EXAMINATIONS – 2009

TRIMESTER 1

ACCY 302

ADVANCED
MANAGEMENT ACCOUNTING

Time Allowed: THREE HOURS

Instructions: Answer ALL FOUR questions.

Question One 20 marks

Question Two 30 marks
Question Three 30 marks
Question Four 20 marks
Total marks 100 marks

This is a closed book examination.

Present value and annuity tables are attached to this exam paper.

Non-programmable silent calculators may be used.

Non-electronic foreign language dictionaries may be used.

A copy of the case study, The Black Swan Hotel, is attached.

You are not permitted to use the copies of the case distributed prior to
this examination.

ACCY 302 CONTINUED

QUESTION ONE
Wellington Zoo is considering the acquisition of a group of four white tigers. These rare
creatures are expected to increase visitor numbers substantially. The director of the zoo has
asked you to write a report for her concerning the viability of the project. She explains the
situation to you:

“The new compound for the tigers will cost $750,000 and it will cost a further $200,000 to buy
the tigers and transport them to Wellington. There is a possibility that a local film director who
is keen on white tigers will give a substantial donation if we buy them, but this is by no means
certain and a decision has to be made before this possibility can be pursued.”

“It is also going to be really expensive to keep the tigers. The table below shows the estimated
annual expenditures required to look after the tigers.

$
Food costs 55,000
Zoo keepers 120,000
Heating costs 20,000
Animal health costs 30,000
225,000

The trustees of the zoo will only authorise the purchase of the tigers if I can assure them that
the rest of the zoo will benefit from the purchase. The rest of the zoo cannot subsidise the
tigers. Visitors currently pay $20 to enter the zoo and then, on average, spend $15 in total on
gifts and food that have cost us $10 to buy. Last year there were 250,000 visitors to the zoo.”

You further ascertain that it is zoo policy to use a cost of capital of 15% when assessing capital
projects and to only forecast five years ahead. The zoo’s commercial manager believes that the
new tigers will considerably increase interest in the zoo but they will have to be regularly
publicised to convert ‘interest’ into actual “visitors”. He estimates that, with additional
advertising expenditure of $100,000 per year, visitor numbers will rise by 10% on current
levels as soon as the tiger compound opens, and will remain at this new level for the next 5
years at least. Entry prices and the other income and costs related to each customer will remain
unchanged. The zoo does not pay tax and you should ignore inflation.

Present value and annuity tables are attached to this exam paper.

ACCY 302 CONTINUED

2
Required:
Write a report for the director analysing the decision to acquire the tigers. Your report should
include the following:
a) A calculation of the payback and net present value of the project if no donation is received.
(6 marks)
b) Your interpretation of the results provided by these figures.
(2 marks)
c) An explanation of the advantages and disadvantages of these two appraisal methods and
clear advice to the director on which method is most appropriate for this type of decision.
(4 marks)
d) Your explanation of the risks associated with this project and the way they should be taken
into account in the overall investment appraisal.
(4 marks)
e) Your explanation and analysis of any qualitative factors that you think should be
considered before the final decision is made and your overall recommendation to the
director taking these qualitative factors into account. Specifically address the issue of the
possible donation and how should this be treated in the decision analysis.
(4 marks)

[TOTAL OF 20 MARKS]

ACCY 302 CONTINUED

3
QUESTION TWO
The following questions relate to the case study, The Black Swan Hotel, which you were given
in week 12 of class. A copy is attached to this examination paper.

Because of your management accounting expertise, you have been asked to join the team of
consultants advising Hazel Clarke and have been asked to concentrate on the area of performance
measurement and improvement. Your first task is to produce a draft report for the next
consultants’ team meeting on the issues outlined below.

