Question 1:

Skipped
A procurement manager consolidates the company expense on printing
and office supplies into broader range of spend category. Other senior
managers are concerned that it may increase company’s spend. Is that
concern justified?

No, because the broader range of spend category can

increase the value of the contract and the buyer may get
volume discount

(Correct)

Yes, because the consolidation may create a large contract

that costs more than placing each purchase order

Yes, because the suppliers can’t provide a broader range of

products and they will fail to deliver

No, because the consolidation will help the supplier to

shorten deliver time.
Explanation
Printing and office supplies are often considered as low risk, low value
items. Consolidation low value, low risk items into a broader range will
dramatically increases the value of the contract and leverage of buying
organisation in the negotiation.

Reference: CIPS study guide page 8-9

LO 1, AC 1.1

Question 2:
Skipped
Which of the following can directly affect labour variance? Select TWO
that apply:


 Overtime

(Correct)

Inflation

Wage rate per hour

(Correct)

Company's budget

Overhead expenditure
Explanation
Labour variance refers to a situation in which actual costs of labor differ
from projected or budgeted labor costs. This concept is most commonly
applied in manufacturing environments.

Labour variance either results from efficiency or rate discrepancies.

Efficiency variance results when actual time worked is more or less than
budgeted time for a project. Rate variance means you paid more per hour
worked than expected. This may occur with overtime pay or when you
have higher paid employees on a project than projected. Labour variance
is fairly typical, but modest variance is usually not a big factor in
manufacturing, because materials and other production costs are often
much higher.

LO 1, AC 1.4

Question 3:
Skipped
Which type of specification is less time-consuming to develop?

Design specification
 

Outcome-based specification

(Correct)

Technical drawings

Conformance specification
Explanation
There are two major types of specification: conformance and performance
specifications. They have the following characteristics:

Since performance specification is often a list of outputs or outcomes, it

usually takes less time to develop than conformance specification.

Reference: CIPS study guide page 116-124

Question 4:
Skipped
A procurement manager is requested to source a major component. She
needs information on suppliers’ direct and indirect cost, fixed and variable
costs to prepare for negotiations. Therefore, she collects 17 annual
reports from potential suppliers who are competing in the same industry.
In order to estimate an approximate value of fixed and variable costs in
that industry, which of the following technique should be adopted by the
procurement manager?

Total cost of ownership


 Line of best fit

(Correct)

Open-book costing

Variance calculation
Explanation
Public annual reports can be a source of information that helps the
procurement professional to analyse an industry's cost and revenue using
the line of best fit. Line of best fit is one of the most important outputs
of regression analysis. Regression refers to a quantitative measure of the
relationship between one or more independent variables and a resulting
dependent variable. Regression is of use to professionals in a wide range
of fields from science and public service to financial analysis.

In this case, by collecting and analysing 17 annual reports, the

procurement manager can find the line of best fit which goes
approximately through the middle of the data points with an equal
number of data points above and below it.

The slope of the line of best fit is the approximate variable costs the
industry. The easiest way to calculate it is to take a point at the right-hand
end of the line of best fit and note its cost and output levels. Divide the
cost by the output and this gives and approximate figure for the cost per
unit of output or variable cost. This gives an approximate value for the
industry fixed and variable costs.

Reference: CIPS study guide page 99-100

LO 2, AC 2.3

Question 5:
Skipped
Which of the following is the technology that disrupts traditional retail?

Robotics


 Blockchain

E-commerce

(Correct)

Self-Driving Cars
Explanation
One of the biggest disruptors in retail has been e-commerce. According to
a report by IDC, in the month of December 2018, which is also the holiday
season in the west, the e-commerce sector globally, has grown by 20
percent.

LO 2, AC 2.2

Question 6:
Skipped
Sabic is a petrochemical manufacturer. It wants to digitalise its operation
and is looking for new IT system. The procurement manager approaches
this matter with a through-life specification. He supposes that stating
“good quality” in the specification will be enough for quality standard
section. Is the procurement manager’s thought appropriate?

Yes, because the specification should be concise.

