MA360 EXAM – MAY/JUNE 2013
SOLUTIONS
Question 1.
Answer
Maximum
Marks
a)
i.
K=
ii.
TOTAL QUALITY COST
(Tolerance allowed)2
= £2,000 = £3,200,000
(0.025)2
2
Two possible solution methods to this problem.
Rewriting the equation for estimating the value of k:
Total quality cost = k x (Tolerance)2
= £3,200,000 x (Tolerance)2
£30 = £3,200,000 (Tolerance)2
Solving:
Tolerance = 0.0031
5
{Alternatively, the tolerance could be computed as:
Tolerance = To √ ͞C1/C2}
Where To = current (or customer tolerance)
C1 = Cost of reworking or scrapping the unit before shipping
C2 = Cost of quality due to failure to meet customer’s expectation
iii.)
0.5 +/- 0.03 i.e. √0.0009
3
b. Y = The learning curve can be expressed as follows
Yx = aXb
Where, Yx = the cumulative average time to produce x units
a is the time to produce the first unit
X is the number of units under consideration
b is the index of learning ,defined as the ratio of the logarithm of the learning
improvement rate divided by the logarithm of 2.
Hence given a learning curve of 80%
b=
log 0.8
log 2
= -0.3219
2
Maximum
Marks
Question 1 Answer contd.
So in order to produce 40 units the average cumulative hours per unit
would be Y = 12(40) -0.3219
= 3.660 hours
Cumulative units
1
Average time per unit total time
40
hours
hours
3.660
146.40
Cost of producing 40 units =
£
Direct materials £40 x 40
1,600.00
Direct labour 146.40 hours x £8
1,171.20
Variable overhead 146.40 hours @ £5
732.00
Total variable cost of production
£3,503.20
Cost per unit = £3,503.20 ÷40 = £87.58
ii.
3
Since learning reaches a steady state at the 50 cumulative units mark one needs to ascertain the
time taken to produce the 50th unit.
For 49 cumulative units a = 12 hours; X = 49 hours and b = -0.3219
•
• • Y = 12(49) -0.3219 = 3.4285
To produce 50 units on average would take 12(50)- 0.3219
= 3.4063 hours
Cumulative units
3
Average time per unit Total time
49
3.4285
167.9965
50
3.4063
170.315
Incremental time for 50th unit =
• The variable cost of a unit would be as follows:
2.3185
3
Question 1 answer contd.
Direct materials
£40.00
Direct labour 2.3185 hours @ £8 per hour
£18.55
Variable overhead 2.3185 @ £5 per hour
£11.59
Total variable cost per unit
£70.14
3
Total 25 marks
_____________________________________________________________________________________
Question 2
Answer:
a. I
£
Direct materials
19.60
Direct labour
16.10
Variable manufacturing overhead
2.10
Fixed manufacturing overhead
Unit product cost
12.40
£ 50.20
2
Mark up on absorption cost =
Required return on Investment (8% x £285,000 ) +
Variable SG&A expenses £3.40 x 23,000) +
Fixed SG&A expenses £473,000
= £22,800 + £78,200 + £473,000 = £574,000 ÷ (£50.20 x 23,000)
4
(Unit cost of production x no of units produced)
= £574,000 / £1,154,600
= 49.71 %
Target Selling Price =
2
£50.20 + (49.71 % x £50.20) = £75.15
ϵd Price elasticity of demand = Ln(1 + % change in quantity sold)
4
1
Ln(1 + % change in price)
= Ln (1 +(- 16%))/Ln (1 + 10%) =- -1.83
The profit maximizing price =
ϵd
1 + ϵd
= ( -1.83/1 + -1.83 ) x £41.20 = £90.8306
2
x Variable cost per unit
1
Question 2 answer contd.
Maximum
Marks
b. i. Revenue - R = PQ =
Marginal revenue
Costs
= dR 100 -0.0002Q
dQ
C = £20Q
Marginal cost MC =
(£100 – .0001Q)Q = 100Q – 0.0001Q2
dC
dQ
2
+ £1,100,000
=
20
Profit is maximized when marginal cost = marginal revenue
100 – 0.0002Q = 20;
80
Q
=
0.0002Q
= 400,000 units
Price in £’s = 100 – 0.0001Q = £100 – 40 = £60
Hence the profit –maximising price is £60.
1
At this price the annual profit would be:
Sales 400,000 x £60
=
Costs £1,100,000 + ( 400,000 x £20)
Profit
£24.0 million
£ 9.1 million
£14.9 million
(c )
Report to: Board of Directors Chammal Co. Ltd.
From : A. Accountant
Date…….
Re: Your Concerns lily Rose and Azalea
Introduction
Findings
2
Question 2 contd.
Concerns may include:
1.
