The Examiners Answers - November 2014

CIMA Gateway Assessment

Some of the answers that follow in Sections A and B are fuller and more comprehensive than
would be expected from a well-prepared candidate. They have been written in this way to aid
teaching, study and revision for tutors and candidates alike.
These Examiners' answers should be reviewed alongside the question paper for this
examination which is now available on the CIMA website at www.cimaglobal.com/m1papers
The Post Exam Guide for this examination, which includes the marking guide for each question,
will be published on the CIMA website by early February at www.cimaglobal.com/m1pegs

SECTION A

Answer to Question One

Rationale
This question examines several learning outcomes from Section B of the Performance
Management syllabus:
B1(f) 'apply the techniques of activity-based management in identifying cost drivers/activities'.
B1(c) 'explain the concepts of continuous improvement and Kaizen costing that are central to
total quality management'.
B1(h) 'explain how target costs can be derived from target prices and the relationship
between target costs and standard costs'.
B1(i) 'discuss the concept of life cycle costing and how life cycle costs interact with marketing
strategies at each stage of the life cycle'.

November 2014

Gateway Assessment

Suggested approach
(a) Explain the changing nature of costs within modern manufacturing: falling percentage of
direct costs and increasing percentage of overheads and discuss reasons for this. Discuss
the increasing importance of support activities and what ABC seeks to achieve; identification
of activities and related costs.
(b) Calculate overhead cost/unit for all three ornaments then go on to produce the profit
statement for traditional absorption and ABC.
(c) Explain target and Kaizen costing then go on to identify and discuss the differences, one
approach focusing on the design of the product and the other on efficiency of the process.

Requirement (a)
The development of the traditional absorption costing approach to dealing with overheads
occurred during a period when overheads represented only a small percentage of overall costs,
the vast majority of costs being accounted for by direct labour and materials. As such, any errors
committed when distributing the overheads to products were deemed to be insignificant.
Over time however, overheads as a percentage of total costs have increased significantly. With
the developments in advanced manufacturing many organisations have witnessed a decline in
direct labour costs to less than 10% of total costs, whilst overheads have continued to rise. This
rise has been especially notable in the area of support activities i.e. set up costs and production
scheduling (as the range and number of products increase), inspection costs (due to the ongoing drive for quality) etc.
One of the main reasons a traditional absorption costing approach has lost its relevance is that
many support activities take place to aid the efficient manufacture of the increasing range of
products in modern organisations, but the costs of such activities are not generally affected by
volume changes in production. The level of support activity costs are more likely to vary i.e.
increase, with the increasing complexity of the product being manufactured.
The problem of how to deal with overheads that are not primarily volume related is what ABM
tries to address.
ABM seeks to identify the major activities taking place within the organisation and then identify
the factors which determine/cause the costs of these activities to occur. Once the factors which
cause the costs have been identified, these costs can then be charged to products based on
how much of the activity each product has consumed/used.

Requirement (b)(i)
Working for absorption costing profit statement:
Overhead recovery rates:
Moulding Department
Finishing Department

$4 per machine hour

$3 per labour hour

Profit statement

Sales
Direct costs
Overheads
Profit (absorption costing)

Gnomes
$000s

Windmills
$000s

Sundials
$000s

Total
$000s

1800
600
750
450

1200
450
660
90

800
200
360
240

1,770
780

E.g. the overhead for Gnomes: [(2hrs x $4) + (11/2 x $3)] x 60,000 units = $750,000
Gateway Assessment

November 2014

Requirement (b)(ii)
Working for ABM profit statement:
Cost pool
Moulding costs
Set up costs
Finishing costs
Purchasing costs
Administration costs

$000s

Cost drivers

570
272
437
155
336

Cost driver rate

Moulding machine hours

Number of set ups
Labour hours
Purchase orders
Sales orders

300,000
1,360
190,000
24,800
30,000

$1.90/mc hr.
$200/set up
$2.30/lab hr.
$6.25/order
$11.20/order

Total overhead cost

Moulding costs
Finishing costs
Set up costs
Administration costs
Purchasing costs
Total

