CGA-CANADA ADVANCED MANAGEMENT ACCOUNTING [MA2] EXAMINATION March 2011 Marks 30 Time: 3 Hours Question 1 Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations.
Note: 11/2 marks each a. Which of the following is a disadvantage of outsourcing? 1) 2) 3) 4) Outsourcing increases transaction costs. Outsourcing limits a firm’s flexibility. Outsourcing increases risks. Outsourcing increases operating costs. b. Which of the following is an example of a formal control system within an organization? 1) 2) 3) 4) c. Corporate culture Ethics and values Management style Strategic plans Which of the following best describes the Sullivan Principles as a control system? ) 2) 3) 4) A set of standards used to measure social responsibility in enterprises A set of principles describing the norms and expected behaviour of all employees A set of measures to help determine whether a company is performing to expectations A formal information system designed to focus managers’ attention on key strategic issues d.
Agency theory makes some simplifying assumptions about people’s behaviour. Which of the following is an example of these assumptions? 1) 2) 3) 4) e. People are self-interested and irrational. People are honest and maximize wealth.
People are rational and maximize wealth. People are honest and self-interested. The assertion that managers should be held responsible for only those decisions over which they have authority is related to what principle? 1) 2) 3) 4) The agency principle The authority principle The controllability principle The management principle Continued… EMA2M11 ©CGA-Canada, 2011 Page 1 of 9 Note: Use the following information to answer parts (f) and (g).
The manager of a retail store earns an annual salary of $120,000. Head office wants to add a motivating bonus to the manager’s fixed salary.
A bonus will be added if this year’s sales are at least 25% greater than last year’s level and a penalty will be imposed if sales are more than 25% less than last year. The compensation will be as follows: If sales are < 75% of last year’s level If sales are between 75% and 125% of last year’s level If sales are > 125% of last year’s level Assume that all three outcomes are equally probable. f. The prospect of a $15,000 penalty worries the manager, so the manager has negotiated to reduce it to $7,500 so that the low sales compensation would be $112,500. What is the certain equivalent of this bonus scheme? ) 2) 3) 4) $117,500 $120,000 $122,500 $125,000 $105,000 $120,000 $135,000 g. What is the risk premium if the certain equivalent of this bonus scheme is $130,000? 1) 2) 3) 4) $ 0 $ 5,000 $10,000 $15,000 h. Which of the following best defines an assessment cost? 1) Activities undertaken to prevent adverse environmental impacts 2) Activities undertaken to monitor areas that have the potential to have a negative impact on the environment 3) Activities that control toxic materials and their use 4) Activities undertaken to clean up damages resulting from an environmental failure i.
Which of the following would likely eliminate the motivation for managers to engage in earnings management? 1) 2) 3) 4) j. Use operating income to evaluate managers’ performance Use net income to evaluate managers’ performance Use share price to evaluate managers’ performance Use net income and share price to evaluate managers Which of the following should be classified as a product-sustaining cost? 1) 2) 3) 4) Acquisition cost of computerized design software Delivery costs Depreciation of manufacturing equipment Procurement costs Continued… EMA2M11 ©CGA-Canada, 2011 Page 2 of 9 Note:
Use the following information to answer parts (k), (l), and (m). A company manufactures tennis balls that are sold in cans of 3 balls. The selling price of a can of 3 balls is $6. 80. Variable costs are 39. 5% of the selling price and the fixed costs are $85,000 per year for the production of the balls. k. What is the break-even point in number of cans of 3 balls? 1) 2) 3) 4) l. 12,500 20,661 31,646 39,661 The acquisition of a new piece of equipment would increase fixed costs by $35,000 and generate savings of 10% on the variable costs of a can of 3 balls. What would be the new break-even point with the acquisition of the new equipment? ) 2) 3) 4) 18,595 27,381 28,481 29,169 m. What amount of sales in dollars is needed to earn net income of $24,000, assuming an income tax rate of 40%? 1) 2) 3) 4) $109,000 $140,495 $180,165 $206,611 n. A number of tools have been developed to analyse quality-control problems. Which of the following describes a tool known as a Pareto diagram? 1) 2) 3) 4) A chart that illustrates a time series of successive observations of a particular step A chart that shows observations outside some specified limits A chart that indicates how frequently each type of defect occurs A diagram that identifies potential causes for failure . Which of the following is generally considered a drawback of decentralization? 1) 2) 3) 4) Decentralization decreases motivation. Decentralization eliminates goal incongruence. Decentralization can lead to sub-optimal decision making. Decentralization slows down the decision-making process. p. Which of the following is a benefit of partial productivity measures? 1) 2) 3) 4) Partial productivity measures allow managers to evaluate the effect of input substitutions. Partial productivity measures are easily understood by operations personnel. Partial productivity measures cannot be manipulated.
