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21 views23 pagesPost exam guide for CIMA P1 exam

Dec 17, 2015

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Post exam guide for CIMA P1 exam

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Post exam guide for CIMA P1 exam

© All Rights Reserved

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September 2010 Exam

General Comments

This was the second sitting of the new P1 syllabus and candidate performance was generally

better than that achieved in the May diet. There were however still core areas of the syllabus

where candidates demonstrated a lack of understanding and preparation. It is essential that

candidates revise the entire syllabus rather than relying on particular topic areas being

included in the paper. As stated in the May 2010 Post Exam Guide, an integral part of the

revision process should be practising questions from past P1, P2 and P7 papers, including a

comparison of the candidates answer to the examiners suggested answers. It was apparent

however that many candidates had not taken this advice, even to the extent of reviewing the

May 2010 exam paper, the examiners answers and Post Exam Guide. The answers given by

many candidates in this sitting continued to demonstrate poor exam preparation, particularly

for those topics from the new areas of the syllabus.

The layouts for numerical answers once again fell short of the standard required. Candidates

place themselves at a disadvantage if they do not provide a clear layout for their workings in

numeric questions.

The quality of answers to discursive questions varied considerably between questions. Many

candidates demonstrated a clear understanding of zero based budgeting but few appeared

to understand what backflush cost accounting involves and were therefore unable to explain

why this system would be more appropriate in a JIT environment. In some questions

candidates did not provide sufficiently detailed explanations of points made; however in other

questions full explanations were given even though candidates were asked to state rather

than explain. It is essential that candidates consider the verb used in the question. The list of

verbs and their definitions is printed in every CIMA examination paper.

Candidates are again reminded of the importance of time management. The exam allows 1.8

minutes per mark and candidates should relate the time they spend on each question to the

marks available. Spending a disproportionate amount of time on sections A and B to the

detriment of section C is not effective time management. Full use should be made of the 20

minutes reading time at the beginning of the examination.

Page 1

Post Exam Guide

September 2010 Exam

Section A 20 marks

ANSWER ALL EIGHT SUB-QUESTIONS IN THIS SECTION

Question 1.1

Which ONE of the following is NOT considered to be a cost of holding inventory?

A

Loss of goodwill as a result of being unable to complete customer orders due to lack of inventory

(2 marks)

The correct answer is A

Question 1.2

The following information has been calculated for a business:

Trade receivables collection period

Trade payables payment period

54 days

67 days

If the working capital cycle is 102 days, the inventory turnover period is

A

19 days

115 days

89 days

13 days

(2 marks)

The correct answer is B

Workings

(102 + 67 - 54) = 115 days

Page 2

Post Exam Guide

September 2010 Exam

Question 1.3

A project requires an initial investment of $200,000. It has a life of five years and generates net cash

inflows in each of the five years of $55,000. The net present value of the project when discounted at the

companys cost of capital of 8% is $19,615.

The sensitivity of the investment decision to a change in the annual net cash inflow is:

A

35.7%

25.0%

9.8%

8.9%

(2 marks)

The correct answer is D

Workings

$19,615/$219,615 = 8.9%

Page 3

Post Exam Guide

September 2010 Exam

The following data are given for sub-questions 1.4 and 1.5 below

A company can choose from four mutually exclusive investment projects. The net present

value of the projects will depend on market conditions.

The table below details the net present value for each possible outcome:

Market

conditions

Projects

A

Poor

$400,000

$700,000

$450,000

$360,000

Average

$470,000

$550,000

$500,000

$400,000

Good

$600,000

$300,000

$800,000

$550,000

Question 1.4

If the company applies the maximin rule it will invest in:

Project A

Project B

Project C

Project D

(2 marks)

The correct answer is C

Workings

If the maximin rule is applied, the highest of the worst profit for each of the three projects is $450,000 i.e.

project C.

Page 4

Post Exam Guide

September 2010 Exam

Question 1.5

If the company applies the minimax regret rule it will invest in:

Project A

Project B

Project C

Project D

(2 marks)

The correct answer is C

Workings

Minimax Regret Table

Market Conditions

Projects

A

Poor

($300,000)

($250,000)

($340,000)

Average

($80,000)

($50,000)

($150,000)

Good

($200,000)

($500,000)

($250,000)

The maximum regret for Project B is $500,000

The maximum regret for Project C is $250,000

The maximum regret for Project D is $340,000

Therefore if the company wants to minimise the maximum regret it will invest in project C.