No, because “good quality” is very ambiguous for suppliers

to identify Sabic’s requirement

(Correct)

No, because “good quality” is an in-house jargon that

suppliers are not familiar with


 Yes, because IT sector has its own standard of quality,
therefore, suppliers may deliver good quality without any
further explanation
Explanation
Specifications for through-life contracts must be clear. They should use
precise technical language and avoid any ambiguity as much as possible.
In most cases, 'good quality' is ambiguous. The contractor doesn't know
exactly which product the buying organisation needs and how to supply
that product.

Other notices for description of requirement are:

- Short and simply description

- Clear definitions at the beginning of the documents

- Clarify abbreviations (if any), but abbreviations should be avoided as

much as possible

- Avoid any 'slang'

- Use imperative forms of language whenever possible.

LO 3, AC 3.2

Question 7:
Skipped
Which of the following areas is specified by ISO/IEC 27000 family?

The requirements for an information security management

system

(Correct)

The dimensions and associated tolerances for a series of

housings for piston seals

The requirements for an environmental management system


 Evaluation and assessment of mutual agreed customer food
safety requirements
Explanation
ISO/IEC 27001 is widely known, providing requirements for an information
security management system (ISMS), though there are more than a
dozen standards in the ISO/IEC 27000 family. Using them enables
organizations of any kind to manage the security of assets such as
financial information, intellectual property, employee details or
information entrusted by third parties.

LO 3, AC 3.1

Question 8:
Skipped
Which of the following are most likely to increase the buyer’s bargaining
power?

1. Buyers are price sensitive

2. High set-up cost for new entrants

3. Threat of forward integration is high

4. Threat of backward integration is significant

3 and 4 only

2 and 4 only

2 and 3 only

1 and 4 only

(Correct)

Explanation
Price sensitivity is the degree to which the price of a product affects
consumers' purchasing behaviours. Buyer power will be stronger if buying
organisation are price sensitive and vice versa.

Backward integration is a form of vertical integration in which a buying

organisation expands its role to fulfil tasks formerly completed by
businesses up the supply chain. Buyer power is strong if threat of
backward integration is high.

Set-up cost is a determinant of threat of new entry. Some industries

require very expensive assets in order to make products. The financial risk
of entering the industry and not succeeding can deter many potential new
entrants. The fewer new entrants, the fewer available substitutes, then
the bargaining power of buyer can be negatively affected.

Forward integration is a business strategy that involves a form of

vertical integration whereby business activities are expanded to include
control of the direct distribution or supply of a company's products. Threat
of forward integration is a determinant of supplier's bargaining power.

Reference: CIPS study guide page 88-91

LO 2, AC 2.2

Question 9:
Skipped
Which of the following bodies provides standards for the products and
services in the US?

AFNOR

ISO

ANSI

(Correct)

BSI
Explanation
ANSI is the American National Standards Institute. It is responsible for
providing technical standards in the US

LO 3, AC 3.1

Question 10:
Skipped
When procuring an IT equipment, at which stage the buyer’s expectations
are translated into a technical specification?

Installation

In-service support

Customer support

Design

(Correct)

Explanation
IT equipment is typically linked with through-life contracts. This type of
contract not only deal with the specification and the price of a machinery,
but also other stages such as design, manufacture, installation, in-service
support, decommission and disposal. Among these stages, the design
stage is when buyer's requirements are translated into technically correct
specification.

Reference: CIPS study guide page 131

LO 3, AC 3.2

Question 11:
Skipped
Which of the following is a risk to buying organization when using
conformance specification?


 Time to produce specification is shortened

Buyer is responsible for product failure

(Correct)

Buyer may face liquidity risks

Buyer cannot control the inputs

Explanation
When using conformance specification, the buying organisation is
responsible for the performance of the purchase. If the product fails due
to poorly designed specification, the buyer is wholly responsible for it. It
cannot blame the supplier for the failure because they still provided 'fit for
purpose' product.

'Time to produce specification is shortened': Conformance specification

requires details on dimension, materials, design, etc. With such
requirements, time to produce a complete conformance specification is
often longer than producing performance specification.

