The Examiners’ Answers for CIMA Masters Gateway Assessment SECTION A Answer to Question One Requirement (a) Direct labour cost: Introduction stage The learning curve applies throughout this stage, therefore: Y = ax
b
Y = $100,000 x 10
-0.4150
= $38,459
Therefore total direct labour cost = 10 x $38,459 = $384,590 Growth stage The learning curve continues for another 20 batches so the direct labour cost of these 20 batches is: Y = ax
b
Y = $100,000 x 30
-0.4150
= $24,378
Total direct labour cost for first 30 batches = 30 x $24,378 = $731,340 Less: Total direct labour cost for first 10 batches = 10 x $38,459 = $384,590 Therefore total direct labour cost for these 20 batches = $346,750 The direct labour cost of each of the other 10 batches in this stage is the same as that of the thirtieth batch:
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Examiner's Answers CMGA
Direct labour cost of the thirtieth batch: Average cost for first 29 batches: Y = ax
b
Y = $100,000 x 29
-0.4150
= $24,723
Total direct labour cost for first 30 batches = 30 x $24,378 = $731,340 Total direct labour cost for first 29 batches = 29 x $24,723 = $716,967 Direct labour cost for the thirtieth batch = $14,373 Therefore the direct labour cost for these 10 batches = 10 x $14,373 = $143,730 Therefore the total direct labour cost for this stage of the product life cycle is $490,480 Maturity Stage The learning curve has now ended so the direct labour cost of these 60 batches will be: 60 batches x $14,373 = $862,380 Decline Stage The learning curve has now ended so the direct labour cost of these 30 batches will be: 30 batches x $14,373 = $431,190
Requirement (b) Introduction
Growth
Maturity
Decline
Sales units
10000
30000
60000
30000
Selling price
$120
$100
$80
$50
$ 1,200,000
$ 3,000,000
$ 4,800,000
$ 1,500,000
Direct labour
384,590
490,480
862,380
431,190
Direct materials
500,000
1,500,000
3,000,000
1,500,000
Other
100,000
300,000
600,000
300,000
Profit
215,410
709,520
337,620
(731,190)
Sales revenue
531,360
Requirement (c) ZTG requires a 20% return on its average investment. Average investment = ($5m + $3m) / 2 = $4m Profit target is therefore 20% of $4m = $800,000 As shown in the answer to (b) above the profit predicted without the experience curve is $268,640 less than that required. Total production throughout the product life cycle = 130 batches. Currently the total direct material cost throughout the product life cycle = $6.5m. This needs to be reduced by $268,640 to $6,231,360 which is an average direct material cost per batch of $47.934.
Examiner's Answers CMGA
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Requirement (d) The concept of life cycle costing is that the costs and revenues of a product are accumulated over its life cycle and its overall profitability is measured, rather than separating costs and revenues into accounting periods. In this scenario the length of the product life cycle is 12 months but this may or may not coincide with the company’s accounting year and the statement shown in solution (b) above shows the product’s profitability over its life cycle. As illustrated in the scenario to this question there are four recognised stages in the life cycle of a product. In this scenario it appears that ZTG is using a market skimming approach to the initial launch pricing of its product because it is starting with a high price in the introduction stage that is then being gradually reduced over the life cycle of the product. ZTG will be reducing the price of the product in order to make it harder for competitors to enter the market but also to increase the demand for its product through the growth stage. At this time the cost of the product will also be lower than at the launch stage, due to the effect of the learning and experience curves on its direct labour and material costs. In the maturity stage, ZTG will reduce the selling price further to consolidate its sales and would hope that there may be further cost savings due to economies of scale though these are not evident from the data in this scenario. Finally, in the decline stage, ZTG reduces the price to maintain sales while under more competition from newer products, prior to launching a new product of its own.
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Examiner's Answers CMGA
Answer to Question Two Requirement (a) Report to explain the potential problems that the shopping centre could face if investment is not made in detailed project planning. A project needs to be managed through its lifecycle, applying appropriate project management methods and skills, in order to avoid/minimise potential problems that could lead to project failure. A key part of the project management process involves defining clear objectives and setting realistic estimates in terms of budget and time and resources needed. Without this, it is unlikely that an estimation of the baseline budget and project schedule can be constructed to present a realistic assessment of the time and funding required, and the resources needed for the successful execution of the shopping centre project. The outcome could be that the project ends up with unrealistic timescales and the different activities may not be sequenced logically, to make the most effective and efficient use of resources. This could also result in budget overspend and delays in various stages of the project. Ultimately the project may fail to be completed on time. As part of the planning stage, feasibility studies should be undertaken, along with an assessment of the risks associated with the shopping centre project. If these critical dimensions are not understood, the project manager will not have the opportunity to identify potential problems and determine the actions needed to deal with them nor develop contingency plans. Given the nature of the project, not undertaking social and environment feasibility studies could lead to future problems and disruptions once construction starts for the shopping centre. For example, the impact on the local environment where the proposed shopping centre is to be built may not have been considered, and potential social issues in terms of whether the local community might object to the plans due to the disturbances during the building work. If the project objectives are not clearly defined and scoped, this can make it more vulnerable to changing client specification. Whilst it is not unusual for client requirements to change during the life of a project, if the project is to come in on time and within budget then Mrs E needs to be aware of what is feasible. When the objectives are changed during the life of a project, there is usually a significant impact on project success and it is important that Mrs E is made aware of the consequences. It is at the early stages within the project that roles and responsibilities are defined for the project team. If they are not clearly defined this could lead to duplication of activities or activities missed. The result might be that members of the project team do not work effectively together, along with poor communications between the various stakeholders in the project. Finally, it is at the planning stage that various control mechanisms would normally be put in place. Without developing an appropriate control system there is the strong possibility of poor cost control and overspend. Effective planning can minimise the potential problems outlined above. In summary, Mrs E is putting the smooth running of the project at risk by wanting to cut out this stage.
