The University of the South Pacific

Serving the Cook Islands, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.

School of Accounting and Finance

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AF201: MANAGERIAL ACCOUNTING

FINAL EXAMINATION - SEMESTER 1, 2010

Time Allowed 3 hours plus 10 minutes reading

Section QUESTION MARK ALLOCATION

A Multiple Choice 30 marks
B 1 Case Study 30 marks
C Short Answers 40 marks

TOTAL 100 marks

INSTRUCTIONS

1. ALL questions are compulsory.

2. Write your answers in the answer booklet provided.
3. Non-programmable Calculators may be used, but are not provided.
4. This exam is worth 55% of your overall mark. The minimum exam
mark is 22/55.

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SECTION A Multiple Choice [30 marks]

Circle the one best answer in the multiple choice answer sheet provided.
Each question is worth 1.5 marks

1. Focusing on customers, promoting innovation, learning new philosophies, driving

out fear, and providing extensive training are all elements of a major change in
organizations. These elements are aimed primarily at

A. Copying leading organizations to better compete with them.

B. Focusing on the total quality of products and services.
C. Being efficient and effective at the same time, in order to indirectly affect
profits.
D. Managing costs of products and services better, in order to become the low-
cost provider.

2. One of the main reasons that implementation of a total quality management

program works better through the use of teams is

A. Teams are more efficient and help an organization reduce its staffmg.
B. Employee motivation is always higher for team members than for individual
contributors.
C. Teams are a natural vehicle for sharing ideas, which leads to process
improvement.
D. The use of teams eliminates the need for supervision, thereby allowing a
company to reduce staffmg.

3. A company produced and sold 100,000 units of a component with a variable cost
of $20 per unit. First-quality components have a selling price of $50. The
component's specifications require its weight to be 20 kg with a tolerance of ± 1
kg. Unfortunately, 1,200 of the units produced failed the company's tolerance
specifications. These 1,200 units were reworked at a cost of $12 per unit and sold
as factory seconds at $45 each. Had the company had a quality assurance
program in place such that all units produced conformed to specifications, the
increase in the company's contribution margin from this component would have
been

A. $14,400
B. $20,400
C. $21,600
D. $39,600

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4. In Year 4, a manufacturing company instituted a total quality management (TQM)
program producing the following report:

Summary Cost of Quality Report

(in thousands)
Year 3 Year 4 % Change
Prevention costs $ 200 $ 300 +50
Appraisal costs 210 315 +50
Internal failure costs 190 114 -40
External failure costs 1,200 621 -48
Total quality costs $1.800 $1.350 -25

On the basis of this report, which one of the following statements is most likely
true?

A. An increase in conformance costs resulted in a higher-quality product and a

decrease in nonconformance costs.
B. An increase in inspection costs was solely responsible for the decrease in
quality costs.
C. Quality costs such as scrap and rework decreased by 48%.
D. Quality costs such as returns and repairs under warranty decreased by 40%.

5. Management of a company is attempting to build a reputation as a world-class

manufacturer of quality products. Which of the following measures would not be
used by the fIrm to measure quality?

A. The percentage of shipments returned by customers because of poor quality.

B. The number of parts shipped per day.
C. The number of defective parts per million.
D. The percentage of products passing quality tests the fIrst time.

6. An effective managerial control system has favourable motivational effects.

Which of the following are aspects of motivation?

Managerial Goal
Effort Congrnence
A. No No
B. No Yes
C. Yes Yes
D. Yes No

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7. The receipt of raw materials used in the manufacture of products and the shipping
of fInished goods to customers is under the control of the warehouse supervisor,
whose time is spent approximately 60% on receiving and 40% on shipping
activities. Separate staffs for these operations are employed. The labor-related
costs for the warehousing function are as follows:

Warehouse supervisor's salary $40,000

Receiving clerks' wages 75,000
Shipping clerks' wages 55,000
Employee benefIt costs (30% of wage
and salary costs) 51.000
$221,000

The company employs a responsibility accounting system for perfotmance-

reporting purposes. Costs are classifIed as period or product costs. What is the
total of labor-related costs reported as product costs under the control of the
warehouse supervisor?