'Buyer cannot control the inputs': Conformance specification is a list of

inputs from buyer, so buyer has control over the inputs that will make the
product. It also means that buyer is responsible for any product failure.

'Buyer may face liquidity risks': Liquidity means that how quick a business
turns its assets into cash. This is a financial term, it does not link directly
with specification failure.

Reference: CIPS study guide page 118-119

LO 3, AC 3.1

Question 12:
Skipped
Dana is an automobile manufacturer. It has a new electrification strategy
that aims at making eco-friendly electric pick-up trucks. To implement this
strategy, the procurement department must source new categories of
parts that make motors, sensors, solenoids and stators. He starts to
analyse the market by identifying specific supply market segments for
those parts and finding suppliers who have the best capabilities in those
segment. He intends to segment the market based on specific features of
the products. Which variable is used by Dana procurement manager to
shape and manage supply market?

Buyer segments

Channel segments

Product segments

(Correct)

Geographical segments
Explanation
In sales and marketing, market segmentation is the process of trying to
understand clusters of customers in terms of their buying behavior and
their buying characteristics. There are some traditional segmentation
approaches: geography, demography, types of industry and the benefits.
Then there are newer segmentation approaches: behavioral, situational,
and psychographic.

Procurement professionals can learn market segmentation from sales and

marketing. Segmenting the market can help them to shape and manage
the supply market effectively. According to Michael Porter, a market can
be segment with array of products and buyers.
Source: Porter, Michael E.. Competitive Advantage: Creating and
Sustaining Superior Performance (p. 234). Free Press. Kindle Edition.

In the scenario, the products that Dana needs to source is distinct in their
features. The best way is to segment the market by product varieties.

Reference: CIPS study guide page 65

LO 2, AC 2.1

Question 13:
Skipped
Which of the following are considered as direct costs in a construction
company? Select TWO options

Raw materials

(Correct)

An employee is hired to work on a project, either exclusively

or for an assigned number of hours

(Correct)

Clerical assistants who maintain the office

 

The materials and supplies needed for the company’s day-

to-day operations.

Advertising and marketing communication

Explanation
Direct costs are directly associated with the production of a good or
service. In this question, 'An employee is hired to work on a project, either
exclusively or for an assigned number of hours' and 'Raw materials' are
directly related to producing the product.

Indirect costs are the general costs of the organisation - these costs
cannot easily be attributed to specific products or services (also known as
overheads). 'The materials and supplies needed for the company’s day-to-
day operations' or 'Clerical assistants who maintain the
office' or 'Advertising and marketing communication' is example of
indirect cost.

Reference: CIPS study guide page 25-26

LO 1, AC 1.2

Question 14:
Skipped
Which of the following is the best definition of target costing?

A product cost estimate derived from a competitive market

price.

(Correct)

The cost of a product after analysing its components step by

step


 The net present cost of the purchase or project and all
future revenues flowing from it discounted back to the
present time.

The total of all costs in acquiring goods or services from the

inception of the demand for them until their safe and
satisfactory delivery at the point required.
Explanation
Target costing is an activity aimed at reducing the life-cycle costs of new
products, while ensuring quality, reliability, and other consumer
requirements by examining all possible ideas for cost reduction at the
product planning, research and development and prototyping phases of
production. But it is not just a cost reduction technique; it is part of a
comprehensive strategic profit management system.

Reference: CIPS study guide page 161

LO 3, AC 3.4

Question 15:
Skipped
After a project, the procurement team at CLK Ltd meets up and
summarises on the performance. They see that they actually spent $5,000
less than planned budget. The team tries to identifies why there is such
difference. This activity is known as...?

Cash flow analysis

Variance analysis

(Correct)

Cost modelling

Rolling budget
Explanation
The procurement team in the scenario is analysing the difference between
the plan and actual spend. This activity is known as variance analysis. The
sum of all variances gives a picture of the overall over-performance or
under-performance for a particular reporting period. For each item,
companies assess their favorability by comparing actual costs to standard
costs in the industry.