Requirement (b) There are a number of different tools and techniques that Mr G could use to assist him in planning the shopping centre project. For example: •
Work Breakdown Structure. This technique is a critical part of project planning involving an analysis of the work required to complete the Shopping Centre project. The activities in the project are broken down into manageable components, referred to as work packages. The process defines the activities that must be carried out for each work
Examiner's Answers CMGA
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package. Each work package will have defined responsibilities and deliverables for the shopping centre project that Mr G can delegate. The analysis of activities for the shopping centre project can be undertaken at a number of levels, for example starting with the major phases then breaking them down into more detailed sub-activities. Mr G would be able to develop a task list from the work breakdown structure to assist in planning, control and monitoring the various stages of the project. The work breakdown structure can, therefore, assist in identifying the people responsible for each activity or work package. •
Another widely used project planning tool is the Gantt Chart. This provides a visual way of illustrating the sequence of activities in a project. Complex project activities are converted into constituent tasks and a graphical and understandable picture is provided. Although it does not show dependencies and internal relationships, it is a helpful framework in the planning of construction projects, such as the shopping centre development. It will show the time taken for each activity and the resources required, hence can be used to monitor progress against the plan and assist project scheduling by planning the timescales for the project. It can also be used by Mr G to communicate the responsibilities of tasks to the project team.
•
A variation of the Gantt chart is the resource histogram which shows the resource requirement usage and availability against a timescale. This will help Mr G in the scheduling and rescheduling of resources for the shopping centre project.
•
Network analysis, sometimes referred to as critical path analysis, is an important technique in project planning, providing a diagram showing the sequence and dependencies between activities or deliverables on a project. Using a work breakdown structure, network analysis arranges each work package/task into a logical sequence, and estimates the time to complete each. The outputs from the work breakdown structure analysis will help the identification of which tasks are dependent on others. Dependencies are critical to project planning. Simplistically, this involves determining the sequence, i.e. if activity B can only begin when activity A is completed there is a dependency. For example, planning permission must be sought for the shopping centre before construction work can commence. This is a crucial activity in project planning and the allocation of resources. Having identified dependencies, it is then possible to calculate the critical path, which is the longest sequence of consecutive activities. It identifies those activities which, if delayed beyond the allotted time, would delay the completion of the shopping centre project and identifies how much float time there is on other tasks. In other words, by how much certain activities could slip before there is an impact on the expected time completion for the shopping centre project. This then enables the minimum possible time to be determined, and can be helpful in identifying where there is some slack time available within the project plan for any unforeseen circumstances.
•
Another project technique is PERT (project evaluation and review technique). This is a development on network analysis that Mr G might find helpful in project planning. The technique is designed to account for uncertainty in the project lifecycle. For each activity in the project PERT uses three time estimates: • • and •
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the optimistic time based on the duration the shopping centre project would take if conditions were ideal; the most likely/probable duration if conditions were normal or as expected; the pessimistic estimates which is the duration it would take if a number of things went wrong.
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Examiner's Answers CMGA
These estimates are then converted into a mean time and standard deviation which means it is then possible to establish the duration of the shopping centre project using the expected times, but also to calculate a contingency time allowance.
