UOL MA Trial 2012 Marking Guide

Question 1 Super Mechanics plc has various divisions making equipment for the building trade. Division D makes complex electronic components that recognise dampness in wood and concrete structures. These are sold to outside customers and to Division M. Division M uses the components in the production of damp metres which it sells to outside customers... [For full question please refer to the examination paper] Required: a. i. Prepare estimated profit statements for one month at current output for each division based on the transfer price of 800 per component. ii. Calculate the total profits earned by the two divisions. (5 marks) Reading for this question
Subject guide, Chapter 9, pp.91-94; Horngren et al. 13th edition, Chapter 22, pp.799-812.

Approaching the question This part uses the basic data from the question to enable the student to become familiar with the question. Variable costs and revenues must be correctly identified and the value of goods transferred must be shown as sales in Division Ds statement and costs in Division Ms statement. Preliminary calculations of unit contributions are as follows: Transfer price of 800 Division D
800 (400) 0

Division M
1,500 (200) (800)

Selling price Variable costs Transfer price Contribution

400

500 Company

Profit statements

Division D

Division M

Total contribution

(1,600 x 400) = 640,000 300,000

(600 x 500) = 300,000 150,000

Less fixed costs

340,000

150,000

490,000

b. Determine the quantity and price at which Division M should sell the damp metre: Reading for this question As part a) above. Approaching the question Optimal output is obtained where marginal cost equals marginal revenue. Since the variable costs per unit do not change throughout the range of demand, the variable cost equals the marginal cost. Obtaining the marginal revenue can be approached in several ways. The most accurate way is to use calculus and an extra mark was given for students who obtained the answer shown by approach 1 or by interpolating in approach 3. Other correct arithmetic approaches used by students are also shown. Part i) looks at the price from the point of view of Division M which is the division able to make the decision on price. However, since the price affects the output of Division D (which is assumed to have exhausted the

i.

outside market, otherwise it would be already selling at full capacity), part ii) looks at the situation for the company as a whole. to maximise Divisional M's profit at the existing transfer price. Approach 1 - Assuming linear relationship between observed points. The market research data indicates that a price change of 100 generates a demand change of 150 units. A price demand equation can be thus identified as: p = 1,900 - 0.667q p = price/bag q = demand per metre Profit is maximised when marginal revenue = marginal cost. Marginal revenue is the derivative of the revenue function, thus: r = price x demand = (1900 - 0.667q)q r = 1900q - 0.667q2 MR = dr/dq = 1900 - 1.334q, {from y = axn, dy/dx = naxn-1} Marginal cost = MC = (transfer price + variable cost) = (800 + 200) = 1,000 / bag Thus, 1900 - 1.334q = 1,000, q = 675. If q = 675, by substitution, p = 1450. Approach 2 - Maximise Division Ms divisional profit at the existing transfer price. The marginal cost faced by Division M per metre is: transfer price 800 + variable costs 200 = 1000.

Marginal revenue calculations Division M

Price per metre Sales units Total revenue 000 720 900 MR 000

1,600 1,500

450 600

180

1,400
1,300 1,200 1,100 1,000

750
900 1,050 1,200 1,350

1,050
1,170 1,260 1,320 1,350

150
120 90 60 30

The change in price/demand is measured per 150 units and so total marginal cost is 1,000 x 150 units = 150,000 The table shows that the optimal output is 750 metres at 1,400 per metre. Approach 3 - Contribution optimal output calculations Unit contribution Units Total sales 000
1,600 - 1,000 = 600 450 720

Total variable costs 000

450

Total contribution 000

270

1,500 - 1,000 = 500 1,400 - 1,000 = 400

1,300 - 1,000 = 300 1,200 - 1,000 = 200 1,100 - 1,000 = 100 1,000 - 1,000 = 0

600 750
900 1,050 1,200 1,350

900 1,050
1,170 1,260 1,320 1,350

600 750
900 1,050 1,200 1,350

300 300
270 210 120 0

The table shows both 600 units and 750 units provide the same total contribution. Interpolating between the two gives a price of 1,450 and a quantity of 675 units. To maximise Division Ms divisional profit at the existing transfer price: Approach 1 table shows that the optimal output is 675 metres at 1,450 per metre. Approach 2 table shows the optimum output as 750 metres at 1,400 per metre. Approach 3 table shows that the optimal output is either 600 metres at 1,500 per metre or 750 metres at 1,400 per metre. Interpolating gives = 675 metres at 1,450 per metre. ii. to maximise the profit of Super Mechanics pic. (10 marks; total marks for b. i and b.ii) To maximise the total company profit requires consideration of variable costs of both divisions which is: Per metre Division D 400 + Division M 200 = 600 Approach 1 - Assuming linear relationship between observed points. The market research data indicates that a price change of 100 generates a demand change of 150 units. A price