For example, if the actual cost is lower than the standard cost for raw
materials, assuming the same volume of materials, it would lead to a
favorable price variance (i.e., cost savings). However, if the standard
quantity was 10,000 pieces of material and 15,000 pieces were required
in production, this would be an unfavorable quantity variance because
more materials were used than anticipated.

Reference:

- CIPS study guide page 57-58

- Variance Analysis - Learn How to Calculate and Analyze Variances

(corporatefinanceinstitute.com)

LO 1, AC 1.4

Question 16:
Skipped
A charity is reviewing their spend and budget after an operation in flooded
areas. They realise that the operators save money against the budgeting
plan. This saving is known as...?

Negative variance

(Correct)

Negative budget

Positive budget

Positive variance
Explanation
The difference between the actual spend and budgeted spend is known as
variance. The formula for variance is:

Variance = Actual spend - Budgeted spend

Variances can be adverse/unfavourable or favourable ie they can be

positive or negative.

Be very careful with these terms. A positive or a negative variance may be

favourable or it may be adverse/ unfavourable.

Adverse variances

Adverse variances are those variances that are unfavourable to the

firm. Examples would be sales below plan; costs above budget, cash
receipts lower than expected, and overtime payment more than forecast.

Favourable variances

Favourable variances are those variances that are beneficial to the

business. Examples would be sales ahead of plan, costs below budget,
and wages below forecast.

Positive variance

A positive variance occurs where 'actual' exceeds 'planned' or 'budgeted'

value. Examples might be actual sales are ahead of the budget.

Negative variance

A negative variance occurs where 'actual' is less than 'planned' or

'budgeted' value. Examples would be when the raw materials cost less
than expected, sales were less than predicted, and labour costs were
below the budgeted figure.

When the operators create saving, it means that the Actual spend is less
than Budgeted spend. Therefore the variance is negative.

Reference:

- Variance analysis

- CIPS study guide page 57-59

LO 1, AC 1.4

Question 17:
Skipped
This is the information on an organisation’s activities over the past year

· Sale were $5,000,000. The value of accounts receivable was $450,000 at

the start of the year and $525,000 at the end of the year

· The value of direct costs was $2,500,000 and 75% of this was bought on
credit

· Indirect costs were $3,000,000 and 25% of this was bought on credit

· During the year the organization spent $1,500,000 on new assets and
sold $150,000 of old assets. $1,000,000 of the spend on assets was
funded by a bank loan

· The organization declared a dividend of $200,000 at the end of the year

but this was not paid for another two months

· Opening balance was $175,000

Which of the following is the bank balance of that organization at the end
of the year?

$1,875,000

(Correct)

$1,675,000

$1,700,000

$2,025,000
Explanation
In this question, you should understand the concept of cash flow and
formula of cash flow. Cash flow calculates the physical money moving in
and out a company's bank balance. The cash flow from sale activity is:
cash flow from sale = account receivable at beginning of the year +
revenue - account receivable at the end of the year = $450,000 +
$5,000,000 - $525,000 = $4,925,000

75% of direct costs was bought by credit, therefore, the company spent
25% on direct cost: -$2,500,000*25/100 = -$625,000

25% of indirect costs was bought on credit. Cash flow out on indirect costs
is: -$3,000,000*75/100 = -$2,250,000

Company spent $1,500,000 on new assets funded by a loan of

$1,000,000. Cash flow out from this activity is -$500,000

Company received $150,000 from selling old assets

Dividends have not been paid for another 2 months, thus, they are not
accounted as cash flow out.

The bank balance at the end of the year is: $175,000 + $4,925,000 -
$625,000 - $2,250,000 - $500,000 + $150,000 = $1,875,000

LO 1, AC 1.4

Question 18:
Skipped
Which of the following might be the consequences of under-specification?
Select TWO that apply:

Unfit products or services

(Correct)

Additional cost to rework

(Correct)

Few suppliers can supply the full range of features


 Higher cost due to inessential features

Poor competition between suppliers

Explanation
Main risks involved in an under-specified requirement

• The product or service is not fit for use since it does not match the
actual needs

• Higher cost due to corrections or reworks (proposal evaluations, scope

or work monitoring, change in insulation materials or systems, reduced
productivity, etc.).

