Uploaded by Mark Ng

ACY4005 Exam

Bachelor Degree Programmes
2019 – 2020 Semester 2 Final Assessment
Module Code
Module Title
Advanced Management Accounting
16 May 2020
Time Allowed :
3 hours
Notes to Candidates:
This question paper has 3 pages (excluding this cover sheet).
3 questions totally. Answer ALL questions.
indicated in brackets.
This examination will be marked out of 80.
Start a new page for each question in your answer.
Show all your WORKINGS and CALCULATION STEPS to earn full credit. You may
OMIT explanation for all journal entries.
You can use calculators in this assessment.
You are reminded of the necessity for clear and orderly presentation in your answers.
Marks allocated to parts of questions are
Question 1 (25 marks)
Spring Resort was for many years a small, family-owned resort serving day skiers from nearby towns.
Spring Resort was recently acquired by Westin Resort, a major ski resort operator. The new owner has plans to
upgrade the resort into a destination resort for vacationers. As part of this plan, the new owner would like to
make major improvements in the City Lodge, the resort’s on-the-hill cafeteria. The menu at the lodge is very
limited – hamburgers, hot dogs, tuna fish sandwiches, pizzas, french fries, and packaged snacks. With little
competition, the previous owner of the resort had felt no urgency to upgrade the food service at the lodge. If
skiers want lunch on the mountain, the only alternatives are the City Lodge or bring their own meal.
As part of the deal when acquiring Spring Resort, Westin Resort agreed to retain all of the current employees
of the resort. The manager of the lodge, while hardworking and enthusiastic, has very little experience in the
restaurant business. The manager is responsible for selecting the menu, recruiting and training employees, and
overseeing daily operations. The kitchen staff prepare food and wash dishes. The dining room staff take orders,
serve as cashiers, and clean the dining room area.
Shortly after taking over Spring Resort, management of Westin Resort held a day-long meeting with all of the
employees of the City Lodge to discuss the future of the ski resort and the new management’s plans for the
lodge. At the end of this meeting, management and employees of the lodge tried to create a balanced scorecard
for the lodge that would help guide operations for the coming ski season. Almost everyone who participated in
the meeting seemed to be enthusiastic about the scorecard and management’s plans for the lodge. Westin
Resort also promises to pay for the costs of staff attending courses at the local university.
(a) Construct a balanced scorecard for the City Lodge. Indicate whether each measure is expected to
increase or decrease.
(10 marks)
(b) Explain the objectives and measures in your balanced scorecard and how might they be linked? (6 marks)
(c) Assume that the company adopts your balanced scorecard. After operating for a year, some performance
measures show improvements, but not others. What should management do next?
(4 marks)
(d) Suppose an organization has not implemented either an activity-based costing system or a balanced
scorecard but it believes that both would be valuable for the organization. However, management is
currently willing to undertake only one major change initiative. Advise management on the decision
between implementing an activity-based costing system or a balanced scorecard.
[Total for Question 1: 25 marks]
Question 2 (25 marks)
Sonic Production Corporation produces cell phone at its plant in Chaoyang, China. In recent years, the
company’s market share has been eroded by stiff competition from overseas. Price and product quality are the
two key areas in which companies compete in this market.
A year ago, the company’s cell phones had been ranked low in product quality in a consumer survey. Shocked
by this result, James Chan, Sonic’s president, initiated a crash effort to improve product quality. James set up a
task force to implement a formal quality improvement program. Included on this task force were
representatives from the Engineering, Marketing, Customer Service, Production, and Accounting departments.
The broad representation was needed because James believed that this was a companywide program and that
all employees should share the responsibility for its success.
After the first meeting of the task force, Holly Ho, manager of the Marketing Department, asked John Tse,
production manager, what he thought of the proposed program. John replied, “I have reservations. Quality is
too abstract to be attaching costs to it and then to be holding you and me responsible for cost improvements. I
like to work with goals that I can see and count! I’m nervous about having my annual bonus based on a
decrease in quality costs; there are too many variables that we have no control over.”