Page 5

Post Exam Guide

September 2010 Exam

Question 1.6

PJ sells goods to customers on credit. It is forecast that credit sales for July will be $36,000 and that sales

will increase by $2,000 per month for the next six months. Based on past experience PJ expects 50% of

customers to pay in the month after sale, 25% of customers to pay 2 months after sale and the remainder

to pay 3 months after sale.

PJ has a trade receivables balance outstanding at the beginning of July of $65,000.

Calculate the cash that PJ will receive from credit customers during the six month period to the end of

December.

(3 marks)

Workings

Credit

sales

July

36,000

Aug

38,000

Sept

40,000

Oct

42,000

Nov

44,000

Dec

46,000

Total

246,000

Cash Collected:

Outstanding receivables June

Credit sales

$

65,000

246,000

311,000

50% November credit sales

25% October credit sales

Total cash collected

(46,000)

(22,000)

(10,500)

232,500

Page 6

Post Exam Guide

September 2010 Exam

Question 1.7

The estimated production volume of a new product for the first year is 2,000 units. The management

accountant has produced the following table showing the possible production costs and their associated

probabilities at this level of output.

The probabilities of the different levels of fixed production costs and variable production costs are totally

independent.

Total fixed production costs

$

Probability

80,000

0.40

130,000

0.45

160,000

(i)

(ii)

0.15

$

Probability

30,000

0.25

40,000

0.35

0.40

50,000

Calculate the expected value of total production costs for the production of 2,000 units.

Calculate the probability of total production costs for 2,000 units being $180,000 or greater.

(4 marks)

Workings

(i)

The expected value of fixed costs is:

($80,000 x 0.40) + ($130,000 x 0.45) + ($160,000 x 0.15) = $114,500

The expected value of variable costs is:

($30,000 x 0.25) + ($40,000 x 0.35) + ($50,000 x 0.40) = $41,500

The expected value of total costs is therefore $114,500 + $41,500 = $156,000

(ii)

$

130,000 +

160,000 +

160,000 +

160,000 +

$

50,000 =

30,000 =

40,000 =

50,000 =

$

180,000

190,000

200,000

210,000

Joint probability is (0.15 x 0.25) =

Joint probability is (0.15 x 0.35) =

Joint probability is (0.15 x 0.40) =

0.1800

0.0375

0.0525

0.0600

0.3300

Alternatively:

$130,000 + $50,000 = $180,000

Joint probability is (0.45 x 0.40) =

At fixed costs of $160,000, total costs are all greater than $180,000

therefore probability is =

0.1800

0.1500

0.3300

Page 7

Post Exam Guide

September 2010 Exam

Question 1.8

A $1,000 bond has a coupon rate of 10% per annum and will repay its face value in five years time.

Similar bonds have a yield to maturity of 8% per annum.

Calculate the current expected market value of the bond.

(3 marks)

(Total for Section A = 20 marks)

Workings

Yield to maturity of similar bonds is 8%, therefore use 8% as the discount rate.

Year 1-5

Year 5

PV

Cashflows

$

100

1,000

Discount rate @ 8%

3.993

0.681

PV of cashflows

$

399.30

681.00

1,080.30

Page 8

Post Exam Guide

September 2010 Exam

Section B 30 marks

ANSWER ALL SIX SUB-QUESTIONS.

YOU SHOULD SHOW YOUR

WORKINGS AS MARKS ARE AVAILABLE FOR THE METHOD YOU USE

Question 2(a)

JP has been offered credit terms by a supplier that will allow JP to claim a cash discount of 2.5% if

payment is made within 15 days of the date of the invoice or to pay on normal credit terms within 45 days

of the date of the invoice.

Required:

(i)

Calculate, to the nearest 0.1%, the effective annual interest rate offered to JP from accepting the

cash discount and paying within 15 days. You should assume a 365 day year and use compound

interest methodology.

