Performance Management

A disheartening number of students in the May exam did themselves no favours by failing to read the requirements sufficiently carefully. Don’t waste time working out the right answer to the wrong question

The results of May 2013’s P2 paper were a little disappointing for a significant number of students. A detailed performance analysis shows that many candidates struggled with most of the questions in section A.

Let’s go through each question in that section to analyse areas of particular difficulty and try to learn from the common mistakes that cropped up (the questions and model answers for this paper and other P2 exams can be found at on CIMA’s website).


This called for the production of a customer profitability statement and had an obvious link to activity-based costing. Most candidates were able to calculate the net profit earned by each customer and they scored the 3.5 marks that were available for this. Unfortunately, most also failed to gain any further marks.

This was for two main reasons. First, the question asked specifically for “appropriate measures”. The three most relevant measures were: profit per shrub, profit per order and profit per $1 of gross revenue (or net profit as a percentage of gross revenue). Few candidates included these in their evaluations. Many proposed meaningless measures that had no relevance to the scenario, while some attempted to show a return on capital employed percentage, even though figures weren’t available for that.

The second reason concerned the lack of quality in the discussion, which is an essential part of the evaluation. Many candidates made no attempt to explain the figures they had calculated. A bland statement saying “customer B generates more profit than customer C” is not an evaluation. Neither is a statement saying “customer B purchased more shrubs than customer C”.

A good example of what could have been said is: “If customer C were to increase the volume of its orders and qualify for the 15 per cent discount, in addition to its 20 per cent delivery-related discount, would the company be able to maintain its overall profit margin?” This statement would need to be supported by relevant figures.

If this type of question is included in any future paper, I would offer the following guidance on tackling it:

Understand and respect the verb used in the question. The verb “evaluate” does not simply entail presenting figures.
Do not underestimate what is required. You will need to explain all of the figures that you have generated.

Question 2

The learning curve has been tested in several recent sittings, but May’s P2 paper marks the first time it has been linked with sensitivity analysis. Most candidates did not fully understand what was required of them. Some included the detailed calculations required to answer part A in part B and vice versa. Many who took a logarithmic approach indicated neither what they were trying to do nor what the results of their arithmetic meant. Also, several figures were written down without any descriptions or labels.

There were numerous acceptable ways to score full marks on this question other than the model answer suggested by CIMA, including the following approach: Part A. With a learning rate of 90 per cent and a labour rate of $40 per hour, the labour cost would be $306,124 (see model answer for workings). If the labour rate increased to $41 per hour, the labour cost would be $41 x 7,653.12 = $313,778. This would represent an increase in cost of $313,778 - $306,124 = $7,654.

The original profit of $75,000 minus the increase in cost of $7,654 gives an adjusted profit figure of $67,346. This represents a reduction in profit of $7,654 ÷ $75,000 = 10.2 per cent.

So a $1 increase in the labour rate represents $1 ÷ $40 = 2.5 per cent of the original rate and leads to a 10.2 per cent drop in profit. Therefore a 1 per cent increase in the labour rate leads to a 10.2 per cent ÷ 2.5 per cent = 4.08 per cent drop in profit. (This reconciles to the model answer as follows: 100 per cent ÷ 4.08 per cent = 24.5 per cent.)

Part B. If the learning rate declines by 1 per cent (a 1 per cent increase on 90 per cent is 90.9 per cent), this gives a total labour cost of $324,941. Compared with the labour cost at 90 per cent (ie, $306,124) there is a change in profit of $18,817, or 25.1 per cent.

Sensitivity: 100 per cent ÷ 25.1 per cent = 3.98 per cent. The difference between this figure and the model answer of 3.72 per cent is purely the result of the number of decimal places used. The markers accepted all reasonable roundings.

Other methods were valid, but in all cases the advice I would offer is the same:

Focus on satisfying the requirement, rather than taking a nebulous approach.
Label all of your figures clearly. Even if the numbers are incorrect, you can still score method marks.

Question 3

This was a straightforward question on the face of it, but the overall results were still a little disappointing. There were three main reasons for this. First, many candidates did not seem to have brought forward an adequate understanding of zero-based budgeting (ZBB) from their earlier studies. The CIMA syllabus states clearly that the papers in each pillar are of a progressive nature and topics such as ZBB, which is introduced in P1, can be incorporated in P2 questions.

The second reason for the poor overall performance concerns a point that has been raised many times: candidates must answer the question asked, not the question they would like to be asked.

