Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
General Comments
The overall performance was disappointing across most of the paper and the pass rate
reflects this level of performance. The paper included no surprises, with many topics such as
the learning curve, limiting factors and investment appraisal appearing again. Candidates
therefore should have been familiar with these topics and the way that they are examined.
This does enforce the point made on several previous occasions that candidates should
familiarise themselves with previous papers (all of which are on the CIMA website).
The level of performance clearly indicates that many candidates had only a peripheral
understanding of some of the topics and were not fully prepared for this exam. Questions that
tested fundamental aspects of management accounting were poorly answered. This reemphasises the point made in previous Post Exam Guides that candidates who have been
awarded an exemption from the Fundamentals of Management Accounting paper need to
ensure that they have a good understanding of the syllabus for that paper.
It is evident from the answers submitted that most candidates are more comfortable with
numerical questions and less able to tackle discursive questions. The marks attained by most
candidates reflect this, but many candidates put forward answers to numerical questions that
were poorly presented and difficult to follow. This seriously hinders the task of the markers
who on occasions were unable to award marks for unclear answers. On other occasions
workings were not referenced in the answer and therefore could not be deciphered. The
quality of handwriting was generally good. However in the majority of cases there was no
evidence of an answer plan and many candidates’ answers were difficult to follow.
Candidates must note the points below. Failure to appreciate their importance could have an
adverse impact on future examination performance.
1. All candidates who plan to sit the P2 examination are advised to examine the
Fundamentals of Management Accounting (C01) syllabus to ensure they have a good
understanding of its content. This applies particularly to candidates who have been
awarded an exemption from this fundamental paper.
2. Show all workings and refer to them clearly.
3. Make full and proper use of the 20 minutes allowed for planning (reading time).
4. Relate narrative answers to the question scenario.
5. Practice regularly using past questions, particularly questions that have appeared on
recent P2 papers.
6. In particular practice questions that require written answers.
7. Ensure that the length of written answers reflects the number of marks available
(refer to the Examiner’s comments on questions 3 and 4).
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Section A – 20 marks
Question 1.1
A company has an annual post tax money cost of capital of 18%.
If inflation is 5% per annum the company’s annual post tax real cost of capital is closest to
A
12%
B
13%
C
23%
D
24%
(2 marks)
The answer is A
Workings
1⋅18/1⋅05 = 1⋅1238
Question 1.2
A company is considering a short-term pricing decision for a contract that would utilise some material P
that it has held in inventory for some time. The company does not foresee any other use for the material.
The work would require 1,000 kgs of Material P. There are 800 kgs of Material P in inventory, which were
bought some time ago at a cost of $3 per kg. The material held in inventory could currently be sold for
$3·50 per kg. The current purchase price of Material P is $4·50 per kg.
The relevant cost of Material P for the company to use when making its pricing decision for the contract is
closest to
A
$3,300
B
$3,500
C
$3,700
D
$4,500
(2 marks)
The answer is C
Workings
800 kgs x resale price of $3⋅50
200 kgs x purchase price of $4⋅50
= $2,800
= $900
Total
= $3,700
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Question 1.3
The table below summarises data that have been extracted from the cost accounting records of SV
Limited. The data show the cost and the inflation index relevant to the period in which the costs were
incurred.
Output level
3,000 units
4,000 units
Total cost
£9,167
£11,760
Inflation index
1·03
1·05
The uninflated variable cost per unit of output to be used when predicting future costs is closest to
A
£2·30
B
£2·59
C
£2·80
D
£2·97
(2 marks)
The answer is A
Workings
Output level
3,000 units
4,000 units
Total cost
£9,167
£11,760
Inflation index
1⋅03
1⋅05
Uninflated total cost
£8,900
£11,200
There is a £2,300 difference in the uninflated cost for the extra 1,000 units, this equals £2⋅30 per unit.
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Question 1.4
A company has only $700,000 available for investment during the coming year. It has identified the
following four investment opportunities, all of which are divisible, and have the same life.
