Solutions to Practice Questions for the ACCT2522 Final Exam

Please note that some information in the answers to the questions may not be relevant to you as the course has changed over the years. Question 1 [10 marks in total]
(a) item identified (a) explaining any of the two NVA identified Resources spent in housing other idle resources. Does not contribute to product. If inventory management practices are in place, the need to store materials would be minimal. Doesnt contribute to the production of the product resource spent simply in shifting materials from one point to the next. Cover for fixing problems elsewhere (upstream activity quality issues). (b) one root cause for each NVA (c)

Storing materials

Material Handling and movement

Unreliable suppliers resulting in inconsistent supply. Inflexible suppliers unable to deliver at short notice. Unable to predict production requirements accurately. Factory layout. Inadequate infrastructure for efficiently moving materials around.

Assess quality of recommendations: reference to appropriate method of reducing activity costs. reference to appropriate type of improvement. good recommendation.

Inspect and test helmet

Poor quality control in production area. Poor quality materials Inexperienced production staff.

Question 2 [35 marks in total] This is the solution relating to the lecture exercise. Question 3 [28 marks in total] Required: Data provided: Standard DM (see below) [note 1] DL DL rate ($20 plus 25% on costs) DM price Thus DL allowed (0.5*1800 units) Actual DM Purchased DM Used DL Used Actual DM price DL rate

0.2 Sq m 0.5 hr $25 $35 900

440 sq m 396 sq m 910 hrs $34 30

[note 1] std material is 0.16 sq metres; but scrap is 20%. Thus for 1800 units we need 360 sq metres. Thus need input = 0.16/0.8 = 0.2 sqm (a) Variance Analysis [12 marks]

For each answer, deduct 0.5 mark if no F or UF. Direct labour rate variance = AR*AH - SR*AH = 4,550 U - (1 mark for calculating direct labour rate: $20*1.25 = $25 Direct labour efficiency variance = SR*AH - SR*SH = 250 U Direct materials usage variance = SP*(AQ-SQ) = 1,260 U (1 mark for calculating SQ see note 1 above) Direct material price variance = AQ*(AP-SP) = $594 F

(b) Provide one likely explanation each for the direct material usage variance and the direct labour rate variance you calculated in requirement (a). [3 marks] Allow for carry over mistakes.

DM usage: Used more scrap than planned, possibly due to greater rework (confirmed by unfavourable labour variance) (allow for other logical explanations) DL rate: Changes in class/experience of labour used. (allow for other logical explanations).

Question 4 [12 marks in total] Required: (a) Using the opportunity cost approach, what is the minimum transfer price for one pair of Beastly Blue glass eyes? [1 mark] Min TP rule = Additional outlay costs per unit incurred by the supplying division. + The opportunity cost per unit to the supplying division.

Since there is excess capacity, there is no opportunity cost. The variable cost represents the additional outlay. Therefore, the transfer price should be $3 (in the absence of any extra admin costs incurred as part of the internal transaction). Two likely reasons: [3 marks]

(b)

Maria runs a profit centre and so wants to maintain profit margin Marias incentives may be based on profit margin. Helping John drags down her overall profit margin and ROI, even though she is making a small amount from the offer ($1 per unit margin on variable costs) Maria could be holding out to find external customers. If she agrees to help John, she may not be in a position to take advantage of external opportunities. Students may also comment on the fact that Maria is not interested in Johns profit or overall profit of the company (which is lower if John buys outside).

(c) Do you agree with this approach? Explain your answer in light of the Agency Theory and the Expectancy Theory. [8 marks] Answers should briefly describe the theory and apply it 3

AT: alignment of interests (group interests aligned with divisional interests); both divisions have the same interests (max. group performance). Thus more likely to agree on a transfer price. (However, may not solve all problems as presumably managers are also evaluated based on other measures) ET: group performance is noisy and the link between effort, performance and reward may not be there.