Gnomes
$000s

Windmills
$000s

Sundials
$000s

Total
$000s

228
207
190
168
48.75
841.75

228
138
52
67.20
76.25
561.45

114
92
30
100.80
30
366.80

570
437
272
336
155
1,770

Gnomes
$000s

Windmills
$000s

Sundials
$000s

Total
$000s

1800
600
841.75
358.25

1200
450
561.45
188.55

800
200
366.80
233.20

1,770
780

Profit statement

Sales
Direct costs
Overheads
Profit (ABM approach)
Profit (Absorption costing)

450

90

240

780

Requirement (c)
Target costing is a customer oriented technique which starts with identifying the price the
customer is willing to pay and deducting the target profit margin to give the target cost of the
product. If the predicted actual cost exceeds this target cost, efforts are made to close the gap.
Kaizen costing is a mechanism for reducing and managing costs, which involves making
improvements to a process through small incremental amounts rather than through large
innovations.
The major difference between target and kaizen costing is that target costing is applied during
the design stage, whereas kaizen costing is applied during the manufacturing stage of the
product life cycle.
As target costing is applied during the products design and planning stage, it can have the
maximum impact in determining the level of locked in costs. It is an iterative process that is
continued until a design is found that gives an estimated cost that is less than or equal to the
target cost. Therefore, the focus is on the product and cost reduction is achieved through
product design.
In contrast, Kaizen costing focuses on the production process and cost reductions are derived
from the increased efficiency of the production process. Therefore, the potential cost reductions
November 2014

Gateway Assessment

are smaller than with target costing because the products are already in the manufacturing
stage of the life cycle and a significant proportion of costs are already locked in.

Gateway Assessment

November 2014

Answer to Question Two

Rationale
Requirement (a) tests candidates' appreciation of the skills required of an effective project manager.
It examines learning outcome B2(c) 'explain the roles of key players in a project organisation'.
Requirement (b) tests candidates' understanding of the risks and uncertainties associated with
projects. It examines learning outcome B1(f) 'produce a basic project plan incorporating strategies for
dealing with uncertainty, in the context of a simple project'.
Suggested approach
Requirement (a) - Answers should discuss the range of specific skills that the project manager will
need to possess in leading the SCMIT project, linking to the project context. A good answer will
provide a comprehensive discussion on the range of skills the project manager will need, with
illustrative examples. A weak answer will be narrow and whilst it may identify some of the skills will
not elaborate in the project context.
Requirement (b) - Answers should first explain briefly the different types of risk and then go on to
explain the different ways the risk can be managed, for example explaining the risk management
process and strategies to minimise risk. A good answer will develop to explain both the stages in risk
management and the alternative strategies. A weak answer will give just a brief account of the way
risk can be managed.

Requirement (a)
There are a range of skills that the project manager of the supplier and client management IT
system (SCMITS) project should possess to be effective in terms their role in leading the project
team and creating confidence in the eyes of the project sponsor.
The project manager can make a significant difference to the effectiveness and success of a
project through leadership. Hence, leadership will be a key skill since the project manager will
very much be involved in influencing others in order to achieve the SCMITS project objectives.
If the project team is well led, then members of the team should respond by good performance
and cooperation. A leader should set examples for others in terms of their own efforts and
motivation, and by setting goals will ensure that both the whole team and each individual
understand what they are required to do and what standards of performance they are expected
to achieve.
An understanding of the different leadership styles would be useful for the SCMITS project
manager since different styles may need to be adopted at different stages of the project
lifecycle. For instance, a more autocratic approach may be more effective at the outset of the
project ensuring everyone understands the project objectives and their role. A more
participative approach may be more conducive when the project is underway so that everyone
feels they are able to contribute ideas if they want to.
As well as leadership skills the project manager needs to be an effective communicator since
part of their role will be regular communication with a variety of people and different project
stakeholders. Communication is essential at all stages of the project lifecycle. For example, the
project sponsor needs to be kept informed of the progress of the SCMITS project and the
achievement of key milestones, the project team needs to be kept up-to date with customer
requirements and any changes. Communication by the project manager can be both formal
such as project briefings, and informal. Active listening skills, which means questioning,
reflecting back and checking that you understand what is being said is an as important for the
project manager as being able to communicate effectively in verbal and written mediums.
The project manager will also need to be an effective negotiator. This is especially important in
project management because the project manager will not have the direct line authority over
resources and often must win commitment and cooperation of other people through negotiation
November 2014

