AF201: MANAGERIAL ACCOUNTING

Introduction and Assignments

Semester 1, 2012

School of Accounting and Finance

Faculty of Business and Economics
The University of the South Pacific
Produced by the University of the South Pacific, Suva, Fiji, 2012.

First produced 1979

This revision January 2011

Introduction & Assignments team for semester 1, 2012

Course coordinator Clayton Kuma
Educational technologist Tomasi V Cabebula
Electronic publisher Mohammed J Hussein
Cover design Marketing, Development and Communications Office

This material has been prepared by the University of the South Pacific for use by students enrolled in
the course for which it was developed.

It may contain copyright material copied under the provisions of the Fiji Copyright Act 1999 or under
license from rights holders or their agents. Copyright in material prepared by USP is owned by USP.

This material cannot be sold or copied for further distribution without the University’s permission.
Where provided in electronic format, it can only be printed by or for the use of the student enrolled in
the course.

AF201 (IA) 12012

ii
Contents
Page

CALENDAR FOR SEMESTER 1, 2012 .......................................................... IV

YOUR COURSE COORDINATOR ................................................................. 1

COURSE INTRODUCTION............................................................................. 2

YOUR LEARNING MATERIALS ................................................................... 3

YOUR LEARNING SUPPORT ........................................................................ 6

HOW TO LOGIN TO MOODLE ...................................................................... 8

STUDY SCHEDULE ........................................................................................ 9

ASSESSMENT OVERVIEW ............................................................................ 10

SUBMISSION OF ASSIGNMENTS ................................................................ 12

WARNING AGAINST CHEATING ................................................................ 14

MAJOR ASSIGNMENT: .................................................................................. 15

PAST MID-TERM TEST PAPER..................................................................... 21

PAST EXAMINATION PAPER ....................................................................... 29

iii
Calendar for semester 1, 2012

iv
Your course coordinator
Nisa Bula to you all! I am Clayton Kuma and I will be your
course coordinator for Semester 1, 2012. I have been
teaching at USP for over 8 years and have coordinated
accounting courses (including AF201) both on-campus and
through distance flexible learning modes.
I completed my BA in Accounting and Economics at the
University of the South Pacific. After teaching Accounting
for three years at the Solomon Islands College of Higher
Education, I went to the University of Auckland, New Zealand and completed
Graduate Diploma in Commerce and MCom (Honours), in Accounting.
I anticipate that as we all journey through this semester, we will have an exciting
time learning managerial accounting.

If you have any questions or concerns, feel free to contact me:

Room (for Laucala based DFL students ONLY): Room S262, Faculty of
Business and Economics, School of Accounting, Laucala Campus,
Suva, Fiji
Email: kuma_c@usp.ac.fj]
Moodle: Use of forum or chat facilities
Telephone: +679 323-2091 Fax: +679 323-1506
Address: Faculty of Business and Economics, University of the South
Pacific, Private mail Bag, Suva, Fiji.
(Remember that it may take some time to get a reply by mail.)

Textbook Authors
The authors of the textbook are Dr Kim Langfield-Smith and Dr Helen Thorne. Read
about these two authors on page xiv of their text. Their experience in business,
accounting, and teaching is evident in the textbook and this will help you to learn more
effectively about management accounting. Both are active members of the Australian
Society of CPA's and undertake consulting for both government and business
organisations, including those operating in the manufacturing industries. Both have
accounting work experience in business.

Ron Peterson
Ron Peterson prepared the package of study material for this distance education course in
management accounting based on the 4th edition of the prescribed textbook. Ron is an
Emeritus Professor of James Cook University in Australia. When preparing this package
he was on a two-year appointment at USP as a Professor in the Department of
Accounting and Financial Management. He has been involved in accounting and
accounting education for more than 40 years. He was appointed a Professor of
Management Studies at the University of Waikato (New Zealand) in 1975 and he has
held appointments at several universities in Australia, New Zealand, USA, Canada,
Malaysia, Peoples Republic of China and the Middle East.

1
Course introduction

Welcome to AF201: Managerial Accounting! I am sure you will find this course
not only challenging and rewarding but also enjoyable - but it also requires a lot
of hard work, as it is not an easy course.

Managerial accounting is an exciting subject. Important changes are occurring,

such as globalisation, deregulation of industries, privatisation of parts of the
public sector, growth of the service sector and recently, the increasing focus on
sustainability issues and good corporate governance. We have tried to capture
some of the excitement of these changes in the material you will be required to
study.

The course assumes that students have previously taken an introductory course in
this area covering basic terms and concepts of management accounting and
including topics such as product/process costing, budgeting, standard costing and
variance analysis, etc, that require expansion in this course.

L e ar n i ng o ut c om es
The basic aim of this course is to provide you with an understanding and
appreciation of the role of management accounting systems as both a source of
information for decision making and as a part of an organisation's control
mechanisms.

After completing this course you should be able to:

• interpret, evaluate and apply a range of contemporary cost management
techniques;
• calculate the cost of products, services and other cost objects using
conventional and contemporary costing techniques;
• obtain information for planning, control and performance evaluation in a
range of organisations and for a range of purposes;
• design basic reward systems to encourage goal congruence in
organisations;
• explain and apply various methods used to determine transfer prices;
• identify, collate, present and use relevant information for tactical, pricing
and product mix decisions. and
• use environmental and social management accounting information for
measuring performance, managing resources and support sustainability
strategies.

2
Your learning materials
You should have already received the following materials a week before semester
starts:
You should have already received the following materials for AF201:

1. The Introduction and Assignments book, which you are reading now.
2. Study Guide - AF201
The Study Guide has been written to guide you through the course and the
prescribed textbook. It is neither a textbook nor a substitute for the
prescribed text.

It will be vital that you regard the Study Guide as your personal guide to this
course and follow instructions precisely. It will guide you through the text
that will be your main source of study. The text will be supplemented by
some comments and notes in the Study Guide.

Contact your USP Campus or Centre IMMEDIATELY if you are

missing any of the materials mentioned above.

3. Textbook (to be bought by individual students)

The textbook for this course is by:

Langfield-Smith, Kim, Thorne, Helen, & Hilton, Ronald W. (2012).

Management Accounting: Information for Creating and ManagingValue,
(6th edition). NSW, Australia: McGraw-Hill.

Please note that the earlier editions of this textbook are now out of date and are
NOT suitable for this course. It is therefore, essential that all students obtain a
copy of the 6th edition of the textbook.

Difficult words

Like most fields of study, accounting has developed some special words and
abbreviations that are not used in every day speech. This means that you may
need to consult a dictionary, because you will constantly be meeting new words
in the Study Guide and in the textbook. If you have not acquired a good
dictionary during your studies, I strongly advise you to buy the Concise Oxford
Dictionary or another dictionary recommended by your USP Centre staff.

