Paper P2 – Performance Management

Post Exam Guide

March 2012 Exam

General Comments
Overall the performance was a little disappointing and there were signs that many candidates were
not fully prepared for this examination. The paper examined topics that have been tested in several
recent papers including the balanced scorecard, the learning curve, budgetary control, Kaizen costing
and standard costing. This should have greatly advantaged candidates who had taken the time and
trouble to practise on past examination questions. The answers submitted to the questions in Section
B of the paper were generally poor. Linear programming is an important topic but many candidates
were not able to construct a meaningful graph and interpret the results. Furthermore in question 7
candidates were not able to analyse a set of figures relating to a number of hotels.

A few well-presented papers were submitted but the majority fell short of the standard required. It is
once again necessary to emphasise the importance of the presentation of answers. On many
occasions the markers were not able to interpret or decipher answers and marks could therefore not
be awarded. In some cases the quality of handwriting was poor which leads to the need to repeat
previous advice that candidates should practise their presentation styles before taking the
examination.

A noticeable weakness, especially with the answers to discursive questions, is that many candidates
do not answer the question requirements as asked. Instead they address their own interpretation of
the question. In effect they rewrite the question. Question 3 is a good example (see the comments
relating to this question).

When reviewing the scripts it is apparent that many candidates had not:

• Studied the entire syllabus

• Practised using past P2 questions
• Benefitted from reading the content of previous PEGs
• Taken the time to read articles in Financial Management magazine and Velocity e-newsletter

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 reproduced from 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.

7. Answers to discursive questions should relate to the scenario in the question. On many
occasions general answers are submitted that attract few marks.

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Paper P2 – Performance Management
Post Exam Guide
March 2012 Exam

8. In preparing for the exam, candidates are advised to practise regularly using past CIMA
questions, comparing their answers to the examiner’s 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 answers and of the depth of
answers required to 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. 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.
4. 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)”)

It is pleasing to note that virtually all candidates attempted all the questions which indicates that time
management was not an issue for this examination.

©The Chartered Institute of Management Accountants Page 2

Paper P2 – Performance Management
Post Exam Guide
March 2012 Exam

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) Calculate the total variable cost of the 6,400 units of the new product.
(4 marks)

(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)

Rationale
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.

Suggested Approach
Carefully read the data provided and recognise that 6,400 units is a six times doubling of the initial batch
of 100 units. Using compound powers calculate the direct labour cost of 6,400 units (or use the learning
curve formula provided) and add to this the other variable costs.

Calculate the difference between the answer to part (a) and the target cost of $45,000. Calculate the
direct labour cost at which the target cost would be achieved. Express the target average direct labour
cost as a percentage of the direct labour cost of the initial batch. Calculate the sixth root of this
percentage to determine the rate of learning required.

Marking Guide Marks

Part (a)
Calculation of direct material cost 0.5 mark
Calculation of other variable costs 0.5 mark
Calculation of average time for 64 batches 1.5 mark
Calculation of total time for 64 batches 1 mark
Calculation of direct labour cost 0.5 mark

Part (b)
Calculation of cost difference 1 mark
Calculation of revised labour cost 0.5 mark
Calculation of revised labour hours 0.5 mark
Calculation of average time per batch 1 mark
Calculation of number of doublings of output 1 mark
Express average time as a percentage of original 1 mark
Calculation of learning rate 1 mark

Maximum marks awarded 10 marks

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Paper P2 – Performance Management
Post Exam Guide
March 2012 Exam

Examiner’s Comments
The attempts for part (a) were good with most candidates earning all the marks available.

The attempts at part (b) were generally poor. It was obvious that most candidates did not know how to
tackle this part of the question. Several alternative methods would have produced the correct answer,
but most candidates lost their way, especially when attempting the logarithm method.

Common Errors
1. Unclear workings.
2. Poor layout.
3. Inability to adopt a logarithm approach.
4. Inability to apply the learning curve formula.
5. Submitting answers that were not in context to the question e.g. showing the labour cost as $704,000
(rather than $8,503).

