Paper 09 – Management Accounting Decision Making (IDEC)

Post Exam Guide

November 2004 Exam

General Comments

This paper produced a full spectrum of performance from the candidature. On the one hand
there were some very good answers to all of the questions with candidates displaying insight
and creativity in their answers. On the other hand there were some answers which suggested
poorly prepared candidates with little ability to cope with the numerical requirements of the
question, to comment on the implications of them or on the principles employed.

Overall performance was in line with previous diets of this paper, which suggests that
standards are being maintained, though it may be helpful to point out where some common
difficulties occurred.

Candidates displayed shortcomings in their ability to interpret the results they have obtained
to questions in a coherent and comprehensive manner and shortcomings in their ability to
evaluate or apply their answers to particular situations. Too often the examiner was faced
with answers which dealt in generalities or regurgitated standard ‘learned’ answers rather
than adapting material to the scenario created. This was in spite of questions requiring
answers applied to the situation or reminders printed on the exam paper about more focused
answers.

It would be helpful in the future for candidates to undertake more practice on questions under
examination conditions and to attempt to deal with the points made above.

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 1.1

The standard output from a joint process was 5,000 litres of Product K, 3,000 litres of Product L and 2,000
litres of Product M. The total cost of the joint process was £156,000. The company is now deciding if it
should modify Product K by putting it through an additional process.

In order to help with that decision the best way to apportion the joint costs of £156,000 to the products is

A in the ratio of 5 : 3 : 2.
B in the ratio of the sales value at the split off point.
C in the ratio of the sales value after further processing.
D £52,000 each (that is one third each).
E none of the above methods.
(2 marks)

The answer is E

Workings

The decision should look at incremental costs and incremental revenues. The joint costs are irrelevant.

Question 1.2

The times taken to produce each of the first four batches of a new product were as follows:

Batch number Time taken

1 100 minutes
2 70 minutes
3 59 minutes
4 55 minutes

Based upon the above data, the rate of learning was closest to

A 85⋅0%
B 84⋅3%
C 78⋅6%
D 70⋅0%
E 69⋅3%
(4 marks)

The answer is B

Workings

(100 + 70 + 59 + 55) = 284. Cumulative average time for 4 units = 284/4 = 71 minutes/unit
0⋅71 = r2
r = 0⋅8426

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

The following information relates to questions 1.3 and 1.4

A company is considering buying a new machine. The machine will cost £200,000 and make
annual profits, after depreciation, of £28,000. The machine will be depreciated on a straight-
line basis over its four-year life and it will have no residual value.

The company uses three techniques to appraise the proposed investment: net present value
(NPV), first year residual income (RI) and cash payback (PB). The company has a 15% cost
of capital and requires projects to pay back within three years.

Question 1.3

The recommendations arising from each of the appraisal techniques will be

(9 = accept, X = reject)

NPV RI PB
A 9 9 9
B 9 X 9
C 9 X X
D X 9 X
E X X X
(4 marks)

The answer is B

Workings

NPV = -200,000 + (78,000 x 2⋅855) = £22,690. Therefore accept.

RI = 28,000 - (200,000 x 0⋅15) = -£2,000. Therefore reject.
Payback = 200,000/78,000 = 2⋅56 years. Therefore accept.

Question 1.4

The internal rate of return for the machine is closest to

A -£120,060.
B £22,690.
C 10%.
D 15%.
E 20%.
(2 marks)

The answer is E

Workings

200,000/78,000 = 2⋅56. This is the annuity factor for the IRR. Searching the annuity tables on the four year
line shows that this is close to 20%.

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 1.5

The budgeted profit statement for Product X for next year shows that it has a margin of safety equal to
20% of budgeted sales and a unit selling price of £10. Product X has a contribution to sales (c/s) ratio of
60% and budgeted fixed costs of £120,000 for the year.

The percentage increase in the unit variable cost that would result in Product X breaking even is

A 20%.
B 25%.
C 30%.
D 40%.
E 80%.
(3 marks)

The answer is C

Workings

Contribution per unit = 10 x 60% = £6

Break-even point = 120,000/6 = 20,000 units
Margin of safety = 20%. Therefore budgeted output = 25,000 units
Profit at 25,000 units = (25,000 x 6) – 120,000 = £30,000
Variable costs at 25,000 units = 25,000 x (10 - 6) = £100,000

Therefore variable costs could rise by £30,000 before the product fails to break even. This gives a
sensitivity of 30,000/100,000 = 30%

The following information relates to questions 1.6 and 1.7

Trialpha Ltd produces and sells three products (R, S and T). The company uses a standard
costing system. Budgeted and actual data for last year is shown in the table below.

