maf490 0107

CONFIDENTIAL AC/APR 2007/MAF490/MAC510

UNIVERSITI TEKNOLOGI MARAFINAL EXAMINATION

COURSE

COURSE CODE

EXAMINATION

TIME

: MANAGEMENT ACCOUNTING ANDPERFORMANCE EVALUATION

: MAF490/MAC510

: APRIL 2007

: 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of two (2) parts:

2.

3.

4.

Answer ALL questions in the Answer Booklet.

PART A (2 Questions)PART B (3 Questions)

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

Do not bring any material into the examination room unless permission is given by theinvigilator.

Please check to make sure that this examination pack consists of:

i) the Question Paperii) an Answer Booklet - provided by the Faculty

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SOThis examination paper consists of 8 printed pages

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CONFIDENTIAL 2 AC/APR 2007/MAF490/MAC510

PART A

Answer BOTH questions.

QUESTION 1

A. Kenara Bhd. is an engineering company which is organized for managementpurposes in the form of several autonomous divisions. The performance of eachdivision is currently measured by calculation of its return on capital employed(ROCE). Kenara Bhd.'s existing accounting policy is to calculate ROCE by dividingthe operating profit generated by each division during the year by the net assets ofthe division at the end of the year. Cash is excluded from net assets since alldivisions 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 conditionalupon achievement of a 15% ROCE target. The divisional managers were providedwith performance forecasts for 2007 which included the following.

Division KikoDivision Dido

Net assets at31 December 2007

RM0002,200

240

Operating profit

RM000324.560

ROCE

%14.7525.00

Subsequently, the manager of Division Kiko invited members of her managementteam 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 debtpayable on 20 December until 1 January. I should add that we will therebyimmediately 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 andgenerate cost savings of RM38.000 per year. The new equipment can be on site andoperational by 31 December 2007.

From the financial controller:

'The existing method of performance appraisal is unfair. We should ask head officeto adopt residual income (Rl) as the key performance indicator, using the company'saverage cost of capital of 12% for a finance charge."

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Required:

Compare and appraise the proposals of the divisional administrator and the worksmanager, having regard to the achievement of the ROCE performance target in 2007and to any longer term factors that may be relevant.

(12 marks)

B. a) The transfer pricing method used for the transfer of an intermediate productbetween two divisions in a group has been agreed at standard cost plus 25%profit mark-up. The transfer price may be altered after taking intoconsideration the planning and operational variance analysis at the transferordivision.

Discuss the acceptability of this transfer pricing method to the transferor andtransferee divisions.

(4 marks)

b) Division A has an external market for product X which fully utilizes itsproduction capacity.

Explain the circumstances in which division A should be willing to transferproduct X to division B of the same group at a price, which is less than theexisting market price.

(4 marks)

c) Before any transfer price can be set for interdivisional transfers, theperformance evaluations of the related divisions should be clearly understoodby the managers. This would either promote a win-win situation amongstdivisions or bring dissatisfactions. Discuss how transfer pricing can promoteharmonization or create conflicts that may arise due to sub-optimization.

(5 marks)(Total: 25 marks)

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QUESTION 2

A manufacturing company has a material handling department, which provides a service toproduction departments, and other services departments. The material-handling departmenthas 50 fork lift trucks and charges users of the service at a rate per fork truck hour which iscomplied using the following budget information:

• Each fork truck attracts drivers' salaries of RM20.800 per annum plus a bonus ofRM0.05 per cubic metre handled (all paid four weekly - based on thirteen four weekperiods per year)

• The fork trucks are powered by electric batteries. The charge to material handlingdepartment for keeping the batteries at full power is made at a cost equivalent toRM1.80 per fork truck running hour.

• Fork trucks cost RM28.600 each and are depreciated over five years on a straightline basis with nil residual value.

• Maintenance per fork truck is implemented by the company maintenance departmentat an average cost of RM120 per truck per four week period. This is considered tobe a fixed cost.

• Each fork truck is expected to be used for 80% of company operating time. Thebudget 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 onthe above information.

• The rate for charging variable cost is calculated based on actual running hours whilethe 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 thebatteries 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 onaverage for 80% of the time. All fork truck running time was charged to users.



