MDC Course Outline Spring 2005

UNDERGRADUATE SUBJECT GUIDE – SPRING SEMESTER 2005

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22421/0 Management Decisions and Control – Course Outline - 2 –

University of Technology, Sydney

BACHELOR OF BUSINESS Course Name: Bachelor of Business Bachelor of Accounting Subject Name: Management Decisions and Control Subject Number: 22421/0 Teaching School: School of Accounting Credit Points: 6 Modes of Presentation: Lectures - 1 hour per week Seminar/workshop - 2 hours per week 13 weeks teaching semester Prerequisite: 22321/223210 Cost Management Systems Co Requisite: Nil Objectives: On successful completion of this subject students should be able to:

1. Understand, apply and critique the application of a range of different decision models used to enable managers to solve problems, control and evaluate performance within an organisational context.

2. Within the social context of an organisation, evaluate the impact of different decisions, control systems and performance evaluation methods.

(See Figure 1 – page 5) This builds on and extends their knowledge and skills developed in 22321/0 Cost Management Systems for the following objectives: 1. Critically understand the role of management accounting in modern organisations; 2. Appreciate both historical and contemporary views of how management accounting creates

value for organisations; 3. Further develop a capacity for independent research and learning; 4. Further develop communication and teamwork skills; and 5. Further develop their information technology and accounting application skills.

Contribution to the Course: This is the capstone subject of the Management Accounting Stream and builds upon the core of management accounting issues and costing systems knowledge developed in 22321/0 Cost Management Systems. It provides an extension of management accounting to areas of decision support and managerial control. This completes a general coverage of the core management accounting concepts, skills and techniques. The subject is therefore an essential subject for accounting majors. It also provides a useful set of concepts, skills and techniques for all potential managers in organisations, for those who wish knowledge and skills beyond cost management applications. It therefore is also relevant to students in other majors.


University of Technology, Sydney As this subject builds on and extends the knowledge and skills developed in 22321/0 Cost Management Systems (CMS) and Accounting Transactions and Business Decisions. Students must have a strong foundation in costing and management accounting knowledge and skills to be able to successfully complete this subject. Some of these basic knowledge and skills will be highlighted in the first two tutorials of this subject. Students who find that their competencies in these knowledge and skills have weakened with time are strongly advised to revise the materials covered in CMS. The subject focuses on the use of accounting information in facilitating (Management Decisions) & influencing (Management Control) managerial decisions in organisations. Decision-Facilitating Role: Managers have the responsibility and authority for making decisions with respect to the acquisition and use of an organisation's resources. To do this effectively they must identify the actions (or strategies) available to them, predict the relevant consequences of those actions, and then choose the action that has the most preferred predicted outcome. Management accounting systems can be effective tools in providing information that is useful in predicting the possible consequences of alternative actions and in presenting a description of those consequences. Furthermore, management accounting systems can help identify situations in which "corrective" action is required. Decision-Influencing Role: Whilst managers have the responsibility and authority for making decisions within organisations, they may not do so in the best interest of the organisation. Management accounting systems can be effective tools in influencing managerial decisions and actions through its role in organisation in evaluating and rewarding performance. However, management accounting systems can also have unintended consequences. For instance, traditional cost allocation system may give managers the incentive to increase inventory when demands and profit are low in order to increase profit. Another example is the use of ROI to evaluate managerial performance may discourage managers from investing in some worthwhile projects (i.e. projects with positive NPV) because the ROI of the project is less than the divisional ROI. An understanding of the behavioural impact of accounting systems on managerial behaviour is therefore important in the design of effective management accounting systems. To do well in this subject, students need to develop analytical and evaluative skills. In other words, you should not approach the material in this course as one of memorising rules or particular solutions. For instance, decision-making questions require students to firstly identify the relevant information. In other words, you have to understand why some information is included and other excluded rather than merely memorising particular solutions. Instead you should develop your analytical skills with respect to the identification and use of decision relevant accounting information. Specific Teaching Strategies: The syllabus material in this subject will be presented in lectures and seminars. Class contact will be 1-hour lecture and 2-hour seminar/workshop. The focus of the learning process will be the seminars where students will be exposed to the fundamental conceptual and technical material through a combination of practical exercises, case studies, debates and discussion. The seminars will be supported by the lectures where theoretical material and illustrations of development in practice will be covered. Students will also take part in independent group project work to explore selected topics in greater depth. In addition, students will be required to demonstrate a proficiency in the use and application of information technology for the preparation and analysis of management accounting information. The specific forms of such skills will include:


University of Technology, Sydney i) Spreadsheet applications; ii) Database applications; and

iii) Word-processing, report writing and presentation applications. iv) Use of Internet for research

Assessment: Marks will be awarded in the following proportion:

