MA360 EXAM – MAY/JUNE 2015
SOLUTIONS
Q1 Netting Centre
P is a multinational professional services company. As P’s treasurer you have decided to investigate the
possibility of introducing a multilateral netting system, to reduce the overall number of inter-office
payments.
You have forecast the following inter-company cash flows for the next month:
Paying office
UK (GBP)
Europe (EUR)
US (USD)
Japan (JPY)
Receiving office
UK (GBP)
¥100,000,000
Europe (EUR)
£2000,000
US (USD)
£1500,000
Japan (JPY)
$4000,000
€3000,000
Foreign exchange rates are:
GBP 1 =
€1.3849
$1.4663
¥176.41
(a) Individual company receipts and payments in GBP:
Paying office
UK (GBP)
Europe (EUR)
US (USD)
Receiving
office
UK (GBP)
Europe (EUR)
£2,000,000
US (USD)
£1,500,000
Japan (JPY)
Total (float)
Japan (JPY)
Total (float)
£566,861 (1)
£566,861
£2,727,955 (1)
£4,727,955
£1,500,000
£2,166,221 (1)
£3,500,000
£2,166,221
£2,166,221
£2,727,955
£566,861
£8,961,037 (1)
Netting Centre – eliminated transactions
UK division
GBP
Receive
566, 861
Japan
Eliminated (1)
Pay
2,000,000
EU
Pay
1,500,000
US
Net
(2,933,139)
Europe division
GBP
Receive
2,000,000
UK
Receive
2,727,955
US
Pay
2,166,221
Japan
Eliminated (1)
Net
2,561,734
US division
GBP
Receive
1,500,000
UK
Eliminated (1)
Pay
2,727,955
EU
Net
(1,227,955)
Japan division
GBP
Pay
566,861
UK
Receive
2,166,221
EU
Net
1,599,360
Net (check total)
0
Eliminated (1)
Float
£8,961,037
4 marks
Eliminated
£4,799,943 (transaction = 4)
4 marks
Presentation of data
Savings £4,799,943 x 1% =
4 marks
£47,999.43
1 mark
£1,473.05
1 mark
£30.00
1 mark
(1 month)
£49,502.48
1 mark
Total savings (12 months)
£594,029.76
1 mark
Float
£8,961,037 x (3/365) x 2% =
Payments / receipts reduce from 5 to 4
Total savings
17 marks
Q1 Netting Centre
(b)
The most obvious advantage is that the multilateral hedging will reduce transaction costs. The various
subsidiary companies will avoid the need to convert cash or pay bank charges. There will also be much
smaller losses because of the dealer’s turns because there will be far fewer purchases and sales
throughout the group.
There may also be a slight hedging effect because individual group members will be protected from
currency risks to an extent.
There is a potential cost in that the tax authorities may be suspicious of inter-company transactions that
have no direct commercial logic. For example, the French subsidiary will be claiming tax relief on
charges totalling £2.6m (€2.9m) even though the related payment was only £1.6m. Furthermore, the
French company will be making a large payment to a Japanese group member without having
undertaken any work for that company. This could start to look like a tax evasion exercise. These
problems could be even more serious if there are exchange controls in operation so that it is necessary
to demonstrate that any money leaving the country is required to meet a binding commitment.
The fact that a notional/indicative exchange rate is used to convert the balances could mean that some
group members feel that they are losing out to other companies if the precise rate is in the other
companies’ favour.
(Any 4 relevant points x 2 mark each = 8 marks)
Q2 Capital Budgeting
Part (a)
(i)
NPV
T0
T1
T2
T3
Cash Flow
-46
12.75
15
37.75
DF @ 9%
1
0.917
0.842
0.772
PV
-46
11.69
12.63
29.14
NPV
£7.46m
3 marks
IRR
T0
T1
T2
T3
Cash Flow
-46
12.75
15
37.75
DF @ 20%
1
0.833
0.694
0.579
PV
-46
10.60
10.41
21.86
NPV
-£3.13m
9% + [7.46 / (7.46 + 3.13) x (20%-9%)] = 16.75%
4 marks
MIRR
T0
T1
T2
T3
-46
12.75
15
37.75
DF @ 9%
1.188
1.09
1
TV inflows
15.15
16.35
37.75
Cash Flow
TV total inflows
69.25/46 (1/3) – 1 =
£69.25m
14.61%
4 marks
Q2 Capital Budgeting
Part (a)
(ii) Advantages and limitations of MIRR
The best method of appraising investments in theory is the NPV method, since it gives the absolute gain
in wealth for the shareholders if a project is undertaken.
