1

CIMA Gateway Assessment

SECTION A

Requirement (a)
The average time per unit for 200 units is:

Y =ax
b

Y =20 x 200
-0.4150

Y =2.219 hours

Total time for 200 units =200 x 2.219 hours =443.8 hours

The average time per unit for 199 units is:

Y =ax
b

Y =20 x 199
-0.4150

Y =2.223 hours

Total time for 199 units =199 x 2.223 hours =442.4 hours

Time for 200
th
unit =1.4 hours

Total time for 500 units =(300 x 1.4 hours) +443.8 hours =863.8 hours

Requirement (b)
\$ \$
Sales revenue (500 x \$85) 42,500

Direct materials (500 x \$34) 17,000
Variable overhead (500 x \$18) 9,000
Direct labour (863.8 hours x \$12) 10,366 36,366

CONTRIBUTION

6,134

Examiner's Answers CGA 2 November 2011

Requirement (c)
Target costing is used where a company is forced to accept the market price for its products.
The company then deducts from the market price its target return and seeks to produce the item
for the difference, i. e. the target cost. If the company cannot produce the item for its target cost
over the lifetime of the product, the company should not produce the item.
In the scenario, SDF is forced to accept the market price of \$85 for its proposed new product.
SDF has set a target return of a 15% unit contribution; therefore its target cost is \$70 per unit
(\$85 - \$15). The direct material cost and variable overhead cost per unit are expected to be \$52
per unit; therefore in order to meet the target the direct labour cost per unit cannot exceed \$18
per unit.
Initially the direct labour cost per unit is expected to be \$240, but this will reduce due to the
existence of a learning curve until it stabilises at \$16.80 per unit once 200 units have been
produced. It can thus be seen that once the steady state has been achieved SDF will meet its
target unit cost. However, as the above calculations show, the lifetime target is not achieved
within the expected life cycle of 500 units and therefore SDF should not proceed with the
product.

Requirement (d)
If SDF is to proceed with the product it needs to reduce its costs so that it meets the target
contribution of \$7,500. Currently its expected contribution is \$1,366 below this target. However,
this difference represents less than 5% of its expected costs.
(i) Value Anal ysi s is a systematic interdisciplinary examination of the factors which affect the
cost of a product or service in order to determine the means of achieving the specified purpose
in the most economical manner while meeting the required level of quality and reliability.
Value Analysis may therefore be viewed as a cost reduction and problem solving technique that
analyses an existing product or service in order to identify and reduce, or eliminate, any costs
which do not contribute to value or performance.
SDF may be able to use Value Analysis to identify cost savings that do not affect the customer,
for example, changing to a batch system of production, changing the purchasing pattern of
materials to reduce inventory holding costs or ordering costs, particularly since only a small cost
saving is required to achieve the target return.
(ii) Functional Cost Anal ysis is a method that can be applied to examine the component costs
of a product or service in relation to the value as perceived by the customer. Functional Cost
Analysis can be applied to new products and breaks the product or service down into its
component parts. The outcome of the analysis is to improve the value of the product whilst
maintaining costs and or reduce the costs of the product or service without reducing value.
Functional Cost Analysis focuses on the value to the customer of each function of the product or
service and consequently allocates resources to those functions from which the customer gains
the most value.
Since SDF is competing in a market with common products, it is less likely to be able to use
Functional Cost Analysis because SDF’s product needs to have the same functions as those of
its competitors.
(iii) 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 our
products or otherwise adversely affecting the customer’s perception of our products.
SDF may be able to use Kaizen Costing to make small improvements gradually throughout the
life cycle of the product. As stated above an overall cost reduction of 4% would mean that SDF
would achieve its target return.

