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Thee Univ

versity
Serving the Co
y of thhe Souuth Paacific
ook Islands, Fiji, Kiriibati, Marshall Island
ds, Nauru, Niue, Sam
moa, Solomon Islandds, Tokelau, Tonga, T
Tuvalu, and Vanuatu..

SCHO
S OOL OF
O ACCCOU
UNTIING A
AND
FIN
NANC
CE

AF20
01: MA
ANAGE
ERIAL ACCO
OUNTIN
NG

FIINAL EXAM
E INATIION – S
SEMES
STER 11, 2015

PRIN
NT MOD
DE

Timee Allowed
d 3 hourrs plus 10 minutees readinng

100 marks
m (5
55% of fiinal gradde)
INSTRUCTIONS
1. This exam
m has TWO O SECTIONS:
Section A: 20 multtiple choice question ns
Section B: 5 proble em solvingg questionss
2. All questtions in all the sectio
ons are commpulsory.
3. Write yo
our answerrs in the an nswer bookklet provid
ded.
4. Non-proogrammab ble calculaators may be used, b but are no
ot provided
d.
5. Relevannt formulae e are provided for yo ou on pagge 15.
6. This exam
m is worth 55% of yo our overall mark. The minimum exam
mark is 22/55.
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SECTION A: MULTIPLE CHOICE

1. Which of the following terms relate to e-commerce?


i. B2B
ii. C2B
iii. B2C
iv. EDI

A. I, ii, and iii


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

2. Customer response time may be defined as:

A. Time between receipt of the customer order and placing that order in
production
B. Time between customer placing an order and customer receiving the
completed order
C. Time between receipt of order and delivery to customer
D. Time between receipt of order and production commencing

3. Time-based management is concerned with the elimination of idle time, which


generates non-value-added costs in which of the following circumstances?

A. The build-up of inventories


B. Loss of customers
C. Delay in sales revenue generation
D. All of the given answers

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

Order placed 1 April


Order received 5 April
Production commenced 12 April
Order completed 15 April
Order delivered to customer 18 April

What is the production lead time?

A. 4 days

B. 7 days

C. 10 days

D. 11 days

5. GoGo Furniture has collected the following customer-related information:

Delivery furniture to customers $10,000


Advertising on national TV $5,000
Handling customer complaints $4,000
Processing sales orders $6,000
Market research $12,000
Supplying regular free gifts to customers $4,500

The total customer level cost is:

A. $8500

B. $18 500

C. $30 500

D. $35 500

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6. Which of the following costs is NOT relevant for special decisions?

A. Incremental costs
B. Sunk costs
C. Avoidable costs
D. All of the above

7. Which of the following costs are relevant to a make-or-buy decision?

A. The original cost of the production equipment


B. The annual depreciation of the equipment
C. The amount that would be received if the production equipment were sold
D. The cost of direct materials purchased last month and used to manufacture
the component.

Use the following data to answer questions 8 and 9.

BG Industries manufactures 40,000 components per year. The manufacturing


cost of the components was determined to be as follows:

Direct materials $50,000


Direct labor 80,000
Variable manufacturing overhead 30,000
Fixed manufacturing overhead 40,000
Total $200,000

8. If BG industries purchases the component from an outside supplier for $4.25 per
unit, the effect on income (profit) would be a

A. $30,000 decrease
B. $30,000 increase
C. $10,000 decrease
D. $10,000 increase

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9. Assume BG industries could avoid $15,000 of fixed manufacturing overhead if it
purchases the component from an outside supplier. If BG purchases the
component from a supplier for $4.25 per unit instead of manufacturing it, the
effect on income (profit) would be a

A. $5,000 increase
B. $15,000 increase
C. $25,000 decrease
D. $35,000 increase

10. Missoula Industries manufactures a product with the following costs per unit
at the expected production of 30,000 units:

Direct materials $ 5
Direct labor 15
Variable manufacturing overhead 8
Fixed manufacturing overhead 6

The company has the capacity to produce 60,000 units. The product regularly
sells for $45. A wholesaler has offered to pay $40 each for 2,000 units.

