Paper 09 – Management Accounting – Decision Making (IDEC)

Post Exam Guide

May 2004 Exam

General Comments

The performance of candidates in this paper was a little better than in previous diets. The multi-
choice section A contained some challenging parts but the average marks awarded were not different
from previous years and in some cases very good scores were recorded. For reasonably prepared
candidates the question in section B contained sufficient opportunity to collect marks at least up to
pass standard.

The challenge in section C was not to be underestimated, but the numerical components in both
questions were unambiguous with a pass mark on these reasonably attainable. There was also
scope here to pick up marks in the discussion components, though this opportunity was not always
taken up by candidates.

The topics contained in section D had occurred in previous papers so the general areas should not
have been a surprise to candidates. However candidates are reminded that each question is unique
and they must structure their answers to respond to the specifics of the question and this is what
distinguishes good from less good answers. Too often answers were quite general, displaying lower
order skills of recall but without higher order skills of analysis, application and evaluation. There was
no major indication that many candidates were significantly short of time in completing the whole
paper.

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

The following data relate to both questions 1.1 and 1.2

TT Ltd has been asked to quote for a special contract. The following information is available.

Material X:
Book value Scrap value Replacement cost
£5⋅00 per kg £0⋅50 per kg £5⋅50 per kg

The special contract would require 10 kgs of Material X. There are 250 kgs of this material in stock
which was purchased in error over two years ago. It has just been noticed that if Material X is
modified, at a cost of £2 per kg, it could then be used as a substitute for Material Y which is in regular
use and currently costs £6 per kg.

Labour
The special contract would require 100 hours of labour. However, the labourers, who are each paid
£15 per hour, are working at full capacity. There is a shortage of labour in the market and therefore
the labour required to undertake this special contract would have to be taken from another contract, Z,
which currently utilises 500 hours of labour and generates £5,000 worth of contribution. If the labour
were taken from contract Z, then the whole of contract Z would have to be delayed, and such delay
would invoke a penalty fee of £1,000.

Question 1.1

The relevant cost of the materials for the special contract is

A £5
B £35
C £40
D £50
E £55
(2 marks)
The answer is C.
Workings
(£6 - £2) x 10 kg = £40

Question 1.2

The relevant cost of the labour for the special contract is:

A £1,500
B £2,500
C £3,500
D £6,500
E £7,500
(2 marks)
The answer is B.

Workings
(£15 x 100) + (£1,000) = £2,500

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

Question 1.3

Market research has revealed that the maximum demand for Product P is 100,000 units per annum
and that demand will reduce by 1,000 units for every £20 increase in selling price. The profit
maximising level of sales for Product P for the coming year is 70,000 units.

The selling price of each of the units at the profit maximising level of sales will be

A £400
B £600
C £900
D £1,100
E £1,300
(3 marks)
The answer is B.

Workings
p = a - bx where p = price, x = quantity demanded, a, b = constants
£0 = a - b (100,000)
£20 = a - b (99,000)
1,000b = £20
b = 0⋅02
a = 0⋅02 x 100,000
a = £2,000
At the profit maximising level, x =70,000
p = £2,000 – (70,000 x 0⋅02)
p = £2,000 - £1,400
∴p = £600

The following data relate to questions 1.4 and 1.5

TM sells theatre tickets. The data below relate to four different ticket prices that the company sold
during the last year.

Ticket type J Ticket type K Ticket type L Ticket type M

Standard information:
Selling price per ticket £12 £15 £17 £21
Budgeted ticket sales (units) 5,000 7,500 6,000 4,000
Actual results for the year:
Ticket sales (units) 5,500 5,625 6,500 4,750

It was forecast that TM would have 25% of the estimated total market of 90,000 tickets.
The actual market size was 85,000 tickets.

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

Question 1.4

The total sales mix revenue variance is nearest to

A £695 Favourable
B £1,881 Favourable
C £3,781 Favourable
D £4,117 Favourable
E £5,681 Favourable
(3 marks)
The answer is D.

