The Examiners’ Answers CIMA Masters Gateway Assessment SECTION A Answer to Question One Requirement (a) The average time per unit for 200 units is: Y = ax
b
Y = 20 x 200
-0.4150
Y = 2.219 hours Total time for 200 units = 200 x 2.219 hours = 443.8 hours The average time per unit for 199 units is: Y = ax
b
Y = 20 x 199
-0.4150
Y = 2.223 hours Total time for 199 units = 199 x 2.223 hours = 442.4 hours th
Time for 200 unit = 1.4 hours Total time for 500 units = (300 x 1.4 hours) + 443.8 hours = 863.8 hours
Requirement (b) $ Sales revenue (500 x $85) Direct materials (500 x $34) Variable overhead (500 x $18) Direct labour (863.8 hours x $12)
17,000 9,000 10,366
CONTRIBUTION November 2011
$ 42,500
36,366 6,134
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Examiner's Answers CMGA
Requirement (c) Target costing is used where a company is forced to accept the market price for its products. The company then deducts from the market price its target return and seeks to produce the item for the difference, i. e. the target cost. If the company cannot produce the item for its target cost over the lifetime of the product, the company should not produce the item. In the scenario, SDF is forced to accept the market price of $85 for its proposed new product. SDF has set a target return of a 15% unit contribution; therefore its target cost is $70 per unit ($85 - $15). The direct material cost and variable overhead cost per unit are expected to be $52 per unit; therefore in order to meet the target the direct labour cost per unit cannot exceed $18 per unit. Initially the direct labour cost per unit is expected to be $240, but this will reduce due to the existence of a learning curve until it stabilises at $16.80 per unit once 200 units have been produced. It can thus be seen that once the steady state has been achieved SDF will meet its target unit cost. However, as the above calculations show, the lifetime target is not achieved within the expected life cycle of 500 units and therefore SDF should not proceed with the product.
Requirement (d) If SDF is to proceed with the product it needs to reduce its costs so that it meets the target contribution of $7,500. Currently its expected contribution is $1,366 below this target. However, this difference represents less than 5% of its expected costs. (i) Value Analysis is a systematic interdisciplinary examination of the factors which affect the cost of a product or service in order to determine the means of achieving the specified purpose in the most economical manner while meeting the required level of quality and reliability. Value Analysis may therefore be viewed as a cost reduction and problem solving technique that analyses an existing product or service in order to identify and reduce, or eliminate, any costs which do not contribute to value or performance. SDF may be able to use Value Analysis to identify cost savings that do not affect the customer, for example, changing to a batch system of production, changing the purchasing pattern of materials to reduce inventory holding costs or ordering costs, particularly since only a small cost saving is required to achieve the target return. (ii) Functional Cost Analysis is a method that can be applied to examine the component costs of a product or service in relation to the value as perceived by the customer. Functional Cost Analysis can be applied to new products and breaks the product or service down into its component parts. The outcome of the analysis is to improve the value of the product whilst maintaining costs and or reduce the costs of the product or service without reducing value. Functional Cost Analysis focuses on the value to the customer of each function of the product or service and consequently allocates resources to those functions from which the customer gains the most value. Since SDF is competing in a market with common products, it is less likely to be able to use Functional Cost Analysis because SDF’s product needs to have the same functions as those of its competitors. (iii) Kaizen Costing is a system of cost reduction based upon the concept of continuous review of systems and procedures to identify and implement small incremental cost savings. It is used in the production phase of a product and employees are both encouraged and empowered to recommend changes that they believe will reduce costs without affecting the quality of our products or otherwise adversely affecting the customer’s perception of our products. SDF may be able to use Kaizen Costing to make small improvements gradually throughout the life cycle of the product. As stated above an overall cost reduction of 4% would mean that SDF would achieve its target return.
