The Examiners’ Answers for CIMA Masters

Gateway Assessment

SECTION A

Answer to Question One

Requirement (a)
Customer value statement report
Item DIY - A DIY - B Small garden
centre shops
Sales (units) 1000 500 400
$ $ $
Sales ($) 200,000 100,000 80,000
Standard variable production costs 60,000 30,000 24,000
Contribution 140,000 70,000 56,000
Delivery costs ($5 per Km) 5,000 2,500 4,250
Emergency deliveries ($600 each) 1,200 0 0
Order costs ($100 per order) 500 400 1,000
Discounts (% of sales) 40,000 15,000 8,000
Sales commissions (% of sales) 20,000 10,000 4,000
Publicity costs (given in $) 25,000 20,000 15.000
Total other overheads 91,700 47,900 32,250
Profit per customer* 48,300 22,100 23,750
Profit per customer margin* 24% 22% 30%
(* pre fixed production overhead)

Order 3 2 1

The traditional contribution margin is 70%; when the other overhead costs per customer are
included in the analysis then the order is as above, and the small garden centre shops are the
most profitable customers.

Requirement (b)
When considering the individual profitability of customers and whether to stop trading with one,
then the following issues are important:
The analysis of customer profitability you are using must incorporate productivity improvements.
The decision must be informed by a production and costing system that is as accurate as
possible. A system providing accurate customer profitability is essential.

May 2010 1 Examiner's Answers CMGA

Account engineering should be used to look at critical issues around how the account is
managed and how aware the customers are of the cost of particular behaviours and activities
e.g. stock outs and emergency delivery, to allow them the option to alter their behaviour and
become more profitable.
There should also be an appreciation of the customer’s commercial strategy and dialogue as to
how it affects the cost and service relationship e.g. marketing and sales arrangements.
There may also be a good reason to retain a less profitable order because of a lack of other
opportunities or that it satisfies another strategic objective e.g. lower prices to support poorer
parts of the world in the pharmaceutical industry.
The lifecycle of the customer relationship must also be carefully considered.

Requirement (c)
A Just-in-Time system aims to produce or procure components and /or products as required by
the customer or for use rather than placed in stock. It is a ‘pull’ system and responds to demand
and has a product line emphasis. It requires a flexible labour force and excellent information /
communication lines.
Just-in-Time systems should result in a move towards the following ‘ideal’ situation:
• Elimination of non-added value activity whereby both value-adding and non-value added
activities must be investigated and managed accordingly.
• Zero inventory levels, or as near as, is the target to minimise the costs of stock holding
and release cash tied up in stock.
• Zero defects resulting from the efficiency and refinement of the processes.
• Achieve optimal batch sizes of one with minimum set-up activity and costs.
• Zero breakdowns in the process to optimise productivity levels
• A 100% on-time delivery service to ensure the satisfaction of customers.
The disadvantages are:
• It requires a reorganisation and orientation of the system and structure plus training
which is costly in terms of time and money.
• It may require the retraining of staff and involve a learning curve period and reduced
productivity in the short term e.g. store keeping staff relocated and trained elsewhere.
• Redundancies may be an unfortunate outcome.

Requirement (d)
Target costing looks to the market for direction in terms of the selling price for products.
A predetermined selling price is obtained from market analysis and from this is deducted
a target profit, to determine target cost.
Target costing is an activity aimed at reducing the life cycle costs of new products,
whilst upholding quality, reliability, and other consumer requirements.
It looks for all possible ways to reduce costs at the product planning, research and development
and prototyping phases of production. It does not just aim to minimise cost but is part of a
strategic system to manage profits.
Techniques like value engineering, and value analysis are used to align the expected costs with
the target cost.
Life cycle costing views products, services and customers over their total life span rather than
assessing them for a single period (generally the accounting year).

Examiner's Answers CMGA 2 May 2010

The idea is that the lifecycle can be managed to maximise product and that all costs are
incorporated into the product e.g. especially important when R & D and exit costs are complex
and relatively high.
Designing cost out of the product and maximising time to market are key factors in profit
maximisation. A return map (lifecycle map) can be used to illustrate for a product – time to
market, breakeven time, breakeven post release and return factor.