Partial productivity measures provide firm-wide numbers. Continued… EMA2M11 ©CGA-Canada, 2011 Page 3 of 9 q. Which of the following would be included in a cost-of-quality report as an appraisal cost? 1) 2) 3) 4) Note: Use the following information to answer parts (r), (s), and (t). Liability claims Machine repairs Product testing Suppliers’ evaluations Johnson Inc. receives an average of 300 orders per year for product X. The product requires 9 hours of manufacturing time on dedicated equipment. The equipment has an annual capacity of 4,500 hours. r.
What is the average wait time needed for production? 1) 2) 3) 4) s. 0. 75 hours 1. 50 hours 6. 75 hours 13. 5 hours What is the excess capacity of the dedicated equipment? 1) 450 hours 2) 900 hours 3) 1,800 hours 4) 2,475 hours t. Johnson is considering introducing a new product, called Z, for which it expects to receive 80 orders in the coming year. Each order of Z will require 6 hours of manufacturing time on the same equipment used to manufacture product X. The number of orders for product X will remain the same whether or not product Z is introduced.
What will be the effect on the average wait time for each order of product X if Johnson decides to introduce product Z? 1) 2) 3) 4) The average wait time for each order of product X will stay the same. The average wait time for each order of product X will decrease. The average wait time for each order of product X will increase. The answer depends on the order in which the orders for each product are received. EMA2M11 ©CGA-Canada, 2011 Page 4 of 9 10 Question 2 You have been appointed the assistant-controller of a major manufacturer of newsprint, fine paper, and different types of specialty papers.
Michaela, the controller, has been asked by the board of directors to prepare a project for a sustainable balanced scorecard. All Michaela knows is that such a scorecard uses different measures in 3 different dimensions: economic, environmental, and social. Michaela would like you to help with this project by providing some examples of measures that could be included in each dimension. Required Briefly describe corporate sustainability and provide Michaela with at least two examples of measures for each dimension that should be used in a sustainable balanced scorecard.
Explain the relevancy of your examples. 12 Question 3 Northern Products Inc. wants to increase its production capacity and improve the quality of the only product it manufactures. For that purpose, the CEO is considering acquiring new digital equipment that will automate the production process while ensuring a better and more consistent quality of product. The new equipment would cost $1,400,000 and replace the old mechanically automated equipment that is currently used.
The old equipment was acquired 6 years ago at a cost of $850,000 and is being depreciated over 8 years using the straight-line method. It was expected that, after 8 years, the salvage value would be zero, but it can be sold now for $212,500. The new equipment will be used for 8 years, with an expected salvage value of $80,000 at the end of its useful life. The capital cost allowance for the new equipment is 20%. The company’s tax rate is 40% and its required before-tax return on all investments is 15%. The new equipment should generate savings of 10% on all variable production costs.
The following data provides information about the current production and sales of the product: Annual production and sales volume in units Sales price per unit Production cost per unit: Direct materials Direct labour Overhead (60% fixed) Total Required 6 6 a. Compute the net present value of the investment in the new equipment. 110,000 $70 $12 15 10 $37 b. Based on your answer to part a), state whether or not Northern Products should proceed with the investment. Identify other factors that the CEO should consider before making a final decision and explain how they could affect the investment decision. EMA2M11 ©CGA-Canada, 2011
Page 5 of 9 14 Question 4 The following information pertains to Gerco Inc. for the year ended December 31, 2010: Net operating income before taxes EVA-adjusted total capital, December 31, 2009 Research costs in 2010 expensed under GAAP Development costs in 2010 expensed under GAAP Development costs in 2010 capitalized under GAAP Impairment loss of goodwill included in the calculation of GAAP income Total depreciation of all equipment Additional information: ? ? ? ? ? ? ? $ 1,300,000 5,400,000 165,000 88,000 34,000 46,000 75,000 Equity accounts for 69% of the firm’s capital structure. The marginal tax rate is 35%.