Gateway Assessment

and persuasion. Negotiation in the context of the SCMITS project will be about the process of
satisfying the projects needs by reaching agreement with others. This may be particularly
complex since the project will impact on the operations of the J2B Company worldwide. This skill
is needed, since throughout the projects life the project manager will be involved in the
negotiation process with the different stakeholders. This could include negotiating on issues
such as the availability and level of resources, schedules, priorities, costs and people. The aim
would be for the project manager to use their negotiation skills to be able to manage the
outcome so that conflict is avoided.
The project manager will not have all the skills necessary to carry out the different tasks
associated with the SCMITS project so it is essential to be able to delegate to those who do
have the skills. Effective delegation should foster team work, collaboration and communication.
The project team should be empowered to accomplish the expected tasks in their area of
responsibility and feel ownership for their part of the project. Delegation, however, is not
abdication but more about empowering and motivating team members, with the project manager
retaining ultimate responsibility. To be successful, the project manager should be one who,
whilst empowering staff, can sense if serious errors are occurring and step in to take control.
The project manager should possess problem-solving skills since they will inevitably be faced
with problems through the SCMITS projects life. To solve problems the project manager needs
to gather information about the problems in order to understand the issues and generate
solution. They should encourage team members to identify and solve their own problems.
Finally, the project manager should have the skills to manage and control change. Project
changes can occur throughout the project lifecycle, for example changes to the customer or user
requirements or changes due to loss of key project team members. Ignoring or procrastinating
about change will have a detrimental impact on the project. It is, therefore, important that the
project manager has the skills to manage change in order that the impact on the
accomplishment of the project objectives and project schedule is kept to a minimum. The project
manager will need to have the ability to manage resistance to any changes, which could be
resistance by the customer or the project team. This is particularly important in view of the scale
of the SCMITS project which will impact on the operations of J2B around the world.
In summary, to be effective, in addition to the technical skills, the project manager of the SCMITS
project will need a set of skills that will lead the project team to achieve the project objectives and
client satisfaction.

Requirement (b)
The project to develop the supplier and client management IT system (SCMITS) will be
vulnerable to risks throughout its lifecycle. It will, therefore be important that the appointed
project manager identifies potential risks as part of the project initiation stage.
Management of risk for the SCMITS project essentially involves having processes in place to
monitor risks, access to reliable and up-to-date information about risks, the right balance of
control in place to deal with those risks, and a decision making process supported by a
framework of risk analysis and investigation. This will encompass both identifying risk and also
put in place policies to eliminate or reduce these risks.
First of all the SCMITS project manager should be aware that there are different types of risk.
Some risks are quantifiable and the assessment of risk can be made with a high degree of
certainty, using statistical analysis. Other risks cannot be quantified accurately and the risks
have to be subjectively assessed. How accurate these judgements are will depend on the
knowledge and skills of the person making the judgement and the information available.
Another type of risk is socially constructed risk, which is an aspect of human psychology, in
other words, people tend to be poor at the rational assessment of risk, downplaying some and
being over-concerned about others.

Gateway Assessment

November 2014

The project manager should take an overview of the SCMITS project in order to establish what
could go wrong during the projects lifecycle and the possible consequences. The following
process of risk management could help the project manager. The stages are as follows:

Identifying and recording risks, for example, producing a list of possible risks facing the
project and recording in a project risk register. The project manager needs to focus on
identifying the risks that are going to affect significantly the SCMITS project
performance.

Analysis and assessment of the risks - this involves assessing the probability and
impact of the individual risks identified. The probability is then evaluated in terms of the
likelihood of the risk actually happening, including the frequency of which this may arise.
Impact can be considered in terms of the financial consequence of a particular risk
actually occurring.

Prioritising - this involves producing a ranked ordering of the various risks identified.

