CIMA Chartered Management Accounting Qualification 2010

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1 CIMA Chartered Management Accounting Qualification 2010 Student Support Guide Paper P1 Performance Operations Introduction This guide outlines matters to be considered by those wishing to sit the examination for Paper P1 Performance Operations of the CIMA 2010 qualification. The first part compares the syllabus of Paper P1 to that of the equivalent Paper P1 in the 2005 qualification and looks at issues relating to transition from the 2005 to the 2010 qualification. It should be noted that in the new 2010 syllabus, learning outcomes are shown as overarching lead outcomes, with several component outcomes resulting from that lead. The syllabus comparison displays the learning outcomes from the previous syllabus with the component learning outcomes from the new syllabus. The remainder of the guide looks at issues that are likely to be relevant to all students planning to sit this examination and ends with a series of frequently asked questions. Overview of syllabus changes This new Paper P1 has changed considerably from the old Paper P1, which was predominantly concerned with costing and budgeting methodologies - some 80% of the syllabus weighting was concerned with those areas but now it is 40%. Areas have been introduced into the new paper P1 from the old Paper P2, covering project appraisal (25%) and uncertainty in analysis (15%). The balance of the paper covers managing short term finance, which was in Paper P7 of the 2005 syllabus. The direction of the new paper has therefore a much broader view of performance, dealing with details of capital budgeting and treasury management issues. The rather narrow technical approach used in the previous syllabus has been replaced, with the student now required to understand the wider aspects of financial operations. Students should ensure that they cover any deficiencies in their basic costing knowledge, since this new Paper P1 will not spend as much time on this area.

2 Syllabus comparison Old syllabus Paper P1 New syllabus Paper P1 Comments P1 A - Cost Accounting Systems 25% (i) compare and contrast marginal and absorption costing methods in respect of profit reporting and stock valuation; (ii) apply marginal and absorption costing approaches in job, batch and process environments; (iii) prepare ledger accounts according to context: marginal or absorption based in job, batch or process environments, including workin-progress and related accounts such as production overhead control account and abnormal loss account; (iv) explain the origins of throughput accounting as super variable costing and its application as a variant of marginal or variable cost accounting; (v) apply standard costing methods within costing systems and demonstrate the reconciliation of budgeted and actual profit margins; (vi) compare activity-based costing with traditional marginal and absorption costing methods and evaluate its potential as a system of cost accounting; (vii) explain the role of MRP and ERP systems in supporting standard costing systems, calculating variances and facilitating the posting of ledger entries; P1 A. Cost Accounting Systems 30% 1 (a) compare and contrast marginal (or variable), throughput and absorption accounting methods in respect of profit reporting and stock valuation; 1 (b) discuss a report which reconciles budget and actual profit using absorption and/or marginal costing principles; 1 (c) discuss activity-based costing as compared with traditional marginal and absorption costing methods, including its relative advantages and disadvantages as a system of cost accounting; 1 (d) apply standard costing methods, within costing systems, including the reconciliation of budgeted and actual profit margins; 1 (e) explain why and how standards are set in manufacturing and in service industries with particular reference to the maximisation of efficiency and minimisation of waste; 1 (f) interpret material, labour, variable overhead, fixed overhead and sales variances, distinguishing between planning and operational variances; 1 (g) prepare reports using a range of internal and external benchmarks and interpret the results; 1 (h) explain the impact of just-intime manufacturing methods on cost accounting and the use of back-flush accounting when This section has undergone considerable change. The study weighting appears to have increased by 5%. However, section B on standard costing of the old 2005 syllabus (weighting 25%) has been absorbed into this new section A on cost accounting systems. In effect two sections have been combined into one, and the weighting reduced from 50% (in total) to 30% Learning outcomes A (ii) and (iii) relating to job, batch and process environments have been removed. Learning outcome A (iv) has been removed but throughput accounting is included in the new 1(a). The skill level requirement for new learning outcome 1(h) - related to JIT - is now at level 2 rather than level 5 as in old A (viii). Learning outcome B (iv) involving behavioural aspects of standard costing has been moved to the new Paper P2. A new learning outcome 3(a) has been added, relating to environmental costing.

3 (viii) evaluate the impact of just-in-time manufacturing methods on cost accounting and the use of back-flush accounting when work-inprogress stock is minimal. P1 B - Standard Costing 25% (i) explain why and how standards are set in manufacturing and in service industries with particular reference to the maximisation of efficiency and minimisation of waste. (ii) calculate and interpret material, labour, variable overhead, fixed overhead and sales variances; (iii) prepare and discuss a report which reconciles budget and actual profit using absorption and/or marginal costing principles; (iv) calculate and explain planning and operational variances; (v) prepare reports using a range of internal and external benchmarks and interpret the results; (vi) discuss the behavioural implications of setting standard costs. work-in-progress stock is minimal. 2 (a) explain the role of MRP and ERP systems in supporting standard costing systems, calculating variances and facilitating the posting of ledger entries. 3 (a) apply principles of environmental costing in identifying relevant internalised costs and externalised environmental impacts of the organisation s activities. P1 C - Budgeting 30% (i) explain why organisations prepare forecasts and plans; (ii) calculate projected product/service volumes employing appropriate P1 B. Forecasting and Budgeting Techniques 10% 1(a) explain why organisations prepare forecasts and plans; 1(b) explain the purposes of budgets, including planning, communication, co-ordination, The study weighting is significantly reduced from 30% to 10%. There are considerable changes to this section with many learning outcomes (shown in red in

