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MDC Course Outline Spring 2005
MDC Course Outline Spring 2005
BACHELOR OF BUSINESS
1. Understand, apply and critique the application of a range of different decision models used to
enable managers to solve problems, control and evaluate performance within an organisational
context.
2. Within the social context of an organisation, evaluate the impact of different decisions, control
systems and performance evaluation methods.
(See Figure 1 – page 5)
This builds on and extends their knowledge and skills developed in 22321/0 Cost Management
Systems for the following objectives:
As this subject builds on and extends the knowledge and skills developed in 22321/0 Cost
Management Systems (CMS) and Accounting Transactions and Business Decisions. Students must
have a strong foundation in costing and management accounting knowledge and skills to be able
to successfully complete this subject. Some of these basic knowledge and skills will be highlighted
in the first two tutorials of this subject. Students who find that their competencies in these
knowledge and skills have weakened with time are strongly advised to revise the materials
covered in CMS.
The subject focuses on the use of accounting information in facilitating (Management Decisions) &
influencing (Management Control) managerial decisions in organisations.
Decision-Facilitating Role: Managers have the responsibility and authority for making decisions with
respect to the acquisition and use of an organisation's resources. To do this effectively they must
identify the actions (or strategies) available to them, predict the relevant consequences of those actions,
and then choose the action that has the most preferred predicted outcome. Management accounting
systems can be effective tools in providing information that is useful in predicting the possible
consequences of alternative actions and in presenting a description of those consequences.
Furthermore, management accounting systems can help identify situations in which "corrective" action
is required.
Decision-Influencing Role: Whilst managers have the responsibility and authority for making decisions
within organisations, they may not do so in the best interest of the organisation. Management
accounting systems can be effective tools in influencing managerial decisions and actions through its
role in organisation in evaluating and rewarding performance. However, management accounting
systems can also have unintended consequences. For instance, traditional cost allocation system may
give managers the incentive to increase inventory when demands and profit are low in order to increase
profit. Another example is the use of ROI to evaluate managerial performance may discourage
managers from investing in some worthwhile projects (i.e. projects with positive NPV) because the
ROI of the project is less than the divisional ROI. An understanding of the behavioural impact of
accounting systems on managerial behaviour is therefore important in the design of effective
management accounting systems.
To do well in this subject, students need to develop analytical and evaluative skills. In other words,
you should not approach the material in this course as one of memorising rules or particular solutions.
For instance, decision-making questions require students to firstly identify the relevant information. In
other words, you have to understand why some information is included and other excluded rather than
merely memorising particular solutions. Instead you should develop your analytical skills with respect
to the identification and use of decision relevant accounting information.
i) Spreadsheet applications;
ii) Database applications; and
iii) Word-processing, report writing and presentation applications.
iv) Use of Internet for research
Assessment:
Marks will be awarded in the following proportion:
Research Assignment 40% Due in tutorials week 10
Final examination 60% To be advised
Total 100%
In-Class Assessment
Students are required to complete their assignments prior to class and are expected to participate in
class discussion. Students that fail to complete the required exercises for the week, called Entry
Ticket Homework, will NOT be allowed into the tutorial. The Entry Ticket Homework is
outlined in the weekly tutorial guide. Students will be allowed one “grace week” where they will be
allowed in to the tutorial without having completed the work. This does not include the first week’s
work which most students would not have had opportunity to prepare for.
Students will be required to achieve a pass in both the overall marks for the continuous assessments
and the final examination to satisfy the requirements of the subject.
Coordinating Lecturer:
Pernilla Linden,
Associate Lecturer, School of Accounting, UTS
Room C311A, Telephone 9514-3773,
E-mail Pernilla.Linden@uts.edu.au
David Bedford
Associate Lecturer, School of Accounting, UTS
Room C311, Telephone 9514-3638,
E-mail David.Bedford@uts.edu.au
22421/0 Management Decisions and Control – Course Outline -5–
University of Technology, Sydney
Problems
&
Decisions
Policies &
Guidelines
Assumption 1
Assumption 2
Social Solution 1
Assumption 3
Context Solution 2
Impact Solution 3
INFORMATION
Decisions Models
Standard Costing
Cost Behaviour
CVP Analysis
Budgeting
Relevant Costing
Pricing Decisions
Control Systems
Performance
Evaluation
22421/0 Management Decisions and Control – Course Outline -6–
University of Technology, Sydney
Prescribed Text:
Langfield-Smith, K., Thorne, H., and Hilton, R. W., (2003), Management Accounting – An Australian
Perspective, McGraw-Hill.
