CONFIDENTIAL

AC/APR 2007/MAF490/MAC510

UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE COURSE CODE EXAMINATION TIME

: : : :

MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION MAF490/MAC510 APRIL 2007 3 HOURS

INSTRUCTIONS TO CANDIDATES 1. This question paper consists of two (2) parts: PART A (2 Questions) PART B (3 Questions)

2.

Answer ALL questions in the Answer Booklet. i) ii) iii) Answer ALL questions from PART A. Answer two (2) questions only from PART B. Start each answer on a new page.

3. 4.

Do not bring any material into the examination room unless permission is given by the invigilator. Please check to make sure that this examination pack consists of: i) ii) the Question Paper an Answer Booklet - provided by the Faculty

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 8 printed pages
Hak Cipta Universiti Teknologi MARA

CONFIDENTIAL

CONFIDENTIAL

AC/APR 2007/MAF490/MAC510

PART A Answer BOTH questions. QUESTION 1 A. Kenara Bhd. is an engineering company which is organized for management purposes in the form of several autonomous divisions. The performance of each division is currently measured by calculation of its return on capital employed (ROCE). Kenara Bhd.'s existing accounting policy is to calculate ROCE by dividing the operating profit generated by each division during the year by the net assets of the division at the end of the year. Cash is excluded from net assets since all divisions share a bank account controlled by Kenara Bhd.'s head office. Depreciation is on a straight-line basis. The divisional management teams are paid a performance-related bonus conditional upon achievement of a 15% ROCE target. The divisional managers were provided with performance forecasts for 2007 which included the following. Net assets at 31 December 2007 RM000 2,200 240 Operating profit RM000 324.5 60 ROCE % 14.75 25.00

Division Kiko Division Dido

Subsequently, the manager of Division Kiko invited members of her management team to offer advice. The responses she received included the following: From the divisional administrator: "We can achieve our 2007 target by deferring payment of a RM45.000 trade debt payable on 20 December until 1 January. I should add that we will thereby immediately incur a RM1,000 late payment penalty." From the works manager: "We should replace a number of our oldest machine tools (which have nil book value) at a cost of RM160,000. The new equipment will have a life of eight years and generate cost savings of RM38.000 per year. The new equipment can be on site and operational by 31 December 2007. From the financial controller: 'The existing method of performance appraisal is unfair. We should ask head office to adopt residual income (Rl) as the key performance indicator, using the company's average cost of capital of 12% for a finance charge."

Hak Cipta Universiti Teknologl MARA

CONFIDENTIAL

CONFIDENTIAL

AC/APR 2007/MAF490/MAC510

Required: Compare and appraise the proposals of the divisional administrator and the works manager, having regard to the achievement of the ROCE performance target in 2007 and to any longer term factors that may be relevant. (12 marks)

B.

a)

The transfer pricing method used for the transfer of an intermediate product between two divisions in a group has been agreed at standard cost plus 25% profit mark-up. The transfer price may be altered after taking into consideration the planning and operational variance analysis at the transferor division. Discuss the acceptability of this transfer pricing method to the transferor and transferee divisions. (4 marks)

b)

Division A has an external market for product X which fully utilizes its production capacity. Explain the circumstances in which division A should be willing to transfer product X to division B of the same group at a price, which is less than the existing market price. (4 marks)

c)

Before any transfer price can be set for interdivisional transfers, the performance evaluations of the related divisions should be clearly understood by the managers. This would either promote a win-win situation amongst divisions or bring dissatisfactions. Discuss how transfer pricing can promote harmonization or create conflicts that may arise due to sub-optimization. (5 marks) (Total: 25 marks)

Hak Cipta Unlversiti Teknologi MARA

CONFIDENTIAL

CONFIDENTIAL

AC/APR 2007/MAF490/MAC510

QUESTION 2 A manufacturing company has a material handling department, which provides a service to production departments, and other services departments. The material-handling department has 50 fork lift trucks and charges users of the service at a rate per fork truck hour which is complied using the following budget information: Each fork truck attracts drivers' salaries of RM20.800 per annum plus a bonus of RM0.05 per cubic metre handled (all paid four weekly - based on thirteen four week periods per year) The fork trucks are powered by electric batteries. The charge to material handling department for keeping the batteries at full power is made at a cost equivalent to RM1.80 per fork truck running hour. Fork trucks cost RM28.600 each and are depreciated over five years on a straight line basis with nil residual value. Maintenance per fork truck is implemented by the company maintenance department at an average cost of RM120 per truck per four week period. This is considered to be a fixed cost. Each fork truck is expected to be used for 80% of company operating time. The budget for company operating time is 115 hours per week. The average quantity handled per fork truck running hour is 10 cubic metres. Fork truck time is charged (absorbed) to users at a rate per running hour based on the above information. The rate for charging variable cost is calculated based on actual running hours while the rate for fixed cost is based on budgeted running hours.

The actual data relating to the four week period ended March 2007 is as follows: Fork truck drivers' salaries RM82.600, bonus RM9.500. Total power cost RM32.500. This is based on the actual time required to keep the batteries at full power where the time is charged at RM1.50 per hour. Total fork truck maintenance cost RM7.000. Depreciation charge is as per budget. The company operated for 120 hours per week with each fork truck operating on average for 80% of the time. All fork truck running time was charged to users.