Research Assignment 40% Due in tutorials week 10 Final examination 60% To be advised Total 100% In-Class Assessment Students are required to complete their assignments prior to class and are expected to participate in class discussion. Students that fail to complete the required exercises for the week, called Entry Ticket Homework, will NOT be allowed into the tutorial. The Entry Ticket Homework is outlined in the weekly tutorial guide. Students will be allowed one “grace week” where they will be allowed in to the tutorial without having completed the work. This does not include the first week’s work which most students would not have had opportunity to prepare for. Students will be required to achieve a pass in both the overall marks for the continuous assessments and the final examination to satisfy the requirements of the subject. Coordinating Lecturer: Pernilla Linden, Associate Lecturer, School of Accounting, UTS Room C311A, Telephone 9514-3773, E-mail [email protected]

David Bedford Associate Lecturer, School of Accounting, UTS Room C311, Telephone 9514-3638, E-mail [email protected]



Problems &

Decisions

Standard Costing

Cost Behaviour

CVP Analysis

Budgeting

Relevant Costing

Pricing Decisions

Assumption 1

Assumption 2

Assumption 3

INFORMATION

Solution 1

Solution 2

Solution 3

Social Context Impact

Policies &

Guidelines

Decisions Models

Performance Evaluation

Control Systems


University of Technology, Sydney Prescribed Text: Langfield-Smith, K., Thorne, H., and Hilton, R. W., (2003), Management Accounting – An Australian Perspective, McGraw-Hill. Kaplan, R. S. and Atkinson, A. A., (1998), Advanced Management Accounting, Upper Saddle River, N. J., Prentice-Hall International. Prescribed readings Briers, M. and Hirst, M. (1990) The role of budgetary information in performance evaluation, Accounting, Organisations and Society, 15(4) 373-398. Emmanuel, C., Otley, D. and Merchant, K. (1990) Accounting for Management Control, London: Chapman & Hall, pp57-67. (658.1511EMMA) Hopwood, A.G., (1976), Accounting and Human Behaviour, Prentice-Hall. Pp. 57-68 (657.019HOPW) Kaplan, R.S., (1983), Measuring Manufacturing Performance: A New Challenge for Management Accounting Research, The Accounting Review, LVIII (4), pp.686-705. Macintosh, N.B., (1985), The Social Software of Accounting and Information Systems, Chapters 2 & 3 Wiley, (658.40388MACI) References: Ashton, D., Hopper, T., and Scapens, R., (1995), Issues in Management Accounting, (2nd Edition) London: Prentice-Hall. (685.1511ASHT) Bromwich, M and Hopwood A.G., (1986), Research and Current Issues in Management Accounting London: Pitman. (685.1511/77) Kaplan, R.S. and Norton, D.P, (1996), The Balanced Scorecard, Harvard Business Press (658.4012KAPL). Macintosh, N.B., (1994), Management Accounting and Control Systems: An Organizational and Behavioural Approach, Wiley. (658.1511MACI) Merchant, K (1997), Modern Management Control Systems, Prentice-Hall. Senge, P., (1990), The Fifth Discipline: The Art and Practice of the Learning Organization, Doubleday, New York (658.4/501) Simons, R., (1995), Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal, Harvard School Press. (658.4120SIMO)



22421/0 Management Decisions and Control on UTSOnline UTSOnline: http://online.uts.edu.au/ You should bookmark this web page. On this page, you can login directly. After you have logged in, you will see a list of subjects you have enrolled in. After you have finished your session, you should logout and close your browser to logout completely. Your login username for UTSOnline is your student number. Your password is the first two letters of your surname in uppercase, followed immediately by your student number. You should change your password under Personal Tools -> Personal Information Editor -> Change Password. Please also remember to enter your email address in User Information. We cannot reply you without a valid email address. There is a Student Manual available under Student Tools. If you have problems accessing UTSOnline (e.g. taking a really long time to load pages, errors about username or password), please contact directly: ITD HELP DESK (02) 9514 2222. Contact the lecturer about UTSOnline only if the problems are associated with lecture materials. The Course outline, Lecture notes, Tutorial notes and Announcements will be on the Accounting for Business homepage. Please check the Announcements regularly and before you make enquiries. UTSOnline is not intended to replace "live" lectures and tutorials but to provide a supplement and a flexible learning option. Students may find using the net more convenient and/or educationally sufficient or superior.

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University of Technology, Sydney Subject Content – Short Form Syllabus

Topic Lecture Topic

1

Introduction (reference – L-S.T.H. Chapter 1 and 2 – Kaplan & Atkinson Chapter 1)

2

Budgeting and Cash Budgets (reference – L-S.T.H. Chapter 9)

3

Budgets and Human Behaviour (reference – Macintosh 1985, Chapter 2 – Hopwood, 1976 pp. 57-68)

4

Operation Costing, Inventory Management and Just-In-Time (reference – L-S.T.H. Chapter 16 – Kaplan, 1983)

5

Compulsory Attendance at Research and Report Writing Lecture

6

Decision Process and Relevant Costing (reference – L-S.T.H. Chapter 18)

7

Decision Process and Pricing Decisions (reference – L-S.T.H. Chapter 19 – Kaplan & Atkinson Chapter 6)

8

Organisational Structure and Decentralisation & Control Systems and Transfer Pricing (reference – L-S.T.H. Chapter 12 - Kaplan & Atkinson Chapter 7 – Emmanuel, Otley & Merchant, pp. 7-67)

