Comprehensive Solution for Advanced Management Accounting Assignment

This document provides a comprehensive solution to an advanced management accounting assignment. It includes multiple-choice questions with answers and detailed solutions to comprehension problems. The comprehension problems cover topics such as transfer pricing, calculating return on investment (ROI), residual income, and economic value added (EVA). Additionally, the assignment addresses risk management, agency costs, activity-based costing, and customer profitability analysis. The solution also explores lean thinking initiatives to improve business processes. The analysis includes calculations, comments, and explanations to facilitate understanding of the concepts.

ADVANCED
MANAGEMENT
ACCOUNTING

SECTION A: MULTIPLE CHOICE QUESTION
1)
b
In the managers' offices, policies and procedures are not always created with great care.
This is primarily due to managers' and supervisors' general emphasis on making wise
decisions.
2)
d)
It focuses on the organization's whole process to make it possible for successful value
chain management to achieve the business's goal.
3)
d)
The company focuses on all of the aforementioned types of activities because it is a long-
term technique that optimises operations by concentrating on all relevant areas in order to
provide greater customer satisfaction.
4)
d)
To get rid of the units that have mistaken and faults, quality-related preventative action is
taken. It also emphasises having an effective risk analysis and focuses on having a certain
type of design so that buyers may choose from standardised items.
5)
b)
The seven guiding principles of the global report project do not contain this. The
particular paper emphasises on the need for an integrated system of standards so that a
trustworthy, transparent process can be developed for all parties.
6)
d)
The outbound logistic is tasked with carrying out tasks that can assist in getting products
to clients. The sustainability activity that needs to be prioritised in this process is having
proper personnel safety measures in place and carrying out dependable product handling
and transportation.
7)
b)
In order to lower agency costs, monitoring is the solution that is taken into account. This
is put into action to monitor expenditures by the principal and to restrict any erroneous
acts of the agent that lower costs.
8)
a)
The management accountant is not required to have a considerable level of
communication skills with the company's payroll team or external financiers. It is
primarily utilised for internal parties, and the pay roll is managed by a specific accountant
so that the management accountant is relieved of this responsibility.
9.
d
Enabler of value is not a suitable function for management accounting, according to the
high calibre worldwide standards, which are related with having appropriate
collaboration and coordination with business requirements.
10
b
Share-based compensations encourage higher CEO salaries so that effective performance
may be obtained by doing away with financial incentives for staff motivation.
SECTION TWO: COMPREHENSION PROBLEMS
Question 1
1. Transfer pricing:
Total cost of pong department =
Material and labour cost + fixed cost + advertising and marketing cost
= $2.10 + $0.80 + $0.75
= $3.65
Selling price charge by pong department = $5.50
So, the profit per bats = $5.50 - $3.65
= $1.85
Transfer price need to charge by ping department from pong department is as follows:
= $1.20 + $1.85 = $3.05

On the basis of the above calculation, it is identified that, if ping department itself make
the bats and sell it in the market than they will make a profit of $1.85 per bats. Hence, the
transfer price that would be charge by ping department from the pong department per bats
based on above calculation is $3.05.
2.
No, the calculated transfer price of $3.05 is not appropriate for the pong department to
pay to ping department because after than the company will not earn zero profit. Hence, it
is not appropriate for ping department to change transfer price calculated above. It is
because the pong department total cost is $3.65 and the selling price is $5.50 before the
consideration of transfer price. In case, if the transfer price of $3.05 consider than it may
leads to the total cost of pong department to $5.50 ($3.50 + $0.90 + $0.80 + $0.75) which
leads to neither profit nor loss to the company.
3.
No, the answer will not change even if the ping department is not operating at its full
capacity. It is because the transfer price per bats will remain same.
Rather than using the above calculated transfer price, the ping department should use the
price charge by competitors such as $2.20 per kilo.
Hence, the most appropriate transfer price to be charged from pong department by ping
department is 2.20. So, the profit of ping department would be $1 ($2.20 - $1.20).
Two reasons:
 Ping department would earn profit of $1.00.
 Pong department would also able to pay the transfer price of $2.20.
Question 2
1. Calculation of Cool Roof’s profit for the year
Particulars Calculation Amount ($)
Sales 320000
Less Variable costs 95000
Contribution 225000
Less Fixed costs 60000
Less overheads allocated 25000
Total 85000
Operating profit 140000
Less finance cost $1125000 * 11.30% 127125
Income before tax 12875
Less Tax 12875 * 30% 3862.5
Net income 9012.5
2. Calculation of ROI of Cool Roof’s
Formula of Return on Investment (ROI) = Net income / Cost of investment * 100
= $9012.5 / $280000 * 100
= 3.21%
**The non-current assets of the organization indicate the long-term investment of Cool
Roof which is further consider as a cost of investment.
Comment: The cost of capital of Cool Roof organization is 14% which indicate that they
need to pay 14% of the money borrowed from the market or public to them. However, the
return on investment of the company is 3.21% which indicate the company will receive
50% of the money they have invested. As the return on investment is lower than the cost
of capital which further indicate that the company performance is poor. Cool Roof
company are not able to earn enough profit from its investment the impact of which they
are not able to covering the cost of capital.
3. Calculation of residual income of Cool Roof company
Formula of residual income = Operating income – (target profit margin * average total
assets)
= $140000– (12% * $223776)
= $113146.88
Assets turnover ratio = Net sales / average total assets
1.43 = $320000 / average total assets
Average total assets = $320000 / 1.43
= $223776
Comment: On the basis of the above calculation, it has been analysed that the residual
income earned by company is higher than the net income. This means that the company
Cool Roof will remain with the profit $113146.88 after covering its all cost or expenses.