Examiner's Answers CMGA
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November 2011
Answer to Question Two Requirement (a) Project management software can be used by the Finance Director to assist him at various stages of the project lifecycle with features such as planning and work scheduling, project progress, monitoring and control. The software can help in the production of detailed project planning documentation, to update project plans and produce reports assisting the project manager to review the relationship between tasks. This will be of particular value to the Finance Director and his team in managing the student village project, given its complexity. It will probably involve a number of sub-projects and dealing with large amounts of data which frequently changes. Some of the "off-the-shelf" packages include Microsoft Project, Micro Planner C-Pert. These provide the following features that could help the Finance Director: Budget and control features of project software will assist at the various stages of the student village project lifecycle, so that actual costs can be compared with budget costs, at both the level of individual activity and for the project as a whole. It will help the Finance Director in reporting back to the Project Board on the financial performance of the project. Project management software will also make project planning easier, in that it will allow the project manager to define the different activities that need to be performed. Once the relevant data is entered, it will provide the Finance Director with task lists and create critical paths. This will allow him to plan for the enormous number of activities involved in the development of the student village. It will also help in the allocation of resources, setting start and completion dates and calculating the expected time to complete the various aspects of the sub-projects. Project management software is particularly helpful in handling multiple projects and complexity often associated with large projects, particularly if there are many variables. The student village project will be complex and it will be crucial to keep track of the interrelationships between the different sub projects. The software can help with the scheduling of activities, building Gantt charts and network diagrams, using the graphics package. These will be invaluable to the Finance Director in reporting back to the project team and Project Board on progress. The software will be a critical support to the Finance Director in undertaking contingency planning and “what if” analysis, allowing him to see the effects of different scenarios. Any changes to task lists will automatically create new schedules for the project. It will also be possible for the Finance Director to schedule recurring tasks, to set priorities for tasks and to specify ‘must end by’ and ‘no later than’ dates for activities. The calendar facility within project management software will be helpful to the Finance Director and the project team both for reporting purposes and also to define work periods. The software facilitates resource planning which should enable the most effective use of the various resources, ensuring the project has the correct staff levels, equipment and material at the right time. Again, this will be important for the student village project where different types of labour and skills will be needed at different stages of the project, for example, design, construction, refurbishment, relocation etc… Again, the graphics package will provide visual displays of the usage and availability of resources. This will assist the Finance Director in seeing where there are surplus resources or too few resources. Project management software is capable of producing standardised and customised reports. The quality of the documentation will be high, and reports can be extracted and shared with the project team, and other interested stakeholders such as the project sponsor. This will be of great help to the Finance Director in reporting on progress to the different project stakeholders and will encourage and facilitate constant progress checking. Whilst there are many benefits in using project management software, the Finance Director should remember that the software is only one tool and cannot account for human factors, such as levels of motivation, commitment and staff turnover that can affect the performance of the project. Human variations can make rescheduling very difficult and the logic of the programme, for example, work breakdown structure, might not be able to reflect the flexible ways that people work. November 2011
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Examiner's Answers CMGA
Requirement (b) Project stakeholders are those individuals who are involved in, or may be affected by, the project activities; in this case the construction of a student village. Stakeholder groups will differ in their interest and attitudes towards the project. Stakeholder mapping could be undertaken, for example using Mendelow’s matrix, to help the Finance Director understand the power and interest of different groups and their likely reactions to the development of the student village. For instance, how the different groups of stakeholders can be influenced to support the project, for example: • • •