Costs relating to production, quality, and quality control over the last two years are given below:
Total production cost
Warranty repairs
Incoming inspection
Process control monitoring
Training suppliers
Quality engineering
Customer returns
Machine maintenance
Costs ( in thousands)
Last year
This year
As they were reviewing the information above, Holly asked John what he now thought of the quality
improvement program. John replied, “I’m relieved that the new quality improvement program hasn’t hurt our
bonuses, but the program has increased the workload in the Production Department. It is true that customer
returns are way down, but the cell phones that were returned by customers to retail outlets were rarely sent
back to us for rework.”
(a) Prepare a cost-of-quality report by showing the costs in both years as percentages of both total
production cost and total quality cost. Carry all computations to one decimal place. By analyzing the
report, determine if Sonic Production Corporation’s quality improvement program has been successful.
List specific evidence to support your answer.
(12 marks)
(b) Do you expect the improvement program as it progresses to continue to increase the workload in the
Production Department?
(4 marks)
(c) James Chan believed that the quality improvement program was essential, and that Sonic Production
Corporation could no longer afford to ignore the important of product quality. Discuss how the company
could measure the cost of not implementing the quality improvement program.
(3 marks)
In order to expand its business, the company is anxious to enter the electronic calculator market. Management
believes that in order to be competitive in world markets, the price of the electronic calculator that the
company is developing cannot exceed $150. Sonic’s required rate of return is 12% on all investments. An
investment of $5,000,000 would be required to purchase the equipment needed to produce the 30,000
calculators that management believes can be sold each year at the price of $150.
(d) Compute the target cost of one calculator.
(3 marks)
(e) From a behavioral point of view, what potential problems can occur when implementing a target costing
(3 marks)
[Total for Question 2: 25 marks]
Question 3 (30 marks)
Apple Products Ltd produces a broad line of sports equipment. Last year, the company planned to produce
10,000 footballs and the actual production was 8,000 footballs. The standard costs associated with this
football, along with the actual costs incurred last year, are given below:
Standard cost
Direct materials:
Standard: 3.7 feet at $5 per foot
Actual: 4.5 feet at $4.8 per foot
Direct labor:
Standard: 0.9 hours at $40 per hour
Actual: 0.7 hours at $50 per hour
Variable manufactured overhead:
Standard: 0.9 hours at $20 per hour
Actual: 0.7 hours at $23 per hour
Total cost per football
Actual cost
The president was elated when he saw that actual costs exceeded standard costs by only $0.2 per football. He
stated, “I was afraid that our unit cost might get out of hand when we gave out those raises last year in order to
motivate the labor to work hard. But it’s obvious our costs are well under control.”
There was no inventory of materials on hand to start the year. During the year 38,000 feet of materials were
purchased and 36,000 feet were used in production.
(a) For Apple Products Ltd, prepare a flexible budget for last year, showing the following items in columnar
form and compute the flexible budget cost variances and planning cost variances for each item.
(i) Direct materials
(ii) Direct labor
(iii) Variable manufactured overhead
(iv) Total cost
(8 marks)
(b) What aspects of the flexible budget performance report should be brought to management’s attention?
Explain who should be held accountable for those variances?
(4 marks)
(c) Calculate the following:
(i) Direct materials: price variance and quantity variance
(ii) Direct labor: rate variance and efficiency variance
(iii) Variable manufactured overhead: rate variance and efficiency variance
(7 marks)
(d) Was the president correct in his statement that “our costs are well under control”? Explain.
(4 marks)
(e) Explain the meaning and relevance of interdependence of variances when reporting to the president.
(3 marks)
(f) “Budgeting involves forecasting the demand for different types of resources over different time periods.”
Do you agree with this statement? Explain.
(4 marks)
[Total for Question 3: 30 marks]
End of Paper