Kaplan, R. S. and Atkinson, A. A., (1998), Advanced Management Accounting, Upper Saddle River,
N. J., Prentice-Hall International.
Prescribed readings
Briers, M. and Hirst, M. (1990) The role of budgetary information in performance evaluation,
Accounting, Organisations and Society, 15(4) 373-398.
Emmanuel, C., Otley, D. and Merchant, K. (1990) Accounting for Management Control, London:
Chapman & Hall, pp57-67. (658.1511EMMA)
Hopwood, A.G., (1976), Accounting and Human Behaviour, Prentice-Hall. Pp. 57-68
(657.019HOPW)
Kaplan, R.S., (1983), Measuring Manufacturing Performance: A New Challenge for Management
Accounting Research, The Accounting Review, LVIII (4), pp.686-705.
Macintosh, N.B., (1985), The Social Software of Accounting and Information Systems, Chapters 2 & 3
Wiley, (658.40388MACI)
References:
Ashton, D., Hopper, T., and Scapens, R., (1995), Issues in Management Accounting, (2nd Edition)
London: Prentice-Hall. (685.1511ASHT)
Bromwich, M and Hopwood A.G., (1986), Research and Current Issues in Management Accounting
London: Pitman. (685.1511/77)
Kaplan, R.S. and Norton, D.P, (1996), The Balanced Scorecard, Harvard Business Press
(658.4012KAPL).
Macintosh, N.B., (1994), Management Accounting and Control Systems: An Organizational and
Behavioural Approach, Wiley. (658.1511MACI)
Merchant, K (1997), Modern Management Control Systems, Prentice-Hall.
Senge, P., (1990), The Fifth Discipline: The Art and Practice of the Learning Organization,
Doubleday, New York (658.4/501)
Simons, R., (1995), Levers of Control: How Managers Use Innovative Control Systems to Drive
Strategic Renewal, Harvard School Press. (658.4120SIMO)
22421/0 Management Decisions and Control – Course Outline -7–
University of Technology, Sydney
You should bookmark this web page. On this page, you can login directly. After you have logged in, you will see a list of
subjects you have enrolled in. After you have finished your session, you should logout and close your browser to logout
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Contact the lecturer about UTSOnline only if the problems are associated with lecture materials.
The Course outline, Lecture notes, Tutorial notes and Announcements will be on the Accounting for Business homepage.
Please check the Announcements regularly and before you make enquiries.
UTSOnline is not intended to replace "live" lectures and tutorials but to provide a supplement and a flexible learning
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are encouraged to contact the Disability Support Officers or Special Needs Service (95141177) for a
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required if you wish to apply for assessment adjustments, including alternative assessment conditions. Each
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adjustments. Meeting with the Disability Support Officers or Special Needs Service before seeking
assessment adjustments from your ALO is required.
