE
Level 1 - KNOWLEDGE
VERBS USED
DEFINITION
List
State
Define
Make a list of
Describe
Distinguish
Explain

purpose of
consideration
something
Identify
Illustrate
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Level 4 - ANALYSIS
May 2014
Analyse
Categorise

practical means
Find an answer to
Arrange in a table
Construct
Discuss
Interpret
Prioritise
Produce

between
Build up or compile
Advise
Evaluate
Recommend

19
Performance Pillar
May 2014
20
May 2014
May 2014 examination
Examiners Answers
The Post Exam Guide for this examination, which includes the marking guide for each question,
will be published on the CIMA website by early August at www.cimaglobal.com/P2PEGS
SECTION A
Rationale
The question examines candidates knowledge, understanding and application of variance
analysis as well as their understanding of responsibility accounting.
Part (a) C2(c), evaluate performance using fixed and flexible budget reports.
Part (b) 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
answers to the scenario. In part (a) candidates needed to calculate the relevant variances in
order to reconcile the actual and budgeted profit, being aware of the requirement for planning
and operational variance calculations.
In part (b) candidates were required to apply their knowledge of responsibility accounting to
provide advantages and disadvantages of the use of their statement to support responsibility
accounting.
(a)
Statement to reconcile budget profit to actual profit for April
$000
Budget profit
1,730.00
Sales volume contribution planning variance
(173.75)
Adverse
Sales volume contribution operational variance
(312.75)
Adverse
Sales price variance
(132.00)
Adverse
Variable costs variance
(99.00)
Adverse
Fixed costs variance
(50.00)
Adverse
Actual profit
962.50
Budget market share: 2,000,000 / 40,000,000 = 5%

Revised budget market share: 5% x 37.5m = 1,875,000
Budget contribution per unit: $3.50 - $2.11 = $1.39
Sales volume contribution planning variance*: (2,000,000 - 1,875,000) x $1.39 = $173,750
Sales volume contribution operational variance**: (1,875,000 - 1,650,000) x $1.39 = $312,750
Sales price variance: ($3.42 - $3.50) x 1,650,000 = ($132,000)
Variable cost variance: (1,650,000 x $2.11) - $3,580,500 = ($99,000)
* Market size variance
** Market share variance
(b)
The revised statement provides additional detail on the causes of the sales volume variance,
splitting into planning and operational elements. This additional detail will facilitate responsibility
accounting by providing the company with the information to assess which elements of
variances were under the control of company managers and which were not. The adverse sales
volume contribution planning variance was caused by the change in the market and the
manager should not be held accountable for this under responsibility accounting. However, the
sales volume contribution operational variance could be said to be under the control of the
manager and they should be held accountable.
The revised statement provides more limited information on the variable cost and fixed cost
variances. The statement is predicated on the assumption that variable costs will change
proportionately with a change in production volume. This may not be the case, for example,
reduced production volumes could result in the company losing volume discounts from
suppliers. This level of information is not available in the revised statement and would not
facilitate responsibility accounting in this respect.
May 2014
SECTION B
Rationale
Part (a) B1(e), apply learning curves to estimate time and cost for new products and services.
Part (b) 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
th
produce the 128 car before going to calculate the time for all 250 cars. Candidates then
needed to use this information to assess the premium already included in the hourly rate
before making the appropriate adjustment using the table in the scenario.
In part (b) candidates were required to discuss life-cycle costing using the specific
circumstances given in the scenario to illustrate their discussion. A discussion, relating the
Model Q car production at SVC to the requirement, was needed to score the highest marks.
(a)
b
y = ax
a = 13 hours
x = 128
b = -0.074
y=
9.078
Average time to produce first 128 cars
y=
9.084
Average time to produce first 127 cars
y = ax
a = 13 hours
x = 127
b = -0.074
Total time to first produce 128 cars
Total time to produce first 127 cars
Time to produce 128th car
8.316
1,161.984
hours
1,153.668
hours
hours
If all cars take 13 hours each to produce, total time required is 3,250 hours
Therefore, a premium of 20% is included in the stated hourly rate
Basic hourly rate = $60 per hour / 1.2 = $50 per hour
Time required to produce 250 cars
Time for first 128 = 1,161.984 hours
Time for remaining 122 cars: 122 x 8.316 hours = 1,014.552 hours
Total time = 2,176.536 hours
Therefore, a premium of 30% will added to the basic hourly rate
$50 x 1.3 = $65
Total labour cost of 250 cars = $65 x 2,176.536 hours = $141,475
May 2014
(b)
Life-cycle costing is the accumulation of costs for activities that occur over the entire life cycle of
a product, from inception to abandonment.
It is common that 80-90% of a products costs are committed in the design and development
stages of its life. The design and development costs for the prototype Model Q car are
significant at $7.8 million. It is important for SVC to understand the total life cycle cost for the
car in order to facilitate profit planning if and when production is started on a car for the wider
market. An understanding of the life cycle cost will assist SVC in focussing attention on where
the majority of costs are incurred. Designing out costs in design and development stages is
likely to yield significant cost saving if and when full production of the car begins. Information on
the life cycle cost for Model Q will also inform SVC on the required life cycle for the car in order
to achieve a required profit and emphasise the need for the time to market to be minimised.
May 2014
Rationale
The question examines candidates knowledge and understanding of cost of quality reports.
The learning outcome tested is B1(d), prepare cost of quality reports.
Suggested Approach
answers to the scenario. In part (a) candidates needed to calculate the quality cost impact of
the various issues detailed in the scenario and then prepare a cost of quality report allocating
the calculated costs under the appropriate headings.
In part (b) candidates were required to discuss the relationship between conformance costs
and non-conformance costs. Again, to score high marks, candidates needed to use the cost
relationships exhibited at NJ to support their discussion points.
(a)
Cost of Quality Report for the latest year
Volume
Rate
Cost
Prevention costs
Staff training
780,000
Appraisal costs
Inspection costs
2,300,000
Internal failure costs

Re-worked bicycles
3,000
1,000
3,000,000
1,500
1,035
1,552,500
External failure costs

Replacement bicycles
Sub total
Opportunity costs
7,632,500
12,500*
330
Total quality costs
4,125,000
11,757,500
* 2,500,000 x 0.5% = 12,500
May 2014
(b)
NJ incurs conformance costs with the aim of removing defects and failure in production.
Conformance costs comprise: i) prevention costs (the cost of ensuring products are not
produced that do not conform with quality requirements) and ii) appraisal costs (the cost of
assessing if products meet the required quality standard). Non-conformance costs are incurred
as a result of faulty products being produced. Non-conformance costs comprise: i) internal
failure costs (the cost incurred when sub standard products are produced but not delivered to
the customer) and ii) external failure costs (the costs incurred when a sub standard product
reaches the customer).
An increase in spend on conformance costs is likely to reduce the amount of cost incurred on
non-conformance costs. The view is that the optimal amount to spend on conformance costs is
where total quality costs are at a minimum. However, this is contrary to the TQM philosophy
where the aim is zero defect production.
Staff training costs are prevention costs and a reduction in spend is likely to result in increased
non-conformance costs that may lead to a rise in total quality cost. This could ultimately
damage NJs reputation and adversely impact revenues.
May 2014

