Distinguish between Strategic Management Accounting (SMA) and TMA
The Bicycle Manufacturing Company (BMC) has been approached by a Large Multiple Store (LMS) group which operates a chain of discount department stores
THE UNIVERSITY OF HULL
Faculty of Business, Law and Politics
Level 7 Examination
Semester (T2)
Accounting, Organisations, and Control
The Bicycle Manufacturing Company (BMC) has been approached by a Large Multiple Store (LMS) group which operates a chain of discount department stores. LMS is beginning to add “house-brand” merchandise to the product lines of its departments. The LMS buyer wants BMC to manufacture bicycles for LMS which would bear the name “Rover”. The initial contract would be for 3 years. This will be a new outlet for BMC as most of their current sales were through independently owned specialist retailers and bicycle shops.
BMC has an established product range and the information supplied assumes average values. BMC bicycles had the image of being above average in quality and price, but not “top-of-the-range”. In 2018, 100,000 bikes were sold, and it is estimated that sales over the next three years will be the same if there would be no LMS deal.
Extracts from the company’s financial statements for 2018 are shown below.
| Assets | £m | Liabilities and Owners’ Equity | £m |
| Plant and Equipment (net)
Inventories Debtors Cash |
3.6
2.7 1.4 0.3 |
Owners’ equity
Long-term loan Short-term bank loans Creditors |
3.1
1.5 2.6 0.8 |
| 8.0 | 8.0 |
Income Statement for the Year
|
Sales revenues |
£m
10.9 |
| Variable manufacturing costs | 6.5 |
| Fixed manufacturing costs | 1.5 |
| Gross margin | 2.9 |
| Fixed selling and admin expenses | 2.3 |
| Income before taxes | 0.6 |
LMS wanted to sell its Rover bicycles at lower prices than the ‘branded’ bicycles they sold, thus, LMS wanted to purchase bikes from BMC on average at £92 per bike; a price lower than that paid by BMC other dealers. They expected to order 20,000 bikes per year and wanted to have access to a large inventory of bicycles; but wanted these financed initially by BMC.
LMS also wanted the Rover bike to be somewhat different in appearance from other BMC bikes. This was going to be applied to items such as tyres and seats not the mechanical parts and would be expected to increase BMC’s purchasing and production costs over and above BMC’s regular products. Thus, Rover unit costs are predicted as follows:
|
Raw materials / components |
£ 40 |
| Labour | 20 |
| Variable overhead | 10 |
| Fixed overhead* | 15 |
| £85 |
*The unit fixed overhead is based on 100,000 bicycles per year.
Management at BMC were aware that the bicycle market had flattened out, this plus a poor economy had caused BMC’s sales to fall slightly for the past two years. As a result, BMC currently was operating its plant below 30% capacity. Thus, the added volume from LMS’s purchases could be very attractive.
The BMC management know that some customers compare bikes in shops, and many of them are likely to recognise a Rover bike as good value when compared with a similar bike at a higher price in a bicycle store. They also expect that if the LMS deal is accepted 5,000 regular bike sales may be lost. These estimates do not include the possibility that a few of the current dealers might drop BMC if they find out BMC is making bikes for LMS.
Required:
- Briefly distinguish between Strategic Management Accounting (SMA) and Traditional
Management Accounting (TMA). (15 marks)
- Assess the financial implications of the LMS offer on the following year’s results of BMC, make brief comments. (15 marks)
- Taking a more strategic perspective, discuss whether it is wise for BMC to go into business with LMS, structure your arguments for and against the proposal. Bring out the strategic aspects of the situation. (20 marks)
TOTAL 50 marks
- You may make calculations for parts (b) and (c) but principles are more important than precise calculations.
Question 2
Transfer pricing is used to coordinate actions and evaluate performance of the subunits of an organisations.
Required:
- a) Critically discuss the meaning of transfer pricing. Your analysis should identify and discuss the main objectives of both domestic and international transfer pricing and the importance of transfer pricing for performance measurement. (25 marks)
- b) Critically discuss the problems associated with international transfer pricing and explain some measures taken by governments to deal with the problems. (25 marks)
Total 50 marks
Question 3
Humber a manufacturing company is structured on a divisional basis. The overall cost of capital for the company is 30%.
The following data relates to the three divisions for the year 2018:
| £’000s | £’000s | £’000s | |
| Divisions: | X | Y | Z |
| Total internal and external sales | 79,200 | 84,732 | 46,620 |
| Depreciation | 22,400 | 24,732 | 15,420 |
| Direct costs including inter-group purchases | 23,650 | 43,900 | 12,950 |
| Allocated head office costs | 2,300 | 3,700 | 800 |
| Fixed assets (net of depreciation) | 21,600 | 84,325 | 16,200 |
| Current assets | 21,330 | 77,290 | 7,020 |
| Current liabilities | 5,400 | 44,225 | 5,220 |
Divisional managers are given responsibility for all management control and operational matters by head office management.
Required:
- Calculate appropriate return on investment and residual income measures for evaluating divisional and overall company management performance and also the financial viability of the respective divisions. Justify your choice of measures, stating any assumptions made, and comment on the results.
(25 marks)
(b) Discuss the relative benefits and disadvantages of using measures such as Return on Investment or Residual Income for managerial as well as organisational performance measurement. You should make reference to any other suitable measures of which you are aware.
(8 marks)
(c) “The balanced scorecard supplemented traditional financial measures with criteria that measured performance from three additional perspectives – those of customers, internal business processes, and learning growth” (Kaplan and Norton, 1996)
Required: Critically evaluate the usefulness of the balanced scorecard (BSC) as a measure of firms’ performance. (17 marks)
Total 50 marks
Question 4
A primary concern of the conventional accounting knowledge is the lack of its application into practice. Therefore, the contemporary management accounting research is more focused on investigating and acquiring better understanding of the physical and social realities in which management accounting knowledge is applied in organisational context.
Required: Critically evaluate the above statement from the perspective of any one research paradigm of your choice used in management accounting research. In your analysis, you should clearly refer to the paradigm’s underlying beliefs and assumptions about the physical and social world along with the behaviour of organisational participants in applying the management accounting knowledge in different context.
Total 50 marks
