Part 1Cram Session Financial Planning, Performance, and Control
Exam format • 3 hrs - 100 multiple choice questions = approx. 1.5 minutes per question (on average). • Find ways to “bank” time • Look for short-cuts • You will find that you most question do not seem “easy”, don’t get discouraged • You “earn” points for each question answered correctly • Some questions are “test” questions that carry no point value. You will not know which ones they are • Extra time can be carried forward to the Essay portion • 1 hr - 2 Essay questions with up to 8 sub-parts • You can’t go back to multiple-choice part once you enter this portion of the exam • Whatever you have typed on the screen will be saved as your answer, irrespective if the timer runs out on you
Exam format Part 1 – Financial Planning, Performance and Control 4 hours, 100 multiple-choice questions and two 30-minute essay scenarios • Planning, budgeting, and forecasting (30%) • Performance measurement (25%) • Cost management (25%) • Internal controls (15%) • Professional ethics (5%) If you find you have weaknesses in any topic ref. Appendix A for ref. the appropriate sub –units
Exam Structure & Feedback • Exam structure • 3 hours of multiple choice questions ~ 75% of score • 1 hour of essay questions ~ 25% of score • Must earn at least 50% on multiple choice section in order to advance to essay section • Cannot return to the multiple choice section once you’ve advanced to the essay section of the exam
Exam Strategy • To pass the exam, you need: • Knowledge • Confidence • Effective Time Management • Commitment!
Last minute prep for the exam • Focus on what you don’t know • Realize that you will be more proficient in some topics more than others • Practice the Essay questions – use the Gleim Essay Wizard • Create short mock multiple choice exams (say no more than 50 questions) to condition for the longer 100 question exam, or take the Gleim online CMA Practice Exam that came with your Gleim study material. It is a 4 hour exam. • You can also read the question and only the correct answer of questions at the end of each SU. It is a fast way of covering a lot of ground. • Make sure your financial calculator has a fresh battery, and that it is not the first time you used it.
Day of the Exam • Do not study up to the exam day/time • Give yourself plenty of time to get to the testing center. Make sure you have identified exact location prior • Make sure you are well rested (probably not a good idea to take exam after a long day of work, for example • It is a four hour exam, make sure you are prepared for the duration (eat, etc.) • Dress in layers. You can always shed layers when you are there, they have lockers • Don’t wear a watch into the testing center • You can bring your own foam earplugs, so long that they are in a plastic bag
Day of the Exam • Take a copy of the type of calculators that are permitted with you. Ref. the ones listed on the IMA Website • You realistically should not plan on any breaks outside of bathroom breaks. Note the timer keeps running if you do take a break. • Be optimistic. At this point there is nothing else you can do, and being stressed or discouraged will not help your test results. Relax - “NO ONE HAS DIED FROM FAILING THE CMA EXAM”, there is life beyond and we will help you pass it!!!!
Exam • Budget your time, know your “time hacks” • See how many Essay sub-questions you will be given. There are two parts with different amounts of sub-parts • Answer the questions in consecutive order, and limit the number you want to come back to no more than say 10, but make sure you answer it before going on to the next. • Never leave a question unanswered, score is based on number of correct answers. • Do not allow the answer choices to affect your reading of the question
Most common reasons for missing questions • Misreading the requirement (stem) – Read the question first • Not understanding what is required • Making a math error – Try to not do calculations of paper first, with the idea of “transferring” to the exam later. If you know how to use your memory button(s) well on your calculator, use it (i.e. save sub-calculations in your calculator). • Applying the wrong rule or concept • Being distracted by one or more of the answers – the most common wrong answers are the incorrect alternatives
Most common reasons for missing questions • Incorrectly eliminating answers from considerations – read all answers first, some are more correct or complete then others • Not having any knowledge of the topic tested – don’t agonize over it. If possible try to make an educated guess by eliminating obvious wrong answers. If you guess, use the same letter each time. • Employing bad intuition when guessing
The essays • Remember, 2 essay questions with 3 to 6 parts each! • This section provides a great opportunity to earn partial credit • Be sure to show your work and assumptions • You can scroll between questions and scenarios within the essay section of the exam • Helps to determine how much time you will need for responses
Essay Questions • Pay close attention to verbs • E.g., if it says compare or contrast, don’t define something • Read the entire question to understand all requirements • You may have more than one requirement, for example: “Define abc and interpret its applicability to xyz.” • Grammar and writing skills • Focus is on use of standard English, organization and clarity • Graders are looking for effective writing skills
Essay Questions • Be brief and to the point • It’s ok to use bullet points!!! • Do not leave a questions blank • If short on time, at least write an outline of your main points • Graders are looking to give you points, not take them away • Make it as easy as possible for graders to give you points!