4 forecasting techniques; (iii) calculate projected revenues and costs based on product/service volumes, pricing strategies and cost structures; (iv) evaluate projected performance by calculating key metrics including profitability, liquidity and asset turnover ratios; (v) describe and explain the possible purposes of budgets, including planning, communication, co-ordination, motivation, authorisation, control and evaluation; (vi) evaluate and apply alternative approaches to budgeting; (vii) calculate the consequences of what if scenarios and evaluate their impact on master profit and loss account and balance sheet; (viii) explain the concept of responsibility accounting and its importance in the construction of functional budgets that support the overall master budget; (ix) identify controllable and uncontrollable costs in the context of responsibility accounting and explain why uncontrollable costs may or may not be allocated to responsibility centres; (x) explain the ideas of feedback and feed-forward control and their application in the use of budgets for control; (xi) evaluate performance using fixed and flexible budget reports; motivation, authorisation, control and evaluation, and how these may conflict. 2 (a) calculate projected product/service volumes employing appropriate forecasting techniques; 2(b) calculate projected revenues and costs based on product/service volumes, pricing strategies and cost structures. 3(a) prepare a budget for any account in the master budget, based on projections/forecasts and managerial targets; 3(b) apply alternative approaches to budgeting. the first column under the old 2005 syllabus) having been transferred to the new 2010 syllabus Paper P2, as follows: C (iv) to C 2(a) C (vii) to C 2(b) C (viii) to C 1(b) C (ix) to C 1(c) C (x) to C 1(a) C (xi) to C 2(c) C (xii) to C 3(b) and 3(c) C (xiii) to C 3(a) C (xiv) to C 3(d) Skill level changes include: C (vii) has gone from level 3 in the 2005 syllabus to level 5 in Paper P2 of the 2010 syllabus. C (xiv) has gone from level 5 in the 2005 syllabus to level 4 in Paper P2 of the 2010 syllabus. One additional learning outcome is included in the 2010 syllabus at 3(a), relating to the preparation of budgets for any account in the master budget.

5 (xii) discuss the role of nonfinancial performance indicators and compare and contrast traditional approaches to budgeting with recommendations based on the balanced scorecard ; (xiii)evaluate the impact of budgetary control systems on human behaviour; (xiv) evaluate the criticisms of budgeting particularly from the advocates of techniques that are beyond budgeting. P1 D - Control and Performance Measurement of Responsibility Centres 20% (i) discuss the use of cost, revenue, profit and investment centres in devising organisation structure and in management control; (ii) prepare cost information in appropriate formats for cost centre managers, taking due account of controllable/uncontrollable costs and the importance of budget flexing; This whole section has now been moved to the new 2010 syllabus Paper P2 - D Control and Performance Measurement of Responsibility Centres (20%). The learning outcomes in the new 2010 syllabus Paper P2 - D have learning outcomes at a higher skills level, with nearly all of them at level 4, rather than at level 3. (iii) prepare revenue and cost information in appropriate formats for profit and investment centre managers, taking due account of cost variability, attributable costs, controllable costs and identification of appropriate measures of profit centre contribution ; (iv) calculate and apply measures of performance for investment centres (often strategic business units or divisions of larger groups);

6 (v) discuss the likely behavioural consequences of the use of performance metrics in managing cost, profit and investment centres; (vi) explain the typical consequences of a divisional structure for performance measurement as divisions compete or trade with each other; (vii) identify the likely consequences of different approaches to transfer pricing for divisional decision making, divisional and group profitability, the motivation of divisional management and the autonomy of individual divisions. P1 C. Project Appraisal 25% 1 (a) explain the processes involved in making long-term decisions; 1 (b) apply the principles of relevant cash flow analysis to long-run projects that continue for several years; 1 (c) calculate project cash flows, accounting for tax and inflation, and apply perpetuities to derive end of project value where appropriate; 1 (d) apply activity-based costing techniques to derive approximate long-run product or service costs appropriate for use in strategic decision making; 1 (e) explain the financial consequences of dealing with long-run projects, in particular the importance of accounting for the This section was previously in the 2005 syllabus Paper P2 section B, (25%) Financial Information for Long Term Decision Making. The learning outcomes are the same but there are small differences in skill levels: The old P2 B (viii) required evaluation and ranking of projects that might be mutually exclusive, while the new Paper P1 C. 2(c) asks for the ability to prioritise projects that are mutually exclusive. The old P2 B (x) required the production of decision support information for management, while the new Paper P1 C. 1(g) asks for the ability to prepare decision support information for management.

