B321: TMA – 2nd Semester 2016 – 2017

Arab Open University
B321: TMA – 2nd Semester 2016 – 2017
Cut-Off Date: May 4, 2017

About TMA:
The TMA covers the management accounting concepts and practices in the businesses. It is marked out of 100 and is worth 20% of the overall assessment component. It is intended to assess students’ understanding of some of the learning points within Sessions 1, 3, 6, 9, 11 and 16 beside the supplementary material. This TMA requires you to apply the course concepts. The TMA is intended to:
 Assess students’ understanding of key learning points within Sessions 1, 3, 6, 9, 11 and 16.
 Increase the students’ knowledge about the reality of the Managerial Accounting as a profession.
 Develop students’ communication skills, such as memo writing, essay writing, analysis and presentation of material.
 Develop the ability to understand and interact with the nature of the managerial accounting tools in reality.
 Develop basic ICT skills such as using the internet.

The TMA:
This TMA is based around two cases of “Blue Corp.” and “The balanced scorecard”. Marks will be awarded for blending the context of each case and with relevant theory by means of your own interpretation. In addition to this, some research is required.
The TMA requires you to:
1- Review various study sessions beside the supplementary materials.
2- Conduct a simple information search using the internet and the e-library.
3- Present your findings in not more than 1120 words ± 10% (800 words for part A and 320 for part B).
4- You should use a Microsoft Office Word and Times New Roman Font of 12 points.
5- You should read and follow the instructions below carefully. Each part of the process will carry marks for the assignment.

Criteria for Grade Distribution:

Criteria Content Referencing& e-library Structure and Presentation of ideas
Part A Part B
Marks 70 30 (5) (5)


The TMA Questions
PART A: Blue Corp.

Blue Corp. produces five types of tires for the automotive industry:
Product Annual Sales (Units)
A 6,000
B 30,000
C 8,000
D 10,000
E 36,000

The accountant used a traditional, volume-based product-costing system, where he used to allocate the indirect manufacturing costs on the basis of direct-labor cost. The incurred direct costs per unit, in American dollars, are as follows:
Products
A B C D E
Raw material 30 12.5 27.50 24.5 9.5
Direct labor 30 (2 hr at $15) 3 (.2 hr at $15) 24 (1.6 hr at $15) 18 (1.2 hr at $15) 2.25 (.15 hr at $15)

The indirect production cost are as follow:
Manufacturing overhead budget: $
Machine setup 150,000
Machinery 2,200,000
Inspection 700,000
Material handling 1,300,000
Engineering 650,000
Total 5,000,000

The management pricing policy is to set a target price equal to 130% of the full product cost.
The company sold the products B & E at a higher prices than the targets. During the past year Blue Corp. has raised the prices for these two products several times, but there has been no apparent loss of sales and the competitors do not seem to be interested in the market for these products. The management thinks that the company is excelling in the production of these two products and that apparently the company has the market to itself for these two products.
While A, C & D were sold at a prices lower than the targets in order to attract orders, and the company has been under increasing pressures, from customers and competitors, to reduce the prices even further.
The actual current prices for all five products are as follow:
Products
A B C D E
Actual current selling price 220 65 200 190 60


Required:
1- Compute the target prices for the three products using the traditional technique. Show your workings.
2- Compute the target prices for the three products using the activity-based costing system using the cost drivers provided by the project team in percentage. Show your workings.
Activity Cost pool Cost Driver Products
A B C D E
Machine setup Number of setups 15% 20% 15% 20% 30%
Machinery Machine hours 5% 30% 10% 15% 40%
Inspection Number of inspections 10% 34% 10% 10% 36%
Material handling Raw-material costs 6% 36% 8% 10% 40%
Engineering Number of change orders 9% 27% 14% 18% 32%
3- Based on your calculations, for both methods, use the return on sales ratio to find the most and least profitable products.
4- Comment on the company's current pricing strategy, the dangers that the company face and the competitors’ reactions.
5- Prepare a table showing how the traditional, volume-based product-costing system distorts the product costs.
6- Using to the new target prices based on the new activity-based costing system, write a report to the CEO to discuss the situation of Blue Corp. & the market/competition for its products. You should also discuss the strategic options available and provide you recommendations about the costing system that should be used.

[Marks: (10+20+10+10+10+10) =70]

PART B: The Balanced Scorecard

FORTUNE MOTORS (TAIWAN): IMPLEMENTING STRATEGY CHANGE
USING THE BALANCED SCORECARD.

