* MSc Accounting and Control --

Exam Advanced ManagementAccounting

Thursday20 March 2008 (resit)

Sovm PREVrous REMARKS This examconsists 5 questionsand25 subquestions. of You canearna maximumof 100 points, per subquestion pointswill be granted. 4 Next to eachquestionyou find the maximumnumberof pointsfor thatparticularquestion. In this exam we will test your knowledgeand insight. While answeringour questions, pleasemake use of the literature and phraseyour answers clearly and concisely. Theresults will be published 3 April2008. on You canreview your examon Wednesday9 April from 15.00to 16.00hrs. The place will be announced the results on list. Goodluck!

Question 1

24 points

A building contractor has the following production figures for the construction of a new type of family homes (costsin thousandsof euros):

Number of houses I

Total variable costs

2
a J

4 5

200 360 508 648 783

The above figures already show a non-linear relation.. a. What are causesfor (positive or negative) nonlinearity in cost functions?

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variableproduction average costof 4 houses? b. What is the cumulative give your calculation. learningratio?Please c . What is the company's project to is d. Our constructor askedto deliverhis irst 50 houses the development is Rijn in Utrecht.The projectdeveloper willing to pay a total sum of Leidsche has fixed costs, for Our 8.300.000 the 50 houses. projectdeveloper 2.000.000 needsa l}Yo profit The constructor apart from the variablecostsof the houses. give acceptthe project developer's offer? Please margin. Shouldthe constructor your calculations. You canusethe following table:
0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1 -2,30 -1,61 -1,20 -0,92 -0,69 -0,51 -0,36 -0,22 -0,11 0 1,1 1,2 1,3 1,4 1,5 1,6 1,7 1,8 1,9 2 0,10 0,18 0,26 0,34 0,41 0,47 0,53 0,59 0,64 0,69

e. Pleasegive a formula with which you can directly calculate the total variable cost of the first 50 houses.Specify how this model has been deducted. Supposethe constructor's firm has a learning ratio of 0,75. This ratio can be applied in both the cumulative averageand in the marginal model. In which model does application of the 0,75 learning ratio lead to the highest learning effect?

whv?
Question2
24 points

The Alpha Company produces digitizers in two versions: Standardand Comfort, generating a contribution margin of 80 and 100 respectively. Both products go through a production and an assemblyprocess.One product Standardtakes 3 hours production time and 4 hours of assembly.One product Comfort takes 3 hours of production and 8 hours of assembly.Comfort also needsfinetuning of I hour per product. Total capacity of production is 100 hours, of assembly 170 hours and of finetuning 50 hours. Alpha's managementwant to maximize contribution margin. a. Formulat a Linear Programming model (negative production numbers is not feasible!). Excel generates following sensitivity report: the

MicrosoftExcel 8.0aSensitivityReport Worksheet:[Opgavetentamen0 I v.3.xlslSheetl 2:8:26PM RepoCreated: 5/31/01

Reduced Cost

Objective Coefficient

Allowable lncrease

Allowable Decrease

$A$2 A $B$2 B Constraints

24.16666667 9.166666667

0 0

80 100 Constraint R.H. Side 170

20 60

_30 20

Final Value

Shadow Price

Allowable lncrease

Allowable Decrease

$F$1 Productie $F$2 Assemblage $F$3 Fijnstelling

100 170 9.1 66666667

27.5 96.66666667 1E+30

36.66666667 40.83333333

b. What is the optimal production schedule? Which production capacity is fully used?Which production factor still has some unused(slack) capacity? c. What does oreducedcost' mean in the first table? Whv is this element zero for both products? d. SupposeAlpha Company has funds available to expand production capacity. What processshould be expandedfirst? Sfhy? e. What does "allowable decrease"of 30 in the adiustable cells table for Standad mean? f. What does the "allowable increase" of 27.5 in the constraintstable for Production mean?

Question 3

24 points

In Groot's article Management Control Merchant's management control theory is explained. Merchant discussesthree different categoriesof managementcontrol systems. a. What are action controls? Mention at least three different kinds of action control systems. and disadvantages action control systems? of b. What ae the advantages c. How can action control systemsbe made more tight? Give at least three different options here. Abernethy, Bouwens and Van Lent study in their article Determinants of Control System Design in Divsional Firms the use of decentralization and divisional summary measuresof performance.

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d. Mostly, divisional managersknow more than corporate managers. We call this information asymmetry. How does information asymmetry impact corporate managers decision to decentralize and to use divisional sunmary measures of performance? The use of appropriate performance measuresis also a topic in the Bouwens and Spekl chapterDoes EVA add value? e. EVA has been propagatedbecausethe measurewould provide division managers better information of how they contribute to strengtheningthe value of the firm. What are Bouwens and Spekl's conclusionsabout this idea? f. How does EVA influence divisional managers'behavior when it is used as a management control instrument?

Question4

I2 points

Lord in his article Strategic Management Accounting (2007) discussesthe idea of corporate managementdesigning and implementing a strategy in order to create longterm strategicadvantagesfor the firm. a. What are the most important componentsin the strategic decision making process according to Lord? Pleasemention at least three and discussthem briefly. b. Most strategy theories present shategy making as a deliberate, conscious,rational and structured decision making process,assistedby accounting information and in which competitor information is very important. Lord criticizes this presentation. Pleasemention some of his remarks and explain each one briefly. c. What do Bhimani and Langfield-Smith in their paper Structure,formality and the importance of financial and non-financial information in strateg)/ development and implementation think of the structuredness strategic decision making and of the role of financial information in strategymaking?

Question 5

16points

The Balanced Scorecardis a recent managementaccounting innovation that aims at broadening the scope of performance measurementssystems by including financial and nonfinancial information. An alternative to the Balanced Scorecardis the PerformancePyramide. How does the Performance Pyramide work? Explain the main differences between the two systems. b . Said, HassabElnabyand V/ier have studied in their article An empirical investigation of the performance consequences nonfinancial measure (2003) the relaof

5 measures firm performand tionship betweenthe useof nonfinancialperformance 'What of ance. are the main conclusions their study? Wong-on-Winget al. considerin their article Reducingcontlct in balancedscorecard evaluationsQ007) the impact of the evaluationof sfrategyon the assessment Why is this important? What is their main conclusion? of divisional performance. How doesa dual fransferpricing systemwork? What is the reasonfor companies to usedual pricing?