Accounting Cost leadership
11 Question 1
Select the best answer for each of the following unrelated items. Answer each of these items by
giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1).
If more than one answer is given for an item, that item will not be marked. Incorrect answers will
be marked as zero. Marks will not be awarded for explanations.
Note:
1 mark each
a. Cost leadership is an example of which of the following?
1) Strategic direction
2) Pricing tactic
3) Competitive strategy
4) Corporate-level strategy
b. In a management control system, a detector performs which of the following functions?
1) Detects behaviour
2) Measures what happened
3) Transmits information
4) Determines the significance of past events
Advanced Management Accounting Assignment 3, Winter Session • 2
c. Which of the following is the best explanation for an unfavourable materials quantity
variance?
1) The price of direct materials was greater than planned at standard.
2) More product was produced than was planned for in the budget.
3) Production equipment was not properly maintained,
4) Production exceeded sales.
d. Which of the following is a benefit of decentralization?
1) Decentralization allows for easier communication within the organization.
2) Decentralization improves profits through intercompany sales.
3) Decentralization ensures optimal decisions.
4) Decentralization allows faster response to local conditions.
e. Which of the following statements is the best example of moral hazard?
1) A manager accepts risk knowing that any negative consequences will be borne by another
person.
2) Perquisites will be over-consumed by managers.
3) Individuals will pursue their own goals to the detriment of the firm.
4) Managers incur additional costs to monitor employees who are not properly trained.
Note:
Use the following information to answer parts (f) and (g).
Pagget Inc. receives an average of 600 orders per year for product X. The product requires five
hours of manufacturing time on dedicated equipment. The equipment has an annual capacity of
5,000 hours.
f. What is the average wait time needed for production?
1) 1.75 hours
2) 3.75 hours
3) 5.00 hours
4) 6.50 hours
g. What is the excess capacity of the dedicated equipment?
1) 1,450 hours
2) 1,500 hours
3) 2,000 hours
4) 2,450 hours
h. Which of the following best describes the time interval from customer order to product
delivery?
1) Order receipt time
2) Manufacturing lead
3) Customer response time
4) Order-delivery time
Advanced Management Accounting Assignment 3, Winter Session • 3
i. Which of the following would be included in a quality cost report as an appraisal cost?
1) Product testing
2) Suppliers’ evaluations
3) Liability claims
4) Machine repairs
j. According to the theory of constraints, which of the following actions will improve
throughput?
1) Reduce set-up time through engineering redesign.
2) Increase selling price relative to input costs.
3) Avoid arbitrary allocation of fixed overhead.
4) Use activity-based costing to allocate non-manufacturing costs to product.
k. Which of the following is a weakness of results controls?
1) They give less autonomy to employees.
2) Conflicting objectives may cause problems between divisions.
3) They are expensive to implement.
4) They are not useful if the results are controllable by the employees.
5½ Question 2
The following information pertains to Winsome Inc. for the year ended December 31, 2015:
Net operating income before taxes $ 1,650,000
EVA-adjusted total capital, December 31, 2015 3,600,000
Research costs in 2015 expensed under GAAP 98,000
Development costs in 2015 expensed under GAAP 120,000
Development costs in 2015 capitalized under GAAP 260,000
Impairment loss of goodwill included in the calculation of GAAP income 13,000
Total depreciation of all equipment 125,000
Additional information:
Equity accounts for 59% of the firm’s capital structure.
The marginal tax rate is 30%.
The market yield on equivalent debt is 7.5%.
The cost of equity is 12%.
Total debt is 41% of capital (debt + equity).
All research and development (R&D) costs were incurred January 1, 2015.
Capitalized development costs are amortized over a period of five years in GAAP income;
R&D costs are amortized over the same period for economic value added calculations.
Required
3½ a. Determine the economic value added (EVA) for the year ended December 31, 2015.
2 b. Explain the significance of your answer to part (a). Identify and briefly explain the major
differences, if any, between EVA income and GAAP income.
Advanced Management Accounting Assignment 3, Winter Session • 4
4 Question 3
Lambi Inc. manufactures wool sweaters. It has two divisions, spinning and knitting. The spinning
division is responsible for converting raw wool into yarn. The yarn can be sold externally or
transferred to the knitting division, which transforms the yarn into sweaters. Each sweater requires
10 skeins of yarn. Knitting can produce 7,000 sweaters per year and is currently at full capacity,
selling all the sweaters they can make.
Following a reorganization, each division will operate as a profit centre with full autonomy over
their operations.
