CIPS L4M2 Questions Answers

Explanation

The difference between the standard cost of direct materials specified for production and the actual cost of direct materials used in production is known as Direct Material Cost Variance. Material Cost Variance gives an idea of how much more or less cost has been incurred when compared with the standard cost. Thus, Variance Analysis is an important tool to keep a tab on the deviations from the standard set by a company.

Material Cost Variance can be due to less purchase price being paid than the standard or because of change in the quantity of material used. Thus, Material Cost Variance is made up of two components namely; Material Price Variance and Material Usage Variance.

Among the 4 options:

- 'The buyer updates purchase-to-pay system to track payment and delivery': The use of e-procurement system can increase the productivity and create labour cost variance, not material cost variance.

- 'An unprocessed goods received note is missing': If a goods received note is missing, the buyer won't pay for that batch, which create quantity variance.

- 'The employees must work overtime to catch up with the customers' orders': Overtime salary can cause labour variance, not material cost variance.

- 'The purchase is made in emergency': Normally, the price in emergency situation is higher than usual. This can cause price variance.

Explanation

Before a project commences (either capital purchase or switching to a new supplier), a business case should be developed. The business case outlines the why, what, how, and who necessary to decide if it is worthwhile continuing a project.

Basically, the following criteria can be applied to the assessment of a business case:

1. Objectives

This part describes why you are doing the project. The business objective answers the following questions:

- What is your goal?

- What is needed to overcome the problem?

- How will the project support the business strategy?

2. Option identification and selection

Identify the potential solutions to the problem and describe them in enough detail for the reader to understand.

For instance, if the business case and proposed solution makes use of technology, make sure to explain how the technology is used and define the terms used in a glossary. Since most problems have multiple solutions an option appraisal is often needed. This will explore the potential solutions and recommend the best option.

When writing the initial business case the option appraisal is likely to contain a long list of options and will cover many possibilities. As the project continues a number of options will be rejected. The final business case may contain three to five options ― the short list ― that includes a do nothing or benchmark option.

3. Benefits and limitations

The benefits and limitations section describes the financial and non-financial benefits in turn. The purpose is to explain why you need a project.

For instance, to:

- Improve quality

- Save costs through efficiencies

- Reduce working capital

- Generate revenue

- Remain competitive

- Improve customer service

- Align to corporate strategy

The business case should also include any limitations since these present potential risk to the pro-ject.

4. Risk management

The risk assessment summarizes the significant project risks and opportunities and how they are managed. The risks included should cover those that could arise from your project or the organiza-tion’s ability to deliver change.

This section answers the following questions:

- What risks are involved?

- What are the consequences of a risk happening?

- What opportunities may emerge?

- What plans are in place to deal with the risks?

- Every project should include a risk log.

When writing a business case, make sure this is included as it explains how risk and opportunity are managed.

5. Implementation plan

The outline plan provides a summary of the main activities and overall timescale ― project schedule ― for the project.

Ideally, the project should be divided into stages with key decisions preceding each stage. Use this section to answer the following questions:

- What is required?

- How is it done?

- Who does what?

- When will things happen?

This outline plan lists the major deliverables and includes a brief project description plus accountabilities for each activity.

In the scenario, the CPO has set out objective, generated options, cost and benefit of each option and implementation plan. In order to make the business case more compelling, he should reinforce it with risk management.

Detailed Explanation:

A business case allows for the evaluation of alternatives and ensures alignment with strategic goals. It also assesses risks, benefits, and financial impact, providing a comprehensive basis for decision-making. Reference: CIPS Level 4, Capital Expenditure and Business Case Development.