Required:
a) From the information available provide your assessment of the business performance of The
Black Swan Hotel last year. Highlight any key weaknesses and point out the main areas
where you think management effort should be concentrated to improve performance.
(5 marks)
b) Provide a critique of the form and content of Manuel's accounts, THEN redraft the
Operating Statement (for the months of November to April only) in a format that you
believe is more useful and fully explain the reasoning for the changes made.
(7 marks)
c) Outline the advantages and disadvantages of the financial performance measures presently
used by Hazel and Manuel to manage the performance of The Black Swan Hotel.
(4 marks)
d) Explain the key characteristics of an effective balanced performance measurement system
and outline ONE modern performance measurement model that could be utilised at The
Black Swan Hotel. (Diagrams may be used but need to be supplemented with appropriate
explanations)
(5 marks)
e) Suggest FOUR key performance measures and explain how they should be used within the
model described in the answer to (d) above to improve the effectiveness of performance
management and to drive performance improvement at The Black Swan Hotel.
(5 marks)
f) Advise Hazel how she could encourage key staff, e.g. the Chef and Bar Steward, to accept
the suggested performance management system and become committed to business
performance improvement at The Black Swan Hotel.
(4 marks)
[TOTAL OF 30 MARKS]
ACCY 302 CONTINUED
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QUESTION THREE
Basil owns and operates The Blue Duck Bar and Restaurant, located on Oriental Bay. His main
competitor is The Black Swan Hotel bar and bistro, which is 100 metres down the road. Four
years ago, Basil was having problems attracting and retaining customers so he implemented an
ISO9000-based quality management system and gained ISO9001 certification.

Building on the success of that certification process, Basil has recently completed the
implementation of a Total Quality Management (TQM) programme. This programme appears
to have already been successful, as Basil has noticed that the number of customers (both new
and repeat) has increased and that his operating costs have reduced. However, Basil is
concerned that as his competition is also focusing on quality improvement he may not be able
to sustain his improving financial performance.

Further, due to recent concerns over wine quality and security of supply, Basil has decided to
purchase the Granite Peak Winery, which is based in Marlborough. This winery, although
producing a good wine, has a poor ecological record and reputation. In an effort to address this,
the winery has recently obtained ISO14001 certification.

Basil is considering the implementation of a TQM programme into the winery. However, he
first needs to know the financial impact of Granite Peak’s current ecological problems. The
wine maker and accountant for the Granite Peak Winery has prepared the following
environmental revenue and cost analysis for the previous financial year. Total annual costs for
the plant were $3,274,175.

Environmental Revenue and Cost Analysis $

Employee training costs to improve the management of effluent disposal 14,000
Scrap value of broken bottles (31,403)
Cleaning of exhaust fans 12,228
Fine for minor leakage of untreated waste into the Wairau River 31,423
Inspection of drainage systems 38,553
Restoring land where waste was dumped in the 1990’s 42,465
Study tour to Hawkes Bay to select new equipment to reduce waste 11,923
Developing air pollution monitoring systems 37,243
Lost sales due to poor environmental reputation 9,468
Worker’s compensation claim due to poor environmental practices 14,130
Obtaining ISO14001 Environmental Management System certification 169,770
TOTAL 349,800

ACCY 302 CONTINUED

5
Required:
a) Explain the difference between TQM and quality assurance.
(3 marks)
b) State what a quality cost is and identify the FOUR cost of quality categories.
(3 marks)
c) Using examples of both financial and non-financial performance measures, advise Basil
how he could measure quality-related performance at The Blue Duck Bar and Restaurant.
(6 marks)
d) Prepare an environmental (ecological) cost report for Granite Peak Winery showing the
FOUR categories of ecological quality costs. Express these as a percentage of total
environmental costs.
(8 marks)
e) Using the environmental (ecological) cost report prepared in (a), make recommendations
to Basil as to what the winery should do to improve its ecological performance.
(4 marks)
f) Compare and contrast the four cost of quality categories to the four ecological quality
cost categories.
(6 marks)

[TOTAL OF 30 MARKS]

ACCY 302 CONTINUED

6
QUESTION FOUR

Robert’s Tyre Services (RTS) sells tyres for many types of vehicles, including those used at the
Wellington Zoo. RTS is a nationwide business and the Wellington area manager, Sarah Smith,
has operating and investment autonomy for operating the Wellington Division.

Sarah’s employment contract is up for renewal and the CEO, Robert Cowie, who is based in
Nelson, is considering how he should compensate Sarah and provide incentives for her to
manage the Wellington Division in line with the company’s objectives and strategies.

The CEO has four compensation proposals for Sarah to consider. These are:
1. Paying Sarah a fixed annual salary of $67,500.
2. Paying Sarah no salary but compensating her based on the Wellington Division’s Return
on Investment (ROI), with the calculation being based on operating income before any
bonus payments.
3. Paying Sarah a fixed salary ($45,000) plus a potential bonus based on ROI achieved.
4. Paying Sarah a fixed salary ($45,000) plus a potential bonus based on a combination of
ROI and the achievement of key non-financial performance targets relating to
environmental responsibility, employee training and development, and customer
satisfaction.

