P2 Progress Test - Answers · 2020-03-05 · P2: ADVANCED MANAGEMENT ACCOUNTING 2 KAPLAN PUBLISHING 4 1 design phase 2 committed costs 3 incurred costs 4 manufacturing and sales phase

KAPLAN PUBLISHING 1

Progress Test

Answers

1 Statement 1 – True

Statement 2 – False

2 1 Assess

2 Redesign

3 Execute

4 Analyse

5 Analyse

6 Plan

7 Execute

8 Plan

3 This is the complete diagram for the Project Management Institute’s 5 process areas:

P2: ADVANCED MANAGEMENT ACCOUNTING

2 KAPLAN PUBLISHING

4 1 design phase

2 committed costs

3 incurred costs

4 manufacturing and sales phase

5 end of product life

5 Y Co is changing their inventory system to a just in time system ("JIT").

To do so, Y Co may need to redesign their production floor to ensure that production processes are grouped by product line. JIT can expose problems In a production plant as the excess inventory that acted as a buffer a no longer exists, so management will have to find long term solutions to ensure that the items required are produced at the right time, at the required quality and in the correct number.

Y Co will also need to consider adjusting their productivity measures as quality becomes more important

6 Statement 1 – False

Statement 2 – True



By definition. Statement 1 – the life cycle can be so short that the cost tracking system produces reports that are too late to be of use. Statement 2 – preventative maintenance should be carried out.

8

Product A B C

Selling price ($) 40 45 46

Direct material costs per unit ($) 10 17 14

Contribution per unit ($) 30 28 32

Time in the machine (hours) 2 4 2.5

Return per factory hour 15 7 12.8

Cost per machine hour: $150,000/100,000 = $1.5

Throughout accounting ratios:

A 15/1.5 = 10

B 7/1.5 = 4.67

C 12.8/1.5 = 8.53

9 The maximum transfer price is $26.00, the minimum is $17.78

Division A: TP ≥ 16/0.9, hence TP ≥ $17.78

Division B: (TP + 10)/0.9 ≤ 40, hence TP ≤ $26.00

PROGRESS TEST ANSWERS

KAPLAN PUBLISHING 3

10

1: Price set by the market

2: Number of Beta produced by Division B

3: Number of Beta required by Division D

11 $18

When no spare capacity exists, as is the case in Division Z, the transfer price should be set at marginal cost + opportunity cost.

Here, the marginal cost of manufacture in Division Z is Direct materials + direct labour = $13 per unit of Delta.

The opportunity cost incurred by selling internally is equal to the lost contribution on external sales of $20 selling price – variable costs of ($8 + $5 + $2) = $5 contribution per unit of Delta.

Therefore, optimum transfer price = $13 + $5 = $18 per unit of Delta

12 24,000

$6 less received per unit for 4,000 units = $24,000

13 36,000

External sales: $180,000;

Variable cost of external sales: $84,000;

Total fixed costs: 24,000 + 36,000 = 60,000;

Therefore profit: 180,000 – 84,000 – 60,000 = $36,000

14 Increase customer loyalty : Customer

Show myself to be a thought provoking / informed individual in my field: Customer

Identify future trends in my field: Internal

Improve awareness of, and therefore income earned, from my name: Internal

Number of repeat comments on my blog: Customer

Views per post: Customer

Bounce rate: Customer

Number of new clients gained who read my blog: Customer

Number of subscribers to my blog: Learning and growth

Number of conferences attended: Learning and growth


4 KAPLAN PUBLISHING



16 Competitive

Competitive (industry) benchmarking looks at the industry as a whole for comparative purposes.

17 Measure of performance

In a participative budget setting process, the manager may succeed in negotiating a budget that is easy to achieve and allows inefficiencies to creep into the production process. This means that variances comparing actual and budgeted results, even flexed budgeted results will not give a worthwhile measure of performance.

18 Statement 1 – True



Statement 2 – False

20 Division B has a higher capital employed figure than Division A.

Division B has not solved the bottleneck in their operations.

Tutorial note

You could use dummy figures to establish the validity of the statements. For example, as asset turnover is Turnover / Capital Employed, dummy figures of $1,300 for Turnover and $1,000 for capital employed could be used for this year in Division A. In Division B, an increase in CE does not translate into an increase in turnover, which could be read as a bottleneck not being resolved.

Division A Division B

This year (1,300 / 1,000) = 1.3 (1,040 / 1,485) = 0.7

Last year (1,300 / 1,181) = 1.1 (1,040 / 1,300) = 0.8

21 0.98

0.89

0.91

Division A: if NBV = accumulated depreciation, then must be 1/2 way through the asset life, i.e. 4 years.

