Strategic Management Accounting

Strategic Management Accounting

2014 / 15Level 6

Module Code 44-6785-00C

Sheffield Business SchoolModule leader - Richard Watkinson

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TABLE OF CONTENTS Page

What's this module about? 3How will this module deliver the relevant industry sector skills and competencies? 3How will this module be delivered? 4Assessment Package 5How will Blackboard be used with this module? 5How will student feedback be obtained on this module and how will this be used? 5Module Team 6Module Overview 6Module Aims 6Module Learning Outcomes 7Schedule of Study 8Reading List 9-10Assessment Task 1 11-13Seminar 1 Questions 14-17Seminar 2 Questions 18-22Seminar 3 Questions 23-34Seminar 4 Questions 35-43Seminar 5 Questions 44-55Seminar 6 Questions 56-58Seminar 7 Questions 59-78Seminar 8 Questions 79-87Seminar 9 Questions 88-112Seminar 10 Questions 113-118

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What's this module about?

This module builds on previous knowledge and application of management accounting concepts so as to enable students to analyse and critically evaluate management accounting systems in the broader context of the strategic management of organisations.

It is designed to encourage students to develop knowledge and skills that are appropriate for senior management positions, such as financial director, strategist, management accountant or strategic accountant. Accountants are no longer seen as bean counters but boardroom strategists who play a greater role in initiating and guiding major organisation change.

How will this module deliver the relevant industry sector skills and competencies?

Learning Philosophy The philosophy adopted in this module, as in all L6 modules, is that you are primarily responsible for your own learning (just as you will be when you leave the University to enter organisational life!). It is the responsibility of the lecturers to provide an appropriate structure for learning to take place, together with incentives through the assessment process.

The emphasis in this module is for you to develop the skills necessary to be a concerned, knowledgeable and critical analyst of strategy and management control systems. To facilitate this, keynote lectures will provide an outline of subject content. But you will only develop the appropriate skills for successful completion of this module by conscientious preparation for, and active participation in, seminar sessions.

As the module progresses you will see that questions require you to analyse, evaluate, criticise, as well as synthesise materials and provide appropriate recommendations. These reflect higher level learning outcomes and the best means of developing them is through debate, discussion and case study analysis. This will involve your participation and a good understanding of appropriate literature, i.e. the teaching team's emphasis will be on self-managed study and further reading.

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How will this module be delivered?

Lectures and Seminars

You will be provided with seminar work which will be a discussion question, a case study, a numerical exercise, or any combination of these. It is essential that you come to seminars well prepared to make a contribution. You need to apply effective time management in order to complete the necessary work in the limited time available in the programme.

Normally, students will be invited to present their answers to seminar questions, followed by a discussion of the issues involved. You should set yourself personal objectives to ensure that you develop the appropriate skills for successful completion of the module. These might include:

1. Get involved in discussion: show you have done your preparation and are willing to make an active contribution:

Ask a question of another student or the tutor; Restate another student's argument or viewpoint to clarify it for yourself or someone

else who may not have understood it; If a case study is used, introduce case facts and evidence as support for, or

contradiction of, someone else's contribution; Quote a few authors' contributions to the subject area.

2. Take an active part in discussion - enter into debate: Introduce an issue, problem, conclusion or recommendation. Based on your

understanding of the case facts and your interpretation of how an authority (author or research) might support your view, state your line of reasoning;

Sum up the arguments of other students and comment on their line of reasoning - where you support it and where you disagree with it. Use these comments to build other contributions and introduce your own analysis and conclusions.

3. Present both sides of an issue Discuss both sides of an issue in order to demonstrate that you see both the strong

points and limitations of the argument. Summarise the discussion and indicate where a consensus has emerged, which issues

are still polarised and where points of view are not yet well formulated.

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Assessment Package

Assessment Type Weighting

Coursework: Group Assignment 40%

Final Exam 60%

How will Blackboard be used with this module?

The module has a dedicated Blackboard site, which students are expected to access on a regular basis. The Blackboard site is used to communicate information to students outside of contact sessions. In addition, the blackboard site includes:

An electronic (PDF) version of the module handbook Tutorial work schemes Links to other relevant sites Details regarding assessments Staff contact details

How will student feedback be obtained on this module and how will this be used?

Students will receive feedback in the following ways:

Formative feedback Through seminar discussions and informal presentations, students will receive

formative oral feedback from the module tutor and other students in the seminar group.

The question-and-answer session at the end of each informal presentation often stimulates further exchange of ideas and learning.

Summative feedback Individual written feedback will be provided to students following the submission

of the first assessment task.

After the return of coursework and summative feedback, students will have an opportunity to meet with the module tutor for feedback and guidance.

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Module Team

The module team will discuss any aspect of the module during timetabled sessions.

Outside of scheduled times, members of the team may be contacted directly by

telephone or email.

Tutor Telephone E mail

Richard Watkinson 0114 2255068 [email protected]

Module Overview

Module Title: Strategic Management Accounting Module Code: 44-6785-00C

Academic Year: 14/15 Level: 6 Credits: 20 Semester: Summer 2015

Course: BSc (Hons) Professional Accounting

Module Leader: Richard Watkinson Module Team:

Richard WatkinsonAssessment Method Weighting Submitted When

1. Coursework 40% 31/07/15

2. Exam 60% Date to be confirmed

Module Aims To provide students with a deeper understanding of traditional and modern

management control theories and practices.

To develop students' critical ability in analysing business strategies and using management accounting control systems for competitive advantage.

To develop students' ability to analyse and critically evaluate the application of various strategic management accounting concepts and techniques in helping organisations drive performance and achieve their strategies.

To further develop students' knowledge and critical analysis of decision making, performance measurement and reward systems within multi divisional / international business.

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Module Learning Outcomes

LO Ref Learning Outcome1 Critically evaluate, using traditional and modern management control

theories, the accounting and control systems adopted by specific organisations and make appropriate recommendations on future change

2 Analyse the strategies and the associated business environment of specific organisations and evaluate the suitability and/orsustainability of the strategies upon the changing environment

3 Analyse the key influences on cost and price and be able to applyactivity-based costing, life cycle costing, kaizen costing and target costing to help organisations manage product, process, customerand other key stakeholders on the supply chain

4 Critically evaluate different types of structures and controls (financial andnon-financial) adopted by specific organisations in order to motivateand measure performance and achieve strategic objectives

5 Apply various methods to identify optimum transfer prices for transactions between internal units and make recommendations of change on existing systems, structure and/or culture if any of these become the hindrance of achieving the objectives of implementing the transfer pricing systems

6 Critically evaluate the practical application of contemporary management accounting approaches to help organisations gain competitiveness; such as the balanced scorecard, total quality management, cost of quality reports, just-in-time and lean manufacturing and operation systems