4. Calculation of EVA
Formula of economic value added =
Net operating profit after tax – (WACC * capital invested)
= $101862.5 – (11.30% * $1125000)
= -25262.5
Calculation of net operating profit after tax
= operating profit – adjusted tax charges
= $140000 – (127125 * 30%)
= $101862.5
Comment: On the basis of the above calculation, it has been evaluated that the economic
value added of Cool Roof company is -25262.5 which indicate that the company will
earn that much profit above its cost of capital.
Question 3
1. Types and sources of risk with example
 Competitive risk:
The risk of not being able to keep an eye on rivals' actions is the significant type of
risk to which the company is subjected. The outcome of this situation is obvious—you
can't draw in or keep clients, thus you lose them. This has long-term difficulties for the
company. For instance, the competitor of the company made its items available online,
allowing it to sell them for less due to decreased operating costs, which resulted in a
significant loss for the business.
 Commodity risk due to natural disaster:
Natural occurrences like disasters are the origins of these risks since they have the
potential to harm the items that are kept in the warehouses, which could have an impact
on both the wholesale and retail operations of the company. Another effect of natural
disasters is that they frequently cause power outages, which accelerates the deterioration
of stored and perishable goods. There is a breakdown in the entire supply chain.
2. The company will face the following issue:
 Poor performance:
The problem with doing this is that the employees who are working hard for the bonus
can feel that they aren't performing well because their efforts will help even the less
diligent and in reality, lazy employees. All employees receive the bonus, regardless of
their contribution, and it is distributed as a percentage of sales.
 Lack of employee support:
Employees are motivated by this system since it only benefits them if they are successful
in closing the sale; as a result, they begin to believe that they will not be rewarded for
their efforts if the contract is not closed. Consequently, their performance is affected.
3. The three types of agency cost are as follows:
 Indirect agency cost: The costs incurred as a result of lost opportunities are
referred to as indirect agency costs. For instance, losing the job of management.
 Bonding cost: This is the term used to describe the direct agency expenses
incurred as a result of the establishment of contractual obligations between the
agent and the business. An illustration is a manager who continues to work for the
business even after it is acquire.
 Monitoring cost: Monitoring costs, which are incurred when the board of directors
of a company monitors it, are one of the direct agency costs. For instance,
employee stock option.
Question 4
1. Calculation of activity cost rate of each of the activities:
Activity Allocation formula Activity cost rate
Processing of order $150000 / 640 orders $234.375 per order
Deliveries $250000 / 560 deliveries $466.428 per deliveries
Administration cost $75000 / 640 orders $117.187 per order
Marketing expenses $70000 / 65 sales visit $1076.923 per sales visit
2. Calculation of activity cost for each of the customers
Activity Fluffy Sooty Pooch
Processing of order
$234.375 per order
$234.375 * 400 =
$93750
$234.375 * 150 =
$35156
$234.375 * 90 =
$21094
Deliveries $466.428
per deliveries
$466.428 * 500 =
$233214
$466.428 * 40 =
$18657
$466.428 * 20 =
$9329
Administration cost
$117.187 per order
$117.187 * 400 =
$46875
$117.187 * 150 =
$17578
$117.187 * 90 =
$10547
Marketing expenses
$1076.923 per sales
visit
$1076.923 * 40 =
$43077
$1076.923 * 15 =
$16154
$1076.923 * 10 =
$10769
Total cost assigned $416916 $87545 $51739
3. Calculation of profit of each of the customer are as follows:
Customer profitability analysis using ABC technique

Fluffy Sooty Pooch
Sales $1200000 $450000 $575000
Less cost of sales 900000 350000 450000
Gross Profit $300000 $100000 $125000
Less activity costs allocated $416916 $ 87545 $51739
(Refer subsection 2)
Contribution ($116916) $12455 $73261
4.
The least profitable customer is fluffy as the company are incurring loss of $116916 from
that customer. It might be because of the two reasons:
 High cost of sales: The cost of sales of the company in serving fluffy customer is
high as compared to other customers.
 High allocated activity cost: The cost of different activities allocated to fluffy
customer is higher as compared to other one which leads to the loss incur by
company from that customer.
5. Lean thinking initiatives
The three initiatives that cat and mouse are need to adopt are as follows:
 Waste is not tolerated at all
Wastes are components of the process flow that solely increase the cost and time without
adding any value to the product or service. In an effective lean process, the customer
values everything we do and is willing to pay for it.
 Make "more" out of "less"
Since the goal of lean thinking is to eliminate duplication and optimise each process that
each employee works on, everyone in cat and mouse organization is involved. Fast and
reliable production is what lean processes aim to produce.
 Operations and production are driven by the "pull" of the customers.
Instead of trying to "push" things or services that your consumers might not desire, it is
better to let them "pull" them from you when they need them. A pushy sales approach
results in increased costs and perhaps even worse profits for cat and mouse company.