Hak Cipta Universiti Teknologl MARA

CONFIDENTIAL

CONFIDENTIAL

AC/APR 2007/MAF490/MAC510

Required:

a)

Prepare a cost statement for the material handling department for the four week period ended March 2007 which compares flexed budget with actual costs and shows: i. ii. iii. variances for each expense type the total cost charged out to user departments the over/under absorption of cost for the period.

(Show ALL workings) (14 marks) b) Explain what is meant by a rolling budget and what additional benefits (minimum of two points) may be claimed for this compared to the annual style of budget? (5 marks) c) For a not-for-profit organization explain and give examples of the following uses of budgets: i. ii. iii. resource allocation authorization control (6 marks) (Total: 25 marks)

Hak Cipta Universiti Teknologl MARA

CONFIDENTIAL

CONFIDENTIAL PARTB Answer TWO (2) questions only. QUESTION 1

AC/APR 2007/MAF49Q/MAC510

Three months ago, Cekap Manufacturing Company's Board of Directors surprised the workforce when they announced a radical new strategy. The new 'approach' was announced as being 'a shared journey to be more responsive to an ever-demanding and fast moving market while becoming more cost-conscious and thereby profitable'. The agenda of the current year was outlined as being: To scrutinize all core and other activities and identify potential for cost reduction. Outsourcing should be progressed as a realistic alternative. To develop a range of 'partner relationships' with customers and suppliers. To develop a more flexible, fluid workforce (including multi-skilled, part-time and temporary employees) leading to an organizational restructure.

More recently, the company announced a 'comprehensive supply chain management solution' in partnership with a logistic company starting initially with a transport solution. The Head of Finance has been asked to provide a briefing paper on the implications of these changes for management reporting systems within Cekap Manufacturing Company. He has asked for your advice in this matter. Required: a) Evaluate the way in which Cekap Manufacturing Company implements its new strategy and comment upon the major challenges posed by the new strategy. (9 marks) b) Given the major changes within Cekap Manufacturing Company, explain why traditional management accounting approaches may not be appropriate. (8 marks) Discuss the likely information demands upon the management accounting function given the changes within the organization. (8 marks) (Total: 25 marks)

c)

Hak Cipta Universiti Teknologi MARA

CONFIDENTIAL

CONFIDENTIAL

AC/APR 2007/MAF490/MAC510

QUESTION 2

A University which derives most of its funds from the government provides undergraduate courses (leading to bachelor degrees) and post-graduate courses (leading to master degrees). Some of its funds come from contributions from student fees, consultancy work and research. In recent years, the University has placed emphasis on recruiting lecturers who have achieved success in delivering good academic research. This has led to the University improving its reputation within its national academic community, and applications from prospective students for its courses have increased. The University has good student support facilities in respect of a library, which is well stocked with books and journals and up-to-date IT equipment. It also has a gymnasium and comprehensive sports facilities. Courses at the University are administered by well-qualified and trained non-teaching staff that provide non-academic (that is, not learning-related) support to the lecturers and students. The University has had no difficulty in filling its courses to the level permitted by the government, but has experienced an increase in the numbers of students who have withdrawn from the first year of their courses after only a few months. An increasing number of students are also transferring from their three-year undergraduate courses to other courses within the University but many have left and gone to different Universities. This increasing trend of student withdrawal is having a detrimental effect on the University's income as the government pays only for students who complete a full year of their study. You are the University's Management Accountant and have been asked by the Vice Chancellor (who is the chief executive of the University) to review the withdrawal rate of the students from the University's courses. (Candidate do not require any knowledge of University admission and withdrawal processes to answer this question.) Required: Apply Value Chain Analysis to the University's activities and advice the Vice Chancellor how this analysis will help to determine why the rate of student withdrawal is increasing. (Draw a value chain analysis diagram) (25 marks)

Hak Cipta Universitl Teknologl MARA

CONFIDENTIAL

CONFIDENTIAL

AC/APR 2007/MAF490/MAC510

QUESTION 3 Walla Bhd. is a company which supplies industrial cleaning services. After it was founded fifteen years ago, Walla Bhd. (as it then was) achieved rapid growth and high levels of turnover. The board of directors at the time believed that its traditional management style was the main reason for the company's success. As the company grew, the directors found that the company had insufficient capital resources to meet the increasing levels of demand for its services. As a result, Walla Bhd. was floated on its domestic stock exchange and increased capital resources flowed into the business, allowing it to maintain its rate of expansion. This seemed to be further evidence of the success of the traditional management style employed. In each of the last three years, however, Walla Bhd. has found that its turnover and profit have fallen below the industry average and that its market share has reduced. There is increasing concern among the shareholders about the long-term decline in turnover and profitability. The finance director of Walla Bhd (to whom you report as management accountant) has quoted the performance of Massa Bhd., a similar size company in the contract catering industry. While Massa Bhd. is not a competitor, it is often viewed as a benchmark against which Walla Bhd. can measure its own performance even though it employs a different management style which requires the consent and commitment of employees. Massa Bhd. has managed to increase its market share, turnover and profitability consistently over the last five years and the finance director has turned to you to analyse why Walla Bhd. seems to be producing continuously unsatisfactory results. Required: a) Explain to the directors of Walla Bhd. how value can be added by carrying out a programme of benchmarking. (10 marks) Explain how you would implement a benchmarking exercise comparing the performance of Walla Bhd. with Massa Bhd. Discuss the possible implications for the style of management which should be employed by the company after carrying out such an exercise. (15 marks) (Total: 25 marks)

b)

END OF QUESTION PAPER

Hak Cipta Unlversitl Teknologi MARA

CONFIDENTIAL