Paper P2 – Performance Management

Post Exam Guide

May 2010 Exam

General Comments

This was the first sitting for the new syllabus and the pass rate was comparable to the equivalent
under the previous syllabus. The questions covered a large portion of the syllabus. The progressive
nature of the P2 syllabus was evident, for example the inclusion of variances in Question 1 and
limiting factors in Question 6. As might be expected, the paper examined key topics in the syllabus
including transfer pricing within divisional structures, the learning curve, linear programming,
budgetary control and aspects of performance measurement. The inclusion of these topics, which
have been examined in both P1 and P2 in several previous papers over the last few years, would
greatly advantage those students who had built a review of previous examination questions into their
revision sessions. Close attention to previous Post Exam Guides would also have helped candidates
to understand the types of common error that have been noted in the past and the approach that is
recommended for tackling different types of question.

The changes to the paper’s assessment strategy, that is the removal of the objective test questions
and the fact that all questions were compulsory, exposed those candidates who had not studied and
revised the entire syllabus, but instead hoped that their favourite topics would appear in the paper.

The answers put forward by many candidates demonstrated a poor understanding of topics that
would have been included in the Certificate level assessments. Limiting factors are a good example
of this point. This once again highlights the point that has been raised on several previous occasions,
that candidates who have been awarded exemptions from both the Certificate level and P1 should
ensure they have a good understanding of all the topics included in the syllabus of those two papers
before attempting P2. Candidates who passed P1 under the previous syllabus should also familiarise
themselves with the new P1 syllabus because topics such as project appraisal and managing short
term finance are now included in that syllabus and may be relevant for the purposes of assessment at
Management level.

It is disappointing to note once again that the quality of handwriting and presentation of discursive
answers and the layouts for numerical answers fell short of the standard required. The end result is
that markers are unable to award marks for illegible handwriting and figures that seem to be
presented in a random fashion. Once again very few answers to discursive questions appeared to
follow a structured answer plan.

Another issue that seemed more noticeable this sitting was the poor interpretation of the verbs used
in the questions. It is essential that candidates fully appreciate the meaning of words such as
discuss, describe and explain. Examples of this misinterpretation of verbs will appear in the individual
question reviews that follow. Candidates are reminded that the list of verbs and their definitions is
published in the inside back cover of every CIMA examination paper.

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

The following points should be noted by candidates when reflecting on the May 2010 P2 examination,
and when preparing for future examinations.

1. Due to the progressive nature of the Performance Pillar, candidates sitting the P2
examination are advised to closely examine the syllabus of the Certificate level, particularly
C01 and C03, and the P1 paper to ensure they have a thorough understanding of all the
topics covered in those papers. Any identified knowledge gap must be addressed.
2. Candidates should always practise time management and relate the time they spend on each
question to the marks available. Candidates should allow 1.8 minutes for one mark.
3. Candidates are advised to read Financial Management magazine and Velocity e-newsletter,
especially articles that relate to technical issues associated with the P2 syllabus.
4. Candidates should study and revise the entire syllabus, and ignore suggestions put forward in
accounting magazines which suggest the topics ‘likely’ to be examined.
5. Candidates are advised to understand the rubric of the paper and plan their examination time
accordingly. In particular, the P2 paper has no objective test questions and no optional
questions.
6. Candidates should make full use of the 20 minutes allowed for reading and planning.
7. Answers to discursive questions should relate to the scenario in the question. On many
occasions general answers are submitted that attract few marks.
8. In preparing for the examinations candidates are advised to practise regularly using past
CIMA examination questions and comparing their answers to the examiner’s suggested
answers. This will allow candidates to measure their own progress. Candidates will also gain
an understanding of the correct layout for numerical questions and of the depth of answer
required to discursive questions.
9. Candidates are advised to present answers in a clear and logical fashion, with clear and
legible handwriting and clear references to workings.

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

Section A – 50 marks

ANSWER ALL FIVE QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 10 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS ARE AVAILABLE FOR
THE METHOD YOU USE.

