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# Faculty of Economics and Business Administration Exam: Code: Coordinator: Date: Time: Duration: Calculator allowed: Graphical calculator

allowed: Management Accounting and Control 61311010 Prof.dr. H.C. Dekker October 25, 2010 15.15 2 hours Yes

No

## Number of questions: 19 Type of questions: Answer in: Open Dutch / English

Remarks: The purpose of this exam is to test your knowledge and insight. Please choose explicit, specific and concise wording in your answers. Also show your calculations where applicable. Good luck!

## Credit score: Grades: Inspection: Number of pages:

100. The grades will be made public on: November 5, 2010. To be announced on Blackboard. 5 (including front page)

Question 1

25 points

Sharp BV manufactures and sells three lines of high-quality kitchen knives: Swift, Combi and Elegant, which have a selling price of 40, 20 and 30, respectively. Projected sales for 2011 are 30,000 units of Swift, 50,000 of Combi and 40,000 of Elegant. The following additional data apply:
Swift PER UNIT data: Direct labor Direct materials Overhead cost based on direct labor hours Hours per 1,000-unit batch: Setup hours Machine hours Direct labor hours Inspection hours 15 8 12 Combi 3 4 3 Elegant 9 8 9

1.0 25 40 30

0.5 25 10 20

1.0 10 30 20

Total overhead costs and activity levels for the year are estimated as follows: Activity Machine hours Direct labor hours Setups Inspections Overhead costs Activity levels 2,400 hours 2,900 hours 95 setup hours 2,700 inspection hours

## 465,500 405,000 870,500

In the past, overhead was allocated on basis of direct labor hours (the traditional system). However, from now on management has decided to use activity-based costing (ABC) instead. 1. 2. Using the traditional system, determine the profit per unit for each type of knive. Using the ABC system, for each type of knive: a. compute the estimated overhead costs per unit. b. compute the estimated operating profit per unit. Explain the differences between the profits obtained from the traditional system (question a) and the ABC system (question b). Discuss which system provides a better estimate of profitability (explain why), and based on the cost analyses, recommend to management how they may improve profitability. Comment on the following statement: In the public sector, tariffs are always calculated using cost plus pricing.

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Question 2

25 points

The following data are available for DCF Company for the year ended September 30, 2010. Sales: Expected and actual production: Manufacturing costs incurred: Variable: Fixed: Non-manufacturing costs incurred: Variable: Fixed: Beginning inventories: 24,000 units at 50 each 30,000 units 525,000 372,000 144,800 77,400 none

Required: 1. Determine operating income using the variable-costing approach. 2. 3. Determine operating income using the absorption-costing approach. Explain the difference between variable-costing and absorption costing operating income, and why this is not the same under the two approaches. Suppose DCF has a theoretical production capacity of 45,000 units, while practical capacity (which takes into account maintenance time) is 40,000. Recommend to the firm which capacity level they should use for product costing and pricing. Explain your recommendation. A firm active in a different industry than DCFs typical customers has made a proposal to buy 7,000 units for 35 per unit. This is expected to be a one-time only purchase by this firm. If this order is accepted, a one-time setup charge of 20.000 will be incurred. From an economic standpoint, recommend to the firm whether or not to accept this one-time order (provide calculations). Also provide two other considerations management should take into consideration when making this decision.

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Question 3

25 points

1. Explain how a balanced scorecard helps communicating strategy to lowerlevel managers in the organization. 2. Instead of designing management control systems, Merchant (1982) explains that firms can also aim to avoid control problems. Describe which four strategies firms can pursue to avoid control problems. 3. Value-based performance measures are said to be an improvement over traditional financial performance measures, such as return on investment (ROI). Explain how Economic Value Added (EVA) improves over ROI, and in particular discuss how the measures can be considered more congruent than ROI. 4. Designing adequate bonus systems requires making a trade-off between risk and incentives. Explain this comment. 5. Comment on the following statement: Funding changes in Dutch public sector led to considerable changes in Management Control Systems of legal courts, universities and Social Security Departments.