8 Organisational Structure and Decentralisation & Control Systems and Transfer Pricing
(reference – L-S.T.H. Chapter 12 - Kaplan & Atkinson Chapter 7 –
Emmanuel, Otley & Merchant, pp. 7-67)
13 Revision
22421/0 Management Decisions and Control – Course Outline -9–
University of Technology, Sydney
8 Organisational Structure and Decentralisation & Control Systems and Transfer Pricing
Week • Contingency Theory of Management Accounting
Commencing • Contextual variables affecting extent of decentralisation
19/9/2005
• Major Principles of Decentralisation
• Features of Decentralisation
• Organisation of Decentralised Units
• Performance Measures for Decentralised Operating Units
• Responsibility accounting and controllability
• Extent of Reliance on Accounting Performance Measures
• Management Control Systems
• Evaluating Management Control Systems
• Organisational Structure and Decentralisation
• Choice About Responsibility Centres
• Responsibility accounting, controllability and transfer pricing
• Transfer Pricing methods and issues
13 Revision
Week
Commencing
31/10/2005
22421/0 Management Decisions and Control – Course Outline - 12 –
University of Technology, Sydney
TUTORIAL ASSIGNMENTS
Tutorial Tutorial Work to be covered
Cost Management Systems – Review
1 • Establish Groups
Week • Review – Cost Management Systems
Commencing • Cost Terminology
1/8/2005
• Job Costing
• Cost-Volume-Profit Analysis
• No Entry Ticket Homework this week
Questions 1 – 3, syllabus pages 16-17
The management of Production Life Pty. Ltd. receives an Interim financial report on June 29th, 2003. The report
covered all activities for the financial year from July 1st, 2002. Inventories of Work-In-Process and finished
goods were $74,500 and $146,000 respectively as of July 1st, 2002. All Jobs on hand had been completed on the
29th June 2003, except for one large job; No. 276. The job cost sheet for this job indicated to date direct labour of
$12,000 and direct material of $10,000 had been used.
Records for the last day of the financial year showed that direct labour costs of $5,000, direct material costs of
$3,000 and factory overhead costs of $2,000 were incurred on that day. Job No. 276 was still incomplete.
Up to the close of business on the 29th June 2003, the work in process account had been charged with $500,000
of direct material. Factory overhead is applied at 150% of direct labour costs. Factory overhead of $850,000 had
been incurred up to the close of business on 29th June 2003.
Sales for the period were $3,300,000, representing a mark-up of 50% on factory cost. There were no sales
recorded on the last day of the period. Closing balance of finished goods was $34,000.
Required:
Incorporate records for the last day of the financial period and for the full financial period prepare:
Estimated Fixed Costs and Fixed Expenses during the year were $440,000.
Manufacturing Capacity is 500,000 units per year.
Required:
(a) Calculate the Contribution Margin per unit and the Contribution Margin ratio.
(b) What is the breakeven point in Units for Global Park Ltd.?
(c) Given an annual sales volume of 420,000 units, calculate the selling price per unit, necessary
to achieve an after tax profit equal to $420,000.
(d) (Revert to original data). At a selling price of $5.50, calculate the number of units that need
to be sold in order to earn a net profit after tax equal to $500,000.
(e) The SELLING PRICE required to earn a net profit after tax equal to 10% of sales revenue
assuming 250,000 units are manufactured and sold.
(f) The number of units that need to be sold at a selling price of $8.00 per unit to earn a net
profit after tax equal to 15% of total costs.
22421/0 Management Decisions and Control – Course Outline - 18 –
University of Technology, Sydney
Seminar 2
1. Please explain why it is important to know Cost Management Systems before undertaking
Management Decisions and Control.
3. Explain the history of management accounting, identifying the key theoretical approaches.
4. Discuss the 4 key disciplines that management accounting builds off and explain how these
disciplines influence the practice of management accounting.
6. Please provide one example from the business press of how management control systems
are used.
22421/0 Management Decisions and Control – Course Outline - 19 –
University of Technology, Sydney
Seminar 3
1. The management accountant of Efficient Manufacturing Ltd. has estimated the following actual cost and
expense functions to prepare flexible budgets:
Materials $ 4,000 + $22.00 per unit produced
Labour $ 6,400 + $15.00 per unit produced
Other factory overhead $12,000 + $25.00 per unit produced
S & A Expenses $ 4,970 + $10.00 per unit sold
2. Eighty per cent of the variable cost of materials and labour are prime costs; the remainder is indirect costs.
Depreciation of production machinery is $2,000 per month and depreciation of office equipment is $1,000 per
month. The company tax rate is 33%. The selling price is $150.00. The Denominator Level of Activity is 400
units.
3. The following balances are available for the month of July 200X:
Opening Balance Closing Balance
Finished Goods 40 units 60 units
Material $3,255 $2,635
Wages payable $3,500 $4,250
Accounts Payable $21,554 CR
Accounts Receivable $60,000 DR
Cash at Bank $26,710 CR
Accounts payable and accounts receivable refer to amounts accrued during the month of June 200X
4. Sales collections are made as follows:
• 40 per cent during the month of sale;
• 58 per cent during the next month;
• 2 per cent un-collectable (to be written off at the end of the month following the sale to the
provision for doubtful debts. Bad debt expenses are provided for in the month of sales as financial
expenses).