Question Number 1

(a) Prepare a revised out-turn performance report for the new product that

(i) shows the flexed budgeted direct labour hours and direct labour cost based on
the revised learning curve data, and

(ii) shows the variances that reconcile the actual results to your flexed budget in
as much detail as possible.
(7 marks)

(b) Explain why your report is more useful to the production manager than the report
shown above.
(3 marks)

Note: The learning index values for an 80% and a 70% learning curve are -0·3219 and
-0·5146 respectively.
(Total for Question One = 10 marks)

Rationale

The question examines candidates’ understanding of learning curves and their interaction with budgets
and variance analysis.

Suggested Approach

• Calculate the total time for 30 batches

• Calculate the total time for 29 batches
•
th
Calculate the time for the 30 batch
• Calculate the total time for 50 batches and the associated labour cost
• Calculate the variances
• Prepare a revised out-turn performance report
• Explain why this report is more useful than the one provided in the question.

Marking Guide Marks

(a)
th
Time for 30 batch 2 marks
Total time for 50 batches 1 mark
Flexed budget direct labour cost 1 mark
Calculation of efficiency & rate variances (1 mark each) 2 marks
Format 1 mark

(b)
Reasons 3 marks

Maximum marks awarded 10 marks

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

Examiner’s Comments
Answers were rather disappointing, especially since the calculations required to flex the budget and the
calculation of two basic variances relate to the C01 syllabus.

Part (a) asked the candidate to prepare a revised out-turn performance report which required the
budgeted hours to be flexed in relation to the actual output, while also recognising that the learning curve
rate had changed. Part (b) simply asked for an explanation of why the new report is more useful to
management.

Common Errors

1. Poor presentation of figures

2. Inability to make simple calculations relating to the learning curve
3. Inability to calculate the labour rate and efficiency variances
4. Failure to flex the budgeted labour hours to the allowance for an output of 50 batches
5. Failure to put forward acceptable benefits of the reconstructed report

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

Question 2

Explain the changes that are likely to occur in the following items at the three later stages in the
product life cycle of a typical PQ product.

(i) Selling price

(ii) Production costs
(iii) Selling and marketing costs
(Total for Question Two = 10 marks)

Rationale

The question examines candidates’ understanding of the changes in costs and selling prices during the
life cycle of a product.

Suggested Approach

Identify the remaining stages of the product’s life cycle and for each of these explain the changes in
selling price and costs that are likely to occur.

Marking Guide Marks

Selling price changes 4 marks

Production cost changes 3 marks
Selling & marketing cost changes 3 marks

(All of the above 1 mark per phase except selling price in the growth phase - 2 marks)

Maximum marks awarded 10 marks

Examiner’s Comments

Overall the answers put forward were good, and a pass mark for this question was achieved by the vast
majority of candidates. The main error lay in candidates wasting valuable time explaining the
introductory phase of the product life cycle and also describing the market skimming approach to selling.
These descriptions were not requested and earned no marks. Some students constructed their answers
in the form of bullet points which reduced the number of marks that could be awarded. The question
asked candidates “to explain the changes” and so a fuller answer was required. This demonstrates the
need for candidates to understand the meaning of the verbs used.

Common Errors

1. Describing the introductory phase of the product life cycle and the market skimming approach to
pricing
2. Poor presentation of answers in terms of handwriting and layout
3. Not being aware of the various stages of the product life cycle
4. Wasting valuable time by including detailed charts to support answers

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

Question 3

(a) With the current production system,

(i) Calculate for each of the six months and the period in total, the total inventory holding
costs.
(ii) Calculate the total production cost savings made by changing to a JIT production system.
(6 marks)

(b) Explain TWO other factors that should be considered by XY before changing to a JIT
production system.

(4 marks)

(Total for Question Three = 10 marks)

Rationale

The question examines candidates’ knowledge of alternative production systems and their costs.

