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Serial No………………
Institute of Certified Management Accountants of Sri Lanka
Strategic Level
May 2013 Examination
Examination Date :
Examination Time:
11th May 2013
9.30 a:m. – 12.30 p:m.
Number of Pages
:
Number of Questions:
05
05
Instructions to Candidates
1.
2.
3.
4.
Time allowed is three (3) hours.
Total: 100 Marks.
Answer all questions in Part I and any three (3) questions from Part II.
The answers should be in English Language.
Subject
Subject Code
Strategic Management Accounting
(SMA / SL 1 - 401)
PART I
Answer all questions
Question No. 01 (40 Marks)
The Hospital Instruments Division of ABC plc manufactures a variety of electronic medical equipment. The
principal product of the Hospital Instruments Division is a sophisticated instrument for measuring and
graphically displaying a variety of medical phenomena, such as heart and respiration rates. The culture
throughout the division was primarily engineering-oriented. One result of this culture was that the company’s
design engineers generally designed new products from scratch, rather than relying on modification of a
current design. While this approach usually resulted in an “elegant” design from an engineering standpoint, it
often resulted in the use of new or unique parts that were not already being used in the company’s other
products. The strategy of the Hospital Instruments Division’s management was to position the division as a
product differentiator and price leader, not as the industry’s low-cost producer. This means that the division
generally led the medical instruments market with new products that exhibited greater functionality than
competing products and that the products were priced at a premium. The company’s competitor then would
emulate a new product, produce it at a lower cost, and undercut the ABC plc price. However, by then ABC plc
had moved on to a new product with even greater functionality. This strategy had been quite successful until
the Japanese entered the medical instruments market in a major way. ABC plc’s new competitors were able to
set product prices some 25% below those of ABC plc, while maintaining close to the same level of
functionality. In order to compete, the Hospital Instruments Division had to lower its prices below its reported
product costs. This resulted in significant losses for the division.
To remedy the situation, the Hospitality Instruments Division’s management began an extensive continuous
improvement program. The division changed its production and inventory management system to a JIT
system, ideas of total quality control were aggressively pursued, and management attempted to develop an
empowered workforce. All of these efforts paid off dramatically. However, production costs were still
relatively high for the industry, and cycle times were considered too long by management. The general feeling
was that in order to remain competitive in the long run, the division would have to further lower its production
costs and shorten its production cycle times. As management contemplated the high production costs, one
problem that kept coming up was the division’s part number proliferation. As the engineering-dominated
company continued to introduce new products, the number of different parts and components that had to be
stocked in inventory continued to increase. Some members of management felt the division’s cost-reduction
goals could be achieved by solving the problem of part number proliferation.
Institute of Certified Management Accountants of Sri Lanka
Strategic Level – Strategic Management Accounting (SMA / SL 1 - 401) – May 2013 Examination
1
As management was pondering the division’ cost-reduction goal, the controller was contemplating the
introduction of a new cost accounting system. The controller was thinking about introducing activity –
based costing and activity-based management in the Hospital Instruments Division.
You are required to:
(a)
Explain why the problem of part number proliferation could increase the division’s production
costs.
(06 Marks)
(b)
Explain how long production cycle time could increase the division’s production costs.
(06 Marks)
(c)
How could an ABC system be used to help reduce costs by attacking the problem of part number
proliferation?
Allow yourself to contemplate an entirely new role of ABC that is quite different from the objective
of more accurate product costs. You may include following in your answer (the division’s strategy
in the market place, How are price currently being determined? Does management really need more
accurate product costs, given its strategy and reality of market-driven prices? What is the current
goal of management? What is to blame for high production cost? Who is to blame for high
production costs? How the ABC system helps to solve the problem and reduces production costs?).
(16 Marks)
(d)
Following up your answer to (c), what cost drivers could be employed to help solve the problem of
part number proliferation?
(06 Marks)
(e)
How could an ABC system help highlight and solve the problem of production cycle times that are
too long?
(06 Marks)
(Total 40 Marks)
End of Part I
Part II
Answer any three (3) questions
Question No. 02 (20 Marks)
(a)
Why strategic management accounting is relevant in public sector and non-for-profit sector if these
organizations not manufacturing product and pursuing a profit?
(10 Marks)
(b)
Discuss the impact that technological developments have had on strategic management accounting.
(10 Marks)
(Total 20 Marks)
Institute of Certified Management Accountants of Sri Lanka
Strategic Level – Strategic Management Accounting (SMA / SL 1 - 401) – May 2013 Examination
2
Question No. 03 (20 Marks)
Dammika Liyanage, a consultant with Deloitte and Young, has just begun an engagement at Olympic
Airways (OA). The company has fallen on hard time of late despite record profits for the rest of the
airline industry. Management is somewhat set in its ways and could probably use some “new blood” as
the most recent hire to the firm’s executive team was 12 years ago.