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Schedule of StudyDate Time Room Topic07/07/15 9-10 7401b Lecture 1: Strategy and Strategic Planning07/07/15 10-11 7401b Lecture 2: Strategic Planning, Choice & Evaluation07/07/15 2-3 7401b Lecture 3: Environmental Analysis07/07/15 3-4 7401b Lecture 4: Value Chain and Supply Chain08/07/15 10-12 7401b Seminar 1 Questions: Home Life, CDE and Yahoo08/07/15 2-4 7503 Seminar 2 Questions: Easy Jet, Apple and Ikea09/07/15 10-12 7401b Seminar 3 Questions: Royal Ichiban, Phillip Morris and McDonalds09/07/15 2-4 7503 Seminar 4 Question: Lego14/07/15 2-3 7401a Lecture 5: ABC, AMB and CPA14/07/15 3-4 7401a Lecture 6: Management Control Theory and Performance Management14/07/15 4-5 7401a Lecture 7 : Balance Scorecard15/07/15 10-12 7401b Seminar 5 Questions: Greeny Ltd, TSS Bank, SJC15/07/15 2-4 7503 Seminar 6 Questions: Jeeve, Daffodil Trust, RP Manufacturing16/07/15 10-12 7401b Seminar 7 Questions: Voyager, Pepsi Co16/07/15 2-4 7503 Seminar 7a: Coursework Support / Exam Technique21/07/15 2-3 7401a Lecture 8: TQM, Benchmarking and Cost of Quality21/07/15 3-4 7401a Lecture 9: Target Costing and Product Lifecycle21/07/15 4-5 7401a Lecture 10: Transfer Pricing22/07/15 10-12 7401b Seminar 8 Questions: Fantaland, FB Toys and Toyota22/07/15 2-4 7503 Seminar 9 Questions: SY Ltd, Tata Nano23/07/15 10-12 7401b Seminar 10 Questions: Home Pride, Spokes, ABC Group, Discursive Questions23/07/15 2-4 7503 Seminar 10a: Coursework Support / Exam Technique26/08/15 2-4 7401a Lectures 11 & 12: Revision

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Reading ListInsert text:

The online resource list for this module is available at: https://shu.rl.talis.com/lists/5B0BCFBF-E9AB-B1F2-766C-00294D0DE35F.html

This list is available on the module Blackboard site (Learning Materials section) or through the Library Gateway link to reading lists https://shu.rl.talis.com/ (search by name of the module or module code).

The key textbooks are:ACCA Approved Study Text - P3 Business Analysis

Johnson, G, Scholes, K, and Whittington, R, (2008), Exploring Corporate Strategy (Text and cases), 8th edition, FT Prentice Hall.It is available in hard copy at the Learning Centre. It is also available as an E-book via the Library Catalogue and can be accessed both on and off campus.

Bhimani, A, Horngren, C, Datar, S and Foster, G, (2008), Management and Cost Accounting, 4th edition, Prentice Hall FT.It is available in hard copy at the Learning Centre. It is also available as an E-book via the Library catalogue and can be accessed both on and off campus.

Hoque, Z, (2003), Strategic Management Accounting: Concepts, Processes and Issues, 2nd

Edition, London: Spiro.

Other relevant books you may wish to refer to:Drury, C, (2008), Management and Cost Accounting, 7th Edition, Cengage Learning.It is available in hard copy at the Learning Centre. It is also available as an E-book via the Library catalogue and can be accessed both on and off campus. Ireland R. D., Hoskisson R. E. and Hitt M. A., (2009), The management of Strategy Concepts and Cases, 9th edition, south-Western.

Anthony, R and Govindarajan, V, (2007), Management Control Systems, 12th Edition, International ed.

Berry, A, Broadbent, J and Otley, D, (2005), Management control: theories, issues and performance, 2nd Edition, Palgrave Macmillan.

Bromwich, M and Bhimani A, (1994), Management Accounting: pathways to progress, London: CIMA.

Emmanuel, C, Otley, D, and Merchant, K, (1995), Readings in Accounting for Management Control, reprinted by International Thomson Business Press.

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https://exchange.shu.ac.uk/owa/redir.aspx?C=b2K_QCSM4EynePhAbYhxcqFc6uYSXdIIhDbd8r2Zq8trxM1ZW-c41A72-cyfG-mwJpUADoegy3w.&URL=https%3A%2F%2Fshu.rl.talis.com%2F

https://shu.rl.talis.com/lists/5B0BCFBF-E9AB-B1F2-766C-00294D0DE35F.html

Some Relevant Journals: Long Range Planning Harvard Business Review Accounting and Business Research Management Accounting (UK) Management Accounting Research (UK) Journal of Management Accounting Research (USA) Accountancy Accounting Organisations and Society CIMA Insight (UK) Financial Management (CIMA)

The Learning Centre has kept a large range of electronic journals. The University has already paid for the subscription fees and all SHU students are entitled to download articles from these journals for study purposes.

Some Relevant Websites:

www.strategicfinancemag.comwww.cimaglobal.comwww.accountancymagazine.comwww.accountingeducation.comwww.accountingweb.co.ukwww.accountancyage.comhttp://news.ft.com/home/ukwww.sps.org.uk/http://money.cnn.com/magazines/fortune/

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http://money.cnn.com/magazines/fortune/

http://www.sps.org.uk/

http://news.ft.com/home/uk

http://www.accountancyage.com/

http://www.accountingweb.co.uk/

http://www.accountingeducation.com/

http://www.accountancymagazine.com/

http://www.cimaglobal.com/

http://www.strategicfinancemag.com/

Assessment Task 1

Module Title: Strategic Management Accounting

Assessment Title: HMV

Individual/Group: Individual Assignment

Weighting: 40%

Submission Date: 31/07/15

Instructions to Students for Submission of This Coursework

1. Hard copy handed in at the Student Help & Information Point (SHIP)

2. Via Turnitin - submission is via the SMA Blackboard site under the "Assessment" tab

Before the deadline, you can submit your work to the "Turnitin - Draft Submission" programme in order to assess the extent of authenticity of your work and how correctly you reference your sources. You can submit your assignment to Turnitin "Draft Submission" more than once.

When your assignment is completed, you must submit the final version to the "Turnitin - Final Submission" Programme. Each group can only submit your assignment once to the final submission. You need to print out the Turnitin summary report which shows the % of match. Your marks will only be recorded if a Turnitin summary report is submitted with your assignment. Please appoint only ONE group member to submit the file to Turninit - Final Submission in order to avoid the system saying you copy from your team mate (if you all submit the same file).

Guidance on how to use Turnitin is posted on the SMA Blackboard site under the "Assessment" tab.

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Task Details

You are required to:

Undertake an in-depth investigation of HMV (http://www.hmv.com/) which includes the following tasks:

1. Identify and analyse HMV's current strategy

2. Critically evaluate HMV's environment and its impact on the design of the company's current strategy.

3. In light of your findings from your environmental analysis, evaluate the suitability of HMV's current strategy in the short to medium term (e.g. 3-5 years). Discuss any changes to the strategic decision and / or business strategy that the company may need to implement in the near future in order to remain competitive.

4. In order for the management to successfully implement future changes as you have suggested in section 3, analyse what HMVs information needs are and how the needs may drive the future development of HMV's management accounting systems and the underlying organisational culture and structure.

Particular instructions to students

The word limit for this assignment is 2,500 words with no more than three pages of appendices.

Ensure your printed submission is printed on one side only.

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http://www.hmv.com/

Group Assignment Marking Matrix

%allocated

Marks awarded

1. Identify and analyse HMV's current business strategy.------------------------------------------------------------------------------------------- Apply appropriate theoretical framework(s) to analyse HMV's current business

strategy. Don't just describe HMV's strategy or what they have done. Use appropriate practical examples to support and elaborate your analysis. You should NOT simply copy their strategy, mission statement or other

materials from the Internet or annual reports. You need to use these materials.

