Paper CMGA – CIMA Masters Gateway Assessment

Post Exam Guide

November 2010 Exam

General Comments

Performance was generally poorer for the November examination than was expected. Candidates
are advised to consult the syllabus document in order to be clear on the subject areas in which they
will be examined. The Gateway paper will examine, by a 25 mark question, the following syllabus
areas:

Section B (Cost Planning and Analysis for Competitive Advantage) from the P2 syllabus;
Section B (Project Management) from the E2 syllabus;
Section A (Group Financial Statements) from the F2 syllabus.
Twelve Objective Test Questions worth 25 marks in total will test the remaining areas of the P2, E2
and F2 syllabi.

It is also advisable to seek guidance from previous Post Exam Guides and practice past questions
using the questions and answers available on the CIMA website.

Question 1

(a) Prepare calculations to show the total direct labour cost of the product for each for each of
the four stages of the product life cycle.
(8 marks)

(b) Assuming that there is no experience curve in relation to the product's direct material cost,
prepare a statement that shows the profitability of the new product for each of the four stages
of the product life cycle individually and in total for the product's life .
(4 marks)

(c) Assuming that the direct material experience curve applies, calculate the average direct
material cost per batch that must be incurred in order for ZTG to meet its ARR target over the
life cycle of the product.
(5 marks)

(d) Discuss the concept of life cycle costing and its effect on product pricing strategies at
different stages of the product life cycle. Use the ZTG scenario to illustrate your answer.
(8 marks)

(Total for Question Five = 25 marks)

Rationale

This question tests learning outcomes: apply learning curves to estimate time and cost for new products
and services and discuss the concept of life cycle costing and how life cycle costs interact with marketing
strategies at each stage of the life cycle.

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Post Exam Guide
November 2010 Exam

Suggested Approach
a)
Identify the output volume at which the learning ends.
Calculate the average direct labour cost per batch for the introduction stage and from this the total
direct labour cost of the introduction stage.
Calculate the average and total direct labour cost for 30 batches (when the learning ends) and
use this to determine the total direct labour cost of batches 11-30 inclusive.
Calculate the average and total direct labour cost for 29 batches and use this to determine the
direct labour cost of batch 30.
Calculate the direct labour cost of the remaining 10 batches in the growth stage and add this to
the cost of batches 11-30 to determine the total direct labour cost of the growth stage.
Calculate the total direct labour costs of each of the maturity and decline stages using the average
th
cost of the 30 batch.
b)
Calculate the revenue and other costs of each stage of the life cycle and prepare a statement
showing these and the direct labour costs calculated above to show the profit for each stage and
for the lifecycle of the product.
c)
Calculate the lifecycle profit target
Calculate the amount by which material costs must reduce to achieve the target profit.
Calculate the average direct material cost per batch to achieve the profit target.
d)
Discuss the concept of life cycle costing
Use the scenario to illustrate the effect of life cycle costing on product pricing strategies at each
stage of the life cycle.

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Post Exam Guide
November 2010 Exam

Marking Guide Marks

a)
Identify the output volume at which the learning ends. 1

Calculate the average direct labour cost per batch for the introduction stage and from this 1
the total direct labour cost of the introduction stage.

Calculate the average and total direct labour cost for 30 batches (when the learning ends)
and use this to determine the total direct labour cost of batches 11-30 inclusive. Calculate
the average and total direct labour cost for 29 batches and use this to determine the direct
labour cost of batch 30. ( 1 mark each) 2

Calculate the direct labour cost of the remaining 10 batches in the growth stage and add
this to the cost of batches 11-30 to determine the total direct labour cost of the growth
stage. 2

Calculate the total direct labour costs of each of the maturity and decline stages using the
th
average cost of the 30 batch. ( 1 mark each) 2

b)
Revenue 1
Direct materials 1
Other costs 1
Profit 1

c)
Calculate the lifecycle profit target 1

Calculate the amount by which material costs must reduce to achieve the target profit. 2

Calculate the average direct material cost per batch to achieve the profit target. 2

d)
Discuss the concept of life cycle costing 2

Use the scenario to illustrate the effect of life cycle costing on product pricing strategies at
each stage of the life cycle. (up to 2 marks per stage) 6

Maximum marks awarded 25

Lead Marker's Comments

Overall, candidates did not answer this question well and it appeared that the learning curve analysis
confused a high proportion of candidates. The figures were poorly approached. However, many
candidates did well on section (d) of the question which boosted marks, though often this was not enough
to gain a pass mark for the question overall.

