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We hold events twice a year which give you the opportunity to ask an experienced tutor a question.
You can use our 'ask a tutor' events to put a syllabus topic that you are having problems with to our tutors. All you need to do is log into your My CIMA account during the advertised days and submit your question using our online form. We'll get a response to you by email as soon as possible.
Details and dates of our next event will be published here and in Velocity, our student e-magazine.
Below are questions and answers relating to paper P1 Management Accounting Performance Evaluation from past events.
Question
I've got a problem explaining Responsibility Accounting. Can you help me?
Answer
Under the principles of Responsibility Accounting, a specific manager is given the responsibility for a particular aspect of the budget. The manager is in fact made responsible for achieving the desired performance targets. This is all about ensuring that someone in the organisation actually takes “ownership” of performance targets and thus will be more motivated to ensure they are achieved. The manager taking the responsibility, must have the power and authority to control the activities for which he has taken responsibility otherwise there may be negative motivational implications.
On the positive side if and when the targets are achieved then the manager involved will get all the credit for a job well done. The opposite of course is that if the target is not achieved, we know exactly who to blame!
Question
Please explain the weaknesses of Activity Based costing?
Answer
ABC is a subjective method as are nearly all costing techniques in the real world! As with any other costing technique it is merely a way of "estimating" the cost to be applied to a product. The whole ethos behind management accounting is that there are various "models" and these are adopted and adapted by each business to suit their own personal and industry specific needs.
The basic principle behind ABC is that it is easier to manage and control activities than it is to manage and control cost amounts. Products cause activities to happen and these activities in turn cause costs. Hence it is all about identifying this "Cause and Effect" link.
The main weaknesses are:
- It is very time consuming and hence can be costly to implement.
- It requires a detailed knowledge of how the business works so that realistic cost drivers can be identified.
- It requires a strong accounting system so that cost drivers can be quantified.
- You cannot assume all cause and effect links are precise. In practice there may be many things that "drive" a cost.
- Should not be introduced unless it can provide additional information which will be used in planning and control.
- It does not resolve the problem of allocating general overheads or past (sunk) costs.
- It is not always easy to measure the activity which drives a cost.
- You should always conduct a cost / benefit analysis.
Question
How do you perform a 'What if' analysis?
Answer
What if analysis is sometimes referred to as Sensitivity Analysis and is often used in Project Appraisal. The idea is to test the projects projected cashflows to find out which is the most sensitive to changes that might happen when the project is implemented. Conducting the analysis will depend on the variables in the given project (exam question). You are trying to find out level of change is required before the decision to do the project would be reversed. For example a 5% changes in sales value might not be a problem but a 5% change in capital outlay might make the project unattractive. Once the most sensitive variable is identified it is then the one which will receive most attention and monitoring from management.
Question
I am attempting Management Accounting Performance Evaluation for the fourth time and at previous attempts I did not pass. I need to know why I am failing even though I cover the whole syllabus.
Answer
Very often in professional exams, the reason for failing is not down to having the right knowledge to pass. It is more likely to be about applying that knowledge and using good exam technique. The following points along with plenty of practice under exam conditions might help.
When tackling any CIMA question, you should take care to read the question and decide exactly what you are being asked. If its a theory question then focus on the verbs used to help decide how much detail is required. The marks available are also a good guide for the amount of time you should spend on the question. If it is a numerical question then review all the information provided and use a logical professional structure to your work. Ensure you show all your workings clearly and cross reference them to your main script. Ideally your workings should be in the same area of the answer booklet as the rest of your solution to that question. Avoid putting all your workings in a separate booklet as this can be confusing and can lead to workings (and marks!!!) being missed. You can often get the final answer wrong but still pick up lots of valuable method marks in your workings.
There is no restriction on the order you answer the questions. However, please ensure that you indicate clearly which question you are attempting and which part of the question. You should also start each question on a new page and if possible avoid splitting the same question into different parts of your answer booklet. Exam technique experts advise that you should always start with a question you know well as it helps build confidence and get you off to a good start in the exam. However, the only warning on this is to watch your time management closely as there may be a temptation to spend too long on the question as you feel comfortable with the subject matter.
