MA2 CGA Sept'11 Exam

EMA2S11 ©CGA-Canada, 2011 Page 1 of 9

CGA-CANADA

ADVANCED MANAGEMENT ACCOUNTING [MA2] EXAMINATION September 2011

Marks Time: 3 Hours 30 Question 1

Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. Note:

11/2 marks each a. Which of the following statements is true?

1) Corporate social responsibility requires compliance with existing laws, regulations, and standards. 2) The professional commitment of management accountants is to the managers of their

organizations. 3) It is difficult for the public to assess the quality of the services provided by a professional

accountant. 4) Management accountants are only responsible for the integrity of the financial information

provided to internal users. Note:

Use the following information to answer parts (b) and (c). Premier Inc. makes and sells a single product. The budgeting system used by the company is based on a relevant range of 18,000 to 45,000 units produced and sold each month. The following budgeted information, for July 2011, is based on production and sales of 24,000 units:

Sales price $60 per unit Direct materials $18 per unit Direct labour $14 per unit Manufacturing overhead (40% fixed) $10 per unit Selling and administrative expenses (80% fixed) $7.50 per unit b. Premier expects to sell 40,000 units in July. What is the total budgeted fixed expense for July?

1) $160,000 2) $240,000 3) $256,000 4) $380,000 c. Assuming a budgeted fixed expense of $260,000, what is the monthly break-even point in units?

1) 12,683 2) 13,171 3) 14,286 4) 15,238

Continued...

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d. A system that allows managers to focus attention and learning on key strategic issues is classified as which type of control system?

1) Belief system 2) Boundary system 3) Diagnostic system 4) Interactive system e. There are different categories of agency costs. In which category should lower profits resulting from

poor decisions be included?

1) Bonding 2) Incentive compensation 3) Monitoring 4) Residual loss f. In the nexus-of-contracts model, decision making is normally separated from monitoring for which of

the following reasons?

1) Classes of participants within the firm are set apart from one another. 2) It makes sense to have agents monitor themselves. 3) Because moral hazard problems exist. 4) Once risk is shared, individuals usually make as much effort to avoid harm as when risk is not

shared. g. The balanced scorecard (BSC) approach can be used to evaluate the effectiveness of an organization’s

enterprise risk management (ERM) strategy. Which of the following risk-related measures would be included in the financial perspective of a BSC/ERM integrated framework?

1) Number of customer defections attributed to price 2) Number of customers retained 3) Number of employees attending risk management training 4) Percentage of units reworked h. Which of the following measures is most likely to be found in the financial perspective of the balance

scorecard of a company that follows a cost leadership strategy?

1) The percentage of its operating income that comes from charging premium prices for its products 2) The percentage of its operating income that comes from productivity gains 3) The percentage of its revenue that comes from new products 4) The percentage of line workers empowered to manage processes i. A strategic analysis of operating income is done by breaking down changes in operating income from

different components. Which of the following are components found in such an analysis?

1) Cost effects of growth and productivity 2) Cost effects of implementing advanced manufacturing controls 3) Revenue effects of productivity and growth 4) Revenue effects of growth, price recovery, and productivity j. Which of the following best describes a discretionary cost?

1) A cost that has a cause-and-effect relationship between outputs and resources used 2) A cost that can be linked to a specific operation 3) A cost that is less certain 4) A cost with a low level of uncertainty about the relationship between outputs and resources used

Continued...

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k. Which of the following strategic objectives best relates to the internal business process perspective in the balanced scorecard of a passenger airline?

1) Build customer loyalty 2) Increase free cash flows 3) Increase passenger revenue 4) Minimize average ground time l. Under which type of levers of control should the Sabarnes-Oxley Act be classified?

1) Belief systems 2) Boundary systems 3) Diagnostic control systems 4) Interactive control systems m. Which of the following statements is true?

1) Business unit strategy is concerned with where to compete in a particular industry. 2) Corporate strategy is concerned with how to compete in a particular industry. 3) Related diversified firms benefit from economies of scale and economies of scope. 4) Unrelated diversified firms grow primarily through research and development. n. Which of the following best describes the degree of operating leverage?