Selling price (£/unit) Sales volume (units)

Budget Actual Budget Actual
R £3⋅00 £2⋅50 10,000 12,000
S £6⋅00 £7⋅00 6,000 7,000
T £8⋅00 £10⋅00 4,000 3,000

Question 1.6

The total sales mix revenue variance for last year was

A £8,700 A.
B £5,800 A.
C £1,280 A.
D £1,000 A.
E £2,080 A.
(3 marks)

The answer is B

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Workings

Standardised mix = 11,000R, 6,600S and 4,400T

£
(12,000 - 11,000) x 3 = 3,000 F
(7,000 - 6,600) x 6 = 2,400 F
(3,000 - 4,400) x 8 = 11,200 A
Total 5,800 A

Question 1.7

The total sales volume revenue variance for last year was

A £2,000 F.
B £3,500 F.
C £4,000 F.
D £4,200 F.
E £9,800 F.
(2 marks)

The answer is C

Workings

(actual sales - budgeted sales) x standard price

£
(12,000 - 10,000) x 3 = 6,000 F
(7,000 - 6,000) x 6 = 6,000 F
(3,000 - 4,000) x 8 = 8,000 A
Total 4,000 F

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 2(a)

Prepare calculations that show, from a financial perspective, whether X should manufacture the DVDR.
State clearly your recommendation based upon your calculations.
(17 marks)

Rationale

This part of the question requires candidates to analyse the data provided and use discounted cash flow
techniques to calculate the financial viability of a proposal to manufacture a new product.

Suggested Approach

1. Calculate profits and deduce tax.

2. Compute capital allowances and tax implications.
3. Summarise cash flows.
4. Apply discount factor.
5. State recommendation.

Marking Guide Marks

Omit sunk costs and depreciation 2

Tax allowances 3

Tax calculation:
Total annual contribution 3
Fixed costs 1
Incorporate tax allowances 1
Tax 1

Cash Flows:
Equipment 1
Working capital 1
Contribution and fixed costs 1
Phasing taxation 1
Discounting 1
Decision 1

Examiner’s Comments

This question was not highly onerous for the marks awarded and candidates generally did quite well in
their calculations.

Common Errors
• A small number of candidates included the irrelevant items.
• Errors often occurred with the calculation of tax, particularly in dealing with the balancing allowance.
• At times the annual profits were miscalculated because they included working capital and asset
disposal values.
• Some candidates made errors in the timing of the tax cash flows, allowing for a lag different to that
specified in the question.

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 2(b)

Discuss any other factors that the management of X should consider before making the decision.
(6 marks)

Rationale

This part of the question requires candidates to discuss any other factors that management should
consider before making a final decision concerning the manufacture of the new product.

Suggested Approach

1. Identify other factors affecting the decision.

2. Develop discussion of the above.

Marking Guide Marks

1 mark for each factor, 2 marks if the discussion is developed significantly. 6

Examiner’s Comments

Candidates were able to offer quite a good range of other factors which should be considered. This part
was answered better than similar parts in earlier exam papers.

Common Errors
• Candidates failed to pick up all of the marks where they produced only a small number of factors
and/or where they failed to elaborate or discuss the factors.

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 2(c)

(i) Briefly explain "target costing".

(2 marks)
(ii) Identify and explain evidence from the scenario that X has adopted “target costing”.
(5 marks)

Total for part (c) = 7 marks

Rationale

This part of the question requires candidates to explain target costing and demonstrate that the company
in the question has adopted target costing by identifying and explaining evidence from the scenario
provided.

Suggested Approach

Part (i)
Develop brief explanation.

Part (ii)
1. Extract evidence from the scenario.
2. Explain evidence

Marking Guide Marks

Part (i)
Market driven price 1
Cost gap identified 1

Part (ii)
1 mark for each piece of evidence, 2 marks if identified and explained. 5

Examiner’s Comments

Part (i)
A small proportion misunderstood target costing completely and offered an incorrect explanation. Two
marks were awarded only rarely for a full explanation.

Part (ii)
This part differentiated answers very successfully. It was not very well answered overall. Candidates often
had difficulty extracting much evidence to support their observation of the use of target costing.

Common Errors
Part (i)
• Answers often relied entirely on making reference to the market guiding the price, thus omitting any
reference to the need to drive down costs to suit that price.

Part (ii)
• Answers here were brief, with little explanation. It seemed that candidates had little idea of, or they
could not identify from the question, what constituted target costing in practice.

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 3(a)

Draw a decision tree that shows the situation facing C Ltd.

(7 marks)

Rationale

This part of the question requires candidates to analyse the data provided and summarise it in a decision
tree.

Suggested Approach

Draw decision tree identifying branches and sub branches with decision points.

Marking Guide Marks

2 marks for each main branch of the decision tree with correct sub-branches 6
Branch for current business 1

Examiner’s Comments

This was generally answered well. Care with the drafting earned some reasonable marks.

Common Errors
• Errors involved a failure to extend the correct number of sub-branches in the decision tree or on
occasions, the omission of the alternative to continue the existing business.

