Paper P2 Performance Management

Post Exam Guide

May 2011 Exam

General Comments
The overall performance was a little disappointing, especially as the paper contained topics that had
been tested in several recent papers such as transfer pricing, the product life cycle, performance
measures in the service sector, costing techniques and variance analysis. The inclusion of variance
analysis and NPV calculations reinforced the progressive nature of this syllabus. It is also an
important reminder to candidates who are sitting this paper for the first time, having gained
exemptions from the Certificate Level Fundamentals of Management Accounting, and P1, that they
must ensure they identify any knowledge gaps.
The papers submitted by many candidates were good but some well documented weaknesses once
again appeared.
Firstly, the answers to discursive questions were weak, for two main reasons. It is apparent that very
few candidates take the time to plan their answers. The result is a disorganised answer and the
duplication of points. The second reason, once again, is the poor interpretation of verbs used in
questions. For example candidates must understand the difference between list and discuss.
It is also important to highlight once again the extremely poor presentation of answers both for
discursive and for quantitative answers. The quality of handwriting was so poor in some cases that
marks simply could not be awarded. Many candidates exhibited bad habits including: writing in the
margins, failing to use any form of punctuation and not indicating the part of the question being
attempted.
The layout of answers to quantitative questions was particularly disappointing. Many figures
appeared with no title or description, and with no apparent indication to where or what they related.
Workings were not referred to, or did not appear at all.
When reviewing the attempts at this paper it is clear that many candidates had not:

studied the entire syllabus

practised using past P2 questions
learned from the content of previous PEGs.

The following points should be noted by candidates when reflecting on the paper just taken, and when
preparing for future CIMA examinations. The list is virtually the same as the one contained in the
previous PEGs, which unfortunately confirms that the same problems still exist.
1. Due to the progressive nature of the Management Accounting Pillar candidates sitting the P2
examination are advised to closely examine the syllabi of the Certificate Level subjects,
particularly C01, and the P1 paper to ensure they have a thorough understanding of all the
topics covered in those papers. Any identified knowledge gap must be addressed.
2. Candidates should always practise time management and relate the time they expend on
each question to the marks available. A simple approach is to allow 1.8 minutes for one
mark. This will avoid candidates failing to complete the paper.
3. Candidates are advised to read Financial Management magazine and Velocity e-newsletter,
especially articles that relate to technical issues associated with the P2 syllabus.
4. Candidates should study and revise the entire syllabus and ignore suggestions put forward in
accounting journals which suggest the topics likely to be examined.
5. Candidates are advised to understand the rubric of the paper and plan their attempts
accordingly.
6. Candidates should make full use of the 20 minutes allowed for reading and planning.

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7. Answers to discursive questions should relate to the scenario in the question. On many
occasions general answers are submitted that attract few marks.
8. In preparing for the exam, candidates are advised to practise regularly using past CIMA
questions, comparing their answers to the examiners suggested answers. The effort exerted
undertaking this task will allow candidates to measure their own progress. Candidates will
also gain an understanding of the correct layout for quantitative questions and the depth of
answers required for discursive questions.
9. Candidates are advised to present answers in a clear and logical fashion e.g. clear and
legible handwriting and workings clearly referred to.
A number of common faults also need attention:
1. Many candidates expend valuable time in writing out the question at the start of their answer.
This is not necessary.
2. Many candidates include facts stated in the question within their answer as if they are putting
forward new information.
3. When answering a question the effort expended should be related to the marks available.
4. If a question asks for, say, three items to be put forward, do not waste valuable time in putting
forward more items. Only three items will be marked.
5. Clearly indicate to the marker if part of the answer to a question appears later in the answer
booklet ( e.g. see page 21 for part b)

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Section A 50 marks
ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS
WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS ARE AVAILABLE FOR
THE METHOD YOU USE.

Question 1

(a)
(i)

Calculate the total variable cost per unit.