• Higher operating cost on many fronts: process control, energy

consumption, maintenance, etc.

• Other problems like corrosion under insulation, mold development,

safety-related concerns, etc.

LO 3, AC 3.3

Question 19:
Skipped
Which of the following provides in-depth detail for both functional and
non-functional requirements and covers assumptions, constraints,
performance, dimensions, weights and reliability of a product?

Design specification

(Correct)

Tolerance

Statement of work

Performance specification
Explanation
Design specification is a detailed document providing a list of points
regarding a product or process. For example, the design specification
could include required dimensions, environmental
factors, ergonomic factors, aesthetic factors, maintenance that will be
needed, etc. It may also give specific examples of how the design should
be executed, helping others work properly (a guideline for what the
person should do).

Performance specification is written requirement that describes the

functional performance criteria required for a particular equipment,
material, or product.

Tolerance is the permissable limit of a variable used to define a product

Statement of work is the document that captures and defines all

aspects of a project, including the activities, deliverables and the
timetable for the project.

Reference: CIPS study guide page 118

LO 3, AC 3.1

Question 20:
Skipped
Interserve is a construction contractor in UK. When receiving a huge and
complex project, Interserve’s procurement manager assesses the risks by
quantifying them and recommends other stakeholders to plan mitigating
actions. Is the procurement manager’s action justified?

No, because no risks can be quantified, therefore the

procurement manager’s action is impossible.

No, because embedding the risk into pricing will decrease

the company’s competitiveness

Yes, because all the risks should be quantified and

eliminated completely before they happen


 Yes, because procurement manager needs to assess the
risks to prioritise and mitigate any potential risks

(Correct)

Explanation
Assessing the risks by quantifying them should be done. Even with
qualitative risk assessment, quantifying is still important since risks need
to be prioritised.

Risk assessment can be qualitative or quantitative. Perform qualitative

and perform quantitative risk analysis are two processes within the project
risk management knowledge area, in the planning process group. While
qualitative risk analysis should generally be performed on all risks, for all
projects, quantitative risk analysis has a more limited use, based on the
type of project, the project risks, and the availability of data to use to
conduct the quantitative analysis.

Qualitative Risk Analysis

A qualitative risk analysis prioritises the identified project risks using a

pre-defined rating scale. Risks will be scored based on their probability or
likelihood of occurring and the impact on project objectives should they
occur.

Probability/likelihood is commonly ranked on a zero to one scale (for

example, .3 equating to a 30% probability of the risk event occurring).

The impact scale is organizationally defined (for example, a one to five

scale, with five being the highest impact on project objectives - such as
budget, schedule, or quality).

A qualitative risk analysis will also include the appropriate categorization

of the risks, either source-based or effect-based.

Quantitative Risk Analysis

A quantitative risk analysis is a further analysis of the highest priority risks

during a which a numerical or quantitative rating is assigned in order to
develop a probabilistic analysis of the project.

A quantitative analysis:

- Quantifies the possible outcomes for the project and assesses the
probability of achieving specific project objectives

- Provides a quantitative approach to making decisions when there is

uncertainty
- Creates realistic and achievable cost, schedule or scope targets

In order to conduct a quantitative risk analysis, you will need high-quality

data, a well-developed project model, and a prioritized lists of project risks
(usually from performing a qualitative risk analysis).

Reference: CIPS study guide page 143-144

LO 3, AC 3.3

Question 21:
Skipped
Due to the growth of consumer electronics market, semiconductor
industry develops exponentially. However, the industry is dominated by a
dozens of manufacturer. Chipset need to be built in factories with highly
controlled environments. New chip factories cost billions of dollars and
can take two years to build. Right now, factories are running at full
capacity, which produce almost perfect yields, meaning basic chipset can
be made for less than a dollar and more advanced versions for not much
more. What are the barriers to new entrants in the semiconductor
industry?