demand equation can be thus identified as: p = 1,900 - 0.667q p = price/bag q = demand per metre Profit is maximised when marginal revenue = marginal cost. Marginal revenue is the derivative of the revenue function, thus: r = price x demand = (1900 - 0.667q)q r = 1900q - 0.667q2 MR = dr/dq = 1900 - 1.334q, {from y = axn, dy/dx = naxn_1} Marginal cost = MC = (variable cost of D + variable cost of M) = (400 + 200) = 600/metre Thus, 1900 - 1.334 q = 600, q = 975. If q = 975, by substitution, p = 1250. Approach 2 Company Price per metre
1,600 1,500 1,400 1,300 450 600 750 900

Sales units

Total revenue 000

720 900 1,050 1,170

MR 000
180 150 120

1,200
1,100 1,000

1050
1200 1350

1,260
1,320 1,350

90
60
0 3

To maximise the total company profit requires consideration of variable costs of both divisions which is 600 x 150 units = 90,000 Approach 3 - Contribution optimal output calculations Unit Contribution Units Total sales 000 Total variable costs 000
270 360 450

Total contribution 000

450 540 600

1,600 - 600 = 1,000 1,500 - 600 = 900 1,400 - 600 = 800

450 600 750

720 900 1,050

1,300 - 600 = 700 1,200 - 600 = 600

1,100 - 600 = 500 1,000 - 600 = 400

900 1050
1200 1350

1,170 1,260
1,320 1,350

540 630
720 810

630 630
600
0 4 5

The table shows both 900 units and 1050 units provide the same total contribution. Interpolating between the two gives a price of 1,250 and a quantity of 975 units. Most accurate answer = 975 metres at 1,250 per metre.

c. Prepare estimated profit statements for one month for each division and for the impact on the profits of Super Mechanics plc as a whole, based on your answers to (b) i. & ii. above. (6 marks) Reading for this question As for part a) above. Approaching the question This part of the question focuses on calculating the impact of decisionmaking on price. It is the natural next step in the investigation of changing the price. It shows that if Division M maximises its own profits, this is not optimal for the company as a whole. This indicates that the existing transfer price system does not lead to goal congruent decisions. This should be discussed in the answer to part d). Since several prices were offered in part b), marks were awarded for the use of the same price by the student in part c). Thus several answers are provided here. Regarding (b) i. Division Ms contribution calculations with metre price of 1,400
Selling price Variable costs Transfer price Contribution per metre 1,400 (200) (800)

400

750 units transferred - selling price of metres 1,400 Division D 000 Division M Company 000
Total contribution Less fixed costs (1,750 x 400) = 700 300 (750 x 400)= 300 150

400

150

550

Division Ms contribution calculations with metre price of 1,500

Selling price Variable costs Transfer price Contribution per metre 1,500 (200) (800)

500

600 units transferred - selling price of metres 1,400 Division D 000 Division M 000 Company 000
Total contribution Less fixed costs (1600, x 400) = 640 300 (600 x 500) = 300 150

340

150

490

Division Ms contribution calculations with metre price of 1,450

Selling price Variable costs Transfer price Contribution per metre 1,450 (200) (800)

450

675 units transferred - selling price of metres 1,450 Division D 000 Division M 000 Company 000
Total contribution Less fixed costs (1,675 x 400) = 670 (675 x 450) = 303.75

300 370

150.00 153.75 523.75

Regarding (b) ii. Division Ms contribution calculations with metre price of 1,200
Selling price Variable costs Transfer price Contribution per metre 1,200 (200) (800)

200

1050 units transferred - selling price 1,300 Division D 000 Division M 000
Total contribution Less fixed costs (2,050 x 400) = 820 300 (1050 x 200) = 210 150