5. Purchases of material are paid for in the month in which they are incurred. Factory overheads and selling and
administration expenses are paid thirty per cent in the month in which they are incurred and seventy per cent in
the following month.
Required
Assume that during the month of July 200X the company will sell 350 units at the selling price of $150.00 per
unit. Prepare a budgeted income statement and a cash budget for the month of July 200X.
22421/0 Management Decisions and Control – Course Outline - 20 –
University of Technology, Sydney
The profit and loss account for Forte for the last financial year is given below:
Forte
Profit and Loss Statement
For Year ended 30 June 2004
Sales revenue 1,904,000
• Forte has invested in new manufacturing equipment. This will increase the current depreciation expenses
in fixed manufacturing overhead to four times its current level. This is the only new investment in fixed
assets made by Forte.
• This new investment resulted in an increase in the efficiency of direct labour of 20 per cent and savings
in direct material of 5 per cent
• Forte will increase advertising expenditure by $50,000 in an effort to boost sales
• As a result of the improve quality of the product and services resulting from the new equipment and
because of increased advertisement, the sales volume is expected to increase by 25 per cent and the unit
selling price by 10 per cent
• All current spending is expected to increase at the rate of 4 per cent
• Ending inventory at 30 June 2005 will be 3,000 units. Use a denominated level of output of 10,000 for
the year 2005 to value ending inventory.
Required
Prepare a budgeted profit and loss statement for the year ended 30 June 2005. (Note: show all your workings
clearly)
22421/0 Management Decisions and Control – Course Outline - 21 –
University of Technology, Sydney
Seminar 4
1. What is Scientific Management movement? How has it influenced the development of management
accounting?
2. What is the idea behind the Human Relations approach? What is the problem with Scientific
Management approach that the Human Relations School attempts to rectify?
3. Briefly discuss Argyris' study on the Impact of Budget on Human Behaviour and explain how it has
influenced the subsequent studies such as Hofstede (1967), Stedry (1968), DeCoster and Fertakis (1968)
and Hopwood (1972, 3).
5. Discuss the impact of budget difficulty on human behaviour and organisational performance.
6. Discuss Hopwood's (1972, 3) study of the impact of budgetary evaluation style on human behaviour.
How is budgetary evaluation style linked to leadership style? Briefly discuss Otley's (1978) replication of
Hopwood's studies and its implication for accounting behavioural research.
7. What is Human Resource approach and how is different from Human Relations School?
Topic 1:
Budget participation provides an environment where budgetary slack appears which reduces organisation
performance; therefore managers should not allow participation in budgeting.
Topic 2:
Personality is the most important factor that influences the effect a budget will have on individuals; therefore
budgets should be designed specifically for individual’s personalties.
22421/0 Management Decisions and Control – Course Outline - 22 –
University of Technology, Sydney
Seminar 7
The report states that total costs for 5,000 units are estimated at $957 000 or $191.40 a unit. The
current purchase price is $130.00 a unit, so the report recommends a continued purchase of the
product.
Components (outside purchases) $120,000
Assembly labour* $300,000
Factory overhead** $450,000
General and administrative overhead*** $87, 000
Total costs $957 000
*Assembly labour consists of hourly production workers.
**Manufacturing overhead is applied to products on a direct labour dollar basis. Variable overhead
costs vary closely with direct labour dollars.
Fixed overhead 50% of direct labour dollars
Variable overhead 100% of direct labour dollars
Manufacturing overhead rate 150% of direct labour dollars
***General and administrative overhead is applied at 10% of the total cost of material (or
components), assembly labour and manufacturing overhead.
Clearview Company has purchased 40,000 digital cameras annually from Zoolander Enterprises Ltd
The price has increased each year and reached $132.00 per unit last year. Because the purchase
price has increased significantly, Clearview management has asked that an estimate be made of the
cost to manufacture the digital camera in Clearview facilities. Clearview products consist of
stamping and moulding. The company has little experience with products requiring assembly.