Investment
Capital required
$
400,000
250,000
300,000
350,000
J
K
L
M
Net Present Value
$
650,000
450,000
480,000
550,000
Calculate the correct rank order for these investments (best first).
(2 marks)
Workings
Investment
J
K
L
M
Capital
required
$
400,000
250,000
300,000
350,000
NPV
$
650,000
450,000
480,000
550,000
Profitability
index
1⋅625
1⋅8
1⋅6
1⋅57
The rank order is K J L M
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Question 1.5
A company is considering investing $100,000 in a new machine that will reduce its annual cash operating
costs as follows:
Year
1
2
3
4
Operating cash costs saved
$000
35
45
55
30
Calculate the payback period to the nearest 0·1 years.
(2 marks)
Workings
The cumulative operating costs saved are as follows:
Year
1
2
3
Operating costs
saved $000
35
80
135
Therefore payback occurs in year 3. To the nearest 0⋅1 years, the payback period is 2 full years plus
20/55 of the third year = 2⋅4 years.
Question 1.6
A company has recently launched a new product.
The average time taken for the first 4 units was 24 minutes per unit and the average time taken for the first
32 units was 9·34 minutes per unit.
Calculate the rate of learning that occurred.
(3 marks)
Workings
Output is doubled three times from 4 units to 32 units.
The average time for 32 units is 38⋅917% of the average time for 4 units.
The third root of the learning index is thus 0⋅3892 so the learning index is 73%.
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Question 1.7
A company manufactures three products and is planning the use of its resources for the next quarter.
Details of the products and their resource requirements are as follows:
Product
Q
R
T
Contribution per unit
$36
$38
$44
Material A per unit (S1)
Material B per unit (S2)
Labour per unit (S3)
5 kgs
6 litres
4 hours
6 kgs
3 litres
5 hours
4 kgs
8 litres
6 hours
All of these resources are limited in supply. The total available resources for the next quarter are:
Material A (S1)
Material B (S2)
Labour (S3)
4,800 kgs
5,000 litres
3,500 hours
Prepare the initial equations for S1, S2 and S3 to be used in solving this problem using linear
programming.
(3 marks)
Workings
Where q = number of units of Q, r = number of units of R and t = number of units of T. S1, S2 and S3 are
unutilsed material A, material B and labour respectively.
5q + 6r + 4t + 1S1 = 4,800
6q + 3r + 8t + 1S2 = 5,000
4q + 5r + 6t +1S3 = 3,500
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Question 1.8
A company is considering the price of one of its products for next year. It expects that the variable cost of
making the item will be $15 per unit. It has also determined that if the selling price were to be $35 per unit
then the demand would be 500 units per week.
However, for every $5 increase in selling price, there would be a reduction in demand of 50 units per
week; and for every $5 reduction in selling price, there would be an increase in demand of 50 units per
week.
Calculate the optimal selling price.
Note: If Price P = a-bx then Marginal Revenue = a-2bx
(4 marks)
Workings
For demand to equal zero there needs to be 10 x $5 increase in selling price, that is the price at which
demand = zero is $35 + $50 = $85
Price = $85 - 0⋅1x
Marginal revenue = $85 - 0⋅2x
Marginal cost = $15
Equating marginal cost and marginal revenue:
15 = 85 - 0⋅2x
0⋅2x = 70
x = 350
If x = 350 then Price = $85 - (0⋅1 x 350) = $50
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Examiner’s comments
The average mark for Section A was slightly higher than that achieved in previous diets, with a number of
candidates attaining full marks. In the majority of cases the presentation of the answers was better than in
previous diets. No particular question was ignored but some questions were answered better than others.
Question 1.4: many candidates did not answer this question, which required candidates to simply rank
order the investments. However, many candidates went further and allocated the available money which
was not called for.
Question 1.5: the question specifically asked for the payback period to be stated to the nearest 0.1 years.