(3 marks)

(ii)

State TWO other methods that the supplier could use to reduce its level of outstanding trade

receivables.

(2 marks)

(Total for sub-question (a) = 5 marks)

Rationale

The question examines the candidates ability to calculate the effective rate of interest of accepting a cash

discount and paying an invoice early. It also examines the ability to identify other methods that a supplier

could use to reduce the level of outstanding trade receivables.

Suggested Approach

Identify the number of days earlier that the debt will be paid. This will then be used as the

compound factor in calculating the effective rate of interest being offered by the supplier.

Recognise that the cost of the discount is 2.5% of the amount paid i.e. 97.5%.

Suggest two other methods that could be used to reduce the level of trade receivables.

Marking Guide

(i) Number of compounding periods

Marks

1 mark

1.00/0.975 or 1 + (0.025/0.975)

1 mark

1 mark

Maximum marks awarded

2 marks

5 marks

Page 9

Post Exam Guide

September 2010 Exam

Examiners comments

This question was reasonably well answered with many candidates receiving full marks. In part (b) most

candidates managed to state two other methods of reducing outstanding trade receivables however a

number failed to note the word other in the question and suggested offering an early payment discount.

Common errors

1. Failure to follow the instructions to calculate to the nearest 0.1%

2. Calculation of the number of compounding periods as 365/15

Page 10

Post Exam Guide

September 2010 Exam

Question 2(b)

BB manufactures a range of electronic products. The supplier of component Y has informed BB that it will

offer a quantity discount of 1.0% if BB places an order of 10,000 components or more at any one time.

Details of component Y are as follows:

Cost per component before discount

Annual purchases

Ordering costs

Holding costs

$2.00

150,000 components

$360 per order

$3.00 per component per annum

Required:

(i)

Calculate the total annual cost of holding and ordering inventory of component Y using the

economic order quantity and ignoring the quantity discount.

(2 marks)

(ii)

Calculate whether there is a financial benefit to BB from increasing the order size to 10,000

components in order to qualify for the 1.0% quantity discount.

(3 marks)

(Total for sub-question (b) = 5 marks)

Rationale

The question examines candidates ability to apply the EOQ formula and to calculate the cost of holding

and ordering the suggested level of inventory. The question then requires candidates to consider whether

it is worth accepting a bulk quantity discount for placing an order greater than the EOQ.

Suggested Approach

Calculate the EOQ and then apply this figure to calculate the cost of holding and ordering

inventory.

Calculate the cost of holding and ordering inventory at the higher order level

Compare the incremental cost to the incremental benefit from the quantity discount.

Marking Guide

(i)

EOQ

Holding costs

Ordering costs

Marks

1 mark

mark

mark

(ii)

mark

mark

1 mark

1 mark

Holding costs

Ordering costs

Value of discount

Evaluation of financial benefit

The Chartered Institute of Management Accountants

5 marks

Page 11

Post Exam Guide

September 2010 Exam

Examiners comments

Overall the answers to this question were good. Part (i) was well done although many candidates could

not calculate holding costs and did not seem to notice that a holding cost of $450,000 was more than the

cost of the components. Many candidates struggled with part (ii), using the EOQ in this part of the answer

and failing to calculate the financial benefit.

Common errors

1. Lack of recognition that the EOQ will result in equal values for holding and ordering costs.

2. Calculating holding cost as $450,000 or $18,000.

3. Using the EOQ in part ii).

4. Careless arithmetical errors.

5. Failure to calculate the financial benefit.

Page 12

Post Exam Guide

September 2010 Exam

Question 2(c)

Explain why a backflush cost accounting system may be considered more appropriate than a traditional

cost accounting system, in a company that operates a just-in-time production and purchasing system.

(5 marks)

Rationale

The question examines candidates ability to explain the benefits of using backflush cost accounting

compared to a traditional cost accounting system in a company that operates just in time production and

purchasing.

Suggested Approach

Explain what a backflush cost accounting system is and how it operates.

Explain the benefits of using backflush cost accounting when just in time purchasing and

production is being used

A good answer will clearly identify and explain why a backflush cost accounting system is more

appropriate than a traditional cost accounting system where JIT purchasing and production is being used.