Workings: Spreadsheet solution for 1.4

Actual sales Actual Budgeted Variance

in Standard sales SP
Mix
A 4,972 5,500 528 £12 £6,333 F
B 7,458 5,625 -1,833 £15 -£27,000 A
C 5,967 6,500 533 £17 £9,067
D 3,978 4,750 772 £21 £16,217
Total sales mix £4,117 F
variance

Alternative calculation
Actual sales Actual sales Budgeted Budgeted
in Standard Mix SP W A SP
A 5,500 4,972 528 £12 £15⋅93 -£3⋅93 -2,076
B 5,625 7,458 -1,833 £15 £15⋅93 -£0⋅93 1,711
C 6,500 5,967 533 £17 £15⋅93 £1⋅07 569
D 4,750 3,978 772 £21 £15⋅93 £5⋅07 3,913
Total sales mix
variance
4,117 F

Question 1.5

The market size revenue variance is nearest to

A £13,541 Adverse
B £19,917 Adverse
C £20,313 Adverse
D £20,709 Adverse
E £21,125 Adverse
(3 marks)
The answer is B.

Workings: Spreadsheet solution for 1.5

Market size variance

Budgeted Market Actual Market Budgeted Market Budgeted Avg Variance
Size Size Share SP
90,000 85,000 25% £15⋅93 £19,917 A

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

Question 1.6

Data relating to the production of the first sixteen batches of a new product are as follows:

Cumulative number of batches Cumulative total hours

1 1,562⋅5
16 12,800

The percentage learning effect is closest to:

A 45%
B 55%
C 65%
D 75%
E 85%
(3 marks)
The answer is E.

Workings
For 16 batches, the cumulative average time = 12,800/16 = 800 hours

Therefore 800 = 1562⋅5 x X4

0⋅512 = X4

4
X= 0 ⋅ 512

X = 0⋅8459

Alternative answer
Cumulative average time taken per unit = 12,800/16 = 800 hours

Using the learning curve formula, y = axb

800 = 1,562⋅5 (16)b
16b = 0⋅512
Taking logs b log 16 = log 0⋅512
b = log 0.512/log 16
b = -0⋅2907/1.2041
b = -0⋅2414
b = log of learning/log 2
-0⋅2414 = log of learning/0⋅3010
log of learning = -0⋅07266
the log of the learning rate converts back to 84⋅59%

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

Question 1.7

A company produces two products: X and Y. The standard variable costs per unit of the products are
as follows
X Y
£ £
Materials (£3 per kg) 15 12
Other variable costs 45 50
Total variable costs 60 62

The Management Accountant determined the optimal production plan by using graphical linear
programming. He noticed that the optimal plan was given at any point on the part of the feasible
region that was formed by the constraint line for the availability of materials.

If the selling price of Product X is £100, the selling price of Product Y is

A £44
B £50
C £80
D £94
E £104
(4 marks)
The answer is D.

Workings
The gradient of the materials line is given by the relationship between coefficients for X and Y that is 5
and 4.

The contribution of X and Y must be in the ratio 5 : 4. The contribution of X is £40 (£100 - £60) so the
contribution of Y has to be £32 (£40/5 x 4). Therefore, the selling price of Y is £94.

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

Question 2(a)

Calculate for each alternative the net present value and annual equivalent cost. Advise senior
management which server infrastructure to purchase, stating any assumptions you have made.
(15 marks)

Rationale
Question two examines a company which is an internet service provider and also stores and
transmits client data over the internet via its server infrastructure. The server infrastructure is about to
become obsolete and the company is considering its replacement. The company is considering two
alternatives.

Suggested Approach

Identify cash flows, and capital allowances. Calculate profit, taxation and phasing of tax. Summarise
cash flows and apply discounting. Compute annual equivalent cost for each alternative and compare.

Marking Guide Marks

For both options:

Capital Allowances 2
Contribution 2
Taxation 4
Other cash flows 2
Discounting 2
NPV and Annual Equivalent Cost 2
Decision 1

Maximum Marks Awarded 15

Examiner’s Comments

Candidates coped reasonably well with the calculations as this was not an unduly complex question.

Common Errors

Problems that did occur were related to the calculation of tax, balancing allowances and timing of
expenses which led to differences in calculation of the tax payable. This inevitably led to a failure to
pick up all of the marks that were available. Most candidates could carry out the discounting of the
cash flows they had developed. Occasionally candidates attempted to arrive at an annual equivalent
cost by dividing by the number of years which is not correct.