1) Contribution margin divided by operating income 2) Operating income divided by contribution margin 3) Operating income divided by sales 4) Sales divided by operating income o. Serious errors can be made when principles developed for task control situations are applied to

management control situations. Which of the following is a task control situation?

1) Decide inventory levels 2) Expand a plant 3) Issue new debt 4) Manage cash flows p. Which of the following is true about using return on investment (ROI) as a performance measurement

system?

1) ROI encourages managers to invest in new equipment. 2) Managers put more emphasis on short-term results if they are evaluated on ROI. 3) The only way to increase ROI is to increase sales while keeping investment constant. 4) ROI is a fair system and can be implemented in any type of firm. q. Which of the following statements is true of earnings management and the change to IFRS for the

preparation of financial statements?

1) Adopting IFRS will lead compensation committees to put more emphasis on net income to evaluate managers’ performance.

2) Adopting IFRS will put more pressure on control mechanisms to prevent earnings management. 3) Adopting IFRS will have no effect on earnings management. 4) Adopting IFRS will increase the reliability of financial statements.

Continued...

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r. For reporting purposes, the cost of environmental work can be categorized into 4 types of activities: prevention, assessment, control, and failure. Which of the following is an example of a control activity?

1) Building proper containment facilities for nuclear waste at a nuclear power plant 2) Cleaning up after an oil spill in the ocean 3) Running computer diagnostics on all trucks in a fleet regularly to ensure that the engines are

holding their compression 4) Using non-toxic alternatives for chemicals in a process s. Which of the following helps distinguish between direct and indirect costs?

1) The behaviour of the cost with respect to each unit produced 2) The controllability of the cost 3) The timing of the cost 4) The traceability of the cost t. The objective to increase the usage of recycled paper by developing packaging alternatives is related

to which perspective in a balanced scorecard?

1) Customer 2) Financial 3) Internal business process 4) Learning and growth

14 Question 2 Sports Inc. is a decentralized company with 4 divisions: football, golf, hockey, and tennis. Management bonuses are based on divisional ROI. The tennis division produces gear for intermediate and advanced tennis players. The manager of the division is faced with an opportunity to invest in 2 independent projects. In the first project the division would acquire new equipment that should increase quality and reduce manufacturing costs. The total investment would be $1,200,000 and generates annual savings of $186,000.

The second project will provide the opportunity to develop and market a new type of racket made of composite materials. Development costs for the new type of racquet would amount to $900,000 and increase operating income by $112,500.

If no new investment is made, the tennis division will have average assets of $9,000,000 and expected operating income of $1,350,000 for the coming year.

Sports’ management has $2,400,000 of capital available for the tennis division. If no investment is made, the capital will be invested at 12%, the minimum rate of return that Sports requires for all investments made by the divisions. Required

2 a. Compute the individual ROI for each project. 6 b. Compute next year’s divisional ROI for each of the following scenarios:

i) No new investment is made. ii) New manufacturing equipment is acquired. iii) The new type of racquet is developed. iv) New manufacturing equipment is acquired and the new type of racquet is developed. Explain which scenario the manager of the tennis division should choose. Identify the risks associated

with your decision. Justify your answer.

6 c. From the point of view of Sports as a whole, indicate which scenario should be chosen. Using quantitative analysis, explain why your answer is the same or different from part b).

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12 Question 3 G-Mart, a large retailer, sells 265,000 soccer balls each year. The purchasing manager would like to know how ordering and carrying costs vary with order quantity. At the same time, the manager would like to know the ordering quantity that will optimize the amount of inventory on hand to satisfy customer demand while reducing inventory-related costs. The cost per purchase order is $58.11. The annual carrying cost per ball is $15.71. Neither cost varies with the quantity ordered. The manager would like you to analyse 5 possible scenarios by completing the following table:

S1 S2 S3 S4 S5

Annual demand (units) 265,000 265,000 265,000 265,000 265,000

Cost per purchase order $58.11 $58.11 $58.11 $58.11 $58.11

Annual carrying cost per ball $15.71 $15.71 $15.71 $15.71 $15.71

Quantity (units) per purchase order 1,200 1,400 1,600 1,800 2,000

Number of purchase orders per year

Annual relevant ordering costs

Annual relevant carrying costs

Annual total relevant costs of ordering and carrying inventory

Required

6 a. Complete the table in your booklet and determine the economic order quantity (EOQ). Round the number of purchase orders to 2 decimals. Briefly discuss your results.

