JUNE 2006 - EXAMINERS' REPORT

As in previous diets, the examination paper comprised two sections, A and B. Section A consisted of two compulsory questions for 40 and 20 marks respectively. Section B consisted of three optional questions, for 20 marks each, from which candidates were required to answer two questions. It was pleasing to see so many candidates providing good answers to every question they attempted and consequently achieving high marks. Although the examination also revealed a large number of candidates who were inadequately prepared for the examination, it was pleasing to observe that far fewer candidates scored very low marks. In general, the overall performance of candidates was much better than in recent diets. Many candidates, despite their obvious knowledge of the syllabus areas examined, did not achieve a pass as a consequence of poor examination technique, especially poor presentation and/or time management. Well-prepared candidates invariably provided concise workings which arrived at the correct solutions to the computational parts of the examination paper. However, a large number of candidates produced workings which were difficult to follow, and a significant number of candidates displayed their answers poorly. It is vital that candidates give more thought to the layout and organisation of their answers. Valuable time was wasted in the production of pages of workings to arrive at incorrect solutions to relatively straightforward calculations such as, for example, those contained in Part (a) of Question 4. A number of candidates also ignored the advice given in previous examiners reports, and did not start each question on a new page in the answer booklet(s) or use clear labelling to indicate which questions were being attempted. Most candidates attempted all four questions, although there was some evidence of poor time management, particularly affecting Question 1. The poor performance of many candidates was once again exacerbated by a clear failure to read carefully the content and requirements of each question being answered. This contributed to some poor performance in both the computational and discursive parts of each question.
QUESTION 1

Most candidates managed to score reasonably well in Part (a). Some appeared to get bogged down in calculations and missed some easy marks, for example, the mark for the fixed costs. Many were able to calculate the cost of the 500th and the 499th batch correctly, but few were able to use their answers to calculate the labour cost for 12 months and 18 months. Very few candidates converted the rate of return for 18 months to an annual rate. Part (b)(i) was also answered reasonably well. Candidates usually opted to give eight actions without going into too much detail on each. Some weaker candidates suggested changes in accounting policies, using annuity depreciation for example, demonstrating a lack of understanding of what was required. A surprising number of candidates misinterpreted the requirement of Part (b)(ii), and wrote their answers as if they were advising the directors on how to reduce the rate of return. Also, surprisingly few candidates identified the obvious risk that the sales targets might not be met. Instead, candidates often suggested the opposite of what they had already suggested for Part (b)(i). In Part (c), most candidates were able to gain some of the marks on offer mainly by explaining target costing. Only a small number demonstrated no appreciation whatsoever of target costing. However, explaining its application by GWCC was less well answered, particularly as relatively few candidates made the connection that the selling price was already fixed and the required rate of return set.
QUESTION 2

Part (a) was well answered by many candidates. However, answers to Part (b) were generally disappointing, especially given the large amount of information which candidates could use to answer this part of the question. The most common problem was a failure to support statements made with relevant data, even where the data was given in the question and no further calculation was required. A surprising number of candidates produced unstructured answers which, in many instances, were far too brief given the marks available. This was surprising, given that similar questions had appeared at previous diets.

QUESTION 3

In Part (a), many candidates were able to match the divisions with the BCG matrix, justifying their answers and thus scoring full marks. A surprising number of candidates wrote a page or more describing the matrix without mentioning SCC Ltd, which simply wasted time as this was clearly not required. Candidates are reminded that this examination is set at a Masters level and candidates are rewarded for the application of wider relevant knowledge. Part (b) was less well answered. Only a small number of candidates suggested strategies that were linked to the scenarios of the divisions. Many, on the other hand, simply offered generic suggestions without any mention of a particular division or, indeed, of SCC at all. In Part (c), most candidates who had read a recent student accountant article on this subject scored near full marks.
QUESTION 4

In Part (a)(i), many candidates achieved good marks for their NPV calculations. Marks were most commonly missed for incorrect treatment of taxation, as many candidates did not appear to understand the mechanics of allowing for taxation in an NPV calculation. Surprisingly few candidates were able to calculate the payback period correctly. Common errors were to use the pre-tax cash flows, to calculate discounted payback, and to calculate the profitability index. In Part (a)(ii), very few candidates attempted to calculate the annual equivalent cash flows, suggesting that many candidates had not studied how to deal with projects that have unequal lives. In Part (b)(i), the majority of candidates were able to score at least one mark by stating that payback is easy to calculate and understand although, as mentioned above, this was not always evident from answers to Part (a)(i). In Part (b)(ii), many candidates could explain the application of sensitivity analysis, but few were able to discuss its inherent limitations.
QUESTION 5

The standard of answers to Part (a)(i) varied considerably. Most candidates, however, were able to identify motivational benefits, and a smaller number of more able candidates provided a good extensive explanation of further potential benefits. Part (a)(ii) was well answered with many candidates being able to explain a list of factors to be considered. In Part (a)(iii), a large number of candidates simply agreed with the statement of the production director. This was disappointing given that candidates had just explained, in Part (ii), the numerous factors which needed to be considered and which could therefore go wrong in the design of a reward scheme. This demonstrated a worrying lack of critical ability by weaker candidates. In Part (b), although many candidates provided good answers just as many only addressed the rewards for shareholders, having either misread the question or (worse) not understood the distinction between a stakeholder and a shareholder.