M1 - CIMA masters gateway assessment (CMGA) - the examiner's answers - November 2010

November 2010 Examiner's Answers CMGA

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The Examiners Answers for CIMA Masters Gateway Assessment

SECTION A Answer to Question One Requirement (a) Direct labour cost:

Introduction stage The learning curve applies throughout this stage, therefore:

Y = axb Y = $100,000 x 10 -0.4150 = $38,459 Therefore total direct labour cost = 10 x $38,459 = $384,590 Growth stage The learning curve continues for another 20 batches so the direct labour cost of these 20 batches is: Y = axb Y = $100,000 x 30 -0.4150 = $24,378 Total direct labour cost for first 30 batches = 30 x $24,378 = $731,340 Less: Total direct labour cost for first 10 batches = 10 x $38,459 = $384,590 Therefore total direct labour cost for these 20 batches = $346,750 The direct labour cost of each of the other 10 batches in this stage is the same as that of the thirtieth batch:

Examiner's Answers CMGA 2 November 2010

Direct labour cost of the thirtieth batch: Average cost for first 29 batches: Y = axb

Y = $100,000 x 29 -0.4150 = $24,723 Total direct labour cost for first 30 batches = 30 x $24,378 = $731,340

Total direct labour cost for first 29 batches = 29 x $24,723 = $716,967

Direct labour cost for the thirtieth batch = $14,373

Therefore the direct labour cost for these 10 batches = 10 x $14,373 = $143,730

Therefore the total direct labour cost for this stage of the product life cycle is $490,480 Maturity Stage

The learning curve has now ended so the direct labour cost of these 60 batches will be:

60 batches x $14,373 = $862,380 Decline Stage

The learning curve has now ended so the direct labour cost of these 30 batches will be:

30 batches x $14,373 = $431,190

Requirement (b) Introduction Growth Maturity Decline

Sales units 10000 30000 60000 30000

Selling price $120 $100 $80 $50

Sales $ $ $ $

revenue 1,200,000 3,000,000 4,800,000 1,500,000

Direct labour 384,590 490,480 862,380 431,190

Direct materials 500,000 1,500,000 3,000,000 1,500,000

Other 100,000 300,000 600,000 300,000

Profit 215,410 709,520 337,620 (731,190) 531,360

Requirement (c) ZTG requires a 20% return on its average investment.

Average investment = ($5m + $3m) / 2 = $4m

Profit target is therefore 20% of $4m = $800,000

As shown in the answer to (b) above the profit predicted without the experience curve is $268,640 less than that required.

Total production throughout the product life cycle = 130 batches.

Currently the total direct material cost throughout the product life cycle = $6.5m. This needs to be reduced by $268,640 to $6,231,360 which is an average direct material cost per batch of $47.934.


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Requirement (d) The concept of life cycle costing is that the costs and revenues of a product are accumulated over its life cycle and its overall profitability is measured, rather than separating costs and revenues into accounting periods. In this scenario the length of the product life cycle is 12 months but this may or may not coincide with the companys accounting year and the statement shown in solution (b) above shows the products profitability over its life cycle. As illustrated in the scenario to this question there are four recognised stages in the life cycle of a product. In this scenario it appears that ZTG is using a market skimming approach to the initial launch pricing of its product because it is starting with a high price in the introduction stage that is then being gradually reduced over the life cycle of the product. ZTG will be reducing the price of the product in order to make it harder for competitors to enter the market but also to increase the demand for its product through the growth stage. At this time the cost of the product will also be lower than at the launch stage, due to the effect of the learning and experience curves on its direct labour and material costs. In the maturity stage, ZTG will reduce the selling price further to consolidate its sales and would hope that there may be further cost savings due to economies of scale though these are not evident from the data in this scenario. Finally, in the decline stage, ZTG reduces the price to maintain sales while under more competition from newer products, prior to launching a new product of its own.


