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These include the costs of reception staff, the heating and lighting of the common areas and other facility related costs. The forecast costs for next year are:

Peak season $300,000 Mid season $400,000 Low season $500,000

These costs could be reduced by 75% if the hotel were to close temporarily for one or more seasons of the year.

There are also some costs that are incurred by the hotel and can only be avoided by its permanent closure. These are estimated to $200,000 for next year.

Required:

(a) Prepare, in an appropriate format, a columnar statement that will help the managers of the hotel to plan for next year. Your statement should show the hotel’s activities by season and in total.

(18 marks)

(b)

(i) Identify, based on your statement, the actions that the managers could take to maximise the profit of the hotel for next year.

(3 marks)

43 | P a g e (ii) Explain TWO factors that the managers should consider before implementing the actions you identified in (b)(i).

(4 marks)

(Total = 25 marks)

44 | P a g e Questions – Section A Part B Cost Planning and Analysis for Competitive Advantage B1 – 1 SWAL (CIMA P2 Pilot paper 2005)

SW is a member of the SWAL Group of companies. SW manufactures cleaning liquid using chemicals that it buys from a number of suppliers. In the past SW has used a periodic review stock control system with maximum, minimum and re-order levels to control the purchase of the chemicals and the economic order quantity model to minimise its costs.

The Managing Director of SW is considering a change by introducing a Just in Time (JIT) system.

Required:

As Management Accountant, prepare a report to the Managing Director that explains how a JIT system differs from the system presently being used and the extent to which its introduction would require a review of SW’s quality control procedures.

(10 marks)

B1 – 2 X group (CIMA P2 May 2005)

The X group is a well-established manufacturing group that operates a number of companies using similar production and inventory holding policies. All of the companies are in the same country though there are considerable distances between them.

The group has traditionally operated a constant production system whereby the same volume of output is produced each week, even though the demand for the group’s products is subject to seasonal fluctuations. As a result there is always finished goods inventory in the group’s warehouses waiting for customer orders. This inventory will include a safety inventory equal to two weeks’ production.

Raw material inventories are ordered from suppliers using the Economic Order Quantity (EOQ) model in conjunction with a computerised inventory control system which identifies the need to place an order when the re-order level is reached. The purchasing department is centralised for the group. On receiving a notification from the computerised inventory control system that an order is to be placed, a series of quotation enquiries are issued to prospective suppliers so that the best price and delivery terms are obtained for each order. This practice has resulted in there being a large number of suppliers to the X group. Each supplier delivers directly to the company that requires the material.

45 | P a g e The Managing Director of the X group has recently returned from a conference on World Class Manufacturing and was particularly interested in the possible use of Just In Time (JIT) within the X group.

Required:

Write a report, addressed to the Managing Director of the X group that explains how the adoption of JIT might affect its profitability.

(10 marks)

B1 – 3 ML (CIMA P2 Nov 2005)

ML is an engineering company that specialises in providing engineering facilities to businesses that cannot justify operating their own facilities in-house. ML employs a number of engineers who are skilled in different engineering techniques that enable ML to provide a full range of engineering facilities to its customers. Most of the work undertaken by ML is unique to each of its customers, often requiring the manufacture of spare parts for its customers’ equipment, or the building of new equipment from customer drawings. As a result most of ML’s work is short-term, with some jobs being completed within hours while others may take a few days.

To date ML has adopted a cost plus approach to setting its prices. This is based upon an absorption costing system that uses machine hours as the basis of absorbing overhead costs into individual job costs. The Managing Director is concerned that over recent months ML has been unsuccessful when quoting for work with the consequence that there has been an increase in the level of unused capacity. It has been suggested that ML should adopt an alternative approach to its pricing based on marginal costing since “any price that exceeds variable costs is better than no work”.

Required:

With reference to the above scenario

(i) briefly explain absorption and marginal cost approaches to pricing;

(ii) discuss the validity of the comment “any price that exceeds variable costs isbetter than no work”.

(10 marks)

46 | P a g e B1 – 4 PK plc (CIMA P2 Nov 2005)

You are the assistant management accountant within PK plc. PK plc manufactures high quality self-assembly furniture from raw materials utilising highly skilled labour within a computer-controlled manufacturing facility. The company produces a range of furniture, and, because of the lead time to receive delivery of its raw materials, has a finished goods inventory policy of holding an average of two weeks estimated sales in inventory.