Applying to Division B, we need the original cost (x): 0.84 * x = 125,000; hence x = $305,176.

Now, new NBV with restated depreciation policy: $305,176 / 2 = $152,588.

Therefore, asset turnover = 150,000 / (152,588 + 15,000) = 0.90.


KAPLAN PUBLISHING 5

22 Scenario 1: Increase then decrease, Scenario 2: Increase.

Statement 1: although not investing in the asset base will initially increase the asset turnover ratio, eventually the asset base will be out of date and will not produce goods efficiently.

Statement 2: the denominator should have a lower value as the value of inventory is lower.

23 Contribution

Gross profit percentage

Net profit percentage will include uncontrollable costs. Asset turnover includes the asset over which the manager has no control.

24 Higher delivery costs of food due to the rural village setting.

25 Current: Decrease, Quick: Increase.

Tutorial note

Here again, using dummy figures can help.

Initial: Current, say (10 + 80)/(25 + 75) = 0.9; quick, is then 80/100 = 0.8

Selling half the inventory: Current: (5 + 80)/(25 + 70) = 0.89; quick: 80/(25 + 70) = 0.84

26 For goal congruence to arise, the decision should be made using RI. This is because the divisional manager will want to reject the project as it decreases ROI whereas the Residual Income will lead him/her to accept the project.

ROI RI

Pre Project 21% (21% × 100,000) – (0.15 × 100,000) = $6,000

Project (10,000 / 62,500) = 16% 10,000 – (0.15 × 62,500) = $625

Post project 19.1% 31,000 – (0.15 × 162,500) = $$6,625

Target 15% –


6 KAPLAN PUBLISHING

27 take place within

internally

internally

may

agreed by negotiation

a good commercial reason

Tutorial note

Where divisions are trading, company policy should always be that the two trade with each other by preference unless a good commercial reason (such as a better price) intervenes. Ideally in a divisionalised organisation the two divisions would agree the price for the transfer by negotiation but head office may choose to set the price to incentivise certain behaviours.

28 Financial

Customer

Internal business

Innovation and learning

Innovation and learning

Customer

Internal business

Goal Perspective

To increase the average amount spent by customers on buying a holiday Increase the company ‘star rating’ on a holiday reviews website

Financial Customer

To improve the time taken from holiday booking to delivery of tickets to customers

Internal business

To increase the range of holidays offered Innovation and learning

To send all sales staff on the company training course Innovation and learning

To increase the number of returning customers Customer

To answer all e‐mails from suppliers within 48 hours Internal business

Tutorial note

Improving customer reviews and the number of returning customers shows that customers are happy. Improving the amount they spend on holidays will help to improve profitability. Improving the time taken to carry out tasks such as answering e‐mails and sending out tickets shows an improvement in the internal business processes of the company. New products and increased staff training show learning and growth.


KAPLAN PUBLISHING 7

29 16%

First, find divisional profit

$ Net profit 105,000 Add back Allocated fixed production overheads 25,000 Apportioned head office administration costs 30,000 Divisional profit 160,000

Then find divisional capital employed

$ Non‐current assets 800,000 Inventory 60,000 Receivables 230,000 Liabilities (50,000) Bank overdraft 40,000 –––––––

1,000,000

$160,000 / $1,000,000 = 0.16 = 16%

30 dissimilar

take account of corporate profitability

profit margin

asset turnover

a balanced scorecard

functional

allocate profits

Tutorial note

Divisionalisation is most successful where the activities of the cost centres are dissimilar and so clear boundaries can be established

Goal congruence involves encouraging managers to align their own aims with the overall profitability of the organisation.

Managers will need to be set targets such as return on capital employed (ROCE) which can be further broken down into profit margin and asset turnover (ROCE = profit / Capital employed = profit margin (profit / Revenue) x Asset turnover (Revenue / Capital employed)

To encourage a broader outlook, targets may be set from a range of perspectives in a framework known a balanced scorecard which combines financial targets with those focussed on internal business, learning and growth and the customer.

Benchmarking may be used to set the targets. Comparison of key processes with a public relations company which carries out a number of similar processes would be an example of functional benchmarking. As they operate in different industries it is more likely that they will be happy to share their methods.

Since the divisions will trade with each other transfer prices may be introduced to allocate profits and encourage interdivisional trade.