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Answer to Question Three $000 39,840 (21,480) 18,360 (4,647) (4,511) 489 (1,866) 180 8,000 (2,325) 5,680
Revenue Cost of sales Gross profit Administrative expenses Distribution costs Gain on disposal of investment in AC Finance cost Share of profit of associate Profit before tax Income tax expense Profit for the year Other comprehensive income Actuarial gains on defined benefit pension plan Tax effect of other comprehensive income Recognised gains on AFS investment Recycling of previously recognised gains on AFS investment Share of other comprehensive income of associates, net of tax Other comprehensive income for the year, net of tax Total comprehensive income for the year
420 (124) 138 (120) 7 321 6001
Profit for the year attributable to: Equity holders of the parent Non-controlling interest
5,091 589 5,680
Total comprehensive income attributable to: Equity holders of the parent Non-controlling interest
5,398 603 6,001
Workings W1 Fair value adjustments Increase in value at acquisition date Remaining useful life from acquisition date Annual charge Charge from date of acquisition charged to admin expenses W2 Goodwill impairment Consideration transferred Non-controlling interest at proportionate share Net assets at acquisition: Share capital Reserves Fair value uplift
$000
$000 8,400 1,926
600 6,150 2,880
Goodwill 10% impairment to be charged to administrative expenses
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$000 2,880 40 years 72 30
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(9,630) 696 70
Examiner's Answers CMGA
W3 Gain on disposal of AC Fair value of consideration received Plus fair value of 105,000 shares retained Less share (75%) of fair value of consolidated carrying value of the subsidiary at date control is lost: Share capital (300 x 75%) Reserves 75% x ($3,900,000 + ($2,127,000 x 9/12)) Unimpaired goodwill
$000
$000 2,880 2,376
225 4,122 420 (4,767) 489
Gain on sale W4 Goodwill on acquisition of AC Fair value of consideration transferred Non-controlling interest at proportionate share of net assets Net assets at acquisition: Share capital Reserves
$000
$000 2,940 840 3,780
300 3,060 3,360 420
Goodwill
W5 - Recycling of previously recognised gains of $120,000 from reserves to administrative expenses, recorded as Dr reserves Cr administrative expenses.
W6 Non-controlling interests
As per MC accounts Additional dep'n of FV 20% NCI x 5/12 months
Profit for the year $000 2,520 (72) 2,448 204
As per AC accounts 25% NCI x 9/12 months Total NCI in PFY Total NCI in TCI
2,052 385 589
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Total comprehensive income $000 2,520 (72) 2,448 204 2,127 399 603
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SECTION B
Answer to Question Four 4.1
As the by-product revenue is credited to the sales account the process costs are unaffected. Units 10mm pipe 15mm pipe 20mm pipe
20,000 14,000 11,000
Sales value ($) (x $14) (x $10) (x $20)
280,000 140,000 220,000 640,000
(280/640 x $480,000) (140/640 x $480,000) (220/640 x $480,000)
Apportioned cost ($) 210,000 105,000 165,000 480,000
The answer is C
4.2
Product investment Total annual costs
x
(£800,000 + £121,600) £1,200,000
Required rate of return
x
25% =
=
Mark up
19.2%
The answer is B 4.3
Fixed cost/unit at breakeven sales level Selling price/unit - fixed cost/unit Options Selling price Variable cost Contribution Sales (units) Total contribution ($m) Fixed costs Profit ($m)
$1.4m/100,000 units = $14/unit $25 - $14 = $11/unit variable cost
$ 21 11 10 266,000 2.66 (1.4) 1.26
$ 25 11 14 185,000 2.59 (1.4) 1.19
$ 30 11 19 135,000 2.565 (1.4) 1.165
The answer is B 4.4
The answer is B Dual-rate transfer prices will reduce divisional incentives to compete effectively. The supplying division can easily generate internal sales to the receiving division when it is charged at variable cost; this protects it from competition and gives it little incentive to improve its productivity.
4.5
The answer is D - Hierarchies or markets
4.6
The answer is B - Supervision
4.7
Resource based view
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Examiner's Answers CMGA
4.8
The answer is: (i) (ii) (iii)
4.9
Opening Bargaining Closing
Non-current assets are recorded at the spot rate at the date of transaction and not retranslated (250,000/0.741 = $337,382). Trade payables are restated at the closing rate as payables are a monetary item (250,000/0.753 = $332,005). The answer is B
4.10 Post tax earnings ($450,000 - 110,000) Weighted avarage number of shares in issue: 1 May - 30 September 3 million x 5/12 months 1 October - 30 April 4 million x 7/12 months
Basic earnings per share $340,000/3,583,333
$340,000 1,250,000 2,333,333 3,583,333 9.5 cents per share
The answer is 9.5 cents per share 4.11 The non-current assets of one entity could be nearing the end of their useful life and therefore be unrealistically low giving a higher non-current asset turnover figure. Alternatively, the non-current assets of one entity could have been revalued which would result in asset turnover being low but not necessarily because of low efficiency. 4.12 The bond purchased by NBW should be classified as a held to maturity investment as NBW intends to hold it to redemption. It is initially recorded at the net cost of $4.5 million and then subsequently measured at amortised cost using the effective interest rate. The closing balance of the liability at 30 June 2010 is $4,711.7, see working below: Opening balance $000 4,500
Examiner's Answers CMGA
10.26% effective rate $000 461.7
10
Coupon interest paid $000 (250)
Closing balance $000 4,711.7
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