CGA_exm_ma2_2012-03
CGA-CANADA
ADVANCED MANAGEMENT ACCOUNTING [MA2] EXAMINATION
March 2012
Marks Time: 3 Hours 1
30 Question
Select the best answer for each of the following unrelated items. Answer each of these items in your
examination booklet by giving the number of your choice. For example, if the best answer for item (a)
is (1), write (a)(1) in your examination booklet. 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:
11/2 marks each
a. Kaizen is the Japanese word for which of the following?
1) Continuous improvement
sustainability
2) Environmental
measurement
3) Performance
analysis
4) Sensitivity
b. Which of the following competitive strategies requires a focus on quality and innovation?
leadership
1) Cost
2) Differentiation
3) Focus
4) Niche
c. A corporation has total fixed costs of $200,000. If the number of units produced increases within the
relevant range of operation, what will happen to the fixed unit cost?
1) It will stay the same.
will
increase.
2) It
3) It will increase or decrease, depending on the variable unit costs.
decrease.
will
4) It
d. What are the 4 perspectives of the balanced scorecard developed by Kaplan and Norton?
1) Customer, financial, internal business process, learning and growth
2) Customer, financial, internal business process, quality
3) Customer, financial, learning and growth, quality
4) Customer, internal business process, learning and growth, quality
e. An ethical code generally implies documents at three levels: codes of business ethics, codes of
conduct for employees, and codes of professional practice. To which levers of control do codes of
conduct for employees belong?
systems
1) Belief
systems
2) Boundary
3) Diagnostic control systems
systems
control
4) Interactive
Note:
Use the following information to answer parts (f) and (g).
A corporation manufactures 20,000 units of part Z19 annually. The part is used in several products of the corporation. The cost per unit for Z19 is as follows:
Direct materials $ 32
Direct labour 19
1
Depreciation
Variable overhead 4
Fixed overhead 2
58
Total $
An outside supplier has offered to manufacture the part for the corporation at a cost of $56.
f. What are the relevant costs that should be considered for the decision to make or buy Z19? Assume
that fixed overhead costs are common.
1) $55
2) $56
3) $57
4) $58
g. What are the relevant costs that should be considered for the decision to make or buy Z19 if the
machine used to produce Z19 could be sold on very short notice for $20,000? Assume that fixed overhead costs are common.
1) $55
2) $56
3) $57
4) $58
h. Which of the following costs is considered an internal failure cost in a cost-of-quality report?
1) Liability
claims
testing
2) Product
evaluations
3) Supplier
4) Spoilage
i. Which of the following indicators is considered a nonfinancial measure of quality in the learning and
growth perspective of the balanced scorecard?
satisfaction ratio
1) Customer
time
2) Cycle
3) Employee satisfaction ratio
rate
4) Rework
j. Which control systems are used to identify strategic feedback sources and attention-directing relevant information on expectations and achievements?
systems
1) Interactive
control
systems
control
2) Belief
3) Boundary control systems
4) Diagnostic control systems
k. Which of the following statements is not an assumption made by the agency theory?
1) Agency theory assumes people are self-interested.
2) Agency theory equates utility maximization to wealth maximization.
3) Agency theory assumes people are irrational.
4) Agency theory promotes goal congruence.
l. “Effective job design” is an example of which of the following?
1) Action control
2) Cultural
control
control
3) Personnel
control
4) Results
m. Passwords are an example of which of the following?
1) Action control
control
2) Cultural
control
3) Personnel
control
4) Results
n. The appropriate management control system to use in any given situation depends on the situation and the specific characteristics of the organization and its environment. This statement is based on which theory?
1) Agency theory
theory
2) Contingency
theory
3) Situational
theory
4) Stakeholder
o. Erco has a business-level strategy based on operational efficiency. What is Erco’s competitive advantage?
1) Cost leadership strategy
strategy
2) Differentiation
strategy
3) Focused
strategy
4) Niche
p. Which perspective of the balanced scorecard focuses on the area of intellectual capital, comprised of human, structural, and relational capital?
perspective
1) Customer
perspective
2) Financial
3) Internal business process perspective
4) Learning and growth perspective
q. Which of the following is not a dimension of sustainability?
1) Economic
2) Environmental
3) Political
4) Social
r. Which of the following is not a feature of good balanced scorecard design?
