Paper P1 – Management Accounting – Performance Evaluation

Post Exam Guide

May 2009 Exam

General Comments

The overall result on this paper was quite good and well above that achieved in November
2008.

In Section A, the marks gained on the ten multiple-choice questions and on the six short-form
calculation questions were once again particularly good. For many candidates this provided a
sound foundation to go on and achieve a pass on this paper. However, it is still the case that
a number of candidates do not attempt all of the multiple-choice questions.

Average performances in Sections B and C of the examination paper were not as good. The
focus of the questions in these sections was more on a requirement for narrative answers,
especially if question 4 was selected by candidates in Section C. Candidates often
demonstrated some difficulty in focusing on the specific requirements of those questions.

There was little evidence of time pressures or poor time management for reasonably
prepared candidates despite workings too often being unnecessarily long and at times
somewhat repetitive. Time spent planning answers is time well spent if it reduces the overall
time taken. Presentation of some candidates’ work was poor with workings difficult to follow or
insufficient.

Lack of preparation once again seemed to be the primary reason for candidate failure.
Candidates who failed Paper P1 at this diet must try to prepare themselves for future exams
with a good knowledge of topic areas. In the exam they need to read questions carefully and
then answer the specific requirements rather than write all they know on a broader topic. They
must be prepared to apply their knowledge to particular practical scenarios.

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Paper P1 – Management Accounting – Performance Evaluation
Post Exam Guide
May 2009 Exam

Section A – 40 marks

Question 1.1

The fixed overhead volume variance is defined as the difference between

A the budgeted value of the fixed overheads and the standard fixed overheads absorbed by actual
production.
B the standard fixed overhead cost specified for the production achieved, and the actual fixed
overhead cost incurred.
C budgeted and actual fixed overhead expenditure.
D the standard fixed overhead cost specified in the original budget and the same volume of fixed
overheads, but at the actual prices incurred.

(2 marks)

The answer is A

The following data are given for sub-questions 1.2 and 1.3 below.
The following data relate to a manufacturing company. At the beginning of April there was no
inventory. During April, 2,000 units of Product X were produced, but only 1,750 units were
sold. The financial data for Product X for April were as follows:

£
Materials 32,000
Labour 12,600
Variable production overheads 9,400
Fixed production overheads 22,500
Variable selling costs 6,000
Fixed selling costs 19,300
Total costs for Product X 101,800

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Paper P1 – Management Accounting – Performance Evaluation
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May 2009 Exam

Question 1.2

The value of inventory of Product X at the end of April using a marginal costing approach was:

A £5,575
B £6,750
C £7,500
D £9,563
(2 marks)

The answer is B

Workings

Marginal cost values inventory at the variable production cost of £54,000. 1/8th of production was in
inventory. 1/8th of £54,000 = £6,750

Question 1.3

The value of inventory of Product X at the end of April using a throughput accounting approach was:

A £1,575
B £4,000
C £5,175
D £5,575
(2 marks)

The answer is B

Workings

Throughput approach values inventory at direct materials cost = 1/8th of £32,000 = £4,000

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Paper P1 – Management Accounting – Performance Evaluation
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May 2009 Exam

Question 1.4

A retailer uses the formula shown below when forecasting standard operating costs for its delivery
vehicles. Analysis has shown that the relationship between miles driven and total monthly vehicle
operating costs is given by the following formula:

y = £2,000 + £0·0003x2
where
y is the total standard monthly vehicle operating cost
x is the number of miles driven in the month

The forecast then needs to be adjusted for inflation in vehicle operating costs, which for April was 2%.

Records for April show that the delivery mileage was 3,900 miles, and that the total actual vehicle
operating costs for April were £5,500.

