G1 - CIMA professional gateway assessment (CPGA) - the examiners answers - May 2010

The Examiners’ Answers for CIMA Professional Gateway Assessment SECTION A Answer to Question One Requirement (a) Customer value statement report Item Sales (units) Sales ($) Standard variable production costs Contribution Delivery costs ($5 per Km) Emergency deliveries ($600 each) Order costs ($100 per order) Discounts (% of sales) Sales commissions (% of sales) Publicity costs (given in $) Total other overheads Profit per customer* Profit per customer margin* (* pre fixed production overhead)

DIY - A

DIY - B

1000 $ 200,000 60,000 140,000 5,000 1,200 500 40,000 20,000 25,000 91,700 48,300 24%

500 $ 100,000 30,000 70,000 2,500 0 400 15,000 10,000 20,000 47,900 22,100 22%

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Order

Small garden centre shops 400 $ 80,000 24,000 56,000 4,250 0 1,000 8,000 4,000 15.000 32,250 23,750 30%

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The traditional contribution margin is 70%; when the other overhead costs per customer are included in the analysis then the order is as above, and the small garden centre shops are the most profitable customers.

Requirement (b) When considering the individual profitability of customers and whether to stop trading with one, then the following issues are important: The analysis of customer profitability you are using must incorporate productivity improvements.

The decision must be informed by a production and costing system that is as accurate as possible. A system providing accurate customer profitability is essential.

May 2010

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Examiner's Answers CPGA

Account engineering should be used to look at critical issues around how the account is managed and how aware the customers are of the cost of particular behaviours and activities e.g. stock outs and emergency delivery, to allow them the option to alter their behaviour and become more profitable.

There should also be an appreciation of the customer’s commercial strategy and dialogue as to how it affects the cost and service relationship e.g. marketing and sales arrangements.

There may also be a good reason to retain a less profitable order because of a lack of other opportunities or that it satisfies another strategic objective e.g. lower prices to support poorer parts of the world in the pharmaceutical industry.

The lifecycle of the customer relationship must also be carefully considered.

Requirement (c) A Just-in-Time system aims to produce or procure components and /or products as required by the customer or for use rather than placed in stock. It is a ‘pull’ system and responds to demand and has a product line emphasis. It requires a flexible labour force and excellent information / communication lines.

Just-in-Time systems should result in a move towards the following ‘ideal’ situation: •

Elimination of non-added value activity whereby both value-adding and non-value added activities must be investigated and managed accordingly.

•

Zero inventory levels, or as near as, is the target to minimise the costs of stock holding and release cash tied up in stock.

•

Zero defects resulting from the efficiency and refinement of the processes.

•

Achieve optimal batch sizes of one with minimum set-up activity and costs.

•

Zero breakdowns in the process to optimise productivity levels

•

A 100% on-time delivery service to ensure the satisfaction of customers.

The disadvantages are: •

It requires a reorganisation and orientation of the system and structure plus training which is costly in terms of time and money.

•

It may require the retraining of staff and involve a learning curve period and reduced productivity in the short term e.g. store keeping staff relocated and trained elsewhere.

•

Redundancies may be an unfortunate outcome.

Requirement (d) Target costing looks to the market for direction in terms of the selling price for products.

A predetermined selling price is obtained from market analysis and from this is deducted a target profit, to determine target cost.

Target costing is an activity aimed at reducing the life cycle costs of new products, whilst upholding quality, reliability, and other consumer requirements.

It looks for all possible ways to reduce costs at the product planning, research and development and prototyping phases of production. It does not just aim to minimise cost but is part of a strategic system to manage profits.

Techniques like value engineering, and value analysis are used to align the expected costs with the target cost.

Life cycle costing views products, services and customers over their total life span rather than assessing them for a single period (generally the accounting year).

Examiner's Answers CPGA

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May 2010

The idea is that the lifecycle can be managed to maximise product and that all costs are incorporated into the product e.g. especially important when R & D and exit costs are complex and relatively high.

