Paper P2 – Management Accounting – Decision Management

Post Exam Guide

November 2009 Exam

General Comments

The overall performance was similar to that seen during the last few years. Unfortunately the
improvement witnessed in the May 2009 sitting has not been maintained. The paper
examined key syllabus topics including Activity Based Costing, linear programming and
investment appraisal. The inclusion of these topics, which have been examined several times
during the last few years, would greatly advantage those candidates who took the advice
given in previous Post Exam Guides (PEGs) and practised answering past questions. A
careful read through previous PEGs would also allow candidates to identify the common
types of error that are made by candidates when these topics are examined.

It is sad to report that a significant proportion of scripts displayed a lack of understanding of

fundamental aspects of management accounting. It was also apparent from the quality of
answers to several questions that many candidates adopted a ‘cherry picking’ approach to
their studies and their revision, in that they did not cover the whole syllabus. This is a risky
approach, especially when the majority of syllabus topics are covered in every paper.

Answers to numerical questions were generally good but the standard of many candidates’
presentation was poor. Many marks were forgone due to lack of clarity, poor layout and
workings that were not referenced, or were completely illegible. This point has been raised in
many previous PEGs.

Answers to discursive questions were generally poor, mainly due to candidates simply not
addressing the question asked. (See question 4).

The quality of handwriting of many candidates was poor. With some scripts marks could not
be awarded because the markers could not read the answers. Very few answers showed
evidence of an answer plan, another point that has been made in several previous PEGs.

The following advice should be noted by candidates when reflecting on the paper just taken,
and especially when preparing for future examinations:

1. Candidates sitting the P2 examination are advised to examine the syllabus of the
Fundamentals of Management Accounting paper to ensure they have a sound
understanding of basic aspects of management accounting that will be tested in the P2
paper.
2. Present answers in a clear and logical fashion . For example use clear and legible
handwriting and refer clearly to the workings.
3. Relate discursive answers to the question scenario. On many occasions general
answers are submitted that attract few marks.
4. Make full use of the 20 minutes allowed for planning.
5. Read the rubric of the paper carefully and plan the examination time accordingly. In
particular relate the time allotted to each question to the marks available for that
particular question.
6. In preparing for the exam, practise regularly using past CIMA questions and compare
the answers to the examiner’s suggested answers. This will allow candidates to
measure their own progress. They will also gain an understanding of the correct layout
for quantitative questions and of the depth of answers required for discursive questions.
7. Study and revise the entire syllabus and ignore suggestions put forward in accounting
journals which indicate the topics ‘likely’ to be examined.

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Section A – 20 marks

Question 1.1
In the context of quality costs, the cost of removing damaged goods from a customer’s premises is an
example of:

A Prevention Cost
B Appraisal Cost
C Internal Failure Cost
D External Failure Cost
(2 marks)

The answer is D

Question 1.2
When making a decision between manufacturing a component or outsourcing its production, the
information required is:

(i) the internal variable manufacturing cost per component

(ii) the monthly volume of components required
(iii) the internal fixed overhead absorption rate per component
(iv) the monthly specific fixed cost total for the component
(v) the purchase price of the component from the external supplier

A (i) and (v) only

B (i), (iii), and (v) only
C (i), (ii), (iv), and (v) only
D (i), (ii), (iii), and (v) only
(2 marks)

The answer is C

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Question 1.3
A company has predicted that its fixed and variable costs for the forthcoming period, and their associated
probabilities, could be as follows:

Variable production costs

$4 per unit 35%
$5 per unit 40%
$6 per unit 25%

Fixed production costs per month

$100,000 20%
$120,000 50%
$150,000 30%

Calculate the expected total monthly cost of producing 10,000 units.

(2 marks)

Workings

($4 x 0·35) + ($5 x 0·40) + ($6 x 0·25) = $4·90

10,000 units x $4·90 $49,000

($100,000 x 0·2) + ($120,000 x 0·5) + ($150,000 x 0·3) = $125,000

Total $174,000

Question 1.4

A project requires an initial investment of $450,000 and has a post tax net present value (NPV) of
$80,000. The post tax present value of sales revenues is $630,000.

Calculate the sensitivity of the investment decision to changes in the value of sales revenues.

(2 marks)

Workings

$80,000 / $630,000 = 12·7%

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

The following data is to be used to answer questions 1.5 to 1.7

The following details relate to an investment project which involves purchasing a machine for
$260,000 in year 0 and selling it for $20,000 in year 4.

