Variant 1
Here's a simpler breakdown of the CIMA exam questions for Kanann's new vegan saddles.
Part 1: Making Decisions & Getting Money
This part is about how Kanann should make smart decisions and pay for things.
Decision Tree: You have to figure out the cheapest way to test the new saddles. The answer says that even though the in-house option looks cheap at first, you have to add all the costs, like a setup fee. Once you do that, the in-house option with trained staff is the cheapest at K$117,000. The problem with this tool is that it's too simple; it doesn't consider things that are hard to put a number on, like how customers might trust a big-name university more.
Borrowing Money: Kanann needs K$300,000. The answer says a bank loan is better than an overdraft. An overdraft is too small and the interest rate can change. A loan gives you all the money you need at a stable, fixed interest rate, which is safer for a big project.
Paying Suppliers: The company might want to pay its suppliers later to save cash. The answer says this is risky. It could make suppliers mad, they might stop giving discounts, or they could even start charging higher prices later. It's a short-term fix with potential long-term problems.
Part 2: Counting Costs & Reporting
This section is about how to record business deals and what costs to use.
New Machine: When Kanann buys a new machine, they have to handle the old one correctly. The answer says to treat the old machine as something "for sale" and report a loss on it. For the new machine, they must add all the costs like delivery and installation to its price, and only start counting its depreciation when it's ready to use.
Accountant's Role: A company's accountant isn't just a bookkeeper. For the new saddle project, the accountant helps with planning (making budgets), controlling (checking if they are on track), and decision-making (setting prices). The answer also explains that for making quick decisions, it's better to use marginal costing, which only looks at the extra costs for each saddle, not the total fixed costs.
Part 3: Budgeting & Checking Performance
This part deals with how to plan and measure success.
Better Budgets: The answer compares two ways of making a budget. Incremental budgeting is simple: just take last year's budget and add a bit for inflation. Beyond budgeting is more flexible and modern. It uses rolling budgets that change over time, which is much better for a new product with lots of unknowns. The answer also says that managers should be involved in creating the budget, so they feel more responsible for it.
Measuring Quality: To check if the new saddles are good, you can't just look at profit. The answer suggests other ways to measure success, like counting customer complaints, checking the cost of fixing problems, and reading online reviews. These are called non-financial KPIs.
Part 4: Understanding Risk & Changes
This final section is about how to analyze performance and deal with risks.
Costing for the New Saddle: The new vegan saddles are made differently than the old ones. The answer says you can't just copy the costs from an old product because the new ones use less material and more machines. They need their own set of costs.
Dealing with Inflation: Because prices are changing, the company needs to use rolling budgets that are updated regularly. This helps them tell the difference between a good or bad performance and a cost increase due to inflation.
Risk: Buying a new machine means Kanann will have higher fixed costs. This increases its operational gearing and makes the company riskier. This means a small drop in sales could lead to a big drop in profit.
Variant 2
of the May–August 2024 CIMA Operational Case Study exam.
Elaborated Breakdown
The second variant of the exam centers on Kanann’s diversification into manufacturing bridles, a move that presents the company with a new set of financial, operational, and strategic problems. The questions require a broad application of management accounting principles.
Section 1: Asset Acquisition, Make-or-Buy, and Receivables
This section tests the ability to correctly apply financial reporting standards and make informed business decisions.
1a. Asset Recognition (IAS 16): The question requires identifying which costs associated with a new machine should be capitalized (added to the asset's value) versus which should be expensed (treated as a cost in the current period). The core principle of IAS 16 is to capitalize only those costs directly needed to get the asset ready for its intended use. Therefore, the purchase price, delivery fee, and floor leveling are capitalized. In contrast, ongoing costs like servicing and training staff are expensed because they are not necessary to make the machine operational and are a recurring part of the business.
1b. Make-or-Buy Decision: This is a classic management accounting problem. The solution requires a two-part analysis:
Financial: Compare the relevant costs. The decision to "make" or "buy" should be based on which option has the lowest relevant cost. For making, this is typically the variable cost per unit. For buying, it's the purchase price. The answer shows that making two types of buckles (throat lash and nose band) is cheaper than buying them, while buying the third (cheek piece) is more cost-effective.
Non-Financial: The answer also correctly emphasizes qualitative factors. Kanann must consider the reliability of the external supplier, the quality of their buckles, and whether making the parts in-house will strain their existing production or require new skills.
1c. Receivables Age Analysis: An age analysis is a crucial tool for managing working capital. By breaking down outstanding customer invoices by how long they've been unpaid, Kanann can quickly identify overdue accounts and customers who have exceeded their credit limits. This allows the company to focus its collection efforts on the riskiest debts, which directly improves cash flow.
Section 2: Inventory, Investment, and Budgeting
This section covers how a company manages its assets, cash, and planning process.