However, it is easier for non-financially minded decision makers to understand the concept of a
percentage measure, which is why IRR and MRR are sometimes used as investment appraisal methods
instead of NPV. Unfortunately, neither of these two methods provides the absolute gain in shareholder
wealth if a project is undertaken, so neither of them relate directly to the overriding objective of
financial management.
If using a percentage (IR or MIRR) to appraise an investment, it is important to interpret the results
properly.
An advantage of MIRR is that it measures the actual percentage return generated by a project over its
life. It can therefore easily compare with the firms cost of capital to decide whether a project is
worthwhile.
IRR on the other hand, is not a measure of the actual return for a project, but instead is a measure of a
breakeven discount rate i.e. a discount rate which would give a zero NPV. IRR is therefore more difficult
to interpret than MIRR.
The other key advantage to MIRR over IRR is that MIRR is always a unique figure for each project,
whereas a single project can have several IRRs (or none at all). This again makes IRR more difficult to
interpret.
(Any six relevant points x 1 mark each = 6 marks)
Q2 Capital Budgeting
Part (b)
(i) Project A has the largest positive NPV (being PV of subsequent cash flows minus initial cost) so should
be chosen if projects are mutually exclusive.
2 marks
(ii)
Initial cost
NPV cash flows
NPV / Invested
Rank
A
30
22
0.73
2
B
20
5
0.25
4
C
40
16
0.4
3
D
10
8
0.8
1
X plc should invest £60,000 as follows:
(1) Do project D leaving £50,000
(2) Do project A leaving £20,000
(3) Do half of project C, using up the remaining funds
3 marks
(iii) X plc can afford to invest in the following combinations:
A+B+D
B+C
C+D
NPV
35
21
24
By trial and error the optimal investment is A + B + D
3 marks
Q3: Divisional Performance Evaluation
(a) RI for the year ended April 2015 can be calculated as:
£1,120,000 – (10% x £13,000,000) = £180,000 negative RI.
(2 marks)
Because the RI is a negative figure, the manager will not earn a bonus.
(1 mark)
(b)
The performance of the DM should only be measured against those elements of revenue and
expenditure that he or she can control [1]. At the moment this is not the case, as a number of
revenue and expense elements are beyond the DM’s control. As a result the current incentive
scheme is not a fair one [1].
A fairer incentive scheme would be based on Controllable Contribution [1], but even then this
would have to be adjusted upwards to account for the following revenue and expense items
which are not controllable by the DM:
(i)
The loss of revenue due to inter-divisional transfers having to take place at below marketrate prices.
At present, variable costs of inter-divisional transfers are 60% of sales, i.e. 60% of
£1,600,000 = £960,000 [1].
If these represented 40% of sales (i.e. representing a 60% contribution on sales), sales
would be £960,000 / 0.40 = £2,400,000 [1]. This represents an increase of £800,000 (i.e.
£2,400,000 - £1,600,000) [1].
(ii)
The additional variable costs, due to higher fertiliser prices, apply to 37.5% of variable
costs, i.e. 37.5% x £2,560,000 = £960,000 [2].
Overcharge (to be added back to controllable contribution) = £960,000 – [100/120 x
£960,000 = £800,000] = £160,000 [2].
(iii)
Only £120,000 (10% x £1.2m) of the £220,000 depreciation charge is controllable by the
DM. A reduction of £100,000 (£220,000 - £120,000) must therefore be made to this cost
[2].
i)
Buying the new machine for £10m will produce an additional PBT of £1.2m per year. This
represents an ROI of 12% [(£1.2m/£10m) x 100]. [1] This is above the cost of capital of both
the company (10%) and the division (11%), and will therefore add value to both [1].
However, the divisional manager has refused it for the following reason:
(c)
New ROI after investment:
£14m + £1.2m =
£100m + £10m
£15.2m
£110m
= 13.82% [2]
Because the divisional manager’s bonus is based on ROI, and because the new investment
will reduce his ROI from 14% to 13.82%, the manager’s bonus will decrease and he will
refuse the investment [1].
