quiz 2 solution

1

ACCG301 Organisational Planning and Control

Semester 1, 2011

Quiz 2 (v1) – 5%

Recommended Solutions Question 1 Total = 4 marks CHAPTER 14: SUSTAINABILITY

Sustainability recognises the web of interrelationships and requires systems thinking. Identify and

describe any two (2) characteristics of systems thinking that reminds us of the big sustainability

picture.

ANY TWO OF THE FOLLOWING: (See Custom Pub pp. 559)

Recognises the larger context – organisations exist within larger systems such as the global economy,

the environment and society

Accepts uncertainty and ambiguity – given the many connections, it is very difficult or virtually

impossible to identify all organisational impacts

Challenges our world view – managerial decisions are influenced by their assumptions of the world, this

is important when accepting other views that may be equally valid.

Emphasises inclusion – within the organisation and between the organisation and its stakeholders,

inclusion and consultation are important to ensure alternative viewpoints and values are consider in

organisational decision-making.

__________________________________________________________________________________

Question 2 Total = 4 marks CHAPTER 8: MANAGING COSTS AND CAPACITY

Steven Corporation manufactures fishing rods that have a price of $21.00. It has costs of $16.32. A

competitor is introducing a new fishing rod that will sell for $18.00. Management believes it must lower

the price to $18.00 to compete in the highly cost-conscious fishing rod market. Marketing believes that

the new price will maintain the current sales level. Steven Corporation's sales are currently 200,000 poles

per year.

a) What is the target cost for the new price if target operating profit is 20% of sales? 1

mark $18.00 - ($18.00 × 0.20) = $14.40

b) What is the change in operating profit for the year if $18 is the new price and costs

remain the same? 2 marks Change = 200,000 × ($21.00 - $16.32) - [200,000 × ($18.00 - $16.32) ]

= $936,000 - $336,000

= $600,000 reduction in income

c) Explain how value engineering can be applied to achieve the target cost. 1 mark

Value engineering is a systematic evaluation of all aspects of the value chain, and its

objective is to reduce costs and achieve a quality level that satisfies customers.

2

Question 3 Total = 4 Marks CHAPTER 15: STRATEGY AND BSC

Identify and describe any two (2) of the three components used in performing a strategic

analysis of operating profit.

ANY TWO OF THE FOLLOWING: (See page 606 of Custom Pub)

a. the growth component (1 mark), which measures the change in operating profit attributable solely to

an increase in the quantity of output sold from one year to the next. (1 mark)

b. the price-recovery component (1 mark), which measures the change in operating profit attributable

solely to changes in the prices of the inputs and the outputs from one year to the next. (1 mark)

c. the productivity component (1 mark), which measures the change in costs attributable to a change in

the quantity of inputs used in the current year (½mark) relative to the quantity of inputs that would have

been used in the previous year to produce current year output. (½ mark)

3


Semester 1, 2011

Quiz 2 (v2) – 5%

Recommended Solutions

Question 1 Total = 4 marks CHAPTER 14: SUSTAINABILITY

Sustainability recognises the web of interrelationships and requires systems thinking. Identify and

describe any two (2) characteristics of systems thinking that reminds us of the big sustainability

picture.

ANY TWO OF THE FOLLOWING: (See Custom Pub pp. 559)

Recognises the larger context – organisations exist within larger systems such as the global economy,

the environment and society

Accepts uncertainty and ambiguity – given the many connections, it is very difficult or virtually

impossible to identify all organisational impacts

Challenges our world view – managerial decisions are influenced by their assumptions of the world, this

is important when accepting other views that may be equally valid.

Emphasises inclusion – within the organisation and between the organisation and its stakeholders,

inclusion and consultation are important to ensure alternative viewpoints and values are consider in

organisational decision-making.

__________________________________________________________________________________


Wallace's Wrench Company manufactures socket wrenches, additional information follows below:

For the next month, the vice CEO of production plans on producing 4,400 wrenches per day.

The company can produce as many as 5,000 wrenches per day, but is more likely to produce 4,500 per day.

The demand for wrenches for the next three years is expected to average 4,250 wrenches per day.

Fixed manufacturing costs per month total $336,600.

The company works 20 days a month.