15%

2. Analyse how HMV's environment has influenced and shaped the group's current business strategy.

------------------------------------------------------------------------------------------- Apply appropriate theoretical framework(s) to analyse HMV's business

environment (including broad, industry and/or internal environment). Examine the ways in which the KEY environmental factors MIGHT HAVE influenced

and shaped HMV's current business strategy. Use appropriate practical examples to elaborate and support your analysis. Your analysis of HMV's strategy and environment must be fully integrated if you

aim at a high mark. Basic description of generic environmental factors will not add value to your coursework.

35%

3. In light of the findings from your environmental analysis, evaluate the suitability of HMV's current strategy in the short to medium terms (e.g. 3-5 years). Discuss any changes to the strategic direction and/or business strategy that the company may need to implement in the near future in order to remain competitive.

------------------------------------------------------------------------------------------ Based upon your findings from the environmental analysis, evaluate the

suitability of HMV's business strategy in short to medium terms. Is HMV's current strategy likely to fit into the environment in the longer run?

Discuss any changes needed for HMV's strategy and/or strategic direction.

10%

4. In order for the management to implement HMV's future changes as you suggested in Part C, analyse what their information needs are and how the needs may drive the future development of HMV's management accounting systems and the underlying organisational culture and structure.

------------------------------------------------------------------------------------------- Identify and analyse the KEY types of information that HMV's managers will need

in order to respond to the changing environment and implement the changes that you have suggested in Part (C) while remain competitive.

Evaluate how the proposed changes and information needs of management drive the future development of HMV's management accounting systems and the culture and structure underlying these accounting systems.

30%

5. Presentation, referencing and standard of academic writing------------------------------------------------------------------------------------------- Clearly structure, develop and present your argument leading to appropriate

conclusions. Correct referencing and a bibliography is provided. Good standard of academic writing.

10%

Total for the assignment 100%

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Seminar 1 Questions:

Home Life Plc

Home Life plc is a large organisation manufacturing domestic appliances such as kettle, toaster, microwave, deep fryer and slow cooker. The company's production is run by four divisions - one is located in the UK and three in the Far East. The group has also outsourced the production of their latest kettle and toaster ranges to a large manufacturer in Poland.

The recent economic downturn has intensified the competition in the domestic appliances market. The suppliers are now competing not only on price and product design and quality, but also on customer services and brand loyalty. Home Life’s new CEO is concerned that the information provided by the company’s management accounting system is too limited for the problems the company now faces. You have recently joined Home Life as its chief management accountant and the CEO has just approached you asking for your advice and comment on the following matters.

1. Identify the main techniques you would expect to see within traditional management accounting systems.

2. Why are traditional management accounting systems considered to be too limited in helping Home Life's management to deal with the high level of operation complexity and competition they face?

3. What are the aims of strategic management accounting (SMA)?

4. What kind of information that strategic management accounting systems should provide in order to support the management to achieve Home Life plc's strategic priorities which including improving market share, profitability and customer loyalty.

5. If Home Life is to install SMA systems, discuss what cultural and organisational changes the company will need to implement in order to successfully introduce the new systems.

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CDE

CDE is a manufacturer of almost one hundred different automotive components that are sold in both large and small quantities on a just-in-time (JIT) basis to the major motor vehicle assemblers. Business is highly competitive and price sensitive. The company is listed on the stock exchange but CDE’s share performance has not matched that of its main competitors.

CDE’s management accounting system uses a manufacturing resource planning (MRPII) system to control production scheduling, inventory movement and stock control, and labour and machine utilisation. The accounting department carries out a detailed annual budgeting exercise, determines standard costs for labour and materials, and allocates production overhead on the basis of machine utilisation. Strict accounting controls over labour and material costs are managed by detailed recording of operator and machine timesheets, raw material movements and by calculating and investigating all significant variances.

While the information from the MRPII system is useful to the management, there is an absence of integrated data about customer requirements and suppliers. Some information is contained within spreadsheets and databases held by the Sales and Purchasing departments respectively. One result of this lack of integration is that inventories are higher than they should be in a JIT environment.

The managers representing the functional areas of sales, production, purchasing, finance and administration believe that while costs are strictly controlled, the cost of the accounting department is excessive and significant savings need to be made even at the expense of data accuracy. These managers believe that there may not be optimum use of the production capacity to generate profits and cash flow and improve shareholder value. CDE’s management wants to carry out sensitivity and other analyses of strategic alternatives but this is difficult when the existing management accounting system is focused on control rather than on decision support.

Required

Critically evaluate CDE’s current management accounting systems in helping the management to improve the company's performance.

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Yahoo

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Seminar 2 Questions: Apple

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EasyJet

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Ikea

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Royal Ichiban

In May 2012, Royalty plc, a UK based hotel and restaurant chain, was acquired by a Japanese group called Ichiban. Ichiban Group has been operating more than two hundred five-star spa resort hotels in sixty countries. Ichiban hotels are famous for their luxurious decorations and first-class services. Their green tea spa treatments and "Body & Soul Cleansing Cuisines" have won many prestigious awards. The Ichiban Group is currently committed to expanding and strengthening their position in all key market regions including America and Europe. The acquisition of Royalty plc is to help Ichiban Group establish an influential position in the UK hospitality industry before they move on to other key European countries.

After the acquisition, Royalty plc’s operation has been renamed as Royal Ichiban. Yoko Kashiwa is the newly appointed Managing Director for Royal Ichiban. You, the Chief Management Accountant for Royal Ichiban, have just received a message from Yoko who has asked you to lead a team looking into the business environment of the UK hospitality industry. Your findings will be presented at the first board meeting to help the senior management formulate an appropriate competitive strategy for Royal Ichiban.

REQUIRED:(A) Using Porter’s typology, identify and discuss the alternative strategies that Royal

Ichiban may adopt. (5 marks)

(B) Critically evaluate the rationale for strategic analysis and the techniques/models of which your team may use to analyse Royal Ichiban's business environment.

(10 marks)

(C) Identify information you consider to be useful for your team to gather from the environmental analysis and discuss how such information and knowledge can help the senior management of Royal Ichiban to design an appropriate business strategy.

(10 marks)

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Philip Morris International

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Seminar 3 - Philip Morris International - continued

formed a joint venture with Swedish Match AB to market smokeless tobacco worldwide.

This collaborative arrangement unites the world's largest seller of smokeless tobacco

(Swedish Match) with a marketing powerhouse that has a strong global presence across

multiple markets (PMI). Because it is less dangerous than cigarettes in terms of disease,

smokeless tobacco is seen as a product with long-term growth potential. PMI will likely

remain committed to the importance of its social performance as it pursues this joint

venture. As a measure of the effects of the physical environment segment of the external

environment, PMI says that it is strongly committed to the "promotion of sustainable

tobacco farming, the efficient use of natural resources, the reduction of waste in (its

manufacturing processes, eliminating child labour and giving back to the communities in

which (it) operates."

Sources: 2009, Altria Group Inc., Standard & Poor's Stock Report, http://standardandpoors.com, April 25, 2009; Philip Morris International home page, http://www.philipinternational.com, May 15; N. Byrnes & F. Balfour, Philip Morris global race, BusinessWeek Online, http://www.businessweek.com,April 23; K. Helliker, 2009, smokeless tobacco to get push by venture overseas, Wall Street Journal Online, http://www.wsj.com, February 4; A Pressman, 2009, Philip Morris unbound, BusinessWeek, May 4, 66, D. Wilson, 2009, Senate votes to allow FDA to regulate tobacco, Wall Street Journal Online, http://www.wsj.com, June 12.

Seminar questionsNote: this exercise does not aim to stimulate students' interest in tobacco products. The industry is used as an example to illustrate how companies adjust their strategies in according to their environment.