8 KAPLAN PUBLISHING

31 MR = 50 – 0.0008Q

The demand equation is p = a – bx

Where p = price

x = quantity demanded

a and b are constants

30 = a – 50,000b

32 = a – 45,000b

2 = 5,000b

b = 0.0004

30 = a – 50,000 x 0.0004

30 = a – 20

a = 50

so the price equation is

p = 50 – 0.0004b

The marginal revenue is therefore

MR = 50 – 0.0008b

Option 1 is the demand equation not the marginal revenue equation

Option 3 deducted not added 20 to 30 when rearranging the equation

Option 4 made both errors

32 355

Available Answers 363

To maximise A1 company profits set MC co = MR co

MC co = $20 + $110 = $130

MR co = MRGroplan

p = 580 – 0.003Q

MR = 580 – 0.006Q

MC = MR

130 = 580 – 0.006Q

450 = 0.006Q

Q = 75,000

p = 580 – 0.003 x 75,000 = $355

To maximise Division C profits, manager will set MCB2 = MR


KAPLAN PUBLISHING 9

33 23.58

At the moment the quick ratio is = (22.5 + 15) / 25 = 1.5

Let p = amount paid to trade payables

[22.5 + (15 + p)] / (25 – p) = 1.65

22.5 + 15 + p = 1.65 x (25 – p)

37.5 + p = 41.25 – 1.65p

3.75 = 2.65p

p = 1.42

New payables = 25 – 1.42 = 23.58

Option 2 added the value of p instead of subtracting

Option 3 is the wrong rearrangement of the equation

Option 4 wrongly included inventory in the calculation

34 10.9%

Residual income

$2,000 / 0.025 = $80,000

Notional capital charge

$300,000 – charge = $80,000

Charge = $220,000

If cost of capital is 8%, capital employed:

$220,000 / 0.08 = $2,750,000

ROI = $300,000 / $2,750,000 = 10.9%

Option 1 used the RI instead of the profit figure in calculating the ROI

Option 2 used 8% x $220,000

Option 3 added rather than deducted the RI to find the charge

35 Stay the same

Increase

Tutorial note

The manufacturing division is selling PP into a perfect market and so can sell as many as they wish at the market price. Production of MM can be reduced or stopped if the production division buys externally and external sales of PP substituted. So their pro t remains unchanged.

For the company as a whole, it earns additional external revenues from the sales of PP and the production division is still able to buy in the product and sell at a pro t as before so overall the company pro t improves.


10 KAPLAN PUBLISHING

36 • IRR

IRR

ARR

NPV

ARR

Payback

Technique Advantage

ARR The whole life of the project is considered

IRR 1 The method uses less subjective information

2 The present or current value earned from an investment is considered.

3 The whole life of the project is considered.

Payback 1 The method uses less subjective information

6 The method is a useful screening tool for companies which liquidity concerns

NPV 1 The method uses less subjective information

2 The present or current value earned from an investment is considered.

3 The whole life of the project is considered.

4 The measure links directly to the primary objective of the business

37 A post completion audit aims to evaluate the efficiency and effectiveness of the decisions made and implemented by management.

The post completion audit can identify weaknesses in the forecasting system and identify where operating inefficiencies have occurred. This allows the organisation to take steps to improve when planning future projects.

38 0.737

(1 + m) = (1 + r) (1 + i)

T1 (1 + m) = 1.08 * 1.03 = 1.1124

T2 (1 + m) = 1.08 * 1.025 = 1.107

T3 (1 + m) = 1.08 * 1.02 = 1.1016

Therefore discount factor = (1 / 1.1124) * (1 / 1.107) * (1 / 1.1016) = 0.737.

Distracters:

Option 1: (1 / 1.1124)3

Option 2: (1 / 1.1016)

Option 4: (1 / 1.1016)3


KAPLAN PUBLISHING 11

39 $(287,874)

Time Description Cash flow

Discount factor (8%)

Present Value

T0 Investment (500,000) 1 (500,000)

T1 Tax depreciation 37,500 0.926 24,103




T4 scrap 175,000 0.735 128,625

–––––––

(287,874)

Tax depreciation working:

Time Value Post tax @30%

500,000

T1 25% RB (125,000) 37,500

–––––––

375,000

T2 25% RB (93,750) 28,125

–––––––

281,250

T3 25% RB (70,313) 21,094

–––––––

210,937

Sale proceeds (175,000)

–––––––

Balancing Allowance – T1 35,937 10,781

Option 1: (–500,000 + 175,000 * 0.735); ignore tax depreciation

Option 3: mistake the balance allowance for a balancing charge

Option 4: not multiply the tax depreciation by the tax rate, i.e. include the capital allowance / balancing charge in the PV calculation.