The manager of the knitting division suggests that the maximum price the division can pay for
yarn transferred from spinning is $7.09 per skein (one unit of yarn). The following information
supports this suggestion:
Price that external customers are willing to pay for one sweater $ 230.00
Costs to produce sweater
Direct labour 80.00
Variable overhead 4.50
Fixed overhead 8.60
Direct materials (other than yarn) 20.00
Total cost per unit 113.10
Target profit margin 46.00
Total cost and margin $ 159.10
Maximum transfer price for 10 skeins of yarn $ 70.90
Currently the knitting division pays $7.10 for one skein for yarn from an outside supplier.
The manager of the spinning division disagrees with the proposed transfer price of $70.90 for 10
skeins. The division is operating at full capacity and can sell all the yarn it produces to external
customers for $8.50 per skein. Moreover, the director says: “For each skein, my direct material
costs $3.00, direct labour cost is $1.50, variable overhead is $2.25, and fixed overhead is $1.10. I
cannot spend $7.85 to make yarn and sell it for $7.09.”
Required
2 a. Determine the minimum and the maximum transfer price that could be used to account for the
transfer of yarn from the spinning division to the knitting division.
1 b. Determine whether it would be beneficial for the company as a whole if yarn were transferred
to the knitting division at the suggested price of $7.09 per skein. Show all your calculations.
1 c. Assume that management is eager to use the yarn produced internally because it is of better
quality. As a result, it imposes a transfer price of $7.00 and requires that spinning provide
knitting with all the yarn it needs. Explain the impact of transferring the yarn to the knitting
division at $7.00 on the performance of each division and specifically on each manager.
Advanced Management Accounting Assignment 3, Winter Session • 5
5 Question 4
Nature Go is a successful company located in British Columbia. Nature Go manufactures a
variety of prepared foods for hikers, campers, and outdoor enthusiasts. Its protein snack bar is
produced in two versions, Energy X and Energy Y. Energy Y is classified as a premium bar
because it is a more expensive product containing premium nuts. In 2015, the Canadian energy
bar market grew by 11%, but Nature Go had some difficulty maintaining its market share. The
CEO asked you to prepare an analysis of last year’s results based on the following budgeted and
actual data. Actual sales prices and costs were exactly as budgeted, but actual profits were
approximately $78,000 less than what was originally budgeted.
Actual data for energy bar market
Unit sales (cases) 2014 2015
Basic bars 370,600 403,954
Premium bars 85,400 102,206
Total 456,000 506,160
Actual data for Nature Go
Unit sales (cases) 2014 2015
Energy X bars 44,472 46,150
Energy Y bars 7,686 8,895
Total 52,158 55,045
Budgeted 2015 sales for energy bar market
Basic Premium
Unit sales (cases) 407,700 93,900
Budgeted 2015 data for Nature Go
Energy X Energy Y
Unit sales (cases) 48,924 8,451
Sales price (per case) $65 $90
Variable cost (per case) $28 $35
Required
1½ a. Calculate the 2015 market share variance and the 2015 market size variance for Nature Go.
1½ b. Calculate the 2015 sales quantity variance and show that it is equal to the sum of the market
share variance and the 2015 market size variance.
2 c. Using the data provided in the question, explain why actual profit for Nature Go was less than
budgeted profit for the 2015 fiscal year.
Advanced Management Accounting Assignment 3, Winter Session • 6
4½ Question 5
Uncertainty exists in every facet of life, despite strategies that promote awareness and caution;
therefore, organizations have to make decisions factoring in a risk quotient. Given that risk is a
factor, regardless of efforts for diversification and preparedness, there are several methods to
mitigate and handle risk.
Required
Describe three risk mitigating methods.
5 Question 6
A management control system (MCS) should ensure that the behaviours and decisions of
employees are consistent with the organization’s objective and strategies. Contingency
theory explains why there is no single best way to lead an organization.
Required
2 a. The planning and control cycle consists of five stages. Briefly outline the stages that relate
directly to control and explain which control devices are used in each of those stages.
3 b. Identify two factors that lead to variations in the way control systems are designed and
implemented. For each factor, provide a brief example of how the factor influences design
specifically in regards to at least one of the control devices or stages in the control cycle.