Designing cost out of the product and maximising time to market are key factors in profit maximisation. A return map (lifecycle map) can be used to illustrate for a product – time to market, breakeven time, breakeven post release and return factor.

Answer to Question Two Requirement (a) Projects are generally defined as having a number of characteristics or attributes that differentiate them from ‘business as usual’ work. They can be characterised as having a lifecycle, since projects tend to pass through a number of phases, starting with the identification of need, followed by the development of a solution, implementation and completion.

A project is usually undertaken for a specific purpose to accomplish an objective or goal through a set of interrelated tasks and, as such, is a temporary process. It will have a clearly defined start and end time and will usually be determined in terms of the scope, schedule and cost.

The objective of the project for PT Hospital will be the design and implementation of the pay and reward system that achieves the desired outcomes of greater flexibility, aids recruitment and retention, and rewards staff for their contribution in achieving hospital targets. The project will be focussed on the tasks needed to design and implement the new pay and reward system by May 2010. All tasks must be scheduled to meet this pre-determined end date imposed by the government.

The project will have a budget allocated to deliver its objectives and must plan within this budget for costs and resources needed. It will have a project sponsor that is the individual or group who will provide the funds for the project. In the case of the pay and reward project, this will be the Hospital Board.

A key feature of a project is that it is unique, in other words it is a non-repetitive activity and does not normally involve routine work. Whilst the hospital HR team are responsible for administering the current pay system, this is an ongoing activity with recurring tasks, but the design of the new system will be a one off activity.

A project will often cut across organisational and functional lines. In this case it will probably include members of the HR team, but also representatives from other staff groups such as nurses, physiotherapists, radiographers, technicians and ancillary staff.

Requirement (b) The project management process for the design and implementation of a new pay and reward system will involve the following stages: Initiation and identification of need The initial phase of the project is the identification of a need or problem that must be resolved. In the case of PT Hospital, the need is driven by the requirement to respond to government demands to modernise the pay and reward system.

At this first stage the development of the primary purpose of the project and the establishment of its goals and objectives must be determined. It is at this stage that the key individuals who will form the project team will be brought together. For the PT Hospital’s pay and reward project, this may include members of the HR team, IT team and Finance team, along with representatives of the different employee groups and union/staff association representatives.

The scope of the project will need to be determined, along with the objectives and expectations and project deliverables.

There will be some parameters and constraints that the project will have to work within, for example resource availability, budget, and time-frame, in PT Hospital’s case this will be May 2010. It is at this stage that feasibility analysis should be undertaken to consider the potential benefits and costs of proceeding with the project. However, in this particular case, the May 2010

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Examiner's Answers CPGA

government’s requirement to reform pay and rewards means that the hospital management have no choice but to go ahead with the project.

Planning Planning involves defining the resources required to undertake and complete the project. It is about determining how the project team will achieve its objectives within the constraints of time, budget and resources. At this stage a schedule of the different activities that will need to be undertaken to design and implement the new pay and reward system will be devised and a budget developed.

During the planning phase the team may use techniques such as work breakdown structure, Gantt charts and networks analysis techniques to help in the scheduling of the different activities that will need to be undertaken and milestones identified.

Executing/Implementation This stage involves the actual performance of the project, resulting in the accomplishment of project objectives. It requires the skill of the project manager to keep team members focused on the project tasks, coordinating project team members that will result in achieving project deliverables. As work is carried out progress meetings will be held. It will be important during this phase to involve the various stakeholders so that any objections can be taken on board and considered as the development of the new scheme emerges.

Controlling Controls should be put in place in order to measure the projects progress and assess if milestones are being achieved. It there are deviations from the plans it will be necessary to determine whether corrective action is needed. This could lead to re-planning, which may in turn lead to goal definition change. For PT Hospital the deliverable is clear and non negotiable since it is being imposed by government, however, there may be some flexibility in how the outcomes are achieved.

Completing and Closure This is the final stage, and involves ensuring that the project is completed and conforms to the latest definitions of what needs to be achieved and meets the customer specification.