Fixed manufacturing overhead is charged on a per-wrench basis.

a) Explain what is meant by the normal capacity utilisation capacity concept.1 mark

This is the level of capacity utilisation that satisfies average customer demand over a

period (e.g. 2-5 yrs) which includes seasonal, cyclical and trend factors

See page331 of the Custom Pub.

b) Using the information provided calculate normal capacity utilisation fixed

manufacturing overhead rate per wrench. 1 mark

Normal overhead rate = $336,600 / (4,250 × 20) = $3.96

4

c) Explain the difference between the practical capacity and the master budget

capacity fixed manufacturing overhead rates per wrench. Use calculations to

support your answer. 2 marks

See page 330 of the Custom Pub.

Practical capacity recognises the need for unavoidable operating interruptions and

therefore uses the 4,500 unit total given that that is what Wallace is more likely to

produce. Practical overhead rate = $336,600/(4,500 × 20) = $3.74

Master budget capacity utilisation is the level of capacity that managers expect for the

current budget period; this capacity concept thus uses the 4,400 number of wrenches

because that is according to production plans.

Master-budget overhead rate = $336,600/(4,400 × 20) = $3.825

__________________________________________________________________________________________


a) Using Wallaces’ Wrench Company, from question 2, provide one (1) objective and

one (1) performance measure for the Internal-business-process perspective, of the

Balanced Score Card. 2 marks

Examples include:

Objective: Reduce delivery time to customers / PM – order-delivery time

Objective: Improve processes / PM – No. of major improvements in manufacturing

processes

Objective: Improve post-sales service / PM – service response time

b) Describe two (2) pitfalls in implementing a Balanced Score Card. 2 marks ANY TWO OF THE FOLLOWING (See page 602 of the Custom Pub.) :

1. Don’t assume the cause-and-effect linkages are precise; they are merely hypotheses. An

organisation must gather evidence of these linkages over time.

2. Don’t seek improvements across all of the measures all of the time. Cost-benefit considerations

should always be a central element when designing a balanced scorecard.

3. Don’t use only objective measures in the balanced scorecard, (i.e. make use of both objective and

subjective measures). When using subjective measures, managers must be careful that the

benefits of this potentially rich information are not lost by using measures that are inaccurate or

that can be easily manipulated.

4. Don’t fail to consider both costs and benefits of different initiatives before including these

initiatives in the balanced scorecard.(1 mark)

5. Don’t ignore non-financial measures when evaluating managers and employees.

6. Don’t use too many measures.

5


Semester 1, 2011

Quiz 2 (v3) – 5%


Identify and describe any two (2) of the GRI2008 defining principles that provide guidance

for defining the content of a focused sustainability report. ANY TWO OF THE FOLLOWING (See page 568 of Custom Pub.):

Materiality – information should cover topics and indicators reflecting organisational significant

environmental, economic and social impacts

Stakeholder inclusiveness – stakeholders should be identified and the report should explain how it has

responded to their reasonable expectations and interests

Sustainability Context – the report should present the organisations’ performance in the wider context

of sustainability

Completeness – coverage of material topics, indicators and definition of the report boundary should be

sufficient to reflect significant economic, environmental and social impacts

____________________________________________________________________________________


a) Explain the difference between locked-in costs and costs incurred. 2 marks See page 324 of the Custom Pub. Locked-in costs are costs that have not been incurred yet, but based on decisions that have

already been made, will be incurred in the future.

Most costs are actually locked-in at the design stage but they are not incurred until the

manufacturing stage.

b) There are four different capacity concepts. Identity which one (1) of these four

different capacity concepts is best used for setting prices. Provide one (1) reason for

your answer. 2 marks

See page 333 of the Custom Pub. Practical capacity is best to use when setting prices because only the actual cost of capacity used

for production is included in the cost of a unit.

6


Bugos Company makes a household appliance with model number XX300. The goal for 2011 is to reduce

direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs

depend on production capacity defined in terms of XX300 units that can be produced. The industry

market size for appliances increased 5% from 2010 to 2011. The following additional data are available

for 2010 and 2011:

2010 2011

Units of XX300 produced and sold 10,000 10,500

Selling price $100 $95

Direct materials (square metres) 30,000 29,000

Direct material costs per square metre $10 $11

Manufacturing capacity for XX300 (units) 12,500 12,000

Total conversion costs $250,000 $240,000

Conversion costs per unit of capacity $20 $20

a) Using the formula below, calculate the revenue effect of the growth component.

Determine whether the effect on the operating profit is favourable or unfavourable.