1) Helps to communicate the strategy
2) Shows cause-and-effect relationships
3) Presents a great number of measures
4) In for-profit companies, places a strong emphasis on financial measures
s. Which of the following is not an element of enterprise risk management according to the Committee of Sponsoring Organizations of the Treadway Commission (COSO)?
1) Monitoring
setting
2) Objective
response
3) Risk
identification
4) Strategy
t. A corporation has total variable costs of $200,000. If the number of units produced increases, what will happen to the variable unit cost?
1) It will stay the same.
increase.
2) It
will
3) It will increase or decrease, depending on the fixed unit costs.
decrease.
4) It
will
8 Question 2
A manufacturing company is considering acquiring a piece of equipment that could increase the
company’s production. This new equipment could produce an additional 52,500 units during its useful life,
which is estimated to be 10 years. The company currently produces 50,000 units. The unit selling price for
the product is $350 and total costs per unit are $325. It is estimated that with the new equipment, total
costs could decrease by $5 for the next 10 years. The manager could sell the old equipment for $23,000.
The new equipment cost is $2,250,000 and will have a salvage value of $37,850 in 10 years. The
installation of the new equipment will cost $147,000. The company has a marginal tax rate of 40%, the
after-tax cost of capital is 15%, the capital cost of allowance of the new equipment is 20%, and straight-
line depreciation is used for accounting purposes.
Required
Calculate the payback period for this investment.
3
10 Question
A corporation that makes doors has 2 divisions: manufacturing and installation. Both divisions are
evaluated as profit centres. The manufacturing division produces 10,000 doors every year. The
manufacturing division transfers the doors at a unit price of $125 to the installation division.
A construction company is willing to buy 1,000 doors from the manufacturing division at a unit price of
$100. The following information pertains to the manufacturing division.
Cost Per Unit
Direct materials $ 45.10
Direct labour 20.90
Fixed overhead 16.50
Variable overhead 25.75
Total cost per unit $108.25
Required
2 a. Assume that the division can manufacture 12,000 doors. Determine the minimum price at which the
manufacturing division should consider selling doors to the construction company.
2 b. Assume that the division can only manufacture 10,000 doors. Determine the minimum price at which
the manufacturing division should consider selling doors to the construction company.
3 c. Indicate whether the corporation can accept the offer at a unit price of $100 from the construction
company even though it is below the transfer price of $125. Justify your recommendation. State the
effects on the firm if it was operating at full capacity.
3 d. Explain the effect of transfer pricing on the managers’ decisions and on goal congruence.
Micro Myo is a mature company in the thermoplastic industry. Its latest innovation was thermoplastic
granules used in the production of running shoes and rain boots. A few years ago, Micro Myo entered the
Indian market with its products. The CEO asked you to prepare an analysis of last year’s results based on
the following budgeted and actual data. Actual sales prices and costs were exactly as budgeted, but actual
profits were almost $160 million less than what was originally budgeted.
Micro Myo2010 2011 Unit sales for Indian market (tons)
Budget — running shoes 450,000 475,800
Budget — rain boots 960,000 1,055,000
Total 1,410,000 1,530,800
Unit sales for Indian market (tons)
Actual — running shoes 425,200 490,200
Actual — rain boots 976,000 910,700
Total 1,401,200 1,400,900
Production for Indian market Running Shoes Rain Boots
Units needed for production (tons)
Budget — 2011 1,250,800 3,476,000
Budget — 2010 1,850,000 3,200,000
Actual — 2011 1,422,400 3,210,000
Actual — 2010 1,500,000 3,000,000
Budgeted 2011 data for Micro Myo Running Shoes Rain Boots
Sales price (per ton) $2,900 $3,710
Variable cost (per ton) $1,895 $2,400
Required
4 a. Compute the 2011 market-share variance and the 2011 market-size variance for Micro Myo.
4 b. Compute the sales-quantity variance and show that it matches the sum of the market-share variance
and the market-size variance.
4 c. Explain why actual profit for Micro Myo was less than budgeted profit. Also explain the effects of the
changes in the markets for running shoes and rain boots.
A corporation manufactures propellers for the windmill industry. On August 1, 2011, there were no
beginning inventories of direct materials and no work in process. The corporation uses a just-in-time (JIT)
production system and backflush costing with 3 trigger points for making entries in the accounting system:
?Purchase of direct materials, debited to: inventory/materials and in-process control
?Completion of good finished units of product, debited to: finished goods control
?Sale of finished goods
The standard cost per propeller consists of $23,000 in direct materials and $12,000 in conversion costs.