Essay Questions • Type your responses into a text box • Similar to MS Word, but with more simple functionality • Effective January 2013, the spreadsheet tool is no longer being used on the CMA exam • Be sure to use all of the time available to you
Essay • There is a sample grading rubric for essay portion enclosed in slide presentation. This is interesting because this shows that the graders only give points for correct answers. They don't deduct for wrong answers. Notice on rubric for the second sample essay, there are multiple points that could be earned for each question, but the total points for each question is less than the sum for all the possible answers. This means that there is more than one correct answer. Once you get the maximum points for this part, the grader moves on. You don't get more points for embellishing. • Don't embellish. Be direct. Be simple. Use bullet points. Show your work, including calculations. Use proper grammar and English. Then move on to the next question. • Practice answering essays online. This will get you used to how to type calculations and make bullet points. • Use ALL the time you have on your essay questions, even if you pull time from your multiple choice section. • The more you study, the better you will do. It is as simple as that.
Sample Essay Question #1 A City owns and operates a community swimming pool. The pool is open each year for 90 days during the summer months of June, July, and August. A daily admission is charged to patrons of the pool. By law, 10% of all recreational and sporting fees must be remitted to a state tourism promotion fund. The City Manager has set a goal that pool admission revenue, after subtracting the state fee and variable costs, must be sufficient to cover the fixed costs. Variable costs are assumed to be 15% of gross revenue. Fixed costs for the three-month period total $33,000. The following budget for the pool has been prepared for the current year. Adult admissions: 30 per day x 90 days x $5.00 $ 13,500 Student admissions: 120 per day x 90 days x $2.50 27,000 Total revenue 40,500 State tourism fee 4,050 Net revenue 36,450 Variable costs 6,075 Fixed costs 33,000 Expected deficit $ (2,625) The City Manager is trying to determine what admission mix is necessary to break even and what actions could be taken to eliminate the expected deficit.
Essay Requirements (partial) • Given the anticipated mix of adult and student admissions, how many total admissions must the pool have in order to break even for the season? • Regardless of the admissions mix, what is the highest number of admissions that would be necessary to break even for the season?
