Paper P2 – Performance Management
Post Exam Guide
November 2014 Exam
General Comments
This was a typical paper which contained questions on key topics within the syllabus. The types of
question were similar to questions that have appeared in many recent papers, especially those
relating to the balanced scorecard, breakeven analysis, the product life cycle, transfer pricing and
different approaches to pricing.
Unfortunately the overall performance was poor. A small number of impressive scripts were
submitted, but the standard of the majority of scripts suggested that many candidates were not
adequately prepared for the rigours of a professional accounting paper. The technical ability and style
of presentation fell well below the standard expected. It was also evident that many candidates simply
did not know how to structure an answer.
As for any exam, when taking P2 it will be important for future candidates to:
 study the entire syllabus, ignoring any suggestions put forward in accounting journals which
give indications of likely topics to be examined
 practise the types of question they can expect to be confronted with in the exam.
©The Chartered Institute of Management Accountants
Page 1
Paper P2 – Performance Management
Post Exam Guide
November 2014 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
Required:
Explain Zero-Based Budgeting and the main stages that would need to be undertaken to
introduce it into the Research and Development Division.
(Total for Question One = 10 marks)
Rationale
This question addresses issues arising from syllabus area C3(d) Discuss the criticisms of budgeting,
particularly from the advocates of ‘beyond budgeting’ techniques.
Suggested Approach
Candidates needed to provide a brief overview of zero-based budgeting (ZBB) and then explain the
main stages that would need to be undertaken to introduce ZBB into the research and development
division of the company.
Marking Guide
General description of ZBB
Valid points related to stages: maximum of 2 marks per point
Marks
2 marks
8 marks
Examiner’s Comments
This was a straightforward question relating to a budgeting technique that has been tested on many
previous occasions. The majority of answers were unfortunately poor, with most candidates simply
describing a traditional approach to budgeting and not mentioning any points relating to ZBB.
Common Errors
1.
2.
3.
4.
5.
6.
An incorrect understanding of ZBB.
Stages of ZBB not identified.
Failing to mention the use of decision packages.
Describing a decision package incorrectly.
Describing the advantages and disadvantages of ZBB although these were not requested.
Not relating the answer to the scenario described in the question.
©The Chartered Institute of Management Accountants
Page 2
Paper P2 – Performance Management
Post Exam Guide
November 2014 Exam
Question 2
Required:
Explain, with reasons, the changes, if any, to the unit selling price AND the unit production cost that
could occur when the product moves from the previous stage into each of the following stages of its
life cycle:
(i)
Growth
(ii)
Maturity
(Total for Question Two = 10 marks)
Rationale
This question requires an understanding of life cycle costing as shown in syllabus area 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
Candidates needed to be aware that the product is innovative and that a market skimming pricing policy
had been adopted. Answers should then explain the implications of these facts for the unit selling price
and unit production costs as the product moves into the growth and maturity phases of its life cycle.
Marking Guide
Growth (price and cost): up to 3 marks each (1 mark per valid point)
Maturity (price and cost): up to 3 marks each (1 mark per valid point)
Marks
10 marks max
Examiner’s Comments
Some good answers were submitted but it was clearly evident that many candidates did not know the
difference between penetration and skimming. The common errors described below highlight reasons
why so many candidates only attained a modest mark.
Common Errors
1. Not knowing the difference between a penetration and skimming approach to pricing.
2. Incorrectly describing the effect on total production costs as opposed to unit production costs.
3. Believing that research and development, marketing, advertising and promotion are production
costs.
4. Incorrectly believing that a skimming approach suddenly converts to a penetration approach
when the unit selling price is reduced.
5. Confusing the words ‘price’ and ‘cost’.
©The Chartered Institute of Management Accountants
Page 3
Paper P2 – Performance Management
Post Exam Guide
November 2014 Exam
Question 3
Required:
(a)
th
(i)
Calculate the expected direct labour cost of the 8 batch.
(ii)
(4 marks)
Calculate the expected contribution to be earned from the product over its lifetime.
(2 marks)
(b) Calculate the rate of learning required to achieve a lifetime product contribution of $400,000,
assuming that a constant rate of learning applies throughout the product’s life.
(4 marks)
(Total for Question Three = 10 marks)
Rationale
This question requires the application of learning curve theory as stated in syllabus area B1(e) Apply
learning curves to estimate time and cost for new products and services.
Suggested Approach
(a) (i)To calculate the time needed for the 8th batch candidates needed to calculate the difference
between the total time for eight batches and the total time for seven batches.