Company 000

520

60

580

Division Ms contribution calculations with metre price of 1,200

Selling price Variable costs Transfer price Contribution per metre 1,300 (200) (800)

300

900 units transferred - selling price 1,300 Division D 000 Division M

Total contribution Less fixed costs (1,900 x 400) = 760 300 (900 x 300 = 270 150

Company 000

460

120

580

Division Ms contribution calculations with metre price of 1,250

Selling price Variable costs Transfer price Contribution per metre 1,250 (200) (800)

250

975 units transferred - selling price 1,250 Division D 000 Division M 000
Total contribution Less fixed costs (1975 x 400) = (975 x 790 243.75 300 250) 150,00 =

Company 000

490

93.75

583.75

Reading for this question As for part a) above. d. Provide a considered view of the effectiveness of company's existing transfer pricing policy (using market price) and discuss one other alternative basis that can be used. (4 marks)

Approaching the question Calculations in a) b) and c) show that total company profits increase most by setting the price for metres at 1,250. However, Division M will only be prepared to reduce the price to 1,450 as this is most profitable for them. A reduction to 1,250 provides the most company profit but reduces Division Ms profit below the amount they were earning at 1,450. Division Ds profits increase proportionately with both increases in demand as there is no change in the transfer price. In order to make extra profit, Division D does not need to take any risks or incur marketing expenses. The discussion of one alternative basis requires a comparison of the basis chosen with the market price based approach currently being used, in terms of goal congruence, acceptance by the managers and ease of adoption on a day to day basis. For example, using opportunity cost as transfer price: To encourage decisions in the best interest of the company as a whole, a transfer price should be set at the opportunity cost of the transfer. In this example, where there is spare capacity, the opportunity cost will be the variable cost of 400 per component. If this rule is applied, Division M will be able to identify the groups opportunity cost (variable cost in this case) and potential contribution. This is conceptually the best approach. However, the manager of Division D will be reluctant to accept this method because Division D will not obtain a contribution on internal transfers and will not have any incentive to transfer goods to the retail division. In practice it is also difficult to monitor opportunity cost in changing business situations, whereas market price is easily obtainable in this example. Other methods which could be discussed are: Division M could pay Division D a lump sum payment per annum, for meeting the retail divisions requirements. Total contribution of the two divisions could be determined and split

Question 2 Garden Plastics Ltd is a small company selling a variety of stackable garden chairs to the trade and retail stores. The company has identified three major cost pools, ordering, storage and shipping. The following information relates to actual activities in the year ended 30th April 2010... [For full question please refer to the examination paper] Required a. Calculate the net income and the net income as a percentage of sales made by Garden Plastics Ltd for the year ended 30th April 2010. (5 marks) Reading for this question
Subject guide, Chapter 7; Horngren et al. (13th edition), Chapter 5, pp.170-78.

Approaching the question

Unusually for an ABC question this company has been able to identify the variable and fixed elements of the cost for each activity. This is a more realistic approach in terms of providing good information for decision making. Although in the long run all costs may be variable, in the short- run some of them are fixed so the allocation of these costs may well result in over/under absorption but the variable elements can reliably be used for calculations of contributions. Net income 2010 Sales 5,000,000 x 10 Cost of sales 5,000,000 x 7.50 Gross income Less costs ordering variable 5,000 x 100 Fixed Storage variable 20,000 x 60 Fixed Shipping variable 16,000 x 70 Fixed General fixed costs Total costs Net income Net income/sales 500,000 720,000 1,200,000 1,200,000 1,120,000 800,000 1,920,000 2,000,000 7,540,000 4,960,000 9.9% 2,400,000 1,220,000 50,000,000 37,500,000 12,500,000

b. Assuming that general fixed costs are allocated based on numbers of chairs ordered and using appropriate cost drivers, calculate the contribution, the Activity Based Cost net income, and the net income as a percentage of sales, for each of the following two orders: (8 marks) Sales Order 672 Chairs ordered Ordering Storage Shipping 80,000 3 different orders 4 loads moved 1 shipment Sales Order 680 1,000 40% of 8 different orders 12 loads moved 2 shipments

