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ACCG301 Organisational Planning and Control Semester 1, 2011 Quiz 2 (v1) 5% Recommended Solutions

Question 1 Total = 4 marks CHAPTER 14: SUSTAINABILITY

Sustainability recognises the web of interrelationships and requires systems thinking. Identify and describe any two (2) characteristics of systems thinking that reminds us of the big sustainability picture.
ANY TWO OF THE FOLLOWING: (See Custom Pub pp. 559)

Recognises the larger context organisations exist within larger systems such as the global economy, the environment and society Accepts uncertainty and ambiguity given the many connections, it is very difficult or virtually impossible to identify all organisational impacts Challenges our world view managerial decisions are influenced by their assumptions of the world, this is important when accepting other views that may be equally valid. Emphasises inclusion within the organisation and between the organisation and its stakeholders, inclusion and consultation are important to ensure alternative viewpoints and values are consider in organisational decision-making. __________________________________________________________________________________ Question 2 Total = 4 marks CHAPTER 8: MANAGING COSTS AND CAPACITY

Steven Corporation manufactures fishing rods that have a price of $21.00. It has costs of $16.32. A competitor is introducing a new fishing rod that will sell for $18.00. Management believes it must lower the price to $18.00 to compete in the highly cost-conscious fishing rod market. Marketing believes that the new price will maintain the current sales level. Steven Corporation's sales are currently 200,000 poles per year.

a) What is the target cost for the new price if target operating profit is 20% of sales? 1 mark
$18.00 - ($18.00 0.20) = $14.40

b) What is the change in operating profit for the year if $18 is the new price and costs remain the same? 2 marks
Change = 200,000 ($21.00 - $16.32) - [200,000 ($18.00 - $16.32) ] = $936,000 - $336,000 = $600,000 reduction in income

c) Explain how value engineering can be applied to achieve the target cost. 1 mark Value engineering is a systematic evaluation of all aspects of the value chain, and its objective is to reduce costs and achieve a quality level that satisfies customers. 1

Question 3 Total = 4 Marks

CHAPTER 15: STRATEGY AND BSC

Identify and describe any two (2) of the three components used in performing a strategic analysis of operating profit.
ANY TWO OF THE FOLLOWING: (See page 606 of Custom Pub) a. the growth component (1 mark), which measures the change in operating profit attributable solely to an increase in the quantity of output sold from one year to the next. (1 mark) b. the price-recovery component (1 mark), which measures the change in operating profit attributable solely to changes in the prices of the inputs and the outputs from one year to the next. (1 mark) c. the productivity component (1 mark), which measures the change in costs attributable to a change in the quantity of inputs used in the current year (mark) relative to the quantity of inputs that would have been used in the previous year to produce current year output. ( mark)

ACCG301 Organisational Planning and Control Semester 1, 2011 Quiz 2 (v2) 5% Recommended Solutions
Question 1 Total = 4 marks CHAPTER 14: SUSTAINABILITY

Sustainability recognises the web of interrelationships and requires systems thinking. Identify and describe any two (2) characteristics of systems thinking that reminds us of the big sustainability picture.
ANY TWO OF THE FOLLOWING: (See Custom Pub pp. 559)

Recognises the larger context organisations exist within larger systems such as the global economy, the environment and society Accepts uncertainty and ambiguity given the many connections, it is very difficult or virtually impossible to identify all organisational impacts Challenges our world view managerial decisions are influenced by their assumptions of the world, this is important when accepting other views that may be equally valid. Emphasises inclusion within the organisation and between the organisation and its stakeholders, inclusion and consultation are important to ensure alternative viewpoints and values are consider in organisational decision-making. __________________________________________________________________________________ Question 2 Total = 4 marks CHAPTER 8: MANAGING COSTS AND CAPACITY

Wallace's Wrench Company manufactures socket wrenches, additional information follows below: For the next month, the vice CEO of production plans on producing 4,400 wrenches per day. The company can produce as many as 5,000 wrenches per day, but is more likely to produce 4,500 per day. The demand for wrenches for the next three years is expected to average 4,250 wrenches per day. Fixed manufacturing costs per month total $336,600. The company works 20 days a month. Fixed manufacturing overhead is charged on a per-wrench basis.

