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* MSc Accounting and Control --

Exam Advanced ManagementAccounting

Thursday20 March 2008 (resit)

Sovm PREVrous REMARKS

This examconsists f 5 questionsand25 subquestions. ou canearna maximumof100points, per subquestion pointswill be granted.Next to eachquestion ou findthe maximumnumberof points or thatparticularquestion.

In this exam we will testyour knowledgeand nsight. While answeringour ques-tions,pleasemake use of the literature andphrase our answers learly and con-cisely.

The esultswill bepublished n 3 April2008.

You can eviewyourexamonWednesday9 April from 15.00 o 16.00hrs. Thepla-ce will be announced n the results ist.

Good uck!

Question 1 24points

A building contractor has the following production figures for the construction of anew type of family homes(costs n thousandsof euros):

Number of houses Total variable costs

648783

The above figures already show a non-linear relation..

a. What are causes or (positiveor negative)nonlinearity in cost functions?

I2aJ

45

200360508

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b.

2

What s the cumulative verageariableproduction ostof 4 houses?

What s thecompany'searning atio?Please ive yourcalculation.

Our constructors asked o deliverhis Íirst 50houseso the development rojectLeidscheRijn in Utrecht.Theprojectdevelopers willing to pay a total sum of €8.300.000or the 50 houses.Ourprojectdeveloper as€ 2.000.000ixed costs,apart rom the variablecostsof the houses. he constructor eedsa l}Yo profitmargin. Should he constructor ccept heprojectdeveloper's ffer? Please iveyourcalculations.

You canuse hefollowing able:

c.

d.

0 ,10,20,30,40,50,60,70,80,9

1

-2,30-1 ,61-1,20-0,92-0,69-0,51-0,36-0,22-0 ,11

0

1 , 11 , 21 , 31 , 41 , 51 , 61 ,71 ,81 ,9

2

0 ,100 ,180,260,340,410,470,530,590,640,69

e . Pleasegive a formula with which you can directly calculate he total variable cost

of the first 50 houses.Specify how this model hasbeen deducted.

Suppose he constructor's firm has a learning ratio of 0,75. This ratio can be ap-plied in both the cumulative averageand in the marginal model. In which modeldoes application of the 0,75 learning ratio lead to the highest learning effect?whv?

Question2 24points

The Alpha Company producesdigitizers in two versions: Standardand Comfort, gen-

erating a contribution margin of €80 and €100 respectively.Both products go througha production and an assemblyprocess.One product Standard akes 3 hours productiontime and 4 hours of assembly.Oneproduct Comfort takes 3 hours of production and 8hours of assembly.Comfort also needs inetuning of I hour per product. Total capac-ity of production is 100 hours, of assembly 170 hours and of finetuning 50 hours. Al-pha's managementwant to maximize contribution margin.

a. Formulat a Linear Programming model (negativeproduction numbers s not feasi-ble!).

Excel generateshe following sensitivity report:

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MicrosoftExcel 8.0aSensitivityReportWorksheet: Opgave entamen0í I v.3.xlslSheetlRepoÉCreated: /31/01 :í8:26PM

Allowablelncrease

AllowableDecreaseost Coefficient

$A$2 A 24.16666667 0 80 20 _30$B$2 B 9.166666667 0 100 60 20

ConstraintsFinalValue

ShadowPrice

ConstraintR.H. ide

Allowablelncrease

AllowableDecrease

Reduced Objective

$F$1 Productie 100 27.5$F$2 Assemblage 170 170 96.66666667 36.66666667

$F$3 Fijnstelling 9.1 6666667 1E+30 40.83333333

b. What is the optimal production schedule? Which production capacity is fullyused?Which production factor still has some unused slack) capacity?

c. What does oreducedcost' mean in the first table? Whv is this element zero forboth products?

d. SupposeAlpha Companyhas unds available o expandproduction capacity. Whatprocessshould be expanded irst? Sfhy?

e. What does "allowable decrease"of 30 in the adiustablecells table for StandaÍd

mean?

f. What does he "allowable increase" of 27 5 in the constraints able for Productionmean?

Question 3 24points

In Groot's article Management Control Merchant's management control theory isexplained. Merchant discusses hree different categoriesof managementcontrol sys-tems.

a. What are action controls? Mention at least three different kinds of action controlsystems.

b. What aÍe the advantages nd disadvantages f action control systems?

c. How can action control systemsbe made more tight? Give at least three differentoptions here.

Abernethy, Bouwens and Van Lent study in their article Determinants of Control Sys-tem Design in Divísional Firms the use of decentralization and divisional summary

measuresof performance.

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d. Mostly, divisional managersknow more than corporate managers. We call thisinformation asymmetry.How does nformation asymmetry mpact corporate man-agers decision to decentralizeand to use divisional sunmary measuresof per-

formance?

The use of appropriateperformance measures s also a topic in the Bouwens andSpeklé chapterDoes EVA add value?

e. EVA has beenpropagatedbecause he measurewould provide division managersbetter information of how they contribute to strengthening he value of the firm.What areBouwens and Speklé'sconclusionsabout his idea?

f. How does EVA influence divisional managers'behavior when it is usedas a man-agement control instrument?

Question4 I2 points

Lord in his article Strategic Management Accounting (2007) discusses he idea ofcorporatemanagementdesigningand implementing a strategy n order to create ong-term strategicadvantages or the firm.

a. What are the most important components n the strategic decision making processaccording o Lord? Pleasemention at least hree and discuss hem briefly.

b. Most strategy heoriespresentshategy making as a deliberate, conscious, ationaland structured decision making process,assistedby accounting nformation and inwhich competitor information is very important. Lord criticizes this presentation.Pleasemention some of his remarksand explain eachone briefly.

c. What do Bhimani and Langfield-Smith in their paperStructure, ormality and theimportance of financial and non-financial information in strateg)/ developmentand implementation think of the structuredness f strategicdecision making andthe role of f inancial information in strategymaking?

Question 5 16points

The Balanced Scorecard s a recent managementaccounting nnovation that aims atbroadening the scope of performance measurementssystems by including financialand nonfinancial information.

An alternative to the BalancedScorecard s the PerformancePyramide. How doesthe Performance Pyramide work? Explain the main differences between the twosystems.

Said,HassabElnabyand V/ier have studied n their article An empirical investiga-

tion of the performance consequences f nonfinancial measure (2003) the rela-

b .

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tionship between heuse of nonfinancialperformancemeasures ndfirm perform-ance.

Whatare hemain conclusions f their study?

Wong-on-Winget al. considern their articleReducingcontlíct in balancedscore-card evaluationsQ007)the mpactof theevaluationof sfrategyon the assessmentof divisionalperformance.What s their mainconclusion?Why is this important?

How doesa dual fransferpricing systemwork?What is the reason or companiesto usedualpricing?