A. $97,500
B. $128,700
C. $130,000
D. $221,000

8. A large manufacturing company has several autonomous divisions that sell their
products in perfectly competitive external markets as well as internally to the
other divisions of the company. Top management expects each of its divisional
managers to take actions that will maximize the organization's goals as well as
their own goals. Top management also promotes a sustained level of management
effort of all of its divisional managers. Under these circumstances, for products
exchanged between divisions, the transfer price that will generally lead to optimal
decisions for the manufacturing company would be a transfer price equal to the

A. Full cost of the product.

B. Full cost of the product plus a markup
C. Variable cost of the product plus a markup
D. Market price of the product

9. Which of the following is the most signifIcant disadvantage of a cost-based

transfer price?

A. Requires internally developed infotmation.

B. Imposes market effects on company operations.
C. Requires externally developed infotmation.
D. May not promote long-tetm efficiencies.

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10. A company has two divisions, A and B, each operated as a profit center. A
charges B $35 per unit for each unit transferred to B. Other data follow:

A's variable cost per unit $30

A's fixed costs $10,000
A's annual sales to B 5,000 units
A's sales to outsiders 50,000 units

A is planning to raise its transfer price to $50 per unit. Division B can purchase
units at $40 each from outsiders, but doing so would idle A's facilities now
committed to producing units for B. Division A cannot increase its sales to
outsiders. From the perspective of the company as a whole, from whom should
Division B acquire the units, assuming B's market is unaffected?

A. Outside vendors.
B. Division A, but only at the variable cost per unit.
C. Division A, but only until fixed costs are covered, then from outside vendors.
D. Division A, despite the increased transfer price.

11. Using the balanced scorecard approach, an organization evaluates managerial

performance based on

A. A single ultimate measure of operating results, such as residual income.

B. Multiple fmancial and nonfinancial measures.
C. Multiple nonfmancial measures only.
D. Multiple fmancial measures only.

12. Decentralized firms can delegate authority and yet retain control and monitor
managers' performance by structuring the organization into responsibility centers.
Which one of the following organizational segments is most like an independent
business?

A. Revenue center.
B. Profit center.
C. Cost center.
D. Investment center.

13. A firm earning a profit can increase its return on investment by

A. Increasing sales revenue and operating expenses by the same dollar amount.
B. Decreasing sales revenues and operating expenses by the same percentage.
C. Increasing investment and operating expenses by the same dollar amount.
D. Increasing sales revenues and operating expenses by the same percentage.

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14. Residual income is a perfonnance evaluation that is used in conjunction with, or
instead of, return on investment (ROI). In many cases, residual income is
preferred to ROI because

A. Residual income is a measure over time, while ROI represents the results for
one period.
B. Residual income concentrates on maximizing absolute dollars of income
rather than a percentage return as with ROI.
C. The imputed interest rate used in calculating residual income is more easily
derived than the target rate that is compared to the calculated ROI.
D. Average investment is employed with residual income while year-end
investment is employed with ROI.

15. Relevant or differential cost analysis

A. Takes all variable and fixed costs into account to analyze decision
alternatives.
B. Considers only variable costs as they change with each decision alternative.
C. Considers the change in reported net income for each alternative to arrive at
the optimum decision for the company.
D. Considers all variable and fixed costs as they change with each decision
alternative.

16. Which one of the following is most relevant to a manufacturing equipment

replacement decision?

A. Original cost of the old equipment.

B. Disposal price of the old equipment.
C. Gain or loss on the disposal of the old equipment.
D. A lump-sum write-off amount from the disposal of the old equipment.

17. In a decision analysis situation, which one of the following costs is not likely to
contain a variable cost component?

A. Labor.
B. Overhead.
C. Depreciation.
D. Selling.

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18. The ABC Company manufactures components for use in producing one of its
fInished products. When 12 000 units are produced, the full cost per unit is $35,
separated as follows:

Direct materials $ 5
Direct labor 15
Variable overhead 10
Fixed overhead 5

The XYZ Company has offered to sell 12 000 components to ABC for $37 each.
If ABC accepts the offer, some of the facilities currently being used to
manufacture the components can be rented as warehouse space for $40 000.
However, $3 of the fIxed overhead currently applied to each component would
have to be covered by ABC's other products. What is the differential cost to the
ABC Company of purchasing the components from the XYZ Company?