Customer demand is seasonal and, as a consequence, this finished goods inventory level fluctuates throughout the year. The company also holds inventories of raw materials based upon estimates of its production requirements. An absorption costing system is used to attribute all manufacturing costs to output.

Increasingly PK plc is facing competition, particularly from overseas manufacturers and its sales team have to make decisions about the extent to which it can offer price discounts in order to win customer orders.

Required:

Prepare a report addressed to the Management Team of PK plc that explains the changing nature of cost structures in the modern manufacturing environment and the implications for PK plc’s

(i) inventory valuation

(ii) short term decision making (10 marks)

Note: There are 2 marks available for format and presentational style

B1 – 5 Financial advisors (CIMA P2 May 2006)

A firm of financial advisors has established itself by providing high quality, personalised, financial strategy advice. The firm promotes itself by sponsoring local events, advertising, client newsletters, having a flexible attitude towards the times and locations of meetings with clients and seeking new and innovative ideas to discuss with its clients.

The senior manager of the firm has recently noticed that the firm’s profitability has declined, with fewer clients being interested in the firm’s new investment ideas. Indeed, many clients have admitted to not reading the firm’s newsletters.

The senior manager seeks your help in restoring the firm’s profitability to its former level and believes that the techniques of Value Analysis and Functional Analysis may be appropriate.

47 | P a g e Required:

(a) Explain the meanings of, and the differences between, Value Analysis and Functional Analysis.

(4 marks)

(b) Briefly explain the series of steps that you would take to implement Value Analysis for this organisation.

(6 marks)

(Total = 10 marks)

B1 – 6 Compliance v conformance (CIMA P2 May 2006)

The Managing Director of a manufacturing company based in Eastern Europe has recently returned from a conference on modern manufacturing. One of the speakers at the conference presented a paper entitled “Compliance versus Conformance – the quality control issue”. The Managing Director would like you to explain to her some of the concepts that she heard about at the conference.

Required:

Prepare a report, addressed to the Managing Director, that discusses quality costs and theirsignificance for the company. Your report should include examples of the different quality costs and their classification within a manufacturing environment.

(10 marks)

Note: 2 marks are available for report format

B1 – 7 AVN (CIMA P2 Nov 2006)

AVN designs and assembles electronic devices to allow transmission of audio / visual communications between the original source and various other locations within the same building. Many of these devices require a wired solution but the company is currently developing a wireless alternative. The company produces a number of different devices depending on the number of input sources and the number of output locations, but the technology used within each device is identical. AVN is constantly developing new devices which improve the quality of the audio / visual communications that are received at the output locations.

The Managing Director recently attended a conference on world class manufacturing entitled “The extension of the value chain to include suppliers and customers” and seeks your help.

48 | P a g e Required:

Explain

(i) the components of the extended value chain; and (3 marks)

(ii) how each of the components may be applied by AVN.

(7 marks)

(Total = 10 marks)

B1 – 8 W (CIMA P2 Nov 2006)

W has recently completed the development and testing of a new product which has cost

$400,000. It has also bought a machine to produce the new product costing $150,000.

The production machine is capable of producing 1,000 units of the product per month and is not expected to have a residual value due to its specialised nature.

The company has decided that the unit selling prices it will charge will change with the cumulative numbers of units sold as follows:

Cumulative sales units Selling price

$ per unit in this band

0 to 2,000 100

2,001 to 7,000 80

7,001 to 14,500 70

14,501 to 54,500 60

54,501 and above 40

Based on these selling prices, it is expected that sales demand will be as shown below:

Months Sales demand per month (units)

1 – 10 200

11 – 20 500

21 – 30 750

31 – 70 1,000

71 – 80 800

81 – 90 600

91 – 100 400

101 – 110 200

Thereafter NIL

49 | P a g e Unit variable costs are expected to be as follows:

$ per unit

A columnar cash flow statement showing the cumulative cash flow of the product after its

“Introduction” and “Growth” stages has already been completed and this is set out below:

Introduction Growth product’s life cycle. Do not copy the Introduction and Growth stages in your answer.

Ignore the time value of money.

(5 marks)

(b) Explain, using your answer to (a) above and the data provided, the possible reasons for the changes in costs and selling prices during the life cycle of the product.