The following data applies to August 2011:
Direct materials purchased $ 790,000
Conversion costs incurred $ 350,000
Number of finished units manufactured 30
Number of finished units sold 29
Sales price per unit $ 45,000
Required
5 a. Prepare summary journal entries for August (without disposing of under- or over-allocated conversion
costs). Assume that there are no direct materials variances.
5 b. Post the journal entries in part (a) to the following T-accounts for inventory: materials and in-process
control, finished goods control, conversion costs control, conversion costs allocated, and cost of goods
sold. Describe the flow of information in the context of backflush accounting.
4 c. Discuss the advantages and the disadvantages of using backflush costing.
8 Question 6
Rainy Ltd. is a window manufacturer well known for the quality of its products. The company spends a
great deal of money on quality control.
Here are Rainy’s annual quality costs:
Rework labour $ 40,000
Quality engineering 100,000
Spoilage 11,000
Inspection 30,000
Product testing 25,000
Disposal of defective products 10,000
Warranty repairs 5,000
Machine repairs 8,000
Supplier evaluations 1,500
230,500
Total $
The president of Rainy has not been satisfied with the quality control of the internal business processes in
the past year and is looking for ways to improve it. It is estimated that once the internal quality control is
improved, Rainy will be able to receive 20 more orders than the average of 105 orders per year now. The
machine that produces the products has a capacity of 7,000 hours per year. The average manufacturing
time per product is 40 hours.
Required
2 a. Calculate the current average wait time for an order for Rainy’s assembly line.
three methods that Rainy could use to identify internal quality problems.
3 b.
the
Identify
3 c. Calculate how much Rainy is spending annually in internal failure costs and identify how these costs
could be reduced.
The following information pertains to Baya Inc. for the year ended December 31, 2011.
INC.
BAYA
Consolidated Balance Sheet
December 31, 2011
Assets
Current assets
Cash $ 210,000
Receivables 195,000
Inventories 380,000
785,000
Net property, plant and equipment 1,100,000
Goodwill 450,000
Total assets$ 2,335,000
Liabilities
Current liabilities
Payables $ 580,000
Long-term debt 800,000
Total liabilities 1,380,000
Shareholders’ equity
Common shares 705,000
Retained earnings 250,000
2,335,000 Total liabilities and shareholders’ equity $
Net operating income before interest and taxes $ 160,000
Impairment loss of goodwill included in the calculation of 2010 GAAP income 2,800
Development cost capitalized in 2010 under GAAP 6,000
Development cost in 2011 expensed under GAAP 8,200
Research costs in 2011 expensed under GAAP 12,600
Total depreciation of all equipment 25,000
Additional information
1. The marginal tax rate is 40%.
2. The cost of equity is 9%.
3. The market yield on equivalent debt is 4%.
4. Assume that all research and development costs were incurred on January 1, 2011.
5. Assume that the fair values of debt and equity are close to their accounting values.
6. Capitalized development costs are amortized over a period of 6 years in GAAP income; research costs
are amortized over the same period in net operating profit after taxes (NOPAT).
Required
9 a. Determine the economic value added (EVA) for the year ended December 31, 2011.
3 b. Explain the meaning or significance of your answer to part (a). Identify and briefly explain the major
differences, if any, between EVA income and GAAP income.
3 c. Briefly explain the difference between return on investment, residual income, and EVA (no
computation is necessary).
3 d. Indicate how EVA and residual income would be incorporated in a balanced scorecard (BSC). Briefly
explain whether this incorporation would be useful.
END OF EXAMINATION
100
Advanced Management Accounting [MA2] Formulas
Average wait time for production
=
–
Economic order quantity (EOQ)
= 2DP/C
Total relevant costs for inventory management (TRC) = (D / Q) × P + (Q / 2) × C or
= (DP / Q) + (QC / 2)
Present value of tax shield for an asset purchase
=
× .
or
= (ct) ×
×
Present value of tax shield on the purchase of an asset expanded to include salvage value = × . – × or
= (ct) × × 2 i 2 1 i
– st × ×
Return on investment (ROI)
= (Income / Revenues) × (Revenues / Investments) or
= Income / Investments
Residual income (RI)
= Actual income – (Cost of capital × Invested capital)
Economic value added (EVA) = NOPAT – (WACC × Total capital)
Return on sales (ROS) = Operating income / Revenues
ADVANCED MANAGEMENT ACCOUNTING [MA2]
EXAMINATION
MA2
Before starting to write the examination, make sure that it is complete and that there are no printing defects. This examination consists of 7 pages and 1 page of attachments. There are 7 questions for a total of 100 marks.
READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED.
To assist you in answering the examination 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 Mathematically determine the
amount or number, showing
formulas used and steps taken. (Also
Compute).
Compare Examine qualities or characteristics
that resemble each other. Emphasize
similarities, although differences
may be mentioned.
Contrast Compare
by
observing
differences.
Stress the dissimilarities of qualities
or characteristics. (Also Distinguish
between)
Criticize Express your own judgment
concerning the topic or viewpoint in
question. Discuss both pros and
cons.
Define 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.
Describe Provide detail on the relevant
characteristics, qualities, or events. Design Create an outcome (e.g., a plan or
program) that incorporates the
relevant issues and information. Determine Calculate or formulate a response
that considers the relevant
qualitative and quantitative factors. Diagram 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)
Discuss 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. Evaluate 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,
CGA-CANADA
ADVANCED MANAGEMENT ACCOUNTING [MA2] EXAMINATION
March 2012
SUGGESTED SOLUTIONS
Marks Time: 3 Hours 1
30 Question
Note:
11/2 marks each
Sources/Calculations:
a. 1) Topic 5.1 (Level 1)
b. 2) Topic 1.1 (Level 2)
c. 4) Topic 1.5 (Level 1)
d. 1) Topic 9.1 (Level 2)
e. 2) Topic 7.6 (Level 1)
f. 1) Topic 1.9 (Level 1)
32 + 19 + 4 = $55
g. 2) Topic 1.9 (Level 1)
32 + 19 + 4 + ($20,000 / 20,000) = $56
h. 4) Topic 3.1 (Level 1)
i. 3) Topic 3.3 (Level 1)
j. 1) Topic 7.1 (Level 2)
k. 3) Topic 7.2 (Level 2)
l. 3) Topic 7.7 (Level 1)
m. 1) Topic 7.7 (Level 1)
n. 2) Topic 7.8 (Level 1)
o. 1) Topic 7.4 (Level 2)
p. 4) Topic 9.1 (Level 2)
q. 3) Topic 9.3 (Level 2)
r. 3) Topic 9.4 (Level 1)
s. 4) Topic 9.2 (Level 2)
t. 1) Topic 1.5 (Level 1)
8
Question 2
Source: Topic 5.6 (Level 1)
Net investment
New piece of equipment $ 2,250,000 Installation fees
147,000 Old piece of equipment (23,000) $ 2,374,000
Annual cash flows
Income before income taxes and depreciation
[52,500 units × ($350 – $320)] + [50,000 units × ($325 – $320)]
$ 1,825,000 Less: Depreciation expense ($2,250,000 + $147,000 – $37,850) / 10 years (235,915) Income before taxes
1,589,085 Less: Income taxes (40%) (635,634) Net income
953,451 Plus: Non-cash expenses
235,915 Annual net cash flow, years 1 to 10 $ 1,189,366
Payback period = Net investment / annual cash flow
=
$ , ,
$ , , = 2 years
10 Question 3
Source: Topics 6.2, 6.3, and 6.4 (Level 1)
2 a. Minimum selling price to the construction company should be: $45.10 + 20.90 + 25.75 = $91.75.
2 b. Minimum selling price should be: $45.10 + 20.90 + 25.75 + ($125.00 – 91.75) = $125.00.
3 c. Yes, in the context of excess capacity, because the variable costs amount to $91.75, which is less than
the offer price of $100.00. If the firm is operating at full capacity, the order can be accepted but the firm will not make an additional profit.
3 d. In a decentralized organization, the managers are evaluated on controllable elements like operating
profit. There will be a problem with goal congruence regarding overall corporate profit maximization as each manager will try to maximize performance of the division. To maximize the return to
shareholders, the division manager is encouraged to make a production decision that would not make sense without the shared information between both divisions. The organization should take a close look at how the division managers are compensated for their efforts.