a) Explain what is meant by the normal capacity utilisation capacity concept.1 mark This is the level of capacity utilisation that satisfies average customer demand over a period (e.g. 2-5 yrs) which includes seasonal, cyclical and trend factors See page331 of the Custom Pub. b) Using the information provided calculate normal capacity utilisation fixed manufacturing overhead rate per wrench. 1 mark
Normal overhead rate = $336,600 / (4,250 20) = $3.96

c) Explain the difference between the practical capacity and the master budget capacity fixed manufacturing overhead rates per wrench. Use calculations to support your answer. 2 marks See page 330 of the Custom Pub. Practical capacity recognises the need for unavoidable operating interruptions and therefore uses the 4,500 unit total given that that is what Wallace is more likely to produce.
Practical overhead rate = $336,600/(4,500 20) = $3.74

Master budget capacity utilisation is the level of capacity that managers expect for the current budget period; this capacity concept thus uses the 4,400 number of wrenches because that is according to production plans.
Master-budget overhead rate = $336,600/(4,400 20) = $3.825 __________________________________________________________________________________________

Question 3 Total = 4 Marks CHAPTER 15: STRATEGY AND BSC a) Using Wallaces Wrench Company, from question 2, provide one (1) objective and one (1) performance measure for the Internal-business-process perspective, of the Balanced Score Card. 2 marks Examples include: Objective: Reduce delivery time to customers / PM order-delivery time Objective: Improve processes / PM No. of major improvements in manufacturing processes Objective: Improve post-sales service / PM service response time b) Describe two (2) pitfalls in implementing a Balanced Score Card.
ANY TWO OF THE FOLLOWING (See page 602 of the Custom Pub.) : 1. Dont assume the cause-and-effect linkages are precise; they are merely hypotheses. An organisation must gather evidence of these linkages over time. 2. Dont seek improvements across all of the measures all of the time. Cost-benefit considerations should always be a central element when designing a balanced scorecard. 3. Dont use only objective measures in the balanced scorecard, (i.e. make use of both objective and subjective measures). When using subjective measures, managers must be careful that the benefits of this potentially rich information are not lost by using measures that are inaccurate or that can be easily manipulated. 4. Dont fail to consider both costs and benefits of different initiatives before including these initiatives in the balanced scorecard.(1 mark) 5. 6. Dont ignore non-financial measures when evaluating managers and employees. Dont use too many measures.

2 marks

ACCG301 Organisational Planning and Control Semester 1, 2011 Quiz 2 (v3) 5% Recommended Solutions
Question 1 Total = 4 marks CHAPTER 14: SUSTAINABILITY

Identify and describe any two (2) of the GRI2008 defining principles that provide guidance for defining the content of a focused sustainability report.
ANY TWO OF THE FOLLOWING (See page 568 of Custom Pub.): Materiality information should cover topics and indicators reflecting organisational significant environmental, economic and social impacts Stakeholder inclusiveness stakeholders should be identified and the report should explain how it has responded to their reasonable expectations and interests Sustainability Context the report should present the organisations performance in the wider context of sustainability Completeness coverage of material topics, indicators and definition of the report boundary should be sufficient to reflect significant economic, environmental and social impacts ____________________________________________________________________________________ Question 2 Total = 4 marks CHAPTER 8: MANAGING COSTS AND CAPACITY

a) Explain the difference between locked-in costs and costs incurred.

2 marks

See page 324 of the Custom Pub. Locked-in costs are costs that have not been incurred yet, but based on decisions that have already been made, will be incurred in the future. Most costs are actually locked-in at the design stage but they are not incurred until the manufacturing stage.

b) There are four different capacity concepts. Identity which one (1) of these four different capacity concepts is best used for setting prices. Provide one (1) reason for your answer. 2 marks See page 333 of the Custom Pub.
Practical capacity is best to use when setting prices because only the actual cost of capacity used for production is included in the cost of a unit.