The total vehicle operating cost variance for April was closest to

A £4,459 adverse
B £1,194 adverse
C £1,194 favourable
D £4,459 favourable

(2 marks)

The answer is C

Workings

Total cost = 2,000 + 0·0003 x (3,900)2

Total cost = 2,000 + (0·0003 x 15,210,000)
Total cost = £6,563

Adjusted for inflation: Total cost = £6,563 x 102% = £6,694

Total cost variance = £6,694 - £5,500 = £1,194 favourable

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Paper P1 – Management Accounting – Performance Evaluation
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May 2009 Exam

Question 1.5

The budgeted profit statement for a company, with all figures expressed as percentages of revenue, is as
follows:

%
Revenue 100
Variable costs 80
Fixed costs 12
Profit 8

After the formulation of the above budget it has now been realised that the sales volume will be only 80%
of that originally forecast.

The revised profit, expressed as a percentage of the revised revenue, will be:

A 5·0%

B 6·4%

C 8·0%

D 20·0%
(2 marks)

The answer is A (4/80).

Workings

Assuming the revenue was $100 will lead to the following revised figures:

Original Revised
$ $
Revenue 100 80
Variable costs 80 64
Fixed costs 12 12
Profit 8 4

Question 1.6

Overheads will always be over-absorbed when

A actual overheads incurred are higher than the overheads absorbed.

B actual overheads incurred are lower than the overheads absorbed.

C budgeted output is lower than actual output.

D budgeted overheads are lower than the overheads absorbed.

(2 marks)

The answer is B

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May 2009 Exam

Question 1.7

A basic standard is:

A a standard set at an ideal level, which makes no allowance for normal losses, waste and machine
downtime.

B a standard which assumes an efficient level of operation, but which includes allowances for factors
such as normal loss, waste and machine downtime.

C a standard which is kept unchanged over a period of time.

D a standard which is based on current price levels.

(2 marks)

The answer is C

The following data are given for sub-questions 1.8, 1.9 and 1.10 below

A company uses a standard absorption costing system and adjusts for any under or over
absorbed overheads at the end of each period. The company produces only one type of
product. The unit standard costs were the same in both March and April.

Data for April included:

Budget Actual
Sales volume 90,000 units 85,000 units
Production volume 80,000 units 78,000 units

Total fixed production overheads $400,000 $395,000

Selling price per unit $11 $14
Variable production costs per unit $4 $4

Question 1.8

The sales price variance for April was

A $108,000 favourable

B $170,000 favourable

C $255,000 favourable

D $270,000 favourable
(2 marks)

The answer is C

Workings

85,000 x ($14 - $11)

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Paper P1 – Management Accounting – Performance Evaluation
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Question 1.9

The sales volume profit variance for April was

A $10,000 adverse

B $14,000 adverse

C $35,000 adverse

D $50,000 adverse
(2 marks)

The answer is A

Workings

(90,000 – 85,000) x standard profit per unit = 5,000 x $2

Question 1.10

If the company had used standard marginal costing to calculate the profit for April that profit, compared to
what would have been calculated by standard absorption costing, would be:

A $10,000 higher

B $35,000 higher

C $49,000 higher

D $50,000 higher
(2 marks)

The answer is B

Workings

Inventory has fallen by 7,000 units and therefore the marginal costing profit would be higher by 7,000 * $5
= $35,000.

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Paper P1 – Management Accounting – Performance Evaluation
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May 2009 Exam

Question 1.11
Three products P, Q and R are produced together in a common process. Products P and Q are sold
without further processing, but Product R must be modified in an additional process before it can be sold.
No inventories are held. There are no process losses.

The following data apply to March.

