ADVANCED MANAGEMENT ACCOUNTING [MA2]

ASSIGNMENT #3
(Updated to the 2014/2015 Module Notes)

MA2
Before starting to write the assignment, make sure that it is complete and that there are no
printing defects. This assignment consists of 7 pages and 1 page of attachments. There are
7 questions for a total of 50 marks.

READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED.

To assist you in answering the 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

Compare

Contrast

Criticize

Define

Describe
Design

Determine

Diagram

Discuss

Evaluate

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.

Explain

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.

CGA-CANADA
ADVANCED MANAGEMENT ACCOUNTING [MA2]
ASSIGNMENT 3 (Summer Session)
(Updated to the 2014/2015 Module Notes)
Marks

Time: 3 Hours
Note:

11

This assignment is similar in form, length, and difficulty to the actual MA2 final examination; however, because of its placement
in the course, it will cover content in Modules 1 through 9. The emphasis of each module in this assignment is based on the
weightings in the examination blueprint, adjusted for the absence of Module 10 material.
The MA2 final examination will cover all 10 modules, as indicated in the examination blueprint.
This assignment will allow you to gauge your readiness for the final examination. While the assignment will not provide a
precise indication of the topics on the final examination it should tell you how ready you are for the final exam. To get the most
benefit from the assignment, complete it under exam conditions within the 3-hour time limit.
The total marks for this assignment are 50, and it is worth 5% of your final grade. The total marks for the final examination are
100.

Question 1
Select the best answer for each of the following unrelated items. Answer each of these items by giving the
number of your choice. For example, if the best answer for item (a) is (1), write (a)(1). 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:
1 mark each

a.

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

b. From a stockholder perspective of corporate social responsibility, which of the following is false?
1)
2)
3)
4)
c.

Managers should act within the limits set by law.

Owners should never give money to charities.
Managers should try to maximize profits for owners.
Companies should provide health benefits for employees if this improves the overall bottom line.

A number of tools have been developed to analyze 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

Continued...
Advanced Management Accounting

Assignment 3 1

d. Which of the following is generally considered a drawback of decentralization?

1)
2)
3)
4)
e.

Decentralization decreases motivation.

Decentralization eliminates goal incongruence.
Decentralization can lead to sub-optimal decision making.
Decentralization slows down the decision-making process.

Which of the following statements is the best example of moral hazard?

1)
2)
3)
4)

There is insider trading.

Managers actions are not readily visible by individuals outside the organization.
Managers have access to information that is not shared with those outside the organization.
Owners have additional information that managers do not have.

Note:
Use the following information to answer parts (f) and (g).

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.
f.

What is the average wait time needed for production?

1)
2)
3)
4)

0.75 hours
1.50 hours
6.75 hours
13.5 hours

g. What is the excess capacity of the dedicated equipment?

1)
450 hours
2)
900 hours
3) 1,800 hours
4) 2,475 hours
h. Which of the following is a term that best describes a new product that offers a new value proposition
which shifts the dynamic of the marketplace?
1)
2)
3)
4)
i.

Technological substitution
Institutional change
Disruptive market innovation
Dynamic capability

Which of the following would be included in a quality cost report as an appraisal cost?
1)
2)
3)
4)

Liability claims
Machine repairs
Product testing
Suppliers evaluations

Continued...

Advanced Management Accounting

Assignment 3 2

j.

Which of the following statements represents the concept of throughput contribution under the theory
of constraints?
1)
2)
3)
4)

Sales revenue minus direct labour costs

Sales revenue minus direct material costs
Sales revenue minus direct material and direct labour costs
Sales revenue minus direct material, direct labour, and variable overhead costs

k. Which of the following is a weakness of results controls?

1)
2)
3)
4)

Conflicting objectives may cause problems between divisions.

They are expensive to implement.
They give less autonomy to employees.
They are not useful if the results are controllable by the employees.

Question 2
The following information pertains to Gerco Inc. for the year ended December 31, 2014:
Net operating income before taxes
EVA-adjusted total capital, December 31, 2014
Research costs in 2014 expensed under GAAP
Development costs in 2014 expensed under GAAP
Development costs in 2014 capitalized under GAAP
Impairment loss of goodwill included in the calculation of GAAP income
Total depreciation of all equipment

$ 1,300,000
5,400,000
165,000
88,000
34,000
46,000
75,000

Additional information:

Equity accounts for 69% of the firms 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).
All research and development (R&D) costs were incurred January 1, 2014.
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
3
2

a.

Determine the economic value added (EVA) for the year ended December 31, 2014.

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.

Continued...
Advanced Management Accounting

Assignment 3 3

Question 3
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. Sawing 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 to produce Pole-S:
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 log, 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
1

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 $61.50 per log. Show all your calculations.

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.

Continued...
Advanced Management Accounting

Assignment 3 4

Question 4
New World Brewery is a successful microbrewery located in Ontario. New World brews different types of
beer: lager, ale, stout, as well as some seasonal fruit beers using local produce. Bottled beer is sold in bars
and liquor stores, whereas draft beer is sold strictly in bars. In 2013, the Ontario microbrewery market
grew by 12%, but New World had some difficulty maintaining its market share. The CEO asked you to
prepare an analysis of last years results based on the following budgeted and actual data. Actual sales
prices and costs were exactly as budgeted, but actual profits were almost $500,000 less than what was
originally budgeted.
Actual data for Ontario market
Unit sales (hectolitres)

2012

2013

289,000
51,000
340,000

332,350
48,450
380,800

Unit sales (hectolitres)

2012

2013

Bottled beer
Draft beer
Total

43,450
6,120
49,570

46,529
7,752
54,281

Bottled

Draft

317,900

56,100

Bottled

Draft

54,043
$192
$135

7,854
$136
$122

Bottled beer
Draft beer
Total
Actual data for New World Brewery

Budgeted 2013 sales for Ontario market

Unit sales (hectolitres)
Budgeted 2013 data for New World Brewery
Unit sales (hectolitres)
Sales price (per hectolitre)
Variable cost (per hectolitre)
Required
1

a.

b. Calculate the sales quantity variance and show that it is equal to the sum of the market share variance
and the market size variance.

c.

