THE HONG KONG POLYTECHNIC UNIVERSITY

SCHOOL OF ACCOUNTING AND FINANCE

Final Examination

Programme : BBA (Hons) in Accountancy (02402)

BBA (Hons) in Accounting and Finance (02402)
BBA (Hons) in Financial Services (02402)

Subject : Management Accounting I (AF2110)

Date : 11 December 2020-14 December 2020

Time : 4 p.m. – 4 p.m.

Time Allowed : 72 hours

Session : 2020/2021 (Semester One)

This question paper has 10 pages (including this cover page).

Instructions to Candidates:

1. This exam is to be completed on your own.

2. Complete ALL SIX (6) questions and put your answers in the exam answer file posted
on Blackboard. No other files will be accepted for submission. Format your answers
so that it is easy for others to read.

3. This exam is due on or before 4:00 pm, December 14 2020.

4. Please submit your answer file through the “Turnitin Assignment” (under the
“Assignment” Tab) on the Blackboard course site titled “AF2110_20201_G:
Management Accounting 1”, where all instructors’ names are listed. Your answer file
must go through the Turnitin system and generate the Originality Report when
submitting on Blackboard.

5. Plagiarism will be taken seriously. Any student found guilty of this offence will be
given a zero mark for the exam and may be subject to further disciplinary actions.

6. Late submission will be penalized. A deduction of 10% from the actual mark achieved
will be imposed on each hour of delay (i.e., if the submission is late for one hour or
less, 10% will be deducted; if the submission is late for more than one hour but less

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 than two hours, a further 10% will be deducted; and so on). Assignments submitted
after 9pm, December 14 2020 (i.e., 5 hours after the deadline) will NOT be accepted.

7. For non-computational questions, a word limit is indicated for each question. You are
also required to put the word count for those questions in the appropriate space
provided. Failure in doing so will result in mark deduction. You may answer the non-
computational questions in point form so long as they are written in complete sentences.

8. To ensure fairness, the instructors will NOT answer questions related to this exam and
the course content on or before the due date.

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Question 1: (10 points)
Adam is a management accountant at Park City Ltd., which manufactures and sells sports
equipment. The company uses a job-order costing system. On January 15, 2020, Adam
received a call from John, CEO of the company, concerning a special-order product, Flying V.
Flying V is a seasonal product that is produced in batches of 100 units. There has been a fierce
debate between the sales team and the production team about this product. Flying-V is sold at
cost plus a 30% markup over cost. The sales team complains that fluctuating unit product costs
significantly affect selling prices, which has caused substantial loss of customer orders for
Flying V. However, the production team insists that each job order should be fully costed on
the basis of the costs incurred during the period in which the products are manufactured and
argues that the only solution to the problem is for the sales team to boost sales in slack periods.
Per John’s request, Adam collected the following quarterly data for 2019 on Flying V:

Q1 Q2 Q3 Q4
No. of Batches Produced 10 25 8 20

Direct materials $50,000 $125,000 $40,000 $100,000

Direct labor $30,000 $75,000 $24,000 $60,000
Manufacturing Overhead $52,690 $100,000 $46,000 $93,000
Total $132,690 $300,000 $110,000 $253,000

Unit product cost $13,269 $12,000 $13,750 $12,650

Required:
(a) What manufacturing cost element is responsible for the fluctuating unit costs? Why? (4
points)
(b) What is your recommended solution to the problem of fluctuating unit cost? Please
restate the quarterly data following your recommended solution. (6 points)

Question 2: (12 points)

EgoTech Company is a traditional manufacturing company in Hong Kong. The company
manufactures and sells a special electronic component that is crucial to many electronic devices.
EgoTech had been using an absorption costing system. The plant has a maximum production
capacity of 40 million units but produced and sold only 10 million units in Year 1. There was
no beginning or ending inventory. EgoTech Company’s income statement for Year 1 is as
follows:

EgoTech Company
Income Statement
For the Year Ended December 31, Year 1 (in HK$'000)

Sales (Note 1) $ 60,000

Less: Cost of Goods Sold
Direct Costs (Note 2) 20,000
Manufacturing Overhead 48,000 68,000
Gross Margin $ (8,000)
Less: Selling, General and Admin Expenses 10,000

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 Operating Loss $ (18,000)
Notes:
1. 10 million units at $6 per unit.
2. 10 million units at $2 per unit

The board of directors was concerned about the $18 million loss. A consultant approached the
board with the following offer: “I agree to become CEO for no fixed salary. But I insist on a
year-end bonus of 10% of operating profit (before considering the bonus).” The board of
directors agreed to these terms and the consultant was hired as EgoTech’s new CEO on January
1, Year 2.