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Post Exam Guide
November 2010 Exam

Question 2(a)
Prepare a report which explains the potential problems that the shopping centre project could face without
good project planning.
(10 marks)

Rationale
This question examines candidates' understanding of the problems that could be encountered in a project
without good project planning. It tests learning outcome B 1 (b) 'apply suitable structures and frameworks
to projects to identify common project management issues'.

Suggested Approach
The suggested approach would be to work through the problems that could be encountered in the
shopping centre project without good project planning. Good answers will make reference to the project
described in the scenario to illustrate the problems.

Marking Guide Marks

Potential problems associated with not having clear objectives, budget, time, e.g.:
Unlikely that estimation of base budget can be constructed 1
Unlikely that project schedule can be constructed 1
Unrealistic time scales 1
Activities not sequenced logically 1

No realistic assessment of resource requirements 1

Problems associated with not undertaking feasibility and risk assessment e.g.:
No opportunity to assess risks 1
No analysis of potential problems - for instance impact on local government 1
No analysis of potential problems - for instance community objections 1

Vulnerable to changing client spec 1

No defined roles and responsibilities 1
No control systems established 1
Health and safety issues not considered 1
No contingency plans 1
Maximum marks awarded 10

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Post Exam Guide
November 2010 Exam

Question 2(b)

Explain the contribution of different project management tools and techniques that could help Mr G in
planning the project.
(15 marks)

Rationale
This question requires candidates to evidence their understanding of the contribution of different project
management tools and techniques that can be used in planning a project. It tests learning outcome B 1 (e)
'apply key tools and techniques, including the evaluation of proposals'.

Suggested Approach
The answer should develop to identify the different project management tools and techniques and explain
how they could help Mr G in the planning of the shopping centre project. Good answers will explain the
contribution of the different project management tools and techniques rather than just describing them.

Marking Guide Marks

Work breakdown structure:

Contribution - analysis of work required 1
Activities broken down into work packages 1
Each package has defined deliverables 1
Identifies people responsible for each activity/work package 1
Can be used to develop task list 1

Gantt Chart:
Contribution - visual way of showing sequence of activities 1
Helps in planning 1
Shows time taken for each activity 1
Shows resources needed for each activity 1
Can be used to communicate responsibilities 1

Resource Histogram:
Shows resource requirements 1
Helps in scheduling/rescheduling 1

Network Analysis:
Diagram showing sequences and dependencies 1
Arranges work packages into logical sequence 1
Estimates time to complete each work package 1
Calculates critical path 1
Determines minimum possible time for project completion 1
Identifies slack/float 1

PERT:
Used to account for uncertainty in project lifecycle 1
Estimates optimistic time if conditions ideal 1
Estimates likely duration if conditions normal 1
Estimates pessimistic duration if things go wrong 1
Helps calculate contingency time allowance 1

(marks will be awarded for other relevant tools and techniques - max 4 per tool/technique
- for example project management software) If PRINCE2 mentioned as technique, this is
acceptable if developed to explain contribution to planning.

Maximum marks awarded 15

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Post Exam Guide
November 2010 Exam

Lead Marker’s Comments

Overall this was the best answered question on the paper with many candidates gaining very high marks.
Part (b) was especially well answered by many candidates.
With regard to part (a) many candidates wrote about general issues regarding the shopping centre project
instead of answering the question and focusing on the problems that could arise with the project in the
absence of good project planning.

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Post Exam Guide
November 2010 Exam

Question 3

Prepare the consolidated statement of comprehensive income for the CAS group for the year ended 30
September 2010.
(25 marks)

Rationale
The question relates to syllabus area A of the F2 syllabus and tested the candidates' ability to draft the
new format SOCI. The question included a disposal during the period - fully consolidating until the date of
disposal and then equity accounting for the remainder of the year and calculating the group gain on sale.
The question also tested the calculation of the non-controlling interest in the revised IAS 1 format so
allocating the NCI for profit for the year and for TCI.