There is also a glossary of terms included in your textbook, should you need to
clarify special accounting words or abbreviations. If you get into the habit of
consulting a dictionary or glossary of terms frequently, you will quickly become
familiar with the new terminology.

3
Additional references
Good students read widely and the following are alternative texts which students
may find useful.

1. Horngren, C.T., Datar, S.M. and Foster G. Cost Accounting - A Managerial

Emphasis, 11th international ed., 2003, Pearson Education Inc.

2. Hart, J. and Wilson, C. Management Accounting: Principles and

Applications, 3rd ed., 2004, Pearson/Prentice Hall.

3. Boer, G.M. Cost Accounting - A Decision Emphasis, 4th ed., 2001, Dame,
Australia.

4. Barfield, J.T., Raiborn, C.A. and Kinney, M.R., Cost Accounting: Traditions
and Innovations, 5th ed., 2003, Thomson/South Western.

5. Hansen, D.R. and Mowen, M.M., Cost management: accounting and

control, 4th ed., 2003, Thomson/South Western.

6. Carter, W.K. and Usry, M.F., Cost accounting, 13th ed., 2002,
Dame/Thomson Learning.

7. VanDerbeck, E.J., Principles of cost accounting, 12th ed., 2002, South

Western/Thomson Learning.

Email and access to 'Moodle'

As a student, you are entitled to a university email address. There is no additional
charge for this facility.
In addition to allowing you to send and receive emails, this University facility
enables you to access electronic support facilities set up to assist you with your
studies, including Moodle.

Moodle is an online learning platform. It will be used to provide you with

updated information and notices on academic matters pertaining to your course.
This will include model answers for your assignments, additional learning
material and notices. You should check the moodle at least once a week to ensure
you read all notices pertaining to your course on a timely basis.

If you do not know how to use or access the moodle, contact the staff at your
USP Campus.

Other study resources available

Several other study resources are available through the On Line Learning
Centre at the McGraw-Hill web site:

http://www.mhhe.com/au/langfield6e

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Details are set out in your textbook. Log on to the above web site and go to the
Student Centre. Two of the most useful resources are:

a) Power point slides

Power point slides can be downloaded from this site. These provide a guide
to all key learning objectives in the textbook. They are extremely useful for
revision. Make sure you download a copy for yourself.

b) Student Revision Tool

This is a self-paced learning tool comprising of approximately 30
interactive, multiple choice questions with extensive feedback for every
chapter of the text. Every question also features a section of "more
information" giving students direct excerpts from the text book to further
explain the question and answer, including a page reference for further
study. As an online product, students can access the program from
anywhere, and at any time. MaxMark screens are designed to load quickly
through an internet connection.

To access the Management Accounting MaxMark you will need to register

using an Access Card which is included with your textbook. Please note that
the MaxMark Access cards are valid for 1 year only, so if you buy a 2nd
hand textbook with an Access Card it is unlikely that the card will be valid.

A combination of study based on the PowerPoint slides and questions from

MaxMark should enable you to revise each week's reading and be directed back
into relevant sections of the text if you are unsure of a question or answer.
A mentor is defined as "a wise and trusted personal advisor". If you can find
somebody to act as your mentor, you may find their help as invaluable. Your
mentor should be somebody who has experience in accounting, and perhaps
office work. For instance, your mentor may be a senior member of staff at your
workplace or he or she could be someone working elsewhere.

Not every student may be able to find somebody suitable to act as a mentor, but
students who do not have ready access to their local USP Campus or Centre, and
the support from the staff there could particularly benefit from the assistance of a
mentor.

We would like you to inform us of the name and address of your mentor, if you
are able to find somebody who can help you in this way.

5
Your learning support
Study groups
Most people find it easier to study in a group or with a friend, at least for part of
the time. Working with others helps to motivate us. It provides a shared goal and
reduces feelings of isolation or boredom. Your local Campus or Centre will be
able to put you in touch with students doing this course and may help you get
organised.

L i b r a r y se r vi ce s
Making good use of the library and its resources is vital for you to be a successful
student. Learn about library support and services and the importance of
information literacy at your Campus or Centre library.

A u d i o co n f e r en ci n g
Audio conferencing is audio communication between the Campuses or Centres
for tutorial sessions to support your course. You may get presentations and notes
in addition to your audio conference. At USP, they are commonly known as
satellite tutorials. You are encouraged to attend the scheduled sessions in the
weeks shown in your study schedule.

Here are some suggestions for getting the most out of these audio conferencing
sessions:
1. Note that before your audio conference tutorial session begins your
tutorial group will be advised as to who all the participants are (regional
and on-campus). Try to note down names of your colleagues and which
Campuses or Centre's they are listening in from.
2. Speak slowly and pronounce your words clearly so that your colleagues
can understand what you are saying.
3. Be courteous and try to maintain a polite tone of voice.
4. When you want to address your tutorial group, press the "speak button",
and aim to maintain a 6-inch distance between your mouth and the
microphone whilst speaking.

6
 5. Know who you wish to hear from and direct your questions to them
personally. If you direct a question in general to "Campus or Centre
colleagues" or "On-campus colleagues", they may unknowingly wait for
each other to speak first which can lead to an uncomfortable silence.
6. Try not to "steal the show". Remember that each of you will have
important points to add to discussions.

V i d eo co n f e r en ci n g
Video conferencing is video communication between the Campuses or Centres
for tutorial sessions to support your course. You conduct yourself in the same way
as you do in an audio conference except that this time you will see your lecturer
or tutor and other participants in the Campuses or Centres. You may get
presentations and notes in addition to your videoconference. You are encouraged
to attend the scheduled sessions in the weeks shown in your study schedule.

Contact your local USP Campus or Centre for further information on using the
audio and videoconferencing facilities.

O n l i n e l ea r n i n g
Moodle is USP’s learning management system and will be used to support
learning in some of your courses.

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How to login to Moodle
If your course has a Moodle component, the instructions below will help you
access the system.
You will need a computer connected to the Internet. The computer must have a
Web browser such as Internet Explorer or Firefox. Such a computer should be
available at your USP Campus (if you don’t already have one at home or work).
You will also be given a username and password by your local USP Campus.

Step 1: Accessing Moodle

• Open your browser: Internet Explorer, Firefox, or other.
Type in the following at the address bar: http://elearn.usp.ac.fj/
• Press Enter.

• Alternatively, you can go to the USP website: http://www.usp.ac.fj/ and

use the Quick Links drop down menu to the left of the page and select
Online Learning (Moodle).

Step 2: Username and password

• You will come to a Login screen.
Type your student number in the
Username box.
• Type your student email (webmail)
password in the Password box.
• Click Login.

Step 3: Accessing your course

• You should now see a list of your courses. Click the Course Code and
Title of the course that you are enrolled in to enter. For example:

L o st o r f o r g o t t en p as sw o r d
Contact your local ITS student Helpdesk or email: moodlehelp@usp.ac.fj

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Study schedule
P l an n i n g yo u r w or k
To help you keep up with the course, we suggest you allocate at least 2 hours a
day to study. Plan your time using this study schedule.