40 8,509 units

Time Description Cash flow ($)

Discount factor (10%)

Present Value ($)

0 Investment (400,000) 1 (400,000)

3 Scrap 150,000 0.751 112,650

1 – 3 Fixed costs (10,000) 2.487 (24,870)

1 – 3 Fixed costs ‐ tax relief 3,000 2.487 7,461

1 Tax depreciation saving 30,000 0.909 27,270



–––––––

(242,006)

Tax depreciation working:

Time Value Post tax @30%

Investment 500,000

T1 25% RB (100,000) 30,000

300,000

T2 25% RB (75,000) 22,500

Sale proceeds 225,000

(150,000)

–––––––

Balancing Allowance – T3 75,000 22,500

To be indifferent, PV of costs = PV of revenue. Let "x" be the units sold in T1.

So, 242,006 = (0.7x * 10 * 0.909) + (0.7 * 2x * 10 * 0.826) + (0.7 * 2x * 10 * 0.751);

Therefore, x = 8,509.

Distracters:

Option 2: forget to discount sales

Option 3: forget to tax sales

Option 4: do not double sales in years 2 and 3

41 $149,038

To discount the perpetuity, need to split the perpetuity.

Cash flow at T1 = $100,000 * (1 / 1.08)

For cash flow at T3, T5, T7, etc, need a two year rate: (1.082 – 1) = 16.64%; i.e. Perpetuity factor = (1 / 0.1664)

However, this assumes the first cash flow arises at T2, but it is T3, therefore, the perpetuity factor needs to be adjusted: (1 / 0.1664) * (1 / 1.08).

Therefore, the NPV = $500,000 + (100,000 / 1.08) + [100,000 / (0.1664 * 1.08)] = $149,038.

Distracters:

Option 1: (500,000) + (100,000 / 0.08) = $750,000. i.e. deal with as if a normal perpetuity

Option 2: (500,000) + (100,000 / 0.1664) = $100,962. i.e. deal with as cash flows in years 2, 4, 6 etc.

Option 3: (500,000) + (100,000 / 1.08) + (100,000 / 0.1664) = $193,554. i.e. cash flows i years 1, 2, 4, 6, 8, etc.



42 Income elasticity

43

A diagnostic system for staff to use which will identify the appropriate training needs for new joiners based on their previous experience

Expert system

A performance reporting system for presenting the management board with monthly updates on national performance to include graphs and comparisons with key competitors

Executive information system

A system to produce weekly management reports based on the day to day transaction data generated by the processing system

Management information system

A system to help the board decide on investment opportunities and evaluate and utilise the cost driver information produced by the new activity based costing system

Strategic enterprise management system

A software system to consider the implications of changing the variables such as price and sales levels in the sales budgets for the coming months

Decision support system

An expert system captures expert knowledge and can be interrogated by non‐experts to identify the correct answer to a problem.

An executive information system presents selected focused information to senior executives in a highly visual way and contains internal and external data.

A management information system gathers data from a transaction processing system to provide standard management reports.

A strategic enterprise management system helps senior management make significant investment decisions and incorporates tools such as activity based management.

A decision support system provides manipulation software to assist with ‘what‐if?’ analysis and other unstructured problems.

44 Lost contribution from delaying production and sales of the range for the four weeks it will take to acquire the additional information. (1 Mark) Warehouse rental for the products made and stored prior to sale: Warehouse space paid on a weekly basis.

Two hours research invoiced by a freelance researcher to gather external data.

The additional NPV earned from a more targeted launch.

The value of information for decision makers is the net benefit earned from the additional information less the costs involved in obtaining it. Only incremental costs and benefits should be included. The work carried out by the junior assistant is not relevant because there is no incremental cost. The same is true of the work carried out by the senior executive who would receive the ‘out of hours’ payment whether or not the work was completed. The current warehouse costs are also not relevant as they are incurred anyway.



45 Velocity

Variety

Volume

Veracity



Statement 1: Big data can only identify correlation, not causation.

Statement 2: By definition

47 The quantity of data generated

The quality and accuracy of the data can fluctuate widely

The number and types of format that data can be submitted in

The speed with which the data is generated and processed

The inconsistency within the data

Linking, connecting and correcting data from multiple sources

48 Sincerity

49 Self interest threat

Self review threat

Intimidation threat

Familiarity threat

50 Integrity

Objectivity

Professional competence and due care

Confidentiality

51 It is in the public interest that a management accountant does not simply follow a set of specific rules, but has a conceptual framework that requires them to consider the fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. A management accountant should identify any threats, evaluate the threats and then take action to address the threats.