1. Poor industry growth

2. High set-up costs

3. Economies of scale

4. Low switching costs

2 and 3 only

(Correct)

2 and 4 only

3 and 4 only


 1 and 4 only
Explanation
Barriers to entry is an economics and business term describing factors
that can prevent or impede newcomers into a market or industry sector,
and so limit competition. The most obvious barriers to entry are high
start-up costs and regulatory hurdles which include the need for new
companies to obtain licenses or regulatory clearance before operation.
Also, industries heavily regulated by the government are usually the most
difficult to penetrate. Other forms of barrier to entry that prevent new
competitors from easily entering a business sector include special tax
benefits to existing firms, patent protections, strong brand identity,
customer loyalty, and high customer switching costs.

In the scenario, the new factory for chipset manufacturing costs billions of
dollars, which indicates high set-up costs. Also, the incumbent
manufacturers have reached economies of scale, allowing them to
produce the components at optimal price.

The above descriptions are compiled from recent reports on current chip
shortage (2021).

Reference:

- Barriers to Entry Definition (investopedia.com)

- CIPS study guide page 96-97

LO 2, AC 2.2

Question 22:
Skipped
Lider Ltd is a leading bathroom furniture manufacturer in India. The
company has more than 30 years experience in the market with extended
knowledge of engineering and customers' taste. Lider is planning to
launch a new type of bath fitting next year which offers Bluetooth
connectivity and thermostat display. The company gathers a team of
multi-disciplines, including engineering, procurement, sales and
marketing. At the first team meeting, the project leader tells the team to
discuss which functions will be valued by the customers, and how to
deliver those functions with the lowest costs possible. Which of the
following describes the process that the project team is undertaking?

Cost analysis


 Just in time

Value engineering

(Correct)

Standardisation
Explanation
From the scenario, you can see that the project team is developing a new
product. They start with analysing the functions, and the costs of
delivering those functions. This is a typical process of value engineering.
You may read more on value engineering from the reference paper.

Reference:

- CIPS study guide page 171-173

- Value Analysis - Norwood Whittle (cimaglobal.com)

- A CASE STUDY ANALYSIS THROUGH THE IMPLEMENTATION OF VALUE

ENGINEERING (researchgate.net)

LO 3, AC 3.4

Question 23:
Skipped
EV Inc is facing the following challenges:

1. The capital investment is enormous.

2. Most of company's working capital is in form of inventories, which

include raw materials, work-in-progress and finished goods.

3. Competitors are increasingly deploying robotics and automation to

boost productivity.

Which of the below business sectors does EV Inc belong to?

Manufacturing
 (Correct)

Construction

Retails

Financial services
Explanation
Every sector among the options requires intensive capital investment.
However, only manufacturing and retails bury much of their working
capital in form of inventory. Raw materials and WIP only present in
manufacturing sector.

The manufacturing industry is undergoing massive change, rivaling the

Industrial Revolution that began in England and continued on Detroit's
assembly lines. But today’s revolution is “smart,” thanks to factories using
artificial intelligence and robots.

A new trend is the “cobot” — a collaborative robot designed to work with

humans. One company called Moduform uses them to make furniture in
the U.S. The company credits using cobots for reducing their staffing
turnover, since the robots do mundane repetitive tasks that bore humans,
while people can now do cognitive tasks requiring judgment and
diversified responsibilities. Other innovations include 3D printing, Artificial
Intelligence and automation.

Today’s artificial intelligence manufacturing revolution improves

performance in two key areas of manufacturing: productivity and quality
control.

Reference:

- The Key Characteristics of Manufacturing (bizfluent.com)

- CIPS study guide page 74-76

LO 2, AC 2.1

Question 24:
Skipped
A buying organisation may not have technical capability to produce a
highly complex specification. Which of the following are sources of
information that can be used to create the specification? Select TWO that
apply

Suppliers' know-how

(Correct)

Standard terms and conditions

Name cards

Industry standards

(Correct)

Constitution
Explanation
If an organisation doesn't have capability to produce a technical
specification, they can draft one based on standards or consulting the
suppliers.

Reference: CIPS study guide page 125-130

LO 3, AC 3.1