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The Examiners’ Answers - May 2012 G1 - CIMA Management Accountant 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 Examiner's answers should be reviewed alongside the question paper for this examination which is now available on the CIMA website at The Post Exam Guide for this examination, which includes the marking guide for each question, will be published on the CIMA website by early August at

SECTION A Answer to Question One Rationale This question examines several learning outcomes from Section B of the Performance Management syllabus. Part (a) examines learning outcome B1(b) 'evaluate the impacts of just-in-time production, the theory of constraints and total quality management on efficiency, inventory and cost'. Part (b) (i), (ii) and (iii) examines learning outcome B1(e) 'apply learning curves to estimate time and cost for new products and services'. Part (b) (iv) examines learning outcome B1(c) 'explain the concept of continuous improvement and Kaizen costing that are central to total quality management'. Suggested approach Part (a) requires candidates firstly to calculate average inventory under the current system and then production costs under both the current and proposed systems. Parts (b)(i) and(ii) are straightforward learning curve calculations which feed into the contribution statement in part (iii). Finally, candidates should explain the principle of Kaizen costing, then, using their answer to part (iii), show how RTY may use this principle to increase contribution.

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G1 - Examiners' Answers

Requirement (a) Present system: Quarter 1 2 3 4

Production 30,000 30,000 30,000 30,000

Sales 22,000 32,000 34,000 32,000

Closing inventory 8,000 6,000 2,000 NIL

Average inventory 4,000 7,000 4,000 1,000 16,000

The difference in profits will be the same as the difference in costs because the revenue is not affected by the method of production that is used. Production costs: $000 9,045 80 9,125

30,000 units x ($70 + $75 + $78 + $78.50) Inventory holding costs 16,000 units x $5

If a JIT production system is used the production costs will be: $000

$000 1,540

Quarter 1

22,000 x $70

Quarter 2

30,000 x $75 2,000 x $95

2,250 190


30,000 x $78 4,000 x $99

2,340 396


30,000 x $78.50 2,000 x $99.50

2,355 199

Quarter 3

Quarter 4

2,554 9,270

Using a JIT system would reduce the profits by $145,000

Requirement (b) (i) y = ax


y = 900,000 x 8


= $460,827

(ii) The average cost for 7 batches is: Y = 900,000 x 7


= $481,067

The total costs are: 8 batches: $460,827 x 8 7 batches: $481,067 x 7 th Cost for 8 batch

G1 - Examiners' Answers

$ 3,686,616 3,367,469 319,147


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(iii) Total direct labour costs: st

1 7 batches Batches 8 - 10: 3 batches x $319,147 Direct material cost Variable overhead Sales revenue Contribution

$ 3,367,469 957,441 4,324,910 1,800,000 1,200,000 7,324,910 7,500,000 175,090

(iv) Kaizen costing is based on the principle that processes are continuously reviewed to identify small incremental changes that result in cost savings. The process of review involves all of the employees because they are in a position to identify any changes that may be beneficial. As can be seen from the answer to part (iii) above the contribution earned from the new product is lower than the target of $500,000 by $324,910. In order to achieve the target, costs would need to reduce by this amount which is 4% of the total cost. Such a small reduction in costs may be achieved by small changes to the processes such as the purchasing of materials or savings in variable overhead costs, or a small increase in the rate of learning.

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G1 - Examiners' Answers

Answer to Question Two Rationale Part (a) requires candidates' to be familiar with what is involved in the initiation stage of a project and then develop to explain what should be included in a project initiation document. It examines learning outcome B1(d) 'Identify the characteristics of each phase in the project process'. Part (b) assesses candidates' comprehension of risk and uncertainties associated with project work. 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 Answers to part (a) should first discuss what is involved in the initiation stage of a project and then develop to explain what should be included in the project initiation document (PID).Good answers will include reference to aspects of the project outlined in the scenario. Answers to part (b) should first explain the different types of risk and then go on to explain the different ways risk can be managed, e.g. the risk management process and strategies to minimise risk. This should be followed by an explanation of uncertainties within the context of a project and the techniques that F could use to manage uncertainties.

