Academic Year 2019-2020

Resit Management Accounting 1 for Business (6012B0421)

Date and time of the resit: 7 January 2020, 19.00 – 22.00

Duration of the exam: 3 hours

Identification:
You have to identify yourself using your certificate of registration (UvA-identification card) and a valid
proof of identity (passport, ID card) with a good resembling photograph. If you cannot identify yourself,
access to the exam may be denied. Also, if you are not correctly registered via SIS for the course component,
your exam will not be marked and registered.

Please write your name and student number on work sheet. Also include your exam serial
number on each work sheet; this helps us in processing the exams more quickly.

Warning against fraud/cheating:

Students who are caught at any form of fraud/cheating will be punished.
Make sure that your mobile phone is switched off and put away in your briefcase/bag. This also applies for
other audio equipment, headphones, digital watches (e.g. I-watches) and other electronic devices. Your
briefcase/bag must be closed and placed on the floor beside your table.

Tools allowed:
You are allowed to use a normal calculator (not a graphic calculator or mobile phone calculator), and if
necessary an unmarked dictionary

Bathroom visits:
Because this is an exam of 3 hours: bathroom visits are allowed but only after permission of the head
invigilator.

Specific information on this exam:

The exam consists of 4 questions. Please use the correct answer sheet for each question. You are not allowed
to take home any papers from the exam room. Hand in the exam questions and any sheets you used for doing
calculations. You may write on the exam questions. This exam will be posted on Canvas with the correct
answers on 8 January 2020.
Question 1 HK Ltd (25 points)
HK Ltd produces high-end cleaning chemicals. In the joint part of its production process, the joint
inputs are first heated and then filtrated to lead to two varieties of cleaning liquid: CI, which is used
in health care for cleaning hospital equipment, and CF, which is used to clean machines used in food
and beverage production. Each product requires some additional processing after the split-off point
to get to the final product which is sold to customers

The production process runs in batches of 500 litres, which is the physical size of the main
production tank. One batch results in 125 litres of CI and 375 litres of CF. The joint costs per batch
are € 150,000. After the split off point, specific costs for CI are € 75 per litre, and for CF € 50 per
litre. Currently, CI sells for € 525 per litre, and CF for € 350 per litre.

Question a (5 points)
Allocate the joint costs to CI and CF based on physical measures (litres). What is the operating profit
for each product?

Question b (7 points)
Allocate the joint costs to CI and CF based on the net realizable value (NRV). What is the operating
profit for each product?

Recently, the R&D department of HK Ltd has developed an additional processing step for CI which
leads to a higher quality cleaning product, CO. As a result, it can be used in settings with a higher
hygiene requirement such as operating rooms for surgeries. The sales department of HK expects that
CO can be sold for € 800 per litre. The extra specific costs to turn CI into CO are € 300, these costs
are in addition to the € 75 which will still be required for the processing step to produce CI.

Question c (6 points)
Based on financial considerations only, should HK implement the additional processing step and
process CI further to create CO? Support your answer with a calculation.

The joint batch costs of € 150,000 consist of € 50,000 in variable materials costs, and € 100,000 in
allocated fixed costs. The fixed costs are allocated based on an expected number of batches of 50 per
year, so total fixed costs per year are € 5,000,000. The € 50,000 in materials costs are only incurred
if a batch is produced. The specific costs are also variable costs. However, the process can only run
in the standard batch size of 500 litres; it is not possible to produce smaller quantities.

Question d (7 points)
What is the break-even number of batches that HK has to produce and sell if it does not implement
the additional processing step, so if it produces CI and CF?

Resit MA 1 for Business (6012B0421) 7 January 2020 2

Question 2 BANK Inc (25 points)
BANK Inc is a financial institution with two divisions: Retail banking (banking services for
individuals) and Wholesale banking (financial services for companies and non-profit organizations).
The Human Resource Management (HRM) department and IT are considered key support
departments for the two operational divisions. HRM department costs are allocated based on the
number of employees, and IT department costs are allocated based upon the number of devices
(desktops/laptops) used in the divisions. Data on the budgeted costs, number of employees and
number of devices per division are as follows:

IT HRM Retail Wholesale

Budgeted costs (€ millions) 520 180 350 260
Employees 2,000 500 6,000 4,000
Devices 1,000 500 1,500 3,000

So for example the Retail division has budgeted costs of € 350 million, it has 6,000 employees, and
uses 1,500 devices.

Question a (6 points)
Using the step-down method with IT costs allocated first, what are the total costs for the Retail and
Wholesale divisions after allocation of the costs of the support departments?

Question b (6 points)
Using the reciprocal method, what are the total costs for the Retail and Wholesale divisions after
allocation of the costs of the support departments?