12 Question
4
Source: Topics 2.2, 2.3, and 2.6 (Levels 1 and 2)
4 a. Budgeted CM
Actual Per Composite
Market Size Actual Budgeted Unit of Market Share
in Units × Market Share1–Market Share2 × Budgeted Mix3 =Variance
U
$120,466,859 4,632,400 × (0.3024 – 0.3238) × $1,215.20 =
Budgeted CM
Composite
Actual Budgeted Per
of Market-Size
Unit
Market Size Market Size Budgeted
Units –in Units × Market Share × Budgeted Mix = Variance
in
$37,144,678
U
× 0.3238 × $1,215.20 =
4,726,800)
–
(4,632,400
B udgeted Sales
4 b. Actual Units Budgeted Budgeted
of All Units of All Sales-Mix CM Quantity
– Products Sold × Percentage × Per Unit = Variance
Sold
Products
×
$1,0054 = $ 40,574,785 U
0.3108
–
Shoes (1,400,900
×
1,530,800)
0.6892
×
$1,3105 = 117,280,475 U
×
–
boots (1,400,900
1,530,800)
Rain
157,855,260
U
variance $
Sales-quantity
Sales-quantity variance = Market-share variance + Market-size variance
= $120,466,859 U + $37,144,678 U = $157,611,537 U
The difference between $157,611,537 U and $157,855,260 U is due to rounding.
1 1,400,900 / 4,632,400 = 0.3024
21,530,800 / 4,726,800 = 0.3238
3[$1,005 × (475,800 / 1,530,800)] + [$1,310 × (1,055,000 / 1,530,800)] = $1,215.20
4$2,900 – $1,895 = $1,005
5$3,710 – $2,400 = $1,310
4 c. The overall quantity of all products sold was less than budgeted quantities and the disparity is more
significant in the case of rain boots, which have a higher contribution margin and were the only
product that created this quantity discrepancy. The effect on profit is measured by the sales-quantity
variance. The disparity in profit can also be explained by the fact that the actual sales mix was
different from what had been budgeted. The other problem is that Micro Myo’s market share for
running shoes rose (from 28% to 33%) while the market declined. The market for rain boots is rising
but Micro Myo’s market share declined from 33% to 28%.
Source: Topic 4.5 (Level 1)
entries
Journal
5 a.
Purchase of direct materials
in-process control ............................................... 790,000
and
Inventory/materials
control or cash......................................................... 790,000 payable
Account
Conversion costs incurred
control ........................................................................... 350,000 Conversion
costs
payable, or cash ......................................... 350,000
wages
payable,
Accounts
Record finished goods completed during period
Finished goods control [30 × ($23,000 + $12,000)] .................................. 1,050,000
in-process control ........................................ 690,000
and
Inventory/materials
costs
allocated ................................................................. 360,000 Conversion
Record the sales for the period
Cash or accounts receivable (29 × $45,000).............................................. 1,305,000 Revenues............................................................................................. 1,305,000
Cost of goods sold [29 × ($23,000 + $12,000)] ........................................ 1,015,000
control ....................................................................... 1,015,000 goods
Finished
Posting
5 b.
Direct materials:
Inventory/Materials and
In-Process Control Finished Goods Control Cost of Goods Sold
790,000 1,050,0001,015,000
690,000 1,015,000
Bal. 100,000 Bal. 35,000
Conversion costs:
Conversion Cost Allocated Conversion Cost Control
360,000 350,000
Material and conversion costs are recorded directly in the finished good inventory control account and
afterward in the cost of goods sold. The in-process inventory is not used.
4 c. The advantage of backflush costing is that it reduces the amount of clerical work that has to be
completed to record operations for production and inventory, since in a JIT system, inventories are
usually very low and most likely not material. Usage of resources can be monitored through some
other measures not found in a traditional cost accounting system.
The major disadvantage of backflush costing is that it does not adhere to GAAP and there is no audit
trail. An asset (WIP) is not recognized in the system and it is not possible to identify how much of
each resource is used at each step of the manufacturing process.
Source: Topics 3.2, 3.3, and 3.4 (Level 1)
2 a. Average wait time for an order for the corporation assembly line: 30 hours
105 orders 40 hours
2 7,000 – 105 40
3 b.Three methods Rainy could use to identify internal quality problems:
?Statistical quality control (SQC) or statistical process control (SPC)
?Pareto diagram
?Cause-and-effect diagram
3 c. Internal failure costs = 40,000 + 11,000 + 10,000 + 8,000 = $69,000. The internal failure costs could
be reduced by increasing investments in quality-control processes, product testing, inspection, and
supplier evaluation.