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Paper P2 – Performance Management
Post Exam Guide
March 2012 Exam

Question 2

(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)

Rationale
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.

Suggested Approach
Explain the principles of Kaizen Costing.

Carefully read the scenario to identify that SD manufactures a range of products. Discuss the effect on
actual results when Kaizen Costing is used. Discuss how this results in changes to manufacturing
methods and the effect on performance measurement using standard costing and variance analysis.

Marking Guide Marks

Part (a)
1 mark per point. Points could include: Max 4 marks
• Continuous review of systems and procedures
• Small incremental cost savings
• Used in the production phase
• Employee empowerment

Part (b)
1 mark per point. Points could include: Max 6 marks
• Kaizen Costing is a moving target
• Measurement against the original target would be invalid
• Analyse the variances between those relating to the changes made by the use of
Kaizen Costing and those relating to operational factors
• Managers would have been involved in the Kaizen process
• Managers have at least some control over the new target
• Kaizen targets may have been over ambitious
• Planning variance measures savings as a result of Kaizen

Maximum marks awarded 10 marks

Examiner’s Comments
Part (a) was generally well answered with most candidates being able to explain the principles of Kaizen
Costing.

Part (b) was less well answered with very few candidates being able to relate standard costing to Kaizen
Costing. Most candidates simply gave a description of standard costing and variance analysis, with only
a small percentage developing the use of planning and operational variances within the scenario in the
question. Very few answers even referred to Kaizen Costing when answering part (b).

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Paper P2 – Performance Management
Post Exam Guide
March 2012 Exam

Common Errors
1. Unable to relate standard costing and variance analysis to Kaizen Costing.
2. Poor handwriting, at times impossible to read.
3. Submitting general answers to part (b), which were not applied to the scenario.
4. Not fully understanding the verb ‘discuss’.
5. Submitting a detailed answer which described the Plan, Do, Check, Act procedure (part b). This
was not requested; neither did it answer the question.

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Paper P2 – Performance Management
Post Exam Guide
March 2012 Exam

Question 3

Discuss how business process re-engineering could help to improve the profits of MLC.

(Total for Question Three = 10 marks)

Rationale
This question examines candidates’ knowledge of business process re-engineering. 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.

Suggested Approach
Carefully read the details provided and recognise the issues that are causing concern. Discuss how
business process re-engineering could be used by MLC.

Marking Guide Marks

Explain business process re-engineering Max 4 marks
Case specific requirements Max 2 marks
Case specific example Max 2 marks
Case specific conclusion Max 2 marks

Maximum marks awarded 10 marks

Examiner’s Comments
A very poorly answered question. Very few candidates were able to describe how business process re-
engineering (BPR) examines business processes and makes substantial changes to the way in which an
organisation operates. A large number of candidates noted the word “engineering” and described either
“value engineering” or “reverse engineering”. Other candidates believed that BPR was simply another
name for either value analysis or function analysis and gave a full description of these two techniques. A
third group gave a detailed description of JIT without relating it to BPR and business processes.

Common Errors
1. Inability to describe BPR.
2. Effectively rewriting the question and assuming that BPR was either value analysis, value
engineering, reverse engineering or functional analysis.
3. Not relating the answer to the scenario in the question.
4. Inappropriately describing the value chain.

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Paper P2 – Performance Management
Post Exam Guide
March 2012 Exam

Question 4

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 company’s budgeting system in your
answer.)
(Total for Question Four = 10 marks)

Rationale
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.

Suggested Approach
Carefully read the scenario and identify the key objectives and targets of the company. Explain how
feedforward control applies to objectives and targets in the planning phase of a budget whereas
feedback control relates to controlling actual performance.