Carrying out risk management strategies - the project manager will need to decide on
the individual strategy for managing each risk.

Reviewing and monitoring the success of the risk management approach to ensure that
the risk is being managed effectively. It also requires tracking the progress of the
strategy in resolving the risk and ensuring no new risks have emerged.

There are a number of different strategies that could be used by the project manager to
minimise or manage possible risks associated with the SCMITS project, for example:

Avoidance, which is where the project manager would look to identify the factors that
might give rise to risk and remove these factors wherever possible from the project.
This could result in changing or abandoning particular objectives of the SCMITS project
or more fundamentally changing the project scope.

Reduction or mitigation of risk would require the project manager to appreciate that the
potential for risk cannot be removed but action has been undertaken to reduce the
incidence and/or its consequences. This can be achieved by putting in place more
internal project controls.

Transference of risk involves finding another party who is willing to take responsibility for
its management and who will bear the liability of the risk should it occur. This could be
through insuring the risk, or sub-contracting to a specialist supplier.

Absorption sometimes referred to as acceptance, is where the potential risk is accepted

as an inevitable part of the project. The hope will be that the incidence and
consequences can be coped with, if necessary. This will require the project manager to
continue to monitor risks to ensure that their potential impact or likelihood has not
increased throughout the project's lifecycle. This strategy will be adopted when the risk
is determined as having low impact and probability of occurring, and allowing the project
manager to focus on the more significant risks.

November 2014

Gateway Assessment

In determining which strategy would be appropriate to manage the risks in the SCMITS project,
an analysis of impact and likelihood of the various risks occurring should be undertaken which
can be plotted on a grid - see below.

It is important that the project manager appreciates that risk management is a continuous
process throughout the life of the SCMITS project and procedures must be in place to regularly
review and reassess the risks documented in the risk register.

Gateway Assessment

November 2014

Answer to Question Three

Rationale
The question tests the following learning outcomes from the F2 syllabus: A1(a) 'prepare a
complete set of consolidated financial statements in a form suitable for publication for a group of
companies' and A1(b) 'demonstrate the impact on group financial statements where'
Requirement (a) tests the preparation of the statement of financial position including the
complex area of piecemeal acquisitions. Requirement (b) requires an adjustment to parent's
equity for the same entity.
Suggested approach
The most efficient approach would be to set up the pro-forma for the SOFP and then work
systematically through the headings, preparing the consolidation adjustments where required.

Requirement (a)
Consolidated statement of financial position for the ABC Group as at 30 June 2014

All workings in $000

$000
ASSETS
Non-current assets
Property plant and equipment (161,300 + 34,000 + 3,067 (W1))
Goodwill (W2)
Current assets
Inventories (36,000 + 8,000 - PUP 400)
Receivables (60,000 + 19,000 - intracompany 6,000)
Cash and cash equivalents (12,000 + 3,000 + cash in transit 4,000)
Total assets
EQUITY AND LIABILITIES
Equity
Share capital ($1 equity shares)
Retained earnings (W3)
Other components of equity (W4)

198,367
1,800
200,167
43,600
73,000
19,000
135,600
335,767

Non-controlling interest (W5)

Total equity

100,000
141,074
241,074
8,293
249,367

Non-current liabilities (20,000 + 8,000)

Current liabilities (40,400 + 20,000 - intracompany 2,000)
Total liabilities
Total equity and liabilities

28,000
58,400
86,400
335,767

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Gateway Assessment

Workings
Working 1 FV adjustments
Uplift in PPE
Additional dep'n (3,2000/10 yrs x 5/12

$000
3,200

Working 2 Goodwill
Consideration transferred for the 60%
Fair value of 20% holding at 1 February 2014
Fair value of non-controlling interest
Net assets acquired:
Share capital
Retained earnings
FV adjustment on acquisition (W1)
Goodwill at acquisition

$000

$000

(133)

