AF201: MANAGERIAL ACCOUNTING

SCHOOL OF ACCOUNTING AND

FINANCE
Final Examination
Semester 2, 2017

FACE TO FACE MODE

Duration of Exam: 3 hours + 10 minutes

Reading Time: 10 minutes

Writing Time: 3 hours

Instructions:
1. This paper has 2 sections. All questions are compulsory.
2. Answer the multiple choice questions on the special answer sheet
provided and attached to answer booklet.
3. This examination carries a 50% weighting towards your overall course
grade. To secure a pass mark in the course, you must score a mark of at
least 50% overall assessment AND a mark of at least 40% in this
examination.
4. You may use a non-programmable calculator. No other materials are
allowed.
5. There are 16 pages in this examination paper, including this cover page.
6. This is a closed book examination.
7. Relevant formulae are provided for you on page 16.
Section A Multiple Choice 30 marks
Answer these questions on the special answer sheet provided.
Each question is worth 1.5 marks.

[Suggested time: 54 minutes]

Q1. Which of the following activities are non-value-added activities?

i. Inspect work in process
ii. Process sales orders
iii. Repair drilling machine
iv. Move raw material to the work station

A. i, iii and iv
B. i, ii and iv
C. i, ii and iii
D. ii, iii and iv

Q2. Beaufort Ltd is introducing a new range of products. It has established that
the target selling prices of the three products are $120, $150 and $210. Beaufort
requires a profit mark-up on cost of 33.3 per cent for all its products. What
percentage of the target prices is the target cost in each case?

A. 50%
B. 60%
C. 66.7%
D. 75%

Q3. Which of the following methods may be used to overcome bottlenecks?

i. Increase staff training

ii. Increase overtime
iii. Reduce work in process
iv. Acquire additional plant and equipment

A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. i, ii and iv

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Q4. When we consider the life cycle sequence of a product, the majority of costs
for a typical product have been committed by the end of:

A. product planning.
B. design and development.
C. customer support.
D. production.

Q5. Lazy Linda Ltd manufactures small kitchen appliances. One of the non-value
added activities identified by the production manager is 'reworking the electrical
component in a toaster'. Which of the following is a likely root cause cost driver?

A. The number of products requiring rework.

B. The quality of the completed toaster.
C. The quality of the electrical wiring purchased from suppliers.
D. Idle labour hours.

Q6. The following dates apply to a specific order processed by Hamilton Ltd:

What is the production lead time?

A. 4 days
B. 7 days
C. 10 days
D. 11 days

Q7. Which of the following is a likely cause for a longer-than-expected

production lead time?

A. The order was received later than expected.

B. The delivery truck has broken down on the way to the customer.
C. The order was lost after the customer sent it to the company.
D. There was excessive idle time in the production process.

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Q8. A customer has placed an order with Cyborg Computers for a custom-made
computer. However, as a result of a system error, the order was lost. It took the
sales representative three days to locate the order again. Once the order was
located, the sales representative sent the order to the production department.
This error is likely to negatively affect which of the following?

A. Production lead time and delivery time

B. Customer response time and order receipt time
C. Customer response time and delivery time
D. Order receipt time and delivery time

Q9. GoGo Furniture needs to purchase glass panes to make glass top coffee
tables. Last year GoGo Furniture has two suppliers, BolBol and TolTol. Based on
last year's experience with these two suppliers, GoGo provides you with the
following supplier related information:

The total costs of ownership of BolBol and TolTol are, respectively:

A. BolBol $10 050; TolTol $4050

B. BolBol $15 050; TolTol $6050
C. BolBol $50 300; TolTol $120 600
D. BolBol $65 050; TolTol $126 050

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Q.10 A firm is likely to develop collaborative relationships with suppliers to help
minimise supplier and inventory-related costs when the strategic focus of the firm
is:

A. growth leadership.
B. differentiation strategy.
C. segmentation strategy.
D. cost leadership.

Q11. The following information was taken from the business united profit and loss
statement of Resell Real Estate Agents for 2014:

In addition, the company incurred common fixed costs of $18 000. What was the
business unit margin of the Tamworth Division during 2014?

A. ($8000)
B. $4000
C. $10 000
D. $30 000

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Q12. Which of the following statements about business unit reporting is/are true?

i. Business unit reports distinguish between costs that are controllable by the
business unit manager and costs that are beyond the influence of the
business unit manager.
ii. These statements must be presented in an absorption-costing format.
iii. Business unit reporting shows profit and loss statements for the company
as a whole and for its major business units.