6 b. G-Mart can reduce its ordering cost to $50 per order by linking its systems to the supplier’s system.

There will be a one-time cost of $2,500 to link the 2 systems. Explain whether G-Mart should proceed with the change. Assume the manager investment time horizon spans 5 years. Justify your answer.

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12 Question 4 Andrews Equipment is considering an investment that can be realized using any of the following 4 projects: Project A Project B Project C Project D

Net initial investment $ 220,000 $ 190,000 $ 290,000 $ 260,000 Year 1 — Net inflows of cash 50,000 40,000 90,000 70,000 Year 2 — Net inflows of cash 80,000 65,000 80,000 100,000 Year 3 — Net inflows of cash 90,000 65,000 80,000 80,000 Year 4 — Net inflows of cash 40,000 95,000 120,000 115,000 Assumptions:

Ignore taxes. Initial investment is made at the beginning of the project. All inflows occur at the end of each year. Andrews’ required rate of return is 12% after taxes. The projects are mutually exclusive. Required

3 a. If Andrews uses the payback period method, identify which project should be chosen. 3 b. If Andrews uses the net present value method, indicate whether it would choose the same project.

Explain and show all calculations. 2 c. State the other factors, financial and non-financial, that Andrews should consider in selecting a

project. 4 d. Identify two strengths and two weaknesses of the payback period method, and two strengths and

two weaknesses of the net present value method.

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12 Question 5 DSL Inc. is an Internet service provider that serves both the residential and the commercial market. DSL would like to estimate the profitability of its commercial customers. The president has asked you to provide a framework that would help the company measure the profitability of each customer. The following data are for the most recent 12-month period for 3 of DSL’s commercial customers. This information is representative of DSL’s 335 commercial customers.

Customer A B C Total

Revenues $ 195,000 $ 212,000 $ 330,000 $ 737,000 Equipment cost 1 $ 30,300 $ 32,300 $ 48,000 $ 110,600 Number of service calls 180 155 175 Number of on-site service calls — regular 155 210 235 Number of on-site service calls — emergency 30 36 56 Number of bills 30 45 38 1 This is the cost of equipment owned by DSL but at the customer’s site. It includes depreciation as well

as the cost of maintaining the equipment. You have also been given cost and usage statistics for all commercial customers for the last 12 months: Number of Units Total Cost

Service calls 40,200 $ 1,407,000 On-site service calls — regular 14,080 $ 1,760,000 On-site service calls — emergency 6,300 $ 1,953,000 Billing 8,040 $ 241,200 Required

6 a. Determine the customer-level operating income for commercial customers A, B, and C. 6 b. Rank customers A, B, and C on customer-level operating income by completing the following table in

your booklet, and discuss the results: Cumulative Customer- Cumulative Customer Level Customer- Level Customer- Operating Income Level Operating Level as a % of Total Customer Operating Customer Income as a % Operating Customer-Level Code Income Revenues of Revenues Income Operating Income

EMA2S11 ©CGA-Canada, 2011 Page 8 of 9

12 Question 6 Quetronic Inc. makes 2 models of laptop computer. The standard model is designed for the home user while the gamer model targets advanced users. Both models are sold online and the company has a 30-day, money-back, satisfaction guarantee. Information on each model for the last 12 months is as follows: Standard Gamer

Units assembled and sold 20,000 10,000 Sales price per unit $ 870 $ 2,377 Seminars with suppliers on quality requirements for components 10 40 Sample testing hours of incoming components 200 2,040 Testing and final inspection hours per unit 0.5 1.0 Percentage of units reworked in plant 6% 12% Rework costs per unit repaired at customer site $ 550 $ 800 Percentage of units repaired at customer site 4% 7% Repair costs per unit repaired under warranty $ 600 $ 920 Percentage of units under warranty returned for repair 3% 2% Repair costs per unit $ 200 $ 230 Customer returns within 30 days of the date of purchase 1.0% 1.5% Costs of activities Seminars $15,000/seminar Testing and inspection $58/hour Required

8 a. Prepare the cost-of-quality report for Quetronic’s 2 models of computer. The report should show both the dollar amount and the percentage of sales for each cost and each model.