(a) (ii) Candidates needed to use their calculations from part (i) to calculate the expected contribution.
(b) Candidates needed to calculate the target labour cost and then derive the rate of learning needed to
be exhibited to achieve it.
Marking Guide
Part (a) (i)
Correct use of formula to calculate cumulative averages: 1 mark each
Calculation of total costs: 0.5 mark each
Correct method: 1 mark
Marks
4 marks
Part (a)(ii)
Calculation of labour cost: 1 mark (own figure rule applies on 16 batches)
Calculation of revenue: ½ mark (no own figure rule applies)
Calculation of other costs: ½ mark (no own figure rule applies)
2 marks
Part (b)
Calculation of target labour cost: 1 mark
Calculation of average batch cost: 1 mark
Calculation of percentage of original: 1 mark
Taking 4th root: 1 mark
4 marks
©The Chartered Institute of Management Accountants
Page 4
Paper P2 – Performance Management
Post Exam Guide
November 2014 Exam
Examiner’s Comments
Quantitative questions relating to the learning curve (LC) have appeared in virtually every paper for the
last few years, but candidates are still making the same types of error. Most of the answers submitted for
part (b) were incorrect due to a poor understanding of the LC formula.
Common Errors
Part (a)
1. No knowledge of the LC formula.
2. Basic mathematical errors.
3. Incorrect use of the formula.
4. Showing the value for a unit as opposed to a batch (of 1,000 units).
5. Submitting answers that were obviously implausible.
Part (b)
1. Inability to calculate the total labour cost of $272,000.
2. Inability to calculate the fourth root of a number.
3. Making basic mathematical errors.
4. Submitting implausible rate of learning percentages.
©The Chartered Institute of Management Accountants
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Paper P2 – Performance Management
Post Exam Guide
November 2014 Exam
Question 4
Required:
Produce, for each of the three non-financial perspectives of a balanced scorecard, an objective and a
performance measure that the bank could use. (In your answer you must state each perspective, and
the objective and performance measure for that perspective and explain why they support the goal of
YY becoming “The bank that people choose”.)
(Total for Question Four = 10 marks)
Rationale
This question requires the application of a balanced scorecard to a banking organisation and addresses
syllabus areas C3(b) Discuss the role of non-financial performance indicators, and C3(c) Compare and
contrast traditional approaches to budgeting with recommendations based on the balanced scorecard.
Suggested Approach
Candidates needed to be aware that the question was set in the context of a large banking organisation.
The performance measures suggested needed to be applicable in such an organisation.
Marking Guide
Three perspectives:
Objective:
Measure:
Why:
1 mark for all three (no marks for giving one or two)
1 mark per perspective
1 mark per perspective
1 mark per perspective
Marks
1 mark
3 marks
3 marks
3 marks
Examiner’s Comments
The principles of the balanced scorecard have been tested on many recent occasions. The only
difference has been the context of the question. This time the banking sector was chosen. Some good
solid answers were submitted, but many answers only gained a few marks due to faults that have been
highlighted in previous post-exam guides.
Common Errors
1. Failing to identify the three traditional perspectives.
2. Failing to identify a specific objective.
3. Not relating a performance measure to the objective.
4. Suggesting a weak objective, eg ‘to keep the customers happy’.
5. Putting forward a performance measure that was difficult to measure.
6. Fully describing the principles of the balanced scorecard. This was not required.
7. Fully describing the financial perspective, even though the question asked for the non-financial
perspectives.
8. Incorrectly labelling the perspectives, eg ‘internal and growth’.
9. Putting forward objectives that did not relate to the question, eg introducing JIT.
©The Chartered Institute of Management Accountants
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Paper P2 – Performance Management
Post Exam Guide
November 2014 Exam
Question 5
Required:
(a)
Calculate for that period:
(i)
the break-even sales revenue.
(ii)
the volume of each product that would have needed to be sold if the
company had wanted to earn a profit of $29,520 in that period.
(6 marks)
(b)
Calculate for the company for the previous period:
(i)
The market size variance.
(ii)
The market share variance.
(4 marks)
(Total for Question Five = 10 marks)
Rationale
Parts (a) (i) and (ii) address syllabus area 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. Part
(b) addresses syllabus area C2(c) Evaluate performance using fixed and flexible budget reports.
Suggested Approach
Part (a): it is necessary to calculate the weighted average contribution to sales ratio. This will then enable
the break-even revenue to be determined. A continuation of the analysis will allow the revenue needed to
generate the target profit to be calculated. This can then be split into the required product mix.