Many candidates chose instead to put forward other variations e.g. 2 years 3 months, 2 years 4½ months
which did not gain all the marks that were available.
Question 1.7: the data in the question clearly showed that there were three products. Therefore a simplex
approach was needed to answer the question (as opposed to a graph). The equations needed to include
the slack variables which many candidates omitted. Many candidates failed to appreciate or realise that if
a slack variable is included an equal sign is required rather than an inequality sign. Many candidates also
stated the objective function which was not requested.
Common Errors
1. Failure to answer the question (e.g. Q1.7)
2. Failure to present the answer in the form requested in the question (e.g. Q1.5)
3. Failure to show workings which could have gained marks (e.g. Q1.8)
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Section B – 30 marks
ANSWER ALL THREE QUESTIONS
Question 2
(a)
Advise NLM as to which (if any) of the further processes should continue to be operated.
State any relevant assumptions.
(6 marks)
(b)
Advise NLM whether they should continue to operate the common process. State any
relevant assumptions.
(4 marks)
(Total for Question Two = 10 marks)
Rationale
This question tests candidates’ ability to demonstrate their understanding of relevant costs and revenues
when deciding whether or not to continue operating separate processes within a joint product
environment. This question addresses the learning outcome: A(v) Explain why joint costs must be
allocated to final products for financial reporting purposes, but why this is unhelpful when decisions
concerning process and product viability have to be taken.
Suggested Approach
(a)
(b)
• For each product
- Identify the incremental contribution per litre
- Multiply by the number of litres
- Subtract the incremental fixed cost to arrive at the incremental
profit of loss
• State any relevant assumptions
•
•
•
Identify the relevant costs of the common process
Compare this figure with the total market values of common process outputs to arrive at a surplus
or deficit
State any relevant assumptions
Marking Guide
Calculate the incremental profit or loss for each product
State recommendation and assumptions
Calculate overall deficit of common process with recommendation
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Marks
3 marks
3 marks
4 marks
Page 9
Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Examiner’s Comments
In many cases this question was poorly answered. A large percentage of candidates were unable to
demonstrate a good understanding of process costing, in particular that an incremental approach was
required in part (a). The simplest and quickest approach is shown in the Examiner’s answers, but many
other more time consuming methods were acceptable. Regardless of which method was chosen,
candidates needed to quantify the effect of further processing i.e. the before and after position. Many
candidates made poor attempts to do this, and many others put forward unclear answers. Very few
candidates presented meaningful assumptions or assumptions that related to the scenario.
The answers put forward to part (b) clearly demonstrated that the question had been completely
misunderstood by many candidates. The question described a common process which yielded three
products. Many candidates suggested the common process should be operated for only one or two of the
products. As with part (a) the assumptions put forward were extremely weak.
Common Errors
1. Not understanding the question requirements.
2. Using poor layouts for the answer.
3. Providing poor descriptions/labels to figures.
4. Stating weak, unrelated assumptions.
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Question 3
(a)
(i)
Calculate the expected time taken for the 8th unit.
(3 marks)
(ii)
Explain two reasons why the time taken for the 1025th unit may be more than expected.
(2 marks)
Note: The value of the 80% learning index is -0·3219
(b)
Explain the importance of considering the learning curve when deciding on the terms for a
gain sharing arrangement with employees.
(5 marks)
(Total for Question Three = 10 marks)
Rationale
This question tests candidates’ knowledge of the learning curve and its relevance to gain sharing
arrangements with employees. This question addresses the learning outcomes: D(iv) Explain and apply
learning and experience curves to estimate time and cost for new products and services and D(ix) Discuss
gain sharing arrangements whereby contractors and customers benefit if contract targets for cost, delivery
etc, are beaten.