A. $8000
B. $20000
C. $24000.
D. $44000.

19. Richardson Motors uses 10 units of Part No. T305 each month in the production
of large diesel engines. The cost to manufacture one unit of T305 is presented
below:

Direct materials $ 2000

Materials handling (20% of direct materials cost) 400
Direct labor 16000
Manufacturing overhead (150% of direct labor) 24000
Total manufacturing cost $42400

Materials handling, which is not included in manufacturing overhead, represents

the direct variable costs of the receiving department that are applied to direct
materials and purchased components on the basis of their cost. Richardson's
annual manufacturing overhead budget is one-third variable and two-thirds fIxed.
Simpson Castings, one of Richardson's reliable vendors, has offered to supply
T305 at a unit price of $30 000. If Richardson Motors purchases the ten T305
units from Simpson Castings, the capacity Richardson used to manufacture these
parts would be idle. Should Richardson decide to purchase the parts from
Simpson, the out-of-pocket cost per unit ofT305 would

A. Decrease $6 400.
B. Increase $3 600.
C. Increase $9 600.
D. Decrease $4 400.

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20. Regis Company manufactures plugs used in its manufacturing cycle at a cost of
$36 per unit that includes $8 of fixed overhead. Regis needs 30 000 of these plugs
annually, and Orlan Company has offered to sell these units to Regis at $33 per
unit. If Regis decides to purchase the plugs, $60 000 of the annual fixed overhead
applied will be eliminated, and the company may be able to rent the facility
previously used for manufacturing the plugs.

If Regis Company purchases the plugs but does not rent the unused facility, the
company would

A. Save $3.00 per unit.

B. Lose $6.00 per unit.
C. Save $2.00 per unit.
D. Lose $3.00 per unit.

SECTIONB Case Study [30 marks]

Customer Profitability at MYTEE Corporation Ltd

Introduction

Managers at Mytee Corp have been using various teams to collect activity-based data
since 2005. Each team has consisted of one or more management accountants working
closely with department managers. The teams typically work for 3-6 months on data
collection and developing spreadsheets. To date the teams have mainly focused on
product costing. Recently two teams have been set up to collect data to improve the
company's understanding of customer-related costs and profitability. One team has
looked at distribution costs and the second at order related costs.

Only 3 customers were included in the analysis. Theses 3 customers represent 10'% of
total sales. The company has approximately 250 customers in total. Finally the teams
only considered labour related costs and direct costs for the cost pools.

The first objective for each team was to estimate the total annual overhead cost and
annual volume for each cost driver. As the company only focused on three customers the
data was quickly estimated. The second objective was to estimate the percentage of each
cost driver per customer.

Collecting Data

The management accept that a 'cost sampling' or snapshot' approach is the best way to
identify key activities and their costs. This technique helps the department to develop
estimates of how much time is devoted to different activities. Then by using an average
hourly rate for all staff managers will be able to estimate the total annual cost of an
activity. The decision to use an average hourly rate for all staff will save time.

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Managers decided that between 4 to 8 activities should to be identified by each team.
The possibility of identifying 20-30 activities was considered but this was rejected
because there was very little time to do the work. For the whole exercise it was felt that
the information must not take too long to collect and interpret.

Most of the managers involved with the new teams have little experience of collecting
data regarding activities and cost drivers. With some activities several cost drivers were
discussed. This confused some managers who felt unclear why a cost driver was rejected
or accepted. The management accountants believed these problems would not affect the
accuracy of the data.

ABC data

Team 1 - Order related overheads

(Data based on 3 customers)

Activity cost Annual overhead Annual volume

pool Cost driver cost for the 3 for the 3
customers customers
Changes to Number of order amendments
orders $50,000 3,000
Pre-sales Number of hours of pre-sales
support support $100,000 3,800
Post-sales Number of hours of post-sales
support support $100,000 2,200
Delayed Number of delayed payments over
payments 3 months $70,000 1,250
Order Number of orders
processing $60,000 20,000
Invoicing Number of invoices $25,000 22,500

Team 2 Distribution costs

(Data based on 3 customers)

Distribution related Annual Annual

overhead costs Cost driver overhead cost volume for the
for the 3 3 customers
customers
Storage expenses Average cartons in stock $12,000 5,000
Requisition handling Number of requisitions $8,500 10,000
Standard deliveries Number of standard $5,000 3,000
deliveries
Special deliveries Number of special deliveries $12,800 500

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Customer sales and activity analysis

North South East

Customer
Annual Sales $175,000 $178,000 $173,000

The following table summarises the cost driver per customer.