Part (b): candidates needed to be aware that the company used standard marginal costing and then
calculate the weighted average contribution per unit. The variances should then be valued using this
figure.
Marking Guide
Part (a)(i)
Weighted C/S ratio
Correct break-even revenue
Marks
2 marks
2 marks
Part (a)(ii)
Contribution needed (no own figure rule applies)
Unit volumes for all three products
Correct split
1 mark
½ mark
½ mark
Part (b)
Market size variance: 300*$40.50: 1 mark each
Market share variance: 240*$40.50: 1 mark each
2 marks
2 marks
NB There are many ways of getting to the correct answers in this question. A weighted
average contribution to sales ratio of 60% anywhere was always awarded 2 marks;
likewise a weighted average unit contribution of $40.50 was always awarded 1 mark.
©The Chartered Institute of Management Accountants
Page 7
Paper P2 – Performance Management
Post Exam Guide
November 2014 Exam
Examiner’s Comments
Part (a) was a simple break-even question but a large percentage of the answers were incorrect due to
basic mathematical errors.
Part (b) was either not attempted or was answered poorly by virtually every candidate.
Common Errors
Part (a)
1. Correctly calculating a figure of 52,000 but showing this figure as units as opposed to $.
2. Rounding far too early which generated an incorrect final answer.
3. Adding the three contribution to sales ratios together and dividing by three, ie failing to take
account of the weighting.
4. Submitting answers that were implausible in the context of the question, such as break-even
revenues of $1,012,985,000 or $14,322,490
Part (b)
1. Calculating the variance in units as opposed to $.
2. Showing the variance as adverse as opposed to favourable.
3. Calculating the weighted contribution per unit incorrectly.
4. Submitting answers that were implausible in the context of the question, such as a market size
variance of $101,250,000 or a market share variance of $20,250,000.
©The Chartered Institute of Management Accountants
Page 8
Paper P2 – Performance Management
Post Exam Guide
November 2014 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
Required:
(a) Calculate the optimum production plan and the resulting contribution per month based on
the above information.
(4 marks)
(b) Calculate the optimum monthly production plan and the resulting contribution.
(Note: the maximum processing time is 30,000 hours per month).
(8 marks)
(c) Calculate the maximum amount per month that should be paid to hire the machine.
Note: If P = a - bx then MR = a - 2bx
(8 marks)
(d) Discuss the view that subjecting Product Y to a value analysis exercise could have led to that
product not being discontinued.
(5 marks)
(Total for Question Six = 25 marks)
Rationale
Part (a) requires an understanding of short-term decision making and addresses syllabus area A2(a)
Explain the usefulness of dividing costs into variable and fixed components in the context of short-term
decision making. Parts (b) and (c) focus on syllabus area A3(a) Apply an approach to pricing based on
profit maximisation in imperfect markets. Part (d) requires an understanding of value analysis as stated in
syllabus area B1(a) Compare and contrast value analysis and functional cost analysis.
Suggested Approach
Part (a) follows the procedure for the allocation of a single scarce resource i.e. maximise contribution per
hour.
Part (b) required the tabulation of the marginal contribution gained by each batch of the two products.
The marginal contributions are then used as the basis of the allocation of the resources.
Part (c) eliminated the need for batch production and therefore the economists’ pricing model could be
used to assess the impact of hiring the machine.
Part (d) required a discussion of value analysis and its worth in a given context. Candidates needed to be
aware of the context.
©The Chartered Institute of Management Accountants
Page 9
Paper P2 – Performance Management
Post Exam Guide
November 2014 Exam
Marking Guide
Part (a)
Marks
Contribution per hour
Rank
Production plan
Total contribution
1 mark
1 mark
1 mark
1 mark
Part (b)
Calculation of marginal contribution
Ranking
Production plan
Total contribution
2 marks
2 marks
2 marks
2 marks
Part (c)
Producing price/demand relationships
Calculating optimum prices and demands
Calculation of total contribution
Decision criteria comparison
2 marks
4 marks
1 mark
1 mark
Part (d)
Definition of value analysis
Application to scenario: 1 mark per valid point
2 marks
3 marks
Examiner’s Comments
Part (a) was a simple introduction to the question and most candidates gained the marks available. Very
few candidates realised that part (b) required a marginal approach and simply used the economists’
pricing model to generate an answer. Having used this approach for part (b) they did not know how to
tackle part (c), which did need the use of the economists’ pricing model. Most candidates were able to
describe aspects of value analysis.