WEEK NO. AND WEEKLY TOPICS TEXTBOOK ASSIGNMENTS AND

DATE REFERENCES TUTORIALS
1 Unit 1: An overview of LS Chaps 1 & 2 Satellite tutorial
20-24 February managerial accounting Mon 20th February 2012
6:00 - 7:00pm
2 Unit 2: Cost behaviour, cost LS Chap 3 Satellite tutorial
27 February-2 March drivers and cost estimations Mon 27th February 2012
6:00 - 7:00p.m.
3 Unit 3: Cost allocation 1: LS Chap 7, p. 305 to mid- Satellite tutorial
5-9 March General principles, allocating page 314 and mid-page Mon 5th March 2012
costs to products and 317 to page 337only 6:00 - 7:00p.m.
responsibility centres, allocating
support department costs
4 Unit 4: Cost allocation 2: LS Chap 7, pp. 338-343 Satellite tutorial
12-16 March Variable and absorption costing, and Chap. 19, pp. Mon 12th March 2012
allocating joint product costs 986-988 and Appendix 6:00 - 7:00p.m.
5 Unit 5: Activity-based costing LS Chap 8 and Chap 7, Satellite tutorial
19-23 March pp.314-317 Mon 19th March 2012
6:00 -7:00p.m.
6 Unit 6: Service costing LS Chap 6 Satellite tutorial
26 - 30 March Mon 26th March 2012
6:00 - 7:00p.m.
7 Unit 7 : Managing costs and LS Chap 16 Satellite tutorial
2-6 April quality Mon 2nd April 2012
6:00 - 7:00p.m.
Assignment due Fri 6th April
2012
7-15 April Mid-Semester Break
8 Unit 8: Managing suppliers and Chap 15 pp. 735- 745 & Satellite tutorial
16-20April customers 750-766 Mon 16th April 2nd
6:00 - 7:00p.m.
9 Unit 9: Financial performance - LS Chap 12, p.599 Satellite tutorial
23-27 April reports, measures and reward to mid of page 613 & Mon 23rd April 2012
systems Chap 13 6:00 - 7:00p.m.
Mid-Sem. Test
(Date to be confirmed later)
[Fiji time]
10 Unit 10: Transfer pricing LS Chap 12, pp. 613- 623 Satellite tutorial
30 April -4 May Mon 30th April 2012
6:00 - 7:00p.m.
11 Unit 11: Contemporary LS Chap 14 Satellite tutorial
7-11 May approaches to measuring and Mon 7th May 2012
managing performance 6:00 - 7:00p.m.
12 Unit 12: Information for tactical LS Chap 19 excluding Satellite tutorial
14-18 May decisions appendix Mon 14th May 2012
6:00 - 7:00p.m
13 Unit 13: Pricing and product mix LS Chap 20 Satellite tutorial
21-25 May decisions Mon 21st May 2012
6:00 - 7:00p.m.
14 Unit 14: Sustainability and LS Chap 17 Satellite tutorial
28 May-1 June Management Accounting Mon 28th May 2012
6:00 - 7:00pm

15 STUDY BREAK
2-10 June
16 EXAMINATIONS
Check with your USP Campus or Centre for the exact time and date of your examination.
11-22 June

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Assessment overview
This course is assessed in 2 ways:
Continuous assessment: 45%
Final examination: 55%
Total value: 100%

C o n t i n u o u s a s ses s m en t
Continuous assessment makes up 45% of the final score and includes one major
assignment and a mid-semester test. It is weighted in the following way:
Major assignment 15%
Mid-semester Test 30%
Total value 45%

M i d - s e m e st e r T est s
You will also be required to sit a mid-semester test. The mark for this forms part
of your coursework assessment. Please check your study schedule to find out
which week your test will be held and check with your USP Campus or Centre to
find out the actual date, time and place.
We have included a sample mid-semester test later in this Introduction and
Assignments book, to give you an opportunity to practise for your test. Note,
however, that your own test may differ in its content and structure from the
sample provided.
This will be a 2 hour test covering all work up to and including Week 7. The test
will be held in Week. The actual date will be confirmed later so please check
with your local campus. To help you prepare and revise for this test, a past mid-
semester test paper is provided at the end of this book. Suggested answers to the
computational questions in the test paper are available from your local tutor or
USP Campus or Centre

Final examination
The final examination will consist of a three(3) hour paper at the end of your
course. This will account for 55% of your final course mark. Please confirm the
date and time with your Campus or Student Academic Services. A sample past
final examination paper is available at the end of this book.
To pass the course you must obtain at least 40% in the final examination AND an
overall mark of 50% for the course.
We have included a sample examination paper later in this Introduction and
Assignments book, to give you an opportunity to practise for your final
examination. Please note, however, that your final examination may differ in its
content and structure from the sample paper.

10
G r ad i n g
The letter grade which you will receive for the course will be determined
according to the following numerical equivalents:
Your course results will be graded on the following basis:

Grade Percentage Outcome

A+ 80–100%
A 75–79% Pass with distinction
B+ 70–74%
B 65–69% Pass with credit
C+ 60–64%
C 50–59% Pass
40–49%
E Below 40% Fail

Note: If you fail to sit the final examination, you will receive an EX grade,
which is a FAIL grade. If you were sick and unable to sit the final exam,
and you have done well in your coursework (at least a B grade), you may
apply for an Aeogrotat Pass. If you could not sit the exam because of a
death in the family or any other personal reasons, you may apply for a
Compassionate Pass. Check with your local USP Campus or Centre for
the appropriate forms which you need to complete very soon after the
examination date. For both types of applications, you will need evidence,
such as a medical certificate.

11
Submission of assignments
You should submit all assignments by the dates given on your study schedule.
Please submit them in the correct order. For each assignment, you should fill out
a yellow assignment cover form which you should obtain from Student Academic
Services (SAS). If you do not have assignment covers, contact your USP
Campus.

For Suva based DFL students, all assignments are to be posted or dropped
off at the allocated boxes in your Faculty at Laucala Campus. The only
assignment(s) that are to be posted or dropped off at Student Academic
Services at Laucala Campus are for the following: Continuing Education,
Law, Agriculture and College of Foundation Studies.
For all other DFL students, all assignments are to be dropped off at your
local Campus or Centre.

It is very important that you keep to the study schedule and complete the
assignments so that you get regular feedback on your progress through this
course.

C o r r ec t l ab el l i n g o f a s si g n m en t s
Please be very careful to correctly label your assignments and fill in your
assignment cover. On each assignment that you send in for marking, you should
write or type:
• the full name you used to enrol in this course;
• your student identification number;
• the correct course code and title; and
• the assignment number.

Correct labelling will help ensure that the marker receives your assignment on
time, and that you get the credit for the work that you do. If your marker receives
one of your assignments late because you did not label it correctly, you may lose
marks.