Suggested Approach
The logical start to this question was to establish a time line and the shareholdings in both entities. Then
draw up a pro-forma and systematically complete the necessary workings for each line of the SOCI,
remembering to insert a line for share of associates profit (in arriving at a group profit before tax) and one
for share of associates OCI. The gain on disposal could have been shown separately or aggregated in
arriving at profit before tax.

Marking Guide Marks

Preparation of SOCI, including goodwill impairment, time apportionment, FV adjustment 11

Elimination of inter-company dividend, OCI, disposal of AFS investments.

Disposal of subsidiary and accounting for retained investment as associate 8

Non-controlling interest and IAS 1 requirement allocation between parent and NCI 6
Maximum marks awarded 25

Lead Marker's Comments

This question attracted very mixed results with a wide band of marks. Many candidates answered the
question well and gained very high marks. However, others gained few marks and many failed to answer
the question at all.

Candidates struggled with the adjustments and the more technical accounting aspects required for the
consolidation. As there was no written element to the question, candidates needed to understand the
numbers in order to gain marks.

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Post Exam Guide
November 2010 Exam

Question 4

Question 4.1

F manufactures a range of plumbing products. From a single process, three sizes of plastic pipe are
produced: 10mm, 15mm and 20mm, along with a by-product, S, which is a small plastic stopper.
The production data for this process for the latest week are as follows:

Process conversion costs $60,000

Raw materials input $420,000

The output from the process and the selling prices of the products were:

Units Price $/unit

10mm pipe 20,000 14
15mm pipe 14,000 10
20mm pipe 11,000 20
By-product S 4,000 4

There were no opening or closing inventories for the week. Any by-product revenue is credited to the
sales account. Joint costs are apportioned on a sales value basis.
What was the full production cost of the 20mm pipe for the week (to the nearest $)?

A £159,500
B $160,976
C $165,000
D $170,500
(2 marks)

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) 220,000 (220/640 x $480,000) 165,000
640,000 480,000

The answer is C

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Post Exam Guide
November 2010 Exam

Question 4.2
1.2
The management of T has set a target annual rate of return on investment of 25% for all of the company's
products.
One of the products, the D, employs non-current assets of £800,000 in its manufacture, plus a working
capital investment of £121,600. Total costs of £1.2 million are forecast to be incurred in the next year. T
uses cost plus pricing for all its products.
What is the required percentage mark up on cost for the D to allow T to meet its target return?

A 20.0%
B 19.2%
C 16.7%
D 2.5%
(2 marks)

Product investment x Required rate of return = Mark up

Total annual costs

(£800,000 + £121,600) x 25% = 19.2%

The answer is B

Question 4.3

J produces a single product for which the quarterly fixed costs are $1.4 million. At a selling price of $25
per unit, J breaks even each quarter when 100,000 units are sold. Actual sales during the quarter were
185,000 units.
The directors of J believe that if they increase the selling price to $30 per unit sales would fall to 135,000
units per quarter and if they reduced the selling price to $21 per unit sales would increase to 266,000 units
per quarter.
Based on the three selling price options available ($21, $25 or $30 per unit), what is the maximum
quarterly profit that J can achieve?
A $1,305,000
B $1,260,000
C $1,190,000
D $1,165,000
(2 marks)

Fixed cost/unit at breakeven sales level $1.4m/100,000units = $14/unit

Selling price/unit - fixed cost/unit $25 - $14 = $11/unit variable cost

Options $ $ $
Selling price 21 25 30
Variable cost 11 11 11
Contribution 10 14 19
Sales (units) 266,000 185,000 135,000
Total contribution ($m) 2.66 2.59 2.565
Fixed costs (1.4) (1.4) (1.4)
Profit ($m) 1.26 1.19 1.165

The answer is B

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Post Exam Guide
November 2010 Exam

