The Examiners Answers for CIMA Masters Gateway Assessment May 2011

The Examiners’ Answers for CIMA Masters Gateway Assessment SECTION A Answer to Question One Requirement (a) Direct material A Direct material B Skilled labour Unskilled labour Supervision labour Machine overhead Other overhead Total cost

$ 115 345 700 420 NIL 280 NIL 1860

Requirement (b) Direct material A This material is in regular use. Therefore, regardless of its original cost or the inventory valuation method, the relevant cost is its replacement cost, i.e. 5 square metres @ $23 per square metre.

Direct material B This material must be bought at a cost of $15 per square metre and the minimum order is 25 square metres. This is a total cost of $375. Since only 10 square metres are to be used on this order and no other use is expected, the remaining 15 square metres would be sold as scrap for $30 so the relevant cost is $345.

Skilled labour The least cost option is to use EC’s existing labour and to use sub-contractors for the work currently being done by EC’s skilled labour. The relevant cost is therefore 100 hours @ $7.

Unskilled labour The unskilled labour is available within EC, but there is an overtime cost that is caused by this work. The cost of the overtime premium is 20 hours @ $3 per hour = $60. Thus the total relevant cost is $420.

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Examiner's Answers CMGA

Supervision labour The supervisor is paid a fixed salary and is to supervise this work within their normal duties.

There is no change in the supervisory labour cost incurred by EC as a result of undertaking this work, therefore the relevant cost is $NIL. Machine overhead The running costs of the machines are relevant because they are only incurred if the machines are operated. This amounts to a total of 20 hours @ $12 per hour = $240. However, there is an additional relevant cost caused by this order which is the hire of the additional machine due to the scarcity of hours available on machine Z - this is a further 8 hours @ $5 per hour = $40. The total relevant cost is therefore $280 Other overhead The other overhead cost is a general cost that is incurred by EC. There is no change to this overhead cost as a result of undertaking this work, therefore the relevant cost is $NIL.

Requirement (c) The job costing system uses historical costs whereas a relevant cost is the opportunity cost to EC of completing the work. In some instances the historic cost and the opportunity cost are the same, for example if the resource required is obtained specifically for the work being undertaken. However in a number of instances there is a difference. This can be illustrated using direct material A and the skilled labour in the above scenario.

Direct material A Direct material A is held in inventory where a FIFO system is used as the method of valuation.

The scenario provided a value of $20 per square metre of material A with further information being that the latest price paid was $22 per square metre and a replacement price being $23 per square metre. The job costing system would use the FIFO basis of valuation thus recording the cost of the materials used at the oldest price of $20. This is the lowest of the three prices and is typical of the situation that normally occurs in economies that have price inflation. By contrast, the relevant cost is the replacement cost because it is this cost that EC will incur to replace the materials used and thus reinstate EC to a position of holding inventory, a position that it enjoyed before undertaking the work.

Skilled labour In a job costing system within absorption costing, the skilled labour cost attributed to a particular job will be based on the number of hours and wage rate of the individual employees that completed the work. This is because the costs will be determined by analysing their timesheets and valuing their time using the wage records. On this basis, the cost will be shown on the job costing record to be 100 hours @ $8 per hour. However, these employees would have earned these wages and thus EC would have incurred this cost anyway because they were fully employed whether the work for the new customer was undertaken or not. Consequently the relevant cost is the additional cost incurred by EC which is the cost of hiring the sub contract labour at $7 per hour or $700 as shown in the answer to (a) above.

These are only two of the differences that will be apparent from a comparison of the historical and relevant costs of the work. It would not be unusual for the reported job cost to be greater than the selling price for such work especially if the profit mark up is only 10% of the relevant cost. This can make it difficult for the managers to justify their acceptance of the customer order.

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Answer to Question Two Requirement (a) The feasibility study should be undertaken during the early stages of project planning, once the requirements and specifications of the golf-course project have been identified. Fundamentally, the purpose of project feasibility is to establish if the proposed project can achieve its objective in a cost effective manner. It enables the organisation to “filter-out” proposed projects that would either cost too much, cause too much disruption, make excessive demand on resources or have side effects that are undesirable and outweigh the advantages. The attainment of project objectives can often be achieved in a number of alternative ways and feasibility studies can also assist the project sponsor and project manager to decide between alternative strategies.

Project feasibility will involve collecting sufficient information to enable the ATL Group to make an informed judgement on whether or not to proceed with the golf course project. This will help to identify the key technical and performance objectives that the project must achieve and to ensure that the technology exists to achieve the project deliverables within budget and on time.

Feasibility can be considered in a number of areas for the golf course project, for example technical, social, environmental, financial and business feasibility.

Technical feasibility will vary depending of the type of project being undertaken. In the case of the golf course project, technical feasibility would need to be undertaken to assess the nature of the technology required to build and run the new venture. Questions will need to be asked such as: • Do all the necessary technologies exist or is significant innovation needed?

• How specialised is the required technology and is the expertise to make use of it readily available?