2 b. Discuss the costs of quality and how they compare for the two models. 2 c. Give two examples of non-financial quality measures that Quetronics could monitor as part of its

quality-control program.

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8 Question 7 The manufacturing division of a large Canadian company is determining the price that should be charged for units of component M transferred to the assembling division of the same company. Both divisions are evaluated as profit centres. The production costs of component M are as follows:

Direct materials $15.00 Direct labour 11.00 Variable overhead 16.50 Fixed overhead 5.50 Total $48.00 The assembling division uses component M, along with externally supplied components, in the assembly of product A. The assembling division can sell product A externally for $68. The costs incurred by the assembling division, excluding the cost of component M, are as follows:

Direct materials $ 3 Direct labour 5 Variable and fixed overhead 1 Total $ 9 Required

2 a. Determine the maximum and the minimum transfer price that could be used for each unit of component M.

1 b. Indicate what the transfer price would be if it is set equal to full production costs.

1 c. Indicate what the transfer price would be if it is set equal to variable production costs.

2 d. Briefly explain why the manufacturing division would be reluctant to transfer component M at a price

equal to variable costs.

2 e. Identify what other factors may have an influence on the determination of the transfer price.

END OF EXAMINATION

100

EMA2S11 [MA2.1011] ©CGA-Canada, 2011 Attachment 1 of 1

Advanced Management Accounting [MA2] Formulas

Average wait time for production

=

–

Economic order quantity (EOQ)

= 2DP/C Total relevant costs for inventory management (TRC)

= (D / Q) × P + (Q / 2) × C or = (DP / Q) + (QC / 2) Present value of tax shield for an asset purchase

= ×

.

Present value of tax shield on the purchase of an asset expanded to include salvage value

=(ct)× ×

.

–

×

Return on investment (ROI)

= (Income / Revenues) × (Revenues / Investments) or = Income / Investments Residual income (RI)

= Actual income – (Cost of capital × Invested capital) Economic value added (EVA)

= NOPAT – (WACC × Total capital) Return on sales (ROS)

= Operating income / Revenues

ADVANCED MANAGEMENT ACCOUNTING [MA2]

EXAMINATION

MA2

Before starting to write the examination, make sure that it is complete and that there are no printing defects. This examination consists of 9 pages and 1 page of attachments. There are 7 questions for a total of 100 marks.

READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED.

To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms.

Glossary of Assessment Terms

Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996). Copyright David Palmer. Calculate Mathematically determine the

amount or number, showing formulas used and steps taken. (Also Compute).

Compare Examine qualities or characteristics that resemble each other. Emphasize similarities, although differences may be mentioned.

Contrast Compare by observing differences. Stress the dissimilarities of qualities or characteristics. (Also Distinguish between)

Criticize Express your own judgment concerning the topic or viewpoint in question. Discuss both pros and cons.

Define Clearly state the meaning of the word or term. Relate the meaning specifically to the way it is used in the subject area under discussion. Perhaps also show how the item defined differs from items in other classes.

Describe Provide detail on the relevant characteristics, qualities, or events.

Design Create an outcome (e.g., a plan or program) that incorporates the relevant issues and information.

Determine Calculate or formulate a response that considers the relevant qualitative and quantitative factors.

Diagram Give a drawing, chart, plan or graphic answer. Usually you should label a diagram. In some cases, add a brief explanation or description. (Also Draw)

Discuss This calls for the most complete and detailed answer. Examine and analyze carefully and present both pros and cons. To discuss briefly requires you to state in a few sentences the critical factors.

Evaluate This requires making an informed judgment. Your judgment must be shown to be based on knowledge and information about the subject. (Just stating your own ideas is not sufficient.) Cite authorities. Cite advantages and limitations.

Explain In explanatory answers you must clarify the cause(s), or reasons(s). State the “how” and “why” of the subject. Give reasons for differences of opinions or of results. To explain briefly requires you to state the reasons simply, in a few words.

Identify Distinguish and specify the important issues, factors, or items, usually based on an evaluation or analysis of a scenario.