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 3(b)

Using the decision tree, or any other method, calculate for each machine
(i) the expected value of the total profit;
(ii) the probability of at least breaking even.
(9 marks)

Rationale

This part of the question requires candidates to analyse the problem faced by C Limited and calculate the
expected value of total profit and the probability of at least breaking even for each of three alternative
machines.

Suggested Approach

1. Identify volumes and profits.

2. Calculate combined probability.
3. Extend the above to expected value.
4. Interrogate for any results which are below breakeven.

Marking Guide Marks

For the three alternatives:

Combined probabilities 3
Expected values 3
Probability of breakeven 3

Examiner’s Comments

This was answered less successfully than part (a) in spite of a correct decision tree having been drawn.
At times candidates earned only a proportion of the marks. Only a small number of good answers were
produced.

Common Errors
• The most common error was a misunderstanding of, or a total failure to understand, the concept of
breakeven when applied to this decision situation.
• An inability to compute the combined probability occurred in some cases.
• More frequently candidates failed to allow for the different volumes of annual output.

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 3(c)

As management accountant, write a report to the management of C Ltd that recommends the action it
should take. The report must support your recommendation by evaluating the situation and include a
discussion of the appropriateness of the methodologies used in part (b).
(9 marks)

Rationale

This part of the question requires candidates to prepare a report that recommends the action to be taken
by the company based upon the calculations in part (b).

Suggested Approach

1. Prepare report.
2. Give attention to format.
3. Support recommendation.
4. Evaluate the situation.
5. Discuss methodologies.

Marking Guide Marks

Report format 1
1 mark for each point dealing with the decision, evaluation of the situation and 8
discussing the methodologies

Examiner’s Comments

Answers here were only of reasonable standard; full answers which dealt with all the required aspects
were rare.

Common Errors
• A report form was frequently adopted and rewarded, but answers were brief.
• Where a recommendation was made, there was little attempt to make a full and clear evaluation of the
situation.
• At times candidates seemed to forget, totally omit, or have very little to say about the methodology.

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 4(a)

(i) Calculate the unit selling price of an assembled bicycle and the quantity that would be demanded
given the current company policy;
(8 marks)

(ii) Calculate the unit selling price, and quantity demanded, of an assembled bicycle that would maximise
the profit of the Premier Cycle Company.
(4 marks)

Total for part (a) = 12 marks

Rationale

This part of the question requires candidates to calculate the price of a bicycle based on the existing
company policy and in a way that maximises the profit of the company.

Suggested Approach

For each division and the company:

1. Identify values for the formula.
2. Substitute in the selected formula.
3. Solve for x and P.

Marking Guide Marks

For each division (two separate answers):
Optimum volumes (for two separate answers) 6
Transfer price/selling price (for two separate answers) 2
For the company as a whole:
Optimum volume 3
Selling price 1
Maximum marks awarded 12

Examiner’s Comments

This part was usually answered either very well or very poorly. Candidates who were confident with the
mathematics and numerical manipulation scored well.

Common Errors
• Inability to identify and substitute appropriate values in the equations.
• In the division and group calculations a misunderstanding of the marginal cost was common.
• On occasions there was confusion in the mind of the candidate as to whether answers were being
offered for the division or the group, that is, confusion between parts (i) and (ii).

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 4(b)

(i) Calculate the price per box that the Box Division will want to charge the Pizza Division if this is to
equal the budgeted external selling price;
(3 marks)

(ii) Calculate the maximum price per box that the Pizza Division would be willing to pay;
(3 marks)

(iii) Discuss the validity of using relevant costs as a basis to set transfer prices for internal performance
measurement. You should use data from Freezer Foods Ltd to illustrate your answer.
(7 marks)

Total for part (b) = 13 marks

Rationale

This part of the question tests candidates’ understanding of transfer pricing and the use of relevant costs.

Suggested Approach

Part (i)
1. Identify values.
2. Substitute in equations
3. Solve for x.

Part (ii)
1. Identify values
2. Substitute in equations
3. Solve for x.

Part (iii)
1. Explain relevant costs.
2. Identify objectives of transfer pricing.
3. Discuss situation and use of relevant costs.

Marking Guide Marks

Part (i)
Required contribution 1
Substitute in equation 1
Solve and interpret 1

Part (ii)
Required contribution 1
Substitute in equation 1
Solve and interpret 1

Part (iii)
1 mark for each point which explains relevant cost, transfer pricing and use or
problems of relevant cost in performance measurement 7

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Examiner’s Comments

Parts (i) and (ii)

These parts were answered quite successfully as basically they involved only a manipulation of costs and
revenues.

Part (iii)
This part was answered less successfully; often a limited interpretation of relevant cost occurred and brief
answers were common.