Vice-Chancellor’s Week – Non-teaching

9

Performance Evaluation – Financial Measures (reference – L-S.T.H. Chapter 13 – Kaplan & Atkinson Chapters 9 & 10 – Briers and Hirst, 1990)

10

Performance Evaluation – Integrating Systems (reference – Kaplan & Atkinson Chapter 8)

11

Performance Evaluation – Customer, Product, & Employees (reference – Kaplan & Atkinson Chapter 11)

12

Performance Evaluation – Incentive and Compensation (reference – Kaplan & Atkinson Chapters 13 & 14)

13

Revision


University of Technology, Sydney Subject Content – Detailed Lecture Guide

Topic Lecture Topic

1 Week

Commencing 1/8/2005

Introduction

• Management Accounting Information • Functions of Management Accounting • Role of the Management Accountant • 20th Century Developments • Understanding Cost Behaviour • Capacity Issues • Service Organisations • The Challenge of the Future • Behaviour Implications

(reference – L-S.T.H. Chapter 1 and 2 – Kaplan & Atkinson Chapter 1)

2

Week Commencing

8/8/2005

Budgeting and Cash Budgets

• Major Features, Advantages and Types of Budgets • Specific Budgeting Techniques • Budgeting and Responsibility Accounting • Responsibility and Controllability

(reference – L-S.T.H. Chapter 9)

3

Week Commencing

15/8/2005

Budgets and Human Behaviour

• Leadership style • Supervisory evaluation style • Participation, motivation and performance • Participation and Budgetary Slack • Budget difficulty, motivation and performance

(reference – Macintosh, 1985, Chapter 2 – Hopwood, 1976, pp.57-68)

4

Week Commencing

22/8/2005

Operation Costing, Inventory Management and Just-In-Time

• Managing Goods and Inventory Costs • EOQ and Problems with EOQ model • Just-in-Time Systems • Major Features of JIT Production Systems • Back-flush Costing • Just-in-Time Purchasing • Performance Measurement and Control in JIT Production

(reference – L-S.T.H. Chapter 16 – Kaplan, 1983)

5

Week Commencing

29/8/2005

Compulsory Attendance at Research and Report Writing Lecture



Topic Lecture Topic

6 Week

Commencing 5/9/2005

Decision Process and Relevant Information

• Information and the Decision Process • The Meaning of Relevance • Special one-off order • Out-sourcing (Make-Versus-Buy) Decisions • Capacity Issues • Product-Mix Decisions • Customer profitability analysis

(reference – L-S.T.H. Chapter 18)

7

Week Commencing

12/9/2005

Decision Process and Pricing Decisions

• Major Influences on pricing • Product-Cost Categories • Costing and Pricing for the Short Run and the Long Run • Target Costing for Target Pricing • Cost-Plus Pricing • Life-Cycle Product Budgeting and Costing

(reference – L-S.T.H. Chapter 19 – Kaplan & Atkinson Chapter 6)

8

Week Commencing

19/9/2005

Organisational Structure and Decentralisation & Control Systems and Transfer Pricing

• Contingency Theory of Management Accounting • Contextual variables affecting extent of decentralisation • Major Principles of Decentralisation • Features of Decentralisation • Organisation of Decentralised Units • Performance Measures for Decentralised Operating Units • Responsibility accounting and controllability • Extent of Reliance on Accounting Performance Measures • Management Control Systems • Evaluating Management Control Systems • Organisational Structure and Decentralisation • Choice About Responsibility Centres • Responsibility accounting, controllability and transfer pricing • Transfer Pricing methods and issues

(reference – Kaplan & Atkinson Chapter 7 – Emmanual, Otley & Merchant, pp.57- 67 - L-S.T.H. Chapter 12)




Topic Lecture Topic

9 Week

Commencing 3/10/2005

Performance Evaluation – Financial Measures

• The Nature of Financial Control • Reliance on Accounting Performance Measure • Contingency Theory of Management Accounting (re-visited) • Control of the Aggregate Using Financial Measures • Control in the Small Using Financial Measures • Operations Control and Management by Exception • Relating Profits to Assets Employed • Return on Investments & Economic Value Added

(reference – L-S.T.H. Chapter 13 – Kaplan & Atkinson Chapters 9 & 10 – Briers & Hirst, 1990)

10

Week Commencing 10/10/2005

Performance Evaluation – Integrating Systems

• Financial and Non-Financial Performance Measures • Different Performance Measures • The Balanced Scorecard • Linking Multiple Scorecard Measures to a Single Strategy • Diagnostic Versus Strategic Measures

(reference –Kaplan & Atkinson Chapter 8)

11


Performance Evaluation – Customer, Product & Employees

• The Customer Perspective • Internal Business Perspective • Employee Capabilities

(reference – Kaplan & Atkinson Chapter 11)

12


Performance Evaluation – Incentive and Compensation

• The Expectancy View of Behaviour • Intrinsic and Extrinsic Rewards • Trying Rewards to Performance • Important Attributes of Compensation Systems • Rewarding Other Organisational Members • Issues and Terms in Formal Incentive Models • The Agency Model – Adverse Selection and Moral Hazard • Risk Aversion • Eliciting Honest Revelation of Privately Held Beliefs