Illustrate Make clear by giving an example, e.g., a figure, diagram or concrete example.

Interpret Translate, give examples of, solve, or comment on a subject, usually making a judgment on it.

Justify Prove or give reasons for decisions or conclusions.

List Present an itemized series or tabulation. Be concise. Point form is often acceptable.

Outline This is an organized description. Give a general overview, stating main and supporting ideas. Use headings and sub-headings, usually in point form. Omit minor details.

Prove Establish that something is true by citing evidence or giving clear logical reasons.

Recommend Propose an appropriate solution or course of action based on an evaluation or analysis of a scenario.

Relate Show how things are connected with each other or how one causes another, correlates with another, or is like another.

Review Examine a subject critically, analyzing and commenting on the important statements to be made about it.

State Clearly provide a position based on an evaluation, e.g., Agree/Disagree, Correct/Incorrect, Yes/No. (Also Indicate)

Summarize Give the main points or facts in condensed form, like the summary of a chapter, omitting details and illustrations.

Trace In narrative form, describe progress, development, or historical events from some point of origin.

SMA2S11 ©CGA-Canada, 2011 Page 1 of 8

CGA-CANADA

ADVANCED MANAGEMENT ACCOUNTING [MA2] EXAMINATION September 2011

SUGGESTED SOLUTIONS

Marks Time: 3 Hours 30 Question 1

Note:

11/2 marks each Sources/Calculations:

a. 3) Topic 1.10 (Level 1) b. 2) Topic 1.5 (Level 1)

= [($10 × 0.4) × 24,000] + [($7.50 × 0.8) × 24,000] = $96,000 + $144,000 = $240,000 c. 1) Topic 1.5 (Level 1)

Contribution margin per unit = $60 – $18 – $14 – ($10 × 0.6) – ($7.50 × 0.2) Contribution margin per unit = $60 – $39.50 = $20.50

Break-even = $260,000 / $20.50 Break-even = 12,683 units d. 4) Topic 7.6 (Level 1) e. 4) Topic 7.2 (Level 2) f. 3) Topic 7.2 (Level 2) g. 1) Topic 9.2 (Level 2) h. 2) Topic 9.6 (Level 1) i. 1) Topic 9.6 (Level 1) j. 3) Topic 9.7 (Level 1) k. 4) Topic 9.1 (Level 2) l. 2) Topic 7.6 (Level 1) m. 3) Topic 7.3 (Level 2) n. 1) Topic 1.7 (Level 1) o. 4) Topic 7.5 (Level 1) p. 2) Topic 10.2 (Level 2)

Continued...

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q. 2) Topic 10.1 (Level 1) r. 1) Topic 10.1 (Level 1) s. 4) Topic 1.5 (Level 1) t. 3) Topic 9.1 (Level 2)

14 Question 2 Source: Topic 8.4 (Level 1)

2 a. Acquisition of the new equipment:

ROI = Operating income/Invested capital ROI = $186,000 / $1,200,000 ROI = 15.50% Development of a new type of racquet:

ROI = Operating income/Invested capital ROI = $112,500 / $900,000 ROI = 12.50%

6 b. i) No new investment is made:

ROI = Operating income/Invested capital ROI = $1,350,000 / $9,000,000 ROI = 15% ii) Acquisition of new equipment:

ROI = Operating income/Invested capital ROI = ($1,350,000 + $186,000) / ($9,000,000 + $1,200,000) ROI = 15.06% iii) Development of a new type of racquet:

ROI = Operating income/Invested capital ROI = ($1,350,000 + $112,500) / ($9,000,000 + $900,000) ROI = 14.77% iv) Acquisition of new equipment and development of a new type of racquet:

ROI = Operating income/Invested capital ROI = ($1,350,000 + $186,000 + $112,500) / ($9,000,000 + $1,200,000 + $900,000) ROI = $1,648,500 / $11,100,000 ROI = 14.85% The manager will invest only in the acquisition of the new equipment because it increases the

divisional ROI and the manager’s bonus. Developing a new type of racquet will decrease the ROI and penalize the manager. That is because the ROI of developing a new type of racquet is less than the current ROI of the division.