Rationale
The 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 a suitable performance measure was required for each of the three nonfinancial perspectives.
Customer perspective
Objective: increase customer loyalty.
Performance measure: percentage of customers using loyalty card offers.
Customer loyalty is important to AST in terms of deepening the relationship AST has with its
customers to drive revenues. A high percentage would indicate that AST has returning
customers and that the offers they are targeting them with are of value to them. If AST can
provide customers with the products that they value, customers will return and potentially
purchase additional items from stores. Deepening the customer relationship to drive revenue
may be cheaper than acquiring new customers.
Internal business process perspective
Objective: for customers to pay for goods in a reasonable time.
Performance measure: time spent by customers queuing to pay for products at a check out.
The customer experience at their supermarkets is extremely important to AST. A key indicator
of the experience of a customer is the time queuing to pay for products at a check out. AST
could measure average queue time to focus resources on managing queuing time to acceptable
levels.
Learning and growth perspective
Objective: to have qualified staff able to meet the needs of the customer.
Performance measure: number of staff training days.
The number of staff training days is an indicator of staff having the required skills to serve
customers and that they are continuing to develop professionally.
May 2014
Rationale
The question examines candidates knowledge, understanding and application of linear
programming and of the outputs of a linear programming model.
Part (b) A2(c), discuss the meaning of optimal solutions and how linear programming
methods can be employed for profit maximising, revenue maximising and satisfying
objectives.
Suggested Approach
answers to the scenario. In part (a) candidates needed to identify the relevant constraints to
be used in a linear programming model and then produce, using simultaneous equations, the
optimum production plan and associated profit.
In part (b) candidates were required to explain the meaning of the given shadow price figure.
The explanation required a description of the shadow price along with the relevance of the
figure for material A at PTP.
(a)
(i)
Let E = the number of units of Product E produced and sold in June.
Let M = the number of units of Product M produced and sold in June.
Constraints:
Material A:
5E + 2M 4,800
Material B:
2E + 3M 3,900
Labour:
2E + M 2,500
Machine hours:
2E + 4M 5,000
Non-negativity:
E,M 0
Objective function: To maximise 51E + 38M
May 2014
(ii)
5E + 2M = 4,800
Equation (1)
2E + 3M = 3,900
Equation (2)
Equation (1) x 2 = Equation (3)
Equation (2) x 5 = Equation (4)
10E + 15M = 19,500
Equation (4)
Equation (3)
10E + 4M = 9,600
11M = 9,900
Equation (4) Equation (3)
M = 900
Substitute into Equation (1)
E = 600
Substitute values into the objective function:
Contribution: (51 x 600) + (38 x 900) = $64,800
Less fixed costs $50,000
Profit = $14,800
(b)
If one more kg of material A were available at the normal cost of $12, this would generate an
additional $7 of contribution for PTP. Therefore, the shadow price of $7 for material A
represents the maximum premium PTP should pay to acquire one more kg of material A.
May 2014
SECTION B
Rationale
The question examines candidates knowledge, understanding and application of pricing
strategies and their consequences.
Part (a) A3(a), apply an approach to pricing based on profit maximisation in imperfect
markets.
Part (b), (c) and (d) A3(b), discuss the financial consequences of alternative pricing
strategies.
Suggested Approach
answers to the scenario. In part (a) candidates were required to apply their knowledge of the
profit maximisation model in order to calculate a contribution figure.
In part (b) candidates needed to apply the cost-plus pricing technique. Candidates also
needed to pay particular attention to the timing of revenue streams from customers and the
customer age profile in order to calculate a total profit figure. In part (c) candidates needed to
understand the customer age profiles impact on profit in order to calculate the required
percentage of customers purchasing the magazine for a second consecutive month.
In part (d) candidates were required to discuss the market penetration and market skimming
pricing strategies and their suitability to Y Magazine. It was necessary to apply the specific
details about Y Magazine to the suitability discussion in order to gain high marks in this part
of the question.
(a)
Variable cost
$
Working
Paper
0.83
Ink
1.20
Machine cost
0.22
Other variable cost
0.15
Total variable cost
2.40
Workings
1
Ink cost per magazine without loses $1.08

10% of ink wasted during printing
$1.08 x (100/(100 10)) = $1.20
p = a -bx
p=
3.99
x=
60,000
May 2014
10
Change in p
0.50
Change in x
10,000
b=
0.00005
a=
6.99
p = 6.99 - 0.00005x
MC = MR x = 45,900
p = $4.70
$
Revenue ($4.70 x 45,900)
215,730
Variable cost ($2.40 x 45,900)
110,160
Contribution
105,570
(b)
Statement of total profit for the first three months
Month 1
Month 2
Month 3
Total
Sales revenue
234,000
257,400
291,330
782,730
Total cost
195,000
214,500
242,775
652,275
Profit
39,000
42,900
48,555
130,455
Workings
New customers
50,000 month 1
Number of Y Magazine sales

Month 1
Month 2
Month 3
50,000
45,000
38,250
10,000
9,000
10,000 month 2
15,000 month 3
15,000
50,000
55,000
62,250
OAR $18,000,000 / 12,000,000 = $1.50 per magazine

Total cost per magazine $2.40 + $1.50 = $3.90
Sales price per magazine $3.90 x 1.2 = $4.68
11
May 2014
(c)
Required profit
$100,000
Profit per copy of magazine ($4.68 - $3.90)
$0.78
Number of magazine copies required
128,205
X is the percentage of customers purchasing for a second month

Total required sales in the first three months
50,000 + 50,000X + 50,000X.0.85 + 10,000 + 10,000X + 15,000 = 128,205
102,500X = 53,205
X = 51.9%
(d)
A penetration pricing strategy is adopting by companies wishing to generate a large market
share quickly by offering the product at a significantly cheaper price than competitors. The low
initial price is designed to attract customers to the product. The price may be increased later in
the product lifecycle when the customers purchasing pattern has changed to favour the product
in question.
Penetration pricing is suitable for products where there are similar substitute products available.
This is the case in the home decoration print magazine market. The profitable BON Group may
be able to support a short-term loss making financial position for the Y Magazine as it gains
market share to a point where its size is a potential deterrent to other new entrants.
Penetration pricing is suitable for products where the demand curve is elastic and there is a
large market for the product. This may not be the case for the home decoration print magazine
market as the existing titles may have built up customer loyalty as a result of their specific
design features and journalistic style. The size of the market is not known and there may not be
room for another profitable print title.
A market skimming pricing strategy sets a high price for the product initially to generate profit for
the company quickly and reduces the price as competitors come into the market offering similar
products. Highly innovative and unique products are likely to be able to take advantage of a
market skimming strategy where consumers are willing to pay a premium for the products
unique design and/or technology. This may not be appropriate for Y Magazine if the magazine
offers a very similar reader experience to the existing titles. A market skimming approach would
require Y Magazine to have a relatively inelastic demand curve: the disposable nature of the
magazine and the competitive market place do not appear to support the market skimming
strategy.
May 2014
12