Answer to Question Two

Requirement (a)
Projects are generally defined as having a number of characteristics or attributes that
differentiate them from ‘business as usual’ work. They can be characterised as having a
lifecycle, since projects tend to pass through a number of phases, starting with the identification
of need, followed by the development of a solution, implementation and completion.
A project is usually undertaken for a specific purpose to accomplish an objective or goal through
a set of interrelated tasks and, as such, is a temporary process. It will have a clearly defined
start and end time and will usually be determined in terms of the scope, schedule and cost.
The objective of the project for PT Hospital will be the design and implementation of the pay and
reward system that achieves the desired outcomes of greater flexibility, aids recruitment and
retention, and rewards staff for their contribution in achieving hospital targets. The project will be
focussed on the tasks needed to design and implement the new pay and reward system by May
2010. All tasks must be scheduled to meet this pre-determined end date imposed by the
government.
The project will have a budget allocated to deliver its objectives and must plan within this budget
for costs and resources needed. It will have a project sponsor that is the individual or group who
will provide the funds for the project. In the case of the pay and reward project, this will be the
Hospital Board.
A key feature of a project is that it is unique, in other words it is a non-repetitive activity and does
not normally involve routine work. Whilst the hospital HR team are responsible for administering
the current pay system, this is an ongoing activity with recurring tasks, but the design of the new
system will be a one off activity.
A project will often cut across organisational and functional lines. In this case it will probably
include members of the HR team, but also representatives from other staff groups such as
nurses, physiotherapists, radiographers, technicians and ancillary staff.

Requirement (b)
The project management process for the design and implementation of a new pay and reward
system will involve the following stages:
Initiation and identification of need
The initial phase of the project is the identification of a need or problem that must be resolved. In
the case of PT Hospital, the need is driven by the requirement to respond to government
demands to modernise the pay and reward system.
At this first stage the development of the primary purpose of the project and the establishment of
its goals and objectives must be determined. It is at this stage that the key individuals who will
form the project team will be brought together. For the PT Hospital’s pay and reward project, this
may include members of the HR team, IT team and Finance team, along with representatives of
the different employee groups and union/staff association representatives.
The scope of the project will need to be determined, along with the objectives and expectations
and project deliverables.
There will be some parameters and constraints that the project will have to work within, for
example resource availability, budget, and time-frame, in PT Hospital’s case this will be May
2010. It is at this stage that feasibility analysis should be undertaken to consider the potential
benefits and costs of proceeding with the project. However, in this particular case, the

May 2010 3 Examiner's Answers CMGA

government’s requirement to reform pay and rewards means that the hospital management
have no choice but to go ahead with the project.
Planning
Planning involves defining the resources required to undertake and complete the project. It is
about determining how the project team will achieve its objectives within the constraints of time,
budget and resources. At this stage a schedule of the different activities that will need to be
undertaken to design and implement the new pay and reward system will be devised and a
budget developed.
During the planning phase the team may use techniques such as work breakdown structure,
Gantt charts and networks analysis techniques to help in the scheduling of the different activities
that will need to be undertaken and milestones identified.
Executing/Implementation
This stage involves the actual performance of the project, resulting in the accomplishment of
project objectives. It requires the skill of the project manager to keep team members focused on
the project tasks, coordinating project team members that will result in achieving project
deliverables. As work is carried out progress meetings will be held. It will be important during
this phase to involve the various stakeholders so that any objections can be taken on board and
considered as the development of the new scheme emerges.
Controlling
Controls should be put in place in order to measure the projects progress and assess if
milestones are being achieved. It there are deviations from the plans it will be necessary to
determine whether corrective action is needed. This could lead to re-planning, which may in turn
lead to goal definition change. For PT Hospital the deliverable is clear and non negotiable since
it is being imposed by government, however, there may be some flexibility in how the outcomes
are achieved.
Completing and Closure
This is the final stage, and involves ensuring that the project is completed and conforms to the
latest definitions of what needs to be achieved and meets the customer specification.
In this last stage of the project there are various activities that should be carried out in addition
to confirmation that the project deliverables have been met. For PT Hospital the key deliverable
is that all staff are on the new pay system by May 2010.
The closure phase will involve the handover of the project to the hospital’s management and
more specifically to the HR department for its administration. It also will involve the disbanding of
the project team, including an audit of the learning from the project that could assist in the
management of future projects.