Required:
Harry Moss, administrator of David’s MDC Hospital, requests your assistance in preparing a cost
analysis for a proposed additional to the telemetry unit. The hospital presently has 10 telemetry
units in operation on a 40-bed floor. A telemetry unit monitors patients who had heart attacks or
have cardiac problems. This unit allows a patient to move about freely in that particular hospital
wing without being confined to a hospital bed. The present 10-unit telemetry monitoring system is
located in the nursing station that can accommodate the proposed 8 additional units without
renovation. Telemetry units represent a step down in the level of care from cardiac intensive care
rooms. Telemetry units not only offer patients more freedom but also offer a considerable cost
saving. Cardiac care rooms average $300 per day, while the telemetry unit charge is the regular
room charge of $120 plus an additional $80 to $120 daily.
Expected revenue. Hospital management is undecided whether to charge a $80 or $120 differential
a day for the proposed unit. Also, there is lack of consensus among the managers regarding the rate
of utilisation. The expected range is from 40 to 60 percent. A 10 percent allowance for bad debts
and insurance discount is estimated. Expected cost. Space for the unit will be obtained by
converting a wing of the hospital presently being used for medical-surgical patients; the regular
room rate is charged for this wing. The equipment’s total cost is expected to be $44,570; the life is
estimated to be only five years due to technological changes. Straight-line depreciation will be
used. The administrator indicates that you are to determine total cost for the five-year period for
each cost element and then divide by five years to obtain an average for the five-year period.
Service contract costs for routine maintenance and service call costs for overtime, labour, and parts
are expected to be $3,060 and $2,400 respectively in Year 2, with an increase of 10 percent per year
thereafter for inflation; no such costs are expected for Year 1 since the equipment will be under
warranty during this time. Costs of supplies will be $2,800 for the first year, with a 12 percent
annual increase thereafter due to inflation and aging of the equipment. One registered nurse earning
$25,000 annually, and two licensed practical nurses, each earning $17,000 annually, will staff the
eight-bed unit. Personnel cost the hospital industry has increased 8 percent annually in the last few
years. For simplicity, assume the service contract, service call, suppliers, and personnel costs are
fixed, unaffected by changes in volume.
Required:
(a.) Determine differential margin that will be received and the annual percentage return on
equipment using a:
(1) $80 charge per day and a 40 percent use rate
(2) $80 charge per day and a 60 percent use rate
(3) $120 charge per day and a 40 percent use rate
(4) $120 charge per day and a 60 percent use rate
(b.) Advise management as to the alternative to choose explaining why you think this is the right
choice.
(c.) List two other factors that should be considered before installation of the unit explaining why
they are important.
(d.) Discuss three guidelines that help a management accountant to determine what the relevant
information is when he or she is confronted with an alternate choice decision. Explain why these
factors are important.
22421/0 Management Decisions and Control – Course Outline - 24 –
University of Technology, Sydney
Seminar 8
Fashionable produces four products, shirt, skirt, trousers and jacket that it sells directly to retailers. The unit
selling price and costs are given below:
At the moment Fashionable produces 2,000 shirts; 600 skirts; 600 trousers and 200 jackets - this uses up all
the available machine hours. The maximum quantities of shirts, skirts, trousers and jackets that Fashion can
sell as well as the minimum quantities that it must sell because of contractual arrangements are given below:
Required
(a) How many units of shirts, skirts, trousers and jackets should Fashionable produce to maximise profit?
What is the profit at the optimal product mix? Support your answers with appropriate calculation.
(b) If Fashionable receives a special order for 50 jackets, what is the minimum unit selling price it would be
willing to accept for this order?
(c) If 100 extra machine hours are available, what are the maximum amounts that Fashionable would pay for
each machine hour?
22421/0 Management Decisions and Control – Course Outline - 25 –
University of Technology, Sydney
Shrub, Inc. has the following direct and indirect cost for the two component parts it manufactures
for the computer industry:
Shrub includes all R&D and design costs in engineering costs. Assume that Shrub has no
marketing, distribution, or customer-service costs.