When answering exam questions you should use the marks awarded as a guide to the time you need to spend on the question. As a guide if the exam is for 3 hours and there are 100 marks available then that means each mark is worth 1.8 minutes in the exam hall. I would suggest using 1.5 minutes per mark as an approximate guide to your writing time hence a 4 mark question should allow approx 6 minutes to answer. Using 1.5 minutes instead of 1.8 minutes makes for easier calculations of your time allotment and also allows additional time to re-read the question and to review your answer on completion to ensure you have not left anything out.
The nature of the question itself should also be considered. A 4 mark question may want 4 points noted down and allow a mark for each point made. Alternatively some questions lend themselves to a more discursive approach and hence might expect 2 points with 1 mark for the point and 1 further mark for developing the point well or providing an example where relevant.
Having made the above comments it is also fair to mention that examiners are much more interested in "quality" rather than "quantity" in terms of what students write so avoid the temptation to keep writing when in reality you have nothing more to say. Repeating the same point in a different way will not get any extra marks.
Hopefully things will go well for you this time. Best of luck
Question
Please kindly explain the method of apportioning common process costs (Joint products) at split-off point other than number of units each product produces.
Answer
Joint products are those resulting from the same process and having substantially equal importance (in value) to the company. After the different products have been separated they may be sold in their then existing state or further processed in order to give them a higher sales value. Whereas post-separation costs are usually identifiable with the particular product to which they relate, pre-separation costs must be apportioned in accordance with one of the recognised bases. These are:
(a) According to sales value, which may be:
(i) The market value at the point of separation;
(ii) The market value after further processing has been carried out, i.e. the final sales value;
(iii) The “net realisation value”, i.e. the final sales value less the post-separation costs.
(b) According to physical measurement, which may be:
(i) Actual, where there is a common unit of measurement for all products;
(ii) Weighted in accordance with some technical estimation which reduces all output to a common basis.
Question
While calculating Economic Value Added (EVA), should depreciation be added back to profit like R&D expenses, staff development,
advertisement, etc? If yes, should depreciation be calculated on the book value of fixed assets or replacement value?
Answer
EVA is a performance measure that is often used instead of ROI and Residual Income. It tries to measure true economic profit taking account of a company’s cost of capital and thus ensures that performance is linked to creating shareholder wealth. EVA is calculated as NOPAT (net operating profit after tax) less a charge for the cost of capital. Depreciation is normally deducted in arriving at the NOPAT figure. This is assuming that any depreciation charge is reasonable and a fair reflection of the assets being used by the division being assessed. You should always read the information in the question for extra guidance on any potential addbacks.
Question
I have problems explaining Back-Flush Accounting. Could you help me?
Answer
Backflush accounting focuses on the output of an organisation and then works backwards when allocating costs between cost of goods sold and inventories. It can be argued that backflush accounting simplifies costing since it ignores both labour variances and work-in-progress. Backflush accounting is ideally suited to a just-in-time philosophy and is employed where the overall cycle time is relatively short and inventory levels are low.
Question
When calculating the TA ratio, what are the costs that should be included in the operating expenses per hour of bottleneck resource?
Answer
Throughput Accounting considers that only material costs are variable. All other conversion costs (incl labour and indirect costs) are deemed to be fixed and are grouped together as “total factory costs”. Hence the denominator in the TA ratio is cost per factory hour and factory costs include all conversion and indirect factory costs (but exclude material costs).
Question
I always mix up the theories of MRP, MRP2 and ERP. What is the correct way of understanding these theories?
Answer
MRP I and II are both essentially business planning techniques to help identify and satisfy resource needs in a manufacturing environment. MRP I concentrates on planning from the viewpoint of raw materials primarily whereas MRP II extends these ideas to include not just materials but all other relevant inputs, for example machine capacity, labour requirements etc.
ERP systems have extended the basic concepts of MRP I and II even further still to include all the resources under the enterprises control, not just those involved with manufacturing.
All the techniques are designed to help optimise resources usage from a cost effective viewpoint.