L at e as si g n m en t s
If you expect to be over two weeks late in submitting an assignment, write to
your course coordinator. You should explain why you are late and suggest a
revised schedule that will allow you to complete the remaining assignments on
time.
Your course coordinator may mark a late assignment if there is a good reason for
its delay. In deciding whether to mark late assignments, your course coordinator
will give greater consideration to students in remote areas with little or no access
to their USP Campus, Centre or tutorial help.
USP reserves the right to decide whether or not to mark late assignments. It is in
your interest to send in your assignments on time. The assignment schedule gives
12
your course coordinator time to provide you with regular feedback on your
progress, before it is too late for you to use this information constructively in
your studies.
Your course coordinator will not mark any assignment received after the final
examination.

M a r ki n g c r i t e r i a
We will grade all assignments according to the following criteria where
applicable:
• evidence of reading;
• evidence of good understanding of the topic;
• good coverage of the topic;
• relevance and correctness of information;
• validity and support of opinion;
• conciseness;
• precision;
• logical presentation of information (flow); and
• use of illustrations, examples and/or reasons to support statements or
arguments.

13
Warning against cheating
Cheating includes plagiarising the work of another person and cheating in any
way in examinations, tests or course work.

P l ag i a r i s m
USP regards plagiarism as a serious form of cheating. Plagiarism means
presenting someone else’s work as if it is your own. This includes the work of
fellow students as well as published authors, and you are plagiarising even by
using just a few of their words or ideas or illustrations without acknowledging
them.
Please take note that:
• if you use someone else’s words or ideas in your assignments, you must
acknowledge the person (and the publication) you got them from; and
• if you work in a group to discuss an assignment, you must ensure that the
final answer which you submit is your own. Similar answers to an assignment
will be seen as plagiarism.

You can find out about the USP regulations on plagiarism in the latest USP
Calendar.

D i sh o n e st p r a c t i ce
Dishonest practice is a serious offence for which there are heavy penalties.
Dishonest practice covers cheating in exams and tests (which includes copying
from other candidates’ work and bringing into the exam or test room any
unauthorised material). Any student found cheating in a test or an exam will be
referred to the Registrar who will refer the matter to the Discipline Committee.
Penalties for cheating range from suspension from studies for a period of time to
expulsion from the University.
You can read more about the regulations on cheating in the University discipline
ordinance and regulations for students. Copies are available at all USP Campuses
and Centres.

14
Major Assignment:
Due date: Friday 6th April 2012 (End of Week)
Value: 100 marks (15%)

Question 1 (15 marks)

Adam Williams was recently hired as assistant controller of GroChem, Inc.,

which processes chemicals for fertilizers. Williams was selected for this position
because of his past experience in chemical processing. During his first month on
the job, Williams made a point of getting to know the people responsible for the
plant operations and learning how things are done at GroChem.

During a conversation with the plant supervisor, Williams asked about the
company procedures for handling toxic waste materials. The plant supervisor
replied that he was not involved with the disposal of wastes and suggested that
Williams might be wise to ignore this issue. This response strengthened
Williams’ determination to probe this area further to be sure that the
company was not vulnerable to litigation.

Upon further investigation, Williams discovered evidence that GroChem was

using a nearby residential landfill to dump toxic wastes – an illegal activity. It
appeared that some members of GroChem’s management team were aware of this
situation and may have been involved in arranging for this dumping; however,
Williams was unable to determine whether his superior, the controller, was
involved.

Uncertain how he should proceed, Williams began to consider his options by

outlining the following three alternative course of action:
• Seek the advice of his superior, the controller.
• Anonymously release the information to the local newspaper.
• Discuss the situation with an outside member of the board of directors
with whom he is acquainted.

REQUIRED

1. Discuss why Adam Williams has an ethical responsibility to take some

action in the matter of GroChem, Inc., and the dumping of toxic wastes.
Refer to the specific standards (competence, confidentiality, integrity,
and/or credibility) in the Statement of Ethical Professional Practice
established by the Institute of Management Accountants to support your
answer.

(5 marks)

15
 2. For each of the three alternative courses of action that Adam Williams has
outlined, explain whether or not the action is appropriate according to the
Statement of Ethical Professional Practice established by the Institute of
Management Accountants.
(5 marks)

3. Assume that Adam Williams sought the advice of his superior, the
controller, and discovered that the controller was involved in the dumping
of toxic wastes. Describe the steps that Williams should take to resolve
this situation. (5 marks)

(CMA, adapted)

Question 2 (30 marks)

Sione Savai, a marketing manager for Pasifika Company, had been puzzled by the
outcome of two recent bids. The company’s policy was to bid 150 percent of the full
manufacturing cost. One job (labeled Job SS) had been turned down by a prospective
customer, who had indicated that the proposed price was $3 per unit higher that the
winning bid. A second job (Job TT) has been accepted by the customer, who was amazed
that Pasifika could offer such a favorable terms. This customer revealed that Pasifika‘s
price was $43 per unit lower than the next-lowest bid.

Sione knew that Pasifika Company was more than competitive in terms of cost control.
Accordingly, he suspected that the problem was related to cost assignment procedures.
Upon investigating, Sione was told that the company used a plantwide overhead rate based
on direct labor hours. The rate was computed at the beginning of the year using budgeted
data. Selected budgeted data follow:

Department A Department B Total

Overhead $500,000 $2,000,000 $2,500,000
Direct labor hours 200,000 50,000 250,000
Machine hours 20,000 120,000 140,000

The above information led to a plantwide overhead rate of $10 per direct labor hour. In
addition, the following specific manufacturing data on Job SS and Job TT were given.

Job SS
Department A Department B Total
Direct labor hours 5,000 1,000 6,000
Machine hours 200 500 700
Prime costs $100,000 $20,000 $120,000
Units produced 14,400 14,400 14,400

Job TT
Department A Department B Total
Direct labor hours 400 400 1,000
Machine hours 200 3,000 3,200
Prime costs $10,000 $40,000 $50,000
Units produced 1,500 1,500 1,500

16
 This information led to the original bid process of $18.75 per unit for Job SS and $60 per
unit for Job TT.

Then, Sione discovered that the overhead costs in Department B were higher than those of
Department A because Department B had more equipment, higher maintenance, higher
power consumption, higher depreciation, and higher setup costs. So he tried reworking the
two bids by using departmental overhead rates. Department A’s overhead rate was $2.50
per direct labor hour; Department B’s overhead rate was $16.67 per machine hour. These
rates resulted in unit process of $14.67 for Job SS and $101.01 for Job TT.

Sione still was not satisfied, however. He did some reading on overhead allocation
methods and learned that proper support-department cost allocation can lead to more
accurate product costs. He decided to create four support departments and recalculate
departmental overhead rates. Information on departmental costs and related item follows:

Maintenance Power Setups General Dept. Dept.

