MODULE CODE: 44-6T68-00C

EXAMINATION - SEPTEMBER 2014

MAIN
FACULTY:

Sheffield Business School

DEPARTMENT:

Finance Accounting and Business Systems

MODULE TITLE:
Strategic Management Accounting (TARC)
MODULE LEADER: Lesley Buick
TIME ALLOWED:
3 hours (plus 15 minutes reading time)
___________________________________________________________________
EXAM REGULATIONS:
1.

The University Regulations on academic conduct, including cheating and plagiarism,

apply to all examinations.

2.

The normal examination regulations of the University apply (see script answer book).

INSTRUCTIONS TO CANDIDATES
1.

Please do NOT start writing until told to do so by the Invigilator.

2.

Candidates must NOT use red ink on the script answer book.

3.

The memory of any programmable/graphical calculator used during this examination must
be cleared before the start of the paper.

4.

There are two sections in this paper:

- Section A. Answer ALL questions (40 marks)
- Section B. Answer TWO questions from this section (60 marks)
Total marks available 100.

5.

This is a CLOSED BOOK exam. NO material or notes may be taken into the exam.

6.

When answering questions you should make reference to appropriate academic

literature.

7.

Start each question on a new page.

___________________________________________________________________
STATIONERY REQUIREMENTS PER STUDENT:
1 x 16 Page Answer Booklets
Case study - Supply Chain Restructuring at Sainsburys Supermarkets
Limited (to be collected following the exam)
_____________________________________________________________

SECTION A
THIS PAPER CONTAINS 7 PAGES INCLUDING THIS SHEET

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Answer ALL questions in Section A
The questions in Section A are based on the pre-seen case study Supply
Chain Restructuring at Sainsburys Supermarkets Limited" by P. Indu and V.
Gupta
Required:
1. Analyse Sainsbury's internal and external environment during the 2000s, the
period during which both Peter Davis and Justin King served as CEO. You
should use the SWOT model to carry out your analysis.
(10 marks)
2. In 2004, Justin King stated that the availability of products, our quality and
service in store have not been what our customers have come to expect of
Sainsburys. We have become distracted by huge changes ... and these have
made us inward looking rather than focused on serving our customers (p.9).
Assess the key problems with Sainsburys supply and value chain around
2004/2005 and critically discuss how Justin King and Lawrence Christensen
sought to restore customer confidence with Sainsburys.
(20 marks)
3. Evaluate the extent to which adopting total quality management principles
helped to ensure the success of restructuring Sainsbury's value chain and
supply chain and thus improving the company's performance.
(10 marks)

(Total 40 marks)

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SECTION B
Answer any TWO questions from Section B
4.

McCoist Ltd specialises in the design and manufacture of a range of quality

sofas and chairs which they sell to customers through a network of specialist
stores. Each piece of furniture comes with a lifetime guarantee against stains
due to the unique stain-resistant fabric used. However it has been noticed
that warranty costs have more than doubled over the last year and the
number of items being returned is increasing sharply.
Sales staff are becoming concerned about their jobs now being much more
difficult as production staff are naming the furniture 'stain magnets' due to the
difficulty in removing any stains from the fabric. This problem has become
relatively well known and the reputation of the furniture is declining.
McCoist Ltd's main rival is Butcher plc, a company that has been in the
market for a longer period and has developed a superior reputation for quality,
on-time delivery and customer service. Butcher plc's (was written as 'Smith
plc' in the printed paper) products only come with a five year warranty and are
generally more expensive that those of McCoist.
McCoist's head office staff have become sufficiently concerned to call a 'crisis'
meeting to discuss how the problems can be solved. Some staff in the
meeting suggested the use of cost of quality reports and introduction of
stricter outsourcing and quality inspection procedures.
Required:
(a)

Discuss actions that the management at McCoist (was written as MTP

in the printed paper) should take in order to identify and quantify the
quality issues and their associated costs.
(6 marks)

(b)

Explain each of the four categories of quality costs, giving two

examples of each that McCoist may have incurred as part of the current
quality problem.
(8 marks)

(c)

Evaluate ways in which McCoist could reduce the four categories of

quality costs discussed in part (b) above. You should ensure you make
suggestions for all four categories.
(8 marks)

(d)

Evaluate how McCoist could learn from the success of Butcher plc and
what changes McCoist could make to improve performance. (8 marks)
(Total 30 marks)

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5. Chunky Monkey Ltd manufactures a chocolate bar (Rider) in the shape of a
London bus which it sells to various retailers throughout the UK. Because of
its appeal to the tourist market, the chocolate bar is a popular product with a
high demand.
It currently costs Chunky Monkey 0.75 to manufacture each unit of Rider and
the selling price to the retailers is determined by applying an 80% mark-up on
cost. This price is non-negotiable but individual retailers can negotiate a trade
discount with Chunky Monkey's sales representatives.
The Income Statement for Quarter 3 has given the Finance Director some
cause for concern as profit is lower than expected. It was expected that
operating profit would be at least 10% of sales revenue as reports from the
sales team intimated that sales to all the retailers was above expectations.
Income Statement - Quarter 3

