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Advanced Management Accounting 20/21 – Exam Period A1

Section A

30 Marks (3 Marks per Correct Answer)

A1. The analysis of which costs does not receive emphasis in companies adopting a product differentiation strategy?

a. Marketing costs

b. Advertising costs

c. Customer profitability

d. Manufacturing costs

A2. Which of the following is not a characteristic of strategic management accounting?

a. Collecting competitor information

b. Exploiting cost reductions in the value chain

c. Calculating life-cycle and target costing

d. Matching of accounting emphasis with strategic position.

A3. A company has $25mln worth of capital, and a cost of capital of 15%. Its profit after taxes for the current year was $4mln. In order to calculate the Economic Value Add, the company has adjusted its profit to $5mln and its capital to $26mln. What is the EVA?

a. 100,000 (4m – 0.15 * 26m)

b. 1. 1m (5m – 0.15 * 26m)

c. 1.25m (5m – 0.15 * 25m)

d. 5m

A4. Which of the below elements is not used in life-cycle costing?

a. After-sales service

b. Asset disposal

c. Research costs during product design

d. Benchmarking costs

A5. A company would like to sell a new product at a profit margin of 16% of the proposed selling price. The average unit cost of the product is £30, and the marketing department established that customers would not pay more than £50 for the product. What is the target cost of the product?

a. £30.00

b. £34.80

c. £42.00

d. £58.00

A6. Which of the following is not a cost category of the environmental cost report?

a. Environmental detection costs

b. Environmental prevention costs

c. Environmental external failure costs

d. Environmental production costs

A7. Which of the following is not a sustainability role of management accountants?

a. Life-cycle cost management

b. Reward systems

c. Budgetary influence

d . Reliability systems

A8. … …… can be defined as a type of accountability that focuses on the monitoring of inputs, outputs and processes and on the achievement of policy objectives.

a. Inward accountability

b. Managerial accountability

c. Pragmatic accountability

d. Political accountability

A9. ……. holds that the more visible a company is in terms of profits and other measures, the more likely it is to report greater volumes of information.

a. Agency theory

b. Political cost theory

c. Stakeholder theory

d. Capture theory

A10. New Public Management (NPM) involves:

a. The use of private sector performance management and accounting techniques in the public sector

b. The introduction of a more explicit cost categorisation in areas where costs were previously aggregated, pooled or undefined

c. Measures that tend to shift the focus of public management towards efficient and effective service delivery

d. All of the above.

Section B

5 fill-in questions related to one case * 3 marks each = 15 Marks

Divisional Performance Measures

Company AB Ltd has one head office, and two divisions, Division A & Division B. The two

divisions operate in nearly identical markets and both serve external customers only. The quarterly profit for 2020 Q1 for the two divisions is as follows:

	Division A	Division B
	Q1	Q1
	£000	£000
Revenues	1,033	983
Net Profit	621	560

Divisional Assets	41,110	18,039

The company’s cost of capital is 12%. The company has also set a target ROI of 20%.

AB Head Office calculates the divisional performance measures based on annualised net profit, after all costs have been taken into account.

B1. What is the annualised Return on Investment for Division A and Division B? Use up to two decimals.

B2. What is the annualised Residual Income for Division A and Division B? Use up to two decimals.

B3. Evaluate the performance of each division based on Return on Investment and Residual

Income.

B4. Evaluate the performance of each division based on the target ROI.

B5. Give two disadvantages of using Return on Investment as a divisional performance

measure.

5 fill-in questions related to another case * 3 marks each = 15 Marks

This scenario relates to questions B6-B10 below.

Mr Walker worked in a private firm prior to joining a public sector agency of the Department of Health as an accountant in March 2020. While Walker worked at the private firm his duties included the preparation of fixed asset schedule, financial statements and performance analysis (such as financial ratio analysis) to analyse the financial performance of the firm.

The public sector agency Walker currently works for deals with large scale transactions and possesses a vast amount of long-term assets used in their day-to-day operations. Walker noticed that cash basis of accounting was used to account for revenue and expenditure in this agency. He then proposed the use of accrual basis of accounting to the Chief Officer of the public sector agency. Walker is confident that the success of using accrual accounting at this level will lead to a reform at the government-wide level. However, his colleagues were very reluctant to accept this change.

B6. An advantage of accrual basis of accounting over cash basis is:

a. Increased transparency

b. Reduced accounting information

c. Failure to take account of future commitments and contingent liabilities

d. Increased compliance with cash budgets

B7. Drawing on public sector accounting literature and as referred to in the paper by Connolly and Hyndman (2011), the value for money for a public sector organisation is

assessed by 3Es. These are ………………., ……………….. and …………………

B8. When is cash accounting more appropriate for a public sector organisation?

a. When many fixed assets are being held for a long period

b. When the organisation has no long-term liability

c. When the organisation deals with large scale of transactions

d. All of the above.

B9. The success of using private sector performance indicators and targets in the public sector is debatable. Why might the use of private sector performance indicators and targets in the public sector be difficult?

a. Different accountability objectives

b. Contingency theory does not apply to public sector organisations

c. Accrual basis involves recording income and expenditure of the public sector organisation

d. Performance indicators and targets focus on a three-year period.

B10. Which of the following could be a reason why Walker’s colleagues were reluctant to accept accrual basis of accounting instead of cash basis?

a. Walker’s colleagues hold relevant qualifications in accounting and have a good knowledge of accrual accounting

b. Complexity of cash basis compared to accrual basis

c. Costs compared to perceived value added

d. None of the above.

5 fill-in/MCQ questions related to a second case * 3 marks each = 15 Marks

Section C 2 questions (15 and 25 marks).

Question C1: 15 Marks

Company CD International Ltd has two divisions, C and D. Division C operates in Country LoTax, and Division D operates in Country HiTax. Both countries use currency CU (Currency Unit).

Division C produces semi-finished goods exclusively for Division D. Division D turns the semi- finished goods into finished goods and sells them to external customers for CU 45 each.

Country LoTax has a corporate tax rate of 10%, Country HiTax has a corporate tax rate of

30%.

Further information about Division C and D for the year 2020 is provided below:

	Division C	Division D
Units Produced	900,000	900,000
Variable Cost (per unit)	CU 13	CU 14
Fixed Cost	CU 500,000	CU 700,000

CD International uses an internally negotiated transfer price of CU 30 for their semi-finished goods.

Draw up the profit or loss statements for Division C and Division D based on the information provided, and calculate the profit after tax for each division. Comment on the decision of CD International to set the transfer price at CU 30.

Question C2: 25 Marks

There is an argument in accountability literature which indicates that “managers in the private and public sector have different views on the meaning of accountability” . In no more than 400 words discuss accountability in relation to the three areas below. Your discussion should include examples of accountability in both private and public sector, and reflect on critical arguments in accountability literature.

a) To whom the managers are accountable.

b) How managers are held accountable

c) Why managers are held accountable

(25 marks)