CIMA OCS N20 F21 Workbook PDF

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Professional Examinations

Operational Level

November 20 & February 21 sittings CIMA Case Study FAMILIARISATION AND PRACTICE WORKBOOK

CIMA N OV E MB E R 2020 AN D FE B R U AR Y 2021 – OP E R ATION AL CASE STU D Y

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CONTENTS CHAPTER 1

Introduction

1

2

Familiarisation

3

3

Summary and key topics

15

4

Core Activity A - Prepare costing information for different purposes to meet the needs of management.

19

5

Core activity B - Prepare budget information and assess its use for planning and control purposes.

29

6

Core activity C - Analyse performance using financial and non- financial information.

39

7

Core activity D - Apply relevant financial reporting standards and corporate governance, ethical and tax principles.

49

8

Core activity E - Prepare information to support short-term decision-making.

57

9

Core activity F - Prepare information to manage working capital.

69

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CIMA N OV E MB E R 2020 AN D FE B R U AR Y 2021 – OP E R ATION AL CASE STU D Y

Chapter 1

INTRODUCTION

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INTRODUCTION TO CASE STUDY EXAMS

The Case Study Exam is an attempt to simulate workplace problem solving, and allows examiners to move one step closer to the assessment of competence than is possible with objective test questions. The Case Study is assessed by way of a three hour computer based examination. You cannot take the examination until you have successfully completed all the Objective Test Examinations for the relevant level. The exam comprises a series of requirements which aim to integrate and apply the technical knowledge tested in the Objective Test Examinations. The exam is based on: •

pre-seen material issued in advance of the exam day, supplemented by

•

additional, previously unseen material given to you in the exam room.

There will be several requirements, comprising: (a) Triggers - information and updates regarding situations in which the company finds itself (b) Tasks - work you will need to carry out based on the trigger

2

CORE ACTIVITIES

The CIMA Operational case study blueprint is based on six ‘core activities’, supported by arrange of ‘assessment outcomes’ expressed in terms of ‘I Can’ statements that speak directly to the skills and competencies that drive the employability of successful learners. More detail on the skills and the competency framework can be found in the Official CIMA Case Study Textbook. However, rather than focussing on the distinctions between the different core activities, the most important skill on the day of the exam is to be able to answer the tasks set with sufficient application to the company concerned. The main reason candidates fail is that their answers are too generic with little application. Broadly speaking you will need to ensure you have properly prepared the pre-seen information in advance of the exam and also be comfortable with how to react to the unseen information provided in the exam. We have split the preparation into these two broad areas - familiarisation with the pre-seen and practice for the unseen and have included exercises and tasks for each of the six core activities at this level. Depending on your chosen method of study, you may also have the opportunity to practice the integration of all technical areas when you attempt mock exams.

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CIMA N OV E MB E R 2020 AN D FE B R U AR Y 2021 – OP E R ATION AL CASE STU D Y

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HOW TO USE THIS WORKBOOK

It is essential that, before you begin the exercises and tasks provided here, you have worked through the Official CIMA Case Study Textbook and read the relevant pre-seen information at least twice. You can then work through the Familiarisation Exercises and Exam-style Tasks for each particular core activity. This will help you to identify any last minute knowledge gaps as you prepare. It is strongly recommended that when working through the workbook, you plan and write your own answer prior to reviewing the suggested solutions. This is an important part of the learning process.

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Chapter 2

FAMILIARISATION 1. QUIZ Attempt this quiz after you have read the pre-seen at least twice. Try not to refer to the pre-seen material when answering the questions unless you really can’t remember. However it is better to look for the answers in the pre-seen if necessary rather than turning straight to the quiz solutions. Question

Response

What does AmaZZZing Beds do?

What market segments does AmaZZZing Beds target?

Who are the shareholders?

Where is it based?

Are sales seasonal?

What sales channels does AmaZZZing Beds use?

Which type of bed frame had the highest % of sales (revenue) in the industry in 2019? Which had the lowest? See page 16 for info. Which type of mattress had the highest % of sales (revenue) in the industry in 2019? Which had the lowest? See page 16 for info.

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Question

Response

How many markets does the company operate in?

Is the industry growing or shrinking and why?

How important is innovation?

How often does AmaZZZing Beds develop new products?

Who are the company’s main competitors?

What type of organisational structure does AmaZZZing Beds have?

How profitable was AmaZZZing Beds in 2020?

Which products have the best gpm?