The new CEO promptly stepped up production to an annual amount of 30 million units. Sales
for Year 2 remained at 10 million units. The resulting EgoTech Company income statement
for Year 2 is as follows:

EgoTech Company
Income Statement
For the Year Ended December 31, Year 2 (in HK$'000)

Sales (Note 1) $ 60,000

Less: Cost of Goods Sold
Cost of Goods Manufactured:
Direct Costs (Note 2) $ 60,000
Manufacturing Overhead 48,000 $ 108,000
Less: Ending Inventory
Direct Costs (Note 3) $ 40,000
Manufacturing Overhead
(Note 4) 32,000 72,000 36,000
Gross Margin $ 24,000
Less: Selling, General, and Admin Expenses 10,000
Operating Profit (before bonus) $ 14,000
Notes:
1. 10 million units at $6 per unit.
2. 30 million units at $2 per unit.
3. 20 million units at $2 per unit.
4. 20/30 x $48 million.

The day after the income statement was verified by the auditors, the CEO took his cheque for
$1,400,000 and resigned to take a job with another corporation. He remarked, “I enjoy
challenges. Now that EgoTech Company is in the black, I would prefer tackling another
challenging situation.” His contract with his new employer is similar to the one he had with the
EgoTech Company.

Required:
Discuss why the new CEO decides to leave EgoTech at the end of Year 2. Show all supporting
computations. Limit your answer to 300 words.

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Question 3: (16 points)
Racing Inc. is a merchandising company that sells a single product—mechanical keyboard.
Paul, the chief financial officer, is preparing for a cash budget for the first quarter of 2021. The
accounting record of 2020 shows that the company sold $450,000 in October, $500,000 in
November, and $300,000 in December and that the cost of goods sold was 60% of sales. John
estimates sales in January, February, and March of 2021 to be $350,000, $400,000, and
$450,000, respectively. In addition, sales in April, May, and June of 2021 will be 1,000 units
higher than the preceding month. To prepare for fluctuations in product market demand, the
company plans to maintain 10% of the next two months’ sales as ending inventory. TypeFast,
the long-time supplier of Racing Inc., has agreed to sell mechanical keyboards to the company
in 2021. Although TypeFast will charge 20% more on each keyboard sold to Racing Inc. in
2021 than in 2020, Racing Inc. plans to keep the selling price of its mechanical keyboard at
$50 per unit.

Operating expenses in the first quarter of 2021 are estimated to be (paid in the month incurred
except for depreciation):
Warehouse rent—$6,000 per month
Insurance—$1,500 per month
Depreciation—$2,000 per month
Utilities—$3,600 per month
Advertising—8% of monthly sales
Shipping expense—$3 per unit sold
Salesperson salary—$5,000 per month
Sales commission—7% of monthly sales

Income taxes are 15% of pre-tax income and are calculated at the end of each quarter and paid
in two installments: 40% due in the first month after the quarter end and the remainder due in
the second month after the quarter end. The pre-tax income in the fourth quarter of 2020 is
$27,000.

All sales and purchases are on account. The collection pattern is as follows: 50% in the month
of sale, 30% in the first month following the sale, and 20% in the second month following the
sale. 60% of merchandise purchases are paid in cash in the month of purchase, and the balance
due is paid in the month following the purchase. In January 2021, the company plans to
purchase additional office furniture costing $5,200.

Racing Inc. has $35,000 cash on hand on December 31, 2020. The company wants to maintain
a minimum cash balance of $25,000. On December 31, 2020, the company has $20,000 loan
outstanding, which bears an annual simple interest of 12% and is scheduled to mature on
January 31, 2021. The interest on this particular loan is accrued and paid every month. The
company maintains a 15% open line of credit for the amount of $80,000 with Big Bear Bank.
The borrowing must be in increments of $1,000. The company borrows and repays on the last
day of the month.

Required:
Prepare a cash budget for January, February, March, and the quarter in total.

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Question 4: (15 points)
Wendy is a partner of Discovery Ltd, a leading IT consulting firm in Hong Kong. The budget
of Discovery for the upcoming year is presented as follows:

Budgeted Item Amount

Revenue $7,797,000

Direct labor (150,000 hours*$20 per hour) $3,000,000

Employee benefits $1,200,000

Travel $900,000

Materials $500,000

Material handling and installation $50,000

Overhead $1,130,000

Pre-tax income $1,017,000

As reflected in the budget, Discovery generally desires a pre-tax income equal to 15% of cost.
Below is the description of the key budgeted items:

1. Direct labor covers the wage cost of consultants who work on specific client projects.
Discovery charges this cost to clients based on the number of direct labor hours worked
on the project multiplied by the hourly wage. 


2. Employee benefits represent the cost of benefits provided to consultants, including

medical and dental insurance, mandatory contrition, social security tax, and paid leaves.
This cost is charged to client as a percentage of direct labor charged to the project. 