Assumption that demand curve and total costs can be identified with certainty. This is
not likely to be the case.
2.
It may have ignored the market research costs of acquiring the knowledge of demand
3.
It assumes that the firm has no production constraint which could mean that the
equilibrium point between supply and demand cannot be reached.
4.
It assumes the objective is to maximize profits. There may be other objectives
5.
It assumes that price is the only influence on quantity demanded. This may not be the
case.
6.
Absorption costing does not consider demand
Maximum of I mark for each valid comment (total 4) + 1 mark for presentation
5
______________________________________________________________________________
Question 3
(a)
i.
Maximum
Marks
Computation of Sales Margin Volume Variances
Blackberry
Budgeted sales
Actual sales
Sales volume variance
4,000
3,960
40 A
x standard margin per box
£20
4,000
5,040
1,040 F
£24
£800 A
Total sales volume variance
Strawberry
£24,960 F
£24,160 F
3
ii. Computation of contribution margin Sales Mix Variance
Blackberry
Strawberry
Actual mix
of sales
boxes
Standard
mix
boxes
3,960
5,040
4,500
4,500
mix variance
boxes
TOTAL £ 2,160 F
540 A
540 F
std margin Mix
per box Variance
£20 £10,800 A
£24 £12,960 F
1.5
Question 3 contd.
Maximum
Marks
ii
Computation of sales quantity variance
Actual sales in Budgeted
Budgeted
Difference Standard Sales
Sales
Proportions
margin quantity
Quantity
(Boxes)
per box
variance
Boxes
Blackberry
4,500
4,000
500 F
£20
£10,000 F
Strawberry
4,500
4,000
500 F
£24
£12,000 F
TOTAL £ 22,000 F
iii
1.5
Computation of market share variance
= Budgeted weighted average
unit contribution margin unit x
Actual
Market share Proportion
Budgeted
Market share x
Proportion
Actual
market
unit sales
1.5
The budget weighted average unit contribution margin is as follows:
Blackberry
4,000
x £20
=
£80,000
Strawberry
4,000
x £24
=
£96,000
Total
8,000
£176,000
Budget weighted average = £176,000 ÷8,000 = £22 per box
£22 x
Iv
(12 % - 10%) x 75,000
=
£33,000 F
1.5
Computation of market size variance =
Budgeted weighted average Actual
unit contribution margin x Total market unit sales
volume
Budgeted
Total market x
unit sales
volume
Budgeted
Market
Share
Proportion
=
£22 x [ 75,000- 80,000] x 10%
Question 3 contd.
=
£11,000 A
Check Factors:
Market share Variance + Market size variance = Sales Quantity variance
£33,000 F + £11,000 A = £22,000
Sales Quantity Variance + Sales Mix Variance = Sales volume variance
3
£22,000 F + £2,160 F = £24,160 F
Maximum
Marks `
b.
i.
Financial Partial Productivity:
(1) Output
2012
2013
39,500
48,600
Direct materials:
i
Quantity
160
Unit cost
x £34
180
x £31
Total direct materials cost
5,400
5,580
DM financial partial productivity ½ =
7.3148
8.7097
Hours spent
1,010
1,350
Hourly wage
X £25
X £24
Total direct labour cost
£25,250
£32,400
1.5644
1.5000
39,500
48,600
Direct materials cost
£5,580
£2,500
Direct labour cost
25,250
32,400
£30,830
£34,900
1.2812
1.3926
2
Direct labour:
X
DL financial partial productivity
ii.
2
Total productivity:
Output
Total cost:
Total direct (prime) cost
Total productivity
iii.
4
The direct labour productivity per direct labour hour per £ decreased from
1.5644 units of output in 2012 ot 1.5000 in 2013. The direct materials
productivity, however, improved from manufacturing 7.3148 units of output
per £ in 2012 to 8.7097 in 2013.
The decision to increase direct materials productivity (reduce direct materials
waste) at the expense of direct labour productivity is the correct decision. The
total productivity improved from 1.2812 units of output for each £ or prime
cost in 2012 increased to 1.3926 units per £ in 2013.
5
Total 25 marks
SECTION B:
Question 4 (Case Study)
(a) SWOT Analysis: (Not exclusive; other valid points will be accepted).
Strengths:





