Strategic Management

Accounting
2014 / 15
Level 6
Module Code 44-6785-00C

Sheffield Business School

Module leader - Richard
Watkinson
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TABLE OF CONTENTS
Page
What's this module about?
3
How will this module deliver the relevant industry sector skills and
competencies? 3
How will this module be delivered?
4
Assessment Package
5
How will Blackboard be used with this module?
5
How will student feedback be obtained on this module and how will this
be used?
5
Module Team
6
Module Overview
6
Module Aims
6
Module Learning Outcomes
7
Schedule of Study
8
Reading List
9-10
Assessment Task 1
11-13
Seminar 1 Questions
14-17
Seminar 2 Questions
18-22
Seminar 3 Questions
23-34
Seminar 4 Questions
35-43
Seminar 5 Questions
44-55
Seminar 6 Questions
56-58
Seminar 7 Questions
59-78
Seminar 8 Questions
79-87
Seminar 9 Questions
88-112
Seminar 10 Questions
113-118
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Page 3 of 132

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.
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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.

Assessment Package
Assessment Type
Coursework: Group Assignment
Final Exam

Weighting
40%
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.

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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.

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
Richard Watkinson

Telephone
0114 2255068

E mail
r.watkinson@shu.ac.uk

Module Overview
Module Title: Strategic Management Accounting
Academic Year: 14/15
Course:

Level: 6

Module Code: 44-6785-00C

Credits: 20

Semester: Summer 2015

BSc (Hons) Professional Accounting

Module Leader:

Richard Watkinson

Assessment Method

Module Team:

Weighting

Submitted When

1. Coursework

40%

31/07/15

2. Exam

60%

Date to be confirmed

Richard Watkinson

Module Aims

To provide students with a deeper understanding of traditional and

modern management control theories and practices.

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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.

Module Learning Outcomes

LO Ref
1
2
3

4
5

Learning Outcome
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
Analyse the strategies and the associated business
environment of specific organisations and evaluate the suitability and/or
sustainability of the strategies upon the changing environment
Analyse the key influences on cost and price and be able to apply
activity-based costing, life cycle costing, kaizen costing and target
costing to help organisations manage product, process, customer
and other key stakeholders on the supply chain
Critically evaluate different types of structures and controls (financial and
non-financial) adopted by specific organisations in order to motivate
and measure performance and achieve strategic objectives
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
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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Page 9 of 132

Schedule of Study
Date
07/07/
15
07/07/
15
07/07/
15
07/07/
15
08/07/
15
08/07/
15
09/07/
15
09/07/
15
14/07/
15
14/07/
15
14/07/
15
15/07/
15
15/07/
15
16/07/

Time
9-10

Room Topic
7401b Lecture 1: Strategy and Strategic Planning

10-11

7401b Lecture 2: Strategic Planning, Choice & Evaluation

2-3

7401b Lecture 3: Environmental Analysis

3-4

7401b Lecture 4: Value Chain and Supply Chain

10-12

7401b Seminar 1 Questions: Home Life, CDE and Yahoo

2-4

7503

10-12

7401b Seminar 3 Questions: Royal Ichiban, Phillip Morris and McDonalds

2-4

7503

2-3

7401a Lecture 5: ABC, AMB and CPA

3-4
4-5

7401a Lecture 6: Management Control Theory and Performance

Management
7401a Lecture 7 : Balance Scorecard

10-12

7401b Seminar 5 Questions: Greeny Ltd, TSS Bank, SJC

2-4

7503

10-12

7401b Seminar 7 Questions: Voyager, Pepsi Co

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Seminar 2 Questions: Easy Jet, Apple and Ikea

Seminar 4 Question: Lego

Seminar 6 Questions: Jeeve, Daffodil Trust, RP Manufacturing

15
16/07/
15
21/07/
15
21/07/
15
21/07/
15
22/07/
15
22/07/
15
23/07/1
5
23/07/1
5
26/08/1
5