Year Post Tax Cash flow

$
0 (260,000)
1 120,000
2 150,000
3 80,000
4 60,000

Question 1.5

Calculate the discounted payback period of the investment to the nearest 0·01 years, assuming the post
tax cost of capital is 12%.

(2 marks)

Workings

Year Present value Cumulative

($) present value ($)
1 120,000 x 0·893 = 107,160
2 150,000 x 0·797 = 119,550 226,710
3 80,000 x 0·712 = 56,960 283,670
4 60,000 x 0·636 = 38,160 321,830

Discounted payback occurs in year 3 after 2 plus (260,000 – 226,710) / 56,960 years = 2·58 years

Question 1.6

Calculate the Accounting Rate of Return (ARR) of the investment.

(3 marks)

Workings

$
Total cash flow 150,000
Add back net capital cash outflows 240,000
390,000
Lifetime Depreciation 240,000
Lifetime Profit 150,000

Average annual profit 37,500

ARR = $37,500 / $140,000 = 26·8%

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Question 1.7

Calculate the Internal Rate of Return (IRR) of the investment.

(3 marks)

Workings

NPV at 12% = 321,830 – 260,000 = $61,830

Using 18%:

Year $ $
1 120,000 x 0·847 = 101,640
2 150,000 x 0·718 = 107,700 209,340
3 80,000 x 0·609 = 48,720 258,060
4 60,000 x 0·516 = 30,960 289,020

NPV at 18% = 289,020 – 260,000 = $29,020

IRR = 18% + ((29,020 / (61,830 - 29,020)) x 6%) = 23%

Question 1.8

A bakery company is considering how often it should replace its ovens. The company’s post tax cost of
capital is 7% per annum and it has already determined the present value of the relevant cash
outflows for the three possible replacement cycles as follows:

2 year replacement cycle $178,000

3 year replacement cycle $245,000
4 year replacement cycle $310,000

Prepare calculations to show the optimum replacement cycle and recommend which replacement
cycle the bakery should adopt and why.

(4 marks)

Workings

1.8 2 years = 178,000 / 1·808 = 98,451

3 years = 245,000 / 2·624 = 93,369
4 years = 310,000 / 3·387 = 91,526

Answer = 4 year cycle because it has the lowest annual equivalent cost.

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Examiner’s comments
The overall average mark for Section A was slightly lower than in previous diets. The presentation of
answers was generally good with no particular question being omitted.

Question 1.5 specifically asked for the discounted payback period to be shown to the nearest 0.01 years.
Many candidates ignored this instruction and gave answers such as 2.6 years and 2 years 6 months.
Candidates submitting such answers deprived themselves of two marks.

Question 1.6 a large percentage of candidates did not know either of the two acceptable approaches that
would have earned marks. Several incorrect, alternative approaches were submitted.

Question 1.8 many candidates were awarded two marks for correct calculations of annual equivalent
costs. Unfortunately, many answers then suggested that the two year cycle was the best option rather
than the four year cycle. The expected values related to costs therefore the lowest figure should have
been selected. Other candidates selected the correct option but failed to explain why.

Common Errors

1. Failure to present the answer as requested (question1.5)

2. Failure to answer the question fully (question 1.8)
3. Poor layout of answers (question 1.7)

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Section B – 30 marks
ANSWER ALL THREE QUESTIONS

Question 2

(a) Calculate the values to be inserted in the table at the points marked a, b, and c.

(3 marks)

(b) Explain how the values in the data table can be used by the management of the cinema and
recommend whether or not the movie should be hired.

(7 marks)

(Total for Question Two = 10 marks)

Rationale
This question tests candidates’ ability to analyse risk and uncertainty. It addresses learning outcome C(iii):
analyse risk and uncertainty by calculating expected values and standard deviations together with
probability tables and histograms.

Suggested Approach
 Carefully read the scenario provided and identify the combinations of Customers & Customer
contributions represented by the letters a, b, and c.
 Calculate the values to be inserted in the table.
 Explain the values in the table.
 Recommend whether or not the movie should be hired.

Marking Guide Marks

(a)
One mark for each value 3 marks

(b)
Range of outcome values 1 mark
Distribution of positive / negative results 2 marks
Application of probabilities 1 mark
Skew of distribution 1 mark
Risk of negative result 1 mark
Repetition of outcomes 1 mark
Recommendation 1 mark
Max 7

Examiner’s Comments
The attempts at this question were generally below the expected standard. Part (a) required three quick
calculations which would have gained three marks. A large proportion of candidates earned only one
mark.