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

Question 2(b)

Discuss the limitations of the net present value approach and the equivalent annual cost approach
when appraising this type of investment.
(5 marks)

Rationale
See 2(a).

Suggested Approach

Discuss the limitations applied to this type of investment.

Marking Guide Marks

One mark for each point to a maximum of 5 marks

Maximum Marks Awarded 5

Examiner’s Comments

This was answered less successfully than the previous part; candidates did not always express
themselves clearly.

Common Errors

Equivalent annual cost was confused at times with internal rate of return. Limitations were often
discussed generally with little reference to ‘this type of investment’ which was a requirement of the
question. This shortcoming displayed a lack of ability to apply principles to the context of the question
and resulted in fewer marks being awarded.

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

Question 2(c)

(i) Briefly explain the purpose and limitations of sensitivity analysis in relation to investment
appraisal.
(4 marks)
(ii) Calculate the sensitivity of your recommendation to changes in the contribution generated by
Alternative 1, and discuss its relevance to the decision.
(6 marks)

Rationale
See 2(a).

Suggested Approach

Explain sensitivity; calculate sensitivity related to changes in contribution of alternative 1.

Marking Guide Marks

Purpose 2
Limitations 2
Contribution 1
Tax 1
Discounting 1
Difference between alternatives 1 and 2 1
Identify sensitivity 1
Explain/discuss sensitivity 1

Maximum Marks Awarded 10

Examiner’s Comments

It is apparent that, beyond a general appreciation, sensitivity analysis is not well understood. Few
candidates answered this part well.

Common Errors

An answer which states that sensitivity analysis is used to assess the sensitivity of investment does
not really explain its purpose and too often candidates offered answers such as this. In terms of the
calculations in part (ii) attention was often focused on the question of whether the NPV of alternative
(1) was reduced to zero. This was not the point of the question, it was appropriate to consider the
implications of the recommendation being switched from one alternative to the other and hence this
needed to be the focus of the calculation, ie the difference between the NPVs, not NPV= zero.

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

Question 3(a)

(i) Prepare a statement, detailing the variances, which reconciles the expected cost and the actual
cost of producing 120 bicycles if the standard cost had been based on the average time to build
a bicycle in the first batch, that is 24 hours per bicycle.
(5 marks)
(ii) For operational control reasons, management wishes to incorporate the learning curve effect
into the labour variance calculations. Recalculate the labour variances to show both the
planning and operational elements.
(10 marks)

Rationale
Question three examines a company that manufactures bicycles. The company has decided to
sponsor a cycling team and has agreed to manufacture 120 custom-built bicycles. The company has
produced the 120 custom-built bicycles and is now reviewing its performance by calculating the
relevant cost variances and incorporating the impact of the learning curve.

Suggested Approach

(i) Calculate total standard cost. Calculate total actual cost. Apply variance formula to each
cost element, compute variance(s) for each cost element as appropriate. Demonstrate
reconciliation.

(ii) Apply learning curve effect to standard costs. Compute cumulative time. Re-compute
variances using cumulative time. Demonstrate reconciliation.

Marking Guide Marks

One mark for each cost element 4

Reconciliation 1
Apply learning curve formula 2
Cumulative time 2
Planning variance 2
Operational variance 2
Rate variance 1
Reconciliation 1

Maximum Marks Awarded 15

Examiner’s Comments

Answers here were generally quite good, with some accurate calculations to both parts. As solutions
could be reached by a process of doubling the volumes, candidates were able to arrive at values for
part (ii) quite swiftly and earn reasonable marks.

Common Errors

Some candidates failed to apply the appropriate formula to calculate the traditional variances and
hence did not pick up all of the marks; others did not demonstrate the reconciliation of variances that
was requested. The learning curve calculations based on arithmetic or the use of mathematical
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Paper 09 – Management Accounting – Decision Making (IDEC)
Post Exam Guide
May 2004 Exam

formula contained errors on occasions and hence some marks were not awarded. Some candidates
did not manage to interpret from the data the average, total and incremental times and their answered
were inappropriate as a result. Some candidates displayed an inability to identify the planning and
operational variances from their earlier calculations even allowing for their own figures being used.
Although the question made specific reference to a batch of 30 bicycles some candidates applied the
learning rate to each individual bicycle and hence did not pick up all of the marks available.