(5 marks)

(Total = 10 marks)

B1 – 9 New product (CIMA P2 May 2007)

A company is planning to launch a new product. It has already carried out market research at a cost of $50,000 and as a result has discovered that the market price for the product should be $50 per unit. The company estimates that 80,000 units of the product could be sold at this price before one of the company’s competitors enters the market with a superior product. At this time any unsold units of the company’s product would be of no value.

50 | P a g e The company has estimated the costs of the initial batch of the product as follows:

$000

Direct materials 200

Direct labour ($10 per hour) 250

Other direct costs 100

Production was planned to occur in batches of 10,000 units and it was expected that an 80% learning curve would apply to the direct labour until the fourth batch was complete.

Thereafter the direct labour cost per batch was expected to be constant. No changes to the direct labour rate per hour were expected.

The company introduced the product at the price stated above, with production occurring in batches of 10,000 units. Direct labour was paid using the expected hourly rate of $10 and the company is now reviewing the profitability of the product. The following schedule shows the actual direct labour cost recorded:

Cumulative number of batches Actual cumulative direct labour cost $000 output given the actual cost of $280,000 for the first batch.

(ii) Calculate the actual learning rate exhibited at each level of output.

(iii) Discuss the implications of your answers to (i) and (ii) for the managers of the company.

(10 marks)

B1 – 10 New small company (CIMA P2 Nov 2007)

You are the management accountant of a new small company that has developed a new product using a labour intensive production process. You have recently completed the budgets for the company for next year and, before they are approved by the Board of Directors, you have been asked to explain your calculation of the labour time required for the budgeted output. In your calculations, you anticipated that the time taken for the first unit would be 40 minutes and that a 75% learning curve would apply for the first 30 units.

51 | P a g e Required:

(a) Explain the concept of the learning curve and why it may be relevant to the above company.

(3 marks)

(b) Calculate the expected time for the 6^th unit of output.

(3 marks)

(c) Discuss the implications of the learning curve for a company adopting a penetration pricing policy.

(4 marks)

(Total = 10 marks) Note: The learning index for a 75% learning curve is -0.415

B1 – 11 XY (CIMA P2 May 2008)

You are the Management Accountant of XY, an engineering company that assembles components into engines for sale to the automotive industry. The company is constantly under pressure from its customers to provide more efficient engines, which are also less damaging to the environment. The company uses value chain analysis as a tool in the management of its activities.

The Managing Director of XY has recently been invited to a conference to give a presentation entitled “The concept of the Value Chain and the management of profits generated throughout the chain in XY.”

Required:

Prepare a report for the Managing Director explaining the points that should be covered in the presentation.

(10 marks)

B1 – 12 Inventory levels (CIMA P2 May 2008)

A company experiences changing levels of demand, but produces a constant number of units during each quarter. The company allows inventory levels to rise and fall to satisfy the differing quarterly demand levels for its product.

52 | P a g e Required:

(a) Identify and explain the reasons for THREE cost changes that would result if the company changed to a Just-In-Time production method for 2009. Assume there will be no inventory at the start and end of the year.

(6 marks)

(b) Briefly discuss the importance of Total Quality Management to a company that operates a Just-In-Time production method.

(4 marks)

(Total = 10 marks)

B1 – 13 Workshop (CIMA P2 May 2008)

A company has developed a new product that it will manufacture in its workshop. The product is highly specialised and initially will be produced to order only. The product will be manufactured in batches. The estimated labour time required for the first batch is 40 hours, but due to the nature of the product and the manufacturing method to be used, it is expected that an 80% learning curve will apply.

Required:

(a) Calculate the expected time for the eighth batch.

(3 marks)

(b) When production commenced the first batch took 45 hours. The actual learning rates observed were as follows:

Month Total batches produced to date Actual learning rate

1 1

2 2 75%

3 4 75%

4 8 90%

For each of months 2 and 4, state possible reasons why the actual learning rates differed from the expected rates.

(3 marks)

(c) The total time taken to produce the first eight batches was 182⋅25 hours. Calculate the cumulative learning rate up to the end of Month 4. (Remember that the first batch took 45 hours).