2a. Inventory Valuation (IAS 2): Under IAS 2, inventory must be valued at the lower of cost or net realizable value (NRV). NRV is the expected selling price minus any completion or selling costs. The solution demonstrates this by calculating the NRV for each type of bridle and leather and then choosing the lower value. This ensures the company's financial statements do not overstate the value of its assets.
2b. Short-Term Investments: When Kanann has extra cash, it needs a secure place to put it. The answer suggests a Certificate of Deposit (CD) over a standard bank deposit account. A CD offers more flexibility, as it can often be sold on a secondary market if Kanann needs cash quickly without incurring withdrawal penalties.
2c. Rolling Budgets vs. Incremental Budgets: This question contrasts two common budgeting methods. An incremental budget simply takes the previous year's budget and adds a small percentage for inflation or growth. It's easy but not reactive. A rolling budget, however, is updated constantly (e.g., every quarter) to always cover the next 12 months. This makes it a much better tool for a new venture like bridle production, where market conditions and costs are highly uncertain.
Section 3: Variance Analysis, KPIs, and Ethics
This section analyzes performance deviations, sets new performance targets, and considers ethical responsibilities.
3a. Labour and Overhead Variances: This question links operational decisions to financial outcomes. The variances show that Kanann paid more per hour for labor (labour rate variance) and that the workers took longer than expected (labour efficiency variance). The report attributes these negative results to the new staff and training needed for bridle production. Similarly, the company overspent on fixed overheads, likely due to the new machinery.
3b. KPIs: The answer provides three crucial non-financial Key Performance Indicators (KPIs) to monitor the new operations:
Labour Efficiency: Measures how effectively labor hours are being used.
Machine Utilisation: Tracks how much the new machinery is being used.
Product Quality: Measures success by tracking returns.
3c. Ethics: The answer highlights the importance of using ethical suppliers. Beyond a moral obligation, using suppliers that treat their workers fairly protects Kanann’s brand reputation, reduces the risk of legal issues, and builds trust with customers. This is particularly important for a high-end product like a saddle.
Section 4: Costing Systems and Forecasting
This section deals with the accuracy of Kanann’s costing model and its ability to predict future sales.
4a & 4b. Costing System Problems: The current costing system uses a single rate to apply overheads to all products. Question 4a correctly points out that this is inaccurate for a diverse product line. Since vegan saddles use different materials and a new machine, they require a different costing approach. The answer to Question 4b suggests two improvements:
Cost Centres: Grouping costs by department (e.g., bridle production) provides better control.
Activity-Based Costing (ABC): This system assigns costs to products based on the specific activities they require (like machine setup or quality inspections). This provides a far more accurate cost per bridle.
4c. Forecasting Challenges: The provided sales data from the old supplier, Bard, is insufficient for a reliable forecast. The answer correctly identifies the main problems: there's no clear trend, the data is inconsistent, and historical data from a different company may not reflect Kanann’s current market conditions or customer base.
Dumbed-Down Breakdown
Think of this exam as a step-by-step guide for Kanann on how to make a new product, bridles.
Part 1: Buying and Paying
New Machine: When buying a new machine, only count the costs that get it up and running (price, delivery, floor work). Don't count ongoing costs like staff training or regular maintenance; those are separate.
Make or Buy? For the bridle parts, you have to decide if it's cheaper to make them yourself or buy them from someone else. It's not just about money, though. You also have to think about quality, and if the outside supplier is reliable.
Getting Paid: The company needs to keep a list of who owes them money and for how long. This helps them know which customers to chase first, especially if they've gone over their credit limit.
Part 2: Money and Planning
Counting Inventory: You can't over-value your stock. You must count your inventory at whichever value is lower: its original cost or what you can realistically sell it for after all selling costs.
Saving Cash: If Kanann has extra money, it's better to put it in a special savings account called a Certificate of Deposit (CD). It's more flexible than a regular bank account if you suddenly need the money back.
Better Budgets: Instead of just taking last year's budget and adding a little bit, a "rolling budget" is smarter. It's like a live document that's updated every few months to stay accurate and handle new changes.
Part 3: People and Standards
Costing Mistakes: When Kanann started making bridles, their costs for labor and overheads went up. This is because they had to hire and train new staff and buy new machines. The accountant's job is to figure out why these costs went up.
Keeping Score: To know if the new project is working well, Kanann should track things that aren't just about money, like how efficiently workers are using machines and how many customer returns they get.
Being a Good Company: It's important to use suppliers that treat their workers fairly. This protects Kanann's reputation and builds trust with customers who care about where their products come from.
Part 4: Getting Costs Right and Guessing Sales
Fixing the Cost System: The company's old way of counting costs is bad for the new products. They need to use a better system called Activity-Based Costing (ABC). This system figures out the true cost of each bridle by looking at all the different activities needed to make it.
Guessing Sales: It's hard to predict how many bridles Kanann will sell because the historical data they have is not very helpful. It's inconsistent and from a different company.
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