Output Product P 2,000 litres

Product Q 3,800 litres
Product R 2,450 litres

Selling prices Product P £2·50 per litre

Product Q £4·00 per litre
Product R £9·00 per litre

Costs incurred in the common process £36,000

Costs incurred in the additional process for R £12,250

Calculate the value of the common process costs that would be allocated to product R using the proxy
sales value method (notional sales value method).
(3 marks)

Workings

Post separation costs are £12,250 / 2,450 = £5 per litre

Notional price at separation point is £9 - £5 = £4 per litre

Total sales value is P 2,000 x £2·50 = £5,000

Q 3,800 x £4·00 = £15,200
R 2,450 x £4·00 = £9,800
£30,000

Allocation of common process costs to R is £36,000 x (£9,800 / £30,000) = £11,760

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Paper P1 – Management Accounting – Performance Evaluation
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May 2009 Exam

Question 1.12

Division L has reported a net profit of £10m for the year ended 30 April 2009. Included in the costs used to
calculate this profit are the following items:

• interest payable of £3m;

• development costs of £12m for a new product that was launched in May 2008, and is
expected to have a life of four years;
• advertising expenses of £1m that relate to the re-launch of a product in June 2009.

The reported net assets invested in Division L at 30 April 2009 were £30m.

The cost of capital for Division L is 5% per year.

Ignore taxation.

Calculate the Economic Value Added® for Division L for the year ended 30 April 2009.

(3 marks)

Workings

£m £m
Net profit 10
Add
Interest 3
Development costs 12
Advertising 1 16
26
Less 1/4 development costs 3
23
Less capital charge: 40 x 5% 2
EVA 21

Note: Capital = £40m = 30 + (12 – 3) + 1

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Question 1.13

A company manufactures a product using two sequential processes. In Process 2 additional materials are
added to the base units that have been transferred from Process 1 and they are then converted to the
finished product. Details for the previous period for Process 2 are:

Opening inventory: 700 base units. They were 75% complete in respect of added materials and 40%
complete in respect of conversion costs.

Closing inventory: 800 base units. They were 55% complete in respect of added materials and 30%
complete in respect of conversion costs.

Input: 2,000 base units were transferred from Process 1 during the period.

Output: 1,900 finished products were transferred out of Process 2.

Losses: there are no losses expected in Process 2.

The company uses “first in, first out” (FIFO) costing.

Calculate the total equivalent units for the previous period that would be used in the calculation of the cost
per unit for the following cost elements:

(i) base units

(ii) added materials

(iii) conversion
(3 marks)

Workings

Base units = 1,200 + 800 = 2,000 equivalent units

Added materials = (700 x 25%) + 1,200 + (800 x 55%) = 1,815 equivalent units
Conversion = (700 x 60%) + 1,200 + (800 x 30%) = 1,860 equivalent units.

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Paper P1 – Management Accounting – Performance Evaluation
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May 2009 Exam

Question 1.14

A company can produce a wide variety of products but its production plans are limited by the time
available on Machine M. The budgeted time available for the next period for Machine M is 12,000 hours.
The overheads for the next period are budgeted to be $216,000.

The company is reviewing the production plans for Product X. The product sells for $8 per unit and incurs
material costs of $2 per unit and labour costs of $4 per unit. Each unit of Product X is worked on by
Machine M for 10 minutes.

(i) Calculate the throughput accounting ratio for Product X.

(ii) State the significance of the figure you have calculated.

(3 marks)

Workings
(i) Throughput accounting ratio = (selling price – materials)/(labour + overhead)

Overhead = $216,000/12,000 hours = $18 per hour

Overhead for Product X = $18 x 10/60 = $3 per unit

Throughput accounting ratio = (8 – 2)/(4 + 3) = 6/7 = 0·857

(ii) The ratio is less than 1·0 and therefore the product is not profitable.

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Paper P1 – Management Accounting – Performance Evaluation
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Question 1.15

A company makes many products, one of which is Product P. Extracts from the budget for the whole
company for June are set out below:

Budget category £ Cost driver details

Direct labour cost 64,000 8,000 direct labour hours
Set-up costs 22,000 44 set-ups
Quality testing costs 6,800 160 tests
General overheads 18,800 Absorbed using direct labour hours.

Budgeted data for the manufacture of Product P in June are as follows:

Budgeted output 200 units

Direct materials £18.00 per unit
Direct labour 0·4 hours per unit
Batch size 100 units
Set-ups 1 set-up per batch
Quality tests 2 tests per batch

Calculate, using an activity-based costing approach, the budgeted cost per unit of Product P for June.