Rationale
The question examines candidates knowledge, understanding and application of alternative
measures of performance for responsibility centres in the context of a chain of vehicle
maintenance garages.
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;
Parts (b) and (c) D2(c), discuss alternative measures of performance for responsibility
centres.
Part (d) B1(b), evaluate the impacts of just-in-time production, the theory of constraints and
total quality management on efficiency, inventory and cost.
Suggested Approach
answers to the scenario. In part (a) candidates were required to apply their knowledge of
controllable and uncontrollable costs in order to provide an advantage and a disadvantage of
charging an apportionment of head office costs to responsibility centres.
In parts (b) and (c) candidates needed to apply their knowledge of Return on Capital
Employed (ROCE) and Residual Income (RI) metrics to perform calculations before providing
an appraisal of the performance metrics. Candidates needed to be aware of the impact of the
head office costs and calculate versions of ROCE and RI including and excluding these
costs.
In part (d) candidates were required to discuss the suitability and the feasibility of
benchmarking the performance of BLR against the performance of NKR. Candidates needed
to cite the relevance of NKR as a private competitor company in their discussion.
(a)
An advantage of BLR garage managers being charged an apportionment of head office costs is
that they become aware of the costs involved in supporting the work of their garage. Arguably,
head office costs are largely support costs and are incurred in support of the operation of the
garages. BLR garage managers should be aware of these support costs as this may lead to
discussions about how the use of head office activities may be reduced.
Conversely, the BLR garage managers are being made accountable for an arbitrary
apportionment of the head office costs over which they have no direct control. The arbitrary
nature of the apportionment of costs by head office is out of the control of the garage
management. This could potentially have a de-motivating effect on managers as their
performance metrics do not represent a true picture of the performance of their garage that is
under their control.
13
May 2014
(b)
Garage A
This year
ROCE (based on net profit)
14%
ROCE (based on controllable profit)
20%
Controllable profit $000
315
Last year
Garage B
This year
Last year
15%
14%
25%
16%
100
Last year the manager of Garage A would not receive a bonus as the ROCE was below the
15% target. The ROCE measure is useful here as it is a relative measure that allows
comparison with other garages.
This year Garage A increased sales revenue by 8% and together with tight control of other
operating costs, delivered an increase in controllable margin of 6 percentage points.
Garage A appeared to invest in net assets as the net book value of assets increased by
$100,000. Despite this increase in net assets, Garage A increased ROCE based on controllable
profit from 14% to 20% in this year. However, including the apportionment of head office fixed
overhead costs, the ROCE in this year is maintained at 14%, a position that would not reward
the manager with a bonus. ROCE does not encourage the purchase of new assets and can
encourage dysfunctional decision making, providing managers with an incentive to keep aging
(and possibly inefficient and obsolete) assets.
It appears that Garage A has improved its performance in this year, yet as a result of acquisition
of new assets and the apportionment of head office fixed overhead cost, the manager will not
receive a bonus based on target ROCE.
Last year Garage B generated a ROCE of 16%; a figure in excess of the target and thus the
manager was awarded a bonus.
Sales performance in this yearappears to be strong, an increase of 10% over last year.
However, the increase in sales has not been delivered efficiently with other operating costs
increasing significantly resulting in a year on year fall in controllable profit margin of 1
percentage point.
Garage B does not appear to have invested in non-current assets, a potential reason why other
operating costs have increased due to a decrease in machine efficiency and increased
maintenance costs. This adverse impact on profit has been offset by the reduction in net book
value of the non-current assets resulting in a favourable impact on ROCE (based on controllable
profit). This measure of ROCE has increased from 16% last year to 25% this year. Including
the apportionment of the head office fixed overhead cost, the ROCE is 15%, a position that
would result in a bonus for the manager. The manager has clearly not performed well, yet will
still receive a bonus this year. Given this analysis, ROCE does not appear to be a suitable basis
to award bonuses to managers.
May 2014
14
(c)
Garage A
Garage B
$000
$000
$000
$000
20X4
20X3
20X4
20X3
RI (based on net profit)
96
29.5
Imputed interest charge
128
32
RI (based on controllable profit)
187
90
68
47
Imputed interest charge
128
120
32
48
RI can reduce the problem that ROCE perpetuates, of discouraging investment in assets with
ROCE in excess of the garages target but lower than the garages current ROCE. RI also
highlights the cost of financing to garage managers.
However, as RI is an absolute measure it does not facilitate comparison between garages. The
absolute nature of the performance metric does not relate the value of the assets employed by a
garage to the profit generated.
(d)
Benchmarking is a continuous process of measuring an organisations services and activities
against those of the best performing organisation. The benchmarking exercise aims to compare
performance with the best in class, identify areas of underperformance and take action to
improve.
The measurement against a set standard at BLR will offer no incentive to improve on this and is
contrary to the TQM ethos. Benchmarking against NKR, a successful competitor company, will
be consistent with the TQM ethos of continuous improvement, provided NKR is the best.
As NKR is a private company, there may be little publically available information on its
performance. BLR may also encounter problems in obtaining commercially sensitive
performance data from NKR. NKR is unlikely to be willing to share data and information on its
processes with BLR, a competitor company.
15
May 2014
Performance Pillar
Thursday 28 August 2014
19.
to close.
TURN OVER
SECTION A 50 MARKS
section.]

Question One
QLJ is planning to expand its product range by producing two new products: Product X and
Product Y.
Product X and Product Y will be produced from different combinations of the same resources.
Only products X and Y use these resources. Details of the estimated selling price and cost
per unit for each product are shown below:
Product X
$
229
40
20
75
32
Selling price
Material A ($8 per kg)
Material B ($20 per kg)
Labour ($25 per hour)
Product Y
$
260
16
60
100
48
The total fixed costs of producing X and Y will be $70,000 per month.
The management accountant at QLJ is in the process of producing a linear programming
model to determine the optimal monthly production plan for the two new products. The
management accountant has established that the following resources are available in each
month and has produced the following graph (on page 3):
Resources available
Material A
Material B
Labour
10,150 kg
5,500 kg
8,400 hours
September 2014
Linear programming graph for Products X and Y
The objective of QLJ is to earn the maximum total profit possible per month from the
production of products X and Y.
Required:
(a)
Interpret the graph to determine the optimum monthly production plan and
the maximum total profit per month from products X and Y.
Note: You are required to use simultaneous equations to determine the exact
quantities of Product X and Product Y to be produced.
(6 marks)
(b)
Calculate the minimum change in the selling price of Product X that would
cause the optimum production plan to change to Point B shown on the
graph.
(4 marks)
TURN OVER
September 2014
Question Two
A company has recently launched a new product. The following information is available for
the first month of production:
Budget
300
11,400
15,000
6,000
125,000
Production volume (units)

Direct material cost ($)
Direct labour cost ($)
Variable overhead cost ($)
Fixed costs ($)
Actual
256
10,500
4,000
1,750
115,000
Variance
44 A
900 F
11,000 F
4,250 F
10,000 F
The standard labour cost per unit of $50 that was used to calculate the budgeted labour cost
was made up of 2 hours at $25 per hour. However this ignored the impact of a learning curve
which was expected to apply for the first 300 units produced. The learning rate was expected
to be 90%.
The variable overhead absorption rate is based on direct labour hours.
The actual rate of pay during the month was $25 per labour hour.
Note: The learning index for a 90% learning curve = -0.152.
Required:
(a)
(i)
Prepare a performance report for the first month of production taking into
account the learning effect.
(4 marks)
(ii)
Calculate the labour efficiency planning variance for the first month of
production.
(2 marks)
(b)
Calculate the actual rate of learning that occurred during the first month of
production assuming that the actual time taken to produce the first unit
was 2 hours.
(4 marks)
September 2014
Question Three
JMM is a car manufacturer. It is a relatively new company and the directors are keen to
establish a reputation for high quality. The management of JMM recognises the need to
establish a culture of Total Quality Management (TQM) at the company.
The management accounting team at JMM has collected the following actual information for
the most recent quarter of the current year:
Cost data
$
Customer support centre cost per hour
58
Equipment testing cost per hour
30
Manufacturing rework cost per car
380
Warranty repair cost per car
2,600
Volume and activity data

