University of the South Pacific

School of Accounting and Finance

AF201 MANAGERIAL ACCOUNTING

Semester 1, 2017 (Print Mode)

Final Examination

Duration
Reading time 10 minutes, Writing time 3 hours

Instructions
Answer the multiple choice questions on the special answer
sheet provided.
All questions are compulsory.
This examination carries a 55% 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.
You may use a non-programmable calculator. No other
materials are allowed.
There are twelve pages in this examination paper, including this
cover page.
Relevant formulae are provided for you on page 12.
Section A Multiple Choice 20 marks
Answer these questions on the special answer sheet provided.
Each question is worth 1 mark.

[Suggested time: 36 minutes]

Q1. When managers within the various units of an organisation are committed to
aligning their goals with the goals set by top management, the result is:

A. goal congruence.
B. planning and control.
C. responsibility accounting.
D. delegation of decision making.

Q2. Which of the following is not a benefit of decentralisation?

A. Specialised information about the local markets

B. Motivation
C. Relief to upper-level management
D. Narrow focus on the manager's own unit

Q3. Which of the following managers is held accountable for the profit of the
unit?

A. Revenue centre manager

B. Profit centre manager
C. Investment centre manager
D. Both B and C

Q4. Transfer prices should not be based on actual costs because:

A. inefficient producing divisions have higher costs of production, which

would be passed on by buying divisions.
B. producing divisions have no incentives to control costs.
C. inefficient units with high costs of production have no opportunity for
profit.
D. inefficient producing divisions have higher costs of production, which
would be passed on by buying divisions AND producing divisions have
no incentives to control costs.

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Q5. Fruities Ltd has two divisions, Durian Division and Juice Division. Durian
Division has an annual capacity of 10 000 units of durian juice concentrate. Juice
Division's annual requirement of durian juice concentrate is 8000 units. There is no
external market for durian juice concentrate; however, the Durian Division can
use its facilities to manufacturer prune paste, which is a very popular product
with unlimited external demand, at $13 per unit. The variable production cost of
one unit of durian juice concentrate at Durian Division is $6, and the variable
production cost of one unit of prune paste is $8. Durian division also incurs $1
additional shipping cost per unit when selling prune paste to external suppliers.
Using the transfer pricing formula, what is the per unit opportunity cost of selling
one unit of durian juice concentrate to Juice Division?

A. $0
B. $4
C. $5
D. $12

Q6. Which of the following are customer costs at the customer level?

i. Regular sales calls

ii. Customer inquiries
iii. Acceptance of sales order
iv. Provision of samples to customers

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

Q7. 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.

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Q8. 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

Q9. GoGo Furniture has collected the following customer-related information:

The total order level cost is:

A. $ 6 000
B. $16 000
C. $24 500
D. $29 000

Q10. Break-even time may be defined as:

A. the time from commencement of production of a new product to the

point where sufficient profit has been generated to repay the original
investment.
B. the time from the original concept to the point where sufficient profit has
been generated to repay the original investment.
C. the time from the first delivery to a customer of a new product to the point
where sufficient profit has been generated to repay the original
investment.
D. None of the given answers

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Q11. Doron Ltd has just computed the supplier performance index (SPI) of the
company's two suppliers, Xema and Zetta. Xema's SPI is 2.11 and Zetta's SPI is
0.99. Which of the following statements is correct?

A. Xema is a preferred supplier because it has a higher SPI than Zetta.

B. Xema is a preferred supplier because its SPI is greater than 1.0.
C. Both suppliers are considered poor quality suppliers, because their SPI is
higher than 0.50.
D. The SPI indices suggest that for every $1 purchase price, Doron has to
incur $2.11 supplier activity costs for Xema and $0.99 activity costs for
Zetta.

Q12. Internal failure costs refer to costs incurred:

A. in determining whether defects exist.

B. because defective products or services are delivered to customers.
C. in determining customer demand.
D. when defective products or services are detected before leaving the
business

Q13. Which of the following are modern approaches to managing costs?

A. Life cycle costing

B. Target costing
C. Both life cycle costing and target costing
D. Neither life cycle costing nor target costing

Q14. 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

Q15. Which of the following do traditional costing systems ignore?

i. Production costs
ii. Design costs
iii. Development costs
iv. Marketing and customer service costs

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

Q16. 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

Use the following information to answer questions 17 & 18.

Lazy Linda Kitchen Appliances manufactures small kitchen appliances such as

toasters and blenders. Last month Lazy Linda recorded the following quality
costs:

Q17. Lazy Linda's total appraisal cost was:

A. $ 5 000.
B. $ 9 500.
C. $12 000.
D. $18 000.

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Q18. Lazy Linda's total internal failure cost was:

A. $9 500.
B. $7 500.
C. $5 000.
D. $2 000.

Q19. 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.

Q20. Three processes are involved in the manufacturing of Chemical Z. First, the
raw mixture goes through the Mixing Process, then the Heating Process, and
finally the Bottling Process. The hourly production capacity of the three processes
is 400 units, 600 units and 400 units respectively. Assume that a recent process
improvement has resulted in a 20 per cent increase in the capacity of the
Bottling Process. This process improvement will:

A. increase the production of Chemical Z by 80 units per hour.

B. increase the production of Chemical Z by 120 units per hour.
C. increase the production of Chemical Z by 200 units.
D. have no effect on the production level per hour.

SECTION B: PROBLEM SOLVING QUESTIONS

QUESTION 1: FINANCIAL PERFORMANCE

Electromart is a retailer of electrical products and has four divisions. At the end of
each year the four divisional managers are evaluated and bonuses are
awarded based on ROI. Last year, the company as a whole produced a ROI of
13 per cent.
During the past week, management of the company’s Little River Division
was approached about the possibility of buying the operations of a competitor,
SuperEI, which wished to cease its retail operations. The following date relate to
recent performance of the Little River Division and SuperEI.