Sample Essay Response Question 1: Given the anticipated mix of adult and student admissions, how many total admissions must the pool have in order to break even for the season? Sample Response: The contribution margin is 75% or $3.75 per adult admission, and $1.875 per student admission. The mix is 20% adult (30 ÷ 150) and 80% student (120 ÷ 150). • Calculate the weighted average contribution margin (WACM) • WACM = 0.20 ($3.75) + 0.80 ($1.875) = $2.25 • The breakeven point in units is calculated as follows: • Fixed costs ÷ WACM • Fixed costs = $33,000 • WACM = $2.25 • $33,000 ÷ $2.25 = 14,667 admissions per season
Sample Essay Response Question 2: Regardless of the admissions mix, what is the highest number of admissions that would be necessary to break even for the season? Sample Response: To calculate the highest number of admissions to break even, you would assume that all admissions are students. That’s because the student admission price is the lowest of all admission prices. • The breakeven point in units is calculated as follows: • Fixed costs ÷ Contribution margin for students • Fixed costs = $33,000 • Contribution margin for students = $1.875 • $33,000 ÷ $1.875 = 17,600 admissions per season
City Pool Question Item Description Maximum % Score Points Correct Question 1 8 CM% = 1-10%-15% (75%) 1 0 Adult = 75% x $5 ($3.75) 1 0 Student = 75% x $2.50 ($1.875) 1 0 Mix = 30/150 adult (20%) / 120/150 students (80%) 1 0 WACM = 20% x $3.75 + 80% x$1.875 ($2.25) 1 0 Break-even point = fixed costs $33,000 1 0 divided by CM ($2.25) (14,667) 1 0 14,667 1 0 0 Subtotal 0.00 Question 2 2 Uses students 1/2 0 $33,000/$1.875 (17,600) 1 0 =17,600 1/2 0 TOTAL FOR ALL QUESTIONS: 10 0.00
Essay Question #2 SmallParts is a manufacturer of metal washers, screws, and other parts required in the manufacture of various handmade craft and novelty items. The firm has the ability to custom make virtually any small part, provided the client is able to provide SmallParts with the dimensions and tolerance required of the product. Because of its niche in the market, SmallParts has over 1,000 clients. Unfortunately, many of its small business clients eventually merge or cease operations. One of the company’s biggest challenges is the return of shipped product. Usually, this is because the small business client has ceased operations. While most of the product is custom made, SmallParts has found that much of it can be sold to other clients for adapted use. The company’s accountant is reviewing the company’s internal controls and financial accounting procedures, in particular, with respect to inventory.
Essay Question #2 Currently, SmallParts has one salesperson responsible for marketing returned product. This salesperson has exclusive and total control over the returned product including arranging of sales terms, billing, and collection. The salesperson receives the returned product and attempts to find a client who may be able to adapt the product for the client’s use. The inventory of returned product is not entered in the accounting records, under the logic that the cost is sunk. Revenue generated from its sale is classified as other revenue on the SmallParts income statement.
Sample Essay Requirements (partial) • Identify and describe the three objectives of a system of internal control. • Identify and explain three ways that the procedure for handling returned product violates the internal control system of segregation of duties. • Identify and describe three ways that SmallParts can provide for better internal control over its inventory of returned product. • The company accountant is concerned about SmallParts’ current procedure for accounting for returned product and has turned to IMA’s Statement of Ethical Professional Practice for guidance. Assume the company’s accountant identifies a possible conflict of interest on the part of the salesperson responsible for the returned product. a)Identify the ethical principles that should guide the work of a management accountant. b)Identify and describe the standards that relate to this situation and explain how they apply.
Sample Essay Response Question 1: Identify and describe the three objectives of a system of internal control. Sample Response: A good system of internal control is designed to provide reasonable assurance regarding achievement of an entity’s objectives involving effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.
Sample Essay Response Question 2: Identify and explain three ways that the procedure for handling returned product violates the internal control system of segregation of duties. Sample Response: Segregation of duties requires that no one person have control over the physical custody of an asset and the accounting for it. There is no evidence to suggest SmallParts makes any effort to account for the value of returned product, which may indeed be significant. The one salesperson seems to be in charge of all aspects related to returned product, including authorizing the returns, crediting the customers, receiving the returns, handling the physical custody, finding new customers, concluding sales, shipping, billing, and collecting. Most of these rules should be separated.