Question 3 Total = 4 Marks

CHAPTER 15: STRATEGY AND BSC

Bugos Company makes a household appliance with model number XX300. The goal for 2011 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of XX300 units that can be produced. The industry market size for appliances increased 5% from 2010 to 2011. The following additional data are available for 2010 and 2011:
Units of XX300 produced and sold Selling price Direct materials (square metres) Direct material costs per square metre Manufacturing capacity for XX300 (units) Total conversion costs Conversion costs per unit of capacity 2010 10,000 $100 30,000 $10 12,500 $250,000 $20 2011 10,500 $95 29,000 $11 12,000 $240,000 $20

a) Using the formula below, calculate the revenue effect of the growth component. Determine whether the effect on the operating profit is favourable or unfavourable. 2 marks
Revenue of growth effect

Actual units of

Actual units of - output sold in 2010

output sold in 2011

Selling Price in 2010

= (10,500 10,000) $100 = $50,000 Favourable

b) Using the formula below, calculate the cost effect of the growth component for direct materials. 2 marks
Units of input
Cost effect of growth for variab le costs

required to produce 2011 output in 2010 -

Actual units of inputs used to produce 2010 output

Input price in 2010

= [( 30,000 x 10,500/10,000 ) 30,000] x $10 = $15,000 Unfavourable

ACCG301 Organisational Planning and Control Semester 1, 2011 Quiz 2 (v4) 5% Recommended Solutions
Question 1 Total = 4 marks CHAPTER 14: SUSTAINABILITY

Identify and describe any two (2) of the GRI2008 defining principles that ensure the quality of a focused sustainability report.
ANY TWO OF THE FOLLOWING: (See page 568 of the Custom Pub): Balance report should reflect positive and negative aspects of organisational performance to enable a reasoned assessment of overall performance Comparability issues and information should be selected, compiled and reported consistently to enable shareholders to analyse changes in organisational performance over time Accuracy report information should be sufficiently accurate and detailed for stakeholders to assess organisational performance Timeliness reporting occurs on a regular schedule and information is available in time for stakeholders to make informed decisions Clarity information made available in a manner that is understandable and accessible to stakeholders using the report Reliability information and processes used in the preparation of a report should be gathered, recorded, compiled, analysed, and disclosed in a way to be subject to examination and that establishes the quality and materiality of the information Question 2 Total = 4 marks CHAPTER 8: MANAGING COSTS AND CAPACITY

Frank's Computer Monitors currently sells 17" monitors for $270. It has costs of $210. A competitor is bringing a new 17" monitor to market that will sell for $225. Management believes it must lower the price to $225 to compete in the market for 17" monitors. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Frank's sales are currently 10,000 monitors per year.

a) What is the target cost for the new price if operating profit is 25% of sales? 1 mark
$225 - ($225.00 0.25) = $168.75

b) What is the change in operating profit if Marketing is correct and only the sales price is changed? 2 marks
Change = 10000 ($270 - $210 ) - [11,000 ($225 - $210) ] = $600,000 - $165,000 = $435,000 reduction in income

c) Explain what is meant by a non-value-added cost. 1 mark This is a cost that if eliminated would not reduce the actual or perceived value or usefulness customers obtain from using the product or service. ______________________________________________________________________________ Question 3 Total = 4 Marks CHAPTER 15: STRATEGY AND BSC

Explain the difference between engineered and discretionary costs. Include the use of one (1) example of each of these costs to support your answer. (See page613 of the Custom Pub.)
An engineered cost results from a cause-and-effect relationship between the cost driver output and the resources used to produce that output. An example of an engineered cost would be direct materials in the production of products OR, other examples of engineered costs might include shipping costs or electrical costs. A discretionary cost has two features. The first feature is that the cost arises from a periodic decision regarding the amount of cost to be incurred. The second feature is that no measurable cause-and-effect relationship exists between the output and the resources used. An example of a discretionary cost would be the cost of advertising for a product OR the amount spent on researching new products OR employee training expenses.