The market yield on equivalent debt is 6%. The cost of equity is 8%. Total debt is 31% of capital (debt + equity). Assume that all research and development (R&D) costs were incurred January 1, 2010. Capitalized development costs are amortized over a period of 8 years in GAAP income; R&D costs are amortized over the same period for economic value added calculations. Required 12 2 a. Determine the economic value added (EVA) for the year ended December 31, 2010. b. Explain the significance of your answer to part a). Identify and briefly explain the major differences, if any, between EVA income and GAAP income.
EMA2M11 ©CGA-Canada, 2011 Page 6 of 9 10 Question 5 Wood Inc. manufactures wood poles. It has two divisions, Harvesting and Sawing, which are both evaluated as profit centres. The Harvesting Division is responsible for all the harvesting operations and transfers logs to the Sawing Division, which transforms the logs into poles for external customers. Sawing can produce 10,000 poles per year. The Sawing Division is currently producing at full capacity, after management decided a year ago to manufacture a higher-demand wood pole, Pole-S, that can be sold readily.
The manager of the Sawing Division suggests that the maximum price the division can pay for logs transferred from Harvesting is $61. 50 per log. The following information supports this suggestion: Price that external customers are willing to pay for one unit of Pole-S Costs per unit: Direct labour Variable overhead Fixed overhead Direct materials (other than logs) Total cost per unit Target profit margin Total cost and margin Maximum transfer price for one log $ 122. 00 35. 00 4. 50 8. 50 2. 50 50. 50 10. 00 $ 60. 50 $ 61. 50
The manager of the Harvesting Division disagrees with the proposed transfer price of $61. 50. The division is operating at full capacity and can sell all the logs it produces to external customers for $75. Moreover, the director says: “For each unit of Pole-S my direct labour cost is $40. 50, variable overhead is $9. 50, and fixed overhead is $15. I cannot spend $65 to cut trees and sell them for $61. 50. ” Required 4 a. Determine whether it would be beneficial for the company as a whole if logs were transferred to the Sawing Division at the suggested price of $61. 0 per log. Show all your calculations. 3 b. Explain the impact of transferring the logs to the Sawing Division at $61. 50 on the performance of each division and specifically on each manager. c. Determine the minimum and the maximum transfer price that could be used to account for the transfer of logs from the Harvesting Division to the Sawing Division. Recommend an appropriate transfer price. Justify your recommendation. 3 EMA2M11 ©CGA-Canada, 2011 Page 7 of 9 10 Question 6 A company provides a wide range of telecommunications products and services across Canada.
The company offers stand-alone products as well as different packages of bundled services. The current prices for the most popular package deals and the stand-alone products are as follows: Product Stand-alone Internet Television (TV) Wireless Internet and TV Internet and wireless TV and wireless All three Price/Month $ 37 30 32 $ 55 57 48 80 Revenues $ 1,875,000 1,125,000 4,500,000 Package deal Required 2 a. If the company uses the stand-alone revenue-allocation method based on selling prices, determine the revenues allocated to individual products for the Internet and television package deal. b. If the company uses the stand-alone revenue-allocation method based on product revenues, determine the revenues allocated to individual products for the television and wireless package deal. c. If the company uses the incremental revenue-allocation method based on selling prices, determine the revenues allocated to individual products for the Internet, television, and wireless package deal. Assume that wireless is the primary product and Internet is the first incremental product. 2 2 2 d. Indicate which allocation method from parts a), b), and c) is the most appropriate and explain why. . Assume now that all three products, Internet, television, and wireless, are under the responsibility of different managers and that each manager receives a bonus based on the operating profit generated by the product under his or her responsibility. Also assume that the managers of the products have no control over the pricing of the package deals. The marketing department is solely responsible for pricing the package deals. Indicate how this would change your answer to part d). EMA2M11 ©CGA-Canada, 2011 Page 8 of 9 14 Question 7 Teltech Inc. anufactures halogen lamps for parking lots. On March 1, there was no beginning inventory of direct materials and no beginning or ending inventory of work in process. Teltech uses a just-in-time (JIT) production system and backflush costing with three trigger points for making entries in the accounting system: ? ? ? Purchase of direct materials debited to inventory/materials and in-process control Completion of finished units of product debited to finished goods control Sale of finished goods Teltech’s standard cost per lamp is direct materials, $20, and conversion costs, $17.
