University of Dundee School of BusinessADVANCED MANAGEMENT ACCOUNTING
MODULE 3MA – BU30003
|ANSWER FOUR QUESTIONS, THREE FROM SECTION A AND ONE FROM SECTION B|
ALL QUESTIONS CARRY EQUAL MARKS
SHOW ALL WORKINGS
The use of dictionaries is not permitted in this examination
Answer THREE questions from this section
- Treble Ltd manufactures specialised cars, vans and trucks. Amongst the various Treble Ltd plants around the United Kingdom is the Parkhead Cover plant. Covering made of various materials – primarily vinyl and upholstery fabric - are sewn at the Parkhead Cover plant and used to cover interior seating and surfaces of Treble Ltd’s products.
Luca Connell is the plant manager for the Parkhead Cover plant. This was the first Parkhead Cover plant in Scotland. As other plants were opened, Connell, in recognition of his management ability, was given responsibility for managing them. Connell functions as regional manager, although the budget both for him and also for his staff is charged to the Parkhead Cover plant.
Connell has just received a report indicating that Treble Ltd could purchase the entire annual output of Parkhead Cover from outside suppliers for £35 million. Connell was astonished at the low outside price because the budget for Parkhead’s operating costs for the coming year was set at £52 million. Connell believes that Parkhead will have to close down operations at the Parkhead Cover plant in order to realise the £17 million annual costs savings.
The budget for Parkhead Cover’s operating cost for the coming year is presented below
Parkhead Cover plant
Annual budget for operating costs
Depreciation – equipment
Depreciation – building
Plant manager & staff
Head Office expenses
The following details regarding the plant’s operation have also been provided:
- The annual (recurring) costs that are relevant to the decision of closing the plant
- The annual costs that are not relevant to the decision of closing the plant
- Any non-recurring costs that would arise due to the plant closure.
Show all workings and indicate any assumptions made in your calculations.
- Bayo Ltd manufactures and markets office communications systems. During the year ended 31 December 2018, Bayo Ltd made an operating profit of £30 million on sales of £360 million. However, the directors are concerned that products do not conform to the required level of quality and Bayo Ltd is therefore not fulfilling its full potential in terms of turnover and profits achieved.
The following information is available in respect of the year ended 31 December 2018:
- Production data:
Units manufactured and sold 18,000
Units requiring rework 2,100
Units requiring warranty repair service 2,700
Design engineering hours 48,000
Process engineering hours 54,000
Inspection hours (manufacturing) 288,000
- Cost data
Inspection cost per hour (manufacturing) 50
Warranty repair cost per repaired unit (customer service) 4,600
Design engineering cost per hour 96
Process engineering cost per hour 70
Customer support cost per repaired unit (marketing) 240
Rework per communication system reworked (manufacturing) 4,800
Transportation costs per repaired unit (distribution) 280
All of the above costs are variable costs.
(iii) Staff training costs amounted to £180,000 and additional product testing costs of £72,000 were incurred.
- The marketing director has estimated that sales of 1,800 units were lost as a result of public knowledge of poor quality at Bayo Ltd. The average contribution per communication system is estimated at £7,200.
A detailed analysis has revealed that the casings in which the communications systems are housed are often subject to mishandling in transit to Bayo Ltd’s manufacturing premises. The directors are considering two alternative solutions proposed by the design engineering team which are aimed at reducing the quality problems that are currently being experienced. These are as follows:
Option 1: Increase the number of immediate physical inspections of the casings when they are received from the supplier. This will require an additional 20,000 inspection hours.
Option 2: Redesign and strengthen the casings and the containers used to transport them to better withstand mishandling during transportation. Redesign will require an additional 4,000 hours of design engineering and an additional 10,000 hours of process engineering.
If Bayo Ltd chooses to inspect the casings more carefully, it expects to eliminate rework on 360 communication systems whereas if it redesigns the casings it expects to eliminate rework on 480 communication systems. In addition, if incoming casings are inspected more carefully, Bayo Ltd estimates that 300 fewer communication systems will require warranty repair and that it will be able to sell an additional 150 communication systems. If the casing is redesigned, the directors estimate that 420 fewer communication systems will require warranty repair and that an additional 180 communication systems will be sold. Only one of the solutions being proposed can be carried out.