18 Question
7
Source: Topics 8.4, 9.1, and 10.2 (Levels 1 and 2)
9 a. Total capital = $2,335,000 – $580,000 = $1,755,000
Calculation of weighted average cost of capital (WACC):
After-tax cost of debt = 4% (1 – 40%) = 2.40%
Weighted average cost of capital = [(955,000 / 1,755,000) × 9%] + [(800,000 / 1,755,000) × 2.40%]
5.99%
=
Calculation of net operating profit after taxes (NOPAT):
Net operating profit before interest and taxes $ 160,000
Add: Developments costs expensed under GAAP in 2010 8,200
Add: Research costs expensed under GAAP in 2010 12,600
Deduct: 2010 amortization of R&D (8,200 + 12,600) / 6 (3,467)
Add: Impairment loss of goodwill included in 2010 GAAP income 2,800
Adjusted net operating profit before taxes $ 180,133
NOPAT = $180,133 (1 – 0.40) = $108,080
Calculation of economic value added (EVA):
EVA = NOPAT – (WACC × Total capital)
EVA = $108,080 – (5.99% × $1,755,000)
EVA = $2,956
3 b. The company is not only profitable under GAAP, it also creates $2,956 of value in addition to the
return based on invested capital. The additional value benefits the shareholders. The main difference
comes from the fact that, under GAAP, R&D costs are not capitalized, while EVA considers these as
investments that should be capitalized and amortized over a reasonable period of time.
3 c. Return on investment provides a rate that measures the return on the amount of money that was
invested in the organization. It enables managers to compare different divisions within the firm.
Residual income is quite similar to EVA. The result consists of the amount of additional wealth that
was created during the period. Economic value added (EVA) is an extension of the residual income
measure of performance. The extension is that when calculating the EVA, some adjustments are made
to NOPAT to take into consideration the impact of some accounting standards, such as expensing
research costs and impairment of goodwill.
3 d. EVA and residual income can be incorporated in the financial perspectives of the BSC. They provide
information about the profitability of the organization and the value created. These financial measures
incorporated in a balanced scorecard are providing additional information to the nonfinancial
information included in the customer, internal process, and learning and growth perspectives. These
measures included in the BSC enable management to provide a balanced approach that will be used to
determine how well the strategy was implemented.
END OF SOLUTIONS 100
CGA-CANADA
ADVANCED MANAGEMENT ACCOUNTING [MA2] EXAMINATION
March 2012
EXAMINER’S COMMENTS
General Comments
The overall performance on this examination was satisfactory. The examination included 7 questions on
several topics from the MA2 course. Most students were able to achieve a satisfactory performance on
Questions 1 (multiple-choice questions), 3 (transfer pricing), 5 (backflush costing), 6 (quality and time),
and 7 (economic value added). The results for Questions 2 (capital budgeting) and 4 (market variance
analysis) were below satisfactory.
Specific Comments
Question 1 Multiple choice (Levels 1 and 2)
The performance of the students on this question, which included twenty multiple-choice items, was
satisfactory. Students were less successful in the following sub-questions: (c) cost behaviour, (g) relevant
costing, (l) management control systems, (m) management control systems, (n) types of control,
(r) balanced scorecard, (s) management control systems, and (t) cost behaviour.
Question 2 Payback period (Level 1)
The performance of the students on this question was unsatisfactory. Most students were able to identify
the cost of the net investment. Many students had difficulty computing the net income and the annual net
cash flows to be considered in the computation of the payback period. Surprisingly, several students
determined the discounted cash flows, while the payback period is a method that does not take into
consideration the time value of money.
Question 3 Transfer pricing (Level 1)
The performance of the students on this question was satisfactory on all four parts. Students were able to
determine the minimum and the maximum transfer prices in part (a) and part (b). In part (c), they could
indicate if the corporation could accept an offer at a price of $100, and in part (d) they could explain the
effect on goal congruence.
Question 4 Market variance analysis (Levels 1 and 2)
The performance of the students on this variance analysis question was unsatisfactory. Many students had
difficulty computing the market variances and explaining the results that were obtained.
Question 5 Backflush costing (Level 1)
Many students performed satisfactorily on this question. Most of the students were able to prepare and
post the summary journal entries in part (a) and in part (b). In part (c), they discussed satisfactorily the
advantages and the disadvantages of using backflush costing.
Question 6 Quality and time (Level 1)
Most students performed satisfactorily on the three parts of this question.
Question 7 Economic value added, return on investment, and residual income (Levels 1 and 2)
Most students performed satisfactorily on this question. In the first part, they needed to compute the EVA.
In the second, they were asked to compare the EVA income to the GAAP income. The last two parts
focused on the concepts of ROI and residual income in comparison to EVA.