2-4

7503

2-3

7401a Lecture 8: TQM, Benchmarking and Cost of Quality

3-4

7401a Lecture 9: Target Costing and Product Lifecycle

4-5

7401a Lecture 10: Transfer Pricing

10-12

7401b Seminar 8 Questions: Fantaland, FB Toys and Toyota

2-4

7503

10-12

7401b Seminar 10 Questions: Home Pride, Spokes, ABC Group, Discursive

2-4

7503

Questions
Seminar 10a: Coursework Support / Exam Technique

2-4

7401a

Lectures 11 & 12: Revision

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Seminar 7a: Coursework Support / Exam Technique

Seminar 9 Questions: SY Ltd, Tata Nano

Reading List
Insert text:
The online resource list for this module is available at:
https://shu.rl.talis.com/lists/5B0BCFBF-E9AB-B1F2-766C00294D0DE35F.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:
Processes and Issues, 2nd Edition, London: Spiro.

Concepts,

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),
pathways to progress, London: CIMA.

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Management

Accounting:

Emmanuel, C, Otley, D, and Merchant, K, (1995), Readings in Accounting

for Management Control, reprinted by International Thomson Business
Press.
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.com
www.cimaglobal.com
www.accountancymagazine.com
www.accountingeducation.com
www.accountingweb.co.uk
www.accountancyage.com
http://news.ft.com/home/uk
www.sps.org.uk/
http://money.cnn.com/magazines/fortune/

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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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Group Assignment Marking Matrix

%
allocat
ed
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.
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.
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.
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

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15%

35%

10%

Marks
awarde
d

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.
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.
Total for the assignment

30%

10%

100%

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 Lifes new CEO is concerned that the
information provided by the companys 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?
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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-intime (JIT) basis to the major motor vehicle assemblers. Business is
highly competitive and price sensitive. The company is listed on the
stock exchange but CDEs share performance has not matched that of
its main competitors.
CDEs 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. CDEs 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 CDEs 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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Seminar 3 Questions:
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 plcs 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 Porters 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

Page 28 of 132

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.
effects

of

the

physical

environment

As a measure of the

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 questions
Note: 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
Page 29 of 132

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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McDonalds

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Seminar 4 Question:
Lego - "Rebuilding Lego brick by brick" case study
1. Using Porters 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
supply chain 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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Seminar 5 Questions:
Questions for the article "Easy as ABC? Activity-based costing in
Oxford University Library Services.
Page 48 of 132

(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 Ltd
Greeny 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 todays
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
Material costs per unit 's
Labour hours per unit
Machine hours per unit
Total production units for the time

Lady Bird

Dragon

15
2
0.5
200,000

12
0.50
1.5
250,000

Fly
18
1
2
200,000

400
4
2
2

500
4
2
2

200
5
4
2

period
Batch size in units
Number of machine set-ups per batch
Number of material orders per batch
Number of material movements per
batch
Number of quality inspections per
batch
Additional Information
1. 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
Machine set-up costs
Materials ordering costs
Materials movement costs
Page 55 of 132

30%
20%
10%
10%

Quality inspection costs

30%
Question 2 continues on the next page

Page 56 of 132

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)

Page 57 of 132

TSS Plc
TSS 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
Number of clients

X
10,000

Y
15,000

Z
15,000

Total
40,000

Total revenue

1,400,00
0

4,500,000

3,750,000

9,650,000

Total contribution

700,000

1,800,000

1,800,000

4,300,000

(560,000)

(1,440,000
)

(1,440,000
)

(3,440,00
0)

140,000

360,000

360,000

860,000

Overheads:
Customer support
costs*
Profit
(before Headquarters'
facility costs)

*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
costs
1,200,000

Personal investment advice

meetings
Personal loans advice meetings
Mini statements prepared
Telephone enquiries
Total
Client group
Activity
Number of investment
advice meetings
Number of personal loans
advice meetings
Mini statements prepared
Page 58 of 132

1,400,000
240,000
600,000
3,440,000
X

TOTAL

15,000

40,000

70,000

125,000

40,000

90,000

45,000

175,000

1,200,00
0

1,800,00
0

1,800,00
0

4,800,00
0

Number of telephone
enquiries

100,000

300,000

600,000

1,000,00
0

Question continued overleaf...