Q3: Divisional Performance Evaluation
ii)
It can be shown that the RI, based on the previous year’s performance, is:
£14m – (£100m x 11%) = £3.0m [1].
If the new machine is purchased, RI will become:
(£14m + £1.2m) – [(£100m + £10m) x 11%] [2]
= £15.2m - (£110m x 11%)
= £15.2m - £12.1m
= £3.1m [1]
As RI will increase from £3.0m to £3.1m, the manager will buy the new machine so as to
increase his bonus [1].
Q4: Standard Costing
a)
Sales Price Variance: (£500 - £330) x 118,800 = £20,196,000 F
[2]
Sales Volume Variance: (118,800 – 100,000) x (£330 - £220) = £2,068,000 F
[2]
2014/2015 actual market share held by Woodworks: [118,800 / 1,100,000] x 100 = 10.8% [1]
Market size variance: (1,100, 000 – 1,000,000) x 10.8% x (£330.00 - £220.00) =
£1,188,000 F
[3]
Market share variance: (10.8% - 10.0%) x 1,000,000 x (£330.00 - £220) = £880,000 F
[3]
b)
It was not a good idea to use last year’s standard cost card to evaluate Oak’s performance. Oak’s
strategy was completely different to Tardy’s, as it involved the manufacture and sale of a highquality bench compared to a low-cost bench. As such, the new bench required more expensive
wood, more skilled workmen (based on the higher wage rate paid in 2014/2015), and probably
different raw material usage and labour efficiency (skilled labour, plus the new machine bought
by Oak may, for example, have improved material usage and labour efficiencies). It therefore
made no sense to use the old standard cost card to calculate production variances in 2014/2015,
as these would be meaningless.
It should also be noted that the new bench competed in a different market, and sold at higher
prices than Tardy’s bench. The sales price variance is therefore also meaningless, and cannot be
used to evaluate Tardy’s performance in this area either.
(Any six relevant points x 1 mark each = 6 marks)
c)
Net variances for 2014/2015: (+ 20,196,000 + 2,068,000 - 13,971,375 + 308,880 - 2,016,000
+240,000 – 60,000 + 96,000 – 500,000 + 950,400 – 200,000 – 120,000) = 6,991,905
[12 x 0.33 = 4 Marks]
EBIT for 2014/2015 = Budgeted EBIT + Net Variances = £5,640,000 + £6,991,905 = £12,631,905
[1]
Actual ROI% = (£12,631,905 / £47,000,000) x 100 = 26.9%
[1]
Q4: Standard Costing
It can be seen that, in the areas of profitability (£12.6m v £5.1m) and ROI (26.9% v 12.2%), Oak’s
performance has been hugely better than Tardy’s [1]. The market share held in 2014/2015 (10.8%) was
much the same as that achieved by Oak in the previous year (10.83%) [1], but the new market has
grown by 10% during 2014/2015 (based on budget expectations), whereas the market for cheap
benches remained stagnant during 2013/2014 [1].
(9 marks)
(Total 25 marks)
Question 5
(a) Students should briefly set out Porter’s three generic strategies, then explain that BIS is using a
differentiation-focus strategy. It appears that BIS is attempting to differentiate itself on the
basis of a good service reputation, with a view to the company becoming trusted advisors to
their customers. The emphasis on recruiting and retaining high-quality consultants would
support this strategy. The focus element of the strategy is based upon BIS’s concentration on
the BI segment of the IT market.
(5 Marks)
(b) The four control types (action controls, results controls, personnel controls and cultural
controls) should be described, and an appropriate example chosen from the case study to
illustrate the use of each control type.
(4 Marks)
(c) (i) Students should explain that control can either be technocratic in nature (looking to control
outputs and/or employee behaviour) or of a socio-ideological nature (influencing employees’
minds). It should then be shown, with reference to Ouchi (1979, 1980) and Wilkins and Ouchi
(1983), why a clan culture is in place at the London branch of BIS (based on the characteristics
necessary for clan formation). An explanation should also be provided as to why a clan culture
creates a climate conducive to social controls and employee self-control, in pursuit of
organisational objectives.