In Dammika Liyanage’s first meeting with the team, OA’s chief executive officer commented that “all
that mattered in this industry were load factors- the percentage of seats sold on scheduled flights. If load
factors were adequate, everything else would take care itself”. Dammika Liyanage noted that while this
measure was important, other, broader facets of operations were also significant. She asked if any of the
management team had heard of the balanced scorecard and received dead silence as a response.
Based on his experiences with other engagements, including two that involved airlines, Dammika
Liyanage convinced that the balanced scorecard could provide benefits in helping to solve OA’s woes.
After a presentation about the philosophy of the balanced scorecard, OA’s management team accepted her
idea, feeling that a shift in operating philosophy was needed for survival.
You are required to:
(a)
What is a balanced scorecard (BSC), and what are its typical key elements?
(b)
Dammika Liyanage wants to assemble a committee to prepare the airline’s balance scorecard. List
several of the company’s functional areas (marketing) that should be represented to the committee.
(06 Marks)
(c)
Indentify a number of measures to evaluate the key elements that you specified in requirement (a).
(08 Marks)
(d)
Did you see any problems with management’s prior focus on only one measure (i.e. load factor)?
Briefly explain.
(03 Marks)
(Total 20 Marks)
(03 Marks)
Question No. 04 (20 Marks)
AB plc has two division, namely, A and B. Division A manufactures a product called ‘A’ and Division B
manufactures a product called ‘B’. Each unit of Product B uses a single product A as a component.
Division A is the only manufacturer of product A and supplies to both Division B and outside market.
Estimated data for the coming period are as follows:
Full Capacity in units
Fixed production overhead
Fixed non production overhead
Variable cost per unit ( excluding transfer price)
Division A
30,000
Rs. 5 million
Rs. 2.5 million
Rs.280
Institute of Certified Management Accountants of Sri Lanka
Strategic Level – Strategic Management Accounting (SMA / SL 1 - 401) – May 2013 Examination
Division B
18,000
Rs. 12 million
Rs. 8 million
Rs.590
3
Market research has indicated that demand schedule for AB plc products from outside market will be as
follows for the coming period:
Price (Rs.) - Product A
1,000
800
600
Demand for Product A (units)
0
5,000
10,000
Price (Rs.) - Product B
4,000
3,800
3,600
Demand for Product B (units)
0
2,000
4,000
You are required to:
(a)
Calculate the unit selling price of product B (accurate to the nearest Rs.) that will maximize AB
plc’s profit in the coming year.
(06 Marks)
(b)
Calculate the unit selling price of product B (accurate to the nearest Rs.) that is likely to emerge if
the Divisional Managers of A and B both set the selling prices calculated to maximize Divisional
Profit from sales to outside customers and the transfer price of A going from Division A to Division
B is set at “market selling price”.
(06 Marks)
(c)
Explain why your answer to parts (a) and (b) are different, and propose changes to the system of
transfer pricing in order to ensure that AB plc is charging its outside consumers at optimum prices.
(08 Marks)
(Total 20 Marks)
Question No. 05 (20 Marks)
(a)
Life Cycle Costing normally refers to costs incurred by the user of major capital equipment over the
whole of the useful equipment life. Explain the determination and calculation of these costs and the
problems in their calculation.
(10 Marks)
(b)
In the strategy and marketing literature there is continual discussion of the product life cycle and it
has four stages, namely, start –up, growth, maturity and harvest. Which system of product costing
would be most useful for decision making and control and why?
(10 Marks)
(Total 20 Marks)
End of Part II
Institute of Certified Management Accountants of Sri Lanka
Strategic Level – Strategic Management Accounting (SMA / SL 1 - 401) – May 2013 Examination
4
Present value table
-n
Present value of 1.00 unit of currency, that is (1 + r) where r = interest rate; n = number of periods until payment or
receipt.
Periods (n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Interest rates (r)
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
0.952
0.907
0.864
0.823
0.784
0.746
0.711
0.677
0.645
0.614
0.585
0.557
0.530
0.505
0.481
0.458
0.436
0.416
0.396
0.377
0.943
0.890
0.840
0.792
0.747
0705
0.665
0.627
0.592
0.558
0.527
0.497
0.469
0.442
0.417
0.394
0.371
0.350
0.331
0.312
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
Periods (n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Interest rates (r)
11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
15%
0.870
0.756
0.658
0.572
0.497
0.432
0.376
0.327
0.284
0.247
0.215
0.187
0.163
0.141
0.123
0.107
0.093
0.081
0.070
0.061
16%
0.862
0.743
0.641
0.552
0.476
0.410
0.354
0.305
0.263
0.227
0.195
0.168
0.145
0.125
0.108
0.093
0.080
0.069
0.060
0.051
End of Question Paper
Institute of Certified Management Accountants of Sri Lanka
Strategic Level – Strategic Management Accounting (SMA / SL 1 - 401) – May 2013 Examination
5