In this last stage of the project there are various activities that should be carried out in addition to confirmation that the project deliverables have been met. For PT Hospital the key deliverable is that all staff are on the new pay system by May 2010.

The closure phase will involve the handover of the project to the hospital’s management and more specifically to the HR department for its administration. It also will involve the disbanding of the project team, including an audit of the learning from the project that could assist in the management of future projects.

Examiner's Answers CPGA

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May 2010

Answer to Question Three $000 Cash flows from operating activities Profit before taxation Adjustments for: Profit on disposal of property Depreciation Finance cost

$000

Ref. to working

19,450 (1,250) 7,950 1,400 27,550 470 (3,100) (1,420) 23,500

Decrease in receivables (Increase) in inventories (Decrease in trade payables Cash generated from operations Interest paid Income taxes paid Net cash from operating activities

1 1 1

(1,480) (5,850)

2 2 16,170

Cash flows from investing activities Acquisition of subsidiary (net of cash) Purchase of property, plant and equipment Proceeds from sale of property Net cash used in investing activities

(1,950) (11,300) 2,250

Cash flows from financing activities Repayment of interest-bearing borrowings Dividends paid by BX Dividends paid to non-controlling interest Net cash used in financing activities

(1,000) (6,000) (200)

3 4 (11,000)

5 (7,200)

Net decrease in cash Cash at beginning of period Cash at end of period

(2,030) 3,900 1,870

Working 1 – Working capital changes

Closing balance Less: Acquired with CM Opening balance Decrease/increase/decrease

Receivables $000 (27,100) 1,300 (25,830) 26,300 470

Inventories $000 (33,500) 1,650 (31,850) 28,750 (3,100)

Trade payables $000 (33,500) 1,950 (31,390) 32,810 1,420

Working 2 – Interest and income taxes

Liability brought forward Liability acquired with CM Charge to income statement Liability carried forward Balance: Amount paid

Interest $000 1,440 1,400 (1,360) 1,480

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Income taxes $000 5,450 250 6,250 (6,100) 5,850

Examiner's Answers CPGA

Working 3 – Acquisition of subsidiary $000 2,000 (50) 1,950

Cash element of consideration Less: Cash acquired with CM

Working 4 – Purchase of property, plant and equipment Balance brought forward Acquired with CM Disposal at net book value Depreciation for year Less: Balance carried forward Balance: Purchased

$000 44,050 4,200 (1,000) (7,950) (50,600) (11,300)

Working 5 – Dividend paid to non-controlling interest $000 1,920 655 1,250 (3,625) 200

Balance brought forward Profit attributable to non-controlling interest Acquired with CM ($5,000 x 25%) Less: Balance carried forward Balance: Dividends paid

Examiner's Answers CPGA

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May 2010

SECTION B Answer to Question Four 4.1

The answer is D

4.2

(90,000 - 85,000) x standard profit per unit = 5,000 x $2 The answer is B

4.3

Marginal cost values the inventory at the variable production cost of £54,000.

1/8 of production cost was in inventory 1/8 of £54,000 = £6,750 The answer is A

4.4

800kg x resale price of $3.50 = $2,800 200kg x purchase price of $4.50 = $900 Total = $3,700 The answer is A

4.5

The answer is D

4.6

The answer is C

4.7

The answer is Vertical conflict

4.8

The answer is: (i) (ii) (iii)

May 2010

Completer/Finisher Team worker Plant

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Examiner's Answers CPGA

4.9 Pension plan assets FV of plan assets at 1 June 2008 Contributions made Expected return on assets Benefits paid Actuarial loss (balancing figure) FV of plan assets at 31 May 2009

$000 3,100 300 190 (225) (25) 3,340

The answer is B 4.10 Post tax earnings Weighted average number of shares in issue: 1 may – 30 September 5 million shares x 5/12 months 1 October – 30 April 7 million shares x 7/12 months Earnings per share $440,000/6,166,000

$440,000 2,083 4,083 6,166 7.1 cents per share

The answer is B 4.11 The answer is D 4.12 The answer is C

Examiner's Answers CPGA

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May 2010