Shrub’s accountant identifies the following activity cost pools for each activity, and the costs per
unit of cost driver for each overhead cost pool:
Over a long-run horizon, Shrub’s accountant views direct materials cost and direct manufacturing
labour costs as variable with respect to the units of RAM and Chips produced, and overhead costs
as variable with respect to their chosen drivers. For example, set-up costs vary with the number of
set-up hours. Direct machining costs represent the cost of machine capacity dedicated to the
production of each product (50,000 hours at $6 per hour for RAM). These costs are fixed and are
not expected to vary over the long-run horizon. Additional information is as follows:
22421/0 Management Decisions and Control – Course Outline - 26 –
University of Technology, Sydney
RAM Chips
1. Production batch sizes 500 units 200 units
2. Set-up time per batch 12 hours 18 hours
3. Testing and inspection time per unit of product 2.5 hours 4.75 hours
produced
4. Engineering costs incurred on each product $340,000 $560,000
Shrub is facing competitive pressure to reduce the price of RAM and had set a target price of
$69.60, well below its current price of $81.20. The challenge for Shrub is to reduce the cost of
RAM. Shrub’s engineers have proposed new product design and process improvements for the
“New RAM” to replace RAM. The new design would improve product quality, and reduce scrap
and waste. The reduction in prices will not enable Shrub to increase its current unit sales.
(However, if Shrub does not reduce prices, it will lose sales.)
The expected effects of the new design relative to RAM are as follows:
a) Direct materials costs for New RAM are expected to decrease by $4.00 per unit.
b) Direct manufacturing labour costs for New RAM is expected to decrease by $1.00 per unit.
c) Machining time required to make New RAM is expected to decrease by 20 minutes. It currently
takes 1 hour to manufacture 1 unit of RAM. The machines will be dedicated to the production
of New RAM.
d) New RAM will take 7 set-up hours for each set-up.
e) Time required for testing each unit of New RAM is expected to be reduced by 0.5 hour.
f) Engineering costs will be unchanged.
Assume that the batch sizes are the same for New RAM as for RAM. If Shrub requires additional
resources to implement the new design, it can acquire these additional resources in the quantities
needed. Further assume the costs per unit of cost driver for the New RAM are the same as those for
RAM.
Required
1. Calculate the full cost per unit for RAM and Chips using activity-based costing.
2. What is the mark-up on the full cost per unit for RAM?
3. What is Shrub’s target cost per unit for New RAM if it is to maintain the same mark-up
percentage on the full cost unit as it had for RAM?
4. Will the New RAM design achieve the cost reduction targets that Shrub has set? Explain.
5. What price will Shrub charge for New RAM if it uses the same mark-up percentage on the full
cost per unit for New RAM as it did for RAM?
6. What price should Shrub charge for New RAM? Why?
7. As Shrub’s management accountant, give 5 suggestions for improving the current business
position that management could consider.
22421/0 Management Decisions and Control – Course Outline - 27 –
University of Technology, Sydney
Plagiarism
‘Plagiarism’ is a broad term referring to the practice of appropriating someone else’s ideas or work and
presenting them as your own without acknowledgment. Plagiarism is literary or intellectual theft! It can
take a number of forms, including:
• copying the work of another student, whether that student is in the same class, from a earlier year of
the same course, or from another tertiary institution altogether;
• copying any section, no matter how brief, from a book, journal, article or other written source,
without duly acknowledging it as a quotation;
• copying any map, diagram or table of figures without duly acknowledging the source; or
• paraphrasing or otherwise using the ideas of another author without duly acknowledging the source.
Whatever the form, plagiarism is unacceptable both academically and professionally. By plagiarising you
are both stealing the work of another person and cheating by representing it as your own. Any instances of
plagiarism can therefore be expected to draw severe penalties.
Cheating means to defraud or swindle. Students who seek to gain an advantage by unfair means such as
copying another student’s work, or in any other way misleading a lecturer about their knowledge or ability or
the amount of work they have done, are guilty of cheating.
Students who condone plagiarism by allowing their work to be copied will also be subject to severe
disciplinary action.
Avoiding plagiarism is one of the main reasons why the Faculty of Business is insistent on the
thorough and appropriate referencing of all written work.