ACCG301 Organisational Planning and Control Semester 1, 2011 Quiz 2 (v5) 5% Recommended Solutions
Question 1 Total = 4 marks CHAPTER 14: SUSTAINABILITY

The answers to these questions can be found on page 565 of the Custom Pub.

Explain what an emissions trading scheme is. Total = 2 marks An ETS is designed to reduce greenhouse gas pollution which is a cause of climate change by providing economic incentives to companies. Explain the relationship between carbon sequestration and the removal unit (RMU) Total=2 marks
The RMU is what organisations receive for drawing carbon dioxide out of the air which is then sold to carbon dioxide emitting organisations. Carbon sequestration is achieved by generating credits by capturing carbon dioxide [Students may also use the example of planting trees in previously unproductive land to help their explanation if they do also allocate half a mark]. In this way carbon sequestration will create new commodities and incentives to find innovative and efficient ways to draw greenhouse gases out of the environment. Question 2 Total = 4 marks CHAPTER 8: MANAGING COSTS AND CAPACITY

Claudia Geer is the new financial controller is discussing the pricing of a new product with sales manager, James Nolan. Identify and explain two (2) major influences that Claudia and James should consider when thinking about the pricing for the new product.
ANY TWO OF THE FOLLOWING (See pages 318-319 of the Custom Pub.):

Customers (1 mark): A price increase may cause customers to reject a company's product and choose a competing or substitute product. (1 mark) Competitors: (1 mark) At one extreme, a rival's prices and products may force a business to lower its prices to be competitive ( mark). At the other extreme, a business without a rival in a given situation can set higher prices. ( mark) OR A business with knowledge of its rivals' technology, plant capacity, and operating policies is able to estimate its rivals' costs, which is valuable information in setting competitive prices. (1 mark) Costs (1 mark): The study of cost-behaviour patterns gives insight into the income that results from different combinations of price and output quantities sold for a particular product. (1 mark)

Question 3 Total = 4 Marks

CHAPTER 15: STRATEGY AND BSC

Bugos Company makes a household appliance with model number XX300. The goal for 2010 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of XX300 units that can be produced. The industry market size for appliances increased 5% from 2010 to 2011. The following additional data are available for 2010 and 2011:
Units of XX300 produced and sold Selling price Direct materials (square metres) Direct material costs per square metre Manufacturing capacity for XX300 (units) Total conversion costs Conversion costs per unit of capacity 2010 10,000 $100 30,000 $10 12,500 $250,000 $20 2011 10,500 $95 29,000 $11 12,000 $240,000 $20

a) Calculate the operating profit for 2010 and 2011 for Bugos Company. 3 marks 2010 Sales Less: Direct Materials Contribution Margin Less: Conversion Costs Operating Profit $1,000,000 $300,000 $700,000 $250,000 $450,000 $997,500 $319,000 $678,500 $240,000 $438,500 2011

b) If Bugos is pursuing a cost leadership strategy, based on your calculations in (a), was Bugos strategy successfully implemented in 2011? Provide one (1) reason for your answer. 1 mark No Bugso strategy was not successfully implemented because operating profit decreased by $11,500.

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ACCG301 Organisational Planning and Control Semester 1, 2011 Quiz 2 (v6) 5% Recommended Solutions
Question 1 Total = 4 marks CHAPTER 14: SUSTAINABILITY

Identify and explain any two (2) ways that greater returns can be achieved as organisations move along the corporate social responsibility value curve.
ANY TWO OF THE FOLLOWING (See page 574 of Custom Pub): Legal and compliance adherence to law in the countries of production, distribution and operation Strategic Philanthropy alignment of charitable activities with social issues that support business objectives Values-based self regulation incorporates the companys value system and/or code of conduct to guide business behaviour Efficiency measurable cost savings through efficient or win-win scenarios Growth Platform access to new markets, new partnerships or product/service innovations that generate revenue Question 2 Total = 4 marks CHAPTER 8: MANAGING COSTS AND CAPACITY

a) There are four different capacity concepts. Identify which one (1) of these four different capacity concepts is best used for evaluating the performance of the marketing manager for the current year. Provide one (1) reason for your answer. 2 marks See page 334 of the Custom Pub.
Master-budget capacity utilisation is best for evaluating performance of managers over the current year because the manager should only be held accountable for budgeted sales of the current year and not production capacity, especially when there is unused capacity.