Reading for this question As for part a) above. Approaching the question This part requires an ABC analysis to be performed for each of the sales orders provided. The requirement to calculate contribution means that the fixed and variable activity charges must be calculated separately Providing contribution calculated as sales minus cost of tiles

is not correct. Workings for fixed cost drivers Fixed cost drivers 2010
Ordering 720,000/5,000 = 144 Storage 1,200,000/20,000 = 60 Shipping 800,000/16,000 = 50 General 2,000,000/5,000,000 = 0.40

Order 672 Chairs ordered Variable costs Cost of tiles Ordering Storage Shipping Total variable costs Contribution Fixed costs Ordering Storage Shipping General fixed costs Total fixed cost Net income Net income/sales % 3x144 4 loads x 60 1 shipment x 50 80,000 x 0.40 80,000 x 7.50 3x100 4 loads x 60 1 shipment 80,000 x 10

800,000

Order 680 1,000 x 10

10,000

600,000 300 240 70 600,610 199,390

1,000 x 7.50 40% of 8 x 100 12 loads x 60 2 shipments

7,500 320 720 140 8,680 1,320

432 240 50 32,000 32,722 166,668 20.8%

40% of 8 x 144 12 loads x 60 2 shipments x 50 1,000 x 0.40

460.8 720 100 400 1680.8 (360.8) (3.6%)

Some students may have answered this part of the question by using the 2011 estimates. The answer for this is shown below. Equal marks were given for this approach. Workings for fixed cost drivers Fixed cost drivers 2011
Ordering 720,000/4,000 = 180 Storage 1,500,000/15,000 = 100 Shipping 800,000/16,000 = 50 General 2,000,000/5,000,000 = 0.40

Order 672 Chairs ordered Variable costs Cost of tiles Ordering Storage Shipping Total variable costs contribution Fixed costs Ordering Storage Shipping General fixed costs Total fixed cost Net income Net income/sales % 3 x 180 4 loads x 100 1 shipment x 50 80,000 x 0.40 80,000 x 7.20 3 x 100 4 loads x 60 1 shipment x 70 80,000 x 9.50

760,000

Order 680 1,000 x 9.50

9,500

576,000 255 240 70 576,565 183,435

1,000 x 7.20 40% of 8 x 100 12 loads x 60 2 shipments

7,200 272 720 140 8332 1168

540 400 50 32,000 32,990 150,445 19.8%

40% of 8 x 144 12 loads x 60 2 shipments x 50 1,000 x 0.40

576 960 100 400 2,036 (868) (9.1%)

c. Compare the two orders and comment on the reasons for differences in profitability. (3 marks) Reading for this question As for a) above. Approaching the question The answer requires demonstration of an understanding of how ABC information is used to provide information for decision making. The answer should make reference to the figures provided in part b). For example: Order 672 is a large, uncomplicated order. It requires chairs from three different suppliers but the whole order is all shipped at the same time. By contrast order 680 is very small and requires chairs of eight different types, requiring 12 amounts of loading and is shipped either to two places or on two dates. This makes Order 680 very resource intensive which is reflected in the higher costs and a loss when attributed fixed costs are included, although it is making a positive contribution. Comparing the overall profit margin and the profit margins shown in the two orders, it would appear that a high proportion of sales orders requires detailed attention. d. Using the figures provided above create a budget for year ended 30th April 2011. (4 marks) Reading for this question As for a) above.

Approaching the question Budgeted net income 2011 Sales 5,000,000 x 9.50 Cost of sales 5,000,000 x 7.20 Gross income Less costs Ordering variable 4,000 x 85 Fixed Storage variable 15,000 x 60 Fixed Shipping variable 16,000 x 70 Fixed General fixed costs Total costs Net income Net income/sales 340,000 720,000 900,000 1,200,000 1,120,000 800,000 1,920,000 2,000,000 7,080,000 4,420,000 9.3% 2,100,000 1,060,000 47,500,000 36,000,000 1 1,500,000

e. Garden Plastics Ltd wishes to make a fixed charge on small sales orders (of 1.0 chairs or less). If 2,000 small sales orders are expected in the year ended 30th April 2011, calculate the charge per order which will be needed to meet Garden Plastics Ltd's profit target. Using information from (b) above discuss a different way of setting a charge for complicated orders. (5 marks) Reading for this question As for part a) above. Approaching the question Shortfall in net income/number of small sales orders: 4.960.0 - 4,420,000 = 540,000/2,000 = 270. The charge could be based on the usage of the facilities, using the ABC drivers to compute a varying charge based on the requirements of the customer. This would be fairer and would enable customers to be aware of the cost of complexity and consider this when making their orders. This could apply to all orders: alternatively, charging rates could allow for a certain level of provision with no charge (e.g. over 20,000 chairs) so that customers who have large simple orders are not driven away.