A. i and ii
B. All of the given answers
C. i and iii
D. ii and iii

Q13. Callahan Company consists of two divisions, Northern and Southern. During
2014, many of the accounting records were destroyed in a fire. The managing
director has asked the accountant for information relating to 2014. The following
information is available to the accountant.

In addition, the contribution margin ratio for both divisions was the same. What
were the common fixed costs (labelled ‘) during 2014?

A. $130 000
B. $45 000
C. $70 000
D. $65 000

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Q14. The biggest challenge in making a decentralised organisation function
effectively is:

A. to earn maximum profits through fair practices.

B. to minimise organisational losses.
C. taking advantage of the specialised knowledge and skills of a manager.
D. obtaining goal congruence among the organisation's autonomous managers.

Q15. Which of the following statements is false?

A. Goal congruence is difficult to achieve because managers are often

unaware of the effects of their decisions on the organisation's units.
B. The development of performance measures to evaluate a unit and its
managers will help achieve goal congruence.
C. People are naturally concerned with the performance of all units within the
organisation.
D. Goal congruence can be achieved by having a reward system tied to a
manager's performance.

Q16. Lido Products produces two products (A and B) from a joint process. The
joint cost of production is $80 000. Five thousand units of Product A can be sold
at split-off for $20 per unit or processed further at an additional cost of $20 000
and sold for $25 per unit. Ten thousand units of Product B can be sold at split-off
for $15 per unit or processed further at an additional cost of $20 000 and sold for
$16 per unit.
What is the difference in profit if Lido decides to process further Product B,
instead of selling it at split-off?

A. $10 000 increase

B. $20 000 increase
C. $10 000 decrease
D. $58 000 decrease

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Q17. Xebex Pty Ltd is considering whether to make or buy a component used in
the production of Faz Machines. The annual cost of producing the 100 000
components used by the company is as follows.

If Xebex were to discontinue production of the component, direct fixed

manufacturing costs would be reduced by 80 per cent.
What are the irrelevant costs in the decision?

A. $50 000
B. $70 000
C. $80 000
D. $100 000

Q18. Sunshine Products is a multiproduct firm. The revenues of a single product

are $200 000 when 10 000 units are sold. Variable costs are $16 per unit. Direct
fixed expenses of $25 000 consist primarily of depreciation on equipment
specialised to the product. By what amount will Sunshine Products' cash flow
change if the product is dropped?

A. $200 000 decrease

B. $160 000 decrease
C. $40 000 decrease
D. $15 000 decrease

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Q19. Silco Pty Ltd manufactures various lines of computer equipment. They are
planning to introduce a line of laptop computers in January 2008. Current plans
call for the production and sale of 1000 computers with estimated production
costs as follows.

The average amount of capital invested in the laptop computer line is $900 000
and Silco's target return on investment for the line is 18 per cent. What unit price
must Silco charge if the company uses cost-plus pricing based on full cost?

A. $868
B. $900
C. $1192
D. $1930

Q20. Under competitive bidding when a company has no excess capacity, the
bid price would normally include:

A. only the incremental costs of the job.

B. only the variable costs of the job plus a modest contribution margin.
C. the full cost of the job including capacity-producing costs.
D. the full cost of the job excluding capacity-producing costs.

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SECTION B: PROBLEM SOLVING QUESTIONS

QUESTION 1: FINANCIAL PERFORMANCE

Total marks for this question: 25 marks
[Suggested time: 45 minutes]

Pacific Products Pty Ltd operates through two branches, and each manager
enjoys a high degree of autonomy. The two managers are ambitious and
considerable rivalry exists concerning results achieved. The following
comparative summary of results for the year ended December 31, 2016 has
been prepared in the head office of the company and made available, by the
General Manager, to both branch managers for comment.