Suggested Approach

• Calculate the inventory at the end of each month

• Calculate the average inventory and its cost for each month
• Determine the months in which overtime would be required and its cost
• Compare the total costs of each production method
• Explain other factors to be considered before changing to a JIT production system

Marking Guide Marks

(a)
Average inventory figures (units) 2 marks
Average inventory figures( cost) 1 mark
Overtime hours 1 mark
Adjustment for 96% efficiency 1 mark
Cost comparison 1 mark

(b)
Explanation of 2 factors (up to 2 marks each) 4 marks

Maximum marks 10

Examiner’s Comments

Few candidates earned the full six marks available for part (a). The most common fault was that
candidates calculated the holding cost on the month-end inventory levels instead of using the average
inventory for each month.

The presentation of the numerical answers was extremely poor in some cases, which disadvantaged
candidates because marks cannot be awarded for answers that cannot be deciphered. A clear layout is

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

essential.

Part (b) was generally well answered, but many candidates described several factors associated with
JIT, instead of only two as requested. Putting forward additional items did not earn additional marks but
took up valuable time.

Common Errors

1. Calculating the inventory cost of month-end inventory figures instead of using the average
inventory figure
2. Failing to adjust the overtime hours for the 96% efficiency level when calculating the overtime
cost
3. Putting forward more than two factors relating to JIT

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

Question 4

(a) Discuss the present budgeting system and its likely effect on divisional partner motivation.

(6 marks)

(b) Explain two non-financial performance indicators (other than client satisfaction and
service quality) that could be used by the firm.

(4 marks)

(Total for Question Four = 10 marks)

Rationale

The question examines candidates’ understanding of budgeting systems and performance indicators in a
service environment.

Suggested Approach

• Read the scenario carefully and identify the problems inherent in the current budgeting system.
• Discuss each of these problems in the context of divisional manager motivation.
• Explain two non-financial performance indicators that the firm could use.

Marking Guide Marks

(a)
Up to two marks per point
Issues include:
• Wasted time
• Being ignored
• Involvement v pseudo involvement
• Not motivated to achieve
• Deliberately failing

Maximum 2 marks per point 6 marks

(b)
Explain two indicators relevant to the scenario (2 marks each) 4 marks

Maximum marks awarded 10

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

Examiner’s Comments
Most answers clearly demonstrated the issue relating to the verbs used in the questions. This question
asked candidates to “discuss” the present budgetary system. Most candidates did no more than
“describe” and gave a full description of “top down, bottom up” and “participative budgets”. Many
candidates simply re-wrote most of the question and then finished their answer with one short sentence
containing the word motivation.

Part (b) asked candidates to “explain” two non-financial performance indicators not associated with client
satisfaction (for instance, repeat business) and service quality. A significant number of candidates simply
gave a bullet point as their answer e.g. “number of cases won”. This type of answer does not address
the requirement to “explain”.

Common Errors

Part (a)

1. No clear answer plan

2. Detailed answers “describing” the current system
3. No reference to motivational issues

Part (b)

4. Suggesting client satisfaction performance measures such as referrals and repeat business
5. Simply stating a performance measure with no explanation
6. Suggesting more than two performance measures

Both parts

7. Poor presentation of answers and poor hand writing

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

Question 5

(a) Explain, using examples from the scenario, three issues that LMN should consider
when designing a new divisional performance statement.
(6 marks)

LMN is thinking of introducing Activity Based Costing at its Head Office to help with the
apportionment of all its costs to the divisions.

(b) Discuss the advantages of applying Activity Based Costing to apportion all of the
Head Office costs.
(4 marks)

(Total for Question Five = 10 marks)

Rationale

The question examines candidates’ knowledge of performance measurement in organisation structures

where costs are apportioned and managers do not have full control over decisions.

Suggested Approach

• Read the scenario carefully; identify the accounting methods being used and how these might
affect performance measurement.
• Discuss the difficulties caused by the accounting system and related policies.
• Discuss the advantages of using Activity Based Costing to apportion costs.