(4 marks)

Workings

£ Calculation
Direct materials 18·00
Direct labour 3·20 0·4 * 64,000/8,000
Set-up costs 5·00 (22,000/44) * (200/100) / 200
Quality testing 0·85 (6,800/160) * (200/100) * 2/200
General overheads 0·94 (18,800/8,000) * 0·4
Total cost per unit 27·99

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Question 1.16

A manufacturing company produces only one type of product. The company has two production
departments, Assembly and Finishing, and two service departments, Maintenance and Stores.

Maintenance provides the following service to the production and service departments: 40% to Assembly,
40% to Finishing and 20% to Stores.

Stores provides the following service to the production departments: 55% to Assembly and 45% to
Finishing.

The budgeted information for the year was as follows:

Budgeted fixed production overheads

Assembly £200,000
Finishing £160,000
Maintenance £60,000
Stores £80,000

Budgeted output 10,000 units

At the end of the year after apportioning the service department overheads, the actual total fixed
production overheads attributed to the Assembly department were £298,790.

The actual output achieved was 10,800 units.

Calculate the under/over absorption of fixed production overheads for the Assembly department.

(4 marks)

Workings

Assembly Finishing Stores Maintenance

£ £ £ £
Overheads 200,000 160,000 80,000 60,000
Reapportion
Maintenance 24,000 24,000 12,000 -60,000
Stores 50,600 41,400 -92,000
274,600 225,400 Nil Nil
OAR 274,600/10,000
£27·46 per unit

Assembly
Absorbed 10,800 x £27·46 £296,568
Incurred £298,790
Under absorbed £2,222

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Post Exam Guide
May 2009 Exam

Section B – 30 marks
ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5
MARKS

Question 2(a)

Explain how a budget can cause conflict between “motivation” and “control”.
(5 marks)

Rationale
(a) covers learning outcome C(v) Describe and explain the possible purposes of budgets, including
planning, communication, co-ordination, motivation, authorisation, control and evaluation.

Suggested Approach
• Define each of the terms 'motivation' and 'control' in the context of budgeting
• Identify situations where there may be conflict between motivation and control and explain why

Marking Guide Marks

Motivation and control 1
Conflict situations (up to 2 marks for each) 4

Examiner’s Comments
Many candidates were able to identify how motivation and control should work in harmony but often failed
to identify conflict situations

Common Errors
• Description of the general purpose(s) of budgeting
• Discussion of motivational aspects but no reference to control
• Focus on harmony rather than conflict
• Repetition

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Question 2(b)

Explain how “zero based budgeting” can overcome the problems that are associated with “incremental
budgeting”.
(5 marks)

Rationale
(b) covers learning outcome C(vi) Evaluate and apply alternative approaches to budgeting.

Suggested Approach
• Describe problems associated with incremental budgeting
• Explain how zero based budgeting can overcome the problems

Marking Guide Marks

Description of incremental budgeting & zero based budgeting (1 mark for each) 2
Problems and how overcome (1 mark per comment) 3

Examiner’s Comments
Generally well answered

Common Errors
• Vague descriptions of incremental budgeting
• Failure to explain how zero based budgeting can overcome the limitations of incremental budgeting
• Focus on the time consuming aspect of zero based budgeting

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Question 2(c)

Explain, giving examples, how budgets can be used for

(i) feedback control

(ii) feedforward control
(5 marks)

Rationale
(c) covers learning outcome C(x) Explain the ideas of feedback and feedforward control and their
application in the use of budgets for control.