Required:

a) Prepare a cost statement for the material handling department for the four weekperiod ended March 2007 which compares flexed budget with actual costs andshows:

i. variances for each expense type

ii. the total cost charged out to user departments

iii. 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 oftwo 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 ofbudgets:

i. resource allocationii. authorizationiii. control



CONFIDENTIAL 6 AC/APR 2007/MAF49Q/MAC510

PARTB

Answer TWO (2) questions only.

QUESTION 1

Three months ago, Cekap Manufacturing Company's Board of Directors surprised theworkforce when they announced a radical new strategy. The new 'approach' wasannounced as being 'a shared journey to be more responsive to an ever-demanding and fastmoving market while becoming more cost-conscious and thereby profitable'. The agenda ofthe 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 andtemporary employees) leading to an organizational restructure.

More recently, the company announced a 'comprehensive supply chain managementsolution' 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 thesechanges for management reporting systems within Cekap Manufacturing Company. He hasasked for your advice in this matter.

Required:

a) Evaluate the way in which Cekap Manufacturing Company implements its newstrategy and comment upon the major challenges posed by the new strategy.

(9 marks)

b) Given the major changes within Cekap Manufacturing Company, explain whytraditional management accounting approaches may not be appropriate.

(8 marks)

c) Discuss the likely information demands upon the management accounting functiongiven the changes within the organization.


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QUESTION 2

A University which derives most of its funds from the government provides undergraduatecourses (leading to bachelor degrees) and post-graduate courses (leading to masterdegrees). Some of its funds come from contributions from student fees, consultancy workand research. In recent years, the University has placed emphasis on recruiting lecturerswho have achieved success in delivering good academic research. This has led to theUniversity improving its reputation within its national academic community, and applicationsfrom prospective students for its courses have increased.

The University has good student support facilities in respect of a library, which is wellstocked with books and journals and up-to-date IT equipment. It also has a gymnasium andcomprehensive sports facilities. Courses at the University are administered by well-qualifiedand 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 thegovernment, but has experienced an increase in the numbers of students who havewithdrawn from the first year of their courses after only a few months. An increasing numberof students are also transferring from their three-year undergraduate courses to othercourses within the University but many have left and gone to different Universities. Thisincreasing trend of student withdrawal is having a detrimental effect on the University'sincome 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 ViceChancellor (who is the chief executive of the University) to review the withdrawal rate of thestudents from the University's courses.

(Candidate do not require any knowledge of University admission and withdrawal processesto answer this question.)

Required:

Apply Value Chain Analysis to the University's activities and advice the Vice Chancellor howthis analysis will help to determine why the rate of student withdrawal is increasing.(Draw a value chain analysis diagram)

(25 marks)

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QUESTION 3

Walla Bhd. is a company which supplies industrial cleaning services. After it was foundedfifteen years ago, Walla Bhd. (as it then was) achieved rapid growth and high levels ofturnover. The board of directors at the time believed that its traditional management stylewas the main reason for the company's success. As the company grew, the directors foundthat the company had insufficient capital resources to meet the increasing levels of demandfor its services. As a result, Walla Bhd. was floated on its domestic stock exchange andincreased capital resources flowed into the business, allowing it to maintain its rate ofexpansion. This seemed to be further evidence of the success of the traditional managementstyle employed.

In each of the last three years, however, Walla Bhd. has found that its turnover and profithave fallen below the industry average and that its market share has reduced. There isincreasing concern among the shareholders about the long-term decline in turnover andprofitability. The finance director of Walla Bhd (to whom you report as managementaccountant) has quoted the performance of Massa Bhd., a similar size company in thecontract catering industry. While Massa Bhd. is not a competitor, it is often viewed as abenchmark against which Walla Bhd. can measure its own performance even though itemploys a different management style which requires the consent and commitment ofemployees. Massa Bhd. has managed to increase its market share, turnover and profitabilityconsistently over the last five years and the finance director has turned to you to analysewhy 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 aprogramme of benchmarking.

(10 marks)

b) Explain how you would implement a benchmarking exercise comparing theperformance of Walla Bhd. with Massa Bhd. Discuss the possible implications for thestyle of management which should be employed by the company after carrying outsuch an exercise.


END OF QUESTION PAPER

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