(2 marks)

(ii)

Calculate the selling price of the product that will maximise the companys profits.
(4 marks)

Note: If Price (P) = a - bx then Marginal Revenue = a - 2bx

(b)

Explain TWO reasons why the company might decide NOT to use this optimum
selling price.
(4 marks)
(Total for Question One = 10 marks)

Rationale
Question One examines candidates knowledge and understanding of product pricing using the
economists pricing model and the limitations as to its use. The learning outcome examined is A3 (a)
apply an approach to pricing based on profit maximisation in imperfect markets.

Suggested Approach
Carefully read the data provided to identify the unit variable cost and the relationship between unit selling
price and demand.
Calculate the selling price at which there is zero demand.
Construct the selling price equation and hence the marginal revenue equation.
Equate marginal cost and marginal revenue to determine the output level at which profit is maximised.
Use the price equation to determine the selling price at which the optimum output level will be demanded.
Identify and explain two reasons why the company might not use this optimum price.

Marking Guide
(a)
Calculate the variable cost per unit
Determine the selling price equation
Calculate the optimum selling price per unit
(b)
Explain two reasons why the company might not use this
optimum price (two marks each)
Maximum marks awarded

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Marks
2
2
2

4
10 marks

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Examiners Comments
It was surprising, even disappointing, to find that many candidates were not able to apply the high low
technique to calculate the total variable cost of the unit. This is one of the most basic, but important,
tools that should be in the armoury of all management accounting students, and should have been
knowledge brought forward from the foundation stage.
Part (a)(ii) was generally answered well, but a significant number of candidates made an error when
calculating the selling price that would maximise the companys profit, and put forward an answer that
could not be possible in the context of the question. Candidates are advised to sensibilise their
answers, and if the error cannot be found clearly indicate to the marker that you are aware that the
answer is incorrect.
The situation described above was compounded in part (b) when candidates attempted to explain figures
that were completely incorrect.
Example 1 - explaining an optimum selling price of $5
Example 2 discussing an output figure of 3.34 million units
Common Errors
1. unable to apply the high-low technique (part (a)(i))
2. incorrectly believing that the total variable cost was simply the sum of the direct material and
direct labour
3. unable to calculate the selling price that would maximise the companys profits. (part (a)(ii))
4. submitting reasons in part (b) that did not relate to the figure calculated in part (a)(ii)
5. unclear workings
6. submitting lengthy answers when addressing part (b) that were disproportionate to the marks
available

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Question 2
For each of the
(i)
(ii)

Growth; and
Maturity stages of the new products life cycle

explain the likely changes that will occur in the unit selling prices AND in the unit
production costs, compared to the preceding stage.
(Total for Question Two = 10 marks)

Rationale
Question Two examines candidates knowledge of the product life cycle and how unit selling prices and
unit production costs are likely to change as the product moves through its life cycle. The learning
outcome examined is B1 (i) discuss the concept of life cycle costing and how life cycle costs interact with
marketing strategies at each stage of the life cycle.

Suggested Approach
Carefully read the scenario and determine the pricing strategy for the product.
Since PT is using a skimming policy this implies that the product is unique and will originally be made in
small volumes.
Describe the likely effects on (i.e. reductions in) unit selling prices and why these would be expected.
Describe the likely changes in unit production costs and why these would occur.

Marking Guide
Explain the effect on unit selling prices for each of the maturity and growth stages of the
product life cycle
Explain the effect on unit production costs for each of the maturity and growth stages of
the product life cycle
Maximum marks awarded

Marks
5

5
10 marks

Examiners Comments
It was surprising to note that many candidates were not fully conversant with the characteristics of a
market skimming pricing policy. Also a significant number of candidates incorrectly believed that R&D,
advertising, distribution and promotion costs were production costs. Some answers were extremely good
with these answers relating closely to the scenario in the question.
Common Errors
1.
2.
3.
4.
5.

confusing market skimming with a penetration policy

wasting valuable time describing the introduction and decline stages of the product life cycle
confusing the words cost and price
putting forward descriptions relating to total production costs rather than unit production costs.
incorrectly stating that when the product moves to the growth stage a penetration pricing policy is
adopted (the two approaches to pricing have completely different characteristics).