(reference – Kaplan & Atkinson Chapters 13 & 14)

13


Revision



TUTORIAL ASSIGNMENTS

Tutorial Tutorial Work to be covered

1 Week

Commencing 1/8/2005

Cost Management Systems – Review• Establish Groups • Review – Cost Management Systems • Cost Terminology • Job Costing • Cost-Volume-Profit Analysis • No Entry Ticket Homework this week

Questions 1 – 3, syllabus pages 16-17

2

Week Commencing

8/8/2005

Introduction to Advanced Management Accounting• Role of Management Accounting • Discussion on the future of Management Accounting • Entry Ticket Homework - Question 4, syllabus page 18

3 Week


Budgeting and Cash Budgets • Major Feature of Budgets • Types of Budgets and Specific Budgeting Techniques • L-S.T.H Chapter 9 Questions 9-1 to 9.21 Exercises 9.25

Problems 9.32 Cases 9.42

• Syllabus Exercises Question 6, syllabus page 20

• Entry Ticket Homework - Question 5, syllabus page 19

4

Week Commencing

22/8/2005

Budgeting and Human Behaviour • Participation, motivation and performance • Participation, Budgetary Slack and Budget difficulty • Syllabus Exercises

Question 7, syllabus page 21 • Entry Ticket Homework - Question 8, syllabus page 21

5 Week


No tutorial this Week


University of Technology, Sydney Tutorial Tutorial Work to be covered

6

Week Commencing

5/9/2005

Operation Costing, Inventory Management and Just-In-Time• Operating Costing - Managing Goods & Inventory Costs • Major Feature of JIT Product Systems • Performance Measurement and Control in JIT Production • L-S.T.H Chapters 16

Questions 16.1 to 16.26 Exercises 16.31, 16.32 Problem 16.43 Case 16.50

• Entry Ticket Homework - Case 16.51

7

Week Commencing

12/9/2005

Decision Process and Relevant Information • Special One-off Order • Out-sourcing (make-v-buy) Decisions • Capacity Issues • Product-Mix Decision • Customer Profitability Analysis • L-S.T.H Chapter 18 Question 18-1 to 18-15 Exercises 18.29 Problems 18.24, 18.37, and 18.39

Case 18.49 • Syllabus Exercises

Question 9, syllabus page 22 (mid-semester exam question, Spring 2003) • Entry Ticket Homework - Question 10, syllabus page 23 (mid-semester

exam question, Autumn 2003)

8

Week Commencing

19/9/2005

Decision Process and Pricing Decision • Costing and Pricing for the short –run • Target Costing for Target Pricing • Cost-plus Pricing • Life-cycle Product Budgeting and Costing • L-S.T.H Chapter 19 Questions 19-1 to 19-15 Problems 19.34, 19.36, 19.44 and 19.45

Case 19.49 • Syllabus Exercises

Question 11, syllabus page 24 • Entry Ticket Homework – Question 12, syllabus pages 25-26 (mid-

semester exam question, Autumn 2003)





9

Week Commencing

3/10/2005

Org. Structures and Decentralisation & Control Systems and Transfer Pricing

• Organisational Structure and Performance Measures of Decentralised Units • Choices about Responsibility Centres • Methods of Transfer Pricing • Kaplan & Atkinson Chapter 7

Problems 7-1 • L-S.T.H Chapter 12 Questions 12.1 to 12.18 Exercises 12.26 and 12.27

Problems 12.32 and 12.34 Case 12.37

Entry Ticket Homework – Case 12.38 Additional references – Emmanuel, Otley & Merchant (1990) – available under ‘course documents’ on UTS Online.

10 Week


Performance Evaluation – Financial Measures • The Nature of Financial Control • Contingency Theory and the extent of RAPM • Relating Profits to Assets Employed • Return on Investment • Economic Value Added • L-S.T.H Chapter 13 Questions 13.2 to 13.21 Exercises 13.29, 13.30 Problem 13.36 • Kaplan & Atkinson Chapters 9 & 10

Problems 9-2, 9-3 and 10-1 • Entry Ticket Homework – Western Chemical Corporation: Divisional

Performance Measurement, Kaplan & Atkinson, pp. 544-550

11


Performance Evaluation – Integrated Systems • Financial and Non-financial Performance Measures • The Balanced Scorecard – Managing Intangible Assets • The Balanced Scorecard – Strategic Measure vs Diagnostic Measure • Predetermined Overhead rates • Entry Ticket Homework - Chadwick Inc. The Balanced Scorecard

(based on the information in the case study; identify 4 performance measures in each of the 4 perspectives discussed in the chapter), Kaplan & Atkinson, pp. 380-383




12


Performance Evaluation – Customer, Process and Employee Performance• The Customer Perspective • Internal Business Perspective and Employee Capabilities • Kaplan & Atkinson Chapter 11

Problems 11-1, 11-2 and 11-7 • Entry Ticket Homework – Draper Instruments – Final Exam

Question, Autumn 2003, Kaplan & Atkinson, pp. 578-582 Provide three ways in which the previous performance measurement system influences the production process explaining why? Design a Balanced Scorecard for Draper Instruments with 4 appropriate measures in each of the 4 perspectives of the Balances Scorecard, and explain how these measures assist the company in achieving it overall strategy.