b) Describe any two (2) undesirable effects of value engineering and target-costing if they are not properly managed. 2 marks
ANY TWO OF THE FOLLOWING (See page 326 of the Custom Pub): Employees may feel frustrated if they fail to attain targets The cross-functional team may add too many features just to accommodate the different wishes of team members A product may be in development for a long time as alternative designs are repeatedly evaluated. Organisational conflicts may occur as the burden of cost cutting falls unequally on different business functions in the organisations value chain

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Question 3 Total = 4 Marks

CHAPTER 15: STRATEGY AND BSC

An operating profit analysis of Sara McCullough Incorporated revealed the following: Operating income for 2009 $500,000 Add growth component 25,000 Deduct price-recovery component (15,000) Add productivity component 60,000 Operating income for 2010 $570,000

a) Having carefully reviewed the operating profit analysis provided to you, please identify the strategy that Sara McCullough Incorporated is using that is consistent with the increase in operating profit from 2009 to 2010. Give two (1) reason for your answer. 2 marks The strategy is the cost-leadership strategy that Sara is using The productivity component uses input prices to measure how costs have decreased from using fewer input, a better mix of products and/or less capacity; the productivity component for McCullough Incorporated ahs made a favourable contribution to the operating income. OR The productivity component measures the amount by which operating pr0ofit increases by using inputs efficiency to lower costs b) Recommend one (1) objective and one (1) performance measure for the Learning and Growth perspective that is consistent with the strategy that you identified in (a). 2 marks [Students please note that you were given some latitude with this, but your objective and performance measure must be aligned with the BSC perspective.]

Examples include: Objective: Improve employee satisfaction / PM employee satisfaction survey OR orderdelivery time Objective: Develop employee skill / PM No. of employees participating in training programs

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ACCG301 Organisational Planning and Control Semester 1, 2011 Quiz 2 (v7) 5% Recommended Solutions
Question 1 Total = 4 marks CHAPTER 14: SUSTAINABILITY

Identify and explain any two (2) sustainable management accounting tools that can be used to pursue social and environmental objectives.
ANY TWO OF THE FOLLOWING (See pages 580 to582 of the Custom Pub) :

Balanced scorecard this methodology can be used to map and manage the interrelationships, and drivers of social, environmental and economic performance. Environmental Management Accounting environmental inputs and outputs are measured and reported, for example life-cycle analysis [please note if students put the life-cycle analysis as a tool allocate a mark, and also the sequential mark if their explanation of what life-cycle analysis is correct] Scenario modelling this tool is important to anticipate how physical, social, political and economic dimensions interact over time Environmental Management Systems this is an organisations formal and systematic process for guiding, measuring and benchmarking their environmental impact Climate change strategy changes in economic, social and environmental systems that will result from climate change will create opportunities and threats to organisational strategy that must be considered. ____________________________________________________________________________________ Question 2 Total = 4 marks CHAPTER 8: MANAGING COSTS AND CAPACITY

Identify and explain two (2) factors that are important to consider when using life-cycle costing and budgeting. (See pages 328-329 of the Custom Pub.)

The development period for R&D and design is long and costly. When a high percentage of total life-cycle costs are incurred before production begins and revenues are received, the company must consider revenues and costs over the life-cycle of the product. Many costs are locked in at the R&D and design stages. Life-cycle budgeting highlights costs throughout the products life cycle and so facilitates target pricing, target costing and value engineering at design stage before costs are locked in.