The golf course project team would need to assess the technology required to produce the landscape needed for a golf course in the hot desert conditions of S Country. Possible engineering problems associated with the construction of the golf-course will also need to be considered.

Social feasibility is all about ensuring the project fits with the business and its social environment. This is becoming increasingly important and should be considered in terms of the likely effects of undertaking the golf course project. For example, the consequences for the people working for the company and also how people living or working in the surrounding area might be affected in terms of possible disruptions during the construction of the golf course.

Linked to this would be environmental or ecological feasibility which could include complying with health and safety legislation, and also making sure the golf-course project is ecologically sound and not harmful to the surrounding environment. So, questions must be asked about whether the technology needed for the golf course is acceptable in terms of environmental concerns. Issues that might arise could be to do with the amount of raw material inputs such as the water required to grow the grass and the energy required to run the golf course. In addition, the project is likely to entail the building of a structure that could impact on the local environment both in terms of visual appearance and the amount of additional traffic it will attract. As a leisure activity complex providing facilities for the general public, health and safety considerations are important.

Financial feasibility is undertaken to explore whether the project provides benefits to the organisation and is usually assessed through cost benefit analysis. In other words, determining the various costs that will be incurred for the development of the golf course venture and the monetary benefits it will bring to the organisation. The costs for the golf course venture could be divided into: • Capital costs that will be incurred in building the golf course and the equipment needed to maintain the golf course; •

Finance cost on any loans needed to fund the project;

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Examiner's Answers CMGA

•

Revenue costs (i.e. all other costs associated with the project).

Techniques such as net present value, payback period and rate of return may be used to assess the financial feasibility of the golf course project.

Finally, feasibility should be considered in terms of whether the project fits with the business goals of ATL Group. This would seem to be the case for the golf course project since it should have a good fit within the product portfolio of ATL Group in terms of its leisure business.

(Answers could develop using alternative feasibility headings, such as business feasibility and economic feasibility)

Requirement (b) There are a range of skills that should be looked for when recruiting a project manager if he/she is to be effective in terms of leading the project team and creating confidence in the eyes of the project sponsor.

Leadership is a key skill since a project manager will be very much involved in influencing others so as to achieve project objectives. A project manager can make a significant difference to the effectiveness and success of a project through leadership. If a team is well led, then hopefully members of the team will respond by good performance and cooperation. A leader should set examples for others in terms of their own efforts and motivation, and by setting goals will ensure the whole team and each individual understand what they are required to do and what standards of performance they are expected to achieve.

As well as leadership skills a project manager needs to be an effective communicator since they must communicate regularly with the different stakeholders associated with the project.

Communication is essential at all stages of the project. For example, the project sponsor needs to be kept informed of the progress of the project and the achievement of key milestones, the project team need to be kept up-to date with customer requirements and any changes.

Communication can be both formal such as project briefings, and informal. Active listening skills, which means questioning, reflecting back and checking that you understand what is being said is an as important for the project manager as being able to communicate effectively in verbal and written mediums.

Project managers rely on their ability to negotiate since they may not have direct line authority over their resources and often must win commitment and cooperation of other people through negotiation and persuasion. This occurs because different stakeholders in the project will have different interests. Negotiation in the context of project management is about the process of satisfying a project’s needs by reaching agreement with others. This skill is needed, since throughout the project’s life the project manager will be involved in the negotiation process with the different stakeholders. This could include negotiating on issues such as the availability and level of resources, schedules, priorities, costs and people. The aim would be for the project manager to use his/her negotiation skills to be able to manage the outcome so that conflict is avoided.

A project manager will not have all the skills necessary to carry out the different tasks associated with the project so it is essential to be able to delegate to those who do have the skills. Effective delegation should foster team work, collaboration and communication. The project team should be empowered to accomplish the expected tasks in their area of responsibility and feel ownership for their part of the project. Delegation, however, is not abdication but more about empowering and motivating team members, with the project manager retaining ultimate responsibility. A successful project manager would be one who whilst empowering staff, can sense if serious errors are occurring and step in to take control.

The project manager should possess problem-solving skills since they will inevitably be faced with problems through the project’s life. To solve problems the project manager needs to gather information about the problems in order to understand the issues and generate solutions. They should encourage team members to identify and solve their own problems.

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Finally, a project manager should have the skills to manage and control change. Project changes can occur throughout the project lifecycle, for example changes to the customer or user requirements or changes due to loss of key project team members. Ignoring or procrastinating about change will have a detrimental impact on the project. It is, therefore, important that the project manager has the skills to manage change in order that the impact on the accomplishment of the project objectives and project schedule is kept to a minimum. The project manager will need to have the ability to manage resistance to any changes, which could be resistance by the customer or the project team.

In summary to be effective, in addition to the technical skills, a project manager needs to possess a set of skills that will encourage and lead the project team to achieve the project objectives and ensure client satisfaction.