2 marks

growth of

effect Revenue =

2010in 2011in

soldoutput - soldoutput

of units Actual of units Actual

Selling Price in 2010

= (10,500 – 10,000) $100

= $50,000 Favourable

b) Using the formula below, calculate the cost effect of the growth component for

direct materials. 2 marks

costs lefor variab

growth of

effectCost

output 2010 2010in

produce toused output 2011

inputs - produce to

of units Actual required

input of Units

2010in

price

Input

= [( 30,000 x 10,500/10,000 ) – 30,000] x $10

= $15,000 Unfavourable

7


Semester 1, 2011

Quiz 2 (v4) – 5%

Recommended Solutions

Question 1 Total = 4 marks CHAPTER 14: SUSTAINABILITY

Identify and describe any two (2) of the GRI2008 defining principles that ensure the

quality of a focused sustainability report.

ANY TWO OF THE FOLLOWING: (See page 568 of the Custom Pub):

Balance – report should reflect positive and negative aspects of organisational performance to enable a

reasoned assessment of overall performance

Comparability – issues and information should be selected, compiled and reported consistently to

enable shareholders to analyse changes in organisational performance over time

Accuracy – report information should be sufficiently accurate and detailed for stakeholders to assess

organisational performance

Timeliness – reporting occurs on a regular schedule and information is available in time for stakeholders

to make informed decisions

Clarity – information made available in a manner that is understandable and accessible to stakeholders

using the report

Reliability – information and processes used in the preparation of a report should be gathered, recorded,

compiled, analysed, and disclosed in a way to be subject to examination and that establishes the quality

and materiality of the information


Frank's Computer Monitors currently sells 17" monitors for $270. It has costs of $210. A competitor is

bringing a new 17" monitor to market that will sell for $225. Management believes it must lower the price

to $225 to compete in the market for 17" monitors. Marketing believes that the new price will cause sales

to increase by 10%, even with a new competitor in the market. Frank's sales are currently 10,000 monitors

per year.

a) What is the target cost for the new price if operating profit is 25% of sales? 1 mark $225 - ($225.00 × 0.25) = $168.75

b) What is the change in operating profit if Marketing is correct and only the sales

price is changed? 2 marks Change = 10000 × ($270 - $210 ) - [11,000 × ($225 - $210) ]

= $600,000 - $165,000

= $435,000 reduction in income

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c) Explain what is meant by a non-value-added cost. 1 mark

This is a cost that if eliminated would not reduce the actual or perceived value or

usefulness customers obtain from using the product or service.

______________________________________________________________________________


Explain the difference between engineered and discretionary costs. Include the use of one

(1) example of each of these costs to support your answer. (See page613 of the Custom

Pub.)

An engineered cost results from a cause-and-effect relationship between the cost driver output and the

resources used to produce that output.

An example of an engineered cost would be direct materials in the production of products OR, other

examples of engineered costs might include shipping costs or electrical costs.

A discretionary cost has two features. The first feature is that the cost arises from a periodic decision

regarding the amount of cost to be incurred. The second feature is that no measurable cause-and-effect

relationship exists between the output and the resources used.

An example of a discretionary cost would be the cost of advertising for a product OR the amount spent on

researching new products OR employee training expenses.

9


Semester 1, 2011

Quiz 2 (v5) – 5%


The answers to these questions can be found on page 565 of the Custom Pub.

Explain what an emissions trading scheme is. Total = 2 marks

An ETS is designed to reduce greenhouse gas pollution which is a cause of climate change by

providing economic incentives to companies.

Explain the relationship between carbon sequestration and the removal unit (RMU)

Total=2 marks

The RMU is what organisations receive for drawing carbon dioxide out of the air which is then sold to

carbon dioxide emitting organisations.

Carbon sequestration is achieved by generating credits by capturing carbon dioxide [Students may also

use the example of planting trees in previously unproductive land to help their explanation – if they do

also allocate half a mark].

In this way carbon sequestration will create new commodities and incentives to find innovative and

efficient ways to draw greenhouse gases out of the environment.


Claudia Geer is the new financial controller is discussing the pricing of a new product with sales manager,

James Nolan. Identify and explain two (2) major influences that Claudia and James should consider when

thinking about the pricing for the new product.