13 Week


Performance Evaluation – Incentive and Compensation• Intrinsic and Extrinsic Rewards • Tying Rewards to Performance • Rewarding Other Organisational Members • The Agency Model • Kaplan & Atkinson Chapters 13 & 14

Problems 13-1 and 14-3 • Entry Ticket Homework – Problem 13-3


University of Technology, Sydney Seminar 1 - Revision Questions

Question 1 – Cost Terminology Discuss the meaning of the following terms: Direct costs Period costs Cost Behaviour Patterns Indirect costs Variable costs Cost Estimation Cost of goods sold Contribution margin Cost driver Gross profit (margin) Fixed costs Cost management Product costs Capacity costs Pre-paid expenses Question 2 – Job Costing The management of Production Life Pty. Ltd. receives an Interim financial report on June 29th, 2003. The report covered all activities for the financial year from July 1st, 2002. Inventories of Work-In-Process and finished goods were $74,500 and $146,000 respectively as of July 1st, 2002. All Jobs on hand had been completed on the 29th June 2003, except for one large job; No. 276. The job cost sheet for this job indicated to date direct labour of $12,000 and direct material of $10,000 had been used. Records for the last day of the financial year showed that direct labour costs of $5,000, direct material costs of $3,000 and factory overhead costs of $2,000 were incurred on that day. Job No. 276 was still incomplete. Up to the close of business on the 29th June 2003, the work in process account had been charged with $500,000 of direct material. Factory overhead is applied at 150% of direct labour costs. Factory overhead of $850,000 had been incurred up to the close of business on 29th June 2003. Sales for the period were $3,300,000, representing a mark-up of 50% on factory cost. There were no sales recorded on the last day of the period. Closing balance of finished goods was $34,000. Required: Incorporate records for the last day of the financial period and for the full financial period prepare: (a) A cost of goods manufactured statement. (b) A cost of goods sold statement. (c) A Statement of Financial Performance


University of Technology, Sydney Question 3 – Cost-Volume-Profit Analysis An excerpt from the income statement of Global Park Ltd. follows: Income Statement - Year Ended 30 June Sales (400,000 units) $2,000,000 Operating Expenses Cost of Goods Sold $950,000 Selling & Administrative Expenses 450,000 $1,400,000 Net Income before tax $ 600,000 Less Tax (40%) $ 240,000 Net Profit after tax $ 360,000 Estimated Fixed Costs and Fixed Expenses during the year were $440,000. Manufacturing Capacity is 500,000 units per year. Required:

(a) Calculate the Contribution Margin per unit and the Contribution Margin ratio. (b) What is the breakeven point in Units for Global Park Ltd.?

(c) Given an annual sales volume of 420,000 units, calculate the selling price per unit, necessary to achieve an after tax profit equal to $420,000.

(d) (Revert to original data). At a selling price of $5.50, calculate the number of units that need

to be sold in order to earn a net profit after tax equal to $500,000.

(e) The SELLING PRICE required to earn a net profit after tax equal to 10% of sales revenue assuming 250,000 units are manufactured and sold.

(f) The number of units that need to be sold at a selling price of $8.00 per unit to earn a net

profit after tax equal to 15% of total costs.



Seminar 2

Question 4 - Introduction to Managerial Decisions and Control

1. Please explain why it is important to know Cost Management Systems before undertaking

Management Decisions and Control.

2. Define and discuss the concept of theory.

3. Explain the history of management accounting, identifying the key theoretical approaches.

4. Discuss the 4 key disciplines that management accounting builds off and explain how these

disciplines influence the practice of management accounting.

5. Define and discuss the concept of management control systems.

6. Please provide one example from the business press of how management control systems

are used.



Seminar 3

Question 5 – Budgeting and Cash Budgets

1. The management accountant of Efficient Manufacturing Ltd. has estimated the following actual cost and expense functions to prepare flexible budgets:

Materials $ 4,000 + $22.00 per unit produced Labour $ 6,400 + $15.00 per unit produced Other factory overhead $12,000 + $25.00 per unit produced S & A Expenses $ 4,970 + $10.00 per unit sold

2. Eighty per cent of the variable cost of materials and labour are prime costs; the remainder is indirect costs. Depreciation of production machinery is $2,000 per month and depreciation of office equipment is $1,000 per month. The company tax rate is 33%. The selling price is $150.00. The Denominator Level of Activity is 400 units.

3. The following balances are available for the month of July 200X:

Opening Balance Closing Balance Finished Goods 40 units 60 units Material $3,255 $2,635 Wages payable $3,500 $4,250 Accounts Payable $21,554 CR Accounts Receivable $60,000 DR Cash at Bank $26,710 CR

Accounts payable and accounts receivable refer to amounts accrued during the month of June 200X

4. Sales collections are made as follows:

• 40 per cent during the month of sale;

• 58 per cent during the next month;

• 2 per cent un-collectable (to be written off at the end of the month following the sale to the provision for doubtful debts. Bad debt expenses are provided for in the month of sales as financial expenses).