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Examiner's Answers CMGA

Answer to Question Three Requirement (a) Treatment of FG IFRS 3 Business combinations requires goodwill on acquisition to be calculated at the date control is gained. The second acquisition gives CVB a 75% holding and therefore control over FG. The simple investment of 15% will be derecognised and the 75% holding will be fully consolidated as a subsidiary in the group financial statements. The goodwill will be calculated as the cost of the 60% acquired in the year plus the fair value of the previously held interest of 15% compared with the fair value of the net assets at the date of acquisition, 1 April 2010.

Requirement (b) Consolidated statement of financial position for the CVB Group as at 31 September 2010 CVB $000 ASSETS Non-current assets Property, plant and equipment (22,000 + 5,000) Goodwill (Working 1)

27,000 405 27,405

Current assets Inventories (6,200 + 800 - 40 (Working 2) Receivables Cash and cash equivalents (1,200 + 300)

6,960 8,500 1,500 16,960 44,365

Total assets EQUITY AND LIABILITIES Equity Share capital ($1 equity shares) Retained earnings (Working 3) Other reserves (Working 6) Non-controlling interest (Working 4) Total equity

20,000 8,629 28,629 1,604 30,233

Non-current liabilities 5% Bonds 2013 (Working 5) Current liabilities (8,100 + 2,000) Total liabilities Total equity and liabilities

4,032 10,100 14,132 44,365

Working 1 - Goodwill $000 Consideration transferred for the 60% Fair value of 15 % holding at 1 April 2010 Fair value of non-controlling interest Net assets acquired Share capital Retained reserves

1,000 3,500

Impaired by 10% Net value of goodwill

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$000 2,900 800 1,250 4,950

(4,500) 450 (45) 405

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Working 2 - Unrealised profit on inventories $000 400 200 40

Sales from FG to CVB 50% in inventories Profit margin 20% - adjust inventories and adjust earnings of FG Working 3 - Retained reserves CVB $000 7,500

As at 30 September 2010 Pre-acquisition ($5m - ($3m x 6/12)) Less unrealised profit of FG (Working 2) Group share 75% Group share of impairment (75% x $45,000) Additional finance costs on bonds Group profit on derecognition of AFS Investment - gain to date of deemed disposal 1 April 2010 (800 - 600) Consolidated retained reserves

FG $000 5,000 (3,500) (40) 1,460

1,095 (34) (132) 200 8,629

Working 4 - Non-controlling interest $000 1,250 365 (11) 1,604

Fair value at 1 April 2010 Plus 5% adjusted post-acquisition reserves $1,460,000 (Working 3) Plus NCI share of goodwill impairment (25% x $45,000) NCI at 30 September 2010 Working 5 - Bonds - amortised costs Opening value

To 30 September 2010

$000 3,900

Effective rate 8.5% $000 332

Interest paid 5% x $4m $000 (200)

Value at 30 September $000 4,032

The difference of $132,000 must be added to the value of the bond liability and deducted from CVB's retained earnings.

Working 6 - Other reserves and AFS investments Less Cost of 60% investment Less Cost of 15% investment Cost of 75% investment Fair value of 75% investment Gains recognised by CVB in individual accounts

$000 2,900 600 3,500 4,000 500

This gain will be removed from the group accounts as the group gain on derecognition of the original investment is the relevant figure for the consolidated accounts.

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Examiner's Answers CMGA

SECTION B Answer to Question Four 4.1 Variable cost of A1 (£13 x 10,000 units Lost contribution from sales of BZ (£80 - £30 - £13) x 10,000 units Additional inspection costs

£ 130,000 370,000 50,000 550,000

The answer is C 4.2 As the transfer prices and royalty payments are both made by P to the subsidiary, both should be increased. This will add to the subsidiary's revenue in both respects without any change in its costs.

The answer is C 4.3 Cost A may allow more effective budgetary control but this does not make it controllable.

Cost B is an avoidable cost. Cost C is a committed cost.

The answer is D 4.4 As the manager of Transport division does not control the cash function, any controllable net assets figure should exclude the cash i.e. €1,570,000 less €130,000 = €1,440,000.

Therefore:

Controllable profit (before interest and tax) Less cost of capital (15% x €1,440,000) Residual income

€'000s 275 (216) 59

The answer is D 4.5

The answer is C - Task Culture

4.6

The answer is A - Accommodation

4.7

The answer is D - Demand Conditions

4.8

The answer is any three from (i) (ii) (iii) (iv)

Firm Infrastructure Human Resource Management Technology Development Procurement

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4.9

EPS = Profit available to shareholders Weighted average ord shares =

4,000,000 (10,000,000 x 7/12) + (12,000,000 x 5/12)

= 36.9 cents per share The answer is B 4.10 The answer is C - Reverse acquisition 4.11 PV of plan obligations FV of plan assets Pensin liability Unrecognised actuarial gains Net pension liability

$m 567 558 9 3 12

The answer is D - A net pension liability of $12 million 4.12 AFS investment - initially recognised (FV + transaction costs) 31 December 2010 - FV Uplift in value

$123,000 $150,000 $ 27,000

The answer is D - Debit investment $27,000 and credit reserves $27,000

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Examiner's Answers CMGA