Suggested solutions to Practice Question 6 [25 marks] 1. Please see attached spreadsheet (12 marks)
ANNUAL INCOME Revenue from road tolls less road maintenance less machine operating cost Pre-tax annual incremental benefit Tax After-tax annual benefit Add tax benefit from depreciation Net annual cash inflow Time 0 Discount factor After tax inflow PV after tax Total NPV 1 -285000 -285000 -230925 0.3 percent 35000 -12000 -2000 21000 6300 Total 14700 300 15000 Time 1 0.893 15000 13395 Time 2 0.797 15000 11955 Time 3 0.712 15000 10680 Time 4 0.636 15000 9540 Time 5 0.567 15000 8505 285000 ONE-OFF Clearing cost levelling tarring sealing lighting and signage new machine 90000 55000 30000 20000 80000 10000

2. Looking for answer (yes/no) but more consideration of (1) reliability of the numerical data provided (2) qualitative factors not incorporated into NPV analysis e.g., detriment to environment, lifestyle of residents. (3 marks)

Suggested Solutions for Practice Question 7: 1. N/A 2. Make-or-buy analysis under ABC. Costs that will be avoided if bottles are purchased: Direct material Activity costs: Product-sustaining costs Batch-level costs Unit-level costs Total avoidable costs Total cost of purchasing (500,000 bottles @ $0.95 per bottle) Cost that will be saved if bottles are purchased Solutions for Practice Question 8 1. Target price Target profit Target cost = $300 + (300 x 10%) = $330 = $330 x 25% = $82.50 = $330 $82.50 = $247.50 $100,000 $720 $253,000 $150,000 $503,720 $475,060 $28,720

2. Hamptons cost is too high to achieve the required profit margin, meaning that some form of cost reduction is required. Value engineering is a cost reduction and process improvement technique that may allow the company to produce the printer at its targeted cost of $247.50. Engineers will examine the unit in terms of parts and process complexity, work with production and with suppliers and make recommendations of where changes may be made to reduce cost without reducing customer value. Suggested solutions for Practice Question 9 1.
Customer Defined Quality Dimension Prevention Durability Casting Downtime Warranties (cast) Product Recall Training Energy Efficiency Testing (energy) Regulator Scrap Product Recall Training White Gold Plating Gold Scrap Warranties (gold) Testing (gold) Product Recall Appraisal Internal Failure $ 8,000 $ $ $ 3,000 $ 20,000 $ $ 3,000 $ $ 25,000 $ 50,000 25,000 $ 50,000 12,000 $ 50,000 25,000 50,000 External Failure $ $ $ $ $ $ $ $ $ $ $ $ $ $ Total 8,000 25,000 50,000 3,000 20,000 12,000 50,000 3,000 25,000 50,000 25,000 50,000

Training Totals Percentages 2. Conformance Cost: Non Conformance Cost: NC to C Ratio

$ $

3,000 9,000 3%

$ 45,000 14%

45,000 14%

225,000 69%

$ 3,000 $ 324,000 100%

$ 54,000 $ 270,000 5:1

3. Four recommendations: Not consistent with customer ranking NC higher than C need to reverse the ratio Analyse why cost of recall is so high Need to estimate lost sales etc Need to increase prevention cost Suggested Solutions for Practice Question 10 Refer to BDMM Chapter 2 readings for Week 1 for more assistance if necessary. 1. The ideal answer would: Define the difference between a functional and a processual view. Outline why a processual view is superior (weaknesses of the functional view and the strengths of the processual view. Provide practical illustrations emphasising the argument. 2. The ideal answer would: Correctly define two of the four aims of process analysis Correctly identify a process analysis of management accounting tool that could assist in fulfilling the aims selected Justify how each selected tool assist

SUGGESTED SOLUTION TO QUESTION 12 (15 marks)

(1) This is a qualitative question so there is no model answer. But each answer should cover the following points: Dan is correct to the extent that in the short term there is a trade off between cost and quality But in the long term spending on quality, particular preventive activities such as quality audit (the example given by Dan) and appraisal activities such as inspection (the other example from Dan) can lower internal/external failure costs such as rework and warranty claims. Thus I also disagree with Dans comment if we consider a longer term perspective. Dan also refers to optimal level of quality: and according to the philosophy of total quality management, there is not optimal spending level: the optimal level of quality is zero defect. (2) (a) Proportionality constant, or k = c/d^2 d=5

k=10/25 = 0.4 L=0.4 * (4*4) = $6.4 Note that target here is zero. (b) Each answer should cover the following: QLF estimates the cost of variability (cost of deviations from the target). This estimate can be incorporated into the cost of quality approach, which is a framework used to categorise and recognise the cost of quality in a company. The four categories are appraisal, prevention, internal failure and external failure. In this case, the estimated quality cost using QLF relates to rework, thus can be grouped into internal failure cost category. Alternatively, if the company believes that this is an estimated cost of customer dissatisfaction if the defective egg timer is realised to customers, then this cost can be seen as an external failure cost.