5. Purchases of material are paid for in the month in which they are incurred. Factory overheads and selling and administration expenses are paid thirty per cent in the month in which they are incurred and seventy per cent in the following month.

Required

Assume that during the month of July 200X the company will sell 350 units at the selling price of $150.00 per unit. Prepare a budgeted income statement and a cash budget for the month of July 200X.


University of Technology, Sydney Question 6 – Budgeting and Cash Budgets The profit and loss account for Forte for the last financial year is given below:

Forte Profit and Loss Statement

For Year ended 30 June 2004 Sales revenue 1,904,000 Cost of goods sold Beginning inventory 345,000 Variable Fixed Material 295,200 20,000 Labour 557,600 120,000 Overhead 98,400 312,000 951,200 452,000 1,403,200 Goods available for sales 1,748,200 Ending inventory 379,500 1,368,700Gross profit 535,300 Selling & Administration expense 96,000 150,000 246,000Net profit 289,300

Additional information on the profit and loss statement • Sales revenue is based on sales of 8,000 units. • The beginning and ending inventory were 2,000 and 2,200 units respectively • The unit absorption cost was based on a normal capacity of 8,000 units of output • Depreciation accounted for half of the fixed manufacturing overhead and a quarter of the fixed selling

and administration expenses Information relevant for the preparation of next year's budget • Forte has invested in new manufacturing equipment. This will increase the current depreciation expenses

in fixed manufacturing overhead to four times its current level. This is the only new investment in fixed assets made by Forte.

• This new investment resulted in an increase in the efficiency of direct labour of 20 per cent and savings in direct material of 5 per cent

• Forte will increase advertising expenditure by $50,000 in an effort to boost sales • As a result of the improve quality of the product and services resulting from the new equipment and

because of increased advertisement, the sales volume is expected to increase by 25 per cent and the unit selling price by 10 per cent

• All current spending is expected to increase at the rate of 4 per cent • Ending inventory at 30 June 2005 will be 3,000 units. Use a denominated level of output of 10,000 for

the year 2005 to value ending inventory. Required Prepare a budgeted profit and loss statement for the year ended 30 June 2005. (Note: show all your workings clearly)



Seminar 4 Question 7 – Budgeting and Human Behaviour 1. What is Scientific Management movement? How has it influenced the development of management

accounting? 2. What is the idea behind the Human Relations approach? What is the problem with Scientific

Management approach that the Human Relations School attempts to rectify? 3. Briefly discuss Argyris' study on the Impact of Budget on Human Behaviour and explain how it has

influenced the subsequent studies such as Hofstede (1967), Stedry (1968), DeCoster and Fertakis (1968) and Hopwood (1972, 3).

4. Discuss the impact of participation on human behaviour and organisational performance. 5. Discuss the impact of budget difficulty on human behaviour and organisational performance. 6. Discuss Hopwood's (1972, 3) study of the impact of budgetary evaluation style on human behaviour.

How is budgetary evaluation style linked to leadership style? Briefly discuss Otley's (1978) replication of Hopwood's studies and its implication for accounting behavioural research.

7. What is Human Resource approach and how is different from Human Relations School? Question 8 – Debate Topics

Topic 1:

Budget participation provides an environment where budgetary slack appears which reduces organisation performance; therefore managers should not allow participation in budgeting.

Topic 2: Personality is the most important factor that influences the effect a budget will have on individuals; therefore budgets should be designed specifically for individual’s personalties.



Seminar 7 Question 9 – Decision Process and Relevant Information

Clearview Company’s engineering, manufacturing, and accounting departments have prepared a report for management in response to the idea of manufacturing digital cameras. Below is some analysis, which includes the estimate for an assembly run of 5,000 digital cameras. Additional production employees would be hired to manufacture the sub-assembly. However, no additional equipment, space or supervision would be needed. The report states that total costs for 5,000 units are estimated at $957 000 or $191.40 a unit. The current purchase price is $130.00 a unit, so the report recommends a continued purchase of the product. Components (outside purchases) $120,000 Assembly labour* $300,000 Factory overhead** $450,000 General and administrative overhead*** $87, 000 Total costs $957 000 *Assembly labour consists of hourly production workers. **Manufacturing overhead is applied to products on a direct labour dollar basis. Variable overhead costs vary closely with direct labour dollars. Fixed overhead 50% of direct labour dollars Variable overhead 100% of direct labour dollars Manufacturing overhead rate 150% of direct labour dollars ***General and administrative overhead is applied at 10% of the total cost of material (or components), assembly labour and manufacturing overhead. Clearview Company has purchased 40,000 digital cameras annually from Zoolander Enterprises Ltd The price has increased each year and reached $132.00 per unit last year. Because the purchase price has increased significantly, Clearview management has asked that an estimate be made of the cost to manufacture the digital camera in Clearview facilities. Clearview products consist of stamping and moulding. The company has little experience with products requiring assembly. Required:

1. Was the analysis prepared by Clearview Company’s engineering, manufacturing, and accounting departments and their recommendation to continue purchasing the digital cameras correct? Explain your answer and include any supporting calculations you consider necessary.