Competent and experienced founding partners
Competent and experienced partners and professional consultants
Established relationships with existing client base
An established capability to grow the business
Established technical competencies in industrial manufacturing
Weaknesses:





Inadequate management control systems / Certain questionable control practices e.g. nature of
incentive scheme
Organisational culture not consistent across all four offices
Narrow technical competencies – industrial manufacturing only
Too much dependency on founding partners?
Incentives for competent staff dependent on continually growing the business
Opportunities:


Expansion/diversification into service industries with technological needs
Expansion into geographic regions with rapid growth in industrial manufacturing, e.g. China
Threats:




Industrial manufacturing market in USA could be shrinking (e.g. moving manufacturing to China)
Poor economic conditions after global economic crisis could slow, halt, or reverse growth
Poor economic conditions being experienced in potential expansion area (Europe)
Heavy reliance on motor industry in Detroit
(Two valid points in each area x 0.5 = 4 Marks)
(b) Results Controls: Profit Sharing Scheme
Results controls are those controls which are intended to reward employees for achieving the desired
results. [1]
Functioning of Profit sharing Scheme (PSS):
Ordinary partners and managing partners (including the founding partners) receive a share of the firm’s
total profits, in proportion to their office’s share of the total revenue generated. [1]
Managing partners (excluding the founding partners) receive an additional bonus, linked to the revenue
growth achieved by their specific offices. The founding partners receive an additional bonus based on
firm-wide revenue growth. [1]
Weaknesses of the PSS and suggested Improvements.

Because profit is shared in proportion to total revenue rather than total profit, partners at
Philadelphia get a greater share of the profit than they should, while those at Boston are in an
equal position, and those at the other two offices get less than they should. To illustrate: the
ratio of total revenue earned between the four branches is: (B, P, D, & SJ): 44.7%; 24.2%;
16.7%; 14.4%. The Ratio of profit earned is: 44.8%; 21.3%; 18.9%; 14.9%.
[2]

Partners therefore get no credit for managing costs, and would in fact be better off if they
incurred higher costs to generate higher revenues. Profit shares should be based on profits
earned, not on revenues earned. [2]

Additional bonuses awarded to managing partners are based on the revenue growth of their
offices; this should also be based on the profit growth of their offices. [1]

The founding partners get an additional bonus based on firm-wide revenue growth. They are
therefore being rewarded on the basis of revenue growth in branches other than their own,
for which they were not responsible. This is not fair, and could cause resentment among the
other partners. Managing partners should only be rewarded for the specific additional
benefits they have brought to the firm as a whole. Perhaps the managing partners should
receive higher salaries to reflect their management role, and should then forego this
additional bonus. [3]