Marking Guide Marks

(a)
Up to two marks per point
Issues include:
• Problems with head office costs
• Issues associated with transfer pricing
• Controls over investments
• Responsibility accounting and control

Maximum 2 marks per point 6 marks

(b)
Two advantages relevant to the scenario
• Overall cost savings
• Divisional external pricing
• Fairer method of apportioning costs

2 marks per advantage 4 marks

Maximum marks awarded 10

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

Examiner’s Comment

The main theme of the question, and the issue on which answers needed to focus, related to “control”.
Answers needed to explain that, with the current system, the directors were being held responsible for
elements of performance that were not within their control. Far too many candidates put forward general
answers such as “the directors should be consulted when a new statement is designed”. Such answers
attracted no marks.

Part (b) called for candidates to quickly confirm that they knew the basics of ABC, and then to explain
how ABC could assist when apportioning Head Office costs. Far too many answers simply stated: “The
apportionment will be better if the company uses ABC”. Candidates needed to explain why it would be
better to use ABC, for example to assist in identifying unnecessary costs.
Common Errors

Part (a)

1. No clear answer plan

2. Not answering the question set and submitting long, general answers
3. Repeating the question in the form of an answer

Part (b)

4. Submitting bullet points or short sentences, and therefore failing to “discuss” the advantages of
applying ABC

Both parts

5. Poor presentation of answers, especially poor handwriting

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

SECTION B – 50 MARKS

ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS ARE AVAILABLE FOR
THE METHOD YOU USE.

Question 6

(a) Assuming that RT completes the order with the commercial customer, prepare
calculations to show, from a financial perspective, the optimum production plan for
June 2010 and the contribution that would result from adopting this plan.
(6 marks)

(b) Prepare calculations to show, from a financial perspective, whether RT should complete the
order from the commercial customer
(3 marks)

(c) Assuming that RT completes the order with the commercial customer, and using
graphical linear programming, prepare a graph to show the optimum production plan
for RT for June 2010 on the basis that the availability of all resources is 10% lower
than originally predicted.
(11 marks)

(d) Discuss how the graph in your solution to (c) above can be used to help to determine
the optimum production plan for June 2010 if the actual resource availability lies
somewhere between the managers’ optimistic and pessimistic predictions.
(5 marks)

(Total for Question Six = 25 marks)

Rationale

This question examines candidates’ understanding of limiting factor decision making and of how those
decisions would be affected if the resource restrictions were to change.

Suggested Approach

• Calculate the resources required for the total demand and identify the limiting factor.
• Rank the products according to their contribution per unit of the limiting factor and prepare an
optimum production plan.
• Calculate the financial viability of the contract.
• Calculate the pessimistic levels of resource availability.
• Prepare a graph to determine the revised optimum production plan.
• Explain the effect on the plan if resource quantities were less restricted.

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

Marking Guide Marks

(a) Identify limiting factor 2 marks

Ranking based on contribution per labour hour 1 mark
Production plan 2 marks
Contribution 1 mark

(b) Recognising shortfall in units to external market 1 mark

Calculation 1 mark
Comparison 1 mark

(c) Identifying resource constraints and constructing equations 4 marks

Constructing equations for demand constraints 1 marks
Plotting constraints 3 marks
Identifying feasible regain 1 mark
Stating solution 2 marks

(d) 1 mark per point 1 marks

Points include
• Most binding constraints
• Shifts to the right
• Parallel to existing constraint
• Material A becomes binding
• No change to labour, others have no effect 5 marks

Maximum mark awarded 25

Examiner’s Comment
Part (a) was simply a limiting factor question and the majority of candidates gained most of the marks on
offer. The main reason for forgoing marks was poor presentation of answers which made it difficult for
markers to identify the relevant figures. (An article relating specifically to this topic appeared recently in
Financial Management magazine.)

The attempts for part (b) were generally good but shorter, quicker methods were available compared to
those used by candidates.

Part (c) was similar to a question that appeared in the November 2009 P2 paper and those candidates
who had reviewed that paper and the relevant post examination guide would have easily understood what
was required. Many candidates earned only half the available marks due to a number of issues including
poorly constructed graphs, presenting only an inaccurate sketch graph, and not putting forward a final
answer.