What will the project deliver to meet stakeholder concerns How could different stakeholder groups demonstrate lack of support and what is the recourse if there is a lack of support What kind of support is needed
This will assist the Finance Director in working out how he needs to manage the relationships with different stakeholders and influence their expectations. Some examples of stakeholder interest in the student village project, that the Finance Director must take into account at various stages of project planning and implementation, will include: The project sponsor/s who are accountable for the resources invested in the project and responsible for the achievement of the project business objectives. This will include both the College and business partners who will have a financial interest in the outcomes of the project. Given the scale of the student village project it is probable that a Project Board will be established. This is the body to which the Finance Director as project manager will be accountable for achieving the project objectives. The Board will be interested in making sure that the project is on target in terms of the milestones set. Users are those individual or groups who will use the student village. The two main groups under this heading are students who will live in and use the student village and the staff who will be based there. At the time of the project planning, it is unlikely that current students will have a great deal of interest, since the project is a long term investment that will probably not be finished until after they have completed their studies. However, they could be a useful group to inform the project team of how they envisage a student village in terms of their requirements. Staff are a key group since they have already voiced a negative reaction and whilst they probably have limited power they will have high interest and the Finance Director needs to determine how to get them to buy into the student village concept. The Finance Director will need to build a good relationship with the regional authority since it is a key stakeholder. Not only is it selling the land but it will also have the power to agree or veto the student village plans. Local residents will be interested in the specifics of the plan in terms of how it might impact on the local neighbourhood. They have the power to lobby against the plans, and as a coalition group of individuals, this will strengthen their power in making representations to the regional authority about the sale of the land and later down the line on planning consent issues. The Finance Director should meet with representatives of the local resident groups to listen to their concerns. Note: There are other stakeholder groups that could be mentioned, such as the project team, local businesses, suppliers and sub-contractors.
Examiner's Answers CMGA
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November 2011
Answer to Question Three Requirement (a) Fair value adjustments Impact on calculation of goodwill at acquisition In this case the calculation of goodwill on the acquisition of XYZ should be based on the fair value of the consideration paid plus the fair value of the NCI less the fair value of the net assets acquired. The fair value of the net assets acquired should include any fair value adjustments required to take the book values of individual assets and liabilities up to (or down to) their fair value. The increase in the values of property, plant and equipment and inventories will increase the value of net assets at acquisition, which in turn will reduce goodwill. The intangible asset will be recognised as an asset at acquisition because it meets the definition of an intangible asset in IAS 38. It will increase the net assets at acquisition and hence reduce goodwill. The contingent liability is also specifically allowed to be included within the fair value of the net assets at acquisition. However, as a liability this will reduce the fair value of net assets and hence increase goodwill. Impact on consolidated financial statements for year ending 31 December 2010: Property, plant and equipment: In the consolidated statement of financial position as at 31 December 2010 the value of PPE will be increased by $1,600,000 and reduced by the additional depreciation arising for the period. The additional depreciation is calculated as the FV adjustment divided by the estimated remaining life of the assets from the date of acquisition. This additional depreciation will be charged to the consolidated income statement each year. Inventories: As the inventories have been sold by 31 December 2010, no adjustment will be required to the inventories balance in the statement of financial position. However, in the consolidated income statement an additional charge should be made within cost of sales. This will obviously also impact retained earnings for the group. Intangible asset: The intangible asset will be recorded in the consolidated statement of financial position and amortised over its life (which in this case is 20 months). The amortisation charge will go through the consolidated income statement and impact group retained earnings. Contingent liability: The contingent liability will be recorded as a current liability in the consolidated statement of financial position. In the consolidated income statements the reduction in the liability will in effect increase profits.