Marking Guide Marks

Up to two marks per well explained point. Points could include: Max 10 marks

• Feedforward is comparison of draft plans with objectives

• A draft budget will be prepared to show the expected costs
• The expected costs are compared to the objectives
• Budget may need to be revised, but social objectives must still be met
• Feedback is comparison of actual and budget
• Variance may be adverse or favourable, and action may be required to alter the
cumulative effect of the variance
• Feedforward occurs in the planning stage, feedback occurs during the year

Maximum marks awarded 10 marks

Examiner’s Comments
A mixed response was received to this question. Some candidates were able to describe both
feedforward and feedback control, whereas others confused the two methods of control. It is disturbing
to note that many candidates did not fully understand words/terms such as ‘a forecast’, ‘a plan’, ‘an
objective’ and ‘a target’ in the context of budgetary control.

Many candidates did not refer to the scenario in the question, especially as it related to a cost budget.
Instead they gave a detailed description of cash budgets.

Common Errors
1. Unable to define/describe feedback and feedforward control.
2. Not relating the answer to the scenario in the question.
3. Assuming that in feedback control the actual v budget exercise is only undertaken at the end of
the financial year.
4. Unable to describe that feedforward occurs in the budget planning stage whereas feedback
control occurs throughout the year.

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Paper P2 – Performance Management
Post Exam Guide
March 2012 Exam

Question 5

(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)

Rationale
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.

Suggested Approach
Carefully read the scenario and identify the key issues facing the college. Explain the concepts of the
balanced scorecard and how it could be applied to the college. Explain two distinct non-financial
measures that could be used by the college to measure its performance.

Marking Guide Marks

Part (a)
Performance should not be monitored using financial measures alone 1 mark
Balanced scorecard contains a number of non- financial segments (include list /
examples) Max 3 marks
Examples of relevance of balanced scorecard to college Max 4 marks

Max 6 marks
Part (b)
Up to two marks for each measure Max 4 marks

Maximum marks awarded 10 marks

Examiner’s Comment
Generally both parts of this question were well answered. Some candidates did not make it clear that the
balanced scorecard is a performance management tool and did not relate the perspectives to the
scenario in the question. Far too many candidates simply described each perspective and listed
numerous performance measures rather than explaining how the balanced scorecard could be used by
the college.

Common Errors
1. Producing long, rambling answers that did not relate to the scenario.
2. Failing to describe the balanced scorecard.
3. Providing more performance measures than were required (part b)
4. Putting forward measures that would be difficult to measure, for example, “establish if the
students are happy”.

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Paper P2 – Performance Management
Post Exam Guide
March 2012 Exam

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) 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 $ Nil

Direct material A $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)

Rationale
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.

Suggested Approach
Carefully analyse the data to determine the resource requirements of each product unit. Determine
the equations for each of the resources, the demand constraints and of the objective function. Plot
the resource and demand constraints accurately on a graph. Use the graph to determine the
feasible region and then identify the optimum weekly production schedule using an iso-contribution
line.
Explain the meaning of the shadow prices provided.
Explain how the graph and hence the optimal solution would change if the unit selling price of
product J increased.

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Paper P2 – Performance Management
Post Exam Guide
March 2012 Exam

Marking Guide Marks

Part (a)
Stating and plotting each of 6 constraints 12 marks
(1 mark for stating and 1 mark for plotting each)
Plotting iso-contribution line 1 mark
Reading off solution (1 mark per product) 2 marks

Part (b)
Explanation of shadow price up to 2 marks
Explanation of skilled labour up to 2 marks
Explanation of direct material A up to 2 marks

Part (c)
Explain change in the slope of the iso-contribution line up to 2 marks
Explain the evaluation of the extreme points of the feasible region up to 2 marks

Maximum marks awarded 25 marks

Examiner’s Comments
In part (a) it was disappointing to note that a large number of candidates were unable to construct a
linear programming graph. Most candidates were able to calculate the coordinates for the
constraints and the demands but far too many graphs lacked accuracy. It is difficult to understand
why some candidates chose to sketch a graph in their answer book and then attach to their answer
book a blank piece of graph paper.

Very few candidates were able to plot a correct iso-contribution line, which is the main way to
establish the optimum position. Most students guessed the optimum point.