Suggested Approach
(a)
•
•
(b)
•
•
Calculate the total time for 7 units and 8 units then subtract one from the other to arrive at the time
for the eighth unit
Put forward suitable reasons for time being greater than expected
Explain gain sharing in the context of the question
Comment on the importance of the learning curve in relation to gain sharing arrangements
Marking Guide
(a) Calculate the time for the eighth unit
Identify reasons why the time may be different from that expected
Marks
3 marks
2 marks
(b) Explain gain sharing
Explain the importance of the Learning Curve in relation to gain sharing
2 marks
3 marks
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Examiner’s Comments
Parts a(i) and (ii) were generally answered well, although some candidates displayed poor exam
technique and wrote a full page when answering part a (ii) which was worth only two marks.
Part (b) was poorly answered. The question clearly requested candidates to explain the importance of
the learning curve when considering a gain sharing arrangement with employees. Many candidates
described a gain sharing arrangement with other parties such as suppliers and contractors. They also
ignored completely the impact of the learning curve, i.e. that if it is not taken into consideration this could
favour the employee or the employer, depending on the target production time agreed.
Common Errors
1. Failing to relate the answer to the scenario in the question.
2. Completely ignoring a major part of the question (part b).
3. Not recognising the mark value of a question, or part of a question (part a (ii)).
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Question 4
Prepare a report to the Managing Director that
(a)
explains Target Costing and how it differs from Standard Costing;
(7 marks)
(b)
explains why net present value is superior to the three other investment appraisal techniques
stated above.
(3 marks)
(Total for Question Four = 10 marks)
Rationale
This question tests candidates’ ability in part (a) to distinguish between target costing and standard
costing. This part of the question addresses the learning outcome: D(vi) Explain how target costs can be
derived from target prices and describe the relationship between target costs and standard costs. In part
(b) candidates were required to explain why net present value is a superior technique compared with other
investment appraisal techniques. This part of the question addresses the learning outcome:
B(vii)Compare, contrast and evaluate the alternative techniques of investment appraisal.
Suggested Approach
Explain target costing, then explain standard costing and finally show how they differ
Explain the favourable characteristics of net present value to show how this technique is superior to
the other techniques
(a)
(b)
Marking Guide
(a) Present a report format
Explain target costing
Explain standard costing
Compare the two techniques
Marks
1 mark
2 marks
2 marks
2 marks
(b) Explain why NPV is superior to other techniques
3 marks
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Examiner’s Comments
In most cases both parts of this question were poorly answered. The majority of candidates did not plan
or compose their responses, and put forward rambling and incoherent answers. A report format was
requested (to, from, introduction, conclusion etc.) but many candidates either ignored this request or put
forward reports that simply started with “Dear Sir” and closed with “Yours Sincerely” (similar comments
apply to candidate responses to question 5(b)).
In part (a) most candidates were able to describe target costing but very few were able to define or
describe standard costing. This is a most worrying situation as standard costing is one of the most
important topics in the management accounting syllabus. Most candidates simply described how a
percentage could be added to a standard cost to derive a selling price. Very few candidates were able to
compare the two techniques to demonstrate that they were completely different, in that target costing is a
costing system with an external bias that relates to the customer and the market price of a product or
service, whereas standard costing is a planning and control mechanism. Most candidates simply assumed
that this was a question about pricing.
The answers to part (b) were also poor. Candidates were in effect asked to explain why NPV is superior to
other techniques. For example it considers the timing of cash flows, it considers all inflows and outflows
and it recognises the opportunity cost of money. Most candidates chose to comment on the weaknesses
of the other three techniques which was not the main thrust of the question.
Common Errors
1. Being unable to define standard costing.
2. Not answering the question i.e. inability to compare two techniques (part (a)).
3. Not answering the question (part (b)), as described above.
4. Failing to use a report format.
5. Submitting lengthy answers that were disproportional to the marks available (part (b)).
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Section C – 50 marks
ANSWER TWO QUESTIONS OUT OF THREE
Question 5
(a)
Demonstrate, using the above information and appropriate calculations, how the Manager of
the KL retail outlet should allocate the space available between the different categories of
items for sale to customers in order to maximise his weekly profit.