Suggested Approach
• Explain feedback control
• Explain feedforward control
• Provide examples of how budgets can be used for both types of control

Marking Guide Marks

Descriptions (1 mark for each) 2
Examples (1 mark for each) 2
Actions (1 mark for each) 2
max 5

Examiner’s Comments
Feedback control was often well answered but candidates lacked knowledge about feedforward control
Common Errors
• Belief that feedforward control is about:
- using information from variance analysis to prepare the next period’s budget
- using forecasts to revise budgets
• Examples not provided

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Question 2(d)

A management consulting company had set the budget for the staff requirements for a particular job as
follows:

£
50 hours of senior consultant at £120 per hour 6,000
90 hours of junior consultant at £80 per hour 7,200
Budgeted staff cost for job 13,200

The actual hours recorded were:

£
60 hours of senior consultant at £130 per hour 7,800
90 hours of junior consultant at £75 per hour 6,750
Actual staff cost for job 14,550

The junior consultant reported that for 10 hours of the 90 hours he recorded there was no work that he
could do.

(i) Calculate the following variances:

• Idle time variance

• Labour mix variance
(3 marks)

(ii) Explain the worth, or otherwise, of this company calculating the labour mix variance in this
situation.
(2 marks)

(Total for sub-question (d) = 5 marks)

Rationale
(d) covers learning outcome B(ii) Calculate and interpret material, labour, variable overhead, fixed
overhead and sales variances.

Suggested Approach
• Calculate the idle time variance
• Calculate the cost of the total actual hours (excluding idle time) if in the standard mix at standard
wage rates
• Calculate the labour mix variance as the difference between the cost of the actual hours at standard
wage rates and the standard cost of the actual hours at standard mix
• Explain the worth of calculating the labour mix variance

Marking Guide Marks

Idle time variance 1
Labour mix variance 2
Worth of mix variance 2

Examiner’s Comments
Some marks were frequently gained for variance calculations but few candidates could explain whether
the mix variance calculation was worthwhile in the circumstances.

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Common Errors
• Valuation of the idle time variance at the actual wage rate paid
• Calculation of the labour mix variance including the idle time and/or using actual wage rates
• Use of incorrect variance signs
• Explanation of how the mix variance is calculated, or of what may have caused it, rather than whether
the calculation was worthwhile

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Question 2(e)

Explain the importance to management, for planning and control purposes, of the differing definitions of
“variable” costs offered by traditional costing methods and activity based costing.
(5 marks)

Rationale
(e) covers learning outcome A(vi) Compare activity-based costing with traditional marginal and
absorption costing methods and evaluate its potential as a system of cost accounting.

Suggested Approach
• Define 'variable' costs in traditional costing methods
• Define 'variable' costs in activity based costing
• Explain the importance for planning and control

Marking Guide Marks

1 mark per definition/comment 5

Examiner’s Comments
This part was generally not well answered.

Common Errors
• Focusing solely on accounting for overheads
• Contrasting absorption and marginal costing
• Not considering the importance for planning and control

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Question 2(f)

A company budgeted to produce 400 units of a product in a period. The standard cost card of the product
showed that the standard cost of the material used to manufacture each unit of the product was 6 kg
costing £12 per kg.

The actual results for the period were that 380 units were produced from 2,500 kg of material which had
cost £29,000.

It has now been realised that the standard material content per unit should have been 6·75 kg.

Calculate

(i) the materials usage planning variance

(ii) the operational materials price variance

(iii) the operational materials usage variance.

(5 marks)

Rationale
(f) covers learning outcome B(iv) Calculate and explain planning and operational variances.

Suggested Approach
• Calculate each of the variances in turn

Marking Guide Marks

Materials usage planning variance 2
Operational materials price variance 1
Operational materials usage variance 2

Examiner’s Comments
Most candidates were able to gain some marks on this part.