2. Briefly discuss three guidelines that relate to this make or buy decision and why they are important.


University of Technology, Sydney Question 10 – Decision Process and Relevant Information Harry Moss, administrator of David’s MDC Hospital, requests your assistance in preparing a cost analysis for a proposed additional to the telemetry unit. The hospital presently has 10 telemetry units in operation on a 40-bed floor. A telemetry unit monitors patients who had heart attacks or have cardiac problems. This unit allows a patient to move about freely in that particular hospital wing without being confined to a hospital bed. The present 10-unit telemetry monitoring system is located in the nursing station that can accommodate the proposed 8 additional units without renovation. Telemetry units represent a step down in the level of care from cardiac intensive care rooms. Telemetry units not only offer patients more freedom but also offer a considerable cost saving. Cardiac care rooms average $300 per day, while the telemetry unit charge is the regular room charge of $120 plus an additional $80 to $120 daily. Expected revenue. Hospital management is undecided whether to charge a $80 or $120 differential a day for the proposed unit. Also, there is lack of consensus among the managers regarding the rate of utilisation. The expected range is from 40 to 60 percent. A 10 percent allowance for bad debts and insurance discount is estimated. Expected cost. Space for the unit will be obtained by converting a wing of the hospital presently being used for medical-surgical patients; the regular room rate is charged for this wing. The equipment’s total cost is expected to be $44,570; the life is estimated to be only five years due to technological changes. Straight-line depreciation will be used. The administrator indicates that you are to determine total cost for the five-year period for each cost element and then divide by five years to obtain an average for the five-year period. Service contract costs for routine maintenance and service call costs for overtime, labour, and parts are expected to be $3,060 and $2,400 respectively in Year 2, with an increase of 10 percent per year thereafter for inflation; no such costs are expected for Year 1 since the equipment will be under warranty during this time. Costs of supplies will be $2,800 for the first year, with a 12 percent annual increase thereafter due to inflation and aging of the equipment. One registered nurse earning $25,000 annually, and two licensed practical nurses, each earning $17,000 annually, will staff the eight-bed unit. Personnel cost the hospital industry has increased 8 percent annually in the last few years. For simplicity, assume the service contract, service call, suppliers, and personnel costs are fixed, unaffected by changes in volume. Required: (a.) Determine differential margin that will be received and the annual percentage return on equipment using a: (1) $80 charge per day and a 40 percent use rate (2) $80 charge per day and a 60 percent use rate (3) $120 charge per day and a 40 percent use rate (4) $120 charge per day and a 60 percent use rate (b.) Advise management as to the alternative to choose explaining why you think this is the right choice. (c.) List two other factors that should be considered before installation of the unit explaining why they are important. (d.) Discuss three guidelines that help a management accountant to determine what the relevant information is when he or she is confronted with an alternate choice decision. Explain why these factors are important.



Seminar 8 Question 11 – Decision Process and Pricing Decisions Fashionable produces four products, shirt, skirt, trousers and jacket that it sells directly to retailers. The unit selling price and costs are given below: Shirt Skirt Trousers JacketUnit selling price $ 21.00 $ 35.00 $ 45.00 $ 75.00 Unit direct material

3.80

8.80

10.00

15.00

Unit direct labour @ $5 per labour hr 5.00 7.50 10.00 20.00 Unit variable overhead 1.50 2.25 3.00 6.00 Fixed overhead @ $30 per machine hr 2.50 5.00 7.50 12.50Unit cost of sales 12.80 23.55 30.50 53.50 Gross profit margin

8.20

11.45

14.50

21.50

Unit variable S & A expenses

1.20

1.80

1.80

3.20

Unit fixed S & A expenses 2.10 3.50 4.50 7.50Total unit S & A expenses 3.30 5.30 6.30 10.70 Net profit margin

$ 4.90

$ 6.15

$ 8.20

$ 10.80

At the moment Fashionable produces 2,000 shirts; 600 skirts; 600 trousers and 200 jackets - this uses up all the available machine hours. The maximum quantities of shirts, skirts, trousers and jackets that Fashion can sell as well as the minimum quantities that it must sell because of contractual arrangements are given below: Shirt Skirt Trousers JacketMaximum number of unit of sales 3,000 800 750 300Minimum number of unit of sales 1,000 400 400 100 There is a limited supply of machine hours. Required (a) How many units of shirts, skirts, trousers and jackets should Fashionable produce to maximise profit?

What is the profit at the optimal product mix? Support your answers with appropriate calculation. (b) If Fashionable receives a special order for 50 jackets, what is the minimum unit selling price it would be

willing to accept for this order? (c) If 100 extra machine hours are available, what are the maximum amounts that Fashionable would pay for

each machine hour?