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 Little River SuperEI
Contribution Margin $2,520,000 $1,820,000
Fixed costs $2,150,000 $1,670,000
Invested capital $1,850,000 $625,000

If the acquisition occurs, the operations of SuperEI will be absorbed into the Little
River Division. The operations of SuperEI will need to be upgraded to meet the
high standards of Electromart, which would require an additional $375,000 of
invested capital.

1. Briefly discuss THREE behavioural issues related to awarding bonuses to

divisional managers based on ROI. (6 marks)

2. (i) Compute the current ROI for the Little River Division (4 marks)
(ii) Compute the Little River division’s ROI if SuperEI is acquired.
(5 marks)

3. What is the likely reaction of divisional management toward the

acquisition? Why? (2 marks)

4. What is the likely reaction of Electromart’s corporate management

toward the acquisition? Why? Show ROI computations of competitor to
support your answer. (5 marks)

5. Assume that Electromart uses residual income (RI) to evaluate

performance and desires a 12 percent minimum return on invested
capital.
(i) Compute the current RI of the Little River Division
(ii) Compute the Little River division’s RI if the competitor is acquired
and upgraded.
Will divisional management be likely to change its attitude toward the
acquisition? Why? (8 marks)
Total marks for this question: 30 marks
[Suggested time: 54 minutes]

QUESTION 2: TACTICAL DECISIONS

Answer the following independent questions;

(1) Process further a joint product

Jazzmyne Company manufactures two products from a joint process.

Information about the two joint products is as follows:

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 Product X Product Y
Anticipated production (in units) 10,000 15,000
Selling price per unit at split-off $60 $100
Additional processing costs per unit after split- $100 $55
off (all variable)
Selling price per unit after further processing $150 $175

The cost of the joint process is $1,750,000

Required

i. Determine which product will be sold at the split-off point and which
product will be processed further? Show all relevant calculations.
(4 marks)

ii. Based on your decision in (i) above, calculate the total profit for
Jazzmyne? Show all workings. (8 marks)

(2) Product Mix decision

The Dash Company manufactures two products: A and B. Information about the
products is as follows:

Product A Product B
Revenue per unit $150 $125
Variable costs per unit 80 70
Contribution margin per unit $70 $55
Total demand 15,000 units 12,000 units
Machine hours per unit 0.5 MH 0.25 MH

There are 5,000 machine hours available during the quarter.

Required

i. Which of the products should Dash Company produce if it can only

produce one of the products? Show all relevant workings. (4 marks)

ii. Assume that Dash Company uses half of the hours available to produce
Product A and half of the hours available to produce Product B. What is
Dash’s total contribution margin? Show all relevant workings. (4 marks)

Total marks for this question: 20 marks

[Suggested time: 36 minutes]

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QUESTION 3: TRANSFER PRICING.

Jesper, Inc., has a number of divisions including a furniture division and a motel
division. The Motel Division owns and operates a line of budget motels located
along major highways. Each year, the Motel Division purchases furniture for the
motel rooms. Currently, it purchases a basic dresser from an outside supplier for
$42. Carrie Burnside, manager of the Furniture Division, has approached George
Sanchez, manager of the Motel Division, about selling dressers to the Motel
Division. Carrie has researched the dresser costs and determined the following
costs:

Direct materials $8
Direct labor 4
Variable overhead 3
Fixed overhead 12
Total manufacturing cost $27

Currently, the Furniture Division has capacity to produce 75,000 dressers but is
only producing 60,000. The Motel Division needs 10,000 dressers per year.

REQUIRED

1. What is the maximum transfer price? The minimum transfer price? Should
the transfer occur? (4 marks)

2. Suppose that Carrie and George agree on a transfer price of $30. What is
the benefit to each division? What is the benefit to the company as a
whole? (6 marks)

3. Suppose that the Furniture Division were operating at capacity. What

would be the maximum transfer price? The minimum transfer price?
Should the transfer take place in this case? Why or why not? (5 marks)

Total marks for this question: 15 marks

[Suggested time: 27 minutes]

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QUESTION 4: CONTEMPORARY PERFORMANCE MEASUREMENT SYSTEMS &
SUSTAINABILITY

Environmental sustainability

We are committed to managing the environmental impact of our activities by

developing solutions that reduce both environmental impacts and costs.

Responsible business lending

How we are managing and reducing our impact through the products and services we
provide to our customers.

Climate change

Our Climate Change Statement confirms our support for international agreement to
limit the average global temperature rise to no more than 2°C above pre-industrial
levels and sets out the actions we are taking in support of this goal.

Managing our footprint

In our workplaces, we seek to identify, control, and improve our environmental

performance. Our online environmental reporting system provides a consistent
approach to assessing the environmental impact of our physical footprint and helps set
targets to improve our performance.

Sustainable sourcing

We manage the social and environmental impact of our procurement decisions and
work in partnership to influence social, environmental and governance performance of
our supply chain.

Source: http://www.anz.com/about-us/corporate-sustainability/environmental-

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REQUIRED

Using the above case as a reference point, answer the following questions

1. Briefly describe two ways in which sustainability can be added to the

Balanced Scorecard. (3 marks)

2. For each of the four perspectives of the balanced scorecard, suggest two
measures of sustainability that ANZ bank could use to measure its
performance. (12 marks)

Total marks for this question: 15 marks

[Suggested time: 27 minutes]

~ THE END ~

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

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