Examiner's Answers CMGA 4 May 2010

Answer to Question Three
$000 $000 Ref. to working
Cash flows from operating activities
Profit before taxation 19,450
Adjustments for:
Profit on disposal of property (1,250)
Depreciation 7,950
Finance cost 1,400
27,550
Decrease in receivables 470 1
(Increase) in inventories (3,100) 1
(Decrease in trade payables (1,420) 1
Cash generated from operations 23,500

Interest paid (1,480) 2

Income taxes paid (5,850) 2
Net cash from operating activities 16,170

Cash flows from investing activities

Acquisition of subsidiary (net of cash) (1,950) 3
Purchase of property, plant and equipment (11,300) 4
Proceeds from sale of property 2,250
Net cash used in investing activities (11,000)

Cash flows from financing activities

Repayment of interest-bearing borrowings (1,000)
Dividends paid by BX (6,000)
Dividends paid to non-controlling interest (200) 5
Net cash used in financing activities (7,200)

Net decrease in cash (2,030)

Cash at beginning of period 3,900
Cash at end of period 1,870

Working 1 – Working capital changes

Receivables Inventories Trade payables
$000 $000 $000
Closing balance (27,100) (33,500) (33,500)
Less: Acquired with CM 1,300 1,650 1,950
(25,830) (31,850) (31,390)
Opening balance 26,300 28,750 32,810
Decrease/increase/decrease 470 (3,100) 1,420

Working 2 – Interest and income taxes

Interest Income taxes
$000 $000
Liability brought forward 1,440 5,450
Liability acquired with CM - 250
Charge to income statement 1,400 6,250
Liability carried forward (1,360) (6,100)
Balance: Amount paid 1,480 5,850

May 2010 5 Examiner's Answers CMGA

Working 3 – Acquisition of subsidiary
$000
Cash element of consideration 2,000
Less: Cash acquired with CM (50)
1,950

Working 4 – Purchase of property, plant and equipment

$000
Balance brought forward 44,050
Acquired with CM 4,200
Disposal at net book value (1,000)
Depreciation for year (7,950)
Less: Balance carried forward (50,600)
Balance: Purchased (11,300)

Working 5 – Dividend paid to non-controlling interest

$000
Balance brought forward 1,920
Profit attributable to non-controlling interest 655
Acquired with CM ($5,000 x 25%) 1,250
Less: Balance carried forward (3,625)
Balance: Dividends paid 200

Examiner's Answers CMGA 6 May 2010

SECTION B

Answer to Question Four

4.1 The answer is D

4.2 (90,000 - 85,000) x standard profit per unit = 5,000 x $2

The answer is B

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

The answer is A

4.4 800kg x resale price of $3.50 = $2,800

200kg x purchase price of $4.50 = $900
Total = $3,700

The answer is A

4.5 The answer is D

4.6 The answer is C

4.7 The answer is Vertical conflict

4.8 The answer is:

(i) Completer/Finisher
(ii) Team worker
(iii) Plant

May 2010 7 Examiner's Answers CMGA

4.9
Pension plan assets $000
FV of plan assets at 1 June 2008 3,100
Contributions made 300
Expected return on assets 190
Benefits paid (225)
Actuarial loss (balancing figure) (25)
FV of plan assets at 31 May 2009 3,340

The answer is B

4.10
Post tax earnings $440,000
Weighted average number of shares in issue:
1 may – 30 September 5 million shares x 5/12 months 2,083
1 October – 30 April 7 million shares x 7/12 months 4,083
6,166
Earnings per share $440,000/6,166,000 7.1 cents per share

The answer is B

4.11 The answer is D

4.12 The answer is C

Examiner's Answers CMGA 8 May 2010