In part (b) very few candidates were able to correctly describe a shadow price. In particular they
could not explain that a shadow price is the maximum premium that a company should pay for an
additional unit of the scarce resource (i.e. for Material A the price would be $10 + $ 11.70 = $21.70
per kg)

Part (c) was poorly answered, if answered at all. The question specifically asked candidates to
“explain, using the graph”. Very few candidates referred to the graph and how the slope of the iso-
contribution line would change if there was a change in the selling price of one of the products.

Common Errors
1. Unable to construct a graph.
2. Submitting poor graphs (size and neatness).
3. Unable to plot an iso-contribution line.
4. Calculating the maximum contribution based on the quantities of the two products. This was
not requested.
5. Not clearly identifying the weekly production schedule that would maximise the profits (an
arrow on the graph is not sufficient).
6. Unable to correctly describe a shadow price (part (b)).
7. Not understanding the requirement and not relating the answer to the graph (part (c)).

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Paper P2 – Performance Management
Post Exam Guide
March 2012 Exam

Question 7

(a) Discuss the relative performance of the three hotels.

Note:
Your answer should include:

• 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)

(b) 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)

Rationale
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.

Suggested Approach
Carefully read the scenario and data provided. Identify the costs and revenues for “Rooms” and
“Restaurant” of each hotel. Calculate the missing Return on Net Assets (RONA) and Residual
Income (RI) for the Southern and Eastern hotels respectively. Calculate the profits and profitability of
“Rooms” and “Restaurant” for each hotel.

Discuss the relative performances of the hotels.

Calculate the RONA of the Northern hotel’s leisure facility for the next five years. Compare these with
the current RONA and recognise that in the first two years of the investment the RONA for the hotel
will decrease. Discuss the hotel manager’s likely attitude towards the investment given its effect on
the hotel’s RONA.

Marking Guide Marks

Part (a)
Calculation of return on net assets – Eastern Hotel 1 mark
Calculation of residual income – Southern hotel 1 mark
All three hotels make profits 1 mark
Southern hotel restaurant is loss making 1 mark
Revised Southern hotel performance if restaurant costs lower Up to 3 marks
Similar restaurant meal prices (with calculations) Up to 2 marks
Room rates / costs calculations Up to 3 marks
Market analysis of Northern & Southern hotels Up to 2 marks
Eastern hotel low market share, pricing comments Up to 3 marks
Dissimilar size invalidates residual income Up to 2 marks
Conclusion Up to 2 marks

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Paper P2 – Performance Management
Post Exam Guide
March 2012 Exam

Note: Other valid points would earn marks Max 18 marks

Part (b) Up to 2 marks

Hotel value increases due to positive NPV 2 marks
RONA calculations 2 marks
Return is greater than cost of capital 2 marks
Return is less than current RONA until 2014 1 mark
Manager’s decision
Max 7 marks
Maximum marks awarded 25 marks

Examiner’s Comments
Part (a) simply required the calculation of relevant ratios and percentages, and the relating of these
to the scenario in the question. The answers submitted by most candidates were weak, in that the
ratios/percentages were either not calculated or were calculated incorrectly. This question gave
candidates the opportunity to display their analytical skills but most candidates simply provided a
weak analysis of the figures such as “N was better than E but not as good as S”.

The question expected candidates to give a possible reason for the financial status of the three
hotels and put forward “what if” situations.

Part (b) was poorly answered with many candidates putting forward a weak discursive answer that
was not supported by quantitative data. Very few candidates calculated the RONA for the next five
years, either for this particular acquisition or for the company as a whole.

The small typo in the data for question 7(b) (the table was headed $ instead of $000) did not trouble
candidates, with all candidates interpreting the values as intended (i.e as $110, 000, $120, 000 etc
rather than $110, $120 etc).

Common Errors
Part (a)
1. Submitting general answers that simply restated the data in the question.
2. Wasting valuable time is writing out the financial data in the question.
3. Not making additional calculations to support answers.
4. Not attempting to suggest reasons for the status of each hotel.
5. Not attempting to submit any ‘what if’ situations.

Part (b)
6. Submitting discursive answers only (i.e. no supporting figures).
7. Failing to calculate the RONA for each year.

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