MBA (Regular) Program

Department of Accounting & Information Systems

Jagannath University
Midterm Examination (11th batch)
Course: Strategic Management Accounting (5202).

1. How would you define the term ‘strategic management accounting’? How does it differ from
conventional ‘management accounting? Explain and give example.
2. Maxell Company manufactures webcams, devices which can provide live video and audio
streams via personal computers. It has recently been suffering from liquidity problems and
hopes that these will be eased by the launch of its new webcam, which has revolutionary
audio sound and visual quality. The webcam is expected to have a product life cycle of two
years. Market research has already been carried out to establish a target selling price and
projected lifetime sales volumes for the product. Cost estimates have also been prepared,
based on the current proposed product specification. Maxell Company uses life cycle
costing to work out the target costs for its products, believing it to be more accurate to use
an average cost across the whole lifetime of a product, rather than potentially different costs
for different years. You are provided with the following relevant information for the
webcam:
Projected lifetime sales volume 50,000 units
Target selling price per unit Tk.20,000
Target profit margin (35% selling cost price) Tk.7,000
Target cost Tk.13,000
Estimated lifetime cost per unit (see note Tk.16,000
below for detailed breakdown)

Note: Estimated lifetime cost per unit:

Manufacturing costs Taka Taka
Direct material (bought in parts) 4,000
Direct labor 2,600
Machine costs 2,100
Quality control costs 1,000
Rework costs 300
Total Manufacturing costs 10,000
Non-manufacturing costs
Product development costs 2,500
Marketing costs 3,500
Total non-manufacturing costs 6,000
Estimated lifetime cost per unit 16,000

The average market price for a webcam is currently Tk.15,000.

The company needs to close the cost gap of Tk.3,000 between the target cost and the estimated
lifetime cost. The following information has been identified as relevant:
 1. Direct material cost: all of the parts currently proposed for the webcam are bespoke parts.
However, most of these can actually be replaced with standard parts costing 55% less. However,
three of the bespoke parts, which currently account for 20% of the estimated direct material
cost, cannot be replaced, although an alternative supplier charging 10% less has been sourced
for these parts.
2. Direct labor cost: the webcam uses 45 minutes of direct labor, which costs Tk.3,467 per hour.
The use of more standard parts, however, will mean that whilst the first unit would still be
expected to take 45 minutes, there will now be an expected rate of learning of 90% (where ‘b’=
-0.152). This will end after the first 100 units have been completed.
3. Rework cost: this is the average rework cost per webcam and is based on an estimate of 15% of
webcams requiring rework at a cost of Tk.2,000 per work. With the use of more standard parts,
the rate of reworks will fall to 10% and the cost of each rework will fall to Tk.1,800.
Required:
Recalculate the estimated lifetime cost per unit for the webcam after taking into account points 1
to 3 above.
Question No.3.
The Biscuits division (Division B) and the Cakes division (Division C) are two divisions of a large,
manufacturing company. Whilst both divisions operate in almost identical markets, each division operates
separately as an investment centre. Each month, operating statements must be prepared by each division
and these are used as a basis for performance measurement for the divisions.
Last month, senior management decided to recharge head office costs to the divisions. Consequently,
each division is now going to be required to deduct a share of head office costs in its operating statement
before arriving at ‘net profit’, which is then used to calculate return on investment (ROI). Prior to this,
ROI has been calculated using controllable profit only. The company’s target ROI, however, remains
unchanged at 20%per annum. For each of the last three months, Divisions B and C have maintained ROIs
of 22% per annum and 23% per annum respectively, resulting in healthy bonuses being awarded to staff.
The company has a cost of capital of 10%.
The budgeted operating statement for the month of July is shown below:
B (Tk.’ 000) Tk. (Tk.’000)
Sales revenue 1,300 1,500
Less Variable costs (700) (800)
Contribution 600 700
Less controllable fixed costs (134) (228)
Controllable profit 466 472
Less apportionment of head office costs (155) (180)
Net profit 311 292
Divisional net assets Tk.23.2 million Tk.22.6 million
Required:
a. Calculate the expected annualized Return on Investment (ROI) using the new method as
preferred by senior management, based on the above budgeted operating statements, for
each of the divisions.
b. The divisional managing directors are unhappy about the results produced by your calculation in
(a) and have heard that a performance measure called ‘residual income’ may provide more
information.
 Calculate the annualized residual income (RI) for each of the divisions, based on the net
profit figures for the month of July.
c. Discuss the expected performance of each of the two divisions, using both ROI and RI, and
making any additional calculations deemed necessary. Conclude as to whether, in your
opinion, the two divisions have performed well.
Question No.4.
Linacre Co operates an activity-based costing system and has forecast the following information for next
year.
Cost Pool Cost Cost Driver Number of Drivers
Production set-ups Tk.105,000 Set-ups 300
Product testing Tk.300,000 Tests 1,500
Component supply and storage Tk.25,000 Component orders 500
Customer orders and delivery Tk.112,500 Customer orders 1,000