Part (b) required an explanation of how the values could be used by the management of the cinema, but
most answers were general in nature and were not supported by calculations, for example of the number
of positive/negative results.

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Common Errors
1. Inability to make three quick calculations (part a)
2. Providing only general answers (part b)
3. Presenting only one or two sentences as a complete answer for seven available marks
4. Failing to make a recommendation (part b)

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Question 3

(a) Calculate the total time required for the first 40 batches of production.

(2 marks)

(b) Calculate the total time required for the first 60 batches of production.

(4 marks)

(c) Explain the likely effect of recruiting new employees on the time required for batches
numbered 61 to 90.
(4 marks)

Note: The 80% learning index = -0·3219

(Total for Question Three = 10 marks)

Rationale
This question tests candidates’ ability to calculate the effects of the learning curve. It addresses learning
outcome D(iv): explain and apply learning and experience curves to estimate time and cost for new
products and services.

Suggested Approach
 Carefully read the scenario to identify the key factors associated with the rate of learning and the
length of the learning period.
 Calculate the total time for the first 40 batches of production
 Calculate the total time for the first 39 batches of production
 Calculate the time for the 40th batch
 Calculate the time for the first 60 batches
 Explain the likely effect on the time required of recruiting new employees.

Marking Guide Marks

(a)
Correct answer 2 marks

(b)
Total time for 39 batches 1 mark
Time for 40th batch 1 mark
Total time for batches 41-60 1 mark
Total time for 60 batches 1 mark

c)
New employees need to learn 1 mark
Existing employees may slow down to train 1 mark
Time per batch will increase 1 mark
Rate of learning may be faster than 80% due to skill transfer 1 mark

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Examiner’s Comments
Parts (a) and (b) simply required candidates to use the learning curve formula to generate the answers.
The major problem that cost candidates between one and three marks was incorrect rounding. For
examples marks were not awarded to candidates who rounded 179.868 to 180, or who rounded 3.132 to
3.

Part (c) was poorly answered. The question did not request a description of the learning curve and in
which circumstances it is most applicable. Candidates were requested to explain ‘the likely effect of
recruiting new employees’.

Common Errors
1. Inability to apply the learning curve formula
2. Incorrect roundings. Two decimal places is an absolute minimum
3. Not answering the question (part c)

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Question 4

(i) Explain how a JIT production system differs from the company’s existing manufacturing
system.

(ii) Explain why quality control systems are particularly important in a JIT environment.

(Total for Question Four = 10 marks)

Rationale
This question tests candidates’ ability to apply the principles of JIT to a scenario. It addresses learning
outcome D(ii): evaluate the impacts of just in time production, the theory of constraints and total quality
management on efficiency, inventory and cost

Suggested Approach
 Read the scenario carefully to identify the key factors of the company’s existing manufacturing
system
 Explain how a JIT production system differs from the company’s existing manufacturing system
 Explain why quality control systems are particularly important in a JIT environment

Marking Guide Marks

Existing system - constant activity levels, adjust for expected seasonality of demand or 1 mark
resource level changes

JIT - customer driven / zero inventory 1 mark

Detailed points 2 marks

Cost changes 2 marks

Quality problems equals lost sales 2 marks
Lost reputation 2 marks

Examiner’s Comments
In general this question was poorly answered. In part (i) candidates were asked to explain how a JIT
system differed from the existing system. Those candidates who scored high marks provided
comparisons or explained differences, as opposed to writing everything they knew about JIT. Some
candidates wrote a four page answer but earned very few marks.

Part (ii) was also poorly answered. Many candidates simply repeated items already covered in (i),
whereas others used (ii) as a continuation to (i) and wrote all they knew about JIT.

Common Errors
1. Not answering the question
2. Failure to set out an answer plan
3. In some cases extremely poor handwriting making it difficult to award marks

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Section C – 50 marks
ANSWER TWO QUESTIONS OUT OF THREE

Question 5

(a) Prepare calculations to determine the production plan that will maximise the profits of
Company C in November 2009.
(5 marks)

(b) For December 2009 only:

(i) Use graphical linear programming to calculate the optimal production plan for the month.
(10 marks)

(ii) Calculate the value of the monthly financial penalty at which the company would be
indifferent between supplying products X and Y under the Company D contract or selling
them in the general market.
(5 marks)

(iii) Calculate the maximum price per kg that should be paid to an alternative supplier to obtain
additional material B.