Question 3 a) Greenwood Ltd manufactures [For full question please refer to examination paper]. This question is straightforward for candidates who have revised the cost of quality. Marks were awarded for candidates who didnt remember the exact titles of the categories but showed understanding of the concept. The pages which relate to this topic are: subject guide pp.102, textbook pp.660-669. i. ii. Required: Classify the items in the table into the four cost of quality categories. (8 marks) Calculate the sum of each category of cost of quality and the total as a percentage of the revenues in each year, 2007 and 2008.
2007
000 Revenues (not required by question) 20,000

(4 marks)
%* 2008
000 25,000

%*

Quality costs
Prevention costs Design engineer ing Preventive equipm ent maintenanc e Supplier evaluation 210 110 80 400 2% 600 200 200 1,000 4%

Appraisal costs
Inc oming materials inspection Ins pection of production Product-testing labour and equipm ent 50 220 530 800 4% 80 170 250 500 670 80 4.5% 750 300 65 635 6% 16.5% 1,000 3250 4% 13% 3% 2%

Internal failure costs

Scrap and rework costs Breakdown maintenance 720 180 900

External failure costs

Cost of returned goods Customer support Warr ant y repair Total *costs as a % of sales revenue 120 80 1,000 1,200 3,300

iii.

Comment on the trends in costs of quality between 2007 and 2008.

(3 marks) Although it is impossible to assume causality from so little information, it would be worth exploring the hypothesis that the doubling of prevention costs has resulted in tighter quality all round, reducing appraisal costs % by half and the others by one third and overall cost by 50,000 i.e. 0.2% of sales. b) Greenwood Ltd has just acquired a patent on an antifreeze recycler which filters a car's used antifreeze to remove dissolved chemicals, and returns it to the car. The financial information concerning the new recycler is as follows: Investment costs will be - patent cost of 2.2 million, plant cost of 9.6 million, and additional working capital of 3.0 million. The company expects to earn a pretax return on the initial investment of 20%. Market analysis shows that the company can sell 2,960 units in the first year. To achieve this level of sales, the firm forecasts that the selling price cannot exceed 2,500 per recycler. Variable selling commissions will be 70 per unit. Fixed administrative cost for this activity is estimated to be 740,000 for the year.

Candidates are often asked to explain the concept of target costing. This question gives them an opportunity to calculate the target cost. The pages which relate to this topic are: subject guide pp.100-101, textbook pp.425-432 and practice questions pp.445-446. Required: i. Calculate the target production cost per recycler in order for Greenwood Ltd to achieve return on investment objectives.
Calc ulation of Target cost Maximum pr ice per rec yc ler Return required on investment per rec yc ler 14,800,000 x 0.2 /2960 Variable s elling costs Fixed admin overhead 740,000/2960 Target manufacturing cost 2,500 1,000 70 250 1,180

(5 marks)

ii.

Briefly explain the difference between target costing and traditional product costing.

(5 marks)

Traditional product costing starts by listing each expected (or actual) cost and adds a previously determined profit % to the total. It assumes design and costs are given and customers will be prepared to pay the price determined by the method. It is often suitable for one-off job costing. The approach is production driven and can lead to overpricing, especially in times of depressed demand. Target costing is market driven and assumes that costs can be reduced by careful attention to the quality of parts and processes, ensuring that economies are made where possible. It tends to be used most where volume driven consumer goods are produced as this justifies the time spent on design.