General fixed overheads such as lighting and heating, which cannot be linked to any specific activity, are
expected to be Tk.900,000 and these overheads are absorbed on a direct labor hour basis. Total direct
labor hours for next year are expected to be 300,000 hours.
Linacre Co expects orders for Product ZT3 next year to be 100 orders of 60 units per order and 60 orders
of 50 units per order. The company holds no inventories of Product ZT3 and will need to produce the
order requirement in production runs of 900 units. One order for components is placed prior to each
production run. Four tests are made during each production run to ensure that quality standards are
maintained. The following additional cost and profit information relates to product ZT3:
Component cost: Tk.1 per unit.
Direct labor 10 minutes per unit at Tk.7.80 per hour.
Profit mark up 40% of total unit cost

Required:
a. Calculate the activity-based recovery rates for each cost pool.
b. Calculate the total unit cost and selling price of Product ZT3.
c. Discuss the reasons why activity-based costing may be preferred to traditional absorption
costing in the modern manufacturing environment.
Question No.5.
Colleyer Products, Inc., has a Valve Division that manufactures and sells a standard valve:
Capacity in units 100,000
Selling price to outside customers Tk.30
Variable costs per unit Tk.16
Fixed costs per unit (based on capacity) Tk.9

The company has a pump Division that could use this valve in one of its pumps. The Pump Division is
currently purchasing 10,000 valves per year from an overseas supplier at a cost of Tk.29 per valve.
Required:
 1. Assume that the Valve Division has enough idle capacity to handle all of the Pump
Division’s needs. What is the acceptable range, if any, for the transfer price between the two
divisions?
2. Assume that the Valve Division is selling all of the valves that it can produce to outside
customers. What is the acceptable range, if any, for the transfer price between the two
divisions?
3. Assume again that the Valve Division is selling all of the valves that it can produce to
outside customers. Also assume that Tk.3 in variable expenses can be avoided on transfers
within the company, due to reduced selling costs. What is the acceptable range, if any, for
the transfer price between the two divisions?
4. Assume that the Pump Division needs 20,000 special high pressure valves per year. The
Valve Division’s variable costs to manufacture and ship the special valve would be Tk.20
per unit. To produce these special valves, the Valve Division would have to reduce its
production and sales of regular valves from 100,000 units per year to 70,000 units per year.

Question No.6.
a) Explain the value chain concept. How the value chain help businesses?
b) Categorize the following processes as value adding or non-value adding:
 Transportation/distribution;
 Materials waste;
 Rework;
 Quality inspection;
 Set-up;
 Assembly;
c) The following costs were incurred by Green Plating Company, a Canadian Company,
during June, 2016:
 Operating cost of waste reprocessing, $31,400.
 Repairs to faulty waste management equipment, $30,000.
 Cost of retraining employees in new waste management processes, $1,800.
 Cost of disposing of chemicals in landfill, $69,800.
 Cost of processing chemicals ready for landfill, $56,000.
 Legal fees related to chemical spill during transport to landfill, $45,800.
 Cost of independent environmental audit, $47,400.
 Cost to achieve ISO 14001 certification, $68,600.
 Cost of protective clothing for employees, $32,400.
Required:
 Prepare an environmental cost report highlighting prevention, appraisal, internal
failure and external failure.

Question No.7.
a. Explain how vision, mission and strategy relate to each other. Provide examples.
b. Explain this statement: ‘There is a different incentive plan for different strategy typologies.’
c. Why is the balanced scorecard very important for an organization? How can the balanced
scorecard help a company improve its ability to meet its strategies?
d. What are the four perspectives covered by the balanced scorecard?