Customer North South East

Number of order amendments 600 60 600

Number of hours of pre-sales support 608 380 1140
Number of hours of post-sales
support 220 330 440
Number of delayed payments 125 150 125
Number of orders 2000 6000 6000
Number of invoices 4500 6750 11250
Average cartons in stock 2000 1500 1500
Number of requisitions 3000 3000 4000
Number of standard deliveries 300 1200 1500
Number of special deliveries 100 300 100

Required:

i) Prepare a customer profitability analysis for each customer based on the ABC
data. Include relevant percentage analysis. [18 marks]

ii) Discuss [in not more than % page] what steps the company should consider to
improve the profitability of its customers under review. [8 marks]

iii) Assume that the company has a complete analysis of all customer-related
revenues and costs. Discuss why such data is needed and how it can be used to
help a company compete profitably. [ 4 marks]

SHOW YOUR WORKING

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SECTIONC Short Answers [40 marks]

A. [15 marks]
Suppose that the director of Lost dogs' home is concerned about an increase in number of
adopted dogs returned to the home because of behaviour problems. When dogs are
returned, the home incurs extra animal intake and adoption costs, in addition to extra
costs for board, room and more training for the dogs. In addition, the director is
concerned that adopting families may not want another dog because of their unhappy
experience. The director views this as a quality problem and wants to improve quality in
adoption services and reduce costs at the same time.

Required:

i) List the four types of quality costs or activities identified in the course.
[4 marks]
ii) Which quality cost category would you place the type of problem the Lost
dogs' home is experiencing? Explain your answer. [3 marks]

iii) Will an ABC system help managers determine costs for their quality activities?
Explain. [5 marks]

iv) List one new cost pool and cost driver that could be used to improve the director's
ability to analyse quality. [3 marks]

B. [15 marks]
Findings of a recent study undertaken to review the environmental accounting practice of
public companies in the Pacific revealed that 'there is only limited involvement of
accountants in the environmental management strategies of companies. The fmdings
suggest that 'accountants have the potential to play a crucial role in environmental
management and reporting, through their managerial, performance measurement and
evaluation, auditing and reporting skills'.

Required:
i) You have been invited to an accountants' conference where you are expected to
comment on the results of this research, and suggest the way forward for the
accounting profession with respect to environmental and sustainability issues.
In not more than % page, write down the content of your speech, which should
include four (4) practical tips that the accountants can implement for their
organizations. [ 11 marks]

ii) Suggest two (2) ways governments in the Pacific region can encourage firms to be
more socially responsible and environmentally friendly in their operations.
[4 marks]

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c. [10 marks]
Part of the process for developing a balanced scorecard is to identify one or more
measures for each perspective.

Required:

Categorise each of the following potential balanced scorecard performance measures

according to the following perspectives:
F Financial
C Customer
I Internal business process
L Learning and growth
[Write your answer in the answer booklet, using the appropriate letters- F, C, L or LJ

(i) Ratio of research and development cost to number of new products

developed
(ii) Number of hours of employee training
(iii) Economic value added (EVA)
(iv) Days in accounts receivables
(v) Throughput time
(vi) Operating margin
(vii) Employee retention rate
(viii) Customer satisfaction ratings
(ix) Number of degrees and certificates held per employee or department
(x) Percentage of purchase orders that are error free

END OF PAPER

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AF201 DFL SECTION A MULTIPLE CHOICE ANSWER SHEET
Circle the ~ best answer for each question.

I. A B C D

2. A B C D

3. A B C D

4. A B C D

5. A B C D

6. A B C D

7. A B C D

8. A B C D

9. A B C D

10. A B C D

II. A B C D

12. A B C D

13. A B C D

14. A B C D

15. A B C D

16. A B C D

17. A B C D

18. A B C D

19. A B C D

20. A B C D

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