Cars requiring manufacturing rework
800 cars
Cars requiring warranty repair
650 cars
Customer support centre time
500 hours
Production line equipment testing time
400 hours
Additional information
JMM undertook a quality review of its existing suppliers during the quarter at a cost of
$60,000.
Due to the quality issues in the quarter, the car production line experienced periods of
unproductive 'down time' which cost $375,000.
Required:
(a)
(b)
Produce a Cost of Quality report for JMM using the four recognised quality
cost headings.
(6 marks)
Explain how a Cost of Quality report would support the development of a
TQM culture at JMM.
(4 marks)
TURN OVER
September 2014
Question Four
TSH provides courses for students who are studying for accountancy examinations. The
accountancy education sector is extremely competitive; it is dominated by a small number of
national organisations but there is also a large number of smaller regional training providers.
The majority of TSH students are part-time students and fit their studies around their
employment. TSH has developed a reputation for understanding its students needs and
delivering a high quality service that meets their requirements.
TSH has grown in recent years from a small regional company to a position where it now has
colleges in several of the countrys large cities. The company directors now wish TSH to
grow further and have implemented a strategy to achieve the objective of becoming the
largest accountancy study provider in the country.
TSHs board of directors currently uses financial reports to monitor the companys
performance but are thinking about implementing a Balanced Scorecard approach to
performance management.
Required:
(a)
Explain the disadvantages of using financial performance indicators alone to

assess performance.
(4 marks)
(b)
Explain TWO non-financial performance measures, each from a different

perspective of the Balanced Scorecard, which TSH could use to measure the
performance of the business against the new strategy. (You must state the
perspectives that your measures relate to and explain why the measures would
be effective.)
(6 marks)
September 2014
Question Five
PBB is a toy manufacturer and retailer. PBB sells toys to consumers through its large
network of retail outlets in its home country and via the companys website.
PBB purchases the materials and components that it needs to manufacture toys from a
number of different suppliers. All of the purchases are delivered to PBBs raw material store at
its factory and are held there until they are needed for production.
Finished toys are transported from the factory to PBBs retail outlets by PBBs fleet of
vehicles. The vehicles follow the same schedule each week irrespective of the load they are
carrying. Finished toys that are destined for sale via the companys website are transported to
PBBs distribution centre.
PBB has recently won the contract to manufacture and sell a new toy. The new toy, Toy Z, is
a doll based on a character from a very popular international childrens film. PBB is free to set
the selling price of Toy Z as it sees fit, but must pay a royalty fee of 15% of the selling price to
the film company. PBB intends to sell Toy Z through its network of retail outlets.
PBB plans to adopt a target costing approach for Toy Z. Market research has determined
that the selling price will be $25 per Toy Z. PBB requires a profit margin of 25% of the selling
price of Toy Z.
The forecast costs per Toy Z are:
$
2.15
1.75
see note below for additional information
6.00
1.89
2.38
Component A
Component B
Other materials
Labour (0.4 hours at $15 per hour)
Product-specific production overhead cost
Product-specific selling and distribution cost
Note: Each Toy Z requires 0.6kg of other materials. These other materials are purchased
from a supplier at a cost of $4 per kg and 4% of all materials purchased are found to be
substandard.
Required:
(a)
Calculate the cost gap that exists between the forecast total cost per unit and
the target cost per unit of Toy Z.
(3 marks)
(b)
Discuss how PBB could reduce costs in THREE primary activities in its value
chain.
(7 marks)
End of Section A. Section B starts on page 8
September 2014
SECTION B 50 MARKS

Question Six
PPP is a theme park. The following information is available for the forthcoming month:
Forecast daily ticket sales and prices
Pre-booked Discounted Ticket

Standard Ticket
Premium Family Ticket
(admits 4 people)
Ticket
sales
Price per
ticket
1,500
8,000
$29
$39
675
$185
The theme park will be open for 30 days in the month.

Costs
Variable costs per person per day are forecast to be $12.50.
Fixed costs for the month are forecast to be $6,500,000.
Pricing information
The sales of pre-booked discounted tickets and standard tickets will be restricted to 1,500 and
8,000 per day respectively for the forthcoming month. It is forecast that all of these tickets will
be sold.
A Premium Family Ticket admits four people to the theme park and allows them to go to the
front of the queues in the theme park. The price of a Premium Family Ticket has been set at
$185 in order to maximise the profit from the sale of these tickets for the month. Market
information shows that for every $5 increase in the selling price of a Premium Family Ticket
the demand would reduce by 25 tickets, and that for every $5 decrease in the selling price the
demand would increase by 25 tickets.
The theme park has adequate capacity to accommodate any level of demand for Premium
Family Tickets. It is to be assumed that four people would always be admitted on every
Premium Family Ticket sold.
Sales of the different ticket types are independent of each other.
Equipment hire
PPP is considering hiring some automated ticket reading equipment for the forthcoming
month. The hire of this equipment would increase fixed costs by $250,000 for the month.
However, variable costs per person would be reduced by 8% during the period of the hire.
September 2014
Required:
(a)
Calculate the financial benefit of hiring the equipment for the forthcoming month
given its impact on variable cost and therefore the price charged for Premium Family
Tickets.
(13 marks)
It has now been realised that a competing theme park is planning to offer discounted
ticket prices during the forthcoming months. It is thought that this will reduce the
demand for PPPs Standard Tickets. PPP will not be able to reduce the price of the
Standard Tickets for the forthcoming month.
(b)
Discuss the sensitivity of the decision to hire the equipment to a change in the
number of Standard Tickets sold per day. (Note: your answer should include
the calculation of the sensitivity).
(4 marks)
PPP produces an annual budget. The annual budget includes details of budgeted ticket sales
volumes, revenues and costs for each month. Each month PPP compares actual
performance against the budget for that month.
At the start of every month, PPP conducts a review of its competitors to produce a revised
forecast for ticket sales. This revised sales forecast is used to devise pricing policies and
promotional campaigns to ensure that budgeted targets are met.
Required:
(c)
Compare and contrast the use of feedforward control and feedback control, using
the information given above about PPP to illustrate your answer.
(8 marks)
TURN OVER
September 2014
Question Seven
MNP is a divisionalised organisation. Some of the divisions are in overseas countries.
Divisional performance is assessed by the trend in the Return on Capital Employed (ROCE)
and the Residual Income (RI) generated by each division based on their year-end values.
The following summary financial information is available for Division M:
Year ending 31st August
2014
$000
6,450
1,070
5,380
3,350
2,030
3,200
Revenue
Direct costs
Gross profit
Operating profit
Capital employed as at the year end
2013
$000
6,200
1,040
5,160
3,600
1,560
4,000
2012
$000
6,000
1,000
5,000
3,800
1,200
5,000
MNP has a cost of capital of 5% per annum.