Question
Please can you explain the advantages and disadvantages of just-in-time management?
Answer
JIT is a system of inventory management that seeks to reduce inventory levels to a bear minimum (ideally zero) and receive goods into stock just at the point in time where they are required for production. The advantages and disadvantages are as follows:
Advantages
- Reduction in inventory holding costs
- Reduction in quality control costs as these are passed back to the supplier
- Improved lead times due to the necessary level of planning
- Reduced scrap / wastage due to improvements in quality
- Forces accurate production scheduling which is good business practice
Disadvantages
- Increased risk of a stock-out (running out of stock)
- May lead to idle time of or factory down time
- May lead to frequent small deliveries which can be inconvenient and consume staff time in handling
- May lead to increased administration due to extra paperwork
- Leads in inflexibility as business may not be able to respond quickly to changes in customer requirements and hence the production schedule
- Results in heavy reliance on suppliers in terms of timely delivery and quality of products
- Not suitable for all industries
Question
I've read a lot on Enterprise Resource Planning, but I still do not understand. I would be grateful if you could give me a more detailed meaning of ERP.
Answer
ERP is a further development of the MRP and MRP II planning models.
It extends the IT planning systems to cover every aspect of the business and does not limit its scope to a concentration on manufacturing only. ERP systems have been closely linked to integrated budgeting and customer relationship management (CRM) systems. ERP seeks to produce and integrate entity-wide plans which try to ensure the optimisation of all the enterprise’s resources.
These systems have lost favour in recent years due to the large amount of data collection and administration associated with them. Also it was felt be many observers that the detailed plans produced by these systems were too restrictive and did not allow the company to respond quickly to changing customer needs and market conditions.
Question
My question pertains to standard costing and variance analysis: is there a common logic behind price and volume variance formulae which will help students understand and memorise them easier. I have found that some volume variances use standard values(labor efficiency variance) and other budgeted (sales volume profit variance). What is the rule if any?
Answer
The easiest way to deal with variance calculations is to remember what the variance is actually comparing. Blindly following a formula can be dangerous as CIMA try to set exams that test your ability to apply knowledge rather than just do rote learning. In simple terms a variance is a difference between what we expected to happen and what has actually happened. Actual can be different to our expectations for a number of reasons but are often categorised as differences due to price or volume. A favourable variance means the actual result is better than we expected where as an adverse variance is the opposite and means the actual is worse than expected.
Labour Efficiency Variance
This looks at how well our employees did work for us compared to how well we expected them to work. Eg If it takes two hours to make a unit and we made 100 units then we would expect the labour time to be (2 x 100) = 200 hours. If they actually took 205 hours then it means they were not working as efficiently as we expected and there is an adverse variance of five hours (translated into a monetary amount at the normal hourly rate).
Sales Volume Variance
This is defined as “The difference between the profit as shown in the original budget and the profit as shown in the flexed budget for the period.” Or to put it in simpler language…..It tries to help explain why the actual profit is different to that expected as a result of a change in the VOLUME (or quantity) sold.
The standard selling price may be used as a starting point but only in so far as it helps us to work out the standard profit / contribution expected. After this the profit figure is used in a standard ABSORPTION costing system where as the contribution is used in a standard MARGINAL costing system.
Question
I am having difficulty in recognising what to identify as cost drivers / activities in ABC. Are there any tips you can give me?
Answer
Activity Based Costing centres on the use of cost drivers to link the costs with the actual units produced and hence arrive at a cost per unit which can then be used for setting prices etc. The most critical aspect of ABC is that it recognises that activities are the things that lead to costs being incurred. In other words, activity is the “cause” and the cost is the “effect” or put another way the activity “drives the cost - hence the term “cost driver”. It this “cause and effect” aspect that makes ABC more accurate and useful than other more traditional costing models.
Identifying the drivers depends on each particular situation (in the real world) or exam question and is not just a matter of learning off a list without thinking about the problem in hand. The examiner usually provides clues in the question and with a bit of practice on past questions you begin to spot the logical driver for each cost. The best way to do this is to keep asking yourself for each cost “What causes this cost to happen?” EG. Distribution costs are caused by the need to deliver out products to customers. Hence the more deliveries a particular customer (or product) requires, the cost should be allocated to it - the cost driver is the number of deliveries.