The profit sharing scheme is restricted to partners. There are no incentives for any of the
other professional consultants, who must wait for a promotion to partner before they benefit
from the profit sharing scheme. This is likely to be de-motivating, as their actions can lead to
more business, revenues and profits for the firm. There should be an incentive scheme for
these employees as well, with Principals, Senior Associates and Associates receiving a specified
percentage of their office’s profits (The percentages could be based on seniority as well as an
annual performance review) As mentioned in the case study, certain capable senior associates
have left the firm because they have not received promotion. [3]
(c) The Form of Control being Practiced in the San Jose Office
It appears that a clan culture has developed in the San Jose office among the principals and
associates, aided by the managing partner and other partners. The word ‘clan’ refers to a group of
people who hold similar values, such as doctors or nurses or accountants. However, a group of
people working in an organisation can also hold certain common beliefs and values. This results in a
culture which influences group members to control their own behaviour (i.e. without supervision)
so as to achieve organisational goals (Ouchi, 1979, 1980). [2]
Wilkins and Ouchi (1983) have identified five conditions necessary for clan formation:
-
A reasonably long history and a reasonably stable membership (citing Schein, 1981).
-
The telling of ‘shared stories’ among the group that illustrate and legitimise a common
management philosophy.
-
Considerable effort by management to screen applicants, to improve the likelihood that
new members would possess values in common with those promoted by the organisation.
-
A strong and shared claim of uniqueness
-
An atmosphere where all team members are encouraged to offer opinions on decisions,
rather than having decision-making dominated by single individuals.
It appears that four of the five requirements are probably being met at the San Jose office, with the
screening of applicants by management being the only unknown factor. As the team does not
appear to have changed for some years, this factor may not be relevant at this stage. [5]
It is possible that clan control could be achieved in the other offices, but the profit-sharing scheme
might need to be changed to provide group incentives. Managing partners and other partners
would also need to create the environment, and adopt the practices, necessary for clan formation
(as described above). [1]
_____________________________________________________________________________________
Question 5
Control Effects of the Different Levels of Organisational Culture:








Management control functions by focusing on worker behaviour, output, and/or the minds of
employees (Alvesson and Kärreman, 2004). Controls intended to influence output and
behaviour have been referred to variously as mechanistic, formal, technocratic etc. (Chenhall,
2003; Collier, 2005; Alvesson and Kärreman, 2004) , whereas controls intended to influence
employees’ minds have been variously referred to as normative (Kunda, 1992), social
(Merchant, 1985b), informal (Collier, 2005) and socio-ideological (Alvesson and Kärreman,
2004).
Cultural control is a form of the latter types of control, intended to exert an influence on
employees’ minds by enabling and reinforcing a shared set of beliefs and values.
Definition of organisational culture, e.g. “a pattern of shared basic assumptions that was
learned by a group as it solved its problems of external adaptation and internal integration, that
has worked well enough to be considered valid and, therefore, to be taught to new members as
the correct way to perceive, think, and feel in relation to those problems.” (Schein, 2004)
Various social science writers have noted that culture manifests itself at various levels, ranging
from ‘shallow’ to ‘deep.’ (Hofstede, 1990).
Schein (2004) states that culture can be analysed at several different levels, ranging from
tangible, overt manifestations to deeply imbedded, unconscious, basic assumptions which
constitute the essence of culture. Schein (2004) refers to the tangible overt manifestations of
culture as ‘artefacts’, while values are acknowledged to be the deeply imbedded, unconscious,
basic assumptions which constitute the essence of culture.
The control effects (if any) and roles in culture formation of the various levels of culture should
now be discussed, with reference to the appropriate literature. Specifically, the roles and
control effects of artefacts and values (both espoused values and shared basic assumptions)
should be addressed. The cultural paradigm and control systems as artefacts (Johnson, 1992)
may also be mentioned.
There is a strong relationship between personnel controls and cultural control. (Brief
explanation of how personnel controls can support cultural control should be provided).
The existence of a particular form of cultural control, i.e. clan control, could also be mentioned
and briefly explained.
(25 Marks)
_____________________________________________________________________________________
Question 6
EVA and VBM


