2. Masters Gateway 2 November 2012
SECTION A – 75 MARKS
[You are advised to spend no longer than 45 minutes on each question in this section]
ANSWER ALL THREE QUESTIONS
Question One
M Company manufactures and assembles a range of components for sale to other manufacturers.
The company operates in a constantly changing market and has to introduce new components
regularly as older components are no longer produced. The market in which M Company operates
has a number of competitors producing similar items and therefore the company has always
concentrated on being as efficient as possible, in particular with the control of costs. To this end,
M Company has for many years used Activity Based Costing.
In order to decide whether or not to produce a new component, M Company uses a target cost
approach.
M Company is considering the production of a new component, X1. The following information is
available.
The cost pools and cost drivers used by M Company for all its components are as follows:
Cost pool $ Cost driver
Machining 1,064,000 Machine hours 380,000
Assembly 580,000 Direct labour hours 725,000
Set up costs 120,000 Set ups 60
Order processing 84,000 Customer orders 24,000
Stores and purchasing 156,960 Requisitions raised 18,000
The data for X1 are as follows:
Due to the constantly changing market, M Company is looking only at the next year, when it is
expected that 40,000 units of X1 will be produced and sold. The target selling price for X1 is to be
$40 per unit. M Company expects a 15% margin on sales on all of its products.
Each unit of X1 is expected to require $10 of direct materials and to need two machine hours to
produce.
During the year the production of 40,000 units of X1 will require:
Number of set ups 10
Number of orders to be processed 6,000
Number of requisitions to be raised 2,500
M Company has a very experienced labour force and expects there to be an 80% learning curve
in the assembly of X1. The number of direct labour hours for the first unit will be 8 hours and a
steady state of labour hours for production will be reached at 474 units, after which each unit will
require the same average number of direct labour hours.
Required
(a) Explain what is meant by 'target cost approach' and what relationship it has, if any,
with life cycle costing.
(6 marks)
3. November 2012 3 Masters Gateway
The direct labour cost per hour in assembly is $12 per hour.
The 80% learning index is -0.322
The calculation for the steady state direct labour hours of assembly per unit of X1 should be taken
to one decimal point.
.
Section A continues on page 4
TURN OVER
Required
(b) Calculate the estimated cost per unit of producing X1 at the steady state of production
and advise M Company as to whether it should proceed with its production.
(15 marks)
(c) Discuss TWO possible problems/limitations with M Company's use of the target cost
approach in the above scenario.
(4 marks)
(Total for Question One = 25 marks)
4. Masters Gateway 4 November 2012
Question Two
TP Company has invested in the development of a new customer relationship information system
which will improve customer ordering and invoicing and provide better customer information. It will
also enable the company to track trends in customer behaviour.
However, the project which was set up to design, develop and deliver the new customer
relationship information system has experienced numerous problems throughout its lifecycle. The
project ended up being well over budget and was not ready for launch by the due date.
Two months after the new system was installed it is clear that there are major errors within the
system. A number of customers have complained that the new system is not user friendly and
others say that they have not received the correct orders. In addition, some customers say that
they have received incorrect invoices. Even worse, some customers are saying that they will no
longer do business with TP Company because of the problems they have encountered with the
new system.
A meeting, called to discuss the failures of the project, between the project manager, the project
team and the project sponsor has ended up with everyone blaming each other. The project team
members said they were unclear about their responsibilities and that there was poor
communication throughout the project.
It is apparent that a project management methodology, which could have helped in identifying and
rectifying earlier in the project lifecycle the problems that have now transpired, was not used.
Section A continues on page 6
Required:
(a) Explain to TP Company how a project management methodology, such as PRINCE2,
could have helped to prevent the failures of the customer relationship information
system project.
(15 marks)
(b) Discuss how each of the two project management techniques, work breakdown
structure and Gantt charts, could have been used to help communication in the
customer relationship system project.
(10 marks)
(Total for Question Two = 25 marks)
6. Masters Gateway 6 November 2012
Question Three
JKL, a listed entity, made investments in three entities, AB, CD and EF, during the financial year
to 31 December 2011. The summarised statements of financial position for JKL, AB and CD as at
31 December 2011 are provided below:
JKL AB CD
ASSETS $000 $000 $000
Non-current assets
Property, plant and equipment 90,200 24,000 13,100
Investments 23,400 - -
113,600 24,000 13,100
Current assets 9,000 4,200 3,300
Total assets 122,600 28,200 16,400
EQUITY AND LIABILITIES
Equity
Share capital ($1 ordinary shares) 50,000 10,000 5,000
Share premium 10,000 - -
Revaluation reserve 12,000 2,000 1,000
Retained earnings 24,600 10,800 7,600
96,600 22,800 13,600
Liabilities
Non-current liabilities 18,000 2,000 -
Current liabilities 8,000 3,400 2,800
Total liabilities 26,000 5,400 2,800
Total equity and liabilities 122,600 28,200 16,400
1. JKL acquired 8 million of the $1 ordinary shares of AB on 1 January 2011 for $17.3 million.
The investment is carried at cost in the financial statements of JKL. At the date of
acquisition, AB had retained earnings of $8.2 million and a balance on revaluation reserve
of $2 million. The fair value of the net assets acquired was the same as their carrying value
at the date of acquisition.
