MANAGEMENT CONTROL

FINAL EXAM: 12 December 2019

“Delivery of this material constitutes my affirmation that I have not violated the IE
University Code of Ethics during this examination. I have neither given nor received help
nor used any illicit means in the preparation and execution of this task”.

Name ___________________________________

Signature_________________________________

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Instructions:

1. This exam will last 2 hours.

2. On the table, you can only have a pen and a calculator. The calculator must be a regular

one, not a calculator that contains memory. Graphic calculators are not allowed.

3. Answer the questions on the pages provided.

Good luck!
1. (1 point) La Salud Madrileña is a medical product firm having 3 main divisions that
manufacture and sell diet pills: the Valenciano division (based in Valence), the
Segoviano division (Segovia), and the Madrileño division (Madrid). Recently, the
Segoviano division acquired a plastics factory that manufactures plastic pots. These
pots can be sold both externally and internally. Company policy permits each manager
to decide whether to buy or sell internally.

Up to this day, the Valenciano division had bought its plastic pots from a variety of
vendors. The average price paid was 75 € per lot of 100 plastic pots. However, the
recent acquisition of the Segoviano division made Diego de La Rosa, head of The
Valenciano division, wonder whether a more favorable price could be arranged buying
the pots internally. He decided to approach Carmen Herrera, head of the Segoviano
division, to see if she would like to offer a better price for an internal transfer. Diego
suggested a transfer of 3,500 pots at 70 € per lot.

Carmen gathered the following information regarding the variable cost of a lot of 100 pots
in her new plant, recently acquired:

• direct materials: 35€

• direct labor: 8€
• variable overhead: 10€

The production capacity of the plant is 20,000 pots and the Segoviano division is currently
producing and selling 16,000 pots to external clients at 75€ per lot of 100 pots. The total
fixed costs of the plant are 1,600 €. If Carmen considered the internal transfer of 3,500
pots at 70 € per lot of 100 pots, suggested by Diego, what would be the operating income
of her division?

Solution:
Fixed costs have been already covered by the production of the 16,000 pots. Therefore,
the operating income is as follows:

Revenues: 16,000 pots * 75€ / 100 pots

3,500 pots * 70€ / 100 pots

Variable costs 19,500 pots * 53 € / 100 pots

Fixed costs 1,600 €
Operating income 2,515 €

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2. (2 points) Bruce Wayne is a business man who sells Batman-related merchandise. In
January 2005, he opened his first shop in Madrid, in January 2008, he opened his second
shop in Barcelona, and in January 2012 he opened his third shop, in Toledo. The historical
cost information for the year 2018 is given below, and it is now 31 December 2018.

Madrid Barcelona Toledo

Revenues € 85.000 € 70.000 € 40.000
Operating costs € 15.000 € 20.000 € 5.000
(excluding shop
depreciation)
Plant depreciation € 30.000 € 24.000 € 14.000
Operating income € 43.000 € 31.000 € 21.000
Current assets € 17.000 € 27.000 € 21.000
Long-term assets € 180.000 € 216.000 € 182.000
(shop)
Total assets € 197.000 € 243.000 € 203.000
Construction cost 100 125 180
index for year of
construction

All shops have a useful life of 20 years with no terminal disposal value. An index of the
construction costs over the years is given in the last row of the table above, and the
construction cost index for 2018 is 205.

1. (1 point) What is the Residual Income of the shop in Barcelona, given that the required
rate of return is 5%?
2. (1 point) What is the Return On Investment at current costs for the Toledo shop?

Solutions:
1.
RI = Operating Income - Req.Rate.of.Return*Total.Assets
31.000 - 5%*243.000 = € 18.850

2.
a) Historical value shop: 20*14.000 = € 280.000.
b) Value at current costs = € 280.000 * 205/180 = € 318.889.
c) Book value at current costs = 13/20 * € 318.889 = € 207.278
d) Total assets at current costs = € 207.278 + € 21.000 = € 228.278
e) Depreciation expense at current costs = € 318.889 / 20 = € 15.944
f) Operating Income at current costs = € 21.000 - (15.944-14.000) = € 19.056
g) ROI at current costs = f / d = € 19.056 / € 228.278 = 8,35%.