As an ROI of 15% can be achieved if Sports does not invest, a manager may be inclined to choose

this option over acquiring the new equipment because the risk of achieving the 0.06% increase in ROI on an investment of 1.2 million dollars is too risky.

Continued...

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6 c. No new investment is made:

Return from investing $2,400,000 @ 12% = $288,000 Acquisition of new equipment:

Return from investing ($2,400,000 – $1,200,000) @ 12% = $144,000 Increase in operating income = $186,000 Increase in profit = $330,000 Development of a new type of racquet:

Return from investing ($2,400,000 – $900,000) @ 12% = $180,000 Increase in operating income = $112,500 Increase in profit = $292,500 Acquisition of new equipment and development of a new type of racquet:

Return from investing ($2,400,000 – $1,200,000 – $900,000) @ 12% = $36,000 Increase in operating income = $186,000 + $112,500 = $298,500 Increase in profit = $334,500 Sports would be better off if the manager invests in both projects because they both yield a return

higher than the minimum required rate of 12%. From the point of view of the company as a whole the decision of the manager is not optimal.

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12 Question 3 Source: Topic 4.1 (Level 1)

6 a.

S1 S2 S3 S4 S5

Annual demand (units) (D) 265,000 265,000 265,000 265,000 265,000

Cost per purchase order (P) $58.11 $58.11 $58.11 $58.11 $58.11

Annual carrying cost per ball (C)

$15.71 $15.71 $15.71 $15.71 $15.71

Quantity (units) per purchase order (Q)

1,200 1,400 1,600 1,800 2,000

Number of purchase orders per year (D / Q)

220.83 189.29 165.63 147.22 132.50

Annual relevant ordering costs (D / Q) × P

$12,832.43 $10,999.64 $9,624.76 $8,554.95 $7,699.58

Annual relevant carrying costs (QC / 2)

9,426.00 10,997.00 12,568.00 14,139.00 15,710.00

Annual total relevant costs of ordering and carrying inventory

$22,258.43 $21,996.64 $22,192.76 $22,693.95 $23,409.58

The economic order quantity is 1,400 soccer balls. It is the order quantity at which carrying costs

equal ordering costs and total relevant ordering and carrying costs are minimized It can be confirmed from a direct calculation. Using D = 265,000; P = $58.11; C = $15.71:

EOQ = 2 265,000 58.11 /15.71 = 1,400.15 balls

6 b. When the ordering cost per purchase order is reduced to $50:

EOQ = 2 265,000 50 /15.71 = 1,298.78 balls The new relevant costs of ordering inventory are:

P

Q

D = (265,000 / 1,298.78) × 50 = $10,201.88

And the new relevant carrying costs inventory are :

C

2

Q= (1,298.78 / 2) × 15.71 = $10,201.92

The total new costs of ordering and carrying inventory = $10,200 × 2 = $20,400 Linking the 2 systems will lower the EOQ to 1,299 balls and the relevant carrying and ordering costs

by $1,600. G-Mart will spend $2,500 to link its system to the supplier system and the net cost will be $900 for the first year but will save $1,600 every year after that. G-Mart should go ahead with the project.

If the time horizon was more than 2 years, the benefits would outweigh the cost and the manager

should invest in linking the 2 systems.

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12 Question 4 Source: Topics 5.3 and 5.6 (Level 1)

3 a. Project A:

Initial investment: $220,000 Inflows: $50,000 (year 1) + $80,000 (year 2) + $90,000 (year 3) Payback = 3 years Project B:

Initial investment: $190,000 Inflows: $40,000 (year 1) + $65,000 (year 2) + $65,000 (year 3) + $20,000 / $95,000 (year 4) Payback = 3.21 years Project C:

Initial investment: $290,000 Inflows: $90,000 (year 1) + $80,000 (year 2) + $80,000 (year 3) + $40,000 / $120,000 (year 4) Payback = 3.33 years Project D:

Initial investment: $260,000 Inflows: $70,000 (year 1) + $100,000 (year 2) + $80,000 (year 3) + $10,000 / $115,000 (year 4) Payback = 3.09 years Project A will be chosen because it has the lowest payback period.