Sample Essay Question #2 Information relative to answering #2 of Question 2 has been circled in red. SmallParts is a manufacturer of metal washers, screws, and other parts required in the manufacture of various handmade craft and novelty items. The firm has the ability to custom make virtually any small part, provided the client is able to provide SmallParts with the dimensions and tolerance required of the product. Because of its niche in the market, SmallParts has over 1,000 clients. Unfortunately, many of its small business clients eventually merge or cease operations. One of the company’s biggest challenges is the return of shipped product. Usually, this is because the small business client has ceased operations. While most of the product is custom made, SmallParts has found that much of it can be sold to other clients for adapted use. The company’s accountant is reviewing the company’s internal controls and financial accounting procedures, in particular, with respect to inventory. Currently, SmallParts has one salesperson responsible for marketing returned product. This salesperson has exclusive and total control over the returned product including arranging of sales terms, billing, and collection. The salesperson receives the returned product and attempts to find a client who may be able to adapt the product for the client’s use. The inventory of returned product is not entered in the accounting records, under the logic that the cost is sunk. Revenue generated from its sale is classified as other revenue on the SmallParts income statement.
Sample Essay Response Question 3: Identify and describe three ways that SmallParts can provide for better internal control over its inventory of returned product. Sample Response: Separate responsibilities and duties. While the salesman may be assigned to work with customers who return products, and find other customers for these products, other staff should post credits to customer accounts following written policy. The products should be received, inventoried, booked and shipped just like regular products.
Sample Essay Response Question 4: (Summarized) a) Identify the ethical principles that should guide the work of a management accountant. b) Identify and describe the standards that relate to this situation and explain how they apply. Sample Response: a)The Statement lists the following four ethical principles: • Honesty, Fairness, Objectivity, Responsibility b)Several standards from the Statement apply. • Credibility: “Each practitioner has a responsibility to disclose deficiencies in internal controls.” • Competence: duty to maintain an appropriate level of professional expertise relative to standard procedure commonly used in the accounting of firms dealing with returned product • Confidentiality: refrain from using this confidential information for unethical advantage, by not informing firms of the lax controls and availability of steep discounts on returned product • Integrity: mitigating any conflict of interest.
Small Parts Question • Item Description Maximum % Score Points Correct • Question 1 2 • Reasonable Assurance 1/2 0 • Effectiveness of operations 1/2 0 • Efficiency of operationsi 1/2 0 • Reliability of financial reporting 1/2 0 • Other 1/2 0 • Subtotal 0.00 • Question 2 2 • 1 person should not control custody • & acctg. 1/2 0 • Salesperson in charge of everything 1/2 0 • No accounting for returned product 1/2 0 No tracking or returned product 1/2 0 • Other 1/2 0 • Subtotal 0.00
Small Parts Question (continued) Item Description Maximum % Score Points Correct Question 3 2 Separate resp./segregation of duties 1/2 0 4 different ind. for ret. Prod. duties 1/2 0 Authority, recording, custody, reco.1/2 0 Other 1/2 0 Subtotal 0.00
SmallParts Question (continued) Item Description Maximum Points % correct Score Question #4 6 a. Principles: max = 1 Honesty, Fairness, Objectivity, Responsibility Two correct identifications 1/2 0 Four correct identifications 1 0 b. Standards max = 5 Competence 1/2 0 maintain appropriate level of prof competence 1/2 0 prepare complete & clear reports 1/2 0 perform in accord with laws, regs & tech stds 1/2 0 Confidentiality 1/2 0 refrain from disclosing confidential info 1/2 0 refrain from using info unethically 1 0 Integrity 1/2 0 refrain from activity discrediting the profession 1 0 avoid actual or apparent conflicts of interest 1 0 refrain fr activity prejudice ability to carry out duties 1/2 0 refrain fr activity subverting attn of org objectives 1/2 0 Credibility/Objectivity 1/2 0 communicate info fairly and objectively 1/2 0 disclose fully all relevant info 1/2 0 other 1/2 TOTAL FOR ALL QUESTIONS: 12 0.00
Remember! • The CMA exam uses essays to reflect a more "real-world" environment in which candidates must apply the knowledge they have acquired. Essays are graded on both writing skills and subject matter. Partial credit IS available for essays that have some correct and some incorrect points. Finally, it is important to remember that essays are not intended to test typing ability, so the time you allocated for essay response is adequate to complete the questions even if you do not have the best typing skills. • Answering multiple-choice questions is an effective method to study the material for both the multiple-choice and essay sections of the exam. They are an excellent diagnostic tool that will allow you to quickly identify your weak areas. Also, think about what your answer would be if the question were not multiple-choice. When reviewing the correct and incorrect answer explanations, your "essay answers" should be somewhat equivalent to the detailed answer explanations.