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Paper P2 Performance Management

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Question 3
Explain how JYT could use Target Costing AND Kaizen Costing to improve its future
performance.
Your answer should include an explanation of the differences between Target Costing and
Kaizen Costing.

(Total for Question Three = 10 marks)

Rationale
Question Three examines candidates knowledge of Target Costing and Kaizen Costing and the
differences between them. The learning outcomes examined are B1 (h) explain how target costs can be
derived from target prices and the relationship between target costs and standard costs B1 (c) explain
the concepts of continuous improvement and Kaizen costing that are central to total quality management.

Suggested Approach
Explain Target Costing and how it operates.
Explain Kaizen Costing and how it operates.
Explain the differences between them.

Marking Guide
Explain Target Costing and how it operates
Explain Kaizen Costing and how it operates
Explain the differences between Target Costing and Kaizen Costing
Maximum marks awarded

Marks
4
4
2
10 marks

Examiners Comments
Many candidates were able to describe Target Costing, but were not able to correctly explain Kaizen
Costing, and were not able to describe how either technique could improve the future performance of the
company.
The descriptions of Kaizen Costing put forward by many candidates were simply detailed descriptions of
JIT and TQM.
(The April 2011 issue of Financial Management contained an article about Kaizen Costing and Target
Costing).
Common Errors
1. unable to describe Kaizen Costing
2. unable to explain the differences between the two costing systems
3. submitting answers that were disproportionate to the marks available (in some cases up to five
pages for this 10 mark question)
4. failing to plan the answer, which resulted in duplication of several points

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Question 4

(a)

Calculate the following operational variances based on the revised market details:
(i)

The total sales mix profit margin variance

(2 marks)

(ii)

The total sales volume profit variance

(2 marks)

(b)

Explain, using the above scenario, the importance of calculating planning and
operational variances for responsibility centres.
(6 marks)
(Total for Question Four = 10 marks)

Rationale
Question Four examines candidates understanding of sales variances, and planning and operating
variances in the context of responsibility accounting. The learning outcome examined is C2 (c) evaluate
performance using fixed and flexible budget reports.

Suggested Approach
Carefully read the data provided to identify the standard sales proportions.
Calculate the standard sales mix for the actual sales volume.
Compare the actual sales of each product with the standard mix and value the differences.
Explain the concept of control and the use of planning and operating variances to separate the
controllable and non-controllable elements of a variance.
Use the market size data provided to explain the use of planning and operating variances.

Marking Guide
(a)
Calculate the sales mix profit margin variance
Calculate the sales volume profit variance
(b)
Explain the concept of control and the use of planning and operating variances
Apply the concept of control to the scenario
Maximum marks awarded

Marks
2
2

2
4
10 marks

Examiners Comments
The attempts at both parts of (a) were extremely poor. Variance analysis is one of the main pillars upon
which management accounting is built, and again emphasises that while variance analysis does not
explicitly appear in the P2 syllabus, it can be assessed at this level due to the progressive nature of the
syllabus.
The answers to part (b) were also poor and clearly demonstrated that many candidates did not
understand planning and operational variances. Many of the answers to part (b) did not relate to the
scenario in the question or to the variances calculated in part (a).

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Common Errors
1.
2.
3.
4.
5.
6.

unable to calculate the variances

incorrectly showing the mix variance as the volume variance, and vice versa
incorrectly showing an adverse variance as a favourable variance, and vice versa
not relating answers to the scenario in the question
showing variances as a percentage
not showing a $ or sign before the variance (a minor but important point)

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Question 5

(a)

Explain why non-financial performance measures are important in the service sector.
(2 marks)

(b)

Recommend, with reasons, TWO non-financial performance measures that SFG

could use to evaluate the performance of the hotel managers.
(4 marks)

(c)

Explain why, and how, non-controllable costs should be shown on the profit reports.
(4 marks)
(Total for Question Five = 10 marks)

Rationale
Question Five examines candidates knowledge of non-financial performance measures and the
reporting of non-controllable costs. The learning outcomes examined are C3 (b) discuss the role of non
financial performance indicators and C1 (c) identify controllable and uncontrollable costs in the context of
responsibility accounting and why uncontrollable costs may or may not be allocated to responsibility
centres.