The non-controlling interest was valued at fair value at the date of acquisition. The fair value
of the non-controlling interest at 1 January 2011 was $4.1 million.
2. JKL acquired 40% of the ordinary share capital of CD on 1 July 2011 for $5 million. The
investment is carried at cost in the financial statements of JKL. At that date, CD had
retained earnings of $6.2 million and a balance on the revaluation reserve of $1 million.
3. JKL made a further investment in EF, a listed entity, at a cost of $1.1 million. The shares
acquired amounted to 8% of the ordinary share capital of EF. The investment was not
classified as held for trading and is currently carried at cost in the financial statements of
JKL. At 31 December 2011 the investment in EF had a market value of $1.3 million.
4. In the year to 31 December 2011, AB sold goods to JKL with a sales value of $1.2 million.
10% of the goods remain in inventories at the year end. AB made a 25% profit margin on all
sales to JKL.
5. An impairment review conducted at the year end estimated that goodwill on acquisition of
AB was impaired by 10%. There was no evidence of the other investments being impaired.
6. The revaluations are performed every two years by an independent valuer. The past
revaluations relate solely to non-depreciable assets.
7. November 2012 7 Masters Gateway
(Total for Section A = 75 marks)
End of Section A
Section B starts on page 8
TURN OVER
Required:
(a) Explain how each of the three investments held by JKL should be classified and
accounted for in the consolidated financial statements of JKL for the year to 31
December 2011.
(7 marks)
(b) Prepare the consolidated statement of financial position of the JKL Group as at 31
December 2011.
(18 marks)
(Total for Question Three = 25 marks)
8. Masters Gateway 8 November 2012
SECTION B – 25 MARKS
[You are advised to spend no longer than 45 minutes on this section]
ANSWER ALL TWELVE QUESTIONS
Question Four
4.1 M produces a single product, T, for which the following direct labour budget was set for the
period:
Budgeted production 4,000 units
Direct labour hours 20,000
Budgeted labour cost $160,000
The actual results for the period were:
Production 4,200 units
Direct labour hours 23,520
Labour cost $176,400
During the period, the manager of M realised that, due to a planning error, the original
standard cost that was set was unrealistic and therefore unacceptable for cost control. The
revised standard to be used for analysis purposes is:
5.5 direct labour hours per unit of T
Labour cost per hour $7.80
What was the total planning variance for the period?
A $8,400 adverse
B $12,180 adverse
C $16,400 adverse
D $19,360 adverse
(2 marks)
Section B continues on the opposite page
Instructions for answering Section B:
The answers to the twelve sub-questions in Section B should ALL be written in your
answer book.
Your answers should be clearly numbered with the sub-question number and ruled
off so that the markers know which sub-question you are answering. For multiple
choice questions you need only write the sub-question number and the letter
of the answer option you have chosen. You do not need to start a new page for
each sub-question.
9. November 2012 9 Masters Gateway
4.2 A is divided into divisions and each division is a cost centre. In the Machining Division,
where capacity is limited to 10,000 hours per period, two products are manufactured. The
production costs of the two products are as follows:
Product A Product B
£ per unit £ per unit
Variable costs 40 25
Fixed costs 20 16
60 41
Period demand 3,000 units 3,000 units
Fixed costs are absorbed at £8 per machine hour.
Each of the products can be bought in from external suppliers to meet any excess demand;
Product A can be bought for £71 per unit and Product B for £48 per unit.
What is the minimum total cost (divisional production costs plus any external purchase
costs) the manager of the Machining Division must incur to meet the total demand for both
products?
A £312,750
B £315,250
C £318,400
D £320,500
(2 marks)
4.3 D is a very large manufacturing company which has six divisions. Each division is based on
a geographical area of the country in which D operates and most of the divisions supply
and receive components to/from each other.
Like many other companies, D has always used a cost-based approach to transfer pricing
between divisions within the company.
The following explanations are often given as to why cost-based approaches to transfer
pricing are used.