SUGGESTED SOLUTION TO QUESTION 13 - Removed

SUGGESTED SOLUTION TO QUESTION 14 (19 marks) a) $ Required investment Purchase price of new equipment Disposal of existing equipment tax benefit (40%) Total Investment Contribution Margin from Product Using new equipment [18,000 x ($40-$14)] Using the existing equipment [11,000 x $40] Increase in contribution margin Less: Tax effect (0.4 x 226,000) Increase in annual cash flow after tax Depreciation Tax shield Depreciation on new equip Depreciation on old equip Increased depreciation charge Tax shield benefit @ 40% Recurring annual cash flow $ 600,000 (48,000) $552,000

468,000 242,000 226,000 (90,400) 135,600

120,000 24,000 96,000 38,400 $174,000

Note: the new equipment is capable of producing 20000 units, but GE can only sell 18000 annually. b) Errors in sales managers analysis: 1. Required investment

The cost of the market research study ($88,000) is an irrelevant cost because it was incurred last year and will not change regardless of whether the investment is made or not The loss on the disposal of the existing equipment will not result in an actual cash cost as shown by the sales manager. The loss on disposal results in a reduction of taxes which reduces the cost of the new equipment.

2. Annual cash flows The sales manager considered only the depreciation on new equipment rather than the additional depreciation which would result from the acquisition of the new equipment. The sales manager also failed to consider that the depreciation is a non-cash expense, which provides a reduction in cash outflows only through tax The sales managers use of the discount rate was incorrect. The discount rate should be used to reduce the value of future cash flows to their current equivalent at time zero. c) NPV: Annual cash flow Annuity discount factor (r =14%, n= 5) = 3.433 Less: initial investment Net present value $174,000 597,342 (552,000) $45,342

d) Should GE invest in the new equipment?

NPV is of amended analysis positive: decision rule is to accept the project Consideration should be given to other issues that could affect the decision. Examples include: o Risk of inaccurate estimates made (eg sales estimates for the product) o New equipment: How easily can it be co-ordinated into the existing production process Is any additional training required for employees to operate this new machinery

SUGGESTED SOLUTION TO QUESTION 15 1) (a) Assuming demand is met, there will be 80 wings and 100 wands. A 80 15*80 10*80 13*80 B 80 + 100 180*15 180*2 C 100 10*100 15*100 8*100 Total time 2200 4200 1160 1840 Avail time 2400 2400 2400 2400 Slack 200 (1800) 1240 560

Units req. D1 D2 D3 D4

(b) Optimal product mix: Wings 90 20+20+5 = 45 8 Wands 100 20+10+10 = 40

Price Direct materials

Throughput contribution Time needed from D2/unit Throughput

45 15 3

60 30 2

Produce wings first and then wands. Demand for wings is 80 units. 80 x 15 = 1200 mins. Leaves 2400-1200 = 1200 mins for wands. 1200/30 = 40 units of wands. Therefore product mix is wings: 80 units wands: 40 units (c) Units Price Revenue Less direct mat Throughput cont. Less operating exp Net profit Wings 80 $90 $7 200 80*45 = 3600 3 600 Wands 40 $100 $4 000 40*40 = 1600 2 400 Total $

$11 200 5 200 $6 000 5 000 $1 000

2. Removed 3. Usefulness of TOC is reduced. (a) D2 is the constraint when everything runs smoothly. Variability is a problem, but it can be dealt with. For example, a buffer can be set up at D2 in order to product it from D1 variability. Inspections can be set up to make sure low quality inputs do not affect D2 production (b) if Theresa continues to accept rush orders the product mix plan goes out the window, and throughput (most likely) ceases to be maximised. (a) As the interdependencies are sequential everyone suffers from poor performance at D1 (although people at D1 will not bear the full brunt of the quality cost, as long as the units leave their department). - There is going to be idle time at other departments leading to a reduced efficiency rate. - Increased scrap. To the extent that poor quality products flow through there is going to be more time trying to identify and correct them. - Given that manufacturing departments are cost centres and costs will be higher, employees are going to suffer financially. - Similarly for sales department, which is a revenue centre: if faulty products reach the customer the sales staff are going to suffer with loss of market share and reduced sales. - The company as a whole suffers overall. (b) The rush orders are great for sales staff (assuming the products are not faulty) because they increase revenues and look good from a performance perspective. Customers are likely to rate them more highly. However it means increased costs (eg set up) for manufacturing

and makes planning much more difficult, which will impact on overall measured performance, and most likely lead to a reduction in remuneration.