3 b. Project A Project B Project C Project D

PV of initial investment $ (220,000.00) $ (190,000.00) $ (290,000.00) $ (260,000.00) PV @ 12% of year 1 — Net inflows 44,642.85 35,714.28 80,357.14 62,499.99 PV @ 12% of year 2 — Net inflows 63,775.51 51,817.59 63,775.51 79,719.38 PV @ 12% of year 3 — Net inflows 64,060.22 46,265.71 56,942.42 56,942.42 PV @ 12% of year 4 — Net inflows 25,420.72 60,374.22 76,262.17 73,084.58 NPV $ (22,100.70) $ 4,167.80 $ (12,662.76) $ 12,243.37 Project D will be chosen because it has the highest NPV.

2 c. Other factors, financial and non-financial, that Andrews should consider:

Safety issues with the proposed equipment Reliability of the equipment/supplier Reliability of the estimates for inflows Training costs

Continued...

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4 d. Net present value

Strengths

Incorporates the time value of money Incorporates more information that improves the precision of the calculations Computes a result in dollars not percentages Can be used where required rates of return vary over the life of a project

Weaknesses

Difficult to compare two different projects Difficult to predict accurately all the cash flows on a long-term project

Payback

Strengths

Easy to understand One way to capture uncertainty about expected cash flows in later years of a project

Weaknesses

Does not incorporate the time value of money Does not consider a project’s cash flows after the payback period

12 Question 5

Source: Topic 2.5 (Level 1)

6 a. A B C

Revenues $ 195,000 $ 212,000 $ 330,000 Cost of equipment on customer site 30,300 32,300 48,000 Gross margin 164,700 179,700 282,000 Service-calls 6,300 5,425 6,125 On site service calls — regular 19,375 26,250 29,375 On-site service calls — emergency 9,300 11,160 17,360 Billing 900 1,350 1,140 Customer-level operating income $ 128,825 $ 135,515 $ 228,000

6 b. Cumulative Customer- Cumulative Customer-Level Customer- Level Customer- Operating Income Level Operating Level as a % of Total Customer Operating Customer Income as a % Operating Customer-Level Code Income Revenues of Revenues Income Operating Income

(1) (2) (3) = (1) / (2) (4) (5) = (4) / 492,340

C $ 228,000 $ 330,000 69.09% $228,000 46.31% B 135,515 212,000 63.92% 363,515 73.83% A 128,825 195,000 66.06% 492,340 100.00% $ 492,340 $ 737,000 The ranking does not include all the customers but it shows that it can vary depending on which

measure it is based. In this example customer B is ranked above customer A when operating income is measured in dollars. On the other hand, customer A’s operating margin is actually better than the operating margin of customer B, when it is based on a percentage of sale revenues. Such ranking should be used with caution and, like all performance measures, it is better to use multiple measures rather than a single one.

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12 Question 6 Source: Topic 3.3 (Level 1)

8 a. QUETRONIC INC. Cost-of-Quality Report

Standard Gamer Amount % of Sales Amount % of Sales Prevention costs Seminars with suppliers 1 $ 150,000 0.86% $ 600,000 2.52% Appraisal costs Sample testing of incoming components 2 11,600 0.07% 118,320 0.50% Testing and final inspection 3 580,000 3.33 580,000 2.44 591,600 3.40% 698,320 2.94% Internal failure costs Rework 4 660,000 3.79% 960,000 4.04% External failure costs Repairs at customer site 5 480,000 2.76% 644,000 2.71% Repairs on units returned 6 120,000 0.69 46,000 0.19 Customer returns 7 174,000 1.00 356,550 1.50

774,000 4.45% 1,046,550 4.40%

Total quality costs $ 2,175,600 12.50% $ 3,304,870 13.90% 1 Standard: (10 × $15,000) = $150,000; Gamer: (40 × $15,000) = $600,000 2 Standard: (200 × $58) = $11,600; Gamer: (2,040 × $58) = $118,320 3 Standard: (0.5 × 20,000 × $58) = $580,000; Gamer: (1.0 × 10,000 × $58) = $580,000 4 Standard: (0.06 × 20,000 × $550) = $660,000; Gamer: (0.12 × 10,000 × $800) = $960,000 5 Standard: (0.04 × 20,000 × $600) = $480,000; Gamer: (0.07 × 10,000 × $920) = $644,000 6 Standard: (0.03 × 20,000 × $200) = $120,000; Gamer: (0.02 × 10,000 × $230) = $46,000 7 Standard: (0.01 × 20,000 × $870) = $174,000; Gamer: (0.015 × 10,000 × $2,377) = $356,550