(A) Undertake a brief research to identify the different kinds of smokeless tobacco products that are available in the market.

(B) Analyse PMI's direction of strategic development by using the Ansoff Model.

(C) Analyse the KEY environmental factors which might have influenced PMI's strategic decisions and action to enter the smokeless tobacco segment of the industry (and other tobacco companies' decisions to enter the smokeless tobacco segment as mentioned in the articles).

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http://www.wsj.com/

http://www.wsj.com/

http://www.philipinternational.com/

http://standardandpoors.com/

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McDonalds

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Seminar 4 Question:

Lego - "Rebuilding Lego brick by brick" case study

1. Using Porter’s typology, identify and discuss the business strategy adopted by Lego in recent years.

(5 marks)

2. The case study (p.4) has mentioned that "to rebuild profitability, the company had to refashion every aspect of its supply chain… the supplychain is a company's circulation system… You have to fix it to keep the blood flowing."

Discuss the key problems found in Lego's supply and value chain and analyse how the company has fixed the problems in order to keep the business blood flowing and improve profitability.

(18 marks)

3. Analyse the role played by Knudstorp in the management of strategic change that Lego has undergone between 2004 and more recent times in order to turn around the company's profitability.

(6 marks)

4. Discuss the type(s) of strategic change, in terms of its scope and nature, that Lego has undergone between 2004 and more recent times in order to turn around the company's performance.

(6 marks)

Seminar 4 - Case study "Rebuilding Lego brick by brick" by K. Oliver, E. Samakh and P. Heckmann, Strategy+business, Issue 48, Autumn 2007.

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Questions for the article "Easy as ABC? Activity-based costing in Oxford University Library Services.

(1) Explain what cost pools and cost drivers are and using examples from the case study discuss their roles in ABC.

(2) Identify the problems that Oxford University Library Services (OULS) faced and evaluate how ABC has helped OULS resolved these problems and improve the efficiency and effectiveness in delivering library services.

(3) To what extent and why would you agree/disagree with the statement that “to build and maintain competitiveness in nowadays’ business environment all organisations need to adopt an activity based management approach”. Use examples from the article to elaborate your argument.

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Greeny LtdGreeny Ltd designs and manufactures lawn mowers. Since the company was founded ten years ago, Greeny Ltd has been using a full cost-plus pricing method which absorbs production overheads on the basis of direct labour hours. This method worked well over the past decade when competition in the garden tools industry was relatively less intensive. However, the growing pace of globalisation has rapidly increased the competition in the garden tools segment. Greeny's best seller, the "Butterfly", has already started to lose market share. Also, now that the production process of the lawn mowers has become more automated the senior managers of Greeny have started to question whether absorption costing and full cost-plus pricing methods are still suitable in today’s competitive environment.

The senior management are considering changing to an activity-based approach of costing, pricing and management. They have just completed an analysis of product costs and key activities during a typical financial period and details are as follows.

Butterfly Lady Bird Dragon Fly

Material costs per unit £'s 15 12 18

Labour hours per unit 2 0.50 1

Machine hours per unit 0.5 1.5 2

Total production units for the time period 200,000 250,000 200,000

Batch size in units 400 500 200

Number of machine set-ups per batch 4 4 5

Number of material orders per batch 2 2 4

Number of material movements per batch 2 2 2

Number of quality inspections per batch 4 5 4

Additional Information1. The direct labour rate is £8 per hour.

2. The total production overheads for a typical financial year are £2,900,000 and these costs are currently absorbed into product on a direct labour hour basis.

3. The analysis has revealed that production overheads for a typical financial period are related to five key activities in the following proportions.

Machine depreciation 30%Machine set-up costs 20%Materials ordering costs 10%Materials movement costs 10%Quality inspection costs 30%

Question 2 continues on the next page

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Greeny Ltd continued

The Managing Director is concerned about the decline in sales. She has come to you, the Management Accountant for Greeny Ltd, for an analysis of the costs by product. If costs associated with the lawn mowers can be reduced, the company can reduce the selling prices in order to compete within the industry segment. Price and product quality and functionality are critical to competition.

Required:

(A) Calculate the total cost per unit for each of the three lawn mowers using the current method of absorbing production overhead costs.

(4 marks)

(B) Re-calculate the production costs for each of the three lawn mowers using an activity-based approach and explain the results to the Managing Director by outlining what this means for each product. Use two decimal places for the cost driver rates.

(15 marks)

(C) “Activity-based costing provides more accurate product and customer costs than absorption costing. It is a more strategic approach to cost management".

Critically evaluate this statement. You should relate your evaluation to your answers for (A) and (B) above and the situation facing Greeny Ltd.

(6 marks)

(Total 25 marks - 2011 Exam)

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TSS PlcTSS plc, a UK banking group, offers a variety of banking and financial services. One of TSS's current accounts, the Platinum Account, targets young professionals who have high disposable incomes and few family responsibilities. Platinum Account clients are classified into three groups according to their annual income. The following annual budgeted information has been prepared for 2013.

Client group X Y Z TotalNumber of clients 10,000 15,000 15,000 40,000

£ £ £ £Total revenue 1,400,000 4,500,000 3,750,000 9,650,000

Total contribution 700,000 1,800,000 1,800,000 4,300,000

Overheads: Customer support costs* (560,000) (1,440,000) (1,440,000) (3,440,000)Profit (before Headquarters' facility costs)

140,000 360,000 360,000 860,000

*It has been TSS's policy to allocate overheads to customer groups based on their respective contribution.

TSS is about to implement an activity based costing system. The implementation team recently completed an analysis of the customer support costs and identified that these costs vary in relation to certain drivers. The details of the analysis in relation to the 2013 budget are shown below.

Activity Customer support costsPersonal investment advice meetings £1,200,000Personal loans advice meetings £1,400,000Mini statements prepared £240,000Telephone enquiries £600,000Total £3,440,000

Client group X Y Z TOTALActivityNumber of investment advice meetings

15,000 40,000 70,000 125,000

Number of personal loans advice meetings

40,000 90,000 45,000 175,000

Mini statements prepared 1,200,000 1,800,000 1,800,000 4,800,000Number of telephone enquiries 100,000 300,000 600,000 1,000,000

Question continued overleaf...

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Question continued...

Required:

(a) Prepare a customer profitability statement for 2013 that clearly shows:

i. The profit per client group for the year;

ii. The profit per customer within each client group for the year;

iii. The profit to sales ratio per client group for the year (formula: profit ÷ sales revenue x 100%).

Note: all relevant workings, including the calculations of cost driver rates, must be clearly showed otherwise marks will be lost.

(16 marks)

(b) Having seen the initial budgeted information (as shown in the question), TSS’s Product Director, Joe Pepper, is disappointed by the performance. He has suggested discontinuing Group X in order to concentrate the resources on serving Groups Y and Z.

Using your answer to (a), evaluate Joe's suggestion. Your evaluation must include the factors that need to be considered when TSS is making a decision on whether to cease serving a client group.

(4 marks)

(c) Critically evaluate the purpose of customer profitability analysis and how the customer profitability statement you prepared in (a) can help TSS understand customer activities and their associated costs.

(5 marks)

(Total 25 marks - past exam question)

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SJCSarah Jane Cosmetics (SJC) Ltd manufactures a range of natural skin care products, which are sold through various distribution channels. Profitability is good but given the current economic climate the management team feel a fundamental review of the business is essential to their continued success. The initial focus of the review is to be the mail order business.