How important is sustainability in the production and retailing of beds and mattresses?

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2. FINANCIAL ANALYSIS Calculate the following ratios for AmaZZZing Beds and answer the questions below: Ratio

2021 (budget)

2020

2019

Growth in revenue Growth in cost of sales Growth in gross profit Gross profit margin Growth in selling, distribution and marketing costs Selling, distribution and marketing costs as a % of revenue Growth in administrative expenses Administrative expenses as a % of revenue Growth in operating profit Operating profit margin Inventory days Receivables days Payables days Length of operating cycle Quick ratio Current ratio Financial gearing using book values of D/E

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Question

Response

Did AmaZZZing Beds perform well in 2020?

Why had turnover increased in 2020?

Comment on the increase in costs between 2019 and 2020

Had the working capital position worsened or improved? Explain.

Comment on AmaZZZing Beds’ financial gearing.

Comment on AmaZZZing Beds’ cash flow.

Discuss whether the 2021 budget is realistic.

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3. SWOT ANALYSIS Summarise what you know about the case by identifying the strengths, weaknesses, opportunities and threats of (or facing) AmaZZZing Beds. Strengths

Weaknesses

Opportunities

Threats

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ANSWERS TO EXERCISES 1. QUIZ Question

Response

What does AmaZZZing Beds do?

•

Sells major brands of mattresses and beds, as well as its own brand (page 3)

What market segment does AmaZZZing Beds target?

•

“quality” (page 9)

Who are the shareholders?

•

100% owned by private equity investor (page 3)

Where is it based?

•

Eastland, in Europe (page 3)

Are sales seasonal?

•

There is seasonality in both sales of beds and mattresses, with sales typically higher in the colder months (page 12)

What sales channels does AmaZZZing Beds use?

• • •

120 stores (80 superstores and 40 smaller stores) Website Note: does not currently sell via independent retailers

Which type of bed frame had the highest budgeted of sales (revenue) in the industry in 2019? Which had the lowest? See page 16 for info.

• •

Both Upholstered (25%) and Metal frame (25%) Adjustable (10%)

Which type of mattress had the highest percentage of sales (revenue) in the industry in 2019? Which had the lowest? See page 16 for info.

• •

Memory foam (40%) Hybrid (12%)

How many markets does the company operate in?

•

The company does not currently sell mattresses or beds outside of Eastland (page 3)

Is the industry growing or shrinking and why?

•

After years of stagnation, over the past 5 years there has been a growth in sales of mattresses and beds (3.5% per year over the period). This is due in part to the popularity of wellness and sleep quality which are seen as important for health (page 15)

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Question

Response

How important is innovation?

•

•

•

How often does AmaZZZing Beds develop new products?

•

•

Process of manufacturing the divan beds and the mattresses has changed little since production started in 1990 (page 13) Small R&D team that is constantly looking at mattress technology to try and improve the sleep experience for consumers (page 3) Innovation is important for the industry as a whole– the growing trend of monitoring sleep patterns has led to innovations in bed and mattress designs (page 17) Production Director is keen to expand the range of mattresses and beds made at the manufacturing facility (page 4) It is unclear how often they develop new products

Who are the company’s main competitors?

•

There are 8 well-known brands of mattresses and beds sold in Eastland (page 17) - Zee Sleep - Relaxicle - Memfoam Delux - Comfort ZZZ - Sleepsters - AmaZZZing Beds own brand - Gordon’s Beds own brand - Robert Mattresses

What type of organisational structure does AmaZZZing Beds have?

•

Functional

How profitable was AmaZZZing Beds in 2020?

•

Profit before tax of E$11.566m (page 18)

Which products have the best gpm?

•

Overall mattresses are better than beds (GPM 49.1% cf 43.1% - summary budget page 21) Own brand better than bought-in items (pages 21 – 23)

• How important is sustainability in the production and retailing of beds and mattresses?