(11 Marks)
(ii) Answers should highlight the fact that, despite BIS being a knowledge-intensive firm (KIF),
there is not much evidence to suggest that clan controls have been employed. It should be
noted that clan-type controls have been identified by the literature to be most appropriate in
cases where means-end relationships cannot easily be determined. This is the case in KIFs,
where various researchers have noted the appropriateness of clan controls (e.g. Alvesson and
Kärreman, 2004).
Instead, AC has attempted to control employee behaviour by way of technocratic, output-based
controls. (Examples should be provided by students). This is inappropriate, and it is likely that
employees will find this form of control offensive (Abernethy and Stoelwinder, 1995). There is a
suggestion in the case study that consultants who were not happy with AC’s management style
left the company, so that the employment of inappropriate control methods may have
contributed to the high consultant turnover in London.
This has in turn created a vicious cycle, as employees who were not a good ‘cultural fit’ with the
company were at times employed out of necessity. The chances of a clan culture being formed
in London are therefore slim, and unless AC realises the error of his ways the control exercised
in London will more than likely continue to be ineffective and even destructive.
(5 Marks)
Question 6:
Students should:
Define the concept of MAS as a package: package is a collection or set of controls and control systems.
Define the problems stemming from not considering MCS as a package:
 Found relationships between some contingency variables and MCS are weak
and the conclusions are fragmentary;
 Any study on a new MCS adopted and their effects within organisations if
carried out focusing on a single MCS in isolation could misleadingly draw a
conclusion that depends on the package of MCS and not on the single MCS
studied
 Any study on a new MCS adopted and their effects within organisations if
carried out focusing on a single MCS in isolation could misleadingly because it is
important to draw a conclusion that depends on the package of MCS and not on
the single MCS studied;
 In the implementation process of a MCS some side effects could come from the
interaction of different typologies of MCS.
(15 marks)
Define and discuss the classification of MCSs proposed by Malmi and Brown and compare it with that
proposed by Merchant and Van der Stede highlighting the differences in terms of classification and the
different level of focus on employee behaviour.
(10 marks)
Question 7:
Students should highlight:
 the defining difference between MCSs of for-profit and not-for-profit organizations: MCS in notfor-profit not focuses on profit generated but on value, and with reference to profit when it is
calculated not-for-profit focuses on how it is distributed;
A not-for-profit organization’s profit cannot be paid to the owners or anyone else associated with the
organization
Instead it must be dedicated to the purpose of the organization
Hence, the major defining characteristic of a not-for-profit organization is the organization’s purpose its mission or goal that usually it is to provide public services.
(10 marks)
 The design of a MCS has to take into consideration some aspects:
The lack of goal clarity because of the existence of various constituencies enforces sometimes
conflicting goals and therefore makes difficult to design MCSs and assess their effectiveness
The degree of achievement of the overall goal (provision of quality service to constituencies) usually
cannot be measured accurately in financial terms and as a consequence it is difficult to use results
controls, install responsibility centers, and compare the performances of subunits with dissimilar
activities
The presence of many overseers (donors, government entities, alumni, etc.) often constituting the notfor-profit organization’s governing body generates extra demands on the MCS (detailed project
proposals, action reports, lengthy and time-consuming planning and budgeting processes, etc.)
Compliance with legal constraints calls for tight action controls and increases control costs and makes
the provision of incentives is not feasible
Compensation is not always competitive and this has an impact on employee quality (cf., personal
limitations)
Employees are often highly committed and, as a consequence, control can be better achieved through
personnel and cultural controls
(15 marks)
Question 8:
Students should highlight:
Why change happens: Environmental pressures /internal pressures
Typologies of change: Static vs dynamic (Processes instead of just results; Linearity vs complexity…a
drift) in other words from management to managing accounting change
Define the concept of institution: Institutions can be defined as shared and taken-for-granted
assumptions in organizations
Why it is difficult to change: because particular management accounting practices become
institutionalized they are rarely questioned; it is seldom that people within such an organization will
‘look outside the bubble‘or blatantly investigate alternative ways of doing business
Define a good process of change:
 Securing top management support
 Formation of a powerful steering committee
 Creating a vision, e.g. a 5-year plan
 Communicating the vision throughout the business
 Developing a sense of ownership at all levels
 Agreeing short-run targets to achieve long-run goals
 Recognition of workers' contributions
(25 marks)