Question 4.4

H is a large multinational company that is structured into six divisions. Many of the divisions trade with
each other, usually providing intermediate components that are then used in the manufacture of final
products in the other division.
The senior management of H has a policy of using dual-rate transfer prices for all inter-divisional
transactions (where the supplying division receives the full cost plus a mark-up on each transaction and
the receiving division is charged at the variable cost of the transfers). However, a number of concerns
have been expressed about the policy including the following;
(i) The use of different transfer prices can cause confusion between divisions
(ii) Different transfer prices can increase divisional incentives to compete effectively
(iii) Different transfer prices can lead to the double counting of internal profits
Which of the above claims made about dual-rate transfer prices is/are incorrect?
A (i) only is incorrect
B (ii) only is incorrect
C (iii) only is incorrect
D None are incorrect
(2 marks)
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.

The answer is B

Question 4.5

According to transaction cost theory, the mechanisms that organisations have to choose between to
control their resources and carry out their operations are:
A Markets or structures
B Hierarchies or culture
C Structures or culture
D Hierarchies or markets
(2 marks)
The answer is D

Question 4.6

Which ONE of the following is an example of a hygiene factor of motivation?

A Challenging tasks
B Supervision
C Advancement
D Recognition
(2 marks)
The answer is B

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Post Exam Guide
November 2010 Exam

Question 4.7

Identify the approach to strategy which proposes that competitive advantage is achieved from an
organisation's unique assets and competences?
The answer is Resource based view
(2 marks)

Question 4.8

The first stage of negotiation is preparation. Identify, in the correct order, the other three stages in the
negotiation process.

The answer is (i) Opening, (ii) Bargaining, (iii) Closing

Question 4.9

BGR's functional and presentational currency is the dollar ($). BGR purchased non-current assets on
credit for €250,000 on 25 March 2010. The payable was settled on 12 May. The relevant exchange rates
were:
25 March 2010 €0.741 : $1
30 April 2010 €0.753 : $1
12 May 2010 €0.731 : $1
At 30 April 2010, the entity's year end, what amounts would have been held in respect of this transaction?
A Non-current assets at cost of $332,005 and trade payables of $332,005
B Non-current assets at cost of $337,382 and trade payables of $332,005
C Non-current assets at cost of $337,382 and trade payables of $337,382
D Non-current assets at cost of $337,382 and trade payables of $341, 997
(2 marks)

The answer is B

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Post Exam Guide
November 2010 Exam

Question 4.10

LMR had 3 million $1 ordinary shares in issue at 1 May 2009. On 30 September 2009, LMR issued a
further 1 million $1 shares at par. Profit before tax for the year ended 30 April 2010 was $450,000 and
the related income tax charge was $110,000.

Calculate the basic earnings per share of LMR for the year to 30 April 2010

Post tax earnings ($450,000 - 110,000) $340,000

Weighted average number of shares in issue:
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

(2 marks)

The answer is B

Question 4.11

The non-current asset turnover ratios of entities X and Y are 0.44 and 0.82 respectively.

Explain, giving TWO reasons, why this ratio may not provide a good comparison of the efficiency of the
entities.

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 re-valued which would result in asset turnover being low but not necessarily
because of low efficiency.
(2 marks)

Question 4.12

NBW purchased a bond with a par value of $5 million on 1 July 2009. The bond carries a 5% coupon,
payable annually in arrears and is redeemable on 30 June 2014 at $5.8 million. NBW fully intends to hold
the bond until the redemption date. The bond was purchased at a 10% discount. The effective interest
date on the bond is 10.26%

Calculate, the closing value of the bond liability in NBW's financial statements as at 30 June 2010.

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 as 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

(2 marks)

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Post Exam Guide
November 2010 Exam

Rationale

Question Four sub-questions 4.1 to 4.12 test candidates’ knowledge of a wide variety of topics within the
syllabus through the use of objective test questions (OTQs).

Suggested Approach/Marking Guide Marks

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 0 or 2
answer. Marking is therefore on the basis of 2 marks for a correct answer and 0 marks for
an incorrect answer.

Lead Marker's Comments

Performance in this question, which in previous exams has generally been very good, was particularly
disappointing in November. It was also surprising to note that despite the section being comprised of
objective test questions and in most cases multiple choice, these were not attempted by some
candidates.

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