University of Technology, Sydney Question 12 – Decision Process and Pricing Decisions Shrub, Inc. has the following direct and indirect cost for the two component parts it manufactures for the computer industry:

RAM Chips Total Direct Materials costs (variable) $ 1,700,000 $ 1,200,000 $ 2,900,000 Direct manufacturing labour costs ( variable) $ 600,000 $ 400,000 $ 1,000,000 Direct machining costs (fixed) $ 300,000 $ 200,000 $ 500,000 Indirect manufacturing costs: Machining set-up costs $ 172,500 Testing costs $ 975,000 Engineering costs $ 900,000 Indirect manufacturing costs $ 2,047,500 Total costs $ 6,447,500 Shrub includes all R&D and design costs in engineering costs. Assume that Shrub has no marketing, distribution, or customer-service costs. Current production and sales are as follows: • RAM: Annual production and sales of 50,000 units at a selling price of $81.20 per unit. • Chips: Annual production and sales of 25,000 units at a selling price of $120.00 per unit. Shrub’s accountant identifies the following activity cost pools for each activity, and the costs per unit of cost driver for each overhead cost pool: Manufacturing

Activity Description of Activity

Cost Driver

Cost Per Unit of Cost Driver

1. Set-up

Preparing machine to manufacture a new batch of products

Setup-hours

$50 per setup-hour

2. Testing

Testing components and final product (Shrub test each unit of RAM and Chips individually)

Testing-hours

$4 per testing-hour

3. Engineering

Designing products and processesand ensuring their smooth functioning

Complexity of product and process

Costs assigned to products by special study

Over a long-run horizon, Shrub’s accountant views direct materials cost and direct manufacturing labour costs as variable with respect to the units of RAM and Chips produced, and overhead costs as variable with respect to their chosen drivers. For example, set-up costs vary with the number of set-up hours. Direct machining costs represent the cost of machine capacity dedicated to the production of each product (50,000 hours at $6 per hour for RAM). These costs are fixed and are not expected to vary over the long-run horizon. Additional information is as follows:



RAM Chips 1. Production batch sizes 500 units 200 units 2. Set-up time per batch 12 hours 18 hours 3. Testing and inspection time per unit of product produced

2.5 hours 4.75 hours

4. Engineering costs incurred on each product $340,000 $560,000 Shrub is facing competitive pressure to reduce the price of RAM and had set a target price of $69.60, well below its current price of $81.20. The challenge for Shrub is to reduce the cost of RAM. Shrub’s engineers have proposed new product design and process improvements for the “New RAM” to replace RAM. The new design would improve product quality, and reduce scrap and waste. The reduction in prices will not enable Shrub to increase its current unit sales. (However, if Shrub does not reduce prices, it will lose sales.) The expected effects of the new design relative to RAM are as follows: a) Direct materials costs for New RAM are expected to decrease by $4.00 per unit. b) Direct manufacturing labour costs for New RAM is expected to decrease by $1.00 per unit. c) Machining time required to make New RAM is expected to decrease by 20 minutes. It currently

takes 1 hour to manufacture 1 unit of RAM. The machines will be dedicated to the production of New RAM.

d) New RAM will take 7 set-up hours for each set-up. e) Time required for testing each unit of New RAM is expected to be reduced by 0.5 hour. f) Engineering costs will be unchanged. Assume that the batch sizes are the same for New RAM as for RAM. If Shrub requires additional resources to implement the new design, it can acquire these additional resources in the quantities needed. Further assume the costs per unit of cost driver for the New RAM are the same as those for RAM. Required 1. Calculate the full cost per unit for RAM and Chips using activity-based costing. 2. What is the mark-up on the full cost per unit for RAM? 3. What is Shrub’s target cost per unit for New RAM if it is to maintain the same mark-up

percentage on the full cost unit as it had for RAM? 4. Will the New RAM design achieve the cost reduction targets that Shrub has set? Explain. 5. What price will Shrub charge for New RAM if it uses the same mark-up percentage on the full

cost per unit for New RAM as it did for RAM? 6. What price should Shrub charge for New RAM? Why? 7. As Shrub’s management accountant, give 5 suggestions for improving the current business

position that management could consider.


University of Technology, Sydney Plagiarism

‘Plagiarism’ is a broad term referring to the practice of appropriating someone else’s ideas or work and

presenting them as your own without acknowledgment. Plagiarism is literary or intellectual theft! It can

take a number of forms, including:

• copying the work of another student, whether that student is in the same class, from a earlier year of

the same course, or from another tertiary institution altogether;

• copying any section, no matter how brief, from a book, journal, article or other written source,

without duly acknowledging it as a quotation;

• copying any map, diagram or table of figures without duly acknowledging the source; or

• paraphrasing or otherwise using the ideas of another author without duly acknowledging the source.

Whatever the form, plagiarism is unacceptable both academically and professionally. By plagiarising you

are both stealing the work of another person and cheating by representing it as your own. Any instances of

plagiarism can therefore be expected to draw severe penalties.

Cheating means to defraud or swindle. Students who seek to gain an advantage by unfair means such as

copying another student’s work, or in any other way misleading a lecturer about their knowledge or ability or

the amount of work they have done, are guilty of cheating.

Students who condone plagiarism by allowing their work to be copied will also be subject to severe

disciplinary action.

Avoiding plagiarism is one of the main reasons why the Faculty of Business is insistent on the

thorough and appropriate referencing of all written work.

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