The figures shown above for the capital employed are the net book values of the divisions
non-current assets.
Other operating costs include depreciation.
There have been no additions or disposals of non-current assets within Division M during the
three year period. No additions or disposals are expected in 2015.
For the year ending 31 August 2015 it is expected that the revenues and costs (excluding
depreciation) will be the same as those in 2014.
Required:
(a)
(i)
(ii)
Calculate for Division M the Return on Capital Employed (ROCE) and the
Residual Income (RI) for:
2014
2015
(4 marks)
10
September 2014
The board of directors of MNP have identified what they believe is a profitable project. The
project would require a capital investment of $2,000,000. The details of the project are as
follows:
Annual revenue
Annual costs (excluding depreciation)
Non-current assets
Life of the project
$750,000
$225,000
$2,000,000
5 years
The new assets would be depreciated in the same way as all other assets in MNP. At the end
of the project the new assets would have no resale value.
The board of MNP have suggested that Division M should undertake the project but the
manager of Division M is reluctant to do so.
Required:
(b) Calculate the forecast ROCE and RI for Division M for the year ending 31 August
2015 if the project is undertaken by Division M. (Assume that the project started on
1 September 2014).
(6 marks)
(c) Discuss, using appropriate calculations based on the above scenario, why the use
of ROCE and RI as performance measures can cause incorrect capital investment
decisions to be taken.
(8 marks)
The project would enable MNP to produce components that could be used by several of the
divisions in the manufacture of their products. However the Board are aware that the setting
of international transfer prices can be problematic and that transfer prices can be disputed by
taxation authorities.
(d) Explain how international transfer prices should be set to avoid taxation disputes.
(Your answer should explain each of the three acceptable methods.)
(7 marks)

September 2014
11
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12
September 2014
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September 2014
13
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14
September 2014
PRESENT VALUE TABLE

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
4%
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
Interest rates (r)

5%
6%
0.952
0.943
0.907
0.890
0.864
0.840
0.823
0.792
0.784
0.747
0.746
0705
0.711
0.665
0.677
0.627
0.645
0.592
0.614
0.558
0.585
0.527
0.557
0.497
0.530
0.469
0.505
0.442
0.481
0.417
0.458
0.394
0.436
0.371
0.416
0.350
0.396
0.331
0.377
0.312
7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
Interest rates (r)

15%
16%
0.870
0.862
0.756
0.743
0.658
0.641
0.572
0.552
0.497
0.476
0.432
0.410
0.376
0.354
0.327
0.305
0.284
0.263
0.247
0.227
0.215
0.195
0.187
0.168
0.163
0.145
0.141
0.125
0.123
0.108
0.107
0.093
0.093
0.080
0.081
0.069
0.070
0.060
0.061
0.051
17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
September 2014
15
Periods
(n)
1
2
3
4
5
1 (1+ r ) n
r
1%
0.990
1.970
2.941
3.902
4.853
2%
0.980
1.942
2.884
3.808
4.713
3%
0.971
1.913
2.829
3.717
4.580
4%
0.962
1.886
2.775
3.630
4.452
Interest rates (r)

5%
6%
0.952
0.943
1.859
1.833
2.723
2.673
3.546
3.465
4.329
4.212
7%
0.935
1.808
2.624
3.387
4.100
8%
0.926
1.783
2.577
3.312
3.993
9%
0.917
1.759
2.531
3.240
3.890
10%
0.909
1.736
2.487
3.170
3.791
6
7
8
9
10
5.795
6.728
7.652
8.566
9.471
5.601
6.472
7.325
8.162
8.983
5.417
6.230
7.020
7.786
8.530
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
11
12
13
14
15
10.368
11.255
12.134
13.004
13.865
9.787
10.575
11.348
12.106
12.849
9.253
9.954
10.635
11.296
11.938
8.760
9.385
9.986
10.563
11.118
8.306
8.863
9.394
9.899
10.380
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.244
8.559
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
16
17
18
19
20
14.718
15.562
16.398
17.226
18.046
13.578
14.292
14.992
15.679
16.351
12.561
13.166
13.754
14.324
14.878
11.652
12.166
12.659
13.134
13.590
10.838
11.274
11.690
12.085
12.462
10.106
10.477
10.828
11.158
11.470
9.447
9.763
10.059
10.336
10.594
8.851
9.122
9.372
9.604
9.818
8.313
8.544
8.756
8.950
9.129
7.824
8.022
8.201
8.365
8.514
Periods
(n)
1
2
3
4
5
11%
0.901
1.713
2.444
3.102
3.696
12%
0.893
1.690
2.402
3.037
3.605
13%
0.885
1.668
2.361
2.974
3.517
14%
0.877
1.647
2.322
2.914
3.433
Interest rates (r)

15%
16%
0.870
0.862
1.626
1.605
2.283
2.246
2.855
2.798
3.352
3.274
17%
0.855
1.585
2.210
2.743
3.199
18%
0.847
1.566
2.174
2.690
3.127
19%
0.840
1.547
2.140
2.639
3.058
20%
0.833
1.528
2.106
2.589
2.991
6
7
8
9
10
4.231
4.712
5.146
5.537
5.889
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.784
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
3.498
3.812
4.078
4.303
4.494
3.410
3.706
3.954
4.163
4.339
3.326
3.605
3.837
4.031
4.192
11
12
13
14
15
6.207
6.492
6.750
6.982
7.191
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.302
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.724
5.847
5.029
5.197
5.342
5.468
5.575
4.836
4.988
5.118
5.229
5.324
4.656
4.793
4.910
5.008
5.092
4.486
4.611
4.715
4.802
4.876
4.327
4.439
4.533
4.611
4.675
16
17
18
19
20
7.379
7.549
7.702
7.839
7.963
6.974
7.120
7.250
7.366
7.469
6.604
6.729
6.840
6.938
7.025
6.265
6.373
6.467
6.550
6.623
5.954
6.047
6.128
6.198
6.259
5.668
5.749
5.818
5.877
5.929
5.405
5.475
5.534
5.584
5.628
5.162
5.222
5.273
5.316
5.353
4.938
4.990
5.033
5.070
5.101
4.730
4.775
4.812
4.843
4.870
16
September 2014
FORMULAE
PROBABILITY
A B = A or B.
Rules of Addition
P(A
P(A
B) = P(A) + P(B)
B) = P(A) + P(B) P(A B)
P(A
P(A
B) = P(A) * P(B)
B) = P(A) * P(B | A)
Arithmetic Mean
x =
x
n
x=
fx
f
Standard Deviation
SD =
( x x ) 2
n
SD =
fx 2
f
INDEX NUMBERS
Price:
Quantity:
P
w 1
Po
w
x 100
Q
w 1
Qo x 100
w
TIME SERIES
Additive Model
September 2014
17
n
S = X[1 + r]
Annuity
PV =
1
1
1
r
[1 + r ] n
Perpetuity
PV =
1
r
LEARNING CURVE
b
Yx = aX
where:
2C o D
EOQ =
Ch
where:
Co
Ch
D
=
=
=

annual demand
18
September 2014

LEARNING OBJECTIVE
Level 1 - KNOWLEDGE
VERBS USED
DEFINITION
List
State
Define
Make a list of
Describe
Distinguish
Explain

purpose of
consideration
something
Identify
Illustrate
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Level 4 - ANALYSIS
September 2014
Analyse
Categorise

practical means
Find an answer to
Arrange in a table
Construct
Discuss
Interpret
Prioritise
Produce