Costs and revenues are routinely analysed between the various distribution channels but within any given channel, such as mail order, further analysis is limited. As a consequence the management team requires a profitability analysis based on the method of ordering for the mail order business. The company uses activity based costing (ABC) within the manufacturing unit, but the approach has never been applied to selling and distribution costs. The review appears to be an appropriate opportunity to extend the use of ABC and an analysis of budget costs for the coming year has revealed the following information:

Post Telephone InternetAverage sales revenue per order £60 £120 £45Gross margin: mark-up on manufacturing cost 100% 100% 100%

Cost driver Cost pool Cost poolPost Telephone Internet

Sales order processing

Number of orders

£180,000 £432,000 £12,000

Customer enquiry handling

Number of orders £144,000 £288,000 £12,000

Picking and packing products

Number of product

items£693,000

Delivery Number of packages

£1,140,000

Post Telephone InternetAverage number of product items included in each mail order 5 10 2Average number of packages included in each mail order

2 2 1

The total number of orders expected through the “mail order” business for the coming year is 120,000 and the split between the three distribution channels is expected to be Post 30%, Telephone 60% and Internet 10%.

In the coming year £2,150,000 out the total budgeted Head Office expenses will be allocated to the mail order business. Almost all of these £2,150,000 expenses are related to general Head Office activities, except £120,000 is for developing the website and the

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maintenance of a dedicated Internet link which is used exclusively to support the internet trading of the mail order business.

Required

(A) Prepare an analysis showing the expected profitability of an order for each of the three distribution channels within the mail order business.

(15 marks)

(B) Critically discuss how helpful the ABC approach and the information you have prepared will be to the management team’s review of the mail order business. You should suggest any additional information that might help to provide a more informed judgement.

(10 marks)

(Total 25 marks)

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Jeeve Ltd

Jeeve Limited is a large firm of consultants providing a range of engineering and IT advisory services to its clients. The firm has a managing partner who is responsible for general management and the firm's accounts and four other partners who each take charge of a consultancy division.

The company is currently preparing its budgets for the next financial year. The managing partner has been responsible for drawing up budgets for the firm since it was founded ten years ago. These include budgets for fee income, divisional and company-wide costs and a cash budget for the firm as a whole. Normally in the quarterly board meetings the managing partner presents the performance review comparing actual results for the quarter and the year to date with the corresponding budgets and the partners are asked to explain any adverse variances that have arisen. These adverse variances on fee income and costs are then posted on the notice board in the staff room.

The five partners recently attended a business conference at which the keynote speaker talked about the needs of abandoning the traditional budgetary planning and control systems developed during the industrial age. He also recommended the audience adopt the "beyond budgeting" principles in the information age.

Required:

(A) Discuss the strengths and weaknesses of the management control systems currently at work in Jeeve Limited.

(5 marks)

(B) Compare the characteristics of the industrial age with the information age and evaluate the argument that management accounting and control mechanisms developed during the industrial age may need to change in order to support companies like Jeeve Limited to compete successfully in the information age.

(13 marks)

(C) Explain the concept of beyond budgeting and discuss how Jeeve Limited can drive and measure performance in a world beyond budgeting.

(7 marks)

(Total 25 marks)

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Daffodil Trust

The Daffodil Trust is a children's charity offering support and advice on a range of issues from domestic violence and family breakdowns to health and medical problems. Staffed by experienced medical and social workers, demand for the service is exceptionally high. In spite of staff working long hours, waiting lists, especially for initial referrals, are unacceptably long.

As a charity organisation the Trust is dependent on fund-raising. Although they have managed to achieve consistent income levels over the last few years, tight control of resources is essential. Consequently, departments are allocated a fixed budget each year to cover their operating costs.

The nature of the work, the volumes of clients and inadequate resource levels have created a very demanding environment for staff. However, their dedication and the culture within the Trust have generated an excellent service. The staff focus on clients and resolving their issues and problems. Financial reporting, budgets and performance measurement bear little relevance to their work.

Nonetheless, in more recent times growing pressure on financial resources has led the trustees to extend and strengthen the management control systems. Departments are now required to report monthly on budgets versus actual expenditure and all significant variances must be explained and accounted for. In addition, a set of performance indicators have been introduced to measure actual performance against targets in relation to client waiting times, time-based resolution rates per client and costs per client.

It has been noted recently that this new regime of management control is beginning to impact on staffing, staff morale and client waiting times. As a result, the newly appointed Chief Finance Officer has suggested that the Trust should adopt the beyond budgeting principles and apply a balanced scorecard approach in order to restore staff morale and a high level of social services.

Required:(A) Evaluate the strengths and limitations of the new management control

systems introduced by the trustees within the Daffodil Trust.

(8 marks)

(B) Evaluate how the beyond budgeting principles and the related systems can help Daffodil Trust improve their management control systems so that staff morale and a high level of service can be restored.

(17 marks)


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RP Manufacturing

Three months ago, the RP Manufacturing Company's Board of Directors surprised the workforce when they announced a radical new strategy. The new "approach" was announced as being "a shared journey to be more responsive to an ever-demanding and fast-moving market while becoming more cost-conscious and thereby profitable". The agenda for the current year was outlines as being:

To scrutinise all core and other activities and identify potential for cost reduction. Outsourcing should be progressed as a realistic alternative.

To develop a range of "partner relationships" with customers and suppliers.

To develop a more flexible, fluid workforce (including multi-skilled, part-time and temporary employees) leading to an organisational restructure.

More recently, the company announced a "comprehensive supply chain management solution" in partnership with a logistics company starting initially with a transport solution.

The Head of Finance has been asked to provide a briefing paper on the implications of these changes for management reporting systems within the RP Manufacturing Company. He has asked for your advice in this matter.

Required:

1. Discuss the major challenges posed by the new strategy.(8 marks)

2. Given the major changes within the RP Manufacturing Company, explain why traditional management accounting approaches may not be appropriate.

(8 marks)

3. Discuss the likely information needs upon the management accounting function and system given the changes within the organisation.

(9 marks)

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Voyager PlcVoyager plc operates a chain of budget hotels, positioned mainly in large cities and close to major road networks. The company aims to provide clean, comfortable accommodation at a price affordable to the cost conscious traveller. The efficient use of resource and tight control of costs is crucial to the company’s business model and cost leadership strategy. To this end the company evaluates performance using monthly financial reports. Costs and profit are analysed and compared across the group and the manager’s bonus is based on financial return.

Being one of the first companies to enter the budget hotel market the company has a strong brand name, but in the last two years room occupancy, revenue and profits have fallen. Management blame the number of new entrants to the market but the newly appointed CEO believes that the problem runs much deeper than just increased competition. At a recent management meeting he cited a series of problems ranging from the “tired looking” appearance of a number of the company’s original hotels, the high turnover in staff, adverse comments on Facebook regarding the level of service and staff friendliness, and more recently adverse publicity regarding health issues at one of their larger hotels.

To reverse the trend in revenue and profits the CEO has stated that the company cannot compete on price alone and the level of service and amenities must improve. To support and drive the change of direction the CEO proposes a change to the methods of measuring and controlling performance. Although strict control of cost remains crucial to Voyager plc the CEO would like to see a more balanced set of performance measures which might encourage staff to question and continually strive for improved levels of service and amenities.

Required(A) Explain the balanced scorecard approach to measuring performance and

critically evaluate how the approach can help drive improvements to Voyager's performance and support the achievement of the company's strategy.