If the special order is accepted, the effect on Missoula’s operating income


(profit) would be a

A. $24,000 increase
B. $34,000 increase
C. $10,000 decrease
D. $12,000 decrease

11. Which of the following represents the cost-based pricing formula?

A. Price = cost + (mark-up % × cost)

B. Price = cost + mark-up %

C. Price = mark-up % × cost

D. Price = cost + (mark-up % + cost)

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12. The Houston Company manufactures office equipment. They are ready to
introduce a new line of desktop copiers. The following data concerns the
copiers:

Variable manufacturing cost $180


Applied fixed manufacturing cost $90
Variable selling and administrative cost $60
Allocated fixed selling and administrative cost $75

If the company uses cost-plus pricing based on variable manufacturing cost,


what price must the company charge when the mark-up percentage is 200 per
cent?

A. $585

B. $450

C. $630

D. $540

13. The Mixed-Up Floor Company Ltd makes two products, carpet polish and
floor deodoriser. Operating information from the previous year is as follows.

Carpet polish Floor deodoriser


Sales price per unit $7.00 $10.00
Variable cost per unit $4.00 $8.00
Units produced and sold 5,000 4,000
Machine hours used 5,000 2,000

Fixed costs of $20 000 per year are presently allocated evenly between both
products. If the product mix were to change, total fixed costs would remain the
same. Calculate the contribution margin per machine hour for carpet polish.

A. $4.00

B. $2.00

C. $3.00

D. $0.25

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14. Avocado Ltd produces small electronic components for kitchen appliances.
Two of its products are Component Y and Component Z. The selling price of
Component Y is $15, and the selling price of Component Z is $20. The variable
cost per unit for Component Y is $8 and the variable cost per unit of Component
Z is $11. The machine hour requirement and demand for the two products are:

Component Y Component Z
Monthly demand 2,500 1,000
Machine hour required per unit 2 hours 3 hours

Avocado Ltd's production capacity is 6500 machine hours per month. The
optimal product mix is:

A. 1000 units Z, 1500 units Y

B. 0 units Z, 2167 units Y

C. 1000 units Z, 2500 units Y

D. 2500 units Y, 500 units Z

15. Avocado Ltd produces small electronic components for kitchen appliances.
This year it expects to produce 10 000 units of component X. The variable
manufacturing cost of component X is $2 per unit, and the variable selling and
administrative cost of component X is $3 per unit. In addition, to produce
component X Avocado Ltd incurs annual fixed manufacturing cost of $50 000
and annual fixed selling and administrative cost of $60 000. If the target profit is
$2 per unit, and using cost plus pricing approach, the mark up percentage
based on total variable costs is:

A. 260%

B. 80%

C. 63.6%

D. 12.5%

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16. Which of the following would not be classified as environmentally induced
revenues?

A. Higher profit contributions resulting from producing greener products.

B. Higher profit contribution resulting from being able to charge higher prices for
environmentally friendly products.

C. Revenue from the sale of recyclable material.

D. None of the given answers.

17. While environmental management accounting (EMA) imposes costs on firms,


there are significant benefits. These benefits include:

A. Enhancing the firm's reputation in the community

B. Enabling the inclusion of both financial and non-financial data in the firm's
management information system

C. Reducing the risk of future litigation for breaching environmental laws

D. Enhancing the firm's reputation in the community AND reducing the risk of
future litigation for breaching environmental laws

18. In terms of the ‘quality' framework, which of the following would be classified
as a cost of internal failure activities?

A. Cost of employee training

B. Depreciation of testing equipment

C. Fines for environmental damage

D. Costs of occupational health and safety claims

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19. In terms of the ‘quality' framework, which of the following would be classified
as a cost of external failure activities?

