CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper P1

Published November 2009

The Examiner's Answers – Specimen Paper

P1 - Performance Operations

SECTION A

Answer to Question One

1.1 C
Contribution after reduction in variable cost = $120,000
Contribution following volume increase = $132,000
Increase in contribution = increase in profit = $32,000
Original profit was $64,000 therefore increase = 50%

1.2 B
Net present value = $50,000
Present value of cash in flows = $500,000
Sensitivity = 50,000/500,000 = 10%

1.3 EV of variable cost = $(70 *0·3)+(60*0·5)+(40*0·2) = $59

Therefore the expected contribution is $61 per member

EV of number of members = (20,000*0.1)+ (30,000*0·6)+ (40,000*0·3)=32,000

Expected total contribution = $61 * 32,000 = $1,952,000

Expected profit = $1,952,000 – 1,100,000 = $852,000

1.4 (i) If VC = $40 then the contribution per member will be $80
Total contribution = 40,000 * $80 = $3,200,000
Profit = $2,100,000

(ii) Joint probability of 20,000 members and $40 variable cost = 0.1 * 0.2 = 0.02

1.5 Selling price= ($50 x (annuity factor t = 4, r = 11)+ ($1,000 x (disc factor t = 4, r =11)

From tables:

Selling price = $(50 x 3102) + (1,000 x 0659) = 1551 + 659 = $81410

GF should sell the bond for $81410

Performance Operations 1 Specimen Exam Paper

CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper P1
Published November 2009

1.6 $000
Inventory used in production 331
Adjustment for increase in inventory 2
333
Add reduction in trade payables 7
Forecast cash required 340

1.7 The outstanding balance of trade payables in 2008 is $40,000. This is calculated as
shown below:

x
x 365  45
324,444

324,444
x  45 x
365

x  40,000

2009 forecast average payment period:

40,000
x x 365
356,900

x  40  91
Days outstanding = 41 days

Specimen Exam Paper 2 Performance Operations

CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper P1
Published November 2009

SECTION B

Answer to Question Two

Requirement (a)
(i)

£
UK non-discount 60%*£2·1m*30/365 103,561
UK discount 40%*£2·1m*10/365 23,014
Overseas 80%*£0·9m*60/365 118,356
Total debtors 244,931

Debtors days = £244,931 * 365/£3m = 29·8 days

(ii)

£
UK non factored 15%*£2·1m*30/365 25,890
Overseas 80%*£0·9mm*60/365 118,356
Total debtors 144,246

Debtors days = £144,246 * 365/£3m = 17·5 days

Requirement (b)
Flexibility - it offers a flexible source of finance, as sales increases with a corresponding
demand for finance, so finance from this source increases.

Security - it allows the firm to pledge other assets as security for the finance.

Last resort – it may be the most cost effective lender to a firm that has no assets to offer as
security.

Administration – it relieves management of the responsibility for the sales ledger and the
factor can probably perform credit checking better than the firm.

Risk of future changes - Management must balance the disruption from cutting back its
administrative function with the financial and other advantages of factoring. However, the
financial advantage may change and it may be costly to re-establish a sales ledger function.

Reputation – factoring is associated in many people’s mind with financial difficulties or at best
with small businesses, which may have an impact on the image of the business in the eyes of
its suppliers.

Customer relationship - The use of factoring may create a barrier between the firm and its
customers.

Performance Operations 3 Specimen Exam Paper

CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper P1
Published November 2009

Requirement (c)
EV with repairs = £51,670
Earnings without repairs = £37,500

Therefore do the repairs.

1/3 £200
£150

1/3
£150
2/3

£141.67 On time
£100
1/3
£51.67 -£90
Late
1/2 £150
Do repairs 1/3

No repairs
£125
£37.5 1/2 £100

Requirement (d)
Trend values Seasonal adjustment Forecast
2009 Q2 134·23 + (7·945 * 7) 0·75 142
2009 Q2 134·23 + (7·945 * 8) 1·00 198
2009 Q2 134.23 + (7·945 * 9) 1·50 309

Requirement (e)
When preparing the whole company’s budget it is important to have a realistic forecast of
what is likely to happen, particularly for cash, purchases, labour and capital budgets.
However, for a budget to be effective for motivation, targets must be set that are challenging.
It is also argued that for control purposes the budget must be a realistic benchmark against
which actual performance can be compared, that is, it must be close to a forecast.

The difficulty is that both of these objectives are valid and beneficial. Thus the issue becomes
whether one budget can do both tasks or whether companies need to choose which task the
budget will be used for.

Requirement (f)

Environmental internal failure costs are costs that are incurred after hazardous materials,
waste and / or contaminants have been produced. The costs are incurred in an attempt to
comply with expected or enforced standards. Examples include treating and disposing of toxic
materials and recycling scrap.

Environmental external failure costs are the most significant costs: they are incurred after the
hazardous materials have been introduced into the environment. Examples of costs that an
organisation has to pay include decontaminating land and clearing a river after leakage.
These costs can give rise to adverse publicity. Some external failure costs may be caused by
the organisation but ‘paid’ by society.