A weak answer will explain backflush costing but will not explain how this differs from a traditional costing

system and why it would be preferable where JIT purchasing and production is in operation.

Marking Guide

Up to 2 marks per valid point

Marks

Max 5 marks

5 marks

Examiners comments

This question was particularly badly answered. Many candidates explained what a JIT environment

involves but were unable to explain backflush cost accounting and why it would be more appropriate than

a traditional costing system in a JIT environment.

Common errors

1. Failure to answer the question that was asked.

2. Providing general statements rather than explaining specific points.

Page 13

Post Exam Guide

September 2010 Exam

Question 2(d)

XY, a not-for-profit charity organisation which is funded by public donations, is concerned that it is not

making the best use of its available funds. It has carried out a review of its budgeting system and is

considering replacing the current system with a zero-based budgeting system.

Explain the potential advantages AND disadvantages for the charity of a zero-based budgeting system.

(5 marks)

Rationale

The question examines candidates ability to identify and explain the advantages and disadvantages of

zero based budgeting.

Suggested Approach

A good answer will clearly identify and explain why zero based budgeting results in a more accurate

budget while recognising the difficulties inherent in a zero based budgeting system. A weak answer will

not clearly identify the advantages of zero based budgeting and/or not recognise the difficulties in its

implementation.

Marking Guide

Up to 2 marks per valid point

Maximum marks awarded

Marks

Max 5 marks

5 marks

Examiners comments

This question was fairly straight forward and was well answered with many candidates achieving full

marks.

Common errors

1. Providing general statements rather than explaining specific points.

2. Lack of detail in the answers.

3. Repetition of the same point a number of times.

Page 14

Post Exam Guide

September 2010 Exam

Question 2(e)

QR uses an activity based budgeting (ABB) system to budget product costs. It manufactures two products,

product Q and product R. The budget details for these two products for the forthcoming period are as

follows:

Number of machine set ups per batch

Batch size (units)

Product Q

80,000

Product R

120,000

4

5,000

2

4,000

Required:

(i) Calculate the budgeted machine set up cost per unit of product Q.

(3 marks)

(ii) State TWO potential benefits of using an activity based budgeting system.

(2 marks)

(Total for sub-question (e) = 5 marks)

Rationale

The question examines candidates ability to apply activity based budgeting to calculate budgeted product

costs.

Suggested Approach

Calculate the cost driver rate i.e. the budgeted cost per set up.

Apply this rate to product Q to calculate the total set up cost for product Q.

Calculate the set up costs per unit by dividing the total set up cost for product Q by the number of

units of product Q.

Marking Guide

(i)

Number of batches for each product

Total number of set ups

Budgeted cost per set up

Total budgeted set up costs

Budget set up costs per unit

Marks

Maximum marks awarded

2 marks

5 marks

mark

mark

mark

mark

1 mark

Page 15

Post Exam Guide

September 2010 Exam

Examiners comments

The performance in this question was particularly poor. Activity based costing is a core part of the P1

syllabus and the failure of many candidates to demonstrate the ability to apply activity based costing

techniques to a simple budgeting question was very concerning. In part (i) candidates failed to recognise the

need to calculate the cost driver rate for the whole company and then apply this to product Q. In part (ii) most

candidates related their answer to activity based costing.

Common errors

1. Calculation of cost driver rate using either the number of batches or the number of set ups per batch.

2. Calculation of budgeted set up costs per batch rather than per unit.

3. Failure to calculate the cost driver rate for the whole company.

4. Poor layout of workings.

5. Relating the answer to ABC rather than ABB.

Page 16

Post Exam Guide

September 2010 Exam

Question 2(f)

(f)

programme. The number of students starting the programme is dependent on economic

conditions. If conditions are poor it is expected that the programme will attract 40 students

without advertising. There is a 60% chance that economic conditions will be poor. If

economic conditions are good it is expected that the programme will attract only 20 students

without advertising. There is a 40% chance that economic conditions will be good.

If the programme is advertised and economic conditions are poor, there is a 65% chance

that the advertising will stimulate further demand and student numbers will increase to 50. If

economic conditions are good there is a 25% chance the advertising will stimulate further

demand and numbers will increase to 25 students.