Factory A B
Overhead $500,000 $225,000 $150,000 $625,000 $200,000 $800,000
Maintenance hours - 1,500 500 - 1,000 7,000
Kilowatt-hours 4,500 - - 15,000 10,000 50,000
Direct labor hours 10,000 12,000 6,000 8,000 200,000 50,000
Number of setups - - - - 40 160
Square feet 25,000 40,000 5,000 15,000 35.360 94,640

The following allocation bases (cost drivers) seemed reasonable:

Support Department Allocation Base

Maintenance Maintenance hours
Power Kilowatt-hours
Setups Number of setups
General Factory Square feet

REQUIRED

1. Using the direct method, verify the original department overhead rates.
(10 marks)
2. Using the sequential method, allocate support-department costs to the producing
departments. (Read page 307 of the text to determine how the support department
costs will be allocated). Calculate departmental overhead rates using direct labor
hours for Department A and machine hours for Department B. What would the
bids for Job SS and Job TT have been if these overhead rates had been in effect?
(Round-off the allocation ratios to 3 decimal places before you allocate the
support department costs). (12 marks)

3. Which method of overhead cost assignment would you recommend to Alden?

Why? (4 marks)

4. Suppose that the best competing bid was $4.10 lower than the original bid price
(based on plantwide rate). Does this affect your recommendation on Requirement
3? Explain. (Adapted from Hansen, D.R & Mowen, M.M. – Management
Accounting 7th edition) (4 marks)

17
Question 3 (35 marks)

Fiji Electric Corporation manufactures electric motors for commercial use. The company
produces three models, designated as standard, deluxe, and heavy-duty. The company
uses a job-order cost-accounting system with manufacturing overhead applied on the
basis of direct-labor hours. The system has been in place with little change for 25 years.
Product cost and annual sales data are as follows:

Standard Model Deluxe Model Heavy-Duty Model

Annual sales (units) 20,000 1,000 10,000
Product costs:
Raw material $10 $25 $42
Direct labor ($20 per hr.) 10 20 20
Manufacturing overhead* 85 170 170
Total product cost $105 $215 $232

*Calculation of predetermined overhead rate:

Manufacturing-overhead budget:

Depreciation, machinery $1,480,000

Maintenance, machinery 120,000
Depreciation, taxes, and insurance for factory 300,000
Engineering 350,000
Purchasing, receiving and shipping 250,000
Inspection and repair of defects 375,000
Material handling 400,000
Miscellaneous manufacturing overhead costs 295,000
Total $3,570,000

Direct-labor budget:
Standard model: 10,000 hours
Deluxe model: 1,000 hours
Heavy-duty model: 10,000 hours
Total 21,000 hours

Predetermined overhead rate: Budgeted overhead _________ = $3,570,000 = $170 per hour

Budgeted direct-labor hours 21,000 hours

For the past 10 years, the company’s pricing formula has been to set each product’s
target price at 110 percent of its full product cost. Recently, however, the standard-model
motor has come under increasing price pressure from offshore competitors. The result
was that the price on the standard model has been lowered to $110.

The company president recently asked the controller, “Why can’t we compete with these
other companies? They’re selling motors just like our standard model for 106 dollars.
That’s only a buck more than our production cost. Are we really that inefficient? What
gives?”

The controller responded by saying, “I think this is due to an outmoded product-costing

system. As you may remember, I raised a red flag about our system when I came on
board last year. But the decision was to keep our current system in place. In my
judgment, our product-costing system is distorting our product costs. Let me run a few
numbers to demonstrate what I mean.”

18
 Getting the president’s go-head, the controller compiled the basic data needed to
implement an activity-based costing system. These data are displayed in the following
table. The percentages are the proportion of each cost driver consumed by each product
line.

Product Lines
Activity Cost Pool Cost Driver Standard Deluxe Heavy-Duty
Model Model Model
I: Depreciation, Machinery Machine time 40% 13% 47%

Maintenance, machinery
II: Engineering Engineering 47% 6% 47%
hours
Inspection and repair defects
III: Purchasing, receiving, and shipping Number of 47% 8% 45%
material
Material handling orders
IV: Depreciation, taxes, and insurance for factory Factory space 42% 15% 43%
usage
Miscellaneous manufacturing overhead

REQUIRED

1. Compute the target prices for the three models, based on the traditional, volume-
based product-costing system. (4.5 marks)

2. Compute new product costs for the three products, based on the new data
collected by the controller. Round to the nearest cent. (12 marks)

3. Refer to the product costs in requirement (2) and the product costs given in the
question (bolded figures). Prepare a table showing how Fiji Electric Motor
Corporation’s traditional, volume-based costing system distorts the product costs
of the standard, deluxe, and heavy-duty models. (3 marks)

4. Calculate a new target price for the three products, based on the activity-based
costing system. Compare the new target price with the current actual selling
price for the standard-model electric motor. (5.5 marks)

5. Write a memo to the company president explaining what has been happening as
a result of the firm’s traditional, volume-based product costing system.
(5 marks)

6. What strategic options does Fiji Electric Motor Corporation have? What do you
recommend, and why? (5 marks)

19
Question 4 (20 marks)
Kuria Kumar is manager of a new medical supplies division. She has just finished her
second year and had been visiting with the company’s vice-president of operations. In
the first year, the operating income for the division had shown a substantial increase over
the prior year. Her second year saw an even greater increase. The vice-president was
extremely pleased and promised Kuria a $15,000 bonus if the division showed a similar
increase in profit for the upcoming year. Kuria was elated. She was completely confident
that the goal could be met. Sales contracts were already well ahead of last year’s
performance, and she knew that there would be no increases in costs. At the end of the
third year, Kuria received the following data regarding operations for the first three
years:

Year 1 Year 2 Year 3

Production 10,000 11,000 9,000
Sales (in units) 8,000 10,000 12,000
Unit selling price $10 $10 $10
Unit costs:
Fixed overhead* $2.90 $3.00 $3.00
Variable overhead 1.00 1.00 1.00
Direct materials 1.90 2.00 2.00
Direct labor 1.00 1.00 1.00
Variable selling 0.40 0.50 0.50
Actual fixed overhead $29,000 $30,000 $30,000
Other fixed costs $9,000 $10,000 $10,000

*The predetermined fixed overhead rate is based on expected actual units of production and expected fixed overhead.
Expected production each year was 10,000 units. Any under- or overapplied fixed overhead is closed to Cost of Goods
Sold.

Yearly Income Statements

Year 1 Year 2 Year 3
Sales revenue $80,000 $100,000 $120,000
Less: Cost of goods sold* 54,000 67,000 86,600
Gross margin $25,600 $33,000 $33,400
Less: Selling and administrative 12,200 15,000 16,000
Operating income $13,400 $18,000 $17,400

*Assumes a LIFO inventory flow.

Recall that Kuria was pleased with the operating data, but she was dismayed and
perplexed by the income statements. Instead of seeing a significant increase in income
for the third year, she saw a small decease. Kuria’s initial reaction was that the
Accounting Department has made an error.