ANY TWO OF THE FOLLOWING (See pages 318-319 of the Custom Pub.):

Customers (1 mark): A price increase may cause customers to reject a company's product and choose a

competing or substitute product. (1 mark)

Competitors: (1 mark) At one extreme, a rival's prices and products may force a business to lower its

prices to be competitive (½ mark). At the other extreme, a business without a rival in a given situation can

set higher prices. (½ mark) OR

A business with knowledge of its rivals' technology, plant capacity, and operating policies is able to

estimate its rivals' costs, which is valuable information in setting competitive prices. (1 mark)

Costs (1 mark): The study of cost-behaviour patterns gives insight into the income that results from

different combinations of price and output quantities sold for a particular product. (1 mark)

10






for 2010 and 2011:

2010 2011








a) Calculate the operating profit for 2010 and 2011 for Bugos Company. 3 marks

2010 2011

Sales $1,000,000 $997,500

Less: Direct Materials $300,000 $319,000

Contribution Margin $700,000 $678,500

Less: Conversion Costs $250,000 $240,000

Operating Profit $450,000 $438,500

b) If Bugos is pursuing a cost leadership strategy, based on your calculations in (a),

was Bugos strategy successfully implemented in 2011? Provide one (1) reason for

your answer. 1 mark

No Bugso strategy was not successfully implemented because operating profit decreased

by $11,500.

11


Semester 1, 2011

Quiz 2 (v6) – 5%


Identify and explain any two (2) ways that greater returns can be achieved as organisations

move along the corporate social responsibility value curve. ANY TWO OF THE FOLLOWING (See page 574 of Custom Pub):

Legal and compliance – adherence to law in the countries of production, distribution and operation

Strategic Philanthropy – alignment of charitable activities with social issues that support business

objectives

Values-based self regulation – incorporates the companys’ value system and/or code of conduct to

guide business behaviour

Efficiency – measurable cost savings through efficient or win-win scenarios

Growth Platform – access to new markets, new partnerships or product/service innovations that

generate revenue


a) There are four different capacity concepts. Identify which one (1) of these four

different capacity concepts is best used for evaluating the performance of the

marketing manager for the current year. Provide one (1) reason for your answer.

2 marks See page 334 of the Custom Pub. Master-budget capacity utilisation is best for evaluating performance of managers over the

current year because the manager should only be held accountable for budgeted sales of the

current year and not production capacity, especially when there is unused capacity.

b) Describe any two (2) undesirable effects of value engineering and target-costing if

they are not properly managed. 2 marks ANY TWO OF THE FOLLOWING (See page 326 of the Custom Pub):

Employees may feel frustrated if they fail to attain targets

The cross-functional team may add too many features just to accommodate the different wishes of

team members

A product may be in development for a long time as alternative designs are repeatedly evaluated.

Organisational conflicts may occur as the burden of cost cutting falls unequally on different

business functions in the organisations’ value chain

12


An operating profit analysis of Sara McCullough Incorporated revealed the following:

Operating income for 2009 $500,000

Add growth component 25,000

Deduct price-recovery component (15,000)

Add productivity component 60,000


a) Having carefully reviewed the operating profit analysis provided to you, please identify the

strategy that Sara McCullough Incorporated is using that is consistent with the increase in

operating profit from 2009 to 2010. Give two (1) reason for your answer. 2 marks

The strategy is the cost-leadership strategy that Sara is using

The productivity component uses input prices to measure how costs have decreased from using

fewer input, a better mix of products and/or less capacity; the productivity component for

McCullough Incorporated ahs made a favourable contribution to the operating income. OR The

productivity component measures the amount by which operating pr0ofit increases by using

inputs efficiency to lower costs

b) Recommend one (1) objective and one (1) performance measure for the Learning and

Growth perspective that is consistent with the strategy that you identified in (a). 2 marks

[Students please note that you were given some latitude with this, but your objective and performance

measure must be aligned with the BSC perspective.]

Examples include:

Objective: Improve employee satisfaction / PM – employee satisfaction survey OR order-

delivery time

Objective: Develop employee skill / PM – No. of employees participating in training

programs

13


Semester 1, 2011

Quiz 2 (v7) – 5%


Identify and explain any two (2) sustainable management accounting tools that can be used

to pursue social and environmental objectives.

ANY TWO OF THE FOLLOWING (See pages 580 to582 of the Custom Pub) :

Balanced scorecard – this methodology can be used to map and manage the interrelationships, and

drivers of social, environmental and economic performance.