Common Errors
Parts (i) and (ii)
• Common errors involved the omission of the profit target, or at times (somewhat strangely), the
variable cost.

Part (iii)
• Candidates’ answers in this part often assumed that relevant cost was equivalent to variable cost and
this limited the scope of their answers. Answers were rarely developed to deal with various situations
and application to the stated company was infrequent.

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 5(a)

Discuss the applicability of ABC to B Ltd’s situation.

(13 marks)

Rationale

This part of the question tests candidates’ ability to assess the data provided for B Ltd and discuss the
applicability of activity based costing to the company.

Suggested Approach

1. Provide overview of the characteristics of ABC.

2. Discuss ABC in the light of the information supplied about B Ltd and its circumstances.

Marking Guide Marks

General explanation of ABC 2

Application to B Ltd – 1 mark for each point in support of the application or
discussing its limitations. 11

Examiner’s Comments

Answers generally displayed an overall appreciation of ABC and the hype sometimes given to it. There
was limited success in confidently discussing the suitability or limitations of the application of ABC to B
Ltd.

Common Errors
• Candidates often failed to link the situation described, or likely to apply in B Ltd, convincingly to what
ABC could deliver.
• ABC was often taken as the accepted solution to the situation without any question; only the positives
were mentioned. The downside or difficulties with ABC were often ignored.

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 5(b)

Discuss the intended use of ABC to

(i) set selling prices by B Ltd;

(6 marks)

(ii) support B Ltd's performance appraisal system.

(6 marks)

Total for part (b) = 12 marks

Rationale

This part of the question requires candidates to discuss the application of activity based costing to setting
selling prices and performance appraisal in the context of B Limited.

Suggested Approach

Part (i)
Consider ABC in pricing; apply to B Ltd.

Part (ii)
Consider ABC in performance appraisal; apply to B Ltd.

Marking Guide Marks

Part (i)
1 mark for each point about the application of ABC to pricing and 1 mark for each point
which draws attention to B Ltd. 6

Part (ii)
1 mark for each point about the application of ABC to performance appraisal and 1 mark
for each point which draws attention to B Ltd. 6

Examiner’s Comments

Answers were quite brief. They often repeated ideas from part (a) and did not generate discussion in any
balanced way. Candidates often raised only positive points about ABC.

Common Errors
Part (i)
• While the greater accuracy of ABC for pricing was noted, the issue of market based pricing or the role
of competition were often ignored.

Part (ii)
• The answers offered here repeated the issue of greater accuracy in relation to profitability. However
little further consideration was given to performance appraisal of the managers more generally and
whether ABC would deal with these requirements.

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 6(a)

Traditional cost classifications, terminology and the dominance of periodic financial accounts must be
challenged if managers are to be provided with information that is focused on decision-making in a
modern manufacturing environment.

Discuss the above statement.

(7 marks)

Rationale

This part of the question tests candidates’ ability to discuss a statement concerning the impact of changes
to the management accounting requirements of managers.

Suggested Approach

1. Identify the key elements of the statement.

2. Produce a balanced response to the statement in relation to each key element.

Marking Guide Marks

1 mark for each point which:

Interprets the statement 2
Relates cost to decision making 2
Discusses/elaborates on the contrast between traditional and modern environments 3

Examiner’s Comments

Although this part of the question offered a few marks, candidates had real difficulty in identifying the key
elements to be focussed upon.

Common Errors
• Answers often consisted of the setting out of standard ‘learned’ comments about current global
competition or modern manufacturing. Rarely did answers dissect the statement and comment on
parts of it.

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Paper 09 – Management Accounting Decision Making (IDEC)
Post Exam Guide
November 2004 Exam

Question 6(b)

Explain how EACH of the following has responded to the challenges:

(i) Activity Based Costing (ABC);

(ii) Throughput accounting;
(iii) Life cycle costing.

Note: Your answers to part (b) should focus on how each one of the above has challenged traditional
cost classifications, terminology and/or periodic accounting; simply describing ABC, throughput accounting
and life cycle costing will not answer the question.
(18 marks)

Rationale

This part of the question requires candidates to explain how each of three modern approaches to
management accounting has responded to the needs of managers.

Suggested Approach

1. Describe each technique.

2. Consider and explain how each technique has challenged more traditional approaches.

Marking Guide Marks

For each technique (three separate answers):

1 mark for each point and 1 mark for each elaboration of the point 18

Examiner’s Comments

Candidates were obviously familiar with the techniques; they have featured in previous examinations.
Candidates had problems however relating their answers to the challenge mentioned in part (a).
Generally fully rounded discussions in this part were rare.

Common Errors
• Marks were earned for describing the techniques but the structure of the answers was often poor. At
times discussion of the challenge to the traditional approach was not identifiable. It seems that
candidates entered the exam room with a general view of appropriate material for this answer but failed
to adapt it to the specifics of the question.

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