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Question 3 Total = 4 Marks

CHAPTER 15: STRATEGY AND BSC

Bugos Company makes a household appliance with model number XX300. The goal for 2011 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of XX300 units that can be produced. The industry market size for appliances increased 5% from 2010 to 2011. The following additional data are available for 2010 and 2011:
Units of XX300 produced and sold Selling price Direct materials (square metres) Direct material costs per square metre Manufacturing capacity for XX300 (units) Total conversion costs Conversion costs per unit of capacity 2010 10,000 $100 30,000 $10 12,500 $250,000 $20 2011 10,500 $95 29,000 $11 12,000 $240,000 $20

a) Using the formula below, calculate the cost effect of the growth component for direct materials. 2 marks
Units of input
Cost effect of growth for variab le costs

required to produce 2011 output in 2010 -

Actual units of inputs used to produce 2010 output

Input price in 2010

= [( 30,000 x 10,500/10,000 ) 30,000] x $10 = $15,000 Unfavourable b) Using the formula below, calculate the cost effect of the growth component for conversion costs. Determine whether the effect on operating profit is favourable or unfavourable. 2 marks
Actual units of capacity in 2010 if adequate to produce

Cost effect of growth for fixed costs

2011 output in 2010 OR If 2010 capacity inadequate to produce 2011 output in 2010, units of capacity required to produce 2011 output in 2010 -

Actual units of capacity in 2010

Price per unit of capacity in 2010

= (12,500 12,500) x $20


= Zero with no effect on operating profit 14

ACCG301 Organisational Planning and Control Semester 1, 2011 Quiz 2 (v8) 5% Recommended Solutions
Question 1 Total = 4 marks CHAPTER 14: SUSTAINABILITY

Identify and explain any two (2) of Ray Andersons Seven Faces that assist organisaitons to achieve sustainability.
ANY TWO OF THE FOLLOWING (See page 576 of the Custom Pub):

Eliminate waste eliminate waste in every product and process that forms part of the business Benign emissions in the design phase of a product design out of the production process and products, the toxic substances Renewable energy use renewable energy such as solar power, wind, landfill gas to support production processes Closing the loop this involves designing the product to use recovered and bio-based material in the first instance and finding ways to recycle them at the end of their life-cycle. Resource-efficient transportation this includes the supply of raw materials, delivery of finished goods and a focus on the transportation needs of employees Sensitising stakeholders influencing employees, suppliers, and customers to move towards sustainability by creating a culture incorporating sustainability principles Redesign commerce this involves changing the fundamental nature of commerce to support sustainability

Question 2 Total = 4 marks

CHAPTER 8: MANAGING COSTS AND CAPACITY

Describe what is meant by the downward demand spiral. Explain what causes a downward demand spiral to occur. (See page 333 of the Custom Pub.) The downward demand spiral is the continuing reduction in the demand for its products that occurs when it fails to meet or better competitors prices; as customers resist the price and consequently demand drops further higher and higher costs make it more difficult to meet competitors prices. When a company uses cost-based pricing and it selects master-budget capacity utilisation, which is the capacity available as the capacity concept level in the denominator, the downward spiral may result.

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Question 3 Total = 4 Marks

CHAPTER 15: STRATEGY AND BSC

An operating income analysis of Deb Schmidt Incorporated revealed the following: Operating income for 2009 $500,000 Add growth component 15,000 Add price-recovery component 100,000 Deduct productivity component (8,000) Operating income for 2010 $607,000

a) Having carefully reviewed the operating profit analysis provided to you, please identify the strategy that Deb Schmidt Incorporated is using, which is consistent with the increase in operating profit from 2009 to 2010. Give two (2) reasons for your answer. 3 marks Deb is using the product differentiation strategy This organisation is showing a large favourable contribution of the price-recovery component of $100,000, which could have been through an increase in the output prices.

b) Identify and explain which sub-process of the internal-business perspective would assist Deb Schmidt in implementing the strategy that you identified in (a). 1 mark See page598 of the Custom Pub The sub-process that Deb will use is that of innovation process This process focuses on creating products, services and processes to remain competitive in the marketplace, which is consistent with the differentiation strategy.

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