Requirement (a) Project initiation is usually classed as the first stage of the project planning process and is an important stage in project management since it involves developing the initial project plans. It sets out the vision for the project and the establishment of goals and objectives. It is at this stage that the members of the project team will need to determine the scope and objectives of the construction project, undertaking feasibility analysis. The Project Initiation Document (PID) will be created, which sets out the project success criteria. The (PID) is sometimes referred to as the project charter, project brief or project authorisation document. The purpose of the PID is to provide a base document against which progress and change through the life of the project can be assessed. It will help in the stadium construction project by setting out the initial project plans and defining the terms of reference for the project and ensure coordination and control systems for the project are in place. The document will provide the background, for example, why the project is necessary, with some rationale for the building of the multi-purpose stadium. An overview of the construction project in the PID will provide information on the key dates, the project objectives, specifying exactly what the project should deliver. The objectives can be defined in terms of the triple constraints of the time they should take, what they should cost and the quality that should be delivered. In this case, the desired outcomes are the construction of a new stadium which must be delivered in time for the world athletics meeting. Any constraints should also be acknowledged such as budget or available resources (i.e. people, money and equipment needed). The PID will help the project team to convey the scope of the project in terms of what is to be included and can be achieved by defining the principal deliverables. The document can be used so that the project team is in general agreement about the nature of the project. To avoid confusion and argument between people during the life of the project, it will also be worth determining anything that it not included. Otherwise there is a danger that the project objectives could change, due to potential conflicting views of the various stakeholders and different user needs.

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The PID should set out the roles, responsibilities and signatory powers of the different members during the project, along with other issues associated with control. The communications, types of meeting and reports should also be explained in the document.

Requirement (b) The construction project to build the stadium will be susceptible to risks and uncertainties but there is range of techniques that F could use to identify risk and put in place policies to eliminate or reduce these risks and manage for uncertainties. There are different types of risk. Some risks are quantifiable and can be established using statistical analysis of past occurrences. The probability of a given loss can then be multiplied by its likely cost. Some risks are unquantifiable, which makes them more uncertain and difficult to manage. There is also 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 overconcerned about others. F should take an overview of the construction project in order to establish what could go wrong during the project’s lifecycle and the possible consequences. The five stage process of risk management could help F. This would involve him: • • • • •

Identifying and recording risks, for example, in a project risk register Assessing risks and recording this assessment Planning and recording risk strategies Carrying out risk management strategies Reviewing and monitoring the success of the risk management approach

There are a number of different strategies that could be employed by F to minimise or manage possible risks associated with the stadium construction project, for example: •

Avoidance, whereby F would look to identify the factors that might give rise to risk and remove these factors where possible.

Reduction or mitigation would require F to appreciate that the potential for risk cannot be removed but analysis has been undertaken to reduce the incidence and/or its consequences.

Transference, whereby the risk is passed on to someone else, for example an insurer.

Absorption, where the potential risk is accepted in the hope that the incidence and consequences can be coped with, if necessary.

It is important that F realises that risk management is a continuous process throughout the life of the construction project and procedures must be in place to regularly review and reassess the risks documented in the risk register. Uncertainty is more difficult to evaluate, and hence F should use contingency planning which involves constructing a number of scenario plans for each risk identified. This would then allow F to look at the project network incorporating each different alternative. It would also allow F to switch to the appropriate plan when the contingency is needed. F could add artificial slack into risky activities, known as buffering, to reduce possible penalties for non-completion of stages on time. F could also make use of the PERT techniques in the planning phase to help account for uncertainty. This, in essence, is a form of network analysis of the construction project, but is designed to account for uncertainty. For each activity an optimistic, most likely and pessimistic estimate of times is made, on the basis of past experience or guesswork. These estimates are then converted into a mean time and a standard deviation. It should then be possible to: May 2012


G1 - Examiners' Answers

• •

Establish the duration of the critical path using expected times Calculate a contingency time allowance

This contingency time allowance, stated in a number of standard deviations, will indicated the probability of completion within the total time allowed, including a contingency. This technique would help F, particularly since the project could face penalties for non-delivery of certain stages.

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Answer to Question Three Rationale This question tests key areas of consolidation and requires the preparation of a group cash flow statement. It examines learning outcome 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' Suggested approach The missing figure approach is still the easiest and most efficient way of tackling the preparation of a cash flow statement. Setting up the pro-forma for each of the 3 cash flow headings and then annotating the question paper, highlighting how each adjustment will impact the cash flow and noting how each element will appear in the cash flow.

Consolidated statement of cash flows for DEF Group for the year ended 31 December 2011 Cash flows from operating activities Profit before tax Add back non-operating and non-cash items Depreciation Amortisation of intangible assets Goodwill impairment (W1) Share of profit of associate FOREX gain in admin Finance costs Changes in working capital: Decrease in inventories (W2) Decrease in receivables (W2) Increase in payables (W2) Cash inflow from operating activities Less interest paid (W8) Less tax paid (W3) Net cash inflow from operating activities

$m 198 260 60 50 (100) (10) 280 40 40 20 838 (292) (8)


Cash flows from investing activities Acquisition of property, plant and equipment (W4) Acquisition of subsidiary, net of cash acquired (120 - 40) Purchase of intangible assets (W5) Dividend received from associate (W6) Cash outflow from investing activities

(124) (80) (150) 20

Cash flows from financing activities Proceeds of share issue (W7) Dividend paid to non-controlling interest (W9) Repayment of long term borrowings (1,080 - 760) Cash outflow from financing activities

