THE UNIVERSITY OF THE WEST INDIES

ST. AUGUSTINE

ALTERNATIVE ASSESSMENT - APRIL / MAY 2021

Code and Name of Course: ACCT 3039 – MANAGEMENT ACCOUNTING II Paper: B.Sc.

Date and Time: Monday April 26th 2021 @ 6 PM to Wednesday April 28th 2021 @ 6 PM Duration: 2 DAYS

INSTRUCTIONS TO CANDIDATES: This assessment has 6 pages and 3 questions.

INSTRUCTIONS:
- The final examination assessment is available from Monday April 26th 2021 @ 6
pm and is DUE BY Wednesday April 28th 2021 @ 6 pm.
- This alternative assessment has three (3) questions.
- All questions are compulsory.
- Submissions should be uploaded in MS Word format ONLY, Times New Roman; Font –
12; 1.5 Spacing.
- Do not ‘copy and paste’ back the questions into your submission document. Only
record your responses.
- Please be reminded that your responses will be checked against Turnitin for
plagiarism and therefore you must ensure that you submit original answers as
responses.
- Remember to state your UWI Student ID number on the front of your submission.
- Total marks – 90.

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QUESTION ONE – Case Study (50 marks)

D Corporation is one of the major producers of pre-fabricated houses in the home building
industry. The corporation consists of two divisions:
1. Bell Division, which acquires the raw materials to manufacture the basic house components
and assembles them into kits.
2. Cornish Division, which takes the kits and constructs the homes for final home buyers.
The corporation is decentralized and the management of each division is measured by its income and
return on investment.

Bell Division assembles seven separate house kits using raw materials purchased at the
prevailing market prices. The seven kits are sold to Cornish for prices ranging from US$45,000 to
US$98,000. The prices are set by corporate management of D Corporation using prices paid by Cornish
when it buys comparable units from outside sources. The smaller kits with the lower prices have
become a larger portion of the units sold because the final house buyer is face with prices that are
increasing more rapidly than personal income. The kits are manufactured and assembled in a new plant
purchased by Bell this year. The division had been located in a leased plant for the past four years.

All kits are assembled upon receipt of an order from the Cornish Division. When the kit is
completely assembled it is immediately taken by the Cornish Division for final construction. Thus, Bell
Division has no finished goods inventory.

The Bell Division’s accounts and reports are prepared on an actual-cost basis. There is no budget
and standards have not been developed for each product. A factory overhead rate is calculated at the
beginning of each year. The rate is designed to charge all overhead to the product each year. Any under-
or over- applied overhead is allocated to the cost of goods sold account and the WIP inventories.

Bell Division’s annual report is presented below. This report forms the basis of the evaluation of
the division and its management by the corporation management.

Additional information regarding corporate and division practices is as follows:

 The corporation office does all the personnel and accounting work for each division.
 The corporate personnel costs are allocated on the basis of number of employees in the
division.
 The accounting costs are allocated to the division on the basis of total costs excluding
corporate charges.
 The division administration costs are included in factory overhead.
 The finance charges include a corporate-imputed interest charge on division assets and any
divisional lease payments.
 The division investment for the ROI calculation includes division inventory and plant and
equipment at gross book value.

Bell Division
Performance Report for the Year Ended December 31, 2020
Increase/(Decrease) from 2019
2020 2019 AMOUNT % CHANGE
Summary Data
Net Income ($000 omitted) $34,222 $31,573 $2,649 8.4
Return on Investment (ROI) 37% 43% (6%) (14.0)
Kits sold (units) 2,000 2,100 (100) (4.8)
Production Data
Kits started 2,400 1,600 800 50.0
Kits transferred to Cornish Div. 2,000 2,100 (100) (4.8)
Kits in process at year-end 700 300 400 133.3
Increase (Decrease) in kits in
process at year-end 400 (500)
Financial Data ($000)
Sales $138,000 $162,800 ($24,800) (15.2)

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Production costs of units sold
Raw material 32,000 40,000 (8,000) (20.0)
Labor 41,700 53,000 (11,300) (21.3)
Factory overhead 29,000 37,000 (8,000) (21.6)
Cost of units sold $102,700 $130,000 ($27,300) (21.0)
Other Costs: Corporate Charges for
Personnel services 228 210 18 8.6
Accounting services 425 440 (15) (3.4)
Financing costs 300 525 (225) (42.9)
Total other costs $953 $1,175 ($222) (18.9)
Adjustments to Income
Unreimbursed fire loss 0 52 (52) (100.0)
Raw material losses due to
impropoer storage 125 0 125
Total adjustments $125 $52 $73 (100.0)
Total Costs $103,778 $131,227 ($27,449) (20.9)

DIVISION INCOME $34,222 $31,573 $2,649 8.4

Division Investment $92,000 $73,000 $19,000 26.0

ROI 37% 43% (6%) (14.0)

Required:
(a) Discuss 3 reasons why performance reporting is important. (6 marks)

(b) Using the annual report presented for Bell Division, evaluate the division and its management in
terms of:
(i) The accounting techniques employed in the measurement of division activities
(ii) The manner of presentation
(iii) The effectiveness with which it discloses difference and similarities between years
(4 marks per part, total = 12 mks)

(c) Make at least three (3) specific recommendations to the management of D Corporation that would
improve its accounting and financial reporting system. (6 marks)

(d) Discuss whether the manager of Bell Division should be evaluated only on ROI.
(4 marks)

(e) Provide two (2) reasons why ROI, RI and EVA may be inappropriate measures of performance.
(4 marks)