3. Travel includes the cost incurred during consultants’ trips to the client sites, including
transportation, food, and lodging, etc. This cost is charged to clients as a percentage of
direct labor charged to the project. 


4. Materials represent the cost of materials purchased by Discovery for use on client
projects, including various hardware and software components. Discovery directly
charges this cost to the specific clients.


5. Material handling and installation cover the cost incurred to make the materials readily
available for use on client projects, including storage, delivery, setup, and installation
of hardware or software components. This cost is charged to clients as a percentage of
the material cost. 


6. Overhead includes (1) the salaries and wages paid to employees who do not directly
work on client projects such as administrative, accounting, and legal staff; (2) other
costs incurred at the corporate level. Most of the overhead is fixed cost. Overhead is

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 charged to clients as a percentage of all other costs incurred on the project.

The compensation of partners at Discovery including Wendy is determined on the basis of their
ability to earn the desired pre-tax income as 15% of cost for each client project done.


Required:

(a) PolyU, a new client of Discovery, contacted Wendy to ask for a price quote for a project
related to PolyU’s e-library system. According to Wendy’s estimation, this project would
require 5,000 hours of direct labor and materials costing $50,000. The amounts of other cost
items and desired pre-tax income would be determined on the basis of the respective
percentages inherent in the budget. What is the amount of the price quote that Wendy should
provide to PolyU on this project? Please show your work. (8 points)

(b) Three days after receiving the price quote, PolyU called Wendy again to ask if she would
be willing to accept a price of $265,000. Identify the factors that Wendy should consider in
deciding whether to accept this offer. Please limit your answer to 250 words. (7 points)

Question 5: (22 points)

Part A:
The Trek Bicycle Corporation manufactures bicycles and has three product lines: Model A,
Model B, and Model C. Data on sales and expenses are as follows:

Model A Model B Model C

1,000 units 2,000 units 1,000 units
Sales $100,000 $400,000 $100,000
Less: Variable manufacturing and selling 50,000 350,000 75,000
expense
Contribution margin 50,000 50,000 25,000
Less: Fixed expenses
Depreciation of special equipment^ 10,000 10,000 10,000
Salaries of product-line managers 4,000 15,000 5,000
General factory overhead* 10,000 5,000 10,000
General administrative expense* 5,000 5,000 10,000
Total fixed expenses 29,000 35,000 35,000
Net operating income $21,000 $15,000 $(10,000)
^ All equipment has no resale value.
* General factory overhead and general administrative expense are common fixed costs
allocated based on direct labor hours.

Required:
(a) Due to fluctuations in market demand, managers estimate that the sales of Model A would
significantly decrease in the future. Managers are thinking about discontinuing the production
of Model A. At what levels of future sales of Model A would managers be indifferent between
keeping and dropping this product line? Show computations and explain your answers. (5
points)

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(b) As the reported income of Model C is negative, managers are thinking about dropping
Model C and replacing it with a new product line, Model D. Managers estimate that they can
sell 2,000 units of Model D at a price of $150 each. The existing special equipment of Model
C would be used to manufacture Model D. The variable manufacturing and selling expense of
Model D would be $136 per unit. The company would need to hire a new product-line manager
for Model D and the estimated salary of the new manager would be $9,000. The addition of
Model D would not involve extra general factory overhead or general administrative expense.
Would you recommend that managers replace Model C with Model D? Show computations
and explain your answers. (6 points)

(c) Besides the revenues and costs that are mentioned in (b), what other factors do you think
managers should consider before making the decision to open a new product line? Explain.
Please limit your answers to 300 words. (5 points)

Part B:
The Modern Electronics Company sells electronic devices. Currently the company sells a
single model, Device 1. The selling price is $100 each. Managers estimate that the market
demand for Device 1 is 5,000 units each year, but production is constrained by the capacity of
a special machine. A total of 2,000 hours is available annually on the machine. The production
of each unit of Device 1 requires 0.5 hours of machine time.

Managers are considering the following options. First, the company can purchase additional
units of Device 1 from an outside supplier. The supplier can provide up to 5,000 units of Device
1 per year at a price of $85 per unit. The company can resell the units to customers after proper
relabelling. Second, the company can use the special machine to manufacture another model,
Device 2, which would require 1 hour of machine time per unit. Managers forecast that they
can sell 10,000 units of Device 2 each year at a price of $200 per unit.

Data on variable costs of the two devices are as follows:

Device 1 Device 2
Variable costs per unit
Direct materials $50 $150
Direct labor 20 30
Manufacturing overhead 10 5
Selling and administrative expense 10 5

In addition to the variable costs above, the annual fixed manufacturing overhead is $20,000
and the annual fixed selling and administrative expense is $5,000.