15 Question 7
Golden Moments Ltd. case
Golden Moments Ltd. is a service company that provides home care assistance and other services
to seniors. Marg Addison started the business five years ago when she witnessed her mother’s
struggle to live in her own home. Golden Moments offers services not provided by government
agencies — services include yard maintenance, minor repairs, hanging a picture, setting up a
home theatre, or dog walking. Golden Moments can do the grocery shopping, pick up the dry
cleaning, or drive seniors to their appointments. It is a for-profit business. Marg began working
out of her apartment, and barely five years later, she has a downtown office and 145 employees
included 35 part-time students. The employees range from registered practical nurses to plumbers
and handy-folk. She incorporated two years ago when the business started its rapid expansion.
You, CGA, are her accountant. Last year you explained the need to develop a management
control system that would work without her direct involvement. Marg laughed, saying, “I have an
excellent management control system. When a new client makes contact, I meet with them, assess
their needs, determine the cost of meeting those needs, assess their ability to pay, and set up a
schedule to provide them with the services they need. Each client is assigned a director who will
ensure that all services are co-ordinated and who serves as a contact point for the client. When a
director has a problem, they let me know and I solve it. When a client isn’t satisfied with services,
I review the situation and make suggestions for change.
I approve all expenditures and do all the banking. I know things are running smoothly when there
is money in the bank. When I’m getting too many phone calls from clients or too many questions
from staff, I know I have problems. So I solve them.”
But the demands on her time were taking their toll. She had her eye on another exciting business
opportunity, and her family was starting to complain that she was never available.
Marg finally took your persistent advice and hired Owen Fischer as CEO after a chance meeting
at a business networking function. She created his job description and crafted his compensation
scheme on her own. Marg decided to limit her involvement in the day-to-day activities of the
Advanced Management Accounting Assignment 3, Winter Session • 7
business but continue to provide oversight and guidance as president and chair of the board of
directors.
Owen had recently retired from an executive position at SKZ Inc., a large national manufacturing
company. Owen saw this as an opportunity for a change of focus and a challenge. Marg thought
Owen could help the company through its expansion phase over the next few years and implement
an organizational structure that would distribute decision-making rights to various levels of
managers.
Marg crafted Owen’s compensation package, which consisted of a base salary equal to 70% of his
total compensation at SZK. Owen could earn a bonus (up to 50% of his salary) based on financial
statement net income exceeding the budget. Owen was responsible for implementing a budgeting
process.
At the end of Owen’s first year, you asked Marg how things were going.
“Oh pretty good, I guess. Net profits exceeded our budget by more than 50%, and Owen earned
his maximum bonus. However, I have no idea if that was the result of Owen’s efforts or just part
of our continued growth. I think I was too generous with Owen. After all, the directors self-motivate without a bonus. They are professionals — registered nurses and registered practical
nurses.
I don’t spend as much time in the office as I used to, but I don’t feel I am working any less. Last
week I had to contact Lilian in accounts payable to explain to her that she needed approval before
any cheques could be issued. It seems that Owen had told her she could authorize all expenditures
under $500. That just won’t work. She needs to have Owen approve them — the way I used to.
It’s a good thing I went in on Sunday to look over the payables list or I wouldn’t have even
known she was doing that.”
Marg sighed. “And clients still call me to complain. It seems Owen has set up some policy that
allows certain directors to make decisions regarding timing and scheduling of services. Maybe it
works, but when a client or their family phones me up and asks for more time to pay or for a
better price — well, that’s what I do.
And Owen wants to fire two of my long-time employees. He says they spend too much time with
clients and we end up having to write down the invoices. But I want happy clients. I built this
business on client satisfaction. No; I’m just not sure this is working.”
Required
As the CGA for Golden Moments Ltd., you have been asked to address Marg Addison’s concerns.
Based on your knowledge of agency theory, develop a recommendation for a management control
system for Marg. Analyze the case using the standard case method and present your solution
using the following section headings:
3 a. Identify the main problem and issues: Identify the main problems with Golden Moments’
management control systems and operations.
4 b. Analyze the data: Evaluate the problem using the mixed motivational view of agency theory
and your understanding of management control system design.
2 c. Generate alternatives: Organizations can be classified as organic and mechanistic. Identify
the management control systems (also known as levers of control) that work best for each of
these types of organizations. These will be the two alternatives you will evaluate for a
potential recommendation in part (e).
1½ d. Select the decision criteria: Identify three criteria that can be used to assess the management
control system.
Advanced Management Accounting Assignment 3, Winter Session • 8
4½ e. Analyze the alternatives and make a recommendation: Evaluate the alternatives
determined in part (c) based on the criteria determined in part (d). Make a recommendation
for the appropriate management control system.
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