Question
I do not understand the topic for Transfer Pricing; please help me to get the important basics on this subject?
Answer
Transfer Pricing in its simplest form is just a way of setting a price for moving goods from one division of an organisation to the other.
If goods are sold on the open market then a price is charged that usually reflects the costs of producing the goods plus some additional amount to cover the profit required. If we are dealing with large multi-national companies, then goods are often transferred from one division or country to another rather than being sold directly to a third party. In these cases it doesn't seem to make sense that goods are transferred at a profit because all movements are within the same overall company even though there may be different countries involved. The only problem with this is that the division transferring does not have any profits for itself. This can make performance measurement difficult using traditional methods such as ROCE because obviously there is no return being generated to be measured. There can also be motivational issues with workers and staff not realising the true 'value' of what they are doing.
Hence the concept of Transfer Pricing is used to set a notional 'sales' price for goods transferred between divisions but still within the same overall company. This allows a comparison to cost and hence a notional profit is reported. This then facilitates performance measurement and turns each division into a notional 'profit centre' in its own right.
Transfer pricing can also be used to manipulate the profit generated by one company within the overall Group and hence show higher or lower profits in different areas as required. This might be used to facilitate tax planning and make sure that the highest profits are reported in a country with low tax rates thus minimising the overall group exposure to taxation.
This is only an overview of what Transfer Pricing is all about but if you understand what it is trying to do it should be easier to apply the detailed calculations.
Question
Could you explain over and under absorb overheads. Which one is add to profit and why and vice versa?
Answer
The best way to think about the over/under absorption is to think good news/bad news for profit. If we have an over absorption in the period this will be good news (ie increase) profit when the adjustment is made. This is because an over absorption means that based on our original estimates and the pre-determined overhead absorption rate, we have provided for more overheads than we actually needed.
Conversely, an under absorption is bad news and will reduce profit when adjusted at the period end. This means that based on the original estimates we have not provided enough to meet the actual overheads incurred.
Question
What is beyond budgeting and what are the features of it? Please explain this to me in simple words.
Answer
This concept was suggested by Hope & Fraser in an Article in Management Accounting (Dec 1997). The basic idea is that some companies get too caught up in producing the annual budget and forget that the whole idea of doing budgets is to make a plan to ensure the company is successful in the future. The purpose becomes ensuring the 'budget' is correct rather than ensuring the business is successful.
Beyond Budgeting suggests that the budget process itself is not helpful and should be abandoned. Companies must think 'beyond' the budget to ensure success. Traditional budgets should be replaced by newer measurement techniques which recognise the complexity and changing environment that is modern business. Concepts such as TQM; business process re-engineering; balanced scorecard and responsibility accounting are much more suitable for target setting and monitoring in a modern competitive environment. Ikea in Scandinavia have successfully abandoned budgets since 1992 and instead managers were given a target of keeping costs/revenue ratios within certain limits.
Question
Feedback control and Feedforward control have been examined in the past. The definitions I have are very confusing - can you help me obtain another? Feedback control has two elements single loop and double loop - is it worth learning the model?
Answer
Feed-back and feed-forward are both methods of applying CONTROL procedures based on a comparison of actual results and planned results.
Feed-back is the more traditional approach and is said to be reactive and backward looking. Feed-forward on the other hand is a newer concept and is said to be proactive and forward looking.
Both methods compare the budget with the actual figures and identify the variance. Feed-back then takes the approach that we got something wrong in the past and therefore should change things in the future. Feed-forward tends to go a step further. It uses the variance identified to try to project future outcomes and then compares these to future budgets. Thus it tells managers what we can expect future variances to be if we do not do something about it in advance.
To compare to CIMA exam results: Imagine you receive your results and realise you failed a paper. You then look back and decide you did not take enough study leave to prepare. This might be called feedback control. If you take the next step and decide that three days for the last exam resulted in a fail, hence three days for the next exam can be expected to result in a fail also. Therefore you may decide to take corrective action in advance and take five days for the next exam. This is feed-forward control.