Question 4 A company makes and sells two products, clarinets and saxophones... [For full question please refer to examination paper.] This topic is covered in Chapter 11 of the textbook and Chapter 4 of the subject guide. This question specifically focused on a small company with constrained resources.
(a) Past experience indicates that instruments are sold in the ratio 3 clarinets to 2 saxophones; calculate the number of each instrument which should be sold to break even for the year and the maximum profit which could be made with the current ratio of sales, given the skilled labour and specialist machine constraints.
In part (a) there are three constraints: skilled staff, machine time and sales mix. In order to calculate break even a weighted average contribution (weighted by sales mix) was required and the solution was then multiplied by the weightings for each product to give the correct level of break even. Clarinets and saxophones Clarinets Saxophones a) Workings to determine contribution etc. Price Variable costs Contribution Labour hours required Special machine hours required Total fixed costs Labour 10,800 x 15 Overhead - machine 1,800 x 40 Overhead - labour 10,800 x 5 Total 300 120 180 4 1 345 115 230 6 0.75 162,000 72,000 54,000 288,000

Weighted Average Contribution (180 x 0.6) + (230 x 0.4) = 108 + 92 =200 Breakeven = 288,000/200 = 1,440 units Clarinets (1,440 x 0.6) Saxophones (1,440 x 0.4) = 864 units = 576 units

In order to calculate the maximum profit with the existing sales mix, the maximum number units of each type which could be produced given the sales mix and each of the other two constraints needed to be determined. This required the calculation of the amount of time in each constraint needed by each product. The maximum profit could then be calculated. It was possible to use linear programming for this part of the question if preferred. The maximum which can be made with this product mix is: Labour hours 10,800/(3 x 4) + (2 x 6) = 450 i.e. 1,350 clarinets and 900 saxophones Machine hours 1,800/(3 x 1) + (2 x 0.75) = 400 i.e. 1,200 clarinets and 800 saxophones Machine hour is the constraint so the profit would be: Clarinets 1,200 x 180 = 216,000

Saxophones 800 x 230

= 184,000 400,000

Less fixed costs Total profit

288,000 112,000

(b) The company would like to use the labour time and machine time to their maximum and would be prepared to incur additional advertising of 12,000 to change the sales mix if necessary. Calculate the optimal annual sales mix for the company and the profit improvement, assuming the company incurred the proposed advertising expenditure.
Part (b) required the use of linear programming to determine the best mix of products. The profit to be made with this mix, after deducting the additional advertising cost, could then be compared with the answer in Part (a). Linear programming - trial and error method (may use graphical method) Machine 1C + 0.75S Labour 4C + 6S Multiply machine constraint by 4 = 4C + 3S Saxophones 3S S Clarinets C = 1,800 - 900 Profit = clarinet contribution Saxophone contribution 900 x 180 = 162,000 1,200 x 230 = 276,000 438,000 Less fixed costs Additional advertising Total profit Less previous profit Profit improvement Total profit earned with only clarinets 1,800 x 180 = 324,000 - 300,000 = 24,000 - reject Total profit earned with only saxophones 10,800/6 =1,800 x 230 = 414,000 - 300,000 = 114,000 - reject 900 clarinets and 1,200 saxophones is the optimal mix as it makes the most profit. 288,000 12,000 300,000 138,000 112,000 26,000 = 1,800 = 10,800 = 7,200 = 3,600 = 1,200 = 900

(c) Explain the meaning of the term 'shadow price' and explain how a shadow price can be used in decision making.
Shadow price is the additional contribution which could be earned from using one more unit of a scarce resource. It can be determined by recalculating the levels programming problem using one more unit of the resource under consideration. This will lead to a change in the optimal output. The new contribution minus the contribution earned by the original solution is the shadow price. The shadow price indicates the maximum amount which could be spent on acquiring one more unit of the scarce resource as it would be unprofitable to spend more than the shadow price. Students who had not heard of the term tended to be wasting time if they tried to guess at the answer.