(7 marks)
(b)
Prepare a report, addressed to the manager of the KL retail outlet that explains
(i) the principles of Direct Product Profitability (DPP);
(ii) how these principles may be applied to his retail outlet; and
(iii) how their application may improve the profits of his retail outlet.
(18 marks)
(Total for Question Five = 25 marks)
Rationale
This question tests candidates’ ability to analyse the data provided to determine the optimum use of space
available in a retail outlet and then to explain how the use of activity based costing might improve the
information available to the manager. This question addresses the learning outcomes: A(vii) Apply
variable/fixed cost analysis in multiple product contexts to breakeven analysis and product mix decision
making, including circumstances where there are multiple constraints and linear programming methods
are needed to reach optimal solutions; and D(x) Apply activity based costing ideas to analyse direct
customer profitability and extend this analysis to distribution channel profitability.
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Suggested Approach
(a)
•
•
Calculate the contribution per % of floor area and rank by category
Allocate the available space while recognising the stipulated minimum requirements
Make a recommendation based on the calculations
•
•
Explain the principles of DPP
Discuss how these principles can be applied to the retail outlet
Explain how profitability could be improved with the application of DPP
•
(b)
•
Marking Guide
(a) Calculate contribution per unit of limiting factor and rank the results
Allocate the available space
Put forward the necessary advice
Marks
3 marks
3 marks
1 mark
(b) Explain three significant principles
Discuss the application of these principles
Identify how profit could be improved
6 marks
6 marks
6 marks
Examiner’s Comments
Very few candidates attempted this question.
Part (a) was simply a basic limiting factor question with display space being the limiting factor. A
reallocation of the available space was the main requirement, but only a few candidates took notice of this
detail in the question, especially that the manager was not required to allocate any space to “other
products”.
Part (b) was poorly answered. Only a few candidates submitted worthwhile attempts to explain DPP, in
particular how it relates closely to Activity Based Costing and applies specifically to the retail trade. Some
candidates were able to describe DPP but did not relate their answers to the question scenario. The
overall quality of written answers was poor, with many candidates appearing to have no answer plan.
It was particularly disappointing to note that many candidates did not know the difference between
allocation and apportionment.
Common Errors
1. Demonstrating poor application of limiting factor principles (e.g. ranking according to contributions
without considering the limiting factor).
2. Not answering the question and not proposing a reallocation of the available space (part a).
3. Demonstrating a lack of planning and not using a clear structure for answering the discursive part of
the question (part b).
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Question 6
(a)
(i) Prepare calculations to identify which of the above six selling prices per unit will result in the
highest annual profit from this product.
(7 marks)
(ii) Explain why your chosen selling price might not result in the highest possible annual profit from
this product.
(3 marks)
(Total for requirement (a) = 10 marks)
(b)
(i) Explain the alternative pricing strategies that may be adopted when launching a new product.
(6 marks)
(ii) Recommend a pricing strategy to the company for its new product and explain how the
adoption of your chosen strategy would affect the sales revenue, costs and profits of this
product over its life cycle.
(9 marks)
(Total for requirement (b) = 15 marks)
(Total for Question Six = 25 marks)
Rationale
This question tests candidates’ ability in part (a) to interpret relevant data to determine the most profitable
selling price from those provided and to explain why this might not be the optimal selling price, and in part
(b) to explain alternative pricing strategies for a new product and recommend the strategy to be used by
the company in the scenario provided. This question addresses the learning outcomes: A(iii) Apply an
approach to pricing based on profit maximisation in imperfect markets and evaluate the financial
consequences of alternative pricing strategies.