Answer to Question Two Requirement (a) Report to explain the potential problems that the shopping centre could face if investment is not made in detailed project planning. A project needs to be managed through its lifecycle, applying appropriate project management methods and skills, in order to avoid/minimise potential problems that could lead to project failure. A key part of the project management process involves defining clear objectives and setting realistic estimates in terms of budget and time and resources needed. Without this, it is unlikely that an estimation of the baseline budget and project schedule can be constructed to present a realistic assessment of the time and funding required, and the resources needed for the successful execution of the shopping centre project. The outcome could be that the project ends up with unrealistic timescales and the different activities may not be sequenced logically, to make the most effective and efficient use of resources. This could also result in budget overspend and delays in various stages of the project. Ultimately the project may fail to be completed on time. As part of the planning stage, feasibility studies should be undertaken, along with an assessment of the risks associated with the shopping centre project. If these critical dimensions are not understood, the project manager will not have the opportunity to identify potential problems and determine the actions needed to deal with them nor develop contingency plans. Given the nature of the project, not undertaking social and environment feasibility studies could lead to future problems and disruptions once construction starts for the shopping centre. For example, the impact on the local environment where the proposed shopping centre is to be built may not have been considered, and potential social issues in terms of whether the local community might object to the plans due to the disturbances during the building work. If the project objectives are not clearly defined and scoped, this can make it more vulnerable to changing client specification. Whilst it is not unusual for client requirements to change during the life of a project, if the project is to come in on time and within budget then Mrs E needs to be aware of what is feasible. When the objectives are changed during the life of a project, there is usually a significant impact on project success and it is important that Mrs E is made aware of the consequences. It is at the early stages within the project that roles and responsibilities are defined for the project team. If they are not clearly defined this could lead to duplication of activities or activities missed. The result might be that members of the project team do not work effectively together, along with poor communications between the various stakeholders in the project. Finally, it is at the planning stage that various control mechanisms would normally be put in place. Without developing an appropriate control system there is the strong possibility of poor cost control and overspend. Effective planning can minimise the potential problems outlined above. In summary, Mrs E is putting the smooth running of the project at risk by wanting to cut out this stage. Requirement (b) There are a number of different tools and techniques that Mr G could use to assist him in planning the shopping centre project. For example:

Work Breakdown Structure. This technique is a critical part of project planning involving an analysis of the work required to complete the Shopping Centre project. The activities in the project are broken down into manageable components, referred to as work packages. The process defines the activities that must be carried out for each work


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package. Each work package will have defined responsibilities and deliverables for the shopping centre project that Mr G can delegate.

The analysis of activities for the shopping centre project can be undertaken at a number of levels, for example starting with the major phases then breaking them down into more detailed sub-activities. Mr G would be able to develop a task list from the work breakdown structure to assist in planning, control and monitoring the various stages of the project. The work breakdown structure can, therefore, assist in identifying the people responsible for each activity or work package.

Another widely used project planning tool is the Gantt Chart. This provides a visual way

of illustrating the sequence of activities in a project. Complex project activities are converted into constituent tasks and a graphical and understandable picture is provided. Although it does not show dependencies and internal relationships, it is a helpful framework in the planning of construction projects, such as the shopping centre development. It will show the time taken for each activity and the resources required, hence can be used to monitor progress against the plan and assist project scheduling by planning the timescales for the project. It can also be used by Mr G to communicate the responsibilities of tasks to the project team.

A variation of the Gantt chart is the resource histogram which shows the resource

requirement usage and availability against a timescale. This will help Mr G in the scheduling and rescheduling of resources for the shopping centre project.

Network analysis, sometimes referred to as critical path analysis, is an important

technique in project planning, providing a diagram showing the sequence and dependencies between activities or deliverables on a project. Using a work breakdown structure, network analysis arranges each work package/task into a logical sequence, and estimates the time to complete each. The outputs from the work breakdown structure analysis will help the identification of which tasks are dependent on others. Dependencies are critical to project planning. Simplistically, this involves determining the sequence, i.e. if activity B can only begin when activity A is completed there is a dependency. For example, planning permission must be sought for the shopping centre before construction work can commence. This is a crucial activity in project planning and the allocation of resources.

Having identified dependencies, it is then possible to calculate the critical path, which is the longest sequence of consecutive activities. It identifies those activities which, if delayed beyond the allotted time, would delay the completion of the shopping centre project and identifies how much float time there is on other tasks. In other words, by how much certain activities could slip before there is an impact on the expected time completion for the shopping centre project. This then enables the minimum possible time to be determined, and can be helpful in identifying where there is some slack time available within the project plan for any unforeseen circumstances.

Another project technique is PERT (project evaluation and review technique). This is a

development on network analysis that Mr G might find helpful in project planning. The technique is designed to account for uncertainty in the project lifecycle. For each activity in the project PERT uses three time estimates:

the optimistic time based on the duration the shopping centre project would

take if conditions were ideal; the most likely/probable duration if conditions were normal or as expected; and the pessimistic estimates which is the duration it would take if a number of

things went wrong.


These estimates are then converted into a mean time and standard deviation which means it is then possible to establish the duration of the shopping centre project using the expected times, but also to calculate a contingency time allowance.