Question 5 Theories of managerial performance measurement vary from advocating a single all encompassing figure such as Economic Value Added to recommending a wide variety of measures such as those seen in the Balanced Scorecard. Explain the two terms Economic Value Added and Balanced Scorecard and critically evaluate their different approaches to performance evaluation. (25 marks) The pages which relate to this topic are subject guide pp.10407, textbook pp.791812 and the Recommended reading articles by Ittner and Larcker, Hayes and Abernathy. This is a discussion question expecting an explanation of each term and a critical comparison between the two approaches. The following bullet points indicate the issues to be included but a wellbalanced essay is expected. Economic Value Added (EVA) Explanation of term: Complex application of Residual Income introduced by consulting company Stern Stewart. Answer may use a numerical example to explain the method. Answer should indicate ways in which EVA differs from RI. Stern Stewart recommendations on definitions. Profit: Net operating profit after tax (NOPAT). Investment: Total assets minus current liabilities. Adjustments needed to make comparable profit and asset figures. Decisions on expensing or capitalising items e.g. research & development. Decisions on treatment of leased assets, revaluation of assets. Off Balance Sheet financing. Inflation. Capital Charge: Rate based on Capital Asset Pricing Model to derive a rate based on the industry and risk characteristics of each division. Balanced scorecard Explanation of term: Aim to measure a wide variety of activities necessary for the long-term profitability of the company. Brief description of measures in four categories. 1. Financial e.g. Operating profit, revenue growth, revenues from new products, gross margin %, cost reduction in key areas, Return on Investment or EVA. 2. Customer Focus e.g. Market penetration or position, new customers, repeat business from existing customers. Existing customers lost why, delivery times, returned goods reasons for returns, complaints. Time to deal with customer queries. 3. Internal Business Processes e.g. Production throughput statistics and improvement, machine down-time, staff turnover, training of staff, staff morale, reputation in the community. 4. Innovation and Learning e.g. R & D new products being developed, new products to market, development of new production or administrative processes. Explanation of how measures are determined and weighted. Discussion of differences in approaches might include the

following. EVA lag indicator encompassing in one measure a wide variety of different factors. Scope for great discretion in achieving targets. Focuses attention only on financial consequences of decision. Could encourage adoption of only safe investments with early returns. Problems with determining treatment and valuation of items in Income Statement and Balance Sheet and capital charge. Potential to easily manipulate activities to improve short-run results to fit expectations. Difficult to identify reasons for changes in measure. Balanced Scorecard very detailed, measures of lead and lag activities. Designed to measure each units particular way of operating. Each feature has to be determined and appropriate measures defined. Weighted score for each feature has to be determined. Problems of too many different aspects to be considered by managers Potential for manipulation of measurement data to fit expectations. Inter-unit rivalry over measured achievement (e.g. between customer facing activities and internal activities). Research on failure to link measures to strategic focus or value drivers (e.g. Ittner and Larcker findings).

Question 6 Give definitions and explain the meaning of each of the following management accounting concepts. Give examples of their applications and explain their significance: a) Direct cost. b) Variable cost. c) Material price and usage variances. d) Process costing. e) Target costing. (25 marks) Reading for this question: Horngren et al, Cost accounting: pp.27, 31, 227233, 99100 and 425430 (twelfth edition). Approaching the question: Good marks will only be awarded for comprehensive definitions and explanations of the management accounting contexts perhaps giving two or three contexts where relevant. These should be followed by good examples, showing how the application contributes to the overall management accounting framework. Some parts give the opportunity to provide longer answers than others; for example, there is more to say about target costing than material price and usage variances.

Question 7 Discuss the role of management accounting information in supporting the strategic management activities of organisations. Reading for this question
Subject guide, pp.9 and 11; Horngren et al. (13th edition), Chapters 13 and 19.

Approaching the question A good answer to this question must be focused on the question which means it must keep strategic management in mind and discuss the appropriate management accounting information to support strategic decision making. Only discussing one or the other is not appropriate.Examiners commentaries 2010 17 One way to approach this would be to: Define strategy/strategic management Corporate level what business are/should we be in? what are the basic directions for future? what is the culture and leadership style? what are the attitudes to strategic change? Business level matching internal capabilities with external opportunities: i.e. what is our competitive advantage? Who are our competitors? How can we improve/innovate? Who are our customers? What value do we add? Define and discuss the appropriate management accounting provision which would assist in the performance of strategy/strategic management Information needs to be sufficiently detailed to be able provide analysis quickly for different alternatives. Cost/benefit aspects of data analysis must be considered. Information needed by management may be financial, quantitative e.g. number qualitative. Thus management accountants must work with other professionals to provide a wide range of information. Some techniques which have been developed to provide these more detailed analyses are: Analysis of forecasts and results by impact of sales growth, changes in prices of inputs, changes in productivity, identifying and using spare capacity and managing bottlenecks (theory of constraints). Techniques e.g. target costing, customer profitability profiles. Quality measurement and improvement. Balanced scorecard. Reports should be able to compare forecasts with outcomes, including analysis of unforeseen external influences. Any of the above techniques should be expanded and more contexts provided.