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Requirement (a)
Project management software can be used by the Finance Director to assist him at various
stages of the project lifecycle with features such as planning and work scheduling, project
progress, monitoring and control. The software can help in the production of detailed project
planning documentation, to update project plans and produce reports assisting the project
manager to review the relationship between tasks. This will be of particular value to the Finance
Director and his team in managing the student village project, given its complexity. It will
probably involve a number of sub-projects and dealing with large amounts of data which
frequently changes.
Some of the "off-the-shelf" packages include Microsoft Project, Micro Planner C-Pert. These
provide the following features that could help the Finance Director:
Budget and control features of project software will assist at the various stages of the student
village project lifecycle, so that actual costs can be compared with budget costs, at both the
level of individual activity and for the project as a whole. It will help the Finance Director in
reporting back to the Project Board on the financial performance of the project.
Project management software will also make project planning easier, in that it will allow the
project manager to define the different activities that need to be performed. Once the relevant
data is entered, it will provide the Finance Director with task lists and create critical paths. This
will allow him to plan for the enormous number of activities involved in the development of the
student village. It will also help in the allocation of resources, setting start and completion dates
and calculating the expected time to complete the various aspects of the sub-projects.
Project management software is particularly helpful in handling multiple projects and complexity
often associated with large projects, particularly if there are many variables. The student village
project will be complex and it will be crucial to keep track of the interrelationships between the
different sub projects. The software can help with the scheduling of activities, building Gantt
charts and network diagrams, using the graphics package. These will be invaluable to the
Finance Director in reporting back to the project team and Project Board on progress.
The software will be a critical support to the Finance Director in undertaking contingency
planning and “what if” analysis, allowing him to see the effects of different scenarios. Any
changes to task lists will automatically create new schedules for the project. It will also be
possible for the Finance Director to schedule recurring tasks, to set priorities for tasks and to
specify ‘must end by’ and ‘no later than’ dates for activities.
The calendar facility within project management software will be helpful to the Finance Director
and the project team both for reporting purposes and also to define work periods.
The software facilitates resource planning which should enable the most effective use of the
various resources, ensuring the project has the correct staff levels, equipment and material at
the right time. Again, this will be important for the student village project where different types of
labour and skills will be needed at different stages of the project, for example, design,
construction, refurbishment, relocation etc… Again, the graphics package will provide visual
displays of the usage and availability of resources. This will assist the Finance Director in seeing
where there are surplus resources or too few resources.
Project management software is capable of producing standardised and customised reports.
The quality of the documentation will be high, and reports can be extracted and shared with the
project team, and other interested stakeholders such as the project sponsor. This will be of great
help to the Finance Director in reporting on progress to the different project stakeholders and will
encourage and facilitate constant progress checking.
Whilst there are many benefits in using project management software, the Finance Director
should remember that the software is only one tool and cannot account for human factors, such
as levels of motivation, commitment and staff turnover that can affect the performance of the
project. Human variations can make rescheduling very difficult and the logic of the programme,
for example, work breakdown structure, might not be able to reflect the flexible ways that people
work.

Examiner's Answers CGA 4 November 2011

Requirement (b)
Project stakeholders are those individuals who are involved in, or may be affected by, the
project activities; in this case the construction of a student village. Stakeholder groups will differ
in their interest and attitudes towards the project. Stakeholder mapping could be undertaken, for
example using Mendelow’s matrix, to help the Finance Director understand the power and
interest of different groups and their likely reactions to the development of the student village.
For instance, how the different groups of stakeholders can be influenced to support the project,
for example:
• What will the project deliver to meet stakeholder concerns
• How could different stakeholder groups demonstrate lack of support and what is the
recourse if there is a lack of support
• What kind of support is needed
This will assist the Finance Director in working out how he needs to manage the relationships
with different stakeholders and influence their expectations.
Some examples of stakeholder interest in the student village project, that the Finance Director
must take into account at various stages of project planning and implementation, will include:
The project sponsor/s who are accountable for the resources invested in the project and
responsible for the achievement of the project business objectives. This will include both the
College and business partners who will have a financial interest in the outcomes of the project.
Given the scale of the student village project it is probable that a Proj ect Board will be
established. This is the body to which the Finance Director as project manager will be
accountable for achieving the project objectives. The Board will be interested in making sure
that the project is on target in terms of the milestones set.
Users are those individual or groups who will use the student village. The two main groups
under this heading are students who will live in and use the student village and the staff who
will be based there. At the time of the project planning, it is unlikely that current students will
have a great deal of interest, since the project is a long term investment that will probably not be
finished until after they have completed their studies. However, they could be a useful group to
inform the project team of how they envisage a student village in terms of their requirements.
Staff are a key group since they have already voiced a negative reaction and whilst they
probably have limited power they will have high interest and the Finance Director needs to
determine how to get them to buy into the student village concept.
The Finance Director will need to build a good relationship with the regional authority since it is
a key stakeholder. Not only is it selling the land but it will also have the power to agree or veto
the student village plans.
Local residents will be interested in the specifics of the plan in terms of how it might impact on
the local neighbourhood. They have the power to lobby against the plans, and as a coalition
group of individuals, this will strengthen their power in making representations to the regional
authority about the sale of the land and later down the line on planning consent issues. The
Finance Director should meet with representatives of the local resident groups to listen to their
concerns.
Note: There are other stakeholder groups that could be mentioned, such as the project team,

5
Requirement (a)
Impact on calculation of goodwill at acquisition
In this case the calculation of goodwill on the acquisition of XYZ should be based on the fair
value of the consideration paid plus the fair value of the NCI less the fair value of the net assets
acquired. The fair value of the net assets acquired should include any fair value adjustments
required to take the book values of individual assets and liabilities up to (or down to) their fair
value.
The increase in the values of property, plant and equipment and inventories will increase the
value of net assets at acquisition, which in turn will reduce goodwill. The intangible asset will be
recognised as an asset at acquisition because it meets the definition of an intangible asset in
IAS 38. It will increase the net assets at acquisition and hence reduce goodwill.
The contingent liability is also specifically allowed to be included within the fair value of the net
assets at acquisition. However, as a liability this will reduce the fair value of net assets and
hence increase goodwill.
Impact on consolidated fi nancial statements for year ending 31 December 2010:
Property, plant and equipment:
In the consolidated statement of financial position as at 31 December 2010 the value of PPE will
be increased by \$1,600,000 and reduced by the additional depreciation arising for the period.
The additional depreciation is calculated as the FV adjustment divided by the estimated
remaining life of the assets from the date of acquisition. This additional depreciation will be
charged to the consolidated income statement each year.
Inventories:
As the inventories have been sold by 31 December 2010, no adjustment will be required to the
inventories balance in the statement of financial position. However, in the consolidated income
statement an additional charge should be made within cost of sales. This will obviously also
impact retained earnings for the group.
Intangible asset:
The intangible asset will be recorded in the consolidated statement of financial position and
amortised over its life (which in this case is 20 months). The amortisation charge will go through
the consolidated income statement and impact group retained earnings.
Contingent liability:
The contingent liability will be recorded as a current liability in the consolidated statement of
financial position. In the consolidated income statements the reduction in the liability will in effect
increase profits.