The profit expected, before deducting the cost of advertising, at different levels of student

numbers are as follows:

Number

of students

15

20

25

30

35

40

45

50

Profit

$

(10,000)

15,000

40,000

65,000

90,000

115,000

140,000

165,000

Required:

Demonstrate, using a decision tree, whether the programme should be advertised.

(5 marks)

Rationale

The question examines candidates ability to use decision trees to evaluate a decision where there is

uncertainty regarding expected cash flows.

Suggested Approach

Draw the decision tree showing each of the possible outcomes.

Calculate the expected value of each of the possible outcomes.

A good answer will provide a clearly constructed decision tree showing the expected payoffs for each

possible outcome.

Page 17

Post Exam Guide

September 2010 Exam

Marking Guide

mark per payoff

Decision tree format

Decision

Marks

3 marks

1 mark

1 mark

5 marks

Examiners comments

This question clearly separated those candidates who had worked on the May exam paper from those

who had not. The question was very similar to the one asked in May and yet it was badly answered by

many candidates and a large number omitted it altogether. Many candidates seemed to think that the

decision was what the economic conditions were going to be. Other candidates misread the question and

ended up with a decision tree with only five branches instead of six and wrote a note to the examiner that

the question was incorrect. Some candidates drew the decision tree but did not calculate any figures.

Common errors

1. Drawing the decision tree on the basis that the decision was to determine the economic conditions.

2. Producing a decision tree with four or five branches rather than six.

3. Giving no figures for the decision tree.

4. Failing to state the final decision.

5. Making computational errors.

Page 18

Post Exam Guide

September 2010 Exam

Section C 50 marks

ANSWER BOTH THE TWO QUESTIONS

Question 3

(a)

Produce a statement that reconciles the budgeted and actual gross profit for product

RG for July showing the variances in as much detail as possible.

(13 marks)

(b)

(i) The total materials cost variance.

(ii) The planning variance for materials price.

(iii) The operational variances for materials price and materials usage.

(6 marks)

(c)

Discuss THREE advantages of using a standard costing system that identifies both

planning and operational variances.

(6 marks)

(Total for Question Three = 25 marks)

Rationale

The question examines candidates ability to calculate variances including both planning and operational

variances and to prepare a statement reconciling the budget and actual gross profit. The advantages of

identifying both planning and operational variances are also examined.

Suggested Approach

Calculate each of the individual variances, clearly identifying whether they are adverse or

favourable

Calculate the actual profit for the period.

Produce a statement showing the budgeted profit and the individual variances reconciling to the

actual profit.

Calculate the planning and operational variances in part (b)

Explain the benefits of calculating these figures in part (c).

A good answer will calculate the variances and actual profit correctly and will produce a clear

reconciliation statement. A weak answer will contain errors in the calculation of variances, will not identify

correctly whether the variances are adverse or favourable, will not calculate the actual profit separately

and will not produce a clear reconciliation statement.

Page 19

Post Exam Guide

September 2010 Exam

Marking Guide

Part (a)

Marks

Sales variances

Material variances

Labour variances

Variable overhead variances

Fixed overhead variances

Actual gross profit

1 mark

3 marks

2 marks

2 marks

1 mark

3 marks

1 marks

Part (b)

(i) Materials cost variance

(ii) Material price planning variance

(iii) Material price operational variance

Material usage operational variance

1 mark

2 marks

1 mark

2 marks

Part (c)

Up to 2 marks per reason

Maximum marks awarded

6 marks

25 marks

Examiners comments

Part (a)

Candidates performed fairly well in this part of the question. The variances which caused difficulty were

the sales volume profit variance and the fixed overhead volume variance. Some candidates provided the

total fixed overhead variance rather than analysing this further to show the expenditure variance and the

volume variance.

Part (b)

This part was less well answered. Few candidates were able to calculate a materials cost variance and

many calculated a price variance instead. The planning variance was seldom calculated correctly and the

operational usage variance caused a lot of difficulty. Overall there was evidence of a lack of knowledge in

this area.