52 $64,000

The first step is to calculate the profitability index (PI) for all those projects with positive NPVs (those with negative NPVs are not worthwhile).

Project Initial investment ($000)

NPV ($000)

Profitability index NPV / Inv

J 70 38 0.54

K 120 58 0.48

L 60 35 0.58

M 90 (15) not worthwhile

N 150 66 0.44

The options can then be considered in turn.

Option 1: Since L has the highest PI, choose all of L which uses $60k of the investment funds plus 60/120 of K (which has the next best PI)

NPV = $35k + ($58k/2) = $64k

Option 2: Choose all of J (next highest PI) then the remaining $50k can be spend on 50k/120 of K

NPV = $38k + ($58 x 5/12) = $62k

Option 1 has the highest NPV

53 5.98 years

Year Cash flow Discount factor at 6%

Discounted cash flow

Cumulative discounted cash flow

0 (30,000) 1.000 (30,000) (30,000)

1 0 0.943 0 (30,000)

2 7,000 0.89 6,230 (23,770)

3 7,000 0.84 5,880 (17,890)

4 8,500 0.792 6,732 (11,158)

5 8,000 0.747 5,976 (5,182)

6 7,500 0.705 5,288 106

Hence discounted payback period = 5 years plus (5,182/5288) = 5.98 years



54 Cumulative average time per unit for 8th unit Y8 = 12 × 8‐0.415

Y8 = 5.0629 hours, therefore cumulative average time per unit for 8 units = 40.503158 hours

Cumulative average time per unit for 7 units Y7 = 12 × 7‐0.415

Y7 = 5. 3513771 hours, therefore cumulative average time per unit for 7 units = 37.45964 hours

Therefore incremental time for 8th unit = 40.503158 hours – 37.45964 = 3.043518

Total labour cost for 8th unit = 3.043518 x $15 = $45.65277

Material and overheads costs = $230

Therefore total cost = $275.65277 per seat

Therefore price per seat = $413.47915

55 Venue 3

The maximum regret if the Venue 1 venue is chosen is $810,000.



Therefore, if SowBiz wants to minimise the maximum regret, it should stage the entertainment event at the ’Venue 3’ venue.

56 36.25%

$140,000 – $ 50,000 = $90,000 Joint probability is (0.45 × 0.25) = 0.1125

$160,000 – $50,000 = $ 110,000 Joint probability is (0.25 × 0.25) = 0.0625

$160,000 – $60,000 = $100,000 Joint probability is (0.25 × 0.35) = 0.0875

$160,000 – $70,000 = $90,000 Joint probability is (0.25 × 0.40) = 0.1000

Total = 0.3625

Alternatively: $140,000 – $50,000 = $90,000 Joint probability is (0.45 × 0.25) = 0.1125

At cash inflows of $160,000, net cash flows are all greater than $90,000 therefore probability is 0.2500.

0.1125 + 0.2500 = 0.3625, so the probability is 36.25%

57 $62,800

((50% × 70% × $250k) + (30% × 70% × $150k) + (20% x 70% × –$80k) + (30% × –$150k) = $62,800



58 The company should therefore choose machine B. This will represent a saving of $2,946 in present value terms.

We must first calculate the NPV of the two options, then convert the NPV of each into an annual equivalent cost

Machine A Machine B

DF CF PV CF PV

0 1 80,000 80,000 110,000 110,000

1 0.909 15,000 13,635 12,000 10,908

2 0.826 11,000 9,086 12,000 9,912

3 0.751 12,000 9,012

102,721 139,832

Cum DF 1.736 2.487

59,171 56,225

Machine B is the cheapest option.

The difference is $2,946.

59 $10.25m

The expected value from each product is:

Product A: ($40m × 0.75) + ($1m × 0.25) – $20m = $10.25m

Product B: ($16m × 0.45) + ($8m × 0.55) – $10m = $1.6m

So Product A would be selected, and the expected value would be $10.25m (option two).

60

Stress Testing

Scenario planning

Value at risk

Values a portfolio under a given set of high‐risk

√

Using Monte Carlo simulation techniques, gives a probability distribution of the potential range of values of a portfolio under a particular set of abnormal market conditions.

√

Measures the maximum expected loss for a given portfolio, under normal market conditions, attributable to changes in the market price of financial instruments

√

Stress testing is a specific example of scenario planning.



Documents

P2 Progress Test - Answers · 2020-03-05 · P2: ADVANCED MANAGEMENT ACCOUNTING 2 KAPLAN PUBLISHING 4 1 design phase 2 committed costs 3 incurred costs 4 manufacturing and sales phase