(4 marks)

(Total = 10 marks)

53 | P a g e B1 – 14 Out-turn performace report (CIMA P2 May 2010)

The budget for the production cost of a new product was based on the following assumptions:

(i) Time for the 1st batch of output = 10 hours (ii) Learning rate = 80%

(iii)Learning will cease after 40 batches, and thereafter the time per batch will be the same as the time of the final batch during the learning period, i.e. the 40th batch (iv) Standard direct labour rate per hour = $12.00

An extract from the out-turn performance report based on the above budget is as follows:

Budget Actual Variance

Output (batches) 60 50 10 adverse

Direct labour hours 163.53 93.65 69.88 favourable Direct labour cost $1,962 $1,146 $816 favourable

Further analysis has shown that, due to similarities between this product and another that was developed last year, the rate of learning that should have been expected was 70% and that the learning should have ceased after 30 batches. Other budget assumptions for the new product remain valid.

Required:

(a) Prepare a revised out-turn performance report for the new product that:

(i) shows the flexed budgeted direct labour hours and direct labour cost based on the revised learning curve data, and

(ii) shows the variances that reconcile the actual results to your flexed budget in as much detail as possible.

(7 marks)

(b) Explain why your report is more useful to the production manager than the report shown above.

(3 marks)

Note: The learning index values for an 80% and a 70% learning curve are 0.3219 and -0.5146 respectively.

(Total 10 marks)

54 | P a g e B1 – 15 PQ (CIMA P2 May 2010)

PQ manufactures and sells consumer electronics. It is constantly working to design the latest gadgets and “must-haves” which are unique in the market place at the time they are launched. The management of PQ are aware of the short product life cycles in this competitive market and consequently use a market skimming pricing strategy at the introduction stage.

Required:

Explain the changes that are likely to occur in the following items at the three later stages in the product life cycle of a typical PQ product.

(i) Selling price (ii) Production costs

(iii) Selling and marketing costs

(Total = 10 marks)

B1 – 16 Timber products (CIMA P2 May 2010)

XY, a company that manufactures a range of timber products, is considering changing to a just-in-time (JIT) production system.

Currently XY employs staff who are contracted to work and be paid for a total of 3,937.75 hours per month. Their labour efficiency ratio is 96% and, as a result, they are able to produce 3,780 standard hours of output each month in normal working hours.

Overtime working is used to meet additional demand, though the management of XY try to avoid the need for this because it is paid at a 50% premium to the normal hourly rate of

$10 per hour. Instead, XY plan production so that in months of lower demand inventory levels increase to enable sales demand to be met in other months. XY has determined that the cost of holding inventory is $6 per month for each standard hour of output that is held in inventory.

XY has forecast the demand for its products for the next six months as follows:

Month Demand (Standard hours)

1 3,100

2 3,700

3 4,000

4 3,300

5 3,600

6 4,980

55 | P a g e You may assume that all production costs (other than labour) are either fixed or are not driven by labour hours worked, and that there is zero inventory at the start of month 1 and at the end of month 6. Assume also that production and sales occur evenly during each month at present, and that the minimum contracted hours will remain the same with the JIT system.

Required:

(a) With the current production system:

(i) Calculate for each of the six months and the period in total, the total inventory holding costs.

(ii) Calculate the total production cost savings made by changing to a JIT production system.

(6 marks)

(b) Explain TWO other factors that should be considered by XY before changing to a JIT production system.

(4 marks)

(Total = 10 marks)

B1 – 17 LMN (CIMA P2 May 2010)

LMN comprises three trading divisions plus a Head Office. There is a director for each trading division and, in addition, there is a Managing Director who is based in Head Office. Divisional directors are empowered to make decisions concerning the day to day operations of their division and investment decisions requiring an initial investment up to

$100,000. Investment decisions involving greater initial expenditure must be authorised by the Managing Director. Inter-divisional trading occurs between all of the trading divisions. The transfer prices are determined by Head Office. Head Office provides services and facilities to each of the trading divisions.

At the end of each month, the actual costs of Head Office are apportioned to the trading divisions. Each Head Office cost is apportioned to the trading divisions using an appropriate basis. The bases used are: number of employees; value of sales; capital invested; and standard hours of service delivered.

The Head Office costs, together with the costs and revenues generated at divisional level, are summarised in a divisional performance statement each month. The divisional directors are not happy with the present performance statement and how it is used to

The Head Office costs, together with the costs and revenues generated at divisional level, are summarised in a divisional performance statement each month. The divisional directors are not happy with the present performance statement and how it is used to

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