The following data applies to the month of March manufacturing: Direct materials purchased Conversion costs incurred Number of finished units manufactured Number of finished units sold Required 5 a. Prepare summary journal entries for March (without disposing of under- or over-allocated conversion costs). Assume that there are no direct materials variances. $520,000 $390,000 20,000 18,000 5 b. Post the entries in part a) to the following T-accounts for inventory: Materials and in-process control, finished goods control, conversion costs control, conversion costs allocated, and cost of goods sold. c.
Critics of backflush costing have raised some criticisms with the method. Identify two of these criticisms and indicate some arguments to counter these criticisms. END OF EXAMINATION 4 100 EMA2M11 ©CGA-Canada, 2011 Page 9 of 9 Advanced Management Accounting [MA2] Formulas Average wait time for production = – Economic order quantity (EOQ) = 2DP/C Total relevant costs for inventory management (TRC) = (D / Q) ? P + (Q / 2) ? C or = (DP / Q) + (QC / 2) Present value of tax shield for an asset purchase = ? . Present value of tax shield on the purchase of an asset expanded to include salvage value =(ct)? . – ? Return on investment (ROI) = (Income / Revenues) ? (Revenues / Investments) or = Income / Investments Residual income (RI) = Actual income – (Cost of capital ? Invested capital) Economic value added (EVA) = NOPAT – (WACC ? Total capital) Return on sales (ROS) = Operating income / Revenues EMA2M11 [MA2. 1011] ©CGA-Canada, 2011 Attachment 1 of 1 ADVANCED MANAGEMENT ACCOUNTING [MA2] EXAMINATION MA2 Before starting to write the examination, make sure that it is complete and that there are no printing defects. This examination consists of 9 pages and 1 page of attachments.
There are 7 questions for a total of 100 marks. READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED. To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms. Glossary of Assessment Terms Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996). Copyright David Palmer. Calculate Mathematically determine the amount or number, showing formulas used and steps taken. (Also Compute). Examine qualities or characteristics that resemble each other. Emphasize similarities, although differences may be mentioned.
Compare by observing differences. Stress the dissimilarities of qualities or characteristics. (Also Distinguish between) Express your own judgment concerning the topic or viewpoint in question. Discuss both pros and cons. Clearly state the meaning of the word or term. Relate the meaning specifically to the way it is used in the subject area under discussion. Perhaps also show how the item defined differs from items in other classes. Provide detail on the relevant characteristics, qualities, or events. Create an outcome (e. g. , a plan or program) that incorporates the relevant issues and information.
Calculate or formulate a response that considers the relevant qualitative and quantitative factors. Give a drawing, chart, plan or graphic answer. Usually you should label a diagram. In some cases, add a brief explanation or description. (Also Draw) This calls for the most complete and detailed answer. Examine and analyze carefully and present both pros and cons. To discuss briefly requires you to state in a few sentences the critical factors. This requires making an informed judgment. Your judgment must be shown to be based on knowledge and information about the subject. Just stating your own ideas is not sufficient. ) Cite authorities. Cite advantages and limitations. In explanatory answers you must clarify the cause(s), or reasons(s). State the “how” and “why” of the subject. Give reasons for differences of opinions or of results. To explain briefly requires you to state the reasons simply, in a few words. Identify Distinguish and specify the important issues, factors, or items, usually based on an evaluation or analysis of a scenario. Illustrate Make clear by giving an example, e. g. , a figure, diagram or concrete example.
Interpret Translate, give examples of, solve, or comment on a subject, usually making a judgment on it. Justify Prove or give reasons for decisions or conclusions. List Present an itemized series or tabulation. Be concise. Point form is often acceptable. Outline This is an organized description. Give a general overview, stating main and supporting ideas. Use headings and sub-headings, usually in point form. Omit minor details. Prove Establish that something is true by citing evidence or giving clear logical reasons. Recommend Propose an appropriate solution or course of action based on an evaluation or analysis of a scenario.
Relate Show how things are connected with each other or how one causes another, correlates with another, or is like another. Review Examine a subject critically, analyzing and commenting on the important statements to be made about it. State Clearly provide a position based on an evaluation, e. g. , Agree/Disagree, Correct/Incorrect, Yes/No. (Also Indicate) Summarize Give the main points or facts in condensed form, like the summary of a chapter, omitting details and illustrations. Trace In narrative form, describe progress, development, or historical events from some point of origin.