between
Build up or compile
Advise
Evaluate
Recommend

19
Performance Pillar
September 2014
Thursday
20
September 2014
September 2014 examination
Examiners Answers
question, will be published on the CIMA website by early October at
SECTION A
Rationale
The question examines candidates knowledge, understanding and application of linear
programming.
Part (b) A2(c), discuss the meaning of optimal solutions and how linear programming
methods can be employed for profit maximising, revenue maximising and satisfying
objectives.
Suggested Approach
answers to the scenario. In part (a) candidates were required to interpret the graph given to
find the optimal solution given the slope of the iso-profit line. Candidates then needed to use
the formulae for the two lines that intersect at the optimal point and determine using
simultaneous equations the production plan.
In part (b) candidates were required to apply their knowledge of graphical solutions to
determine the impact of a change of selling price for Product X.
(a)
The optimal solution can be found using the iso-contribution line at point C of the feasible
region, at the intersection of the Labour and Material A resource constraint lines.
Material A:
5x + 2y = 10,150 -- equation 1
Labour:
3x + 4y = 8,400 -- equation 2
Multiply equation 1 by 2 to give equation 3
10x + 4y = 20,300 equation 3
Equation 3 minus equation 2 gives:
7x
= 11,900
x
= 1,700
Substitute into equation 2.
5,100 + 4y = 8,400
4y = 3,300
y = 825
Contribution = 62x + 36y
Contribution $135,100
Fixed costs ($70,000)
Profit
$65,100
(b)
If the optimum moved to Point B the gradient of the iso-contribution line would be the same as
that of the labour constraint line.
The gradient of the labour constraint line is given by 3x and 4y. Therefore if the contribution
from Y is $36 the contribution from X would have to be $27 for the contributions to be in the
ratio 3X:4Y.
The current contribution from X is $62 per unit and therefore the minimum change in the
selling price of Product X needed to move the optimum plan to Point B is a decrease of $35
per unit.
Note: an alternative method of calculating the answer is to calculate the production plan at
Point B (640 X and 1620 Y) and equating the contribution from that plan with what would be
earned at Point C (keeping the selling price of Y constant).
September 2014
Rationale
The question examines candidates knowledge and understanding of flexible budgets and the
learning curve.
Part (a) C2(c), evaluate performance using fixed and flexible budget reports.
Part (b) B1(e), apply learning curves to estimate time and cost for new products and services.
Suggested Approach
produce 256 units before using this information to prepare a flexible budget and revised
performance report. In the second part of the question candidates then needed to calculate
labour efficiency planning variance.
In part (b) candidates needed to ascertain that direct the labour cost was $4,000 and the
labour time of 160 hours before then working out an average time per unit. This figure should
then be used to find the eighth root of the proportion that the average labour time per unit for
256 units is compared to that for the first unit.
(a)
(i)
Performance report for the first month of production
Production volume (units)

Direct material cost
Direct labour cost
Variable overhead cost
Fixed costs
Total
Original
budget
300
$
11,400
15,000
6,000
125,000
157,400
Revised budget
Actual
Variance
256
$
9,728
5,510
2,204
125,000
142,442
256
$
10,500
4,000
1,750
115,000
131,250
44 A
$
772 A
1,510 F
454 F
10,000 F
11,192 F
Budgeted production time was expected to take:

y = ax
a=2
x = 256
b = -0.152
Average time for first 256 units =

Total time for 256 units =
0.861
hours
220.416
hours
(ii)
256 units x 2 hours (original standard)
512 hours
256 units at the revised standard
220.416 hours
291.584 hours
September 2014
Standard labour cost per hour
$25
Labour efficiency planning variance
$7,290 favourable
(b)
Actual direct labour cost
Actual direct labour time
Average time for 256 units
% of original average
Learning rate
$4,000
160 hours
0.625
31.25
86.5%
(divide by $25 per hour)

(divide by 256)
Take the eighth root of .3125
September 2014
Rationale
The question examines candidates knowledge and understanding of cost of quality reports.
The learning outcomes tested is B1(d), prepare cost of quality reports.
Suggested Approach
answers to the scenario. In part (a) candidates needed to calculate the quality cost impact of
the various issues detailed in the scenario and then prepare a cost of quality report allocating
the calculated costs under the appropriate headings.
In part (b) candidates were required to explain the role of the cost of quality report in
developing a TQM culture at JMM. Candidates needed to explain the specific ways in which
the cost of quality report could be used to support a TQM culture.
(a)
Cost of Quality Report
Volume
Rate
Cost
Prevention costs
Supplier review
60,000
Appraisal costs
Equipment testing
400
30
12,000
Internal failure costs

Down time
Manufacturing rework
375,000
800
380
Total internal failure costs
304,000
679,000
External failure costs

Customer support
500
58
Warranty repair
650
2,600
29,000
1,690,000
Total external failure costs
1,719,000
Total quality costs
2,470,000
September 2014
(b)
A Total Quality Management (TQM) culture is one where all departments and staff are
committed to a process of continuous improvement. The aim is to achieve a zero defect
position where products are delivered on a consistently high quality basis and the focus of the
organisation is on improving processes to attain this state.
The reporting of quality costs highlights the cost of quality activities at JMM. Highlighting
quality activities and reporting on money spent on quality failures goes to reinforce the TQM
ethos. The cost of quality report can also clearly display the relationship between
conformance costs (prevention and appraisal costs) and non-conformance costs (internal
failure and external failure costs) and the drivers of a reduction in the overall spending on
quality. JMM has a significantly higher spend on non-conformance costs than conformance
costs. JMM should increase prevention and detection activities in order to try and reduce the
spend on non-conformance costs. High levels of non-conformance costs also carry the risk of
damaging the reputation of JMM and could seriously impact the future viability of the
company as a high quality car manufacturer. This emphasis and measurement of quality
costs will ensure staff are focussed on appropriate indicators to embed the TQM culture.
In order for TQM to be successful, all staff at JMM must be engaged in the improvement
process and share in the continuous improvement ethos. As displayed by the disparity
between conformance costs and non-conformance costs, JMM is not a TQM company at
present. In order to establish a reputation as a high quality car manufacturer JMM must
ensure staff are focussed on quality and attitudes changed toward the importance of
conformance activities. A cost of quality report communicates this vision to all staff and
places the focus on quality. The cost of quality report is therefore a vehicle for
communicating and facilitating the change in the corporate culture.
September 2014
Rationale
The question examines candidates knowledge and understanding of the non-financial
perspectives of the balanced scorecard.
The learning outcome tested is:
C3(b), discuss the role of non-financial performance indicators.
Suggested Approach
Candidates needed to read the question carefully and understand the context in which this
question is set. In part (a) candidates needed to provide a reasoned explanation of the
shortcomings of using financial performance indicators alone to assess the performance of an
organisation.
In part (b) suitable performance measures were required for each of two perspectives.
Candidates needed to ensure their chosen measure was aligned to the objectives of the
organisation and explain their choices of measure.
(a)
Financial performance indicators are lag indicators. The financial impact, in terms of sales
revenue or profitability, of a decision taken at an organisation will be reported some time after
that decision has been made.
Many financial performance indicators provide little insight into the business as they could be
said to be the product of decisions made and actions taken possibly long before the period in
which they are reported and/or considered. They provide very little linkage to the strategy of
the business and may invoke short termism and overlook motivation, quality, efficiency and
other drivers of success.
Financial performance indicators are vulnerable to manipulation and to the choice of
accounting policies (such as depreciation and inventory valuation).
(b)
Customer perspective: The primary purpose of the training courses that TSH provides is to
help students pass their examination papers. Student examination pass rate is a key
measure that will attract and retain students. Students passing exams will result in those
students continuing their professional education with that college. Students passing exams
will also generate advocates for that college as successful students tell their friends and
colleagues about their experience. This in turn will attract further students to the college, thus
delivering on TSHs stated strategic objective.
Learning and growth perspective: The success of new innovations in teaching and learning at
TSH is a determinant of student satisfaction and exam success. If students are finding these
new learning resources valuable this will likely lead to an increase in the effectiveness of the
learning delivery at TSH and in turn the students satisfaction with their experience. A
measure to assess the success of the new innovations introduced by TSH is the number of
times a student has logged in to their account and used the software provided.
Note: measures from two perspectives were required. Answers did not have to be from the
perspectives used above.
September 2014
Rationale
The question examines candidates knowledge, understanding and application of target
costing and the value chain.
Part (a) B1(h), explain how target costs can be derived from target prices and the relationship
between target costs and standard costs.
Part (b) B1(j), discuss the concept of the value chain and the management of
contribution/profit generated throughout the chain.
Suggested Approach
answers to the scenario. In part (a) candidates needed to calculate a target cost and then
work through the information in the scenario to produce a forecast cost before calculating the
cost gap.
In part (b) candidates were required to discuss how PBB could reduce costs in three primary
activities in its value chain. Candidates were required to provide specific examples directly
related to the scenario of how costs could be reduced. A discussion was required of the
primary activity in the value chain where cost savings could be made, along with the related
cost saving initiative.
(a)
$
Sales price
25.00
25% profit margin
6.25
Target cost
18.75
$
Component A
2.15
Component B
1.75
Materials
2.50
Labour (0.4 hours at $15 per hour)
6.00
Production overhead cost
1.89
Distribution and sales cost
2.38
Royalty fee
3.75
Forecast cost
20.42
Cost gap
1.67
Working
Workings
1.
0.6kg x $4 per kg = $2.40