(f) Briefly explain two (2) potential pitfalls encountered in the design of performance indicators and
measurement systems. (4 marks)

(g) Given that the performance report for Bell Division is poorly presented, how can D Corporation go
about designing a good performance report? (5 marks)

(h) Do you think that the Balanced Scorecard approach can be employed to evaluate the performance
of Bell Division? If yes, why? If no, why not? (4 marks)

(i) Instead of the Balanced Scorecard, outline one other performance model/framework D Corporation
can use? (5 marks)

Word count for this entire question should not exceed 2,500 words

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QUESTION TWO (30 marks)

Part (a) – 10 marks

Jax Construction Company plans to erect a new building. It will use part of the space for its own offices
and lease the balance of the space to tenants. The company has two alternatives: (1) do its own
construction work or (2) use an independent contractor.

Cost estimates have been prepared showing the costs of operation for the coming year during which
the new building will be constructed. The costs of constructing the building, if done by Jax, are included
in that set of estimates.

If the company does its own construction work, it will not be able to handle outside construction
contracts that would contribute $500,000 to net income. The costs attributable to these outside
contracts are excluded from the estimated costs of operation shown below.

Estimated Costs to Estimated Costs to

Operate – Operate (including
Constuction by Construction) –
Independent Construction by Jax
Contractors (self)
Materials $6,000,000 $7,000,000
Labour 3,000,000 4,800,000
Indirect materials and supplies 315,000 400,000
Supervision 650,000 780,000
Taxes and insurance 50,000 55,000
Heat and light 47,000 47,000
Maintenance and repairs 106,000 106,000
Truck and equipment operation 91,000 91,000
Depreciation 60,000 60,000
Travel 40,000 43,000
Telephone 10,000 10,000
Other utilities 50,000 50,000
Miscellaneous 10,000 10,000

The independent company has bid $4,000,000 for the job.

Required: Which of the two alternatives should be selected? Show all calculations. Are there any
qualitative or non-financial factors that the firm should consider in the decision making
process? (10 marks)

Word count for Q2 part (a) should not exceed 300 words

Part (b) – 10 marks

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Jim Salters, the COO of CryoDerm, has asked his cost management team for a product-line profitability
analysis for his firm’s two products, Zderm and Bderm. The two skin care products require a large
amount of research and development and advertising. After receiving the following statement from
CryoDerm’s costing team, Jim concludes that Zderm is the more profitable product and that perhaps
cost-cutting measures should be applied to Bderm.

Zderm Bderm Total

Sales $3,000,000 $2,000,000 $5,000,000
Cost of Goods Sold ($1,900,000) ($1,600,000) ($3,500,000)
Gross Profit $1,100,000 $ 400,000 $1,500,000
R&D (900,000)
Selling expenses (100,000)
Profit before taxes $ 500,000

Required:
(i) Briefly explain why Jim may be wrong in his assessment of the relative performance of the two
products. (2 marks)

(ii) Suppose that 80% of the R&D and selling expenses are traceable to Zderm. Prepare life-cycle income
statements for each product. What does this indicate about the importance of accurate life-cycle
costing? (4 marks)

(iii) Consider the following additional information – R&D and selling expenses are substantially higher
for Zderm because it is a new product. Jim has strongly supported development of the new product,
including the high selling and R&D expenses. He has assured the Board of Directors that the Zderm
investment will pay off in improved profits for the firm. Discuss the ethical issues, if any, facing Jim
as he reports to top management on the profitability of the firm’s two products.
(4 marks)

Word count for Q2 part (b) should not exceed 600 words

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Part (c) – 10 marks

Some waste, scrap or by-product materials have little value. In fact, such materials represent liabilities
for companies in that the materials require companies to incur significant disposal costs. Alternatively,
some companies have historically found “cheap” ways to dispose of such materials. For example, on
Friday April 2nd 1993, residents of Brazos County, Texas, U.S.A., stumbled across 19 cans of industrial
waste that were scattered along the banks of the Navasota River. The cans were labelled “lacquer
thinner” but the actual contents which were leaking into the ground and the river were not immediately
known. The cans appeared to have been thrown from a vehicle travelling over on a nearby road. Some
cans were heavily dented, some were capped with rags and all of them appeared to be scattered in a
random pattern. State and county officials worked most of Saturday April 3rd 1993 cleaning up the site.
Source: Chuck Squatriglia, “Solvent Cans Dumped near Navasota River” Bryan-College Station Eagle (April 4, 1993),
p.A9. Courtesy: Bryan-College Station Eagle.

Required:
(i) Explain whether this method of disposing of industrial waste is a “cheap” alternative.
(2 marks)
(ii) Briefly discuss the ethical and legal implications of disposing of industrial waste in this manner.
(2 marks)
(iii) What actions can people take to reduce these kinds of incidents?
(3 marks)
(iv) Ethically, what obligation does the vendor/manufacturer of these industrial materials have to the
consumers and society as a whole. (3 marks)

Word count for Q2 part (c) should not exceed 500 words

QUESTION THREE (10 marks)

Part (a) – 5 marks
Discuss the implications of the COVID-19 pandemic for transfer pricing arrangements.
(5 marks)

Word count for Q3 part (a) should not exceed 250 words
Part (b) – 5 marks
Discuss how activity-based budgeting OR value proposition budgeting can be adopted by a local bank
of your choice. (5 marks)

Word count for Q3 part (b) should not exceed 300 words

END OF ASSESSMENT

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