Explain Compare Contrast Criticize Define Describe Design Determine Diagram Discuss Evaluate CGA-CANADA ADVANCED MANAGEMENT ACCOUNTING [MA2] EXAMINATION March 2011 SUGGESTED SOLUTIONS Marks 30 Question 1 Note: 11/2 marks each Time: 3 Hours Sources/Calculations: a. 2) Topic 7. 2 (Level 2) b. 4) Topic 7. 6 (Level 1) c. 1) Topic 7. 6 (Level 1) d. 3) Topic 7. 2 (Level 2) e. f. 3) Topic 10. 1 (Level 1) 3) Topic 7. 2 (Level 2) Certain equivalent = 1/3 ($112,500 + $120,000 + $135,000) = $122,500 g. 3) Topic 7. 2 (Level 2) Risk premium = $130,000 – $120,000 = $10,000 h. 2) Topic 10. (Level 1) i. j. 4) Topic 10. 1 (Level 1) 1) Topic 2. 4 (Level 1) k. 2) Topic 1. 7 (Level 1) Contribution margin = (1 – 0. 395) = 0. 605 $85,000 / (0. 605 ? $6. 80) = 20,661 cans l. 2) Topic 1. 7 (Level 1) Variable costs = (0. 395 ? 90%) = 0. 3555 Contribution margin = (1 – 0. 3555) = 0. 6445 ($85,000 + $35,000) / (0. 6445 ? $6. 80) = 27,381 cans Continued… SMA2M11 ©CGA-Canada, 2011 Page 1 of 6 m. 4) Topic 1. 7 (Level 1) Sales – Variable costs – Fixed costs – Income taxes = $24,000 $6. 80Q – $2. 686Q – $85,000 – Income taxes = $24,000 $4. 114Q – $85,000 – [0. 4 ? $4. 114Q – $85,000)] = $24,000 $4. 114Q – $85,000 – 1. 6456Q + $34,000 = $24,000 $2. 4684Q = $24,000 + $51,000 $2. 4684Q = $75,000 Q = 30,384 Sales = 30,384 ? $6. 80 = $206,611 n. 3) Topic 3. 2 (Level 1) o. 3) Topic 6. 1 (Level 2) p. 2) Topic 9. 7 (Level 1) q. 3) Topic 3. 1 (Level 1) r. 3) Topic 3. 4 (Level 1) 300 ( , ) = 6. 75 hours s. 3) Topic 3. 4 (Level 1) Excess capacity = 4,500 – (9 ? 300) = 4,500 – 2,700 = 1,800 hours t. 1) Topic 3. 4 (Level 1) 80 ? 6 hours = 480 hours, which is less than the excess capacity, thus no change 10 2 Question 2 Source: Topic 9. (Level 2) Corporate sustainability is a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental, and social developments. Economic: ? ? ? ? 2 Customer relationships Corporate governance Innovation Economic value created 2 Environmental: ? ? ? ? Water consumption Atmospheric emissions Residual material produced Energy consumption 2 Social: ? ? ? ? Training of employees Donation and sponsorships Retention of employees Labour practices 2 SMA2M11 The examples connect the balanced scorecard to sustainable growth and manage risks. CGA-Canada, 2011 Page 2 of 6 12 Question 3 Source: Topic 5. 3 (Level 1) 6 a. Net present value (NPV) After-tax rate of return: 15% (1 – 40%) = 9% After-tax savings on variable costs per unit: [$12 + $15 + (40% ? $10)] ? (1 – 40%) ? 10% = $1. 86 Annual savings = 110,000 ? $1. 86 = $204,600 Initial investment outlay: Cost of new equipment Disposal of old equipment Total initial investment outlay PV of cash savings on variable costs: $204,600 (PVAF, 9%, 8 years) PV of tax savings from depreciation: 1,187,500 0. 2 0. 4 . 2+0. 09 $ (1,400,000) 212,500 (1,187,500) 1,132,420 ? 1+0. 5(0. 9) 1+0. 09 314,062 PV of loss of tax savings due to salvage value: 80,000 0. 2 0. 4 0. 2+0. 09 ? (1) . (11,076) PV of cash flow from proceeds of disposition of the new equipment in 8 years: 80,000 (PVIF, 9%, 8) NPV 6 $ 40,149 288,055 b. At first glance, the company should replace the old equipment with the new equipment because the net present value of the project is positive. However, other factors should also be considered, such as the selection of an appropriate discount rate to account for risk and the possibility that some of the hypotheses will not materialize as expected.