(5 marks)

(Total for Question Five = 25 marks)

Rationale
This question tests candidates’ ability to analyse the data provided and solve a scarce resource problem.
It addresses learning outcome A(viii): discuss the meaning of “optimal” solutions and show how linear
programming methods can be employed for profit maximising, revenue maximising, and satisfying
objectives.

Suggested Approach
(a)
 Read the scenario carefully to identify direct labour hours as the scarce resource
 Calculate the contribution from each product per direct labour hour
 Rank the products based on their contribution per direct labour hour
 Calculate the direct labour hours required to meet the contracted demand
 Calculate the optimum use of the remaining labour hours based on the product rankings

(b)
 Calculate the resources available after meeting the contracted demand
 Derive the equalities for each of these resources
 Calculate the co-ordinates of each resource and plot on the graph
 Plot the demand constraints
 Identify the feasible region
 Calculate the optimal solution
 Compare the value from the resources used to meet the contract with their alternative use value,
and thereby determine the penalty value at which the company would be indifferent
 Calculate the contribution that could be earned from additional supplies of material B and thereby
calculate the maximum price that should be paid for additional units of material B.

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Marking Guide Marks

(a)
Product ranking based on contribution per direct labour hour 2 marks
Contract resource requirements 1 mark
Allocation of remaining resource 1 mark
Production plan 1 mark

(b) (i)
Resource constraints – one mark each 3 marks
Plotting of resource and demand constraints 5 marks
Identify solution from graph 2 marks

(b)(ii)
Resources released 1 mark
Use of resources released 2 marks
Compare contract v market contribution 2 marks

(b) (iii)
Calculate existing position 1 mark
Calculate revised position 1 mark
Compare contributions 1 mark
Calculate maximum price (1 for premium; 1 for original) 2 marks

Examiner’s Comments
Part (a) was simply a single limiting factor exercise and most candidates gained the majority of the marks
available. The main reason for lost marks was poor answer layout.

Part (b)(i) was a typical linear programming question that needed a graph (on graph paper or sketched) to
generate the answer. Many candidates chose not to attempt a graph, while others put forward extremely
poor attempts. Marks were also lost by, or could not be awarded to, candidates who ignored, in whole or
in part, the demand for products X and Y. Very few candidates took the time to prove their readings from
the graph by solving the simultaneous equations of the two binding constraints. As a result some strange
answers were put forward which gained few or no marks.

Part (b)(ii) was either poorly attempted, or not attempted at all. In fact there were a number of routes that
would have given the correct answer, but many candidates seemed unclear as to what was required.
Method marks were available for incorrect answers but very few could be awarded as the method used
was often unclear or incorrect.

Part (b)(iii) was attempted by very few candidates. The few attempts that were put forward indicated a
complete lack of understanding of how to calculate a shadow price. This could indicate that candidates do
not study and revise a topic in its entirety.

Common Errors
1. Poor layout
2. Unclear workings
3. Inability to construct a graph, and extremely poor graphs
4. Lack of understanding of shadow pricing

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Question 6

(a) Distinguish between the four categories of cost identified above, giving one example of
each in your explanation.
(8 marks)
(b) Calculate the production and sales of products A, B and C required in order to maximise
the monthly profit from each product. Assume that sufficient resources are available within
the existing cost structures to produce up to 7,000 units of each product per month.

(4 marks)

(c) Calculate the production and sales of products A, B and C in order to maximise the profit
for next month. Assume that product sustaining costs are not avoidable.
(9 marks)

(d) Explain, in detail, how you would calculate the shadow prices of machine hours for next
month. No calculations are required.
(4 marks)

(Total for Question Six = 25 marks)

Rationale
This question tests candidates’ ability to explain the cost categories of activity based costing and then to
apply the data provided to solve a practical product pricing problem. It 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 and D(v): apply the techniques of activity based
management in identifying cost drivers/activities and explain how process re-engineering can be used to
eliminate non-value adding activities and reduce activity costs.

Suggested Approach
(a)
 Distinguish between the four categories of cost
 Give an example of each cost category

(b)
 Read the scenario carefully to determine the demand / price relationship of each product
 Calculate the variable cost of each product
 Calculate the lowest selling price at which there is a positive contribution from each product

(c)
 Calculate the incremental contribution from each product for each block of incremental machine
hours
 Identify the optimum use of each block of incremental machine hours until no further machine
hours are available or there is no further incremental contribution
 Explain the meaning of shadow prices and how to calculate the shadow price of the machine
hours in this scenario by identifying the incremental contribution from any further machine hours

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Marking Guide Marks

(a)
For each category:
Explanation – one mark max 8
Example – one mark marks

(b)
Unitised costs per product 1 mark
Identifying positive contribution levels for each product 3 marks

(c)
Calculate marginal contributions / hour – up to two marks per product 5 marks
Allocate machine hours 3 marks
Production plan 1 mark

(d)
Explain shadow price 1 mark
Usage of additional resource by ranking of products 2 marks
Multiple shadow prices 1 mark

Examiner’s Comments
This question was the least popular of the optional questions. Part (a) was well answered but
unfortunately most answers to parts (b), (c) and (d) were extremely poor with very few candidates gaining
any marks.