Calculate the 2013 market share variance and the 2013 market size variance for New World Brewery.

Using the data provided in the question explain why actual profit for New World Brewery was less
than budgeted profit.

Question 5
Uncertainty exists in every facet of life, despite strategies that promote awareness and caution; therefore,
organizations have to make decisions factoring in a risk quotient. Given that risk is a factor, regardless of
efforts for diversification and preparedness, there are several methods to mitigate and handle risk.
Required
Describe 3 risk mitigating methods.

Continued...
Advanced Management Accounting

Assignment 3 5

Question 6
The 7S model is a tool for assessing and monitoring changes in the internal situation of an organization.
The model can be used to understand how organizational elements are interrelated, and to ensure that the
wider impact of changes made in one area is taken into consideration. The benefit of the model is that if
one element changes, this will affect all the others.
Required
Describe 5 of the 7S elements in the model.

15

Question 7
Small Dreams

Small Dreams Inc. is a service company that provides administrative guidance and support to small
businesses. It was started five years ago by Amanda Yee, who is an entrepreneur with a vision. She began
working out of her apartment, and barely five years later, she has a downtown office and 145 employees.
She incorporated two years ago when the business started its rapid expansion.
Last year, you (as her accountant) explained the need to develop a management control system that would
work without her direct involvement. Amanda laughed. I have an excellent management control system.
When an employee makes contact with a potential new customer, I meet with them, assess their needs,
determine the cost of meeting those needs, assess their ability to pay, and set them up with a business ally
(thats what we call the person responsible for client contact). When the ally has a problem, they let me
know and I solve it. When a client isnt satisfied with advice from their ally, I review the situation and
make suggestions for change.
I approve all expenditures and do all the banking. I know things are running smoothly when there is
money in the bank. When Im getting too many phone calls from clients or too many questions from staff,
I know I have problems. So I solve them.
But the demands on her time were taking their toll. She had her eye on another exciting business
opportunity, and her family was starting to complain that she was never available.
Amanda finally took your persistent advice and hired Sam Williamson as CEO after a chance meeting at a
business networking function. She created his job description and crafted his compensation scheme on her
own. Amanda would limit her involvement in the day-to-day activities of the business but provide
oversight and guidance as president and chair of the board of directors.
Sam Williamson had recently retired from an executive position at PipeLink Inc., a large, national
plumbing supply company. Sam saw this as an opportunity for a change of focus and a challenge. Amanda
thought Sam could help the company through its expansion phase over the next few years and implement
an organizational structure that would distribute decision-making rights to various levels of managers.
Amanda crafted Sams compensation package, which consisted of a base salary equal to 70% of his total
compensation at PipeLink. Sam could earn a bonus (up to 50% of his salary) based on financial statement
net income exceeding the budget. Sam was responsible for implementing a budgeting process.
At the end of Sams first year, you asked Amanda how things were going.
Oh pretty good, I guess. Net profits exceeded our budget by more than 50%, and Sam earned his
maximum bonus. However, I have no idea if that was the result of Sams efforts or just part of our
continued growth. I think I was too generous with Sam. After all, the allies self-motivate without a bonus.
They are professionals accountants, lawyers, HR specialists, and IT specialists.

Continued...

Advanced Management Accounting

Assignment 3 6

I dont spend as much time in the office as I used to, but I dont feel I am working any less. Last week I
had to contact Marise in accounts payable to explain to her that she needed approval before any cheques
could be issued. It seems that Sam had told her she could authorize all expenditures under $500. That just
wont work. She needs to have Sam approve them the way I used to. Its a good thing I went in on
Sunday to look over the payables list or I wouldnt have even known she was doing that.
Amanda sighed. And clients still call me to complain. It seems Sam has set up some policy that allows
certain managers to make decisions regarding customer service. Maybe it works, but when an old client
phones me up and asks for more time to pay or for a better price well, thats what I do.
And Sam wants to fire two of my long-time employees. He says they spend too much time with clients and
we end up having to write down the invoices. But I want happy clients. I built this business on client
satisfaction. No; Im just not sure this is working.
Required
As the CGA for Small Dreams Inc., you have been asked to address Amanda Yees concerns. Based on
your knowledge of agency theory, develop a recommendation for a management control system for
Amanda. Analyze the case using the standard case method and present your solution using the following
section headings:
Identify the main problem and issues. Identify the main problems with Small Dreams management
control systems and operations.

a.

b. Analyze the data: Evaluate the problem using the mixed motivational view of agency theory and
your understanding of management control system design.

c.

d. Select the decision criteria: Identify three criteria that can be used to assess the management control
system.

e.

Generate alternatives: Organizations can be classified as organic and mechanistic. Identify the
management control systems (also known as levers of control) that work best for each of these types
of organizations. These will be the two alternatives you will evaluate for a potential recommendation
in part (e).

Analyze the alternatives and make a recommendation: Evaluate the alternatives based on the
criteria determined in step (d). Make a recommendation for the appropriate management control
system.

The case used in this assignment which is representative of the cases used for MA2 examinations integrates several
topics from the course materials. Remember to carefully review the case content and requirements to determine which
components of the course material you should use in your response.
50

Advanced Management Accounting

END OF ASSIGNMENT

Assignment 3 7