Suva Lautoka Total

$’000’s $’000’s $’000’s
Sales 24,000 20,000 44,000
Cost of Goods manufactures and Sold 14,400 14,000 28,400
Gross Margin 9,600 6,000 15,600
Selling and Administrative Expenses 2,400 2,400 4,800
Net Profit 7,200 3,600 10,800

Net book value of assets (Invested 22,500 10,000 32,500

capital)

Among the comments received by the General Manager are the following:

From Suva Manager:

“It is unfair to me to compare results in this way, because my assets are all
company owned whereas in Lautoka they have the following leased assets:

Equivalent Net Book Annual Lease Rental

Value Expense

$’000’s $’000’s
Factory 2,000
Factory Buildings 6,000
TOTAL 8,000 1,200
Factory Plant and Equipment 4,000 1,000

From Lautoka Manager:

“The profit figures are not comparable, because we were required to purchase
product components in the form of electric motors from the Suva branch at a

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cost of $3 million when we could have bought them from an outside supplier for
$2 million, and, in any event the variable cost of production of the motors in the
Suva branch was only $1.5 million.”

REQUIRED

In answering parts a, b, and c, to this question, show all relevant calculations:

1. Disregarding the comments of the Branch Managers, calculate for Suva

and Lautoka branches.

a. Return on sales;

b. Investment turnover;

c. Return on investment;

d. Residual income for each branch after charging 30% imputed

interest on value of net assets. (8 marks)

2. Assuming that the Suva Manager’s comments are correct, for comparison
purposes,
a. Recalculate the rate of return on investments for Lautoka after
making a notional increase to the net assets figure and adjusting
the income to take account of notional depreciation on factory
building at 2.5 % and plant and equipment at 10% per annum,
based on equivalent net book value. [Hint: Consider leased assets]

b. Comment briefly on this comparison. (5 marks)

3. If the Lautoka Manager’s comments are correct and if the Lautoka

Branch had been allowed to purchase electric motors from the outside
supplier for $2 million; calculate what the effect would have been on the
2016 profit result for:

a. The Suva Branch;

b. The Lautoka Branch;
c. The Company as a whole. (5 marks)

4. After adjustments made in (2) and (3) above,

a. Re-calculate the ROI and RI (imputed interest rate is still 30%) for
Suva and Lautoka.

b. Which manager do you consider recorded the better performance

for 2016? Explain your answer. (7 marks)

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QUESTION 2: TRANSFER PRICING.

Total marks for this question: 15 marks

[Suggested time: 27 minutes]

The Slate Company manufactures and sells television sets. Its assembly division
(AD) buys television screens from the screen division (SD) and assembles the TV
sets. The SD, which is operating at capacity, incurs an incremental
manufacturing cost of $65 per screen. The SD can sell all its outputs to the outside
market at a price of $100 per screen, after incurring a variable marketing and
distribution cost of $8 per screen. If the AD purchases screens from outside
suppliers at a price of $100 per screen, it will incur a variable purchasing cost of
$7 per screen. Slate’s division managers can act autonomously to maximize their
own division’s operating income.

REQUIRED

1. Briefly explain how transfer pricing assists in measuring the performance of

a. Divisions
b. An entire company
(4 marks)
2. Calculate the following:
a. The minimum transfer price at which the SD manager would be
willing to sell screens to the AD? (2 marks)
b. The maximum transfer price at which the AD manager would be
willing to purchase screens from the SD? (2 marks)

3. Now suppose that the SD can sell only 70% of its output capacity of 20,000
screens per month on the open market. Capacity cannot be reduced in
the short run. The AD can assemble and sell more than 20,000 TV sets per
month.
a. What is the minimum transfer price at which the SD manager would
be willing to sell screens to the AD? (1 mark)

b. From the point of view of Slate’s management, how much of the

SD output should be transferred to the AD? Briefly explain.
(2 marks)

c. If Slate mandates the SD and AD managers negotiates the transfer

by “splitting the difference” on the minimum transfer price that SD is
willing to accept (in requirement 3 (a)) and maximum transfer price
that AD is willing to pay (in requirement 2)
i. What would be the resulting transfer price? (1.5 marks)
ii. Does this price achieve the outcome desired in requirement
3 b? Briefly explain. (1.5 marks)
iii. Briefly explain how negotiation method is used to set the
transfer price. (1 mark)

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QUESTION 3: MANAGEMENT ACCOUNTING AND SUSTAINABILITY

Total marks for this question: 15 marks

[Suggested time: 27 minutes]

Read the following article and answer the questions that follow:

Fiji Airways Environment Project Launched

Fiji Airways yesterday launched its environmental project called, Every take off, one tree at Blackrock
Army Camp in Votualevu Nadi. Photo:ARISHMA DEVI-NARAYAN
March 22
11:00 2017

👤 by ARISHMA DEVI-NARAYAN, NADI

To begin with its environment conservation project, Fiji Airways yesterday launched
its ‘Every take off, one tree’ initiative by planting 500 mahogany plants in Nadi.