Question 8 a. i. Meeting customers expectations is vital for profitability. Explain the term customer response time and describe, with examples, two reasons why delays in meeting customer expectations occur. (5 marks) Reading for this question
Subject guide, pp.5660 and p.104; Horngren et al. (13th edition), pp.70103.

Approaching the question Customer response time is the amount of time between a customer placing an order and delivery to the customer. Two reasons for delay (Horngren et al., p.703) are: uncertainty over when a customer will order products or services. bottlenecks due to limited capacity. Examples of these or other valid reasons were required to obtain good marks. A high proportion of students suggested that customer response time was the amount of time it took the customer to respond. This meant that their examples in part i) and answer to part ii) tended to be incorrect. ii. Describe how customer response time could be improved in a student canteen and how the costs and benefits could be quantified. (4 marks) Reading for this question As for part i) above. Approaching the question In the canteen example there is little uncertainty over when the customer will require the products, in fact that is part of the problem, so the answers must address the bottlenecks by first obtaining good information on the problem and then trying to resolve it. Good examples were needed and a discussion on how cost and benefits would be measured, for example: Monitor busy times, monitor types of transaction e.g. how many items bought, what types, drinks, cold food, hot food. Monitor customer waiting time expectations, how long before to go elsewhere, etc. Possible solutions more vending machines, more staff at busy times, hot food paid for at a separate cash desk, etc. Measuring cost and benefits cost extra resources, benefit increased contribution at busy times, customer satisfaction survey. b. i. Explain the Theory of Constraints and define the following: Throughput contribution; Investments; Operating costs. (4 marks) Reading for this question
Subject guide, p.104; Horngren et al. (13th edition), Chapter 19, p.707.

Approaching the question Correct definitions as shown in subject guide or textbook are acceptable. For example: Throughput contribution revenues direct material cost of goods sold Investments sum of direct materials cost in direct materials, 97 Management accounting 20

work in progress and finished goods inventories, R&D costs and costs of equipment and buildings. Operating costs all costs other than direct material incurred to earn throughput contribution, includes salaries and wages, rent, utilities, depreciation, etc. ii. Describe the process of managing bottlenecks. (6 marks) Reading for this question
Subject guide, p.104; Horngren et al. (13th edition), Chapter 19, pp.70709.

Approaching the question This question can be answered by expanding on the points below. It is well discussed in the textbook: recognise that bottleneck resource determines throughput contribution of the plant as a whole search and find bottleneck resource, evidenced by large quantities of work in progress waiting to be worked on keep bottleneck working and subordinate all non-bottleneck resources to bottleneck resource take actions to increase bottleneck efficiency and capacity by calculating throughput capacity and identifying any relevant/irrelevant costs improve the quality of parts and products manufactured at the bottleneck operation. iii. Discuss the situations in which it may be more appropriate to use linear programming approaches as a decision tool rather than Theory of Constraints. (6 marks) Reading for this question
Subject guide, Chapter 4, pp.4649 and Chapter 10, p.104; Horngren et al. (13th edition), Chapter 11, pp.236438 and Chapter 19, pp.70609.

Approaching the question This part requires a discussion of the important features of the two methodsand the contexts in which each is more appropriate e.g. Linear programming is most relevant where there are several limited resources and shared by several products. The approach assumes that it is possible to identify, all variable costs (not only materials), revenues and resource use for all products involved. The method can respond quickly to changes in prices and variable costs. It tends to be used in highly structured environments e.g. mix of products to be made from crude oil. It is also more relevant where it is difficult to make for inventory. The technique requires good information relating to all the costs, revenues and constraints. As a powerful mathematical model it can also calculate shadow prices for all the limited resources. The throughput contribution approach is used in situations where a more pragmatic solution is required and many factors are difficult to identify with accuracy. It therefore focuses on the areas which are easy to identify, product prices, material prices and one bottleneck. It is more appropriate where a company makes a large number of diverse products for which the estimates of demand are difficult and different products use the resources in different ways. In todays environment it is not an unreasonable assumption that direct materials are the only easily measurable variable cost.