May 2024
CIMA’s latest pre-seen is here for the OCS, so saddle up as tutor Andrew Mower picks out the key examinable topics from Kanann.
Kanann is a company that designs, manufactures and sells saddles for horse riding. The company is based in Keeland, a country in mainland Europe.
Kanann has a well-established brand and reputation for high-quality, value-for-money saddles, but lacks innovation, which had led them to ‘falling behind the times’. So, what topics could be examined?
Core Activity A
Activity based costing (ABC) – Kanann currently uses a standard absorption costing system, with a single overhead absorption rate based on labour hours.
Although the product range is not currently complex, there is potential for Kanann to launch new specialist saddles. Fixed costs are significant within the business, so a more accurate costing system such as ABC could be tested. Revise the key differences between ABC and absorption costing, and the pros and cons of switching. Both are commonly examined in OCS.
Core Activity B
Stress-testing budgets – Kanann’s budgets rely on several factors running smoothly in order for them to be accurate for 2024 – including sales, material costs and production rates
You may be asked to discuss stress-testing the budgets – what could change that would affect the budgeted figures?
Major disruptions for Kanann could include the loss of a major retailer, an issue with a key supplier, or staff illness.
Stress testing would then involve predicting these scenarios, and seeing how budgets would be affected. Know how this could work in this scenario.
Core Activity C
KPIs and Variances – This is the most predictable one – KPIs and variances come up in nearly every OCS exam. The pre-seen doesn’t give us any KPIs for Kanann, so you may be asked to discuss suggested KPIs presented to you, or generate some brand new KPIs.
The key with these is to ensure they are SMART (specific, measurable, attainable, relevant and time-bound), and also justify why they are important to Kanann. This could link to the lack of innovation, sustainability targets or new saddle ranges, for example. You often get given a variance report, so be prepared to explain what the variances mean, and discuss what could have caused them. The most important tip with variances is to relate them to the scenario given – the answers will often be in the question, so use that to support your points.
Core Activity D
PPE and Leases – Kanann is looking to become more innovative and sustainable, and the average time to produce a saddle is a massive 28 hours. It would make sense to invest in new, innovative manufacturing equipment to help make saddles faster and in a more energy- efficient way.
This would involve knowing which costs to recognise initially under IAS16, and then how to depreciate the assets and deal with any subsequent expenditure. Given Kanann doesn’t have huge amounts of cash, an alternative could be to lease assets instead, to avoid the upfront costs and allow them to update the equipment more frequently to stay innovative in future years.
Kanann doesn’t lease any assets currently, so you could be asked to explain right of use assets and lease liabilities under IFRS16
Core Activity E
Expected Values – There are several clues that Kanann will launch a new saddle range soon, potentially focusing on specialist saddles rather than just their existing general purpose models. If this happens, Kanann will want to forecast demand – and how this would be affected by different marketing campaigns or by differing states of the economy in Keeland.
Know how to explain expected values, potentially as part of a decision tree. Other statistical tools such as standard deviation and coefficient of variation could also be tested. Remember, if the examiner asks for a recommendation, make sure you do one, or you will slip down in the marking grid and throw away several easy marks.
Core Activity F
Inventory Management – Kanann holds a reasonably high level of inventory (K$590,000 at 31st December 2023), which we are told is very labour- intensive to manage in the warehouse. Inventory days have dropped from 64 in 2022 to 56 in 2023, which could suggest Kanann has already started the process of becoming more lean with their inventory levels.
A move to a Just in Time (JIT) system, or introducing the use of Economic Order Quantity (EOQ) could be suggested. Revise how each of these systems works, and the benefits and drawbacks of adopting each approach – including the assumptions behind EOQ.
- Andrew Mower has just launched a brand new online course for OCS, available now at vivatuition.com. You can also follow him on LinkedIn for exam tips and more
