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Questions and answers

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 P2 Management Accounting Decision Management from past events.

Question

How can I tell which rate of capital is to be used? Money or Real? I get confused with the terms used in the questions, and end up using the real instead of the money and vice versa.

Answer

You should apply the real rate of return (excluding inflation) to cashflows predicted in terms of today's values. The discount rate would probably need to be adjusted but cashflows are normally given in today's terms so do not need adjusting. For the monetary approach, use the money rate with cashflows that have been adjusted for their individual inflation rates. This can be lengthier calculations but easily caters for differing increases in cashflows. A question could be answered using either approach and arrive at approximately the same results (excluding some rounding!). Sometimes a question might be dealt with quicker via one method, depending on what facts are given in the question. Often the real method leads to using the formula for discounting rather than the discount tables and thus many students prefer the monetary approach.

Question

Please can you guide me about the 'two way data table', why it is used? how do we interpret it?

Answer

You should read the article called "two-way tables" in the articles archive for this paper.

In addition, the pilot paper contained an example of a question on this topic (question 6 part b)

See links above to the articles archive and exam questions.

Good luck in the exam

Question

Answer

Standard deviation helps to explain the range of data about a given mean. Armed with this statistical figure, it can be used in various calculations where known relationships apply such as probability analysis, confidence levels using normal distribution. It can be seen as a measure of risk too. The use of the formula is covered in the Certificate level and so is assumed knowledge from the prior level. In the context of this exam however, you are more likely to have to explain and use a given standard deviation figure.

This was seen in the May 2007 exam and as such you should review the question and post exam guide for May 2007 (question 3 part b). See links above to access the past exam paper and post exam guide.

Question

I have a question on replacement cycles, I am not sure how to treat the depreciation aspect. For example in the May 07 exam question 3 there was a replacement cycle question in the format I am looking to revise, however there is no depreciation in that question. Can you give me some guidance please

Answer

You need to calculate the net present values and then calculate from that present value an annualised figure. This means that you should firstly discount the relevant cashflows for the project/product. Relevant cashflows would not include depreciation itself as this is a non-cash item.

Question

How can linear regression be used for forcasting sales? What are the limitations of extrapolation?

Answer

Linear regression allows us to calculate the equation of a straight line that best fits the data being analysed.

If this data relates to sales then the resulting equation can allow us to predict sales for a given time period (eg y=ax+b where y=sales a=slope of the line b=y intercept and x=time period). This does assume that the pattern of sales will follow a straight line trend.  In the last examination sitting (November 2006) this was examined on paper 1 question 2f.
 
Extrapolating data means that we are taking it outside the relevant or normal range and thus it makes the big assumption that the current pattern would continue. In other words it ignores sudden changes in demand due to competitors actions, changes in marketing, changes in selling price, customer mix etc (in the case of sales).

Question

I have a problem in answering the linear programming problems of simplex tableaux?

Answer

The simplex method begins in the same way as the graphical solution by setting up equations for the objective function and the constraints. It usually involves more than 2 products and hence the need for something more than a 2-dimensional solution.

It involves using algebraic methods to solve matrices but you do not need to know this for the exam. You only need to learn how to set up the initial table and then interpret the final results. I suggest that you read the article called "Straight thinking" in the articles archive (see link above).

Please assist, with an example, with the interpretation of final simplex table

Answer

An example is seen in question 6 of the November 2005 examination. You should find maximum profit/minimum cost = objective function value; products = figures that represent quantities to be made and  sold; slack values= spare capacity and thus if a product has no slack value then used all its availability and  thus it would have a dual or shadow price.

Question

I can't get a pass in this paper and have attempted it three times in a row. I tend to get panicked with the long questions, get lost and go blank most of the time. The questions have parts of so many chapters together and I don't know where to start. Please advise, thank you.

Answer

Before the exam you should make sure that make revision notes of all chapters and then do as much past question practice as possible. It would also be a good idea to read the examiners comments in the post exam guides from the last couple of papers to learn what mistakes you should be avoiding.

In the exam itself, ensure you choose the order in which you tackle the questions carefully. If the first question always seems too scary then start from the back of the paper and attempt question one last. Once you have done a question you find easier then your confidence grows and you will avoid so much panic. Always stick to 1.8 minutes per mark - once you have reached the time limit then stop that question and move on. Present answers professionally, therefore neat and with reference to appropriate tidy workings.

Question

With Asset replacement and finding the optimum replacement - when is it appropriate and not appropriate to use annualised Equivelent costs?

Answer

If you were investigating whether to replace an asset or not then you would calculate NPV but if you were investigating a pattern of replacement cycles then it is more appropriate to calculate annualised equivalent figures.

For example if you were to look at replacing an asset EVERY 2 years or EVERY 3 years then you calculate NPV of the total costs for each option but these values are not comparable and therefore you need to then divide by the cumulative discount factors to find the annual equivalent sums.  Thus the annual equivalents are used only to then be able to compare like with like.

Question

Can you advise me the best way when answering sensitivity analysis. What is the best way when answering Simulation model when evaluating the risk based on both long and short term decision?

Answer

Calculate the original decision and repeat for a change in one variable is probably the safest method - although this can be lengthy.

See the May 2005 past exam question 5 for an example. 

Ensure that you could discuss simulation/monte carlo method and use random number tables and how it could be applied to predict stock holdings and pay offs for probability distributions.

Question

Can you, by an example, let me know the difference between Payback period (how it's calculated), Discounted Payback period and Discounted Payback Index?

Answer

Payback period is the time it takes to recoup the initial investment, for example £1000 investment with a net income of £200 per annum will take 5 years to recover the initial outlay. This ignores the time value of money so discounted payback then discounts each £200 back to its present value and then uses these values to find the length of time to recoup the investment. The index is the number of times it recoups the investment and is calculated as PV of inflows/initial outlay (higher the better)

Question

Internal Rate of Return (IRR) assumes that the cash flows are reinvested at the rate of IRR, which may not be realistic. Therefore IRR calculation should be modified to reflect reinvestment of cash flows at cost of capital. Can you please explain with illustration how to calculate Modified Internal Rate of Return (MIRR) for a project in an examination question.

Answer

You are correct in your definition of MIRR. To calculate this you would need to:
1. Calculate the terminal values of each cash inflow (i.e. establish the value at the end of the project having invested the cashflows at the cost of capital rate)
2. Calculate the discount factor that would need to be applied to this total terminal value of inflows to equate it with the initial outflow.
3. Using the present value tables trace the discount factor back to the rate. This is the MIRR.
Example 1.

 
2. Year0 outflow/ year4 inflow = 2000/3337= 0.599
 
3. Read across row for year 4 until you find 0.599 & look up to find rate= 13.5%  

Question

How do I get past question papers on this subject to aid my studies?

Answer

We have produced pilot exam papers which are indicative of the type and style of the new exams. You can download this by clicking on the link above called 'Exam questions'.  The May 2005 exam questions are now also available to download.

Please note that the responses given are the tutors' own. They are not definitive nor do they necessarily reflect the views of CIMA.

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