ACCY 302 CONTINUED

7
Required:
a) Evaluate each of these FOUR proposals Make sure you discuss the advantages and
disadvantages (risks) of each proposal for both Sarah and the company (RTS).
(10 marks)
b) RTS competes against Craig’s Tyre Warehouse (CTW) for its business. CTW is a
Wellington-based business that is a similar size and operates in similar areas to RTS. One
other proposal being considered by Robert is to evaluate Sarah’s performance by
benchmarking her divisional ROI against that of CTW and pay her a bonus based on the
result. Sarah considers this unfair, as she has no control over the performance of CTW.

Discuss whether Sarah’s complaint is valid.

(5 marks)
c) The salespeople at RTS are responsible for selling tyres and for providing a quality service
to their customers. The amount of sales made by each salesperson is easy to measure but
currently customer satisfaction is not measured. Sarah wants to compensate the sales staff
solely on the basis of a sales commission paid for each tyre sold. Her reasons for this are
that it provides a strong incentive for the sales staff to sell tyres and that RTS can only
afford to pay commission when it is earning revenue.

Evaluate Sarah’s proposal from both RTS’s and the sales staff point of view.
(5 marks)

[TOTAL OF 20 MARKS]

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ACCY 302
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 Present Value Tables
Value of $1 to be received in n years time at discount rate r
n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 25% 30% 35%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.800 0.769 0.741
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.640 0.592 0.549
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.512 0.455 0.406
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.410 0.350 0.301
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 0.328 0.269 0.223
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.565 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 0.262 0.207 0.165
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.210 0.159 0.122
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0.168 0.123 0.091
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 0.134 0.094 0.067
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 0.107 0.073 0.050

Annuity tables
Present value of $1 per year for n years at discount rate starting one year hence.
n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 25% 30% 35%
1 0.99 0.98 0.97 0.96 0.95 0.94 0.93 0.93 0.92 0.91 0.90 0.89 0.88 0.88 0.87 0.86 0.85 0.85 0.84 0.83 0.80 0.77 0.74
2 1.97 1.94 1.91 1.89 1.86 1.83 1.81 1.78 1.76 1.74 1.71 1.69 1.67 1.65 1.63 1.61 1.59 1.57 1.55 1.53 1.44 1.36 1.29
3 2.94 2.88 2.83 2.78 2.72 2.67 2.62 2.58 2.53 2.49 2.44 2.40 2.36 2.32 2.28 2.25 2.21 2.17 2.14 2.11 1.95 1.82 1.70
4 3.90 3.81 3.72 3.63 3.55 3.47 3.39 3.31 3.24 3.17 3.10 3.04 2.97 2.91 2.85 2.80 2.74 2.69 2.64 2.59 2.36 2.17 2.00
5 4.85 4.71 4.58 4.45 4.33 4.21 4.10 3.99 3.89 3.79 3.70 3.60 3.52 3.43 3.35 3.27 3.20 3.13 3.06 2.99 2.69 2.44 2.22
6 5.80 5.60 5.42 5.24 5.08 4.92 4.77 4.62 4.49 4.36 4.23 4.11 4.00 3.89 3.78 3.68 3.59 3.50 3.41 3.33 2.95 2.64 2.39
7 6.73 6.47 6.23 6.00 5.79 5.58 5.39 5.21 5.03 4.87 4.71 4.56 4.42 4.29 4.16 4.04 3.92 3.81 3.71 3.60 3.16 2.80 2.51
8 7.65 7.33 7.02 6.73 6.46 6.21 5.97 5.75 5.53 5.33 5.15 4.97 4.80 4.64 4.49 4.34 4.21 4.08 3.95 3.84 3.33 2.92 2.60
9 8.57 8.16 7.79 7.44 7.11 6.80 6.52 6.25 6.00 5.76 5.54 5.33 5.13 4.95 4.77 4.61 4.45 4.30 4.16 4.03 3.46 3.02 2.67
10 9.47 8.98 8.53 8.11 7.72 7.36 7.02 6.71 6.42 6.14 5.89 5.65 5.43 5.22 5.02 4.83 4.66 4.49 4.34 4.19 3.57 3.09 2.72

ACCY 302
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