3. - Manufacturing employees will be feeling overworked and irritable at lack of control over their measured performance (effort = performance relation). D2,3 and 4 employees will be suffering because of D1 quality problems and rush order effects. This may result in reduced effort, sick days, dysfunctional behaviour etc. - Sales staff are motivated to accept every rush order that comes their way they will be enthused with every extra sale made and make efforts to increase them as long as they are not bearing the brunt of the extra costs associated with rush sales. (4) Possible answers (a) Make D1 bear the brunt of any costs associated with their machine breakdowns and variable quality. Ensure that D2, 3 and 4 are not penalised for idle time due to D1 inefficiencies ie accumulate costs associated with D1 and charge them back to D1. - Install a quality programmes to prevent more problems. - Training programmes for staff at D1 (b) Accumulate extra costs associated with rush orders and charge them to the sales department, rather than production. The sales manager will choose rush jobs more carefully and not try to push them all through. (c) Look at ways to elevate constraint D2 etc

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SUGGESTED SOLUTION TO QUESTION 16 Direct material variance for Frames and Lenses. Frames DM quant variance

= SP (AQ SQ) = $ 2134 U = AQ (AP SP) = $ 3104 U = SP (AQ SQ) = $ 15035 U = AQ (AP SP) = $ 4753 F

DM price variance Lenses DM quant variance

SP = $33,000 / (3x5000) = $2.2 AP = $48000/20000 = $2.40 PQ = 20000 AQ = $37248/$2.40 = 15520 SQ = 4850 x 3 = 14550 SP = $93000 / (6x5000) = $3.1 AP = $88800/30000 = $2.96 PQ = 30000g AQ = $100492/2.96 = 33950 SQ = 6 x 4850 = 29100

DM price variance

Direct labour rate and efficiency variances DL rate variance = AH (AR SR) = $1309.20 F = SR (AH SH) = $10912.50 U AH = 96903/$14.80 = 6547.5 hrs AR = $14.80 SR = $90000/(5000 x 1.2) = $15 SH = 1.2 x 4850 = 5820 hrs

DL eff variance

SUGGESTED SOLUTION TO QUESTION 17

1. Direct method Provider of Support Repair Power Total support department costs allocated Overhead costs traceable to production departments Total overhead cost Direct labour hours (DLH) (10 X 1,000) (40 x 1000) Overhead rate per hour (total overhead /DLH) Cost to be Allocated $24,000 $125,000 Moulding Proportion (50/450) (420/480) Production Department Assembly Amount Proportion $2,667 $109,375 $112,042 $100,000 $212,042 10,000 $21.20 (400/450) (60/480)

Amount $21,334 $15,625 $36,958 $160,000 $196,958 40,000 $4.92

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Solution to Question 18: 1. The opportunity cost to Tom Corporation of producing the 2,000 units of XX is the contribution margin lost on the 2,000 units of TT that would have been forgone, as calculated below: Selling price Variable costs per unit: Direct materials Direct manufacturing labour Variable manufacturing overhead Variable marketing costs Contribution margin per unit Contribution margin for 2,000 units $25 $4 $3 $2 $4

$13 $12 $24,000

2. The minimum price for XX should be $11 as incremental costs for XX are $11 as calculated below: Minimum selling price Variable costs per unit: Direct materials Direct manufacturing labour Variable manufacturing overhead Variable marketing costs Contribution margin per unit ? $4 $3 $2 $2

$11 0

Solution to Question 19: (NOT RELEVANT) An allowable cost is the cost at which the product must be produced if it is to be sold at the target selling price and generate the target profit margin. A product level target cost is the difference between the current cost and the target cost reduction objective (that is, a realistic assessment of the product designers, product engineers and suppliers to remove cost from the product). The main difference between the allowable cost and the product-level target cost is that the allowable cost is derived from the selling price, whereas the profit-level target cost is derived from the current cost. Some firms use the product-level target cost as the focus for cost reduction rather than the allowable cost as it is an achievable target, although only with considerable effort and creativity.

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Solution to Question 20: 1. Relative sales value method of allocation: Joint cost Joint products $750,000 MSB CBT Total Sales value at split-off point $ 300,000 $ 900,000 $1,200,000 Relative proportion 25% 75% Allocation of joint cost $ 187,500 $ 562,500 $750,000

The joint cost allocated to MSB is $187,500. 2. Incremental revenue from processing further: (60,000 * ($12.50 - $5.00) Further processing cost Increase in contribution margin if process further, i.e., coated $450,000 $(250,000) $200,000

Therefore, the contribution would decrease by $200,000 if Cygnet Sawmill chooses not to process the mine support braces (MSB) beyond the split-off point.

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