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), TSSs 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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SJC
Sarah 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
Average sales revenue per order
Gross margin: mark-up on
manufacturing cost

Delivery

100%

100%

100%

Post

Internet

Number of
orders

180,000

432,000

12,000

Number of
orders

144,000

288,000

12,000

Cost pool

Number of
product
items

693,000

Number of
packages

1,140,00
0
Post

Average number of product items

included in each mail order
Average number of packages
included in each mail order
Page 60 of 132

45

Cost pool
Telephon
e

Cost
driver
Sales
order
processing
Customer
enquiry
handling
Picking
and
packing
products

Internet

60

Telephon
e
120

Telephone
Internet

10

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 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 teams 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)

Page 61 of 132

Seminar 6 Questions:
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)

Page 62 of 132

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

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control systems so that staff morale and a high level of service

can be restored.
(17 marks)
(Total 25 marks - past exam question)

Page 64 of 132

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)

Page 65 of 132

Page 66 of 132

Seminar 7 Questions:
Voyager Plc
Voyager 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 companys 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 managers 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 companys 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
Page 67 of 132

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)

Page 68 of 132

Pepsi Co

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Seminar 8 Questions:
Page 87 of 132

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)
(Total 25 marks - past exam question)
Page 88 of 132

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
Invoiced to customers
Free replacements to customers
Motorcycles produced in the
period

Sept '12 - Feb

'13
55,000
1,700
62,000

Mar - Aug '13

44,500
400
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.

Lease of testing equipment

Quality Training
Compensation paid to the retailers
and customers
Wages of the inspection team
Legal costs
Administration costs for replacing
products
Supplier Evaluation Scheme
Page 89 of 132

Sept '12 - Feb

'13

2,500
60,000

Mar - Aug '13

40,000
50,000
100,000

25,000
90,000
0

26,400
0

5,600
125,000

10,000
120,000

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)
(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)
(Total 25 marks - past exam question)

Page 90 of 132

Toyota

Discussion:
1. Discuss the underlying principles of total quality management.
2. It was mentioned in the Toyota article A that:
"Toyotas 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 Toyotas and other companies
experience in losing control of their quality?

Page 91 of 132

Article A - Toyotas long climb comes to an abrupt halt

Page 92 of 132

It has been a brutal week for Toyota, long the gold standard for
quality, reliability and efficiency in car manufacturing.
Page 93 of 132

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 & Poors 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.
Toyotas 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.
Toyotas 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 Toyotas 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.
Toyotas 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 industrys most valuable and trusted brands.
Page 94 of 132

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.
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 companys 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 USs
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 Toyotas expansion on six continents was not matched by a
change in the companys 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.
Toyotas 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
Page 95 of 132

Association, who owns Toyota and General Motors dealerships in

Iowa.

Page 96 of 132

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 mid1980s.
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 companythatMontreal-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.

Page 97 of 132

Article B - Toyota lost way in rapid expansion

Financial 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 companys 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 Toyodas 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 carmakers US marketing arm,
said the companys recall may not totally solve the problem of
unintended accelerations. Mr Lentz also blamed the overwhelming
influence of Toyotas 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.
Page 98 of 132

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 Toyotas 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.
Copyright The Financial Times Limited 2010.

Page 99 of 132

Seminar 9 Questions:
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.
ii.
iii.

the level of competition in the market

the volume of sales of the MANPAC
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 Bowmans 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 Chairmans vision
of making a peoples 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 worlds 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 ultralow cost passenger vehicle segment.
(14 marks)
(Total 50 marks)

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Seminar 10 Questions:
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 Division
The 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
Direct labour (0.02 hour at 4
hour)
Variable production overheads

0.35
0.08
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 Division
The 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
Direct materials (excluding the cost of Ding Dong
chips)
Direct labour (0.25 hour at 5 hour)
Variable production overheads
Fixed production overheads
(based on the budgeted production level of
360,000 units)

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8.04
1.23
1.25
0.50
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 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)

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(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)
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

MB Division

Bike frame
Per unit

Mountain
Bike
Per unit
400

Current selling price

200

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
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the divisions 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 Managers 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)
(Total 25 marks - past exam question)

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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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