November 2011
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Examiner's Answers CMGA
Requirement (b) Consolidated statement of financial position as at 31 December 2010 for the ABC Group $000 ASSETS Non-current assets Property, plant and equipment (24,000 + 8,000 + 1,500 (Working 1)) Goodwill (Working 2) Intangible asset (Working 1)
33,500 416 180 34,096
Current assets Inventories (4,400 + 1,600 - 60 (Working 3) Receivables (6,800 + 1,800) Cash and cash equivalents (1,600 + 600) Total assets
5,940 8,600 2,200 16,740 50,836
EQUITY AND LIABILITIES Equity Share capital ($1 equity shares) Retained earnings (Working 4) Total equity attributable to parent Non-controlling interest (Working 5) Total equity
20,000 15,786 35,786 3,482 39,268
Non-current liabilities Long term borrowings Current liabilities (4,000 + 2,000 + 168)) Total liabilities Total equity and liabilities
5,400 6,168 11,568 50,836
Working 1 - Fair value adjustments
Property, plant and equipment Inventories Intangible assets Liabilities
At acquisition date $000 1,600 400 300 (420) 1,880
Movement
$000
$000 7,600 3,200 10,800
$000 (100) (400) (120) 252 (368)
31 December 2010 $000 1,500 180 (168) 1,512
Working 2 - Goodwill Consideration transferred NCI at fair value Net assets at fair value Share capital Retained earnings Fair value adjustments
2,000 6,400 1,880 (10,280) 520 (104) 416
Goodwill on acquisition 20% impairment Goodwill at 31 December 2010
Examiner's Answers CMGA
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November 2011
Working 3 - Unrealised profit on inventories Sales of $600k x 20% x 50% left in inventories at y/e = $60k Working 4 - Retained earnings $000 15,000
As per SOFP Pre-acquisition reserves Adjustments arising from movement in FV adjustments Group share 75% Unrealised profit on inventory transfer Goodwill impairment (75% x 104) (W2) Consolidated reserves
$000 8,000 (6,400) (368) 1,232
924 (60) (78) 15, 786
Working 5 - Non-controlling interests NCI at acquisition (at fair value) 25% x post acquisition retained earnings $1,232,000 (W4) Goodwill impairment (25% x 104) (W2)
November 2011
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$000 3,200 308 (26) 3,482
Examiner's Answers CMGA
SECTION B Answer to Question Four 4.1 Models (i) and (ii) are feedforward models as they involve the forecasting of future outcomes and comparisons with desired outcomes, allowing control action to be taken by the division where necessary. Model (iii) is a feedback control model as it provides information on what has already happened. The answer is A 4.2 The sales budget and the stock budget are necessary before the preparation of the production budget. After the production budget has been established, the purchases budget can be prepared. When the other budgets are in place the information is available to prepare the cash budget. . The answer is B 4.3 Component
X
Y
Supplier price Variable cost to make Cost of buying in Machine hours saved by buying in Extra cost of buying/machine hour saved
47 40 7 1 7
48 30 18 3 6
Therefore, make X first as this will minimalise the extra cost of buying/machine hour saved. The answer is B 4.4 Return on Investment
Residual income
Current Position
€3.9m = 22.94% €17m
€3.9 - (€17 x 12%) = €1.86m
New Position
€3.9m + €0.250m = 22.43% €17m + €1.5m
€4.15m - (€18.5m x 12%) = €1.93m
lower
higher
The answer is D 4.5
The answer is C - Coordinating
4.6
The answer is B - Approach to marketing a product
4.7
The answer is D - Team members do not want to disturb group consensus
Examiner's Answers CMGA
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November 2011
4.8
The answer is any three from (i) (ii) (iii) (iv) (v) (vi) (vii)
Economies of scale Capital requirement Cost advantage independent of scale Government policy Product differentiation Access to distribution channels Switching costs
4.9 2009 (300-25-40) x 1,000 x $1.22 = $286,700 over 3 years = $95,567 charge for 2009 2010 (300-25-15-20) x 1,000 x $1.22 = $292,800 x 2/3 years = $195,200 recognisable to date Less amount recognised in 2009 $(195,200-95,567) = $99,633 charge for 2010 The answer is B 4.10 $m 13.9 (13.1) 0.8 (0.5) 0.3
Statement of financial position PV plan liability FV of plan assets Unrecognised actuarial losses Net pension liability The answer is B 4.11 Subsequent measurement Dr Investment Cr Profit or Loss (Income statement) - gain
$40,000 $40,000
Being the uplift in value and the recording of the gain in the income statement The answer is D 4.12 Operating profit/revenue = $(49-18-16)m/$252m x 100 = 5.95% The answer is B
November 2011
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Examiner's Answers CMGA