Cologne Rotterdam EMBA, Fall 2022

Term paper II, Managerial Accounting.

NAME: [lastname], [firstname]

INSTRUCTIONS
• This assignment consists of two parts, A and B, each with sub-questions as listed below
on 3 pages.
• The questions aim to be clear. If you need to make assumptions to answer, please do so
explicitly.
• Always explain your answers. For the numerical questions, show all your calculations in
logical steps.
• Number notation: thousands are separated with a comma, fractions with a dot. Examples:
10,000 = ten thousand; 4.83 = 4 83/100 (said, 4 point 8 3, or 4 and 83 hundredths).
• This is an individual assignment. Submitting your solution means that you certify that you
worked on it independently.
• Submit your assignment as a PDF file or Word document (max. 5 pages; double line
spacing). Save this file by adding your name to the file name to get:
“2022_MA_Term_2_paper_by_lastname_firstname”.
• Hand in the assignment on or before Sunday 6 November 2022 via Canvas.
• After the deadline the answers will be posted on Canvas.

Good Luck!
PART A: Flexible budgeting and variance analysis
Contemporary furniture manufactures office desks. The company budgeted to sell 5,000 desks
at $210 per desk in 2021. Budgeted costs include $80 variable cost per desk, and $180,000
fixed costs/year. In 2021 the company sold 6,000 desks at $190, and incurred $78 variable cost
per desk and $200,000 fixed cost for the year.

Required:

A1) Prepare, in proper form, a variance analysis report identifying both flexible budget and sales-
volume variances. Label all component variances as (F) (favorable) or (U) (unfavorable).
A2) Explain clearly how the two variances calculated for part A1 should be interpreted and why
they are useful to managers.

Trieste Toy Company manufactures only one product, Robot Ranger. The company uses a
standard cost system and has established the following standards per unit of Robot Ranger:

During November, the company recorded the following activity:

▪ Actual production was 6,000 units;
▪ Budgeted production for the month was 6,200 units;
▪ A total of 21,000 pounds of material were used, purchased at a cost of $245,700;
▪ The company employs 40 persons to work on the production of Robot Ranger;
▪ These employees worked an average of 160 hours at an average rate of $16.

The company’s management wishes to determine the efficiency of the activities related to the
production of Robot Ranger.

Required:

A3) Provide your answers to the requirements (a,b,c,d) above (variances should be calculated
for the month of November).
PART B: Performance measurement and incentive systems
B1) Please consider the case below.

The Royal Golf Course is a private club that is owned by the members. It has the following
managers and organizational structure:

Eric Olson: General manager responsible for all the operations of the golf course and
other facilities (swimming pool, restaurant, golf shop).
Jennifer Jones: Manager of the golf course and responsible for its maintenance.
Edwin Moses: Manager of the restaurant.
Mabel Smith: Head golf professional and responsible for golf lessons, the golf shop, and
reserving times for starting golfers on the course.
Wanda Itami: Manager of the swimming pool and family recreational activities.
Jake Reece: Manager of golf carts rented to golfers.

Required: Describe each of the managers in terms of being responsible for a cost, profit, or
investment center and possible performance measures for each manager.

B2) Above you see a graphical representation of a typical reward function. As discussed
thoroughly in this course, this function has often been criticized for its incentives for
dysfunctional managerial behavior. This also holds for the upper bound. At the same time,
one of the reasons for using such an upper bound or ‘cap’ is to prevent dysfunctionalities.
Explain why the upper bound can lead to dysfunctional behavior. Also explain how it can
prevent dysfunctional behavior.

B3) Business unit managers’ targets are typically in 80-90% of cases achievable, while goal
setting studies suggest that ‘stretch’ targets that are much less achievable would be best for
motivation. Provide and explain clear rationales for using more achievable targets for
managers in practice.
B4) Please consider the case below.

The president of the In&Co Insurance Company has just read an article on the balanced
scorecard. The article outlined that companies can implement a balanced scorecard with a set of
performance measures that reflect the diverse interests and goals of all the stakeholders
(shareholders, customers, employees, and society) of the organization. Currently, In&Co
Insurance Company has only one performance measure for the top executives: profit. The board
of directors claims that profit as the sole performance measure is sufficient. “If customers are
satisfied and employees are productive, then the company will be profitable. Any other
performance measure will detract from the basic goal of making a profit.”

Required: Do you agree with the above claim? Explain why or why not. Discuss the costs and
benefits of only having profit as a performance measure. What advise would you give to the board
of directors?