Candidates should clearly explain the EVA concept and its link with value creation.
Although metrics such as EVA provide a single measure upon which management can focus, it is
not possible to act directly on EVA; improved EVA is the end result of other processes and
activities.
 While Pitman realised that multiple activities are required within the organisation to create
value, he did not appear to appreciate that frameworks such as the BSC facilitate the
organisation of activities for the purpose of value creation. Multiple subsidiary objectives, if
properly aligned in cause-and-effect linkages, can therefore help to achieve an overall objective
of increased EVA, for example.
 To achieve higher levels of EVA it will be necessary for organisations to conceive and implement
a value-adding strategy. Because, as Otley (1999) has pointed out, the processes and activities
necessary to implement a value-adding strategy using EVA are not clear, it will be necessary to
employ a strategic management system in support of EVA.
 The generic VBM framework identified by Ittner and Larcker (2001) is in effect a strategic
management system.
 The use of EVA within this framework should now be discussed, in the context of the six steps
set out by I&L (2001):
Ittner and Larcker (2001) note that, while VBM systems vary slightly from firm to firm, they all
include the following six steps:
(1) Choosing specific internal objectives that lead to shareholder enhancement;
(2) Selecting strategies and organizational designs consistent with the achievement of the chosen
objectives;
(3) Identifying the specific performance variables, or “value drivers”, that actually create value in
the business, given the organization’s strategies and organizational design;
(4) Developing action plans, selecting performance measures, and setting targets based on the
priorities identified in the value driver analysis;
(5) Evaluating the success of action plans and conducting organizational and managerial
performance evaluations;
(6) Assessing the ongoing validity of the organization’s internal objectives, strategies, plans, and
control systems in light of current results, and modifying them as required.
(25 Marks)
_____________________________________________________________________________________
Question 7
Anthony and Govindarajan’s (2007) management control framework:
Anthony and Govindarajan (A & G) define management control as follows:

Management control is the process by which managers at all levels ensure that the people they
supervise implement their intended strategies.
Although this appears to be a broad and potentially inclusive view of management control (i.e.
incorporating both formal and informal control methods), A&G in reality place a greater emphasis on
the formal control process. A & G believe furthermore that the management control process is a
systematic one, involving a series of steps that occur in a predictable sequence according to a more-orless fixed timetable, and with reliable estimates. This would include:






Planning what the organisation should do
Coordinating the activities of several parts of the organisation
Communicating information
Evaluating information
Deciding what, if any, action should be taken
Influencing people to change their behaviour
Although A&G define management control as the process by which managers implement strategy, they
exclude from their framework certain means of strategy implementation, i.e. organisational structure,
human resource management, and organisational culture.
In essence, A&G seem to take the view that employee behaviour can be controlled by way of formal
control systems, and by trying to achieve goal congruence, i.e. aligning employees’ personal goals with
those of the organisation. They see this as being achieved via rewards linked to formal control systems.
Other writers on management control (such as Merchant and Van Der Stede, 2007) focus on directly
and indirectly controlling employees’ behaviours in order to achieve the organisation’s strategic
objectives, and as such see human resource management (‘personnel controls’) and culture (‘cultural
controls’) as part of a broad package of controls (which could also include, but not be restricted to,
formal control systems such as budgets).
(10 Marks)
Reasons why A&G’s framework may no longer be valid in the 21st century
Discussion could consider and elaborate upon a number of the following themes (referring, where
appropriate, to relevant academic research) which have severely tested A&G’s control paradigm:










Changes in the control environment
A change in the nature of change – now discontinuous, abrupt and seditious
The diffusion of new technologies (e.g. the internet)
The need to build and maintain the trust of a broad set of stakeholders
The need to establish a better balance between ‘hard’ and ‘soft’ control methods
Shorter product lifecycles and new product positioning strategies
The spread of modular design from the computer industry to a diverse range of industries
The widening gap between current management control literature and management practice
The gap between the management control literature and conceptual developments in broader,
control-related literatures
The scope for closer links between the management control literature and the burgeoning
literature on performance measurement and management
(15 Marks)
Total:
(25 Marks)
_____________________________________________________________________________________