The management of BANK is not happy with the allocation of IT costs. As IT is key to ensuring a
good market position, it wants more insights into the drivers of IT costs using an activity-based
costing (ABC) approach. After a detailed investigation by BANK’s management accountants, three
main activities are identified: Transaction processing, Customer support, and Device support. The
cost for each activity and their cost drivers are as follows:

Activity Cost pool (in € Cost driver Retail Wholesale

million)
Transaction processing 300 Transactions 30,000,000 15,000,000
Customer support 130 Customer requests 225,000 750,000
Device support 90 Devices supported 1,500 3,000

So the activity ‘Transaction processing’ has costs of € 300 million, and its cost driver is the number
of transactions. For the Retail division, 30 million transactions are processed, and for the Wholesale
division 15 million.

Question c (9 points)
Using the ABC approach, allocate the costs of the IT department to the Retail and Wholesale
divisions.

Question d (4 points)
Explain in words why the ABC method of question c leads to a different allocation result for the IT
department than the methods used in question a and question b (note: the correct answer is not
‘because a different costing system is used’). Which method (step-down, reciprocal, ABC) would
you prefer, and why?
Resit MA 1 for Business (6012B0421) 7 January 2020 3
Question 3 GoodIdeas Co (25 points)
GoodIdeas Co is a leading marketing agency, which develops advertising campaigns for big and
small clients. It has three job levels in its organization: Starter, Manager, and Principal. Principals are
highly epxerienced team leaders, who are responsible for acquisition and client relationships.
Managers typically manage projects and provide creative content, while Starters do the more simple
tasks. For planning purposes, GoodIdeas management assumes the following budgeted staff use for
an advertising campaign:

Staff category Hours Cost per hour Total

Principals 56 € 180 € 10,080
Managers 210 € 110 € 23,100
Starters 434 € 50 € 21,700
Totals 700 € 54,880

So for a standard advertising campaign, the budgeted staff costs are € 54,880

Question a (4 points)
Give a definition of a budget, and give three reasons why firms use budgets with a very brief
explanation (one sentence) for each reason.

Many tasks in campaign development, especially with respect to design and copywriting, can be
undertaken by all levels, which means that the actual hours for each staff category may be different
in a project. Additionally, some projects turn out to take more or less staff time than expected.

In the last three months of 2019, GoodIdeas completed 10 advertising campaigns. Actual costs and
hours in this period were as follows:

Staff category Hours Total

Principals 600 € 126,000
Managers 2,200 € 231,000
Starters 5,200 € 234,000
Totals 8,000 € 591,000

Question b (9 points)
Calculate the flexible budget variance, and the labor price and efficiency variance for Principal,
Manager, and Starter staff.

Question c (9 points)
Calculate the yield and mix variances for Principal, Manager, and Starter staff.

Question d (3 points)
Explain how the results of question b and question c are related to each other. How should we
interpret the yield and mix variance for Professional staff, so how can we use it in managing the care
process?

Resit MA 1 for Business (6012B0421) 7 January 2020 4

Question 4 Tallis Corp (25 points)
Tallis Corporation has two divisions. The Purcell division manufactures the product Alium, which is
then transferred to the Byrd division. Alium is further processed by the Byrd division into a product
called SpAlium and sold to customers at a price of € 140 per unit. Purcell is currently required by
Tallis management to transfer its total yearly output of 50,000 units of Alium to Byrd at full cost (so
including allocated fixed costs) plus a 10% markup. The market price for unprocessed Alium (as
supplied by Purcell) is € 80.
Production of one unit of Alium by Purcell requires variable costs of € 40; the fixed costs of Purcell
are € 1 million per year. The processing of Alium into SpAlium by Byrd requires additional variable
costs per unit of € 36 per unit; Byrd’s fixed costs are € 1.1 million.

Question a (4 points)
Calculate the operating income (profit) for each division using (1) the cost-based transfer price (so
full cost plus a 10% markup), and (2) the market price for Alium (so you need to calculate four profit
numbers).

Tallis management decides to increase the level of decentralization. Both divisions are free to go to
the market for their Alium, either to sell or to buy it; they are not required to engage in an internal
transfer between Purcell and Byrd if they do not want to do this. If Purcell would sell its Alium at
€ 80, it would incur variable marketing costs of € 3 per unit. Byrd would incur € 4 in variable
purchasing costs if it would buy Alium on the market rather than from Purcell. Byrd’s yearly demand
for Alium is expected to remain 50,000 units; both divisions have a maximum capacity of 60,000
units per year.

Question b (5 points)
Define decentralization, and give two advantages and two disadvantages of decentralization, with a
brief explanation of each advantage and disadvantage.

Question c (6 points)
From the standpoint of Tallis Corporation as a whole, what is the optimum amount of