•

•

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Sustainability in both the production and retailing of beds and mattresses is becoming increasingly important (page 17) Focus is on using recycled materials and recycling old bed frames and mattresses

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2. FINANCIAL ANALYSIS Ratio

2021 (budget)

2020

Growth in revenue

2.9%

3.1%

Growth in cost of sales

1.1%

1.3%

Growth in gross profit

5.0%

5.2%

Gross profit margin

46.9%

46.0%

Growth in selling, distribution and marketing costs

2.2%

Selling, distribution and marketing costs as a % of revenue

30.1%

Growth in administrative expenses

4.6%

Administrative expenses as a % of revenue

9.1%

Growth in operating profit

22.2%

Operating profit margin

6.8%

2019

45.0%

30.3%

9.0%

5.7%

Receivables days (Note)

4.6

4.5

Inventory days

71.8

70.1

Payables days

114.2

112.1

Length of operating cycle (Note)

(37.8)

(37.5)

Quick ratio

0.6

0.5

Current ratio

1.2

1.1

13.6%

24.5%

Financial gearing using book values of D/E

Note: given receivables do not relate to trade sales, you could argue that the receivables days should not be included in the calculation of the operating cycle

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Question

Response

Did AmaZZZing Beds perform well in 2020?

Positives • Operating profit grew by 22.2% and gross profit grew by 5.2% • Gross profit margin improved slightly • Financial gearing down • Cash up by E$3.906m Negatives • Revenue growth of 3.1% is below industry average of 3.5% • Is the company’s performance pretty static?

Why had turnover increased in 2020?

• •

Comment on the increase in costs between 2019 and 2020

Positives • Gross margin improved slightly as COS went up by less than revenue. This could be due to fixed costs within COS • Selling, distribution and marketing costs fell slightly Negatives • Admin costs up 4.6%, which is disappointing as would expect most of these costs to be fixed

Had the working capital position worsened or improved? Explain.

Positives • Receivables days more or less the same (only 4.6 days) • Cash up by E$3.906m Negatives • Inventory days up slightly • Payables days have increased slightly and are high (114.2 days when supplier payment terms range between 30 and 75 days, although this could partly be affected by seasonal trade and a June y/e) Overall, not much change (quick and current ratios unchanged)

Comment on AmaZZZing Beds’ financial gearing.

• •

Comment on AmaZZZing Beds’ cash flow.

Positives • Cash generated from operations of G$13.338m • Able to buy E$0.76m of PPE without borrowing • Paid E$5m dividend • Repaid E$1.7k of long term borrowings • Cash up by E$3.906m Negatives • Increase in trade and other payables E$0.922m

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Revenue increased by 3.1% (64% for mattresses and 36% for beds) Most likely to be due to recent popularity of wellness and sleep quality which are seen as important for health (No new products or channels for 2020)

Financial gearing gone down markedly from 24.5% to 13.6% Due to both equity increasing and borrowings decreasing

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Question Discuss whether the 2021 budget is realistic.

12

Response Revenue growth of 2.9% not explained. This only includes existing products, two of which (sprung mattresses and divan beds) are seeing a long term industry decline in demand • Growth in COS and gross profit are slightly less than 2020, with no explanation regarding potential cost savings or efficiencies (0.2% fall in growth for each) • Given the above, gross profit margin is expected to rise by 0.9% over same period Overall the budget looks slightly optimistic, given the very unambitious strategy that supports it (i.e. nothing)

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3. SWOT ANALYSIS Strengths • • • •

• • • • • • • • • • •

• • • • • • • •

Well-functioning website Eastland’s largest bed and mattress retailer (based on revenue) Sells all major bed and mattress brands, along with own brand Good range of different types of mattresses and beds (4 of each) and each type of mattress/ bed in 4 sizes High quality materials used Highly skilled production employees Small R&D team looking to improve customers’ sleep experience Single production site should result in production economies of scale Well-trained retail staff, good customer service Retail stores are customer friendly (coding system on mattresses) Excellent relationships with suppliers Relaunched brand 4 years ago Gradually replacing delivery fleet with hybrid vehicles HR Director is expert in employment law Production Director recently joined AmaZZZing Beds from Zee Sleep (a wellknown brand who, in 2018, was the first manufacturer in Eastland to produce a mattress made largely from recycled materials) Experienced directors, keen to drive the business forward Customer pays in full at point of ordering, thus improving cash flow In-house Logistics Team Holds inventory of its most popular bought in beds and mattresses Increasingly considering sustainability of materials and credentials of suppliers Beds and mattresses have 12 month guarantee, supported by the supplier Few customer returns of own brand products Recognised as good employer, offering training opportunities and pay above national minimum wage

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Weaknesses •

• •

•

Owned by private equity investor may lead to a lack of goal congruence between owner and directors Single supplier for springs and single supplier for memory foam Mattresses wrapped in plastic covering for protection (not environmentally friendly) Seasonality in sales of both beds and mattresses (typically higher in colder months)

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• • • •

Financial systems integrated with sales, production and inventory systems Profitable L...