Required:
What would you recommend to managers as to how many units of Device 1 (if any) should the
company purchase from the outside supplier and how many units of Device 1 and Device 2 (if
any) should the company manufacture? What is the income that would result from this plan?
Show computations and explain your answers. (6 points)

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Question 6: (25 points)
DOTS Holdings (DOTS) was founded in Hong Kong since 1980s. The company is a well-
diversified conglomerate with operations of over 30 subsidiaries throughout the South East
Asia region. Although DOTS has survived though a few major economic crises, the firm is
under tremendous pressure to perform. In particular, the presence of online businesses and
advanced digital technologies bears stiff competition and some subsidiaries may no longer have
any commercial value. To ensure sustainability, DOTS management is very diligent in
managing the performance of each individual subsidiary.

One of DOTS subsidiaries is Sunway Fitness (Sunway), a fitness club operating in Hong Kong.
Currently, Sunway has 3 different branches located in high-traffic areas. The branch manager’s
performance is measured using return on investment (ROI) on an annual basis. Sunway
requires all assets to earn a minimum return of 12%. Selected financial information for Sunway
is as follows:
HK$'000
Branch TST MK CWB

Fee Revenue $ 1,800 $ 2,100 $ 4,500

Fixed Costs $ 936 $ 1,092 $ 2,520
Variable Costs $ 465 $ 567 $ 1,500
Current Assets $ 800 $ 900 $ 1,000
Non-current Assets $ 1,300 $ 2,775 $ 2,000
Current Liabilities $ 80 $ 240 $ 480

With the goal of continuously improve Sunway’s ROI, Senga Cheng, the manager of the MK
branch, has proposed the following initiatives for the coming period:
a. Write-off obsolete equipment amounted to HK$60,000 and
recognize a loss in disposal.
b. Cut $150,000 spending on marketing and postponed routine
maintenance on fitness equipment.
c. Speed up the collection of accounts receivable amounted to
$30,000 which will overdue in 3 months.

Another subsidiary is Tai Fat Auto (Tai Fat), a car dealership located in a busy commercial
district since 1984. Tai Fat has 3 divisions: new cars, used cars, and service. Ten years ago, Tai
Fat replaced its aging showroom and service center with a new, state-of-the-art facility – the
building costs $12 million whereas the land costs $900,000. The market for new vehicles is
very competitive because many buyers shop on the Internet before visiting new car dealers.
Once customers decide to purchase a new car, they usually trade-in their used car to avoid the
hassle of selling the car themselves, and hence these new car buyers are willing to accept lower
prices from car dealers for their trade-ins. In fact, used cars have higher margins because there
is less competition, as each used car differs in terms of mileage, condition, and options.
However, nearly all used car sales are generated from vehicles brought in from the trade-in
transactions.

As an example of a typical transaction in Tai Fat: a new car was sold for $45,000 ($500 over
dealer cost) and the buyer receives a trade-in allowance on his old car of $8,000 and pays the
difference in cash. That used car is then sold for $10,800. The dealer makes $500 from the new
car division and $2,800 on the used car division. Tai Fat also offers parts and service for the
new and pre-owned cars it sells.

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The divisional managers are compensated based on residual income. The minimum required
return for Tai Fat’s assets is 16%. Selected financial information from Tai Fat are extracted as
follows:

New Cars Used Cars Service

Net Income $600,000 $1,725,000 $1,813,000

Land (% occupied) 50% 40% 10%
Building (% occupied) 30% 10% 60%
Other assets (note 1) $2,500,000 $6,700,000 $1,300,000

Notes:

1 Other assets relate to items such as inventories and account receivables

2 Income is computed by revenues and expenses directly traceable to that
department. Income taxes are charged entirely to DOT Holdings.

Required:
(a) Evaluate the performance of the three branches of Sunway Fitness based on ROI. Also,
briefly explain the specific factor(s) that yields such performance. Show all supporting
computations where necessary. Limit your response to 200 words. (5 points)
(b) Evaluate Senga’s initiatives one by one with respect to its effect on MK branch’s ROI.
Recommend which initiative(s) Senga should adapt for the coming period. Limit your
response to 300 words. (5 points)
(c) The marketing manager of Sunway said the following in a meeting “We only need to
concern ourselves with the number of complaints received from clients during each
period and this is the perfect performance measure for Sunway. As long as the number
of complaints received from clients is not increasing over the period, Sunway’s success
can be assured with 100%.” Comment on the above statement in no more than 150
words. (5 points)
(d) Evaluate the performance of the three divisions of Tai Fat Auto using residual income.
Show supporting computations where necessary. Limit your response to 120 words. (5
points)
(e) Comment on Tai Fat’s performance measurement system using residual income,
especially on behavioral implications to divisional manager of New Car division, and
to Tai Fat as a whole. Limit your response to 250 words. (5 points)

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