Common Errors
Part (a)
1. Ranking on contributions as opposed to contribution per unit of limiting factor.
2. Making errors when drawing up the production plan.
Part (b)
1. Not appreciating that a marginal approach was required.
2. Giving figures for product Y, which had been discontinued.
3. Some candidates attempted a marginal approach but simply became bogged down in columns of
figures.
Part (c)
1. Not fully knowing how to use the economists’ pricing model.
2. Making basic mathematical errors, which generated strange answers.
Part (d)
1. Believing that value analysis is another name for the value chain and describing characteristics
of the value chain.
2. Believing that value analysis is simply another name for value engineering.
3. Believing that value analysis is another name for functional analysis.
4. Believing that value analysis is cost control as opposed to cost reduction.
©The Chartered Institute of Management Accountants
Page 10
Paper P2 – Performance Management
Post Exam Guide
November 2014 Exam
Question 7
Required:
(a)
Calculate, based on a transfer price of $45 per Component A, the monthly profit
that would be earned as a result of selling Product B by:
(i) BB division
(ii) AA division
(iii) ZZ group
(9 marks)
(b)
Calculate the maximum monthly profit from the sale of Product B for the ZZ
group.
(4 marks)
(c)
Calculate, using the marginal cost of Component A as the transfer price, the
monthly profit that would be earned as a result of selling Product B by:
(i) BB division
(ii) AA division
(iii) ZZ group
(5 marks)
(d)
Discuss, using the above scenario, the problems of setting a transfer price and suggest
a transfer pricing policy that would help the ZZ group to overcome the transfer pricing
problems that it faces.
(7 marks)
(Total for Question Seven = 25 marks)
Rationale
Parts (a), (b) and (c) test the understanding of transfer pricing and its impact on profits, as required by
syllabus area 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. Part (d) explores the relationship between transfer prices,
performance measurement and management behaviour, which relates to syllabus area D3(b)
Discuss the typical consequences of a divisional structure for performance measurement as divisions
compete or trade with each other.
Suggested Approach
Part (a): using the information given it was necessary to determine the action of the manager of
Division BB. The resulting output of Division BB determined the output for Division AA and therefore
the profits of both divisions and the group.
Part (b): candidates needed to be aware that to maximise profits the marginal costs of both divisions
should be used to determine the contribution from Product B and the optimal price and output.
Part (c): this required profit calculations based on a given transfer price (and this was the price that
candidates should have used in (b)).
Part (d): this required an understanding of the impacts of transfer prices on the profits and therefore
motivation of divisional managers. Candidates needed to discuss these issues and suggest how they
can be overcome.
©The Chartered Institute of Management Accountants
Page 11
Paper P2 – Performance Management
Post Exam Guide
November 2014 Exam
Marking Guide
Part (a)
Marks
Identification of BB optimum output
Revenues (method) (0.5+0.5 +1)
Variable costs (method) (0.5+0.5 +1)
Profits (method) (0.5+0.5 +1)
3 marks
2 marks
2 marks
2 marks
Part (b)
True variable cost
Profit maximising output level
Calculation of profit
2 marks
1 mark
1 mark
Part (c)
5 marks max
Revenues (method) (0.5+0.5 +1) (no own figure rule applies)
Variable costs (method) (0.5+0.5 +1) (no own figure rule applies)
Profits (method) (0.5+0.5 +1)
2 marks
2 marks
2 marks
Part (d)
7 marks max
Problems: 1 mark per valid point
Suggestion: 1 mark per valid point
4 marks max
4 marks max
Examiner’s Comments
This is a straightforward transfer pricing question that caused problems for many candidates. The
main error that undermined many attempts at parts (a), (b) and (c) was a failure to realise that the
situation was governed by the actions of the manager of BB. Most of the written answers to part (d)
lacked detail and attracted few marks.
Common Errors
Part (a)
1. Failing to appreciate the point described above.
2. Incorrectly assuming that AA would produce to its maximum capacity.
3. Poor layout of answers.
Part (b)
1. Misreading the question and only giving the position for Division BB whereas the question
related to product B.
2. The question clearly stated that component A could only be produced in batches of 1,000
units with a maximum of 6,000 units. Unfortunately many candidates used numbers ranging
from 900 to 700, ignoring both conditions.
Part (c)
1. Not appreciating the link between part (b) and part (c).
Part (d)
1. Simply describing the situation in the question and failing to identify any problems.
2. Putting forward weak suggestions, eg ‘the divisional manager would not be happy’.
3. Failing to suggest any alternative method of transfer pricing.
4. Suggesting an opportunity cost approach to transfer pricing where there was no external
market.
©The Chartered Institute of Management Accountants
Page 12