For example, if actual savings on variable costs are only 7% instead of the 10% used in the calculations, the NPV of the project is negative. On the other hand, the acquisition of the new equipment should increase the production capacity, but all calculations are based on the current level of 110,000 units per year. If sales increase, that will have a positive effect on the NPV of the project. SMA2M11 ©CGA-Canada, 2011 Page 3 of 6 14 Question 4 Source: Topic 8. 4 (Level 1) 12 a. Calculation of weighted-average cost of capital (WACC): After-tax cost of debt = 6% (1 – 0. 35) = 3. % Weighted-average cost of capital = 0. 69 ? 0. 08 + 0. 31 ? 0. 039 = 6. 73% Calculation of net operating profit after taxes (NOPAT): Net operating profit before taxes Add: Development costs expensed under GAAP in 2010 Add: Research costs expensed under GAAP in 2010 Deduct: 2010 amortization of R&D (88,000 + 165,000) / 8 Add: Impairment loss of goodwill included in 2010 GAAP income Adjusted net operating profit before taxes NOPAT = $1,567,375 (1 – 0. 35) = $1,018,794 Calculation of economic value added (EVA): EVA = NOPAT – (WACC ? Total capital) EVA = $1,018,794 – (6. 73% ? $5,400,000) EVA = $655,374 2 b.
The company is not only profitable under GAAP, it also creates $655,374 of value in addition to the return based on invested capital. The additional value benefits the shareholders. The main difference comes from the fact that, under GAAP, R&D costs are not capitalized, while EVA considers these as investments that should be capitalized and amortized over a reasonable period of time. This provide the manager with an incentive to invest in R&D. Question 5 Source: Topics 6. 2 and 6. 4 (Level 1) 4 a. Contribution margin from selling 10,000 logs to external customers: [$75 – ($40. 50 + $9. 50)] ? 10,000 = $250,000
Contribution margin from selling 10,000 units of Pole-S to the Sawing Division: [$122. 00 – ($40. 50 + $9. 50) – ($35. 00 + $4. 50 + $2. 50)] ? 10,000 = $300,000 The contribution margin is $50,000 higher if logs are transferred from the Harvesting Division to the Sawing Division. Wood Inc. would be better off transferring the logs. 3 b. The transfer of logs at $61. 50 will have the effect of transferring profits from the Harvesting Division to the Sawing Division. As the two divisions are evaluated as profit centres, the manager of the Harvesting Division will be penalized while the manager of the Sawing Division will benefit. . The minimum transfer price is equal to the variable costs of the Harvesting Division, which is equal to $75. The maximum transfer price is equal to the market price of $75 per log. The market price of $75 is the appropriate transfer price because the Harvesting division is operating at full capacity. $ 1,300,000 88,000 165,000 (31,625) 46,000 $ 1,567,375 10 3 SMA2M11 ©CGA-Canada, 2011 Page 4 of 6 10 Question 6 Source: Topic 2. 1 (Level 2) 2 a. Internet = 37 37+30 ? $55 = $30. 37 TV = 30 37+30 ? $55 = $24. 63 2 b. TV = $1,125,000 $1,125,000+4,500,000 $4,500,000 ? $48 = $9. 60 Wireless = 2 c.
Product $1,125,000+4,500,000 ? $48 = $38. 40 Cumulative Revenue Allocated $32 (Wireless) $69 (Wireless + Internet) $80 (Wireless + Internet + TV) Revenue Allocated $32 37 11 $80 Wireless $32 Internet ($69 – $32) TV ($80 – $69) Total 2 d. The stand-alone revenue-allocation method based on product revenues is the most appropriate because it uses both the level of revenues for each product and the market price based on the amount that each service can generate as a stand-alone product. e. None of the methods used in parts a), b), and c) would be appropriate for the managers to determine their bonuses.