As part of your answer you should provide appropriate examples of objectives and measures for each perspective of the BSC.

(15 marks)

(B) Suggest how benchmarking may be used both individually and in support of the BSC approach to drive continuous improvements within Voyager.

Use relevant examples of the different types of benchmarking methods to illustrate your suggestions.

(10 marks) (Total 25 marks - past exam paper)

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Pepsi Co

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Fantaland

Fantaland plc is a leading UK based toy manufacturer producing a wide range of miniature dolls and cars. Besides the well-known Debbie branded dolls and accessories the company also produces a number of toys under franchise, such as “Dino the Dinosaur", "Nico the Fish" and "My Lord and the Rings".

Over the last three years many of the components and some elements of the manufacturing process have been outsourced in a bid to reduce costs. The Directors of Fantaland plc have been pleased with the outsourcing policy as the company appears to be in a better financial position.

Within the last month major quality problems have emerged. Several lines of Debbie Dolls' Accessories have had to be recalled due to fears over safety. The UK Safety Standards Agency has issued warnings to the general public that the high level of lead found in certain Debbie Dolls' Accessories can be harmful to children. The recalled products are amongst the six accessory lines that Fantaland plc has recently outsourced the production to a local toy manufacturer.

In Fantaland plc's Head Office several emergency meetings were called to identify remedial actions. In addition to tightening control over outsourcing and quality inspection procedures, the use of cost of quality reports was proposed. Introduction of a benchmarking system was also discussed in the meetings.

Required:(A) Discuss the purpose and role of a cost of quality report.

(5 marks)

(B)Critically assess the extent to which information contained within cost of quality reports can support management decision-making and control within Fantaland plc, given their current situation.

(12 marks)

(C)Discuss the rationale of benchmarking and evaluate how the introduction of a benchmarking system can help Fantaland plc improve the quality of their products.

(8 marks)


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FB Toys

The Sheffield Division of FB Toys plc produces the Rocket, an electric powered replica motorcycle. Sales of the Rocket were buoyant until the summer of 2012 when the company started experiencing problems first with a bought-in power unit overheating and then with the braking system malfunctioning. By the autumn senior management were concerned that sales for the Christmas season would be affected and took remedial actions immediately.

Senior management are keen to assess the impact of their remedial actions and the following information regarding quality related costs has been gathered. Numbers of Motorcycles Sept '12 - Feb '13 Mar - Aug '13Invoiced to customers 55,000 44,500Free replacements to customers 1,700 400Motorcycles produced in the period 62,000 47,800

The company has been operating a just-in-time method of production control and as such stocks of finished product have been kept at zero.

During the above two time periods, a thorough inspection of the Rocket took place when the products were fully completed. Due to the stringent health and safety regulations imposed on toys and the needs of getting the product absolutely right in order to restore public confidence, the management decided that defective products found at the final stage of production would be scraped, rather than repaired. Additional quality information related to the two time periods is showed below.

Sept '12 - Feb '13 Mar - Aug '13£ £

Lease of testing equipment 2,500 10,000Quality Training 60,000 120,000Compensation paid to the retailers and customers 40,000 25,000Wages of the inspection team 50,000 90,000Legal costs 100,000 0Administration costs for replacing products 26,400 5,600Supplier Evaluation Scheme 0 125,000

During the two time periods, Rocket was sold at £200 and its standard variable cost was £90.

Required(A) From the information provided produce a cost of quality report for each of the periods identified. The report should indicate all costs associated with ensuring the quality of the product and classify them appropriately.

(15 marks)

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(B) Referencing the cost of quality reports you have produced in (A) critically assess the value of such reports to a company like FB Toys Ltd.

(10 marks)


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Toyota

Discussion:

1. Discuss the underlying principles of total quality management.

2. It was mentioned in the Toyota article A that:

"Toyota’s speed to market, lean manufacturing, and groundbreaking technology has helped it attain near-legendary status in the industry.

But many of the features that made it the largest and until last year the most profitable carmaker in history started to look more like liabilities this week".

Analyse why the assets which helped Toyota become the most successful car marker have now become the liabilities. What have gone wrong in Toyota?

3. What lessons can we draw from Toyota’s and other companies’ experience in losing control of their quality?

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Article A - Toyota’s long climb comes to an abrupt halt

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It has been a brutal week for Toyota, long the gold standard for quality, reliability and efficiency in car manufacturing.

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On Friday, Akido Toyoda, company president and chief executive, apologised for causing customers “worry” after a global recall ballooned into broader concerns over its vehicles’ quality, its own integrity and the future of its business.

Toyota has lost more than a fifth of its market value since January 21, when it announced a recall in the US of cars due to defective accelerator pedals that might stick.

The recall widened to Europe and beyond.

Standard & Poor’s on Friday said it had put its double A debt rating under review with negative implications, citing the risk the group faced from “quality-related issues”.

Toyota’s speed to market, lean manufacturing, and groundbreaking technology has helped it attain near-legendary status in the industry.

But many of the features that made it the largest and until last year the most profitable carmaker in history started to look more like liabilities this week.

Toyota’s use of common parts across many models was one of the reasons behind the size of the latest recall, which affects 4.5m vehicles, mostly in the US and Europe.

This was separate from its earlier recall of 5.75m cars whose floor mats risked jamming in the accelerator, though some models are subject to both recalls.

Then the Prius, synonymous with Toyota’s technological edge and “green” brand ethos, came under US regulators’ scrutiny after more than 100 customer complaints about the regenerative braking system that recharges the battery.

Toyota’s assurances that the problems were “rare” seemed out of touch with growing concern over its products in the US and doubts about whether it had been entirely open about the various issues.

The US Congress pressed for more information in preparation for hearings starting next week.

Toyota said the recall and related sales and production freeze – it closed five US assembly lines temporarily last week – would cost it about $2bn, but that figure does not take into account the impact from lost future sales.

Last month, Toyota saw is US sales drop 16 per cent, while its top two rivals General Motors and Ford both reported big gains.

Its rapid fall from favour contrasts sharply with its slow rise to the top as one of the industry’s most valuable and trusted brands.

Launched before the Second World War out of a family loom-making business, Toyota built the car business to challenge US and European incumbents by focusing on lean production techniques.

When it entered the US market in 1957 its first car, the Toyopet, was such a clunker that it got no further than Las Vegas on a Los Angeles to New York endurance run.

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But Toyota learned.

“No detail was unimportant, and they paid very close attention to customers,” says Dave Cole, chairman of the Ann Arbor-based Centre for Automotive Research.

Toyota was criticised during the Japan-bashing climate of the 1980s but adapted by building more plants in the US, where it has invested $17bn to date.

The company’s models, such as the Camry and Corolla sedans and RAV sport utility vehicle, were far from eye-catching but by the end of the decade beat Detroit-built models on quality and reliability.

In 1989, it launched the Lexus, which was to become the US’s biggest luxury brand.

Most carmakers have copied elements of The Toyota Way in order to cut costs in their operations.

Industries outside car making have embraced its practices. Its Japanese names have entered the management lexicon: kaizen (continuous improvement) and genchi genbutsu (going to the source of a problem to study it oneself).

But Toyota’s expansion on six continents was not matched by a change in the company’s culture, still surprisingly provincial in outlook and centered in Japan.

By 2006, Toyota had the largest recalls of any carmaker in the US.

At the time, then president Katsuaki Watanabe described mounting quality problems as a “warning signal” and “an emergency”.