Suggested Approach
Explain the role of non-financial performance measures in the service sector.
Using the scenario, identify and recommend with reasons two non-financial measures that SFG could
use.
Explain controllable and non-controllable costs and why and how they should be shown on profit reports.

Marking Guide
(a)
Explain the importance of non-financial performance measures

(b)
Identify and explain two non-financial performance measures that could be used by
the hotel (2 marks each)

(c)
Explain why non-controllable costs should be shown
Explain how non-controllable costs should be shown

2
2

Maximum marks awarded

Marks

10 marks

Examiners Comment
Very few candidates correctly interpreted what was required for part (a). Most candidates simply
discussed issues such as customer satisfaction, whereas the main thrust related to the short-term nature
of financial measures at the expense of long-term non-financial issues.

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Part (b) was generally well answered but part (c) was poorly answered.
Part (c) asked candidates to explain why, and how, non-controllable costs should be shown on profit
reports. However, many candidates simply changed the emphasis and stated non-controllable cost
should not be shown on the profit reports, and then went on to explain the reasons for this statement.
This is a common fault and should be avoided i.e. changing the question.
Common Errors
1.
2.
3.
4.

misunderstanding what was required (part (a))

not relating performance measures to the scenario in the question i.e. the hotel industry (part (b))
restating the question (part (c))
assuming non-controllable costs were simply Head Office costs. Some costs that fall into this
category can be directly related to a division, although the expenditure, for whatever reason, is
controlled by the Head Office
5. putting forward up to five measures when only two were requested.
6. confusing the service sector with not-for-profit organisations

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SECTION B 50 MARKS
ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS
WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS ARE AVAILABLE FOR
THE METHOD YOU USE.

Question 6

(a)

Prepare, in an appropriate format, a columnar statement that will help the

managers of the hotel to plan for next year. Your statement should show
the hotels activities by season and in total.
(18 marks)

(b)
(i)

Identify, based on your statement, the actions that the managers could take to
maximise the profit of the hotel for next year.
(3 marks)

(ii)

Explain TWO factors that the managers should consider before implementing
the actions you identified in (b)(i).
(4 marks)
(Total for Question Six = 25 marks)

Rationale
Question Six examines candidates knowledge and understanding of relevant costs in the
context of a closure decision. The learning outcome examined is 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.

Suggested Approach
Carefully read the scenario to identify the relevant costs and their causes.
Prepare a statement that uses marginal costing principles to show the relevant costs and
revenues for each part of the hotels operations for each season as well as in total.
Identify the activities/seasons that have a negative contribution and recommend actions to the
managers.
Explain other factors that should be considered.

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Marking Guide
(a)
Calculate guest related costs
Calculate room costs
Calculate snack contribution
Calculate restaurant contribution
Calculate fixed costs
Calculate and present hotel results
(b)
Identify actions to improve the profits
(c)
Explain two factors to be considered before implementing the actions
identified
Maximum marks awarded

Marks
2
3
4
4
3
2

25 marks

Examiners Comments
A relatively straight forward question, which simply required a number of basic calculations, and
arranging the figures in the most appropriate manner. Most candidates attained a high mark but
easy marks were lost due to poor presentation of the figures (see below for more details)
The attempts for parts (b)(i) and (b)(ii) were generally good but many candidates did not comment
on the figures they had produced in part (a) but instead gave generic answers that could have
applied to many similar situations.
Common Errors
Part (a)
1. failure to show workings
2. untidy statements, many with no total column
3. within the same statement some figures were shown in full, whereas others were to the
nearest thousand
4. incorrectly including both the spend and the gross margin in the statement for the hot
snacks and the restaurant
5. incorrectly adopting a relevant costing approach and completely ignoring all the fixed costs
6. incorrectly attempting to apportion the $200,000 hotel annual fixed costs
7. not even preparing a statement
Parts (b)(i) and (b)(ii)
8. putting forward minor, irrelevant actions
9. not putting forward actions that related to figures produced in part (a)
10. not relating part (b)(ii) to part (b)(i), as requested