The question asked candidates “to show” the optimum production plan. Many candidates interpreted this
request by simply drawing an arrow to indicate the maximum position, rather than setting down the figures
in the answer book, or writing them on the graph paper.

Many of the graphs submitted were poorly constructed; the lines and the axes were not labelled and the
graphs were very untidy.

Part (d) was generally poorly answered. Again a similar question was included within a previous paper.

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

Common Errors

Part (a)

1. Poor layout
2. Not stating the value of the maximum contribution

Part (b)

3. Using overly complicated methods

Part (c)

4. Poorly constructed graphs

5. Failure to submit a final answer
6. Including incorrect demand constraints

Part (d)

7. Failure to address the specific question requirement

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

Question 7

(a)

(i) Calculate the annualised Return on Investment (ROI) achieved by each of the
process divisions during April 2010.
(4 marks)

(ii) Discuss the suitability of this performance measure in the context of the data
provided for each process division.
(4 marks)
(b)
(i) Calculate the effect on the annualised Return on Investment in 2011 of Process
Division C investing in new capital equipment.
(4 marks)

(ii) Discuss the conflict that may arise between the use of NPV and ROI in this
investment decision.

(4 marks)

(c) Discuss the transfer pricing policy being used by H from the viewpoints of the
managers of Process Division B and Process Division D.
(9 marks)
(Total for Question Seven = 25 marks)

Rationale

The question examines candidates’ understanding of process accounting and ability to identify the data
relevant to measure divisional performance. It then tests candidates’ knowledge of Return on Investment
(ROI) and how ROI is affected by investment decisions and transfer pricing within a divisionalised
structure.

Suggested Approach

• Identify the data relevant to the calculations of ROI, perform those calculations based on the
monthly data and annualise the results.
• Read the scenario carefully and identify the key factors that will influence ROI, discussing them
in the context of the scenario.
• Calculate the ROI of Division C for next year if no investment is made.
• Evaluate the effect of the investment on the results of Division C for next year and calculate the
resulting ROI.
• Discuss the conflict between ROI and NPV.
• Discuss the effects of the transfer pricing policy on the decisions and reported performance of
the divisions.
• Relate the discussions to the scenario; an answer that merely gives a text book description of the
issues will not earn sufficient marks to pass.

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

Marking Guide Marks

(a) Calculations of monthly ROI (1 mark each) 3 marks

Calculation of annualised ROI 1 mark

Discussion 4 marks

(b) Calculation of ROI if no investment 1 mark

If investment is undertaken:
Calculation of revised sales 1 mark
Calculation of revised depreciation 1 mark
Calculation of ROI 1 mark

Discussion 4 marks

(c) Up to 2 marks per point discussed maximum

9 marks

Maximum marks awarded 25 marks

Examiner’s Comments

This question called for candidates to select the data required to address the questions. This was not, as
it first appeared to be, a process costing question. Rather it was a question relating to divisional
performance measurement in a process costing setting. It was disappointing that many candidates
incorrectly identified a profit as a loss and vice versa. This error had an adverse effect on the
calculations in (a)(i) and on the discussions in other parts of the question. Some candidates also used
total cost figures instead of profits. Both errors indicate a lack of basic accounting skills.

Common Errors

Part a (i)

1. Incorrectly showing profits as losses and vice versa when calculating the ROI
2. Using the total costs as profits
3. Not annualising the figures
4. Calculating an incorrect asset net book value

Part a (ii)

5. Discussing general/non relevant issues

Part b (i)

6. Poor attempts at the calculations

Part b (ii)

7. Discussing the advantages and disadvantages of NPV (which the question did not ask for)
8. Making no comparison between NPV and ROI in the context of the question.

Part (c)

9. Incorrect interpretation of the verb “discuss”

10. Simply rewriting the transfer details relating to Divisions B and D and not answering the question.

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Paper P2 – Performance Management
Post Exam Guide
May 2010 Exam

11. Describing Process Division B as loss-making rather than profit-making.

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