Toyota’s expansion formally went into reverse in 2009, just after it overtook GM as the largest carmaker, when it reported a record loss and shelved plans to open its 11th US plant.

Mr Toyoda on Friday promised a return to the genchi genbutsu and “customer first” principles.

People who know the company say it faces a tough slog.

“This is a big challenge, but if anyone can get past it, they can,” says John McEleney, chairman of the National Automobile Dealers Association, who owns Toyota and General Motors dealerships in Iowa.

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Examples of Damage Control

In 1982, seven Chicago-area residents died after taking Tylenol, the top-selling painkiller in the US that had been laced with cyanide.

Johnson & Johnson quickly recalled more than 30m bottles.

It briefed the media often and introduced measures including the first triple-seal tamper-resistant packages. It distributed discount coupons when Tylenol returned to the shelves.

The brand regained 70 per cent of its market share within five months and remains the leader.

Audi, the German carmaker, hoped scientific analysis would quell reports of unintended acceleration in its 5000 model in the mid-1980s.

But its near-silence on the issue was perceived as an admission of guilt.

Its problems reached a climax in November 1986 after allegations that an out-of-control Audi had caused the death of a six-year-old boy in the US.

Sales plummeted following recalls.

Regulators later cleared the company of wrongdoing but it was a decade before Audi returned to the US market in full force.

Ford and Firestone, its main tyre supplier, turned crisis into disaster after US regulators raised questions in 2000 about the role of defective tyres in a series of fatal accidents involving Ford Explorer sport-utility vehicles.

The two companies initially blamed drivers for not inflating the tyres properly, then turned on each other. Lawsuits flew.

Firestone recalled 6.5m tyres and severed a century-long relationship with Ford.

Mega Brands, maker of Lego rival Mega-Bloks, was engulfed in a storm when a toddler died in 2005 after swallowing magnets that had come loose from a toy. They were made by a company that Montreal-based Mega Brands had not integrated into its culture. It was left burdened by debt and embroiled in lawsuits, and announced a recapitalisation plan last month.

Copyright The Financial Times Limited 2010.

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Article B - Toyota ‘lost way’ in rapid expansionFinancial Times by Bernard Simon and Stephanie Kirchgaessner in Washington Published: February 23 2010 15:09 | Last updated: February 24 2010 09:14

Akio Toyoda, the embattled Toyota chief executive, has admitted that the company lost its way and its sense of priorities in its rapid rise to the top, culminating in a massive vehicle recall and a loss of consumer trust.

“I fear the pace at which we have grown may have been too quick,” Mr Toyoda says in written testimony released on Tuesday and due to be delivered on Wednesday before the US House oversight committee.

While safety used to be the company’s top priority, followed by quality and volume, the chief executive acknowledges that those priorities became “confused” in the expansion of its business. “We pursued growth over the speed at which we were able to develop our people and our organisation, and we should sincerely be mindful of that,” Mr Toyoda’s testimony says.

Lawmakers are expected to grill Mr Toyoda on when Toyota first learnt of safety problems related to sudden acceleration in its vehicles and on why it did not alert US regulators even though Toyota had “clear evidence” the issue was of concern in Europe. He will also face questions on whether Toyota hired former safety regulators in order to narrow the scope of investigations into the company, congressional staff said.

On Wednesday, Toyota Motor Corp lost 1.5 per cent, in line with the broader market.

In a hearing on Tuesday before the House energy and commerce committee, Jim Lentz, head of the carmaker’s US marketing arm, said the company’s recall may “not totally” solve the problem of unintended accelerations. Mr Lentz also blamed the overwhelming influence of Toyota’s headquarters in Japan for causing the current crisis, admitting that the company did a poor job of communicating.

Lawmakers also pointed a finger at US safety regulators at the National Highway Traffic Safety Administration. “Carmakers have entered the electronics era, but the NHTSA seems stuck in a mechanical mindset,” said Henry Waxman, the Democratic chairman of the energy committee.

Staff on the committee said there was “ample evidence” of problems related to sudden acceleration before the fall of 2008, but that safety investigators often performed “cursory investigations” into the issue.

In light of the alleged failures, lawmakers also raised the prospect on Tuesday of legislation to tighten safety rules. Bart Stupak, a Democratic committee member, said Toyota’s problems called into question whether a 2000 law is still adequate.

Ray LaHood, the US transportation secretary, did not acknowledge faults by his department. Instead, he said the NHTSA had “pushed Toyota to take corrective action” at “every step of the way”.

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SY Ltd

SY Ltd, a manufacturer of computer games, has developed a new game called the MANPAC. This is an interactive 3D game and is the first of its kind to be introduced to the market. SY Ltd is due to launch the MANPAC in time for the peak selling season.

Traditionally SY Ltd has priced its games based on standard manufacturing cost plus selling and administration cost plus a profit margin. However, the Management team of SY Ltd has recently attended a computer games conference where everyone was talking about life cycle costing, target costing and market-based pricing approaches. The team has returned from the conference and would like more details on the topics they heard about and how they could have been applied to the MANPAC.

Required:As management accountant of SY Ltd,

(a) discuss how the target costing approach could have been applied to the MANPAC.

(8 marks)

(b) evaluate the market-based pricing strategies that should have been considered for the launch of the MANPAC and recommend a market-based pricing strategy that should have been chosen;

(6 marks)

(c) analyse each stage of the life cycle of MANPAC with specific reference to following factors that the management team will need to consider:

i. the level of competition in the marketii. the volume of sales of the MANPAC iii. the level of costs and profit of the MANPAC

(11 marks)

(Total = 25 marks)

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Tata Nano

Question 1

Required:

(A) Using Bowman’s strategic clock model, analyse the positioning of Tata Nano within the passenger vehicle segment of the Indian automotive market. Use examples from the case study to support your analysis.

(6 marks)

(B) The Nano Project was built on the Tata Group Chairman’s vision of making a “people’s car” - a safe, affordable family car for the masses which would revolutionise personal transport in India.

Evaluate how the concept of targeting costing along with Tata Motors' strategy of producing the world’s cheapest car priced at Rs. 1 lakh (US$2,500) drove the product design and development, manufacturing, marketing and sales and distribution of Tata Nano.

(24 marks)

(C) Analyse the leadership style and the role that senior managers of the Nano team, such as Ratan Tata and Ravi Kant, played in developing and launching Tata Nano - the people's car.

(6 marks)

(D) Tata Motors faces the threat of competition in the future. The senior management has realised that almost everything in the Nano can be imitated. "The window available is quite short because somebody will find a way of doing it and possibly doing it better" (p.14 of the case study).

Critically evaluate how kaizen costing (continuous improvement) and total quality management will help Tata Motors further enhance their competiveness within the ultra-low cost passenger vehicle segment.

(14 marks)

(Total 50 marks)

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Home Pride Plc

A UK based group, Home Pride plc, consists of two divisions, Blade and Owl. The two divisions are autonomous business units and are free to make their own selling and buying decisions. Divisional managers' performance is judged solely by divisional profitability.

Blade DivisionThe Blade Division produces one type of microchip, Ding Dong, which is used in electrical products to activate sound or light effects. Blade sells Ding Dong to external customers and to the Owl Division at the same selling price. The competition in the microchip market has rapidly increased. Blade has worked very hard to secure the level of orders that will utilise 90% capacity to produce 2,700,000 chips in the financial year 2013. The Blade Division prices Ding Dong with a 60% mark-up on total production costs. The unit variable production costs of Ding Dong are shown as below.