Part (c)

This part was poorly answered. Most candidates discussed standard costing systems without reference to

planning and operational variances. When planning and operational variances were considered there was

a lack of detail in the points made.

Common errors

Part (a)

1. Incorrect labelling of variances.

2. Confusion over the calculation and labelling of the fixed overhead variances.

3. Use of incorrect variance signs (adverse/favourable) for the direction of variances, especially with the

fixed overhead variances.

4. Incorrect calculation of the sales volume profit variance.

5. Not providing a reconciliation statement.

Part (b)

1. Calculation of a material price variance rather than a materials cost variance.

2. Calculation of the material planning variance using actual quantity.

3. Incorrect calculation of the material usage variance.

Part (c)

1. Not answering the question that was asked.

Lack of detail in the answers.

The Chartered Institute of Management Accountants

Page 20

Post Exam Guide

September 2010 Exam

Question 4

(a) Calculate the net present value (NPV) of the gymnasium and spa project.

(16 marks)

(b)

Calculate the post-tax money cost of capital at which the hotel would be indifferent to

accepting / rejecting the project.

(4 marks)

(c)

Discuss an alternative method for the treatment of inflation that would result in the

same NPV.

Your answer should consider the potential difficulties in using this method when

taxation is involved in the project appraisal.

(5 marks)

Rationale

Part (a) of the question examines candidates ability to calculate the net present value of a project

involving the identification of relevant costs and the calculation of the effect of inflation and taxation. Part

(b) examines candidates ability to calculate the IRR of a project. Part (c) examines the candidates

understanding of the treatment of inflation in investment appraisal.

Suggested Approach

In part (a) firstly identify the incremental cash flows of the project then calculate the tax effect of

the cash flows taking account of the timing of the tax payments.

Discount the resultant net cash flows at the companys cost of capital.

In part (b) calculate the IRR of the project.

In part (c) calculate the real discount rate which could be applied to cash flows that were not

adjusted for inflation.

Also demonstrate appreciation of the problem involved with this approach where there are tax

implications of the appraisal.

Page 21

Post Exam Guide

September 2010 Exam

Marking Guide

Part (a)

Marks

Current revenue

Future projected revenue

Incremental revenue

Employee costs

Overhead costs

Adjusting net cash flows for inflation

Residual value

Tax calculations and phasing of cash flows

Discounting cash flows

3 marks

2 marks

1 mark

1 mark

1 mark

1 mark

1 mark

4 marks

2 marks

Part (b)

Recognising need for an IRR calculation

Calculating NPV at higher/lower discount rate

Calculating IRR

1 mark

2 marks

1 mark

Part (c)

Explanation of alternative approach

Formula to calculate real cost of capital

Calculation of real cost of capital

Explanation of problems where taxation is involved

1 mark

1 mark

1 mark

Up to 2 marks

Examiners comments

Part (a)

This part of the question was reasonably well answered although many candidates did not seem to

recognise that only the incremental revenue was relevant. Similarly many candidates included the

absorbed fixed overheads as a relevant cash flow. Most candidates were able to calculate the tax

depreciation for years 1-3 but often calculated the balancing figure for year 4 incorrectly.

Part (b)

Candidates that recognised the need for an IRR calculation scored well in this part of the question but

many candidates did not understand what was required. Some candidates gave the answer to part c)

instead.

Part (c)

This part of the question was omitted by many candidates. Those who did attempt it were usually able to

give the formula to calculate the real cost of capital but many did not then go on to calculate it.

Explanations given for the difficulties in using this method when taxation is involved were vague and did

not demonstrate any clear understanding.

Common errors

Part (a)

1. Failure to calculate incremental revenue.

2. Inclusion of non-relevant costs in the cash flows.

3. Omission of the residual value from the cash flows.

4. Use of 365 days in the calculation of revenue.

5. Incorrect calculation of Year 4 tax depreciation.

6. Incorrect phasing of the benefit from the tax depreciation.

Part (b)

1. Failure to recognise the need to calculate the project IRR.

Page 22

Post Exam Guide

September 2010 Exam

Part (c)

1. Lack of knowledge of the topic area.

2. General statements that did not demonstrate a clear understanding.

Page 23

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