The manager of the TV business unit would be heavily penalized with any of the three methods. All methods allocate the price of the package deal, over which the managers of all three products have no control. 2 SMA2M11 ©CGA-Canada, 2011 Page 5 of 6 14 Question 7 Source: Topic 4. 5 (Level 1) 5 a. Journal entries Purchase of direct materials Inventory/materials and in-process control ……………………………………….. Accounts payable control …………………………………………………………. Incur conversion costs Conversion costs control …………………………………………………………………
Accounts payable, wages payable ……………………………………………… Completion of finished goods Finished goods control [20,000 ? ($20 + $17)] ………………………………….. Inventory/materials and in-process control …………………………………. Conversion costs allocated ……………………………………………………….. Sale of finished goods Cost of goods sold [18,000 ? ($20 + $17)] ……………………………………….. Finished goods control …………………………………………………………….. 5 b.
Posting Direct materials: Inventory/Materials and In-Process Control 520,000 400,000 Bal. 120,000 Conversion costs: Conversion Cost Allocated 340,000 Conversion Cost Control 390,000 Bal. 74,000 Finished Goods Control 740,000 666,000 Cost of Goods Sold 666,000 520,000 520,000 390,000 390,000 740,000 400,000 340,000 666,000 660,000 4 c. Criticisms of backflush costing focus mainly on the fact that it does not adhere strictly to GAAP and that there is no audit trail. An asset (WIP) is not recognized in the system and it is not possible to identify how much of each resource is used at each step of the manufacturing process.
On the other hand, in a JIT system, inventories are usually very low and most likely not material. Usage of resources can be monitored through other measures not found in a traditional cost accounting system. 100 END OF SOLUTIONS SMA2M11 ©CGA-Canada, 2011 Page 6 of 6 CGA-CANADA ADVANCED MANAGEMENT ACCOUNTING [MA2] EXAMINATION March 2011 EXAMINER’S COMMENTS General Comments The overall performance on this examination was not satisfactory. The examination included 7 questions on several topics from the MA2 course. Candidate performance was satisfactory on Questions 1 (multiple choice) and 4 (economic value added).
For Questions 2 (corporate sustainability), 3 (capital budgeting), 5 (transfer pricing), 6 (revenue allocation), and 7 (just-in-time and back flush costing) the average performance was below satisfactory. Specific Comments Question 1 Multiple choice (Levels 1 and 2) Candidate performance on this question that included twenty multiple-choice items was satisfactory. Candidates were less successful on the following sub-questions: (a) outsourcing, (p) performance measurement, and (t) time and competitiveness. Question 2 Corporate sustainability (Level 2) The performance of the candidates on this question was unsatisfactory.
Most candidates were unable to describe corporate sustainability and provide examples of measures for each of the dimensions of a sustainable balanced scorecard. It seemed that many candidates were not very familiar with this topic. Question 3 Capital budgeting (Level 1) The performance of the candidates on this question was almost satisfactory. In part (a), some candidates used the incorrect amount for the total initial investment to compute the present value of tax savings from depreciation and the wrong formula to calculate the present value of lost tax savings due to salvage value.
Some candidates did not use the after-tax rate of return in their calculation. In part (b), some candidates were unable to explain how the factors enumerated could affect the investment decision. Question 4 Economic value-added (Level 1) The performance of the candidates on this economic value-added question was satisfactory. Question 5 Transfer pricing (Level 1) Most candidates had an unsatisfactory performance in this question. In part (a), many candidates included fixed costs in their calculations. Some candidates did not consider the impact on the company as a whole.
In part (c), many candidates mentioned a minimum and a maximum transfer price but did not recommend an appropriate transfer price. Question 6 Revenue allocation (Level 2) Most candidates did not perform satisfactorily on parts (b), (d), and (e) of this question. Many candidates were unable to compute the revenues allocated to individual products for the television and wireless package deal in part (b). Many candidates were unable to indicate which of the three methods is the most appropriate and explain why in part (d). Many candidates did not seem to understand this topic.
Continued… MA2M11 ©CGA-Canada, 2011 In part (e), candidates were asked if a bonus system based on the operating profit generated by a product under the responsibility of a manager would influence the choice of one of the three methods that could be used. Performance was unsatisfactory on this part. Question 7 Back flush costing (Level 1) Most candidates did not perform well on this question. They did not use the appropriate accounts and the correct amounts in the journal entries. Many candidates did not post the entries in the T-accounts. MA2M11 ©CGA-Canada, 2011