Sales Revenue
Variable Costs
Gross Profit

75,625,000
(41,250,000)
34,375,000

Customer Complaints administration

Telephone Enquiries handling
Meetings with retail customers
Transportation - normal deliveries
Transportation - urgent deliveries
Discounts to retailers
Total Costs

4,500,000
6,600,000
3,199,940
6,216,000
3,353,125
7,562,500
(31,431,565)

Operating Profit
Operating Profit Margin

2,943,435
3.9%
Question 5 continues on the next page

Question 5 continued
As part of the investigation into why operating profit margin is so low, the Finance
Director has asked you, as Senior Management Accountant, to review the four main
retail customers and identify any areas of concern that can be considered at the next
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retail customer meeting. Information on each of the four retail customers for Quarter
3 is given below.

Units sold `
Trade discount
Miles travelled per delivery
(same distance for urgent
and normal deliveries)
Number of normal deliveries
Number of urgent deliveries
Telephone enquiries
Complaints received
Customer meetings held

Novelty
Snacks
5,000,000
10%

Little Treats
10,000,000
10%

London
Delights
25,000,000
6%

Visitors'
Village
15,000,000
4%

30

40

35

60

6,000
600
50,000
330
40

5,000
200
100,000
440
120

14,000
300
250,000
660
100

4,000
600
150,000
770
20

Required:
(a) Prepare a customer profitability analysis statement for Chunky Monkey Ltd
for Quarter 3 which shows the following information for each of the retail
chain customers:
i. The total operating profit
ii. The operating profit per Rider chocolate bar
iii. The operating profit margin (in %)
Note: all relevant workings (including the calculation of cost drivers) must be
clearly shown as marks will be allocated to the workings. Marks will also be
awarded for clear presentation of the information.
(15 marks)
(b) Analyse the results of the customer profitability analysis statement completed
in (a) and make recommendations to the Finance Director as to the key
issues that should be raised at the next retail customer meeting.
(8 marks)
(c) Critically evaluate the outputs of an Activity Based Management system and
how these can be used in assessing strategic decisions.
(7 marks)
(Total 30 marks)
6. Commonwealth Ltd has two divisions, each of which operates as a separate
profit centre with individual performance targets against which divisional
managers' performances are measured.
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Commonwealth manufactures and constructs children's go-karts. The Push
Division is responsible for manufacturing the go-kart frame and the Pedal
Division assembles purchased components into the finished go-kart. There
are external markets for both the frames and the go-karts.
The Divisional Managers have complete autonomy over their own divisions
and are responsible for all aspects of production, supply and delivery of their
output. Included in their responsibilities is the negotiation of transfer prices
between the divisions.
The divisions are currently involved in the negotiation of a transfer price for
the supply of 100 go-kart frames per month from Push Division to Pedal
Division. The following data relating to the potential deal is available.
Push Division
Go-kart frame (per unit)
50
of 37.50

Current selling price

Variable
costs
production
Variable
costs
of
production
(excluding
cost of frame)

Pedal Division
Go-kart (per unit)
100
55

Currently, the Push Division is producing and selling 225 go-kart frames per
calendar month to external customers. This represents 75% of the division's
total capacity. This demand is likely to stay the same for the foreseeable
future.
Denny Toaster, the divisional manager of the Push Division, is keen to use up
the spare capacity in his division as his bonus is based on performance and
he needs to achieve his profit target. Interest is charged at a rate of 10% per
annum on the division's current debt of 255,000 and the division also has to
cover fixed costs of 8,000 per month. In order to achieve target profit after
covering these costs, the Push division is required to earn a residual income
of 37,500.
Lucy Waster, Push Division's Sales Manager, believes that sales would be
higher if the selling price was reduced to be more in line with that of the
competition. She has suggested that external sales of the go-kart frame could
increase to 300 units per month if the selling price was reduced to 48.75.
Question 6 continues on the following page
Required:
(a) For EACH of the following scenarios, calculate the most appropriate
transfer price(s) for the sale of 100 go-kart frames from Push Division to Pedal
Division and comment on your results.
Page 6 of 7

MODULE CODE: 44-6T68-00C

(i) Current capacity, demand levels and selling price remain unchanged within
the Push Division and the transfer price is based on opportunity costs.
(ii)

Push Division is going to achieve its target residual income of 37,500

and current capacity and demand levels remain unchanged within this
division.

(iii) Denny Toaster accepts the Sales Manager's advice and lowers the selling
price of the frames to 48.75 which means that Push Division's sales
increase to 300 units per month.
(12 marks)
(b) Using your answers to (a) above, critically discuss the purpose and roles
of transfer pricing policies within companies such as Commonwealth Ltd.
(10 marks)
(c) If Commonwealth Ltd decided to transfer Push Division to Africa, evaluate
the additional issues that the company would have to consider when setting
transfer prices between divisions that are geographically located in different
countries.
(8 marks)
(Total 30 marks)

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