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

Question 3(b)

Calculate the total labour cost expected for producing the third batch of the custom-built bicycles,
taking into account the learning curve effect.
(5 marks)

Rationale
See 3(a).

Suggested Approach

Apply learning curve formula for the third batch. Compute average time per batch. Compute total
time for three batches. Deduce time for third batch. Apply standard labour cost.

Marking Guide Marks

Apply learning curve 1

Average time per batch 1
Total time for three batches 1
Time for third batch 1
Apply standard cost 1

Maximum Marks Awarded 5

Examiner’s Comments

The calculations of this part were undertaken less successfully because of the need to focus on the
third batch, and hence required application of the mathematical formula provided.

Common Errors

Some candidates had difficulty incorporating the values into the learning curve formula and others
were confused in either completing the calculation or interpreting the number from it. As in part 3 (a)
some confused the average, total and incremental times.

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

Question 3(c)

Discuss the implications of the learning and experience curves for planning, control and decision
making within BG.
(5 marks)

Rationale
See 3(a).

Suggested Approach

Explain learning and experience curves. Discuss their application for planning, control and decision-
making.

Marking Guide Marks

Explain learning / experience effect 1

Apply to material, labour and overhead 1
Planning 1
Control 1
Decision-making 1

Maximum Marks Awarded 5

Examiner’s Comments

Candidates displayed little ability to discuss the implications of the learning curve and at times failed
to place any focus on planning, control and decision-making.

Common Errors

Answers here were often brief and limited to a general interpretation of the learning curve without any
reference to the situation of BG. The lack of, or poor application of the learning or experience curve
to planning, control and decision-making was perhaps the most common reason for some marks not
to be awarded.

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

Question 4(a)

Use decision tree analysis to advise RY Ltd on the optimum selling price to set.
(10 marks)

Rationale
Question four examines a transatlantic airline company which has recently launched a low cost
airline company providing flights within Europe. The company has commissioned some market
research to assist in the pricing decision for a London to Paris route.

Suggested Approach

Identify decision options. Apply values (prices and costs). Attribute probabilities. Compute expected
values. Make recommendation.

Marking Guide Marks

Contributions 3
Combined probabilities 3
Expected values 3
Recommendations 1

Maximum Marks Awarded 10

Examiner’s Comments

This question attracted some good answers but also some very confused logic and arithmetic.

Common Errors

At times the branches of the decision tree were confused or inappropriate. There was on occasions a
failure to produce joint probabilities related to both passenger numbers and airport charges. This
made the calculations shorter and easier but inevitably provided the wrong answer, a consequence of
this was an awarding of only some of the marks available. Frequently answers were based on
revenue only without any consideration of the airport charge.

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

Question 4(b)

(i) If RY Ltd knew that there would be a pessimistic market, which price should it charge in order to
maximise profit?
(3 marks)
(ii) The market research company has now stated that by performing further analysis, it will be able
to accurately predict the state of the market. What is the maximum price that RY Ltd should pay
for this further analysis?
(7 marks)

Rationale
See 4(a).

Suggested Approach

(i) Apply contributions to demand given for the pessimistic market.

(ii) Apply contributions to demand given for the most likely and optimistic markets. Apply
probabilities to all three market states. Deduct contribution from part (a).

Marking Guide Marks

Pessimistic market:
Principle 1
Calculation 1
Recommendation 1
All markets:
Expected value from (i) 1
Evaluate most likely market 2
Evaluate optimistic market 2
Deduct contribution from (a) 1
Identify value of perfect information 1

Maximum Marks Awarded 10

Examiner’s Comments

A relatively small number of candidates were able to see their way through this part to reach the right
conclusion. It was evident that a considerable number of candidates did not fully understand the
concept behind this part.

Common Errors

Confusion from part (a) inevitably passed into this part where candidates often incorporated incorrect
probabilities, though credit was given for ‘own figures’. The omission of the airport charge was again
an error though maybe this did not change the decision. Candidates found difficulty in computing the
likely profit or contribution with perfect information, this was attributed to either errors in calculation or
failure to understand the concept, though some did understand the need to compare this with the
existing profit or contribution in order to obtain the value of perfect information.

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

Question 4(c)

Discuss the limitations of basing this decision on expected value calculations.