Jung Hua Li, chief executive officer (CEO) of Fortune Motors, the largest Mitsubishi dealership in Taiwan, sat in his office in eastern Taipei on a chilly day in January 2004, thinking carefully about his vision for the survival of his company. He knew that Fortune Motors’ sales in 2003 had fallen below 50,000 units for the first time in 10 years. Fortune Motors’ market share had in fact been falling for several years, which Li attributed in part to Toyota’s aggressive growth. With long experience of selling and financing new Mitsubishi cars and small commercial vehicles throughout Taiwan, Li had what he thought was a good plan to enter the business of financing used-car purchases. He thought the “Balanced Scorecard” would be a very useful tool to help implement this change. The first step would be to construct a corporate scorecard.
But what should the corporate scorecard look like? What critical variables should he monitor carefully to give him a clear picture of how well his change plan was proceeding?

THE AUTOMOTIVE INDUSTRY IN TAIWAN
Several major automakers were represented in domestic auto manufacturing industry in Taiwan. Toyota,
Nissan, Ford/Mazda, Mitsubishi, Suzuki and Honda all had local assembly plants, which primarily served the local market, though Ford exported approximately 4,500 units (7 per cent of output), and Mitsubishi exported approximately 1,500 units (1.5 per cent) of production in 2003. This domestic manufacturing industry operated under the protection of an import tariff, which had been 30 per cent during most of the
1990s, but in 2002, had been reduced by one percentage point per year.
The total market for new cars in Taiwan was approximately 400,000 vehicles per year). The market had been in steady decline during the late 1990s and had fallen drastically in 2001. Sales had recovered to some degree in the two following years, but 2003 sales had still not recovered to their 2000 level. Toyota was the most successful local manufacturer, with sales of about 100,000 units (28 per cent market share) in 2003. Mitsubishi’s share was nearly 24 per cent market share, or about 86,000 units.
Various reasons for this decline had been suggested, including high oil prices and the fact that in recent years, many Taiwanese businesspeople had either temporarily or permanently immigrated to China. Exact numbers of immigrants were difficult to obtain, but some estimated the number at between two million and four million.
As in most countries, new cars in Taiwan were sold through dealerships appointed by the manufacturers and were usually exclusive to a single automaker. Financing for new car purchases was provided by both banks and the dealers (or by automakers through their dealers). Auto loans in Taiwan were a small part of most banks’ business, so they usually subcontracted the credit evaluation to outside companies, which relied on public credit data and were paid based on the number of applications processed, not on the accuracy of their risk assessment. As a result, banks’ bad auto loans were about 3 per cent per year, whereas Fortune Motors, for example, with a close relationship with its customers, enjoyed a bad loan rate of only 1.3 per cent on its new car loans. Consequently, new car financing was a profitable business for dealers.
The used-car market, however, operated differently in Taiwan. Because new car dealers were registered for tax purposes, when they sold cars, they were required to charge 5 per cent sales tax on both new and used cars. However, when private individuals sold their used cars, the transaction attracted no tax — the purchaser simply registered the new ownership. As a result of this 5 per cent price advantage, the market for used cars was served by approximately 3,000 unregulated small, often family-owned, used-car dealers who were not — and did not need to be — registered for sales tax purposes. Thus, when a new car customer wanted to trade in an old car, the new car dealer did not typically buy it. Instead, the salesperson would put the customer in touch with a reputable used-car trader to complete the transaction. If someone wished to buy a used car and needed financing, finding a source of finance was often difficult. Used-car buyers were perceived as high-credit risks by banks, and banks did not have the expertise to evaluate that risk. The only sources of used-car financing were family or the illegal underground financing market where interest rates could be up to 1 per cent per day. In contrast, a low-risk customer would pay about 20 per cent per year for a personal loan.

FORTUNE MOTORS LTD.
Fortune Motors was the larger of the two Mitsubishi retail dealers in Taiwan and was the exclusive supplier of Mitsubishi’s line of small commercial vehicles (less than 3.5 tons). The typical price of these vehicles was approximately NT$300,000. Fortune Motors was 40 per cent owned by China Motors
Corporation, the Taiwanese manufacturer of Mitsubishi vehicles, and 60 per cent owned by three local families.
In 2004, Fortune Motor Company operated 89 sales centres throughout the country and dominated the market for small commercial vehicles, with 80 per cent market share. Within Mitsubishi vehicles (including passenger cars), Fortune held 60 per cent share (Shung Ye Group, which sold only the Mitsubishi car line, held the remaining share). In the previous two years, the market for new vehicles in Taiwan had rebounded, growing at about 9 per cent per year after several years of decline. Mitsubishi’s share had declined from 25.4 per cent in 2002 to 20.8 per cent in 2003, and within that, Fortune Motors’ share from 15.8 per cent to 12.1 per cent.
The company sold and financed new cars (about 40 per cent of Fortune’s new car sales were also financed by them) and provided service. Selling new cars was unprofitable, but the financing was profitable, so overall, Fortune Motors’ new car sales and financing activity broke even. Servicing was profitable and made about as much profit as financing new cars.
A critical part of financing was the accurate assessment of the credit risk of the customer. Historically, approximately 10 per cent of applications were not approved for credit risk reasons. Li attributed the company’s success over its 30-year history to its strong core values, which centered on its careful attention to customer service and satisfaction. Fortune Motors’ service motto was “Get it right the first time — or it is free.”