REQUIRED

1. Explain to Kuria why she lost her $15,000 bonus. (4 marks)

2. Prepare variable-costing income statements for each of the three years.
Reconcile the differences between the absorption-costing and variable-costing
incomes. (12 marks)
3. If you were the vice president of Kuria’s company, which income statement
(variable costing or absorption costing) would you prefer to use for evaluating
Kuria’s performance? Why? (4 marks)
(Adapted from Hansen, D.R & Mowen, M.M. – Management Accounting 8th edition)

20
Past mid-term test paper
You are given the following past mid-semester test paper to help you to prepare
for your test. However, remember that the test paper that you will take this
semester may not follow exactly the same structure, format or content as this one.

The University of the South Pacific

Serving the Cook Islands, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Samoa, Solomon Islands, Tokelau, Tonga,
Tuvalu, and Vanuatu.

SCHOOL OF ACCOUNTING AND FINANCE

AF201: MANAGERIAL ACCOUNTING

MID-SEMESTER TEST – SEMESTER 1, 2011

PRINT MODE

Time Allowed 2 hours plus 10 minutes reading

100 marks (30% of final grade)

There are 2 sections:

Sections Allocated marks

A Multiple choice: Questions 1 - 10 20 marks
B Question 11 15 marks
Question 12 25 marks
Question 13 30 marks
Question 14 10 marks
TOTAL 100 marks

INSTRUCTIONS

1. ALL questions in each section are compulsory.

2. Write your answers in the answer booklet provided.
3. Non-programmable Calculators may be used, but are not provided.

21
 SECTION A

MARK YOUR ANSWERS TO QUESTONS IN SECTION A ON THE

ANSWER SHEET PROVIDED AND RETURN THE SHEET WITH YOUR
ANSWER BOOKLET

Answer the questions by placing a circle around the letter on the ANSWER
SHEET that you think is the correct answer.

There are 10 questions in this Section. All questions carry 2 marks each.
Answer ALL questions.

Question 1. Refer to the following data.

Direct material used $150 000

Selling costs $5 000
Indirect labour $7 000
Administrative costs $10 000
Depreciation on factory equipment $70 000
Direct labour $40 000
Overtime premiums paid $20 000
Indirect materials $45 000

The prime costs are:

A. $190 000
B. $40 000
C. $150 000
D. $142 000

Question 2. The Casual Furniture Company manufactures outdoor furniture, and

incurred the following costs during the month of January.
Timber $25 000
Paint $5 000
Glue $500
Wages—assembly personnel $20 000
Wages—factory supervisor $3 500
Factory cleaner’s wages $2 000
Sales commissions $10 000
Administrative staff salaries $4 000
Depreciation—factory equipment $3 000
Depreciation—sales office equipment $1 000
Utilities, insurance—factory $6 000
Utilities, insurance—sales office $2 000
Advertising $8 000
Total costs $90 000

22
The product costs are:
A. $90 000
B. $83 000
C. $65 000
D. $63 000

Question 3. Technical Engineering presently leases a copying machine on a

monthly basis. The lease agreement requires a fixed fee each month in addition to
a charge per copy. Technical Engineering made 2 400 copies and paid a total of
$162 in rent in September and in October they paid $195 for 3 500 copies.
Determine Technical’s monthly fixed fee.

A. $138
B. $ 90
C. $ 66
D. $ 55

Question 4. The Longreach Toy Factory has determined machine hours to be the
cost driver of the company’s electricity costs. During the first six months of the
year, the company incurred the following electricity costs:
Month Machine Electricity
Hours Cost
Jan 780 $8 200
Feb 720 $8 360
Mar 800 $8 950
Apr 900 $9 360
May 950 $9 625
June 920 $9 150

Using the high–low method, determine the cost formula that expresses the cost
behaviour of the company’s electricity costs:

A. Y = $3 735 + $6.20X
B. Y = $1 664 + $8.38X
C. Y = $4 760 + $5.00X
D. Y = $4 400 + $5.50X

Question 5. Lipex Pty Ltd produces two products (A and B) from a particular
joint process. Each product may be sold at the split-off point or processed further.
Additional processing requires no special facilities, and production costs of
further processing are entirely variable and traceable to the products involved.
Joint production costs for the year were $60 000. Sales values and costs are as
follows.

Product Units Sales value at Sales value of Separable cost

made split-off final product of processing
A 8 000 $40 000 $78 000 $10 000
B 6 000 $78 000 $90 000 $9 000

Allocate the joint production costs based on the physical units method. What are
the joint costs assigned to product B? (Round off answers to nearest whole
number)

23
A. $25 714
B. $20 339
C. $34 286
D. $39 661

Question 6. The Kelsey Manufacturing Company Ltd has two production

departments (Assembly and Finishing) and two support departments (Janitorial
and Personnel). The usage of the two support departments in 2008 is as follows:
Provider
User of Support Personnel Janitorial
Personnel — 5%
Janitorial 10% —
Assembly 60% 40%
Finishing 30% 55%

The budgeted costs in the support departments of 2008 were as follows:

Personnel $90 000
Janitorial $50 000

Using the direct method, what is the Janitorial Department cost allocated to the
Assembly Department? (Round off answers to the nearest whole number)

A. $28 948
B. $21 053
C. $34 158
D. $25 000

Question 7. A professional audit firm charged juniors at $50 per hour, seniors at
$200 per hour and the overhead rate for both was 100 per cent on direct labour.
The firm added 5 per cent on total cost to arrive at a fee to be charged. If a job
took 10 junior hours and 2 senior hours, what was the total cost?

A. $900
B. $1090
C. $1890
D. $1800

Question 8. If the engineer worked for 20 hours on a job, Z, and the rates were
overhead 125 per cent on direct labour cost and the direct labour rate was $25 per
hour, what is the total cost of the job?

A. $500
B. $625
C. $1000
D. $1125

Question 9. The Pinewood Furniture Company Pty Ltd plans to manufacture

two lines of chairs in the coming year—lounge and patio. The company is
considering introducing an activity-based costing system. Given below are each
activity, its cost and its related activity driver.

24
Activity Cost Activity Driver
Material setups 300 000 Number of setups
Material handling 250 000 Number of parts
Cutting 700 000 Number of parts
Assembly 600 000 Direct labour hours
Finishing 450 000 Number of units

The level of activity for the year is:

Lounge Patio
Units to be produced 10 000 5 000
Number of setups 60 60
Number of parts per unit 10 5
Direct labour hours per unit 5 2

Under an activity-based costing system, what is the activity cost per unit of
activity driver for assembly?