Specimen Exam Paper 4 Performance Operations

CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper P1
Published November 2009

SECTION C

Answer to Question Three

Requirement (a)

Workings £000

Year 0 1 2 3 4 5 6
Money Sales 399.600 583.200 642.453 700.652 697.931
Money costs 318.000 393.260 452.586 492.366 535.290
Tax profit 81.600 189.940 189.867 208.286 162.641
Tax 24.480 56.982 56.960 62.486 48.792
tax offset 24.480 56.982 56.960 62.486 48.792

Capital value 500 375 281.25 210.9375 158.2031

Allowance 125 93.75 70.3125 52.73438 108.2031
C/f 375 281.25 210.9375 158.2031
Tax 37.5 28.125 21.09375 15.82031 32.46094
offset 37.5 28.125 21.09375 15.82031 32.46094

Cash flows

Investment -500 50
Sales-costs 81.600 189.940 189.867 208.286 162.641
Tax -24.480 -56.982 -56.960 -62.486 -48.792
Tax allow 37.5 28.125 21.09375 15.82031 32.46094
net cash flow -500 81.6 202.96 161.01 172.4194 165.9752 -16.3312
Discount factor 1.00 0.893 0.797 0.712 0.636 0.567 0.507
Present Value -500 72.87 161.76 114.64 109.66 94.11 -8.28

Net present value = £44,760

Sales Revenue 399.600 583.200 642.453 700.652 697.931

Operating Costs 318.000 393.260 452.586 492.366 535.290
Depreciation 90.00 90.00 90.00 90.00 90.00
Profit (8.40) 99.94 99.867 118.286 72.641

Total profit = £382,334.

Average profit = £382,334/5 = £76,467

Average investment = (500,000+50,000)/2 = £275,000
Accounting Rate of Return = £76,467 /£275,000 = 0.278
Accounting Rate of Return = 28%

Performance Operations 5 Specimen Exam Paper

CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper P1
Published November 2009

To: Board of Directors

From: Management Accountant
Date: July 2009
Subject: Investment projects

From a financial perspective based on the information given and that the projects are mutually
exclusive the company should invest in Project 2. Investment decisions should be based on
Net Present Values as this methodology is consistent with maximising company wealth.
However, the company will also need to consider non-financial factors that could affect the
decision.

Examples include:

 Consistency with the company’s strategy

 Impact on other areas of the business
 Technical compatibility and obsolescence

Accounting rate of return is a simple method of investment appraisal but has many
disadvantages. In particular it is based on accounting profit rather than cash flow. Accounting
profit is a subjective and dependant on the choice of accounting methods used. Accounting
rate of return also ignores the time value of money.

The Net Present Value method is preferable as it ensures that shareholders wealth is
maximised and recognises that cash received in the future is less valuable than cash received
today. Net present value does suffer from a number of disadvantages as follows:-

 The speed of the repayment of the original investment is not highlighted

 Non-financial managers may have difficulty in understanding the concept
 Determination of the correct discount rate can be difficult

Requirement (b)

Annual repayments = £250,000/(10 year 8% annuity factor)

= £250,000/6·71
= £37,258

There are just over years remaining therefore the company will be about to make a payment
and then will have four more annual payments to make. The value of these five payments is:

£37,258 + (37,258 * 3·312) = £160,656

Specimen Exam Paper 6 Performance Operations

CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper P1
Published November 2009

Answer to Question Four

Requirement (a)
Surgical procedure – November reconciliation

$ $ $
Original budget (20 procedures)
Team 60,000
Variable overheads 39,000
Fixed overheads 48,000
Total cost 147,000
Flexed budget (22 procedures)
Additional variable costs 9,900
Expected total cost of 22 procedures 156,900
Variances F A
Team fee rate (47 x 1,500) – 75,400 4,900
Team efficiency ((22 x 2) – 47) x 1,500 4,500
Variable overhead expenditure (47 x 975) – 48,000 2,175
Variable overhead efficiency ((22 x 2) – 47) x 975 2,925
Fixed overhead expenditure (48,000 – 46,000) 2,000 ……
2,000 14,500 12,500
Actual cost 169,400

Requirement (b)
Revised standard cost = $1,625 per hour
Original standard cost = $1,500 per hour

Original total team cost for 22 procedures (22 * 2 * $1,500) 66,000

Actual cost 75,400
Total variance 9,400 adverse

Planning variance (22 * 2 * (1,500 – 1,625)) 5,500 adverse

Operational team rate variance (75,400 – (47*1,625)) 975 favourable
Operational team efficiency variance (3 * 1,625) 4,875 adverse
9,400

Requirement (c)
Budgets are projected cost (and/or revenue) aggregates which quantify expectations about
future performance. They are used as comparators against which current performance can be
measured and as “authority to spend” within which expenditure will be allowed. A budget is an
effective planning and control tool for service based organisation.

Standards measure performance at a lower, operational, level. Standard costing is

extensively used in manufacturing industries but can equally be applied to service based
organisations e.g. in the insurance industry, a standard may be the time to process an
insurance claim or key in a document.

Standard costing and budgetary control can be used effectively in both manufacturing and
service organisation. They should however be used in combination because together they are
more powerful and embrace the organisation more completely than either can do in isolation.
It makes little sense to control, or plan, at operational level, without considering impacts at
higher levels. Similarly, overall budgets cannot be realistically set without looking at the
feasibility of setting operational standards.
__________________________________________________________________________

 The Chartered Institute of Management Accountants 2009

Performance Operations 7 Specimen Exam Paper