Common Errors
• In (i), calculation of the materials usage planning variance using the budgeted, rather than the actual,
output
• In (i), calculation of the total materials usage variance rather than just the planning variance
• In (ii), calculation of the total materials operational variance rather than just the price variance
• In (iii), calculation of the total materials usage variance rather than just the operational variance
• Incorrect variance signs

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Paper P1 – Management Accounting – Performance Evaluation
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Section C – 30 marks
ANSWER ONE OF THE TWO QUESTIONS

Question 3(a)

Calculate, in units, the budgeted break even point and margin of safety for the next year.
(6 marks)

Rationale
(a) covers learning outcome C(iii) Calculate projected revenues and costs based on product/service
volumes, pricing strategies and cost structures

Suggested Approach
• Calculate the contribution per unit and the total fixed costs from the information provided
• Use the total fixed costs and the contribution per unit to calculate the break even point in units
• Calculate the margin of safety in units

Marking Guide Marks

Contribution per unit (½ for each variable cost element deducted from the selling price) 2½
Total fixed costs (½ for each element) 1½
Break even point in units (based on 'own figures') 1
Margin of safety in units (based on 'own figures') 1

Examiner’s Comments
Answers to this question were often disappointing with many candidates seemingly unaware of how to
calculate a break even point.

Common Errors
• Not including bad debts and/or variable selling costs in the calculation of contribution per unit
• Including fixed production costs in the calculation of contribution per unit
• Not including loan interest and/or depreciation in the calculation of fixed costs
• Using incorrect formulae for the calculation of break even point and/or margin of safety

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Question 3(b)

It is now thought that the price of raw materials could range from £7·50 to £11·50 for each unit
produced.

Produce a diagram that shows the sensitivity of the budgeted profit to changes in the price of the raw
materials.
(4 marks)

Rationale
(b) covers learning outcome C(vii) Calculate the consequences of “what if” scenarios and evaluate their
impact on master profit and loss account and balance sheet.

Suggested Approach
• Re-calculate the budgeted profit at each alternative material price (£7·50 & £11·50)
• Plot the budgeted profit figures against material price on a graph

Marking Guide Marks

Revised profit calculations 1
Plotting 1
Labelling 2

Examiner’s Comments
This part was not generally answered very well with many candidates making no attempt at charting the
profit sensitivity

Common Errors
• Incorrect profit calculations
• Not appreciating that profit needed to be plotted against material price

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Question 3(c)
Prepare, showing all cash flows, a cash budget for period 1 and a cash budget for period 2 (assume the
price of raw materials is £9·50 for each unit produced).

(14 marks)

Rationale
(c) covers learning outcome C(iii) Calculate projected revenues and costs based on product/service
volumes, pricing strategies and cost structures.

Suggested Approach
• Calculate the cash inflows arising from sales in each of periods 1 & 2 (net of bad debts)
• Calculate the cash outflows in each of periods 1 & 2 arising from each separate element of cost
• Using the cash inflows and outflows calculated, prepare the cash budget including period net cash
flows and period end balances

Marking Guide Marks

Bad debt adjustment 2
Phasing of sales receipts (based on 'own figure' sales) 2
Materials inventory adjustment 2
Phasing of materials payments (based on 'own figure' purchases) 2
Outflows for other production costs (wages & expenses) 3
Variable selling expenses 1
Loan interest 1
Net cash flow & balances 1

Examiner’s Comments
Reasonable marks were gained by many candidates but few did really well on this part
Common Errors
• Not adjusting sales revenues for the bad debts
• Incorrect phasing of sales receipts
• Not adjusting materials purchases for the inventory change
• Incorrect phasing of materials payments
• Incorrect treatment of opening receivables, payables & inventory balances
• Including depreciation as a cash outflow
• Including the loan as a cash inflow

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Question 3(d)
Explain three areas from your cash budget which could cause problems for the company’s
management team.
(6 marks)

Rationale
(d) covers learning outcome C(xi) Evaluate performance using fixed and flexible budget reports.

Suggested Approach
• Using the cash budget in answer to part (c), and the question scenario, identify areas which could
cause cash problems

Marking Guide Marks

Up to 2 marks for each area fully explained 6

Examiner’s Comments
This part was quite well answered with many candidates identifying the short term shortage of cash as a
problem, along with a suggested solution, caused by the up-front payments for fixed production expenses
and loan interest and the increase in working capital.