Direct materials £0.35Direct labour (0.02 hour at £4 hour) £0.08Variable production overheads £0.12

The budgeted annual production fixed costs for the Division for 2013 are £810,000 and these costs are absorbed in to products on the basis of total direct labour hours for 2,700,000 chips.

Owl DivisionThe Owl Division makes a unique design of doorbell, Big Ring, which has both sound and flashing light effects. Each Big Ring uses two Ding Dong chips. The unique features of Big Ring are well received by the market. Nonetheless, the recent influx of "sleek and cheap" door bells from the Far East has intensified the competition in the UK market. The Owl Division is expected to operate at 80% capacity (360,000 units) in the financial year 2013. The unit selling price and costs of Big Ring are shown as follow.

Selling price £8.04Direct materials (excluding the cost of Ding Dong chips) £1.23Direct labour (0.25 hour at £5 hour) £1.25Variable production overheads £0.50Fixed production overheads(based on the budgeted production level of 360,000 units)

£1.00

HSGB Bank has just approached the Owl Division and enquired about whether the company is willing to provide 80,000 units of Big Ring at £6.50 each over the next six months. HSGB will give away Big Ring as a complimentary gift to their potential

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mortgage customers. If this promotional campaign works, there is likely to be a repeat order in the following year.

Owl's Divisional Manager, Diane Blue, is very interested in the HSGB's proposal as it will not only utilise the spare capacity of her Division during the low season but also open up a new customer base. Diane has just spoken to the Blade's Divisional Manager, John Yellow, and requested him to review the selling price of Ding Dong. John pointed out to Diane that she had signed the 2013 purchase contract for Ding Dong a long time ago. He incorporated these internal sales with the external demand to produce his Division's budgets for 2013. It is now too late to ask for a reduction in price, even just for the additional chips to make the HSGB's order.

Diane has then contacted the Head Office and complained about the full cost plus 60% transfer price for Ding Dong set by the Blade Division. Diane has threatened that if the Blade Division does not reduce its selling price for the additional chips needed for the HSGB order, the Owl Division is prepared to search for a new supplier in the future. Given that a leading Japanese microchip firm, Ninja Creations, has just set up its factory in Nottingham making similar products as the Blade Division, it should not be difficult for the Owl Division to find a substitute chip to replace Ding Dong.

REQUIRED:

(a) Calculate the current cost, profit mark-up and selling price of each unit of Ding Dong and Big Ring respectively.

(6 marks)

(b) Suggest a range of transfer prices for the Ding Dong chips between the Blade and Owl Divisions in order to meet the HSGB's order of 80,000 units of Big Ring.

(5 Marks)

(c) The Owl Division has just found a microchip to replace Ding Dong from the Japanese producer, Ninja Creations. Ninja has agreed to supply all the microchips required for the HSGB order at £1 per chip. Each unit of Big Ring will use two microchips. Calculate the financial impact of this option from the viewpoint of both the Owl Division and the Home Pride Group as a whole.

(6 marks)

(d) Using appropriate academic literature, critically evaluate how the current events and the relationship between the two Divisions might contribute to, or hinder, the achievements of the objectives of transfer pricing policy within the Home Pride Group.

(8 Marks)

(Total 25 marks)

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Spokes Ltd

Spokes Ltd is organised and structured into two divisions, each operates as a separate profit centre with set performance targets. The BF Division produces a single design of lightweight bicycle frame whilst the MB Division assembles mountain bikes from purchased components. There are external markets for both the bicycle frames and the mountain bikes.

The Divisional Managers are responsible for all decisions relating to the supply and distribution of their own products. This includes the negotiation of any transfer price between the two divisions.

The two divisions are currently negotiating a transfer price for the supply of 400 frames per month from BF to MB for use in their mountain bike production. The following data relating to the supply is available to both BF and MB Divisions

BF Division

Bike framePer unit

MB Division

Mountain BikePer unit

Current selling price £200 £400

Incremental costs of production £150

Incremental costs of production (excludes the cost of the bike frame) £220

The BF Division currently produces and sells to external customers 900 frames per calendar month (representing 75% of the division's production capacity). This level of demand is unlikely to rise due to stiff competition.

As bonus is performance related, George Lucas, the Divisional Manager for BF, is keen to achieve the profit target for his division. After deducting from the target profit an interest charge of 10% on the division’s £1,020,000 asset base and covering monthly fixed costs of £32,000, the BF Division needs to generate a residual income at £150,000 per annum.

BF Division's Sales Manager believes that the demand for BF's frames is artificially low due to an inflated selling price in relation to the competition. She advises George Lucas that at a selling price of £195 the BF Division is assured of 1,200 frames per month of external sales.

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Spokes Ltd

Required:

(A) For EACH of the following scenarios, calculate the most appropriate transfer price(s) which should apply to the sale of 400 frames per month between the BF and MB Divisions and comment on your results.

(i) The current capacity, demand levels and selling price are maintained within the BF Division and the transfer price is based on opportunity costs.

(ii) The current capacity and demand levels are maintained within the BF Division and the Division is going to achieve the target residual income of £150,000 per annum.

(iii) George Lucas decides to adopt the Sales Manager’s advice to lower the selling price of the frames to £195 so that the BF Division's external sales will increase to 1,200 frames per month.

(12 marks)

(B) With reference to your answers to (A), critically discuss the purpose and role of transfer pricing policies within companies such as Spokes Ltd.

(8 marks)

(C) If Spokes Ltd decides to move the BF Division to Asia, discuss the additional issues the management needs to consider when setting transfer prices between the two divisions that are geographically located in different countries.

(5 marks)


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ABC Group

ABC Group: Assume that Division A, which is part of the ABC group, manufactures a single product M. Division A's maximum capacity is 450,000 Ms a year. It sells 420,000 Ms to external customers at a price of £75.95 a unit. This gives Division A a contribution of £30.50 a unit.

Division B is also part of the ABC group but is situated in a different country to Division A. Division B purchases 120,000 units of product M each year from a local company X (which is not part of the group) at a local currency price which is equivalent to £65.33 a unit.

It has been suggested that, in the interests of maximising the group's profit, Division B should purchases Ms from Division A. As there are no marketing costs involved when transferring goods to Division B, Division A would set the transfer price for an M at £69.60. This would give Division A the same contribution as an external sale, i.e. £30.50 per unit. Division A would give Division B's order priority and so some external customer orders could no long be met.

Requirements:

1. Should Division B continue to purchase from company X or switch to Division A in order to maximise the group's profit if:

a. the tax rate in the country in which division A operates is 40% and the tax rate in Division B's country is 50%;

b. the tax rate in the country in which Division A operates is 55% and the tax rate in Division B's country is 10%?

(assume that changes in the contribution can be used as a basis for calculating changes in tax charges and that Division B generates sufficient profit from other activities to absorb the tax benefits).

2. Discuss the key factors that should be taken into account when setting transfer prices between divisions located in different countries, such as Divisions A and B.

Source: CIMA paper 9 Study System

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Discursive Questions

1. "Under the general transfer-pricing guideline, the minimum transfer price will vary depending on whether the supplying division has idle capacity or not". Discuss the above statement.

Source: Bhimani et al., Management and Cost Accounting, 4th edition, p.636, Prentice Hall Financial Times.

2. Discuss the advantages and disadvantages of using the negotiated transfer pricing method.

3. Discuss the circumstances that favour the use of negotiated transfer prices.

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Strategic Management Accounting

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