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3. (3 points) Microdisk sells memory cards for use in portable devices such as mobile
phones, tablets, digital cameras. One of its memory cards is the Mini SD, which it sells to
retailers for an average selling price of 8 €. Microdisk has a budgeted monthly production
level of 420,000 Mini SDs. To produce the Mini SD, the company incurs in direct material
and direct labor costs. The budgeted direct material cost for each Mini SD card is 2.35 €.
The budgeted input quantities and costs for direct labor are as follows:

Quantity per Mini SD card Cost per labor hour

Direct Manufacturing Labor 3 minutes 28 €

The CEO is disappointed with the results for June 2017, especially in comparison to their
expectations. Given the performance report for June 2017 here below:

Performance Report June 2017

Actual results Static Budget
Output units 462,000 420,000
Revenues 3,626,700 € 3,360,000 €
Direct material costs 1,200,000 € 987,000 €
Direct material labor 628,400 € 588,000 €

And given the following information:

Input usage report, June 2017

Actual quantity used Actual cost
Direct manufacturing labor 1,319,000 minutes 628,400 €

Calculate the following variances and answer the questions posed.

a. Total sales-volume variance (1 point). What is the meaning of this variance? (0.5 points)
b. Direct manufacturing labor price variance and direct manufacturing labor efficiency
variance. (1 point) Comment on the meaning of these variances. (0.5 points)

Solution a.

Flexible budget Static budget

Revenues 8€/u*462,000u = 3,696,000€ 8€/u * 420,000u = 3,360,000€
Direct material costs 2.35€/u*462,000u = 1,085,000€ 2.35€/u*420,000u = 987,000€
Direct labor costs 1.4€/u*462,000u = 646,800€ 1.4€/u*420,000u = 588,000€
Operating Income 1,963,000 € 1,785,000 €

Sales-volume variance = 1,963,000 € - 1,785,000 € = 178,500 € (favorable variance)

The sales-volume variance indicates the increase in Operating Income achieved due to the
fact that the company has sold more memory cards (462,000 units) than what was
budgeted (420,000 units).

Solution b.
 Actual labor cost Budgeted price Flexible budget
28€/60 minutes * 28€/60 minutes *
1,319,000 minutes = 3 minutes/unit *
462,000 units =
628,000 € 615,533.3 € 646,800 €

Efficiency variance = 615,533.3 € - 646,800 € = 31,266.7 € (favorable)

Price variance = 628,000 € - 615,533.3 € = 12,466.7 € (unfavorable).

The actual efficiency ratio (1,319,000 min / 462,000 units = 2.85 min/unit) is better than
expected (3 min/unit). But the actual price of labor (28.57€/labor hour) is higher than
budgeted (28 €/LH). Thus, the problem lies in the price, not in the efficiency. So, labor
costs are higher (perhaps because of strong labor unions or high demand for these skilled
workers), which may also result in attracting more productive employees, hence the
favorable efficiency variance.

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4. (1 point) A company is estimating its budget for 2019. Given the information below (all
related to 2019), calculate the budgeted Costs of Goods Sold.

Estimated budget amounts for 2019

Expected sales 9,500,000 €
Production budget 17,500 units
Direct materials purchase budget 2,487,000 €
Direct materials usage budget 2,570,000 €
Direct labor budget 1,500,000 €
Costs of manufacturing overhead 3,000,000 €

Inventories of materials
1 January 2019 31 December 2019
Value of inventories 263,000 € 239,500 €

Inventories of finished goods

1 January 2019 31 December 2019
Value of inventories 210,000 € 1,158,000 €

Solution:

Cost of Goods Sold

+ Cost of beginning inventories (units) 210,000 €
+ Cost of Goods produced
 • Direct materials usage budget 2,570,000 €
• Direct labor budget 1,500,000 €
• Manufacturing OH 3,000,000 €
- Cost of ending inventories (units) - 1,158,000 €
Costs of Goods Sold 6,122,000 €

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Question 5 (1 point): In 2019, a business unit of the company has an EVA (Economic Value
Added) of 23,000 €. What does this value represent?

Solution:
It is the difference between the operating income (after taxes) achieved in 2019 by the
business unit that is in excess of the average cost of capital of the long term investments
of the company that year.

Question 2 (1 point): What is the format of the flexible budget?

Solution:

It is calculated using the budgeted selling price per unit and the budgeted costs per unit,
multiplied by the actual number of units sold.

Question 3 (1 point): In the industry of computer assemblers (e.g., Dell, HP), provide one
balanced scorecard metric that could be included in the internal-process perspective, and
another one that could be included in the customer perspective.

Solution:

Customer perspective: % of consumers buying a second computer after x number of years.

Internal-process perspective: number of days between the time when the company pays to
suppliers and the time it is paid by consumers.