Part (b) was much more straightforward than most candidates realised and the four marks available were
a fair reward for the effort that was required to generate the answer.

Part (c) required a marginal approach but the few attempts made simply used a weighted average
method. Most attempts did not put forward realistic figures. This highlights the point made in previous
PEGs which advised candidates to ensure that the figures in their answers are in the context of the
question i.e. that their answers are sensible.

Part (d) produced very few meaningful answers. This could indicate that the topic of the shadow price is
being overlooked when studying and revising.

Common Errors
1. Poor layout (parts b and c)
2. Lack of understanding (part d)

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Question 7

(a) Calculate the net present value of the cash flows arising from the investment and
recommend to the hotel group whether or not to proceed with the purchase of the hotel.

(14 marks)

(b) Calculate the sensitivity of the investment to a change in the value of “other fixed costs”.
(6 marks)

(c) Explain Pareto Analysis and how the hotel group could improve its profits by combining
Pareto Analysis with Activity Based Costing.
(5 marks)

(Total for Question Seven = 25 marks)

Rationale
This question tests candidates’ ability in part (a) to analyse the data provided to determine the relevant
cash flows of an investment, in part (b) to calculate the sensitivity of the solution to a change in one of the
input variables and in part (c) to explain how Pareto analysis may be combined with activity based costing.
The question addresses learning outcomes B(vi): evaluate project proposals using the techniques of
investment appraisal and D(xi): apply Pareto analysis as a convenient technique for identifying key
elements of data and in presenting the results of other analyses, such as activity-based profitability
calculations.

Suggested Approach
(a)
 Read the scenario carefully and identify the relevant cash flows of the investment
 Apply the inflation indices to the appropriate cash flows
 Prepare a cash flow analysis
 Discount each year’s net cash flows and calculate the net present value of the investment
 Recommend whether to proceed with the investment

(b)
 Calculate the present value of the “other fixed costs”
 Calculate the sensitivity of the investment decision to a change in the value of these costs

(c)
 Explain Pareto analysis
 Explain activity based costing in the context of a hotel
 Explain how the hotel group’s profits could be improved by combining these techniques.

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Paper P2 – Management Accounting – Decision Management
Post Exam Guide
November 2009 Exam

Marking Guide Marks

(a)
Capital outflow & inflow 1 mark
Guest revenue (volume & inflation) 2 marks
Fixed costs 1 mark
Variable costs (volume & inflation) 2 marks
Tax on cash flow (amount & timing) 2 marks
Tax depreciation (amount & timing) 2 marks
Discounting 1 mark
Correct years 2 marks
Recommendation 1 mark

(b)
Inflation adjustment 1 mark
Tax adjustment (amount & timing) 2 marks
Discounting 1 mark
Sensitivity calculation 2 marks

(c)
Explanation of principle 1 mark
Application to scenario 2 marks
Management of costs / profits 2 marks

Examiner’s Comments
This proved to be the most popular of the optional questions and most candidates achieved good marks,
especially for part (a). Unfortunately the quality of answer layouts put forward by a significant number of
candidates was poor and figures within the main answer were not supported by clear, legible workings.
Marks could not be awarded to many candidates who seemed to be unable to adjust figures (e.g. the
revenues) for two situations, i.e. volume changes and inflation.

Part (b) was fairly well answered but the majority of candidates did not appreciate that the ‘other fixed
costs’ figure needed to be adjusted for inflation and tax before being discounted.

Part (c) was again fairly well answered but most candidates applied the 80/20 rule to revenues as
opposed to costs. This confused the marking team as the question asked candidates to link Pareto
analysis with activity based costing. Very few candidates suggested ideas about how management could
take action and control those activities that cause the costs.

Common Errors
1. Poor layouts (part a)
2. Unclear workings (part a)
3. No reference to workings (part a)
4. Not relating Pareto analysis to ABC and to the scenario in the question (part c).

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