THE BALANCED SCORECARD
The Balanced Scorecard was a tool first proposed by Professor Robert Kaplan and others, based on field research into best practice performance measurement. Each company’s scorecard was unique, reflecting the company’s corporate strategy, with a limited number of (typically four) measures on four interrelated dimensions or perspectives: Financial, Innovation, Customer and Internal Processes. Senior management would usually prepare each company’s corporate scorecard. Sub-units of the company would then build their own lower-level scorecard, informed by and linked to the corporate scorecard. Often, the process of identifying the key measures and their interrelationships was a valuable process in its own right, clarifying the role of sub-units in the corporate strategy. The ongoing annual review and fine-tuning of the scorecard was also a valuable strategy communication and implementation process.

THE NEW STRATEGY
Li’s vision was to build on the company’s expertise in financing new cars and on the powerful network of relationships between its 1,500 salespeople located in the 89 sales centres with the thousands of small and medium-sized used car sellers around the country. These two strengths would allow Fortune Motors to sell used-car financing profitably through the thousands of small and medium-sized used car dealers in Taiwan.
The dealers that would offer Fortune’s financing would not merely be a more attractive source of financing than the illegal market or relatives but would need to meet strict requirements for cleanliness of their premises and for quality and safety standards.
Li envisioned a nationwide umbrella branding of used-car dealers that Fortune Motors would approve as vendors of its financing service. The name-mark he proposed for this venture was SUM, which stood for
“Serve Your Motors.” SUM-appointed car dealers would be required to maintain high ethical and customer service standards, compatible with Fortune’s own values. Not all used car dealers would be able to become members of the SUM family. Li felt it important that the SUM dealers share his values of the importance of customer service. For this reason, Li believed that husband-and-wife owner-managed small dealerships were most suitable. (The very largest used-car dealers would typically be run by hired managers and were already too large to be able to easily change their existing values, so they would not be appointed. Very small dealers were excluded because they would probably not be economical, since signing up a dealer required considerable effort on the part of Fortune Motors). Li estimated that approximately 3,000 dealers would qualify. In effect, the SUM brand would become a quality and integrity certification of a used-car dealer. For warranty purposes, certified dealers would only be permitted to sell Taiwanese-made vehicles less than five years old. Li did not plan to charge a fee to the used-car dealers for the use of the SUM brand, unless their volume was very small.
Customers buying from a SUM dealer would know that they would be receiving a guaranteed high-quality used car, and if they were financing their purchase, a fair interest rate. In fact, customers would be able to buy an additional warranty if they wished. All this would make purchasing (and financing) a used car from a SUM-certified dealer far less stressful and risky than was the case at present.

IMPLEMENTING THE PLANNED BALANCED SCORECARD
Li was aware that he needed to first recruit used car dealers over the next several years and, through them, build up the used car loan business. At the same time, he was concerned about the downturn in the economy, the pressure from Toyota, and the risks of the new business. His management team fully supported the new strategy. He knew that as CEO, it was his responsibility to create the corporate scorecard. How could he best measure the effectiveness of his new strategy?

Source: IVEY Publishing, https://www.iveycases.com/ProductView.aspx?id=23108


Required:
1. Evaluate the strengths and weaknesses of the used-car financing business proposal. (200 words)
2. What must Jung Hua Li do well in order for the new business to succeed? (60 words)
3. Prepare a balanced scorecard, 2 measures per perspective, for the implementation of this business. (60 words)
[Marks: (12+6+12) =30]
Total Marks: 70 + 30 - 10 Marks of deductions for general presentation and references]
In your answer, you should explain each point or inquiry separately.
All answers should be supported by examples from the case study.
Use the following headings (below) to make up the different sections of your work:

The PT3 form
Title and contents page
Part A Blue Corp.
Part B The balanced scorecard
References (Recorded according to the Harvard style - Available on LMS)