Common Errors
• Discussion of items that were not relevant or problematic

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Question 4(a)
Assume that the 15,000 wheel sets are supplied by the Wheels Division at a transfer price of $900
per set.

Calculate the impact on the profits of each of the divisions and the group.

(5 marks)

Rationale
(a) covers learning outcome D(i) Discuss the use of cost, revenue, profit and investment centres in
devising organisation structure and in management control

Suggested Approach
• Calculate the incremental impact on the profit of Wheels Division or calculate revised total sales, costs
and profit to compare with the current profit
• Calculate the extra costs, and thus reduced profit, in Frames Division
• Calculate the impact on Group profit

Marking Guide Marks

Wheels Division profit increase:
- increased contribution 1
- increased fixed costs 1
- net gain 1
Frames Division profit decrease 1
Group profit change ('own figure') 1

Examiner’s Comments
This part was generally answered reasonably well.

Common Errors
• Failure to realise that the variable costs on internal transfers would be reduced by $50 per set
• Keeping total output at 30,000 sets
• Not including the increased fixed costs for Wheels Division
• Not appreciating that the effect on the Group would be the sum of the effects on the two divisions, or
not calculating the effect on Group profit at all

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Question 4(b)
Calculate the minimum price at which the Manager of the Wheels Division would be willing to transfer
the 15,000 sets to the Frames Division if his performance is to be measured against maintaining:

(i) the profit of the division (currently $1m)

(ii) the return on assets consumed by the division (currently 12·5%).

(9 marks)

Rationale
(b) covers learning outcome D(vii) Identify the likely consequences of different approaches to transfer
pricing for divisional decision making, divisional and group profitability, the motivation of divisional
management and the autonomy of individual divisions.

Suggested Approach
• Calculate the change in the $900 per set transfer price, or the required contribution plus fixed costs
per set, that would result in profitability remaining unchanged under each of the two scenarios
• (Various approaches were possible)

Marking Guide Marks

(i) Required total contribution 2
Required contribution per set 1
Minimum transfer price 2
(ii) Required total contribution 2
Required contribution per set 1
Minimum transfer price 1
NB Alternative approaches gained marks as appropriate (based on 'own figures' from (a))

Examiner’s Comments
There were some very good answers, using 'own figures' from answers to part (a), but many other
candidates did not know how to approach the calculations required.

Common Errors
• Assuming that capacity would be 45,000 sets within the Group
• Calculating an average price for the whole of the 35,000 sets manufactured
• Applying incorrect methods to the problem
• Providing solutions that were not sensible given the answers to part (a)

The Chartered Institute of Management Accountants Page 26

Paper P1 – Management Accounting – Performance Evaluation
Post Exam Guide
May 2009 Exam

Question 4(c)
Produce a report to the Managing Director of the group that:

(i) explains the problems that may arise from the directive and the introduction of performance
measures;
(10 marks)

(ii) explains how the problems could be resolved.

(6 marks)

Rationale
(c) covers learning outcome D(vi) Explain the typical consequences of a divisional structure for
performance measurement as divisions compete or trade with each other

Suggested Approach
• Identify the problems that may arise from the directive that Wheels Division are to supply sets to
Frames Division, at $900 per set
• Identify the problems that may arise from the performance measures under consideration
• Explain how the problems could be resolved

Marking Guide Marks

(i) 1 mark per relevant point 10
(ii) 1 mark per relevant point 6

Examiner’s Comments
Many candidates failed to grasp the real issues about autonomy, goal congruence and performance
measurement and the possible effect on motivation in general.

Common Errors
• Focussing on ROCE and RI as other performance measures without considering whether they would
solve any problems
• Not relating the answer to the situation revealed by the question scenario and the answers to parts (a)
and (b)
• Failing to suggest reasonable solutions to the problems

The Chartered Institute of Management Accountants Page 27