A. Recycling of packaging materials from suppliers

B. Inspecting processes and products

C. Loss of future sales due to public awareness of the firm's non-environmentally


friendly activities

D. Cost of cleaning up plant interior following a chemical spillage

20. From the following list, calculate the total of environmental prevention costs.

Auditing environment risks $25,000


Employee medical costs following a chemical spillage $5,000
Fines for environmental damage $20,000
Costs of cleaning up plant following a leakage $30,000
Costs to reduce pollutants before manufacture $100,000
Cost of employee training $50,000
Estimated lost sales revenue $500,000
Cost of occupational health and safety claims $10,000
Cost of cleaning up polluted sites $100,000

A. $225 000

B. $150 000

C. $175 000

D. $255 000

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SECTION B: PROBLEM SOLVING QUESTIONS

QUESTION 1: COST MANAGEMENT

“Contemporary management accounting systems also include various tools and


techniques that provide information for cost management.” (Langfield-Smith,
Thorne, and Hilton, 2012: 736).

REQUIRED

For each of the following cost management tools, briefly explain how it can be
used to manage cost. (Give three points for each of the tools)

 Activity-based management
 Business process re-engineering
 Life cycle costing
 Target costing
 Managing throughput (Theory of constraint) (3 marks each)

Total marks for this question: 15 marks

QUESTION 2: SEGMENTED INCOME STATEMENT.

Paula of Pacific Island Apparel in Nadi Fiji, is organized into two divisions. The
company’s contribution format segmented income statement for last month is
given below:

Divisions
Total Company Cloth Leather
Sales $3,500,000 $2,000,000 $1,500,000
Variable expenses 1,721,000 960,000 761,000
s 1,779,000 1,040,000 739,000
Traceable fixed expenses:
Advertising 612,000 300,000 312,000
Administration 427,000 210,000 217,000
Depreciation 229,000 115,000 114,000
Total traceable fixed expenses 1,268,000 625,000 643,000
Divisional segment margin 511,000 $415,000 $96,000
Common fixed expenses 390,000
Net operating profit $121,000

Top management can’t understand why the Leather Division has such a low
segment margin when its sales are only 25% less than in the Cloth Division. As one

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step in isolating the problem, management has directed that the Leather
Division be further segmented into product lines. The following information is
available on the product lines in the Leather Division:

Leather Division Product lines


Garments Shoes Handbags
Sales $500,000 $700,000 $300,000
Traceable fixed expenses:
Advertising $80,000 $112,000 $120,000
Administration $30,000 $35,000 $42,000
Depreciation $25,000 $56,000 $33,000
Variable expenses as percentage of sales 65% 40% 52%

Analysis shows that $110, 000 of the Leather Division’s administration expenses
are common to the product lines.

REQUIRED

1. Prepare a contribution format segmented income statement for the Leather


Division with segments defined as product lines. (7.5 marks)

2. Management is surprised by the handbag product line’s poor showing and


would like to have the product line segmented by market. The following
information is available about the markets in which the handbag line is sold.

Handbag Markets
Domestic Foreign
Sales $200,000 $100,000
Traceable fixed expenses:
Advertising $40,000 $80,000
Variable expenses as a percentage of sales 43% 70%

All of the handbag product line’s administration expenses and depreciation


are common to the markets in which the product is sold. Prepare a
contribution format segmented income statement for the handbag product
line with segments defined as markets. (4.25 marks)

3. Refer to the statement prepared in (1) above. The sales manager wants to run
a special promotional campaign on one of the product lines over the next
month. A marketing study indicates that such a campaign would increase
sales of the garment product line by $200,000 or sales of the shoes product line
by $145,000. The campaign would cost $30,000. Show computations to
determine which product line should be chosen. (8.25 marks)

Total marks for this question: 20 marks

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QUESTION 3: TRANSFER PRICING.

The paper Division of Edu-Tech, Inc., produces photographic paper that can be
sold externally or internally to Edu-Tech’s School Photography Division. Sales and
cost data per package of photographic paper follows:

Unit selling price $3.95


Unit variable product cost $2.25
Unit product fixed cost* $1.20
Practical capacity 500,000 units (packages)

*$600,000/500,000

During the coming year, the Paper Division expects to sell 350,000 packages of
photographic paper. The School Photography Division currently plans to buy
150,000 packages of this paper on the outside market for $3.95 each. Penelope
Cruise, manager of the Paper Division, has approached Tom Cruz, manager of
the School Photography Division, and offered to sell the 150,000 packages of
paper for $3.75 each. Penelope explained to Tom that she can avoid selling
costs of $0.40 per package and she would split the savings by offering a $0.20
discount on the usual price.