3,067

$000

$000
20,700
7,900
7,400
36,000

10,000
21,000
3,200

Working 3 Retained earnings

As at 30 June 2014
Pre-acquisition retained earnings (W2)
FV adjustment (W1)
Unrealised profit $(2,000 x 20%)
Group share 80%
Group profit on derecognition of AFS investment - to deemed
disposal date, 1 February 2014 (7,900 - 6,400)
Consolidated retained reserves

ABC
$000
136,000

3,574
1,500

(34,200)
1,800
XY
$000
26,000
(21,000)
(133)
(400)
4,467

141,074

Working 4 Other components of equity and AFS investments

Cost of 60% investment (1 Feb 2014)
Cost of 20% investment (1 Mar 2010)
Therefore, cost of 80% investment (30 June 2014)
Compared with fair value of 80% investment (30 June 2014)
Resultant gain recognised by ABC in individual accounts since 1 Mar 2010 and
balance in other reserves of ABC

$000
20,700
6,400
27,100
28,700
1,600

This gain will be removed from the consolidated accounts as the group gain on derecognition of
the original investment is the relevant figure for the consolidated accounts, leaving a balance of
NIL in the group accounts for other reserves.
Working 5 Non-controlling interest
Fair value at 1 February 2014
Plus 20% adjusted post acquisition reserves of 4,467 (W3)
Non-controlling interest at 30 June 2014

$000
7,400
893
8,293

Requirement (b)
Additional acquisition of shares
Adjustment to parent's equity
Consideration transferred
Reduction in NCI at 1 July 2014 (10/20% x $8,293,000)
Adjustment to retained earnings - debit
Recorded as
Dr
Dr

NCI
Group retained earnings
Cr
Bank
Being the adjustment to parent's equity

Gateway Assessment

10

$000
4,400
(4,147)
253

$4,147,000
$253,000
$4,400,000

November 2014

SECTION B
Answer to Question Four
Rationale
Question Four sub-questions 4.1 to 4.12 test candidates knowledge of a wide variety of
topics within the syllabus, which were not examined in questions one, two and three, through
the use of objective test questions (OTQs).
Suggested approach
Sub-questions 4.1 to 4.12. Except for 4.7 where 1 mark was awarded for each component
these sub-questions have been constructed on the basis that there is only one correct
answer. Marking is therefore on the basis of 2 marks for a correct answer and 0 marks for an
incorrect answer.

4.1

Workings
Budgeted sales for the period
Margin of safety (25%)
Break-even volume of sales

500,000 units
125,000 units
375,000 units

Selling price = contribution (40%) + variable cost (60%) = $20

$8
+
$12
At break-even sales level:
Sales revenue (375,000 units x $20)
Variable costs (375,000 units x $12)
Fixed costs

$7,500,000
$4,500,000
$3,000,000

The answer is B

4.2

Workings
Units
50,000
60,000
70,000
80,000

Selling
Price/unit
$10
$9.50
$9
$8.50

Variable
Cost/unit
$4
$4.20
$4.40
$4.60

Contribution
/units
$6
$5.30
$4.60
$3.90

Total
Contribution
$300,000
$318,000
$322,000
$312,000

From the above calculation a production level of 70,000 units gives the highest
contribution.
The answer is C

November 2014

11

Gateway Assessment

4.3

Workings
The new direct labour cost at the old hourly rate would be:
(33 hrs x 100) = 3hrs x $10/hr = $30 per unit
(
110)
This would lead to an increase in unit contribution and profit of $3. The employees would
benefit from 40% of this additional contribution/profit, receiving $31.20 for each unit
produced.
New hourly rate : $31.20/3hrs = $10.40

The answer is A

4.4

Workings
Total contribution

25,000 units x $25.60/unit

Less Depreciation
$175,000
Fixed costs
$350,000

= Profit
Less

Residual income

= Cost of capital

$640,000
$525,000
$115,000
$32,500
$82,500

The answer is C

4.5
The answer is D

4.6
The answer is B

4.7

The answer is Delegation

4.8

The answer is any three from:

Factor conditions
Demand conditions
Related and supporting indudtries
Firm strategy, structure and rivalry

4.9
The answer is A

4.10
The answer is C

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November 2014

4.11
The answer is B

4.12
The answer is B

November 2014

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Gateway Assessment