160 (12) (320)

Net inflow of cash and cash equivalents Cash and cash equivalents at 1 January 2011 Cash and cash equivalents at 31 December 2011

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(172) 32 72 104

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Working 1 - Goodwill

Impairment (balancing figure) Closing balance

$m 150 116 266 (50) 216

Goodwill on acquisition Consideration transferred (200m x $1.50) + Cash $120m Non-controlling interest (20% x $380m) Less fair value of net assets acquired Goodwill arising

420 76 (380) 116

Opening balance Arising on acquisition (see below)

Working 2 - Changes in WC

Opening balance On acquisition Movement (balancing figure) Closing balance

Inventories $m 560 120 680 (40) 640

Receivables $m 620 140 760 (40) 720

Payables $m 380 60 440 20 460

Working 3 - Tax Paid $m 204 40 244 8 236

Opening balance $(64m + 140m) Tax on profit Movement (balancing figure) Closing balance $(80 + 156)m

Working 4 - Acquisition of PPE $m 1,680 140 1,820 (260) 1,560 134 1,694 124

Opening net book value On acquisition Depreciation Additions (balancing figure) Closing balance Additions for cash $134m-Forex gain $10m

Working 5 - Acquisition of Intangible assets $m 120 (60) 60 150 210

Opening net book value Amortisation Additions (balancing figure) Closing balance G1 - Examiners' Answers


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Working 6 - Dividend received from associate Opening balance Share of associate's profit Dividend received from associate (balancing figure) Closing balance

$m 400 100 500 (20) 480

Working 7 - Proceeds of share issue $m 1,000 300 1,300 160 1,460

Opening balance $(400 + 600)m Issued on acquisition (200m x $1.50) Issue for cash (balancing figure) Closing balance ($900m + $560m)

Working 8 - Interest paid As per income statement Plus gain on HFT offset against finance costs (52-40) Interest paid

$m 280 12 292

Working 9 - Dividend paid to non-controlling interest $m 240 76 24 340 (12) 328

Opening balance NCI On acquisition (20% x 380) NCI share of profit for year Dividend paid to NCI (balancing figure) Closing balance NCI

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G1 - Examiners' Answers

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 4.8 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 Budgeted sales of G Decrease in finished goods inventory Production required

97,000 units (1,400) units 95,600 units

Raw materials needed for production (95,600 units x 5kgs/unit Increase in raw material inventory Budgeted raw materials purchases

478,000 kgs 3,000 kgs 481,000 kgs

The answer is B


If Y accepts the offer, Z loses sales revenue of £130 per unit, saves variable costs of £70 per unit and so overall loses £60 per unit. M pays £115 per unit, saves £70 per unit and so overall loses £45. Therefore, Z's profit decreases and M's overall company profit also decreases.

The answer is C

4.3 € 300,000

Original budgeted contribution: (25,000 units x €12) Changes as a result of increases: Selling price (€28 x 110%) Variable cost (€16 x 108%) Contribution

€ per unit 30.80 (17.28) 13.52

Contribution required/new contribution per unit €300,000/€13.52


new sales volume required


22,190 units

The answer is B

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A is incorrect because LP is only necessary where there is more than one limiting factor B is incorrect because it depends on where the feasible region is located as to the point at which profit is maximised. The furthest point where resource constraints intersect may be where the resource is not a binding constraint. D is incorrect as the ranking is based on the contribution per unit of limiting factor and not per unit of product.

The answer is C


The answer is B - Threshold Resources


The answer is C - Clan/cultural control


The answer is C - Participative


Three characteristics of the positioning view of strategy: • • •


Competitive advantage stems from the firm's position in relation to its environment Aligns internal resources with external opportunities and threats Outside-in view of the firm, adapting strategy to fit with its external environment

1,000 options x (300-32-35) employees x FV$8 x 1/3 years



The SARs are an example of a cash-settled share-based payment and therefore the credit is to liabilities.

The answer is D 4.10 Opening balance $ 9,130,000

Finance cost at 7% $ 639,100

Interest paid 5% $ (475,000)

Closing balance $ 9,294,100

The answer is B

4.11 EPS =

profit for the year available to shareholders weighted average number of shares in the year

= $160m/300m = 53.3 cents per share The answer is A

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G1 - Examiners' Answers

4.12 Goodwill Consideration transferred Non-controlling interests


Fair value of net assets acquired: Share capital Retained earnings

$000 3,250 1,960 5,210

1,000 2,760 (3,760) 1,450

Goodwill on acquisition

Note: the additional 20% purchase of shares does not trigger a goodwill calculation because SR already controls BN. The additional acquisition is dealt with by an adjustment to parent's equity. The answer is B

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