REQUIRED

1. (i)What is the minimum transfer price the Paper Division would be willing to
accept?
(ii)What is the maximum transfer price that the School of Photography Division
would be willing to pay?
(iii) Should an internal transfer take place?
(iv)What would be the benefit (or loss) to the firm as a whole if the internal
transfer takes place? (6 marks)

2. Suppose Tom knows that the Paper Division has idle capacity. Do you think
that he would agree to the transfer price of $3.75? Suppose he counters with
an offer to pay $3.20. If you were Penelope, would you be interested in this
price? Explain with supporting computations. (4 marks)

3. Suppose that Edu-Tech, Inc.’s policy is that all internal transfers take place at
full manufacturing cost.
(i) What would the transfer price be?
(ii)Would the transfer take place? (5 marks)

Total marks for this question: 15 marks

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QUESTION 4: PERFORMANCE MEASUREMENT

“I know headquarters wants us to add that new product line,” said Fred
Halloway, manager of Kirsi Products’ East Division. “But I want to see the numbers
before I make a move. Our division’s return on investment (ROI) has led the
company for three years, and I don’t want any letdown.”
Kirsi Products is a decentralized wholesaler with four autonomous divisions.
The divisions are evaluated on the basis of ROI, with year-end bonuses given to
divisional managers who have the highest ROI. Operating results for the
company’s East Division for last year are given below:

Sales $21,000,000
Contribution margin 7,600,000
Fixed expenses 5,920,000

Divisional Operating assets $5,250,000

The company has an overall ROI of 18% last year (considering all divisions). The
company’s East Division has an opportunity to add a new product line that
would require an investment of $3,000,000. The cost and revenue characteristics
of the new product line per year would be as follows:

Sales $9,000,000
Variable expenses 65% of sales
Fixed expenses $2,520,000

REQUIRED

1. Compute the East Division’s ROI for last year; also compute the ROI as it
would appear if the new product line is added. (6 marks)

2. If you were in Fred Halloway’s position, would you accept or reject the
new product line? Explain. (2 marks)

3. Why do you suppose headquarters is anxious for the East Division to add
the new product line? (Show supporting computations) (3 marks)

4. Suppose that the company’s minimum required rate of return on


operating assets is 15% and that performance is evaluated using residual
income.

a. Compute the East Division’s residual income for last year; also
compute the residual income as it would appear if the new
product line is added. (6 marks)

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b. Under these circumstances, if you were in Fred Halloway’s position
would you accept or reject the new product line? Explain
(3 marks)

Total marks for this question: 20 marks

QUESTION 5: CONTEMPORARY APPROACHES TO MEASURING AND MANAGING


PERFORMANCE

The University of the South Pacific's Campus Life Section is entrusted with the
responsibility for the provision of services that foster a sense of community and
promote physical, social, spiritual and intellectual growth and development
among students in an atmosphere of understanding, responsibility, tolerance
and sensitivity. The Campus Life Section seeks to provide these services in the
most effective and efficient manner possible through teamwork from its staff who
are committed, dedicated and responsive to all issues that fall within the scope
of its responsibilities. Specifically, the services provided are in the areas of Student
Accommodation, Food outlets, Sports and Recreation, Health, Counselling,
(including Chaplaincy) and Security.
(Source: http://www.usp.ac.fj/index.php?id=campuslife)

REQUIRED

1. The Campus life manager wants to measure the performance of campus life.
Briefly explain how Balanced-scorecard can be a useful tool for measuring
performance. (5 marks)

2. For each of the FIVE selected services, identify ONE possible measure that
campus life manager could use to measure the success of its operation.

i. Student Accommodation
ii. Sports and Recreation
iii. Health
iv. Counselling
v. Security (5 marks)

Total Marks for this question: 10 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. Mark-up percentage
On total variable cost = Target profit + total annual fixed cost_______
Annual volume x total variable cost per unit

4. Transfer price = Outlay cost + Opportunity Cost

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