7 time value of money ; 1 (f) apply sensitivity analysis to cash flow parameters to identify those to which net present value is particularly sensitive; 1 (g) prepare decision support information for management, integrating financial and nonfinancial considerations. 2 (a) evaluate project proposals using the techniques of investment appraisal; 2 (b) compare and contrast the alternative techniques of investment appraisal; 2(c) prioritise projects that are mutually exclusive, involve unequal lives and/or are subject to capital rationing. P1 D. Dealing with Uncertainty in Analysis 15% 1 (a) analyse the impact of uncertainty and risk on decision models that may be based on relevant cash flows, learning curves, discounting techniques etc; 1 (b) apply sensitivity analysis to both short and long-run decision models to identify variables that might have significant impacts on project outcomes; 1 (c) analyse risk and uncertainty by calculating expected values and standard deviations together with probability tables and histograms; This section was previously in the 2005 syllabus Paper P2 section C, (15%) The treatment of Uncertainty in Decision Making The learning outcomes are the same but there are small differences in skill levels: The old P2 C (i) required evaluation of uncertainty and risk, while the new Paper P1 D. 1(a) asks for analysis of the impact of uncertainty and risk. 1 (d) prepare expected value tables; 1 (e) calculate the value of

8 information; 1 (f) apply decision trees. P1 E. Managing Short-Term Finance 20% 1 (a) explain the importance of cash flow and working capital management; 1 (b) interpret working capital ratios for business sectors; 1 (c) analyse cash-flow forecasts over a twelve-month period; 1 (d) discuss measures to improve a cash forecast situation; 1 (e) analyse trade debtor and creditor information; 1 (f) analyse the impacts of alternative debtor and creditor policies; 1 (g) analyse the impacts of alternative policies for stock management. 2 (a) identify sources of shortterm funding; 2 (b) identify alternatives for investment of short-term cash surpluses; 2 (c) identify appropriate methods of finance for trading internationally; 2 (d) Illustrate numerically the financial impact of short-term funding and investment methods. This section was previously in the 2005 syllabus Paper P7 section D (25%), Managing Short Term Finance. The learning outcomes are similar with some skill level changes: The old P7 D (iii) asked for identification of measures to improve cash forecasts while the new Paper P1 E 1 (d) requires a discussion of measures to improve cash forecasts. The old P7 D (vi) demanded evaluation of debtor and creditor policies while the new Paper P1 E 1 (f) asks for analysis of the impacts of debtor and creditor policies The old P7 D (vii) required evaluation of methods of stock management but the new Paper P1 E 1(g) asks for the analysis of the impacts of alternative policies for stock management. There is a new learning outcome at 1(a) requiring an explanation of the importance of cash flow and working capital management. There is a new learning outcome at 2 (d) requiring numerical illustration of the financial impact of shortterm funding and investment methods.

9 Assessment methodology There will be a written examination paper of three hours, plus 20 minutes of pre-examination question paper reading time. The examination paper will have the following sections: Section A 20 marks A variety of compulsory objective test questions, each worth between two and four marks. Mini scenarios may be given, to which a group of questions relate. Section B 30 marks Six compulsory short answer questions, each worth five marks. A short scenario may be given, to which some or all questions relate. Section C 50 marks One or two compulsory questions. Short scenarios may be given, to which questions relate. The Performance Operations examination will primarily test the skills of knowledge, comprehension and application, covering verbs from levels 1-3 of the CIMA verb hierarchy. You will be expected to use all of your knowledge and skills gained from your study of the Performance Operations syllabus, to explain and apply the various concepts you have learned. The scenarios used in this examination are based on real life, though much simplified, and prepare you for the Management level examinations. Preparing for the exam At the Operational level, textbook learning is generally sufficient. However, in order to develop the required skill of application, you need to use your knowledge to solve relatively straightforward, structured problems. This can best be done by practising examinationstandard questions. FAQs Question I have passed the CIMA Certificate examinations of the 2005 CIMA syllabus, and this is my first attempt at Paper P1. Have I missed anything that I need to catch up on? I have failed old Paper P1. Where should I concentrate my efforts before doing my resit? Answer No 1. That depends on what other papers you have studied (and passed): If you have studied old Papers P2 and P7, you should refresh your memory on the parts of those syllabuses that have been moved into this paper. If you have not studied old Paper P2 and/or P7, you will need to spend an appropriate amount of time (up to 60% of the time you would spend on a new paper - see study

10 Question Where can I find the detailed syllabus for this paper? Will there be a specimen examination paper? What knowledge is assumed prior to studying this syllabus? What will be the balance between calculations and discussions on this exam? Answer weightings) on the relevant new areas of the new P1 syllabus that you have not previously studied. 2. The assessment methodology for the operational level has changed. There are now fewer objective test questions, and a greater emphasis on application of your knowledge. You should look at (and attempt) the specimen examination paper (see below). On the CIMA website under the 2010 syllabus. Yes it will be available on the CIMA website at the end of October It is assumed that you have passed (or been exempted from) all of the Certificate level papers. You should look at the specimen examination paper for guidance (see above). End Ver1 Aug09