Learning models are often important but beware that CIMA exams try to test your ability to APPLY the model not just to repeat the text from a book.
Question
What is the clear definition of budgetory slack?
Answer
Slack is a term to indicate excess amounts included in a budget to allow for uncertainties that may not have been foreseen.
It usually occurs where a proper investigation process has not taken place and the person preparing the budget is scared of being wrong with the estimates. For example, say we think that a cost centre requires £1.5m for a new machine but we do not know for sure and have not bothered to check prices properly. We might submit a budget for machine purchases of (at a guess) £1.8m. This is the estimate of £1.5m plus an estimated amount in case we got it wrong.
The extra £300,000 here would be called budgetary slack. Such guesses are not in the overall best interests of the company as they result in funds being allocated to cost centres that do not really need them and other centres being deprived of funds because of them.
Question
Can you summarise the basics of Process Costing and FIFO?
Answer
Process costing is focused on establishing a cost per unit of finished output from the process. The key difficulty is that a unit of production (cost unit) cannot be identified until the end; and attributing costs to something we cannot identify causes us obvious problems. We overcome this by using the concept of notional (imaginary) 'Equivalent Units' which express part complete work as imaginary fully complete work eg. 60 units 50% complete is Equivalent to 30 fully completed units.
The next step is to use either FIFO or Weighted Average to value the output (and losses etc). The FIFO system seeks to match the work done in this period (expressed in equivalent units) to the costs incurred this period. The Weighted Average system seeks to match the work to date with costs to date. Weighted Average makes no distinction between this and other items which make it to finished goods level. FIFO, however, assumes that finished goods are made up of opening work-in-process which must be finished in the month and then other units that have been started and completed.
Process costing is an area that most students find difficult. However, it is an area that lends itself nicely to following a set structure of procedures. The following steps should be useful:
Step 1 - Trace the physical flow of units to make sure that all input units are accounted for as either output, closing stock or losses. This will help identify any hidden abnormal losses/gains.
Step 2 - Convert physical units into equivalent units for each factor of production (materials, labour, overheads).
Step 3 - Calculate the total cost for each factor of production for the period.
Step 4 - Establish a cost per equivalent unit by dividing total costs by equivalent units under each factor of production heading.
Step 5 - Value the output, closing stock and abnormal loss/gain using the cost per equivalent unit (Step 4) and the equivalent units per factor of production (Step 2)
Step 6 - Draw up the ledger accounts for the process.
Note: There will be changes to steps 2 and 3 depending on whether the FIFO or weighted average system is used for valuation so read the question carefully.
Question
I have a question where I am reconciling budgeted with actual profit/loss (using marginal costing).
There are two products manufactured in the factory. However, the actual results show the variable costs (material, labour, overheads) as a total amount, not split by product. What approach should I take to split the costs by product?
Answer
In deciding how to split the costs the key thing is to be guided by the information provided in the particular question itself.
The question will normally have to give some indication of the method required. It may be based on proportions of physical production quantity, or of market value or some other suitable basis. If there is no indication at all in a question then ask yourself the obvious question: do I actually need to split the costs at all, or can I treat them as totals in my comparisons?
This will depend on the information and data in each individual question so read the requirements very carefully.
Question
What is the easiest way of revising this subject and remembering as I find this subject a bit more difficult than others?
Answer
The best way of revising for this and most other CIMA subjects is to concentrate on doing as many past exam style questions as possible. Also, try to do them under exam conditions with time constraints and without looking at the answers.
Do not fool yourself into thinking that reading the text book or manual is actually studying and revising. Keep trying exam questions and when you run into an area you have problems, use the text book to clarify your difficulties and then go back and try the question again.
There is no point looking at a question and then going straight to the suggested answer and studying that. You must actually try the questions yourself before referring to the solutions.
Don't forget to practice all types of question styles including theory and practice and also check out the pilot exam paper for the new syllabus for extra guidance.