(5 marks)

Rationale
See 4(a).

Suggested Approach

Discuss the limitations of the expected value approach.

Marking Guide Marks

One mark for each point raised 5

Maximum Marks Awarded 5

Examiner’s Comments

Generally answers to this part were not well developed.

Common Errors

A shortcoming of answers to this part was their brevity. It seemed that candidates had only a limited
understanding of the principles and/or few ideas on the practical issues surrounding the calculations
they had made, as a result they did not pick up all of the marks available.

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

Question 5

Write a report to the Managing Director which:

(i) explains the advantages and disadvantages that would be experienced by PQR in operating a
decentralised structure;
(6 marks)
(ii) explains which types of responsibility centres you would recommend as being most appropriate
for W and Z in a decentralised structure;
(6 marks)
(iii) critically evaluates the possible use of the financial performance measures "return on capital
employed" and "residual income" for the decentralised structure of PQR;
(8 marks)
(iv) discusses the issues that need to be considered in relation to setting transfer prices for
transfers made from Z to PQR and W.
(5 marks)

Rationale
Question five examines a company that develops educational software. The company has recently
acquired two other companies. The managing director, who is now faced with integration issues in
terms of planning, control and decision making, is seeking to determine the best structure to operate
going forward.

Suggested Approach

(i) Identify and explain advantages and disadvantages.

(ii) Identify and explain possible responsibility centres and make recommendation with
reasons.
(iii) Discuss and evaluate ROCE and RI.
(iv) Discuss transfer pricing issues.

Marking Guide Marks

(i) Each advantage/disadvantage one mark to a maximum of six. 6

(ii) Identify responsibility centres. 1
Discuss decentralisation 1
Apply to W and Z one mark each point. 4
(iii) Explain financial performance measures 2
Objectives of performance measures 2
Evaluate ROCE 2
Evaluate RI 2
(iv) Each issue discussed one mark to a maximum of five. 5

Maximum Marks Awarded 25

Examiner’s Comments

Full and clear discussions in answers were rare. Often responses were more in generalities rather
then responding to the specific issues raised in the parts of the question. Candidates did quite well in
some parts of their answers, especially part (i) and to an extent part (iii).

Common Errors

Generally, answers to all four parts were not well ‘applied’ to the situation of PQR.

(i) This was answered most successfully, candidates are reminded however that time
allocation is important and should have been managed in relation to the 6 marks
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Paper 09 – Management Accounting – Decision Making (IDEC)
Post Exam Guide
May 2004 Exam

available. Quite frequently answers were longer than was justified by the marks being
awarded.

(ii) Clear recommendations on this part were rare. A few candidates did not identify
appropriately the responsibility centres involved and did not really describe or explain the
characteristics or suitability of the responsibility centre.

(iii) Marks were awarded for explaining ROCE and RI. Most candidates could explain their
computation but had limited views regarding their limitations or application in PQR and
hence did not fully undertake the critical evaluation required.

(iv) In this section the international nature of the business attracted occasional comments
regarding tax and exchange rates but this tended too often to be the extent of the answer,
which was the briefest of the four sections attempted.

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

Question 6

Discuss the relevance and value of each of these techniques for providing appropriate information for
planning, control and decision making.
(25 marks)

Rationale
Question six examines organisations that have embraced new technologies and manufacturing
strategies to maintain and improve its competitive advantages. Such systems and technologies
include throughput accounting, target costing and life cycle costing.

Suggested Approach

Describe each technique; develop discussion as required about relevance and value applied to
planning, control and decision-making.

Marking Guide Marks

General statement about accounting for modern manufacturing 1

Throughput accounting 8
Target costing 8
Life cycle costing 8

Maximum Marks Awarded 25

NB: The eight marks for each technique should be broken down into: Describe technique (2), apply to
planning (2), apply to control (2), apply to decision-making (2).

Examiner’s Comments

It was apparent that candidates could describe generally the techniques and their characteristics and
hence pick up some early marks in this question.

Common Errors

Some responses to this question may have been influenced by similar questions in previous
examinations. As a result the answers failed to focus on the specific requirements of the question. As
a result they displayed a poor structure and they did not clearly discuss the ‘relevance and value’ of
each technique, nor did they make reference to providing information for ‘planning, control and
decision-making’.

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