(i) Because the receiving division wishes to maximise its profits
(ii) Because the external market is imperfect
(iii) Because there is no external market for the component being transferred
(iv) Because the transferring division wants to maximise profits
Which of the above is/are correct?
A (i) only
B (ii), (iii) and (iv)
C (ii) and (iii)
D (i) and (iv)
(2 marks)
Section B continues on page 10
TURN OVER
10. Masters Gateway 10 November 2012
4.4 Q is due to launch a new product into the market but is undecided about which pricing
strategy to use. When is market penetration pricing appropriate?
(i) If demand is inelastic
(ii) If there are significant economies of scale to be achieved
(iii) If the firm wishes to discourage new entrants from entering the market
(iv) If the product has a short life cycle
A (ii) and (iii)
B (i) and (iv)
C (iii) only
D (ii), (iii), and (iv)
(2 marks)
4.5 Which ONE of the following, according to Herzberg's motivation theory, is NOT an example
of a hygiene factor?
A Policies and procedures for staff treatment
B Pleasant physical and working conditions
C Recognition of good work
D Appropriate level of salary and status for the job
(2 marks)
4.6 Which ONE of the following approaches to managing stakeholders is recommended if the
stakeholder has a high level of interest but a low level of power?
A Participation
B Education/communication
C Intervention
D Direction
(2 marks)
4.7 Describe the TWO main ways in which an organisation can generate superior competitive
performance and gain competitive advantage.
(2 marks)
4.8 Identify THREE of the fundamental principles underlying CIMA's guidelines on professional
ethics.
(3 marks)
Section B continues on the opposite page
11. November 2012 11 Masters Gateway
4.9 AB granted 1,000 share options to its 300 employees on 1 January 2011. To be eligible,
employees must remain employed for three years from the date of issue and the rights
must be exercised in January 2014. In the year to 31 December 2011, 32 staff left and a
further 35 were expected to leave over the following two years.
The fair value of the share options at 1 January 2011 was $8.
The accounting entry to record the expense associated with the share options (to the
nearest $), for the year to 31 December 2011, in accordance with IFRS 2 Share-based
Payment is to:
A debit staff costs $1,864,000 and credit other reserves (within equity) $1,864,000.
B debit staff costs $1,864,000 and credit liabilities $1,864,000.
C debit staff costs $621,333 and credit other reserves (within equity) $621,333.
D debit staff costs $621,333 and credit liabilities $621,333.
(2 marks)
4.10 NM acquired an equity investment in another entity and classified it immediately as held for
trading. The investment cost $880,000 on 1 May 2011 and at its following year end NM had
recognised a gain of $6,800 on the investment. NM pays 2% commission to its broker on all
transactions.
The value of this investment will be included in NM's statement of financial position at:
A $886,800
B $904,400
C $904,536
D $912,560
(2 marks)
4.11 GHJ operates a defined benefit pension plan for its employees. At 1 July 2011 the present
value of the plan liabilities was $1,400,000. The interest cost on the plan liabilities was
estimated at 7%.
The actuary estimates that the current service cost for the year ended 30 June 2012 is
$300,000. GHJ made contributions into the pension plan of $400,000 in the year.
The pension plan paid $220,000 to retired members in the year to 30 June 2012.
At 30 June 2012 the present value of the plan liabilities was $1,600,000.
GHJ recognises actuarial gains and losses in other comprehensive income in the period in
which they occur.
The actuarial gain or loss on the pension liabilities that GHJ will recognise in other
comprehensive income for the year ended 30 June 2012 is:
A gain of $198,000
B gain of $22,000
C loss of $8,000
D loss of $22,000
(2 marks)
Section B continues on page 12
TURN OVER
12. Masters Gateway 12 November 2012
4.12 ABC issued 6% debentures on 1 January 2010 at their par value of $3 million. Issue costs
were $200,000. The interest on the debentures is paid annually in arrears. The debentures
will be redeemed in 4 years' time at a premium of $400,000. The effective interest rate in
respect of these debentures is approximately 11%.
The debentures will be included in the statement of financial position of ABC at 31
December 2011 at a value of:
A $2,928,000
B $2,940,000
C $3,070,080
D $3,150,000
(2 marks)
Total for Section B = 25 marks)
End of Question Paper
Reminder
All answers to Section B must be written in your answer book.