Led by Fiji Airways managing director and chief executive officer, Andre Viljoen and
Hardwood Corporation Limited, they also marked the International Day of Forests at
Blackrock Army Camp Votualevu, in Nadi. The ‘Every take off, one tree’ initiative
means that for every international flight of Fiji Airways that takes off in a year, there
would be a tree planted.

Mr Viljoen said in a year, 2000 flights from the country’s international airport takes
off. Therefore, 2000 trees will be planted this year.

But these trees will be planted on a quarterly basis – 500 trees quarterly.

Mr Viljoen said: “We will be planting one native tree at a very important place where
we know it is protected.”

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 He said the project was one of Fiji Airways’ key initiatives towards environmental
conservation.

“These mahogany plantations will be protected forests and grow to maturity without
being harvested for lumber,” Mr Viljoen said.

“As the country’s flag carrier, we see it as our duty to protect and promote the
conservation of our country’s flora and fauna, as well as make every effort to mitigate
the impact of our operations.

“This is our commitment to Fiji and its future generations.

“This action is especially imperative at an advent when nature is at its most

vulnerable,” he said.

The project was launched at Fiji Airways’ 65th year celebrations last September.

Mr Viljoen has further encouraged stakeholders in the forestry, agriculture and rural
development sectors to engage in the expansion of forestry plantations.

This he said would be an environmentally friendly and economically attractive

development alternative not only with mahogany, but with other high value native
species.

Fiji Hardwood Corporation Limited chief executive, Giuseppe Dal Bosco said they
were happy to support Fiji Airways in this commendable initiative by supplying
seedlings and expertise for their plant a tree programme.

“These trees will not to be harvested and will remain for the benefit of future
generations,” Mr Bosco said.

REQUIRED

1. “The increased adoption of sustainability reporting and sustainability

practices can be related to the changing demands of organisations’
stakeholders” (Langfield-Smith, Thorne, Smith, & Hilton, 2015:759).

From the article, identify five stakeholders who might influence Fiji Airway’s
‘Every take off, one tree’ initiative’ or be influenced by this initiative. For
each stakeholder identified, briefly describe how they influenced Fiji
Airways’ initiative or how they are influenced by it. (6 marks)

2. Assuming you were asked to develop sustainability balanced scorecard

for Fiji Airways;

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 (i) How could you add sustainability into a balanced scorecard?
(1 mark)

(ii) For each of the four perspectives of balanced scorecard suggest

two performance measures (lag indicators) that Fiji Airways could
use to measure its performance. [Hint: Performance measures must
be measurable] (8 marks)

QUESTION 4: PRODUCT MIX DECISIONS

Total Marks for this question: 15 marks

[Suggested time: 27 minutes]

Westford Company produces three products, A110, B382, and C657. Unit data
for the three products follows:

Product
A110 B382 C657
Selling price $84 $56 $70
Variable costs:
Direct materials $24 $15 $9
Labor and other costs 28 27 40

Quantity of Bistide per unit 8 kg. 5 kg. 3 kg.

All three products use the same direct material, Bistide. The demand for the
products far exceeds the direct materials available to produce the products.
Bistide costs $3 per kilogram and a maximum of 5,000 kilograms is available each
month. Westford must produce a minimum of 200 units of each product.

REQUIRED

1. Calculate the contribution margin per kilogram for A110, B382, and C657.
(3 marks)

2. Calculate the excess kilograms of direct material after producing the

minimum requirement for each of the products. Which product will the
management decide to produce with the excess kilograms? Briefly
explain. (6 marks)

3. How many units of product A110, B382, and C657 should Westford
produce to achieve the highest contribution margin? (6 marks)

~ THE END ~

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RELEVANT FORMULAE

1. Return on investment (ROI)= Profit ÷ Invested capital

2. Residual income (RI) = Profit – (invested capital x imputed interest rate)

3. Transfer price = Outlay cost + Opportunity cost

4. SPI = Total supplier activity costs ÷ Total purchase price

5. Target cost = Target selling price – target profit margin

6.

Markup Profit required to Total annual costs not

percentage = achieve target ROI + included in cost base
Annual volume Cost base per unit used in
x cost-plus pricing formula

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