$2.40 x (1/0.96) = $2.50
2.
$25 x 0.15 = $3.75
September 2014
(b)
Inbound logistics
The receipt and storage of components and materials from suppliers are Inbound Logistics
activities in PBBs value chain. PBB currently purchases components and materials from a
number of suppliers and stores these in a raw materials store. Switching to a just-in-time
(JIT) system of purchasing could potentially save significant storage costs. The JIT supplier
must take the responsibility for the quality of products supplied, This could also potentially
provide a source of savings as substandard items are removed. However, this should be
contrasted with the premium PBB may expect to pay to a supplier that is willing to establish
the close relationship required for JIT purchasing to work.
Outbound logistics
Scheduled deliveries of toys to retail outlets are outbound logistics activities at PBB. The
scheduled transportation of toys each week is potentially an inefficient method of providing
products to retail outlets. The scheduled deliveries do not take into consideration toy
requirements at retail outlets thus PBB is potentially delivering to retail outlets that do not
require toys and incurring excessive transportation costs. An ERP system is likely to deliver
longer term efficiencies at PBB.
Marketing and sales
At PBB, this includes the sale of Toy Z through its network of retail outlets. Cost could
potentially be reduced by offering the toy for sale via the PBB website. As well as cost
savings this could potentially deliver higher revenues. The internet sales channel could
potentially attract international customers to the merchandise from the international hit
childrens film.
September 2014
SECTION B
Rationale
The question examines candidates knowledge, understanding and application of pricing
based on profit maximisation in imperfect markets and feedforward control and feedback
control.
Part (a): A3(a) apply an approach to pricing based on profit maximisation in imperfect
markets.
Part (b): A2(d), analyse the impact of uncertainty and risk on decision models based on CVP
analysis.
Part (c): C1(a), explain the concepts of feedback and feed-forward control and their
application in the use of budgets for planning and control.
Suggested Approach
answers to the scenario. In part (a) candidates were required to apply their knowledge of the
profit maximisation model in order to calculate the maximum total profit possible given
changes to the variable costs and fixed costs. Candidates needed to identify the variable cost
of a four person Premium Family Ticket, i.e. 4 x $11.50, to correctly calculate the contributionmaximising ticket price. The maximum possible contribution and the relevant fixed cost
should then be compared to the current contribution to determine if the machine should be
hired or not.
In part (b) candidates were required to discuss the sensitivity of their recommendation in part
(a) to a change in the number of Standard Tickets sold per day. Candidates were required to
calculate the sensitivity and discuss the implications of the result for PPP. The discussion
element of the requirement needed to be specific to PPP.
In part (c) candidates were required to compare and contrast the use of feedforward control
and feedback control in relation to the budgetary process of PPP.
10
September 2014
(a)
Calculation of current profit
Ticket type
Pre-booked
Standard
Premium Family
Persons per ticket
Price per ticket $
29
39
185
Number of tickets
1,500
8,000
675
Days in the month
30
30
30
1,305,000
9,360,000
3,746,250
Variable costs $
562,500
3,000,000
1,012,500
Contribution $
742,500
6,360,000
2,733,750
Revenue $
$
Total contribution
9,836,250
Fixed costs
(6,500,000)
Total profit
3,336,250
If equipment is hired:
Variable cost
$12.50 x 0.92 = $11.50 per person
Fixed costs
$6,500,000 + $250,000 = $6,750,000
p = a -bx
MR =
a - 2bx
MC =
46.00
X=
P=
(11.50 x 4)
p=
185
x=
675
Change in p
5.00
Change in x
25
685.00
183.00
Therefore
September 2014
11
b=
0.2
a=
320
Pre-booked
Standard
Premium
Family
Persons per ticket
Price per ticket $
29
39
183
Number of tickets
1,500
8,000
685
Days in the month
30
30
30
1,305,000
9,360,000
3,760,650
Variable costs $
517,500
2,760,000
945,300
Contribution $
787,500
6,600,000
2,815,350
Revenue $
$
Total contribution
10,202,850
Fixed costs
(6,750,000)
Total profit
3,452,850
Profit is expected to increase by $116,600.
Alternative method:
Original contribution from Premium Family Tickets

Revised contribution from Premium Family Tickets
Increased contribution from Premium Family Tickets
Reduced variable costs on other tickets 3,562,500 x 8%
Hire fee
Net benefit
$
2,733,750
2,815,350
81,600
285,000
-250,000
116,600
(b)
Change in profit required
$116,600
Contribution per Standard ticket