Answers to Section B written on the question paper will not be
submitted for marking
Maths tables and formulae are on pages 13 -15 which are detachable
for ease of reference
15. November 2012 15 Masters Gateway
FORMULAE
Annuity
Present value of an annuity of $1 per annum receivable or payable for n years,
commencing in one year, discounted at r% per annum:
PV =
+
− nrr ][1
1
1
1
Perpetuity
Present value of $1 per annum receivable or payable in perpetuity, commencing in one year,
discounted at r% per annum:
PV =
r
1
Growing Perpetuity
Present value of $1 per annum, receivable or payable, commencing in one year, growing in
perpetuity at a constant rate of g% per annum, discounted at r% per annum:
PV =
gr −
1
Time series
Additive model:
Series = Trend + Seasonal + Random
Multiplicative model:
Series = Trend*Seasonal*Random
Regression analysis
The linear regression equation of Y on X is given by:
Y = a + bX or Y – Y = b(X – X ),
where:
b =
)(
)(
X
XY
Variance
Covariance
= 22
)(
))((
XXn
YXXYn
∑−∑
∑∑−∑
and a = Y – b X
or solve
∑ Y = na + b ∑ X
∑ XY = a ∑ X + b ∑ X
2
Exponential Y = ab
x
Geometric Y = aX
b
Learning curve
Yx = aX
b
where:
Yx = the cumulative average time per unit to produce X units;
a = the time required to produce the first unit of output;
X = the cumulative number of units;
b = the index of learning.
The exponent b is defined as the log of the learning curve improvement rate divided by log 2.
19. November 2012 19 Masters Gateway
LIST OF VERBS USED IN THE QUESTION REQUIREMENTS
A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.
It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION
Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details of/facts of
Define Give the exact meaning of
Level 2 - COMPREHENSION
What you are expected to understand. Describe Communicate the key features
Distinguish Highlight the differences between
Explain Make clear or intelligible/State the meaning or
purpose of
Identify Recognise, establish or select after
consideration
Illustrate Use an example to describe or explain
something
Level 3 - APPLICATION
How you are expected to apply your knowledge. Apply
Calculate
Put to practical use
Ascertain or reckon mathematically
Demonstrate Prove with certainty or to exhibit by
practical means
Prepare Make or get ready for use
Reconcile Make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table
Level 4 - ANALYSIS
How you are expected to analyse the detail of
what you have learned.
Analyse
Categorise
Examine in detail the structure of
Place into a defined class or division
Compare and contrast Show the similarities and/or differences
between
Construct Build up or compile
Discuss Examine in detail by argument
Interpret
Prioritise
Translate into intelligible or familiar terms
Place in order of priority or sequence for action
Produce Create or bring into existence
Level 5 - EVALUATION
How you are expected to use your learning to
evaluate, make decisions or recommendations.
Advise
Evaluate
Recommend
Counsel, inform or notify
Appraise or assess the value of
Advise on a course of action
20. Masters Gateway 20 November 2012
CIMA Masters
Gateway Assessment
November 2012
Tuesday Afternoon Session
![Masters Gateway 2 November 2012
SECTION A – 75 MARKS
[You are advised to spend no longer than 45 minutes on each question in this section]
ANSWER ALL THREE QUESTIONS
Question One
M Company manufactures and assembles a range of components for sale to other manufacturers.
The company operates in a constantly changing market and has to introduce new components
regularly as older components are no longer produced. The market in which M Company operates
has a number of competitors producing similar items and therefore the company has always
concentrated on being as efficient as possible, in particular with the control of costs. To this end,
M Company has for many years used Activity Based Costing.
In order to decide whether or not to produce a new component, M Company uses a target cost
approach.
M Company is considering the production of a new component, X1. The following information is
available.
The cost pools and cost drivers used by M Company for all its components are as follows:
Cost pool $ Cost driver
Machining 1,064,000 Machine hours 380,000
Assembly 580,000 Direct labour hours 725,000
Set up costs 120,000 Set ups 60
Order processing 84,000 Customer orders 24,000
Stores and purchasing 156,960 Requisitions raised 18,000
The data for X1 are as follows:
Due to the constantly changing market, M Company is looking only at the next year, when it is
expected that 40,000 units of X1 will be produced and sold. The target selling price for X1 is to be
$40 per unit. M Company expects a 15% margin on sales on all of its products.
Each unit of X1 is expected to require $10 of direct materials and to need two machine hours to
produce.
During the year the production of 40,000 units of X1 will require:
Number of set ups 10
Number of orders to be processed 6,000
Number of requisitions to be raised 2,500
M Company has a very experienced labour force and expects there to be an 80% learning curve
in the assembly of X1. The number of direct labour hours for the first unit will be 8 hours and a
steady state of labour hours for production will be reached at 474 units, after which each unit will
require the same average number of direct labour hours.
Required
(a) Explain what is meant by 'target cost approach' and what relationship it has, if any,
with life cycle costing.
(6 marks)](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)