Suggested Approach
(a)
(b)
•
•
•
Calculate the profit at each level of demand, using the formula provided to determine the cost
Make a recommendation based on the levels of profit
Put forward reasons why this might not result in the highest possible profit
•
•
Describe the pricing strategies that are most suitable for this scenario
Recommend a suitable pricing strategy and relate the stages of this strategy to the product life
cycle
Marking Guide
(a) Calculate a profit for each level of demand
Make a recommendation
Explain why this might not result in the highest profit
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Marks
6 marks
1 mark
3 marks
Page 17
Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
(b) Explain alternative pricing strategies
Select an appropriate strategy and show how this strategy relates to:
Sales revenue
Costs
Profits
6 marks
3 marks
3 marks
3 marks
Examiner’s Comments
Part (a) was well answered by most candidates.
Part b(i) was generally well answered but a large percentage of candidates suggested pricing techniques
that did not relate to the scenario.
In part b(ii) the question requirement provided candidates with a format for answering this question, that is
how the proposed strategy would affect the sales revenue, costs and profits over the life cycle of the
product. Many candidates chose to ignore this suggested answer structure and discussed instead the
stages of pricing when using a market skimming approach.
Common Errors
1. Putting forward answers that did not relate to the question scenario (part b(i)).
2. Changing the thrust of the question and converting it to a pricing question (part b(ii)).
3. Presenting poorly laid out written answers.
4. Using poor handwriting.
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Question 7
(a)
Prepare calculations to show whether the investment is worthwhile assuming that the 30%
increase in seating capacity is fully utilised and recommend whether the investment should
proceed.
(14 marks)
(b)
Calculate and interpret the Internal Rate of Return (IRR) of the proposed investment.
(6 marks)
(c)
Calculate the sensitivity of your recommendation to changes in the percentage capacity
utilisation.
(5 marks)
(Total for Question Seven = 25 marks)
Rationale
This question tests candidates’ ability in part (a) to calculate the net present value of an investment
proposal from the data provided and in parts (b) and (c) to calculate the Internal Rate of Return of the
proposal and the sensitivity of their solution to changes in the decision variables. This question addresses
the learning outcomes: B(iii) Calculate project cash flows, accounting for tax and inflation, and apply
perpetuities to derive “end of project” value where appropriate; and B(vi) Evaluate project proposals using
the techniques of investment appraisal and C(ii) Apply sensitivity analysis on both short and long run
decision models to identify variables that might have significant impacts on project outcomes.
Suggested Approach
(a)
•
•
•
•
Prepare calculations for each year, on an incremental basis, for each item of sales and costs,
incorporating the relevant levels of inflation
Calculate the tax on profits and the tax saved on investments
Calculate the net present value using the money cost of capital provided
Make a recommendation based upon the calculations
(b)
Calculate and interpret the internal rate of return
(c)
Calculate the level of sensitivity related to the change in capacity utilisation
Marking Guide
(a) Calculate revised sales figures
Calculate cost figures
Calculate tax on profits
Calculate tax saved on investment
Generate NPV figures
Make a recommendation
Marks
2 marks
8 marks
2 marks
2 marks
1 mark
1 mark
max 14
(b) Calculate the IRR
Interpret the IRR
3 marks
3 marks
(c) Generate variables, subject to tax and discounting
Calculate sensitivity
3 marks
2 marks
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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2008 Exam
Examiner’s Comments
Part (a) was a familiar investment appraisal question that was similar to questions that have appeared in
recent papers. Unfortunately the question was poorly answered. The majority of candidates did not adopt
an incremental approach, resulting in poor marks. In addition, the presentation and neatness of answers
was well below the standard expected of management accounting students. In many cases workings
were not referred to and were difficult to decipher.
In part (b) most candidates were able to submit an IRR calculation (albeit using their own figures) but only
a small percentage of candidates attempted to interpret the IRR, thus limiting their potential mark to three
out of the six marks available.
Part (c) was answered by only a few candidates and generally the attempts were extremely poor.
Common Errors
1. Failing to use an incremental approach (part (a)).
2. Offering poorly presented answers.
3. Providing no workings to explain how figures have been derived (all parts).
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