Lastly, several candidates failed to relate their answers to the scenario, which allowed ZBB to be put into context with a typical business situation - in this case, an R&D environment.

Some good answers were submitted, of course, but some candidates:

Thought ZBB was simply another name for a rolling budget, so they provided a detailed explanation of a rolling budget.
Discussed the advantages of ZBB as opposed to the disadvantages.
Gave a detailed description of ZBB.
Wrongly stated that the R&D manager wanted to bring in incremental budgets.
Listed the disadvantages of applying incremental budgets.

Question 4

Most answers were extremely poor. As with question 3, many candidates did not respect the progressive nature of the management accounting pillar and failed to show that they understood (or even knew about) fundamental concepts covered in P1.

The first paragraph of the question shows that it is firmly within the syllabus in terms of both knowledge learnt from P1 and the indicative content of P2. It states that there are 12 possible outcomes arising from three feasible market conditions and four different marketing packages. The table provided shows the NPVs of the cash flows from each scenario. This is given to remind candidates about how they might have seen such information presented in their studies. It is a pay-off table, not a regret matrix.

The next paragraph states: “Unfortunately Z missed the session on how to deal with risk and uncertainty. He has sent the table to the tutor for the course and has asked for help. The tutor replied: ‘I will send you some notes. Based on your table you will need the methods in the section on “Uncertainty”. If you can estimate the probability of each type of market condition occurring, you need “Risk-based methods”. However, whichever method you use, your decision will be influenced by your attitude.’”

This paragraph is again provided as an aid to candidates, this time in differentiating between uncertainty and risk.

The requirement states clearly what must be explained: three methods to deal with uncertainty and one method to deal with risk. The methods for dealing with uncertainty are as follows:

“Maximin”. The decision-maker will choose the option that has the highest minimum return. This type of decision-maker is a pessimist who will look at the worst outcome for each of the options and seek the best of the worst.
“Maximax”. The decision-maker will choose the option that has the highest return. This type of decision-maker is an optimist.
“Minimax regret”.The decision-maker will choose the option that, if it does turn out to be the wrong choice, the regret they feel will be less than if others had been chosen and these were wrong. This type of decision-maker is a pessimist who seeks to minimise the post-event regret of having made a wrong decision.

The method for dealing with risk is totally different from the three methods for dealing with uncertainty. It can described as follows. If probabilities can be assigned to the outcomes, “uncertainty” will become “risk”. It will then be possible to work out the expected values. The decision-maker will choose the outcome that has the highest expected value, assuming that the decision-maker is risk-neutral. The expected value of an option does not give any sign of the risk associated with it. The risk, or spread, of the possible outcomes of each option can be measured by calculating the standard deviation. A risk minimiser would choose the option with the lowest standard deviation. The trade-off between risk and return can be evaluated by calculating the coefficient of variation (the standard deviation divided by the expected value).

It was clear from their answers that many candidates didn’t understand what was required. Common errors included:

Writing about life-cycle costing and customer profitability.
Writing about internal rate of return, cost-volume-profit analysis, break-even analysis, simulation and sensitivity.
Writing about pricing methods such as market skimming.
Describing standard and marginal costing on the basis that they were answering a costing question.
Describing value analysis and functional analysis on the basis that they were answering a cost-reduction question.

With all this in mind, I would offer two pieces of advice to future candidates:

Ensure that you remember what you learnt during your studies for the P1 paper, because you may have to draw on this knowledge again.
Read the question carefully to understand fully what is required.

Question 5

Beyond budgeting is clearly part of the P2 syllabus, but the poor standard of most answers gave the impression that the topic had been completely overlooked by candidates. I suspect that this was the case purely because beyond budgeting hadn’t been examined before. Many answers were lengthy, mainly discussing general budgeting matters unrelated to the modern, dynamic business environment. Other low-scoring answers included:

Providing a full description of top-down budgeting.
Building the entire answer around the balanced scorecard.
Describing beyond budgeting but failing to explain how its principles related to the scenario.
Assuming that beyond budgeting is another name for a rolling budget.
Giving detailed descriptions of the disadvantages of traditional budgeting.

The key lesson that candidates should take from this is the need to learn the entire P2 syllabus. Any topic within it is examinable - as are all subjects already covered in preceding papers.

Norwood Whittle is CIMA course leader at the University of Northampton and the lead marker for P2.





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