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Question 7

(a)

Prepare an analysis of the sales made by Division E that shows clearly, in units
and in $, the internal and external sales made during the year.
(3 marks)

(b)

Discuss the effect of possible changes in external demand on the profits of

Division E, assuming the current transfer pricing policy continues.
(6 marks)

(c)
(i)

Assuming that the current transfer pricing policy continues:

Evaluate the investment from the perspective of the manager of Division E.
(6 marks)

(ii)

Evaluate the investment from the perspective of the DE Company.

(4 marks)

Note: Ignore inflation and taxation.

(d)

Explain TWO factors that should be considered when designing divisional

performance measures.
(6 marks)
(Total for Question Seven = 25 marks)

Rationale
Question Seven examines candidates understanding of transfer pricing and its impact on divisional
performance measurement and on decision making. The learning outcomes examined are 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, D3 (c) discuss the likely
consequences of different approaches to transfer pricing for divisional decision making, divisional and
group profitability, the motivation of divisional management and the autonomy of individual divisions
and D2 (c) discuss alternative measures of performance for responsibility centres.

Suggested Approach
Carefully read the scenario to identify the selling and buying divisions.
Identify the quantities being sold internally and externally by the supplier division.
Identify the transfer pricing policy
Prepare a table summarising the sales of the selling division.
Test the effect of an increase in the selling divisions external demand on the transfer price used for
the internal sales by changing the data provided.
Discuss the effect of the change in the external demand.
Determine the costs and benefits to Division E of investing in the new equipment and evaluate them
using net present value.
Make an appropriate recommendation.
Determine the benefits to the company from the investment and evaluate them using net present
value.
Make an appropriate recommendation.
Explain two key factors to consider when designing divisional performance measures.

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Marking Guide
(a)
Show an analysis of the sales in units and value

Marks
3

(b)
Explain the effect of capacity availability and external demand on the transfer price
Explain the effect on the profit of different transfer prices

4
2

(c)
Calculate the cost saving that will be made by Division E
Calculate the net present value of the investment and advise Division E
Calculate the cost saving to the company
Calculate the net present value of the investment and advise the company

4
2
2
2

(d)
Explain two factors to be considered when designing divisional performance
measures (3 marks each)
Maximum marks awarded

6
25 marks

Examiners Comments
Overall the attempts were poor, especially for parts (c) (i) and (c) (ii). Part (a) was generally well
answered but the answers to the discursive parts (b) and (d) were weak.
Questions relating to transfer pricing have appeared quite regularly at recent sittings and each time
the marks have been disappointing. It leads one to suppose that many candidates do not
understand this area of the syllabus and ignore it in their revision programme.
Common Errors
Part (a)
1. Not answering the question and giving profit/ contributions in addition to sales in units and $
Part (b)
2. The question did not ask for an alternative transfer system to be put forward and described
(e.g. dual pricing)
3. Incorrectly suggesting that Es external customer might seek an alternative supplier
4. The question asked for a discussion, not a series of statements showing profit and losses for
changes in external demand.
Part (c)(i)
5. Failing to show an incremental position i.e. showing the profits with and without the
investment
6. Submitting figures that were not explained
7. Not submitting figures for a net present value calculation
8. Failure to show any workings or failure to refer to workings.
Part (c)(ii)
9. Failing to use the figures in c(i) when tackling c(ii), plus, points 6,7,and 8 from c(i)
Part (d)
10.
11.

Putting forward up to six factors when only two were requested

Submitting lengthy answers that were disproportionate to the marks available

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12.

Concentrating on motivational issues and ignoring more obvious factors such as

fairness, goal congruency, easy to calculate and understand, and including only
items that are within a divisional managers control

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