CIMA Operational Case Study – Mock Exams – November 2022 & February 2023

FireWorks as an organisation is passionate about all aspects of outdoor dining. In order to stay competitive and keep up with consumer demands, senior management recognise that developing new products is key to sustained growth. There are several possible product development ideas in contention, and the first step is to appraise each of these from a financial perspective, whilst also taking into account how the company’s appetite for risk will impact upon the resulting choice. Additionally, changing the company’s product mix leads to questions surrounding the adequacy of the current absorption costing system and the potential benefits of implementing an activity-based costing system instead.

With new product development comes questions around factors such as demand and pricing. Specifically, how can the historic demand for a similar line of products manufactured by a competitor, be used to forecast the likely demand for a comparable range of FireWorks products? Also, what price should the company set for the new pizza oven range, and how will specific retail discounts impact upon costs and profits?

Once production has begun, there are a new range of issues to review. Initial insights show that there has been an adverse performance versus budget with a number of unfavourable material variances arising and there is a need to identify what may have driven these. Additionally, there are questions surrounding the company’s current inventory management practices and whether implementing the EOQ could prove beneficial. Looking at how these issues could have been prevented is also key and increased managerial involvement in the budget setting process is one solution under contention.

Finally, in line with the company’s environmental goals and continuing with the theme of making improvements and seeking efficiencies throughout the organisation, the business is procuring a new fleet of hybrid vehicles. Therefore consideration must be given to how to account for these assets and also the accounting treatment required in respect of the existing vehicles set for disposal.

The overall theme of this mock is that a corporate customer, ‘Rent A Tent’ has approached the business for a customised order. It is hoped successful fulfilment of this order would open up a new revenue channel.

The relevant costs to be considered before deciding whether to accept the order are to be identified and discussed. Then an explanation of the benefits of ABC costing over the current absorption costing system is made in the context of costing and pricing for the corporate order. Lastly, a discussion is made on the importance of budgeting for this corporate order.

The financial implications of extending a longer credit period to the corporate customer – ‘Rent A Tent’ is considered. Accounting treatment of non-current assets is explained.

The concept of responsibility accounting is discussed and the possible concerns of heads of sub-departments over responsibility for quality KPIs are discussed. A discussion is made on the calculation of fixed overhead variances and possible reasons for the same. Planning and operational variances and the benefits of reporting them separately are discussed.

Explanation of the linear programming graph with demand and capacity constraints made to determine optimum production. Also, a discussion of how to overcome capacity constraints and how to determine the maximum price for additional resources was discussed. Three areas of the CGMA Cost Transformation Model were discussed. Sustainability KPIs were identified, and appropriateness and method of calculation were discussed.

FireWorks is undertaking a review of its sustainability practices, which includes looking at its supply chain and logistics, as well as the feasibility of offering an eco-friendly solar-powered portable camping grill. With all the changes going on at the company, the benefits and drawbacks of ABC, as well as rolling budgets, need to be outlined.

As part of the sustainability review, FireWorks is looking into leasing electric delivery vehicles. The relevant and irrelevant costs in relation to the lease need to be explained, as well as how the lease of the vehicles will be recorded in the financial statements. Further, the benefits of acting more socially responsible in relation to sustainability need to be outlined.

A make or buy decision has to be made about the new solar powered camping grill; should FireWorks keep production in-house, or outsource it to a supplier? Feedback and feedforward budgetary control systems also need to be explored.

The company is considering extending its credit terms for customers to entice them into buying the new solar-powered camping grill. Is using a factoring service a suitable way to do this? And finally, KPIs need to be drawn up in order to ensure the sales team for the solar-powered campaign grill is successful.

This season, FireWorks kills two birds with one stone by diversifying into the smart grill industry and expanding into Deeland through its recently formed subsidiary. In the new market, the team must identify a suitable supplier for the smart grill app and so the cost structures of the potential suppliers need to be analysed. Challenges emerge relating to costing the app product FireWorks, and there is a question as to whether beyond budgeting should be implemented in the new subsidiary.

The FireWorks group, now operating in two different countries, needs to be a transfer price for intra-group sales of smart grills that will not be viewed as tax evasion. It also faces issues with its cash flow, and measures need to be put in place to avoid a cash deficit.To improve the performance of the new subsidiary, the Head Office is making a decision on whether to implement new digital technology, both in the budgeting process and in the performance monitoring of the new subsidiary through the use of a KPI dashboard.

When a performance review reveals that the subsidiary is still not performing as expected, the performance targets need to be analysed, and a new marketing approach needs to be chosen using expected values. Finally, there is also a discussion of whether FireWorks would benefit from a shift from absorption costing to marginal costing.