Environmental Management Accounting – environmental inputs and outputs are measured and

reported, for example life-cycle analysis [please note if students put the life-cycle analysis as a tool

allocate a mark, and also the sequential mark if their explanation of what life-cycle analysis is correct]

Scenario modelling – this tool is important to anticipate how physical, social, political and economic

dimensions interact over time

Environmental Management Systems – this is an organisations’ formal and systematic process for

guiding, measuring and benchmarking their environmental impact

Climate change strategy – changes in economic, social and environmental systems that will result from

climate change will create opportunities and threats to organisational strategy that must be considered.

____________________________________________________________________________________


Identify and explain two (2) factors that are important to consider when using life-cycle costing and

budgeting. (See pages 328-329 of the Custom Pub.)

The development period for R&D and design is long and costly.

When a high percentage of total life-cycle costs are incurred before production begins and

revenues are received, the company must consider revenues and costs over the life-cycle of the

product.

Many costs are locked in at the R&D and design stages.

Life-cycle budgeting highlights costs throughout the products’ life cycle and so facilitates target

pricing, target costing and value engineering at design stage before costs are locked in.

14






for 2010 and 2011:

2010 2011








a) Using the formula below, calculate the cost effect of the growth component for

direct materials. 2 marks

costs lefor variab

growth of

effectCost

output 2010 2010in

produce toused output 2011

inputs - produce to

of units Actual required

input of Units

2010in

price

Input

= [( 30,000 x 10,500/10,000 ) – 30,000] x $10

= $15,000 Unfavourable

b) Using the formula below, calculate the cost effect of the growth component for conversion

costs. Determine whether the effect on operating profit is favourable or unfavourable.

2 marks

costs fixed

for growth

ofeffect Cost

2010in output 2011 produce to

requiredcapacity of units

2010,in output 2011 produce to

2010in inadequatecapacity 2010 If

capacity of - OR

units Actual 2010in output 2011

produce toadequate if 2010

incapacity of units Actual

2010in

capacity of

unitper Price

= (12,500 – 12,500) x $20

= Zero with no effect on operating profit

15


Semester 1, 2011

Quiz 2 (v8) – 5%


Identify and explain any two (2) of Ray Andersons’ Seven Faces that assist organisaitons to

achieve sustainability. ANY TWO OF THE FOLLOWING (See page 576 of the Custom Pub):

Eliminate waste – eliminate waste in every product and process that forms part of the business

Benign emissions – in the design phase of a product design out of the production process and products,

the toxic substances

Renewable energy – use renewable energy such as solar power, wind, landfill gas to support production

processes

Closing the loop – this involves designing the product to use recovered and bio-based material in the first

instance and finding ways to recycle them at the end of their life-cycle.

Resource-efficient transportation – this includes the supply of raw materials, delivery of finished goods

and a focus on the transportation needs of employees

Sensitising stakeholders – influencing employees, suppliers, and customers to move towards

sustainability by creating a culture incorporating sustainability principles

Redesign commerce – this involves changing the fundamental nature of commerce to support

sustainability


Describe what is meant by the “downward demand spiral”. Explain what causes a downward

demand spiral to occur. (See page 333 of the Custom Pub.)

The downward demand spiral is the continuing reduction in the demand for its products that occurs when

it fails to meet or better competitors prices; as customers resist the price and consequently demand drops

further higher and higher costs make it more difficult to meet competitor’s prices.

When a company uses cost-based pricing and it selects master-budget capacity utilisation, which is the

capacity available as the capacity concept level in the denominator, the downward spiral may result.

16


An operating income analysis of Deb Schmidt Incorporated revealed the following:


Add growth component 15,000

Add price-recovery component 100,000

Deduct productivity component (8,000)


a) Having carefully reviewed the operating profit analysis provided to you, please

identify the strategy that Deb Schmidt Incorporated is using, which is consistent

with the increase in operating profit from 2009 to 2010. Give two (2) reasons for

your answer. 3 marks

Deb is using the product differentiation strategy

This organisation is showing a large favourable contribution of the price-recovery

component of $100,000, which could have been through an increase in the output prices.

b) Identify and explain which sub-process of the internal-business perspective would

assist Deb Schmidt in implementing the strategy that you identified in (a). 1 mark

See page598 of the Custom Pub

The sub-process that Deb will use is that of innovation process

This process focuses on creating products, services and processes to remain competitive

in the marketplace, which is consistent with the differentiation strategy.

quiz 2 solution

Documents

society accepts

accg301 organisational

organisational

balanced score

gri2008 defining

ensure alternative

industry market

variab le