- Prepare a Cost of Quality (COQ) report which shows actual prevention costs, appraisal costs, internal failure costs, and external failure costs for the year ended 31 December 2018 before taking into consideration any of the two options proposed by management.
- estimate of the financial consequences of each of the proposed options and advise the directors of Bayo Ltd which option should be chosen.
- Dundee Fashion makes fashion products and competes on the basis of quality and leading edge designs. The company has two divisions: clothing, and cosmetics.
The company has invested £600m in assets in its clothing manufacturing division. Sales generated from investment were £500m in 2017/18 and the net profit margin for the clothing division was 30%.
The company has invested £2,000m in assets in its cosmetics division. Sales generated from investment were £1,600m in 2017/18 and the net profit margin for the cosmetics division was 25%.
The previous return on investment was 22% for both divisions.
Cost of capital is 12% for both divisions.
Further information available for the clothing division is as follows:
- Non-cash expenses totalling £20m
- Non-capitalized leases valued at £40m in 2017/18 which were not subject to amortisation.
The Chief Executive of Dundee Fashion has told his divisional managers that the division that ‘performs the best’ in 2017/18 would get a performance related bonus.
(a) Calculate the return on investment (ROI) and residual income (RI) for both divisions.
(b) Comment on your results from part (a) and state which method of evaluation would be most useful when comparing divisional performance and why.
(c) Calculate the economic value added (EVA) for the clothing division.
(d) Outline three objectives of EVA as noted by O’Hanlon and Peasnell (1998).
- Lighting Solutions is a divisionalised manufacturing organisation. Division B produces industrial lamps for which it purchases LED bulbs from outside (at £125 per bulb) and also from Division A of Lighting Solutions.
The LED bulbs produced by Division A are transferred at £120 each to Division B. This price is set by adding a 20% profit mark-up to the variable cost of production. Division A operates at its full capacity. The manager of Division A is concerned that this pricing policy is unfair and claims that the price should be set at 10% profit mark-up on full cost.
The following additional details are provided:
The manufacture of one LED bulb consumes 2 minutes of labour at £300 per hour. Fixed production overheads are to be absorbed to the bulbs at 200% of the labour cost.
Division A is not presently supplying the external market though it could supply any quantity at the present market price of £125 per bulb. However, supplying to the external market would result in a cost to Division A of £4 per bulb on selling and distribution costs.
Lighting Solutions ultimate objective is to maximise the profit of the whole company.
(a) Calculate the proposed transfer price at 10% profit mark-up on full cost basis.
(b) (i) Calculate the maximum transfer price that is acceptable to Division B.
(ii) Calculate the minimum transfer price that is acceptable to Division A.
(iii) Discuss the appropriateness of present and proposed transfer prices.
(c) Discuss how the dual rate pricing policy could be used to overcome transfer pricing issues in Lighting Solutions.
(d) Provide examples of the transfer prices practices used by corporations to avoid taxes in developing and developed countries. You should make reference to Sikka and Willmott (2010).
Answer ONE question from this section
- “At present, sustainability is forcing companies to find ways to improve environmental performance in parallel with economic growth... It is not an easy task to integrate environmental issues into traditional accounting systems. There are … barriers to the development of environmental management accounting.”
With reference to the above statement, critically discuss the barriers to the development of environmental management accounting and the impact on corporate environmental performance.
- “The Balanced Scorecard (BSC) has been defined as one of the major innovations in the recent history of management accounting (Atkinson et al., 1997; Ittner and Larcker, 2001), and it is said to respond to a call for integrating financial and nonfinancial performance measures in order to support strategy implementation, increase performance, and improve strategic decision making (Kaplan and Norton 1992, 1996).”
(Busco & Quattrone, 2015)
Critically evaluate the extent to which the Balanced Scorecard has achieved the objectives outlined above.
END OF PAPER