A. $4.80 per part

B. $24 per direct labour hour
C. $10 per part
D. $10 per direct labour hour

Question 10. The following are the expected quality costs for a firm for a
selected period.
Line inspection $1 000
Normal spoilage identified $500
Design engineering $20 000
Returned goods $4 000
Customer problems and complaints $3000
Rework $5 000
Preventive maintenance $5 000
Product liability claims $30 000
Incoming materials inspection $1 500
Breakdown maintenance $2 000
Product-testing labour $6 000
Training $4 000
Supplier evaluations $2 000

Calculate the amount of internal failure costs.

A. $5 000
B. $7 500
C. $8 500
D. $9 500
Total marks for this section: 20 marks
SECTION B ANSWER ALL QUESTIONS

QUESTION 11

“In many organizations in the twenty-first century, management accountants play

an important strategic role by contributing to the organisation’s formulation and
implementation of strategy…” (Langfield-Smith, Thorne, and Hilton, 2002:13).

25
REQUIRED

In the light of the above quotation, describe THREE major decisions that a
management accountant considers when formulating an organisation’s strategies.
(5 marks for each point)

Total marks for this question: 15 marks

QUESTION 12

The Rewa Rice plant has two categories of overhead: maintenance and
inspection. Costs expected for these categories for 2010 are as follows:

Maintenance $ 60,000
Inspection 180,000

The plant currently applies overhead using direct labor hours and expected
capacity of 20,000 direct labor hours is available. The data provided below
has been assembled for use in developing a bid for a proposed job. Bid prices
are calculated as full manufacturing cost plus 40 percent markup.

Direct materials $1,200

Direct labor $6,000
Machine hours 300
Number of inspections 3
Direct labor hours 400

Total expected machine hours for all jobs during the year were 10,000, and
the total expected number of inspections is 1,500.

REQUIRED

(A) (i) Calculate the current overhead rate. (2 marks)

(ii) Compute the total cost of the potential job using direct labor hours
to assign overhead. (5 marks)

(ii) Determine the bid price for the potential job. (2 marks)

(B) (i) Using activity-based costing, calculate the overhead rates

assuming maintenance is driven by machine hours, while
inspection is driven by number of inspections.
(4 marks)

(ii) Compute the total cost of the job using the rates calculated in (B)
(i) to allocate the overhead costs.
(6 marks)

(ii) Determine the bid price if activity-based costing is used.

(2 marks)

26
(C) Prepare a memorandum to the plant manager recommending a bid price
for the potential job. Support your recommendation by explaining which
costing method best reflects the actual cost of the job.
(4 marks)

Total marks for this question: 25 marks

QUESTION 13

Pasifika Industries began operations on January 1. The company sells a single

product for $75 per unit. During the year, 9,000 units were produced and 8,600
units were sold. There was no work-in-process inventory at December 31.

The company uses an actual cost system for product costing, and actual costs for
the year were as follows:

Fixed Costs Variable Costs

Direct materials 0 $22.00 per unit produced
Direct labor 0 $16.00 per unit produced
Manufacturing overhead $90,000 $5.00 per unit produced
Selling and administrative $50,000 $3.00 per unit
expenses

REQUIRED

(A) Determine the cost per unit using absorption costing. (3 marks)

(B) Determine the cost per unit using variable costing. (2 marks)

(C) Determine the finished goods inventory cost at December 31 using

absorption costing. (2 marks)

(D) Determine the finished goods inventory cost at December 31 using

variable costing. (2 marks)

(E) Calculate the operating profit using absorption costing method.

(7 marks)

(F) Calculate the operating profit using variable costing method.

(8 marks)

(G) Explain why there is a difference between the absorption and variable
costing operating profits.
(6 marks)

Total marks for this question: 30 marks

27
 QUESTION 14

Refer to the following diagram and answer the question that follows:

Moulding Assembly Testing & Packaging

Customer

THROUGHPUT THROUGHPUT
THROUGHPUT 600 units per hour
700 units per 600 units per
hour + idle capacity for
hour
400 units per hour

(A) Which department is the bottleneck? Briefly explain (4 marks)

(B) How many units per hour will be delivered to the customer? (1 mark)

(C) If moulding department increases its throughput to 900 units per hour,
how many units per hour will be delivered to the customer? ( 1 mark)

(D) If moulding department increases its throughput from 700 to 900 units per
hour, by how much has the stock pile increase per hour? ( 2 marks)

(E) What strategy would the management put in place to increase the units
per hour to its customer? ( 2 marks)

Total marks for this question: 10 marks

~THE END~

28
Past examination paper
You are given the following past examination paper to help you to prepare for
your final examination. However, remember that the examination paper that you
will take this semester may not follow exactly the same structure, format or
content as this one.

The University of the South Pacific

Serving the Cook Islands, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.

SCHOOL OF ACCOUNTING AND

FINANCE

AF201: MANAGERIAL ACCOUNTING

FINAL EXAMINATION – SEMESTER 1, 2011

PRINT MODE

Time Allowed 3 hours plus 10 minutes reading

100 marks (55% of final grade)

INSTRUCTIONS

1. This exam has FIVE (5) compulsory questions.

2. Write your answers in the answer booklet provided.
3. Non-programmable Calculators may be used, but are not provided.
4. Relevant formulae are provided for you on the final page.
5. This exam is worth 55% of your overall mark. The minimum exam mark is
22/55.

29
QUESTION 1: MANAGING SUPPLIERS AND CUSTOMERS &
CONTEMPORARY APPROACHES TO MEASURING
AND MANAGING PERFORMANCE.

Comfy Ltd. produces comfortable bed sheets and linen for hotels and
departmental stores. Recently, due to the arrival of a new competitor in the
market, Comfy Ltd. realizes that the profits for 2009 was 10% lower than the
previous year before the competitor came into the market. Consequently the
management accountant was given the task to analyze the customer –driven
activities as a first step in analyzing customer profitability. The activities are as
follows:
• Process order sale
• Deliver order
• Invoice customer
• Process payment
• Handle complaint
• Investigate bad debt
• Visit customers
• Advertise in hotel magazines

To further improve the analysis, the management accountant also wants to

develop the performance measures for the customer perspective of the balanced
scorecard. Unfortunately, he has to rush off to town to attend to some business so
he asks you to do the following requirements.

REQUIRED

1. Classify each of the customer-driven activities listed above as either order

level, customer level, or market level. (8 marks)

2. Develop the customer perspective of the balanced scorecard by specifying

two lag indicators and two lead indicators for each of the following
customer objectives:

Objectives:

• Improve customer satisfaction

• Increase customer retention
• Increase customer profitability
(12 marks)

Total marks for this question: 20 marks

30
QUESTION 2: FINANCIAL PERFORMANCE.

Knitpix Products is a division of Parker Textiles, Inc. During the coming year, it
expects to earn an operating profit of $310,000 based on sales of $3.45 million;
without any new investments, the division will have an average net operating
asset of $3 million. The division is considering a capital investment project –
adding knitting machines to produce gaiters – that requires an additional
investment of $600,000 and increases operating profit by $57,500 (sales would
increase by $575,000). If made, the investment would increase beginning net
operating assets by $600,000 and ending net operating assets by $400,000.
Assume that the minimum rate of return required by the company is 7 percent.