Essay • Roughly 75% of points come from multiple choice. Essay only accounts for 25% of points. • There are two essay questions for each section of the CMA exam. Each question will have 3-6 parts that must be answered. • Be sure you skim all essay parts before begin answering. This will help you survey how much time to spend on each question from the beginning. Some will be easy, just asking for a definition. Some will require calculations. Show all your work. Even if your answer is wrong, showing your work will give you partial credit. • Be sure to answer the question correctly. If the question asks you to compare or contrast something, don't define it. That is not what they are looking for.
Ethics • Ethics is tested from: • Individual Perspective – Part 1 • Organizational Perspective – Part 2 • Questions could be either Multiple Choice or Essay • Make sure you study the IMA Framework on Ethics, ref. the IMA website, or following URL: http://www.imanet.org/PDFs/Public/Press_Releases/STATEMENT%20OF%20ETHICAL%20PROFESSIONAL%20PRACTICE_2.2.12.pdf http://www.imanet.org/resources_and_publications/ethics_center_helpline.aspx • Have it “conceptually” memorized. • Similar to the AICPA version • You will then be able to answer any question from there • Stay “within” an objective view, and don’t get side-tracked in emotional distractors
Ethics IMA’s Statement of Ethical Professional Practice • The Statement contains four overaching principles, which can be remembered with the mnemonic HFOR. 1. Honesty 2. Fairness 3. Objectivity 4. Responsibility • The Statement also contains four specific standards, which be remembered with the mnemonic CCIC. 1. Competence 2. Confidentiality 3. Integrity 4. Credibility
Conflict of Interest One of the provisions of the IMA Statement enjoins members to mitigate actual, and to avoid apparent, conflicts of interest.
Budgeting • Overview • A Formal Plan - A budget is a formal statement of an organization’s plan for a period of time expressed in quantitative terms. It is used to guide an entity toward reaching its operational goals and is, therefore, an important element of overall planning and control. Financial and qualitative issues must be considered along with the quantitative data to ensure that all aspects of company operations are included in profit planning.
Budgeting • Budgeting is part of an effective planning process. • Hierarchy of Planning • Mission and strategic plans • Strategic objectives and plans • Tactical objectives and plans • Operational objectives and plans • Contingency Plans
Budgeting • Budgeting is part of an effective control system, which has: • Measurement of Progress • Corrective Actions • Adaptation to change
Budgeting • Different types of controls include: • Preliminary (Feedforward) Controls • Screening (Concurrent) Controls • Post-Action (Feedback) Controls • Budgeting is also used for/with Benchmarking • “A point of reference from which measurements can be made.”
Budgeting • Used for communication and coordination • Evaluation tool – Budget Report • Budget/Variance Report • Motivation • Top management commitment • Essential Planning Element
Budgeting • Roles of Budgeting – Each company may use budgets for different purposes. Remember PREMECC • Planning • Ritual • Evaluation • Motivation • Education • Coordination • Communication
Budgeting • Environments include: • Economic • Organization • Behavior • Budgets include • Annual • Project • Level of detail • Line items • Programs
Budgeting • Estimates for budgets include: • Incremental • Zero-based • Process includes: • Authoritarian/Top-down/Imposed • Participative/Bottom-up • Types of budgets include: • Kaizen budgeting • Continuous/Rolling Budgets • Contingency Budgeting • Activity-based Budgeting
Budgeting • See examples on page 73
Cost Classifications • Controllable VS. Noncontrollable • Avoidable Vs. Committed • Incremental vs. Differential • Engineered s. Discretionary • Outlays vs. Opportunity • Relevant vs. Sunk