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Answer to Question Three $000 Revenue 39,840 Cost of sales (21,480) Gross profit 18,360 Administrative expenses (4,647) Distribution costs (4,511) Gain on disposal of investment in AC 489 Finance cost (1,866) Share of profit of associate 180 Profit before tax 8,000 Income tax expense (2,325) Profit for the year 5,680 Other comprehensive income Actuarial gains on defined benefit pension plan 420 Tax effect of other comprehensive income (124) Recognised gains on AFS investment 138 Recycling of previously recognised gains on AFS investment (120) Share of other comprehensive income of associates, net of tax 7 Other comprehensive income for the year, net of tax 321 Total comprehensive income for the year 6001 Profit for the year attributable to: Equity holders of the parent 5,091 Non-controlling interest 589 5,680 Total comprehensive income attributable to: Equity holders of the parent 5,398 Non-controlling interest 603 6,001 Workings W1 Fair value adjustments $000 Increase in value at acquisition date 2,880 Remaining useful life from acquisition date 40 years Annual charge 72 Charge from date of acquisition charged to admin expenses 30 W2 Goodwill impairment $000 $000 Consideration transferred 8,400 Non-controlling interest at proportionate share 1,926 Net assets at acquisition: Share capital 600 Reserves 6,150 Fair value uplift 2,880 (9,630) Goodwill 696 10% impairment to be charged to administrative expenses 70


W3 Gain on disposal of AC $000 $000 Fair value of consideration received 2,880 Plus fair value of 105,000 shares retained 2,376 Less share (75%) of fair value of consolidated carrying value of the subsidiary at date control is lost:

Share capital (300 x 75%) 225 Reserves 75% x ($3,900,000 + ($2,127,000 x 9/12)) 4,122 Unimpaired goodwill 420 (4,767) Gain on sale 489

W4 Goodwill on acquisition of AC $000 $000 Fair value of consideration transferred 2,940 Non-controlling interest at proportionate share of net assets 840 3,780 Net assets at acquisition: Share capital 300 Reserves 3,060 3,360 Goodwill 420

W5 - Recycling of previously recognised gains of $120,000 from reserves to administrative expenses, recorded as Dr reserves Cr administrative expenses.

W6 Non-controlling interests Profit for the year Total comprehensive income $000 $000 As per MC accounts 2,520 2,520 Additional dep'n of FV (72) (72) 2,448 2,448 20% NCI x 5/12 months 204 204 As per AC accounts 2,052 2,127 25% NCI x 9/12 months 385 399 Total NCI in PFY 589 Total NCI in TCI 603


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SECTION B

Answer to Question Four 4.1 As the by-product revenue is credited to the sales account the process costs are

unaffected.

Units Sales value ($) Apportioned cost ($)

10mm pipe 20,000 (x $14) 280,000 (280/640 x $480,000) 210,000 15mm pipe 14,000 (x $10) 140,000 (140/640 x $480,000) 105,000 20mm pipe 11,000 (x $20) (220/640 x $480,000) 220,000

165,000 640,000 480,000

The answer is C 4.2 Product investment Total annual costs

x Required rate of return = Mark up

(800,000 + 121,600) 1,200,000

x 25% = 19.2%

The answer is B

4.3 Fixed cost/unit at breakeven sales level $1.4m/100,000 units = $14/unit Selling price/unit - fixed cost/unit $25 - $14 = $11/unit variable cost

Options $ $ $ Selling price 21 25 30 Variable cost 11 11 Contribution

11 10 14 19

Sales (units) 266,000 185,000 Total contribution ($m)

135,000 2.66 2.59 2.565

Fixed costs (1.4) (1.4) Profit ($m)

(1.4) 1.26 1.19 1.165

The answer is B

4.4 The answer is B

Dual-rate transfer prices will reduce divisional incentives to compete effectively. The supplying division can easily generate internal sales to the receiving division when it is charged at variable cost; this protects it from competition and gives it little incentive to improve its productivity.

4.5 The answer is D - Hierarchies or markets

4.6 The answer is B - Supervision

4.7 Resource based view


4.8 The answer is:

(i) Opening (ii) Bargaining (iii) Closing

4.9 Non-current assets are recorded at the spot rate at the date of transaction and not retranslated (250,000/0.741 = $337,382). Trade payables are restated at the closing rate as payables are a monetary item (250,000/0.753 = $332,005).

The answer is B

4.10

Post tax earnings ($450,000 - 110,000) Weighted avarage number of shares in issue:

$340,000

1 May - 30 September 3 million x 5/12 months 1,250,000 1 October - 30 April 4 million x 7/12 months 2,333,333 3,583,333 Basic earnings per share $340,000/3,583,333 9.5 cents per share

The answer is 9.5 cents per share

4.11 The non-current assets of one entity could be nearing the end of their useful life and

therefore be unrealistically low giving a higher non-current asset turnover figure. Alternatively, the non-current assets of one entity could have been revalued which would result in asset turnover being low but not necessarily because of low efficiency.

4.12 The bond purchased by NBW should be classified as a held to maturity investment as

NBW intends to hold it to redemption. It is initially recorded at the net cost of $4.5 million and then subsequently measured at amortised cost using the effective interest rate. The closing balance of the liability at 30 June 2010 is $4,711.7, see working below:

Opening balance 10.26% effective rate Coupon interest paid Closing balance $000 $000 $000 $000 4,500 461.7 (250) 4,711.7

SECTION AAnswer to Question One

Documents

M1 - CIMA masters gateway assessment (CMGA) - the examiner's answers - November 2010