(Note: Invested capital is defined as equal to average net operating asset)

REQUIRED

Show ALL necessary workings in all the requirements

1. Compute the ROI for the division without the investment. (Round off
answers to 2 decimal places)
(2 marks)

2. Compute the return on sales and investment turnover ratios without the
investment. Show that the product of the return on sales and investment
turnover ratios equals the ROI computed in Requirement 1. (Round off
answers to 2 decimal places)
(6 marks)

3. Compute the ROI for the division with the new investment. Do you think
the divisional manager will approve the investment?
(6 marks)

4. Compute the return on sales and investment turnover ratios for the
division with the new investment. Compare these with the old ratios.
(Round off answers to 2 decimal places)
(6 marks)

5. Assume that a JIT purchasing and manufacturing system is installed,

reducing average operating assets by $800,000. Compute the ROI with
and without the investment under this new scenario. Now do you think the
divisional manager will accept the new investment? Should he accept it?
Explain your answer. (Round off answers to 2 decimal places)
(6 marks)

6. Refer to Requirement 5. Compute the return on sales and investment

turnover ratios without the investment. (Round off answers to 2
decimal places)
(4 marks)

Total marks for this question: 30 marks

31
QUESTION 3: TRANSFER PRICING.
The Perth division of Aeronautic Controls (AC) produces a digital thermometer.
The thermometer can be sold in an open market for $180 each, or it can be used
by the Brisbane division in the production of a temperature control gauge that has
a unit contribution margin of $140 (given that the digital thermometer is
transferred at variable cost plus shipping).

The Perth division is currently operating at 70 per cent of its capacity of 2000
digital thermometers per month. Following are average costs per unit at this level
of capacity.

Average cost
Direct materials $ 50
Direct labour 10
Fixed costs 100
Total average cost per thermometer $160

If a digital thermometer is sold on the open market, the customer pays the
shipping cost. The cost of shipping a digital thermometer from Perth to Brisbane
is $15.

REQUIRED

1. What is the best transfer price for AC overall if a digital thermometer is

transferred to Brisbane and the Perth division is operating at 70 per cent of
capacity? (3 marks)

2. Using the transfer price in (1) above, what is the total unit contribution
margin of Perth Division?

(2 marks)

3. What is the best transfer price for AC overall if a digital thermometer is

transferred to Brisbane, but the Perth division is operating at full capacity and
the digital thermometer could have been sold on the open market?
(3 marks)

4. Suppose the Brisbane division can purchase a substitute for the digital
thermometer from an outside supplier for $100 (including shipping costs).
Using the transfer price calculated in (1) above, what is Brisbane’s new
contribution margin?
(3 marks)

5. If you were the manager of Brisbane division, under what circumstance

would you either accept or reject a special offer? Briefly explain.
(4 marks)

Total Marks for this question: 15 marks

32
QUESTION 4: TACTICAL DECISIONS, PRICING AND PRODUCT MIX
DECISIONS

There are TWO INDEPENDENT parts to this question. Answer the parts
separately.

PART A: MAKE OR BUY

Mills Inc. manufactures 50,000 components per year. The manufacturing cost per
unit of the components is as follows:

Direct materials $ 12
Direct labor 13
Variable overhead 5
Fixed overhead 10
Total unit cost $ 40

An outside supplier has offered to sell the component to Mills Inc. for $35.

REQUIRED

1. What is the effect on profit if Mills Inc. purchases the component from the
outside supplier?
(4 marks)

2. Assume that Mills Inc. can avoid $700,000 of the total fixed overhead costs if
it purchases the components. Now what is the effect on profit if Mills Inc.
purchases the component from the outside supplier?
(4 marks)

PART B: PRODUCT MIX DECISIONS

The Dash Company manufactures two products: A and B. Information about the
products is as follows:
Product A Product B

Revenue per unit $150 $125

Variable costs per unit 80 70
Contribution margin per unit $70 $ 55

Total demand 15,000 units 12,000 units

Machine hours per unit 0.5 MH 0.25 MH

There are 5,000 machine hours available during the quarter.

33
REQUIRED

1. Which of the products should Dash Company produce if it can only

produce one of the products?
(4 marks)

2. Assume that Dash Company uses half of the hours available to produce
Product A and half of the hours available to produce Product B. What is
Dash’s total contribution margin?
(4 marks)

3. Assume that Dash Company produces the product mix that will maximize
profit. What is Dash’s total contribution margin?
( 4 marks)

Total Marks for this question: 20 marks

QUESTION 5: SUSTAINABILITY AND MANAGEMENT

ACCOUNTING.

Below are two service organization’s efforts in reducing their environmental

impacts. Read each of the cases and answer the question that follows:

Case 1: Commitment to the environment

“Air Pacific’s overall commitment is to the maintenance and promotion of a
clean and pure environment. We practise recycling wherever possible, for its
economic and environmental benefits and reduce waste material and engine
emission. We actively seek and use biodegradable and non-polluting chemicals in
aircraft maintenance and cleaning tasks.” (Source: Air Pacific Annual Report
2009, p.2).

REQUIRED

1. Suggest ONE economic and ONE environmental benefit of recycling.

(2 marks)

2. What specific steps has Air Pacific taken to address environmental issues
in relation to:
• Paper use
• Ticketing
• Fuel consumption
• Carbon emissions
(4 marks)

34
 3. Based on Air Pacific’s overall commitment of maintaining and promoting
a clean and pure environment, give ONE example for each of the
following environmental costs:
• Prevention cost
• Appraisal cost
• Internal failure cost
• External failure cost
(4 marks)

Case 2: Environmental footprint - Reducing our environmental footprint

ANZ is committed to actively managing the environmental impact of our
activities. As part of this commitment, we set clear, measurable targets to reduce
our consumption of electricity, water and paper, our greenhouse gas emissions,
and the amount of waste we send to landfill.
We have developed an Environment Management System (EMS) which gives us
a structured approach to assessing how our operations impact on the environment
and setting targets to improve our performance. Our EMS also governs how we
measure and report on our progress. (Source: http://www.anz.com/about-
us/corporate-responsibility/environment/environmental-footprint/)

REQUIRED

1. What is an environmental management system? Describe how ANZ has used

its EMS (3 marks)

2. Suggest one way in which ANZ bank can reduce the number of papers used.
(1 mark)

3. Suggest one way in which ANZ bank can reduce the consumption of
electricity. (1 mark)

Total Marks for this question: 15 marks

~ THE END ~

35
RELEVANT FORMAULAE

1. Return on sales = Profit / Sales revenue

2. Investment turnover = Sales revenue / Invested capital

3. Return on investment = Profit / Invested capital

4. Transfer pricing = Additional outlay costs per unit + Opportunity cost per unit
incurred by supplying unit to the supplying unit

5. Contribution margin = Sales – Variable cost

36