($39 - $11.50)
$27.50
Number of Standard tickets
4,240
($116,600 / $27.50)
Reduction in tickets per day
141.33
(4,240 / 30)
Sensitivity (141.33/8,000)
1.8%
Sales of Standard Tickets would have to fall by 1.8% for each day of the month for the
decision to hire the equipment to change. The management of PPP expected to sell 8,000
12
September 2014
Standard Tickets per day before the competitors action; a reduction of only 1.8% is probable.
Unexpected changes in the weather along with many other factors could potentially cause a
drop in sales of tickets. The management of PPP should also consider the assumptions that
the demand forecasts are based on and the impact on the customer experience of hiring the
machine before taking the decision.
(c)
Feedback control involves the comparison of actual results against an expected position.
Where there is difference between the actual and expected position the variance is
investigated. The information provided by the feedback control enables further action to be
taken and therefore a modification in subsequent periods to achieve the required results.
At PPP, the comparison of actual results against the budget set at the start of the year is an
example of feedback control. Feedback is reactionary and is based on historical data.
Feedforward control uses a latest forecast of results to compare to a required position. The
latest expectation is usually generated in the light of information that was not available at the
time the original plan was set. This differs from feedback control because the latest forecast is
an estimation of future results and its aim is to proactively anticipate any issues.
The comparison of the latest forecast position with the required position is an example of
feedforward control at PPP. The latest demand information is based on different assumptions
than those used in the original plan and as such PPP will pre-empt the impact of these
changes by assessing variances between the forecast and the required position.
Feedback control compares an actual position to a plan and bases the change to future
actions on the information underlying the difference. However, the reasons for the differences
experienced in the past may not be a determinant for future results. Feedforward control
compares a latest forecast to a required position. This differs from feedback in that the latest
forecast comparator can be a changing position rather than the static actual or budget.
However, in order for the latest assumptions incorporated into the forecast to be valid they
should be continually updated to ensure the integrity of the feedforward control.
September 2014
13

Rationale
The question examines candidates knowledge, understanding and application of alternative
measures of performance for responsibility centres in the context of a professional services
organisation, and international transfer pricing.
Part (a) and (b): 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 (c): D2(c), discuss alternative measures of performance for responsibility centres.
Part (d): D3(d), discuss in principle the potential tax and currency management
consequences of international transfer pricing policy.
Suggested Approach
answers to the scenario. In part (a) candidates were required to calculate the ROCE and RI
for Division M for two years. Candidates needed to produce forecast figures for the second
year.
In part (b) candidates needed to apply their knowledge of Return on Investment (ROI) and
Residual Income (RI) metrics to perform calculations based on revised figures as a result of a
capital investment opportunity.
In part (c) candidates needed to apply their knowledge of capital investment decisions and
the possible conflict with performance measures. Candidates needed to be aware of the
behavioural consequences of using ROCE and RI to assess performance.
In part (d) candidates were required to apply their knowledge of international transfer pricing
and the methods of pricing acceptable to taxation authorities.
(a)
2014
ROCE = 2,030 / 3,200 = 63.4%
RI = 2,030,000 (3,200,000 x 5%) = $1,870,000
2015
Gross profit
Operating profit
$000
5,380
3,190
2,190
Capital employed
2,560
3,350-(4,000 x 20%)+(3,200 x 20%)
ROCE = 2,190/2,560 = 85.5%

RI = 2,190 (2,560 x 5%) = $2,062,000
14
September 2014
(b)
If Division M were to undertake the project, the incremental impact would be:
Revenue
Costs
Operating profit
$000
750
625
125
Capital employed
1,600
225 + (2,000 x 20%)
2,000 (2,000 x 20%)
This would result in the following calculations for the performance metrics for 2015:
ROCE = (2,190 + 125) / (2,560 + 1,600) = 55.6%
RI = 2,315 (4,160 x 5%) = $2,107,000
(c)
Assessing performance on ROCE alone could potentially lead to dysfunctional decisions
being taken by divisional managers. Division M would continue to increase its ROCE in 2015
had the investment not been made. This is due to Division M generating the same level of
profit as in 2014 but from a lower asset base (the asset base will have had a further year of
depreciation). RI offers no further insight in this case. As with ROCE, it suggests that Division
M has improved its performance in 2015.
By undertaking the new project, Division M will earn an additional $45,000 of residual income
signalling the value of the expansion to Division M and MNP. Conversely, the ROCE falls
from 63.4% in 2014 to 55.6% in 2015 when the expansion project is included in the forecast
results. In this specific example, RI would motivate the Divisional manager to undertake the
project but this might not always be the case.
RI is an absolute measure and therefore does not facilitate comparison of the performance of
the separate divisions by MNP. RI and ROCE both suffer from using historical accounting
figures. The use of historic financial information is unlikely to enlighten MNP as to the
underlying drivers of performance and it would be useful to include a range of non-financial
performance indicators as lead indicators of future financial performance.
Capital investment opportunities should be appraised using Net Present Value. The NPV of
the project is calculated as:
$
750,000
225,000
525,000
4.329
2,272,725
2,000,000
272,725
Annual cash inflow

Annual cash outflow
Net annual cash inflow
5 year annuity factor @ 5%
Present value of cash inflows
Capital investment
Net present value
The net present value of the project is positive and therefore the project should be
undertaken. The impact of the project on a divisions ROCE or RI should not be part of the
decision criteria.
September 2014
15
(d)
International transfer prices should be based on the arms length price principle. An arms
length price is one that would have been arrived at by two unrelated companies acting
independently. There are three methods that the tax authorities would accept:
1. The comparable uncontrolled price method (which uses externally verified prices of
similar transactions involving unrelated companies)
2. The resale price method (which deducts a percentage from the selling price of the
final product to allow for profit) can be used when goods are sold on with little further
processing
3. The cost-plus method: an arms length gross margin is established and is applied to
the sellers manufacturing cost.
Guidelines state that whenever possible the comparable uncontrolled price method should be
used and if there is no market price, preference should be given to cost-plus.
16
September 2014

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Performance Pillar

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO

The Chartered Institute of Management Accountants 2012

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

Direct material cost per unit is expected to be $4

Direct labour is to be paid $10 per hour

A 90% learning curve is expected to apply

Other variable costs are expected to be $2 per unit

Note: The learning index for a 90% learning curve is -0.1520

Explain the principles of Kaizen Costing.

Discuss how SD can use standard costing and variance analysis to

Section A continues on the next page

Explain TWO non-financial measures (chosen from different perspectives

(Total for Section A = 50 marks)

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

Direct material A ($10 per kg)

Explain the relevance of these values to the management of JRL.

Section B continues on page 8

Regional Bedroom Market share %

Restaurant capacity per day (meals)

Residual Income ($000)

Discuss the relative performance of the three hotels.

a review of the relative profits of the rooms and restaurants in each

(Total for Section B = 50 marks)

End of question paper

PRESENT VALUE TABLE

Present value of 1 unit of currency, that is 1+ r

)n where r = interest rate; n = number of

Interest rates (r)

Interest rates (r)

Interest rates (r)

Interest rates (r)

P(A B) = P(A) + P(B)

P(A B) = P(A) * P(B)

E(X) = (probability * payoff)

Quantity relative = 100 * Q1/Q0

cost of placing an order

LIST OF VERBS USED IN THE QUESTION REQUIREMENTS

Communicate the key features

Put to practical use

Examine in detail the structure of

Counsel, inform or notify

Management Level Paper

Direct material (6,400 units x $4)

= 13.286 hours per batch, which is a total of 850.32 hours for 64

850.32 hours x $10 per hour = $8,503.20

Answer to Question Two

Answer to Question Three

Answer to Question Four

Answer to Question Five

Answer to Question Seven

Room and breakfast

The Senior Examiner for P2 Performance Management offers to future candidates

Management Level Paper

Answer to Question Two

Answer to Question Three

Sales (90,000 units)

Other overhead costs

Answer to Question Four