Examiner's Answers CGA 6 November 2011

Requirement (b)
Consolidated statement of financial position as at 31 December 2010 for the ABC Group

\$000
ASSETS
Non-current assets
Property, plant and equipment (24,000 +8,000 +1,500 (Working 1)) 33,500
Goodwill (Working 2) 416
Intangible asset (Working 1) 180
34,096
Current assets
Inventories (4,400 +1,600 - 60 (Working 3) 5,940
Receivables (6,800 +1,800) 8,600
Cash and cash equivalents (1,600 +600) 2,200
16,740
Total assets 50,836

EQUITY AND LIABILITIES
Equity
Share capital (\$1 equity shares) 20,000
Retained earnings (Working 4) 15,786
Total equity attributabl e to parent 35,786
Non-controlling interest (Working 5) 3,482
Total equity 39,268

Non-current li abilities
Long term borrowings 5,400
Current li abilities (4,000 +2,000 +168)) 6,168
Total liabilities 11,568
Total equity and li abilities 50,836

Working 1 - Fai r value adj ustments
At acquisition
date
Movement 31 December
2010
\$000 \$000 \$000
Property, plant and equipment 1,600 (100) 1,500
Inventories 400 (400) -
Intangible assets 300 (120) 180
Liabilities (420) 252 (168)
1,880 (368) 1,512

Working 2 - Goodwill
\$000 \$000
Consideration transferred 7,600
NCI at fair value 3,200
10,800
Net assets at fair value
Share capital 2,000
Retained earnings 6,400
(10,280)
Goodwill on acquisition 520
20% impairment (104)
Goodwill at 31 December 2010 416

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Working 3 - Unreali sed profit on inventories
Sales of \$600k x 20% x 50% left in inventories at y/e =\$60k

Working 4 - Retained earnings
\$000 \$000
As per SOFP 15,000 8,000
Pre-acquisition reserves (6,400)
Adjustments arising from movement in FV

(368)
1,232
Group share 75% 924
Unrealised profit on inventory transfer (60)
Goodwill impairment (75% x 104) (W2) (78)
Consolidated reserves 15, 786

Working 5 - Non-controlli ng interests
\$000
NCI at acquisition (at fair value) 3,200
25% x post acquisition retained earnings \$1,232,000 (W4) 308
Goodwill impairment (25% x 104) (W2) (26)
3,482

Examiner's Answers CGA 8 November 2011

SECTION B

4.1
Models (i) and (ii) are feedforward models as they involve the forecasting of future
outcomes and comparisons with desired outcomes, allowing control action to be taken by
the division where necessary. Model (iii) is a feedback control model as it provides
information on what has already happened.

4.2
The sales budget and the stock budget are necessary before the preparation of the
production budget. After the production budget has been established, the purchases
budget can be prepared. When the other budgets are in place the information is available
to prepare the cash budget. .

4.3

Component

X Y
Supplier price 47 48
Variable cost to make 40 30
Cost of buying in 7 18
Machine hours saved by buying in 1 3
Extra cost of buying/machine hour saved 7 6

Therefore, make X first as this will minimalise the extra cost of buying/machine hour
saved.

4.4
Return on Investment Residual income
Current €3.9m
Position €17m
= 22.94% €3.9 - (€17 x 12%) =€1.86m

New €3.9m +€0.250m
Position €17m +€1.5m
= 22.43% €4.15m - (€18.5m x 12%) =€1.93m

lower higher

4.5 The answer is C - Coordinating

4.6 The answer is B - Approach to marketing a product

4.7 The answer is D - Team members do not want to disturb group consensus

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4.8 The answer is any three from
(i) Economies of scale
(ii) Capital requirement
(iii) Cost advantage independent of scale
(iv) Government policy
(v) Product differentiation
(vii) Switching costs

4.9
2009 (300-25-40) x 1,000 x \$1.22 =\$286,700 over 3 years =\$95,567 charge for 2009
2010 (300-25-15-20) x 1,000 x \$1.22 =\$292,800 x 2/3 years =\$195,200 recognisable to
date
Less amount recognised in 2009 \$(195,200-95,567) =\$99,633 charge for 2010

4.10
Statement of financial position \$m
PV plan liability 13.9
FV of plan assets (13.1)
0.8
Unrecognised actuarial losses (0.5)
Net pension liability 0.3