2 b. External failure costs are too high, in dollars and as a percentage of sales, for both models. They represent 36% of total quality costs for the standard model and 32% for the gamer model. The number of customer returns may be an indicator that customers are not happy with the quality of the products, which may be lower than the quality of other comparable laptops in the market. The company should spend more on prevention and appraisal costs in order to reduce both internal and external failure costs and, possibly, increase customer satisfaction.

2 c. Overall customer satisfaction with the products. Survey customers to measure their overall degree

of satisfaction with their purchase. Quality of technical support. If customers have a problem setting up a new computer and it cannot

be fixed, they are more likely to return the laptop and buy one from a competitor. Average time it takes to talk to a technical support representative. Identify which problems occur

more frequently. The number of units that need to be repaired more than once.

SMA2S11 ©CGA-Canada, 2011 Page 8 of 8

8 Question 7 Source: Topics 6.2, 6.3, and 6.4 (Level 1)

2 a. The minimum price for component M is $42.50, equal to the amount of the variable costs of the manufacturing division. The maximum price is $59.00, which is, for the assembling division, the difference between the sales price to external customers and the incremental costs to assemble product A using component M ($68.00 – $9.00).

1 b. $48.00 1 c. $42.50 2 d. It is because the division, which is evaluated as a profit centre, would not be making any profit. 2 e. ● Does the manufacturing division has excess capacity or is it operating at full capacity?

Is there an external market for component M? If there is such a market, what is the price at which the component can be sold or purchased on the

market?

END OF SOLUTIONS 100

MA2S11 ©CGA-Canada, 2011

CGA-CANADA

ADVANCED MANAGEMENT ACCOUNTING [MA2] EXAMINATION September 2011

EXAMINER’S COMMENTS

General Comments The overall performance on this examination was unsatisfactory. The examination included 7 questions on several topics from the MA2 course. The results for Questions 4 (capital budgeting), 6 (cost of quality), and 7 (transfer pricing) were just above satisfactory. However, many students were unable to achieve a satisfactory performance on Questions 1 (multiple-choice questions), 2 (performance measurement), 3 (inventory management), and 5 (customer profitability analysis).

Specific Comments

Question 1 Multiple choice (Levels 1 and 2) The performance of the students on this question, which included twenty multiple-choice items, was unsatisfactory. Students were less successful on the following parts: (a) new issues in management accounting, (i) strategic analysis of operating income, (j) cost concepts, (n) operating leverage, and (o) management control and strategy.

Question 2 Performance evaluation (Level 1) The performance of the students on this question was satisfactory in parts (a) and (b). The performance in part (c) was unsatisfactory. Students were able to compute the return on investment for different scenarios but had difficulty choosing a project based on these calculations and therefore making a recommendation.

Question 3 Inventory management (Level 1) The performance of the students on this question was satisfactory in part (a). Students were able to complete the table and determine the economic order quantity. Students had an unsatisfactory performance in part (b). They were asked to make a decision about inventory management based on the issues discussed in Topic 4.1. In this question, many students mastered the technical components of the topic but had difficulty using the techniques to support decision-making.

Question 4 Capital budgeting (Level 1) The performance of the students on this capital budgeting question was satisfactory.

Question 5 Customer profitability analysis (Level 1) Most students had an unsatisfactory performance on this question. It seems that many students were unfamiliar with the concepts pertaining to customer profitability analysis. In part (a), many students were able to compute the customer-level operating income, but only a few were able to rank customers in terms of the cumulative customer operating income as a percentage of total customer-level operating income in part (b).

Question 6 Costs of quality (Level 1) Most students performed satisfactorily on both parts of this quality costing question.

Question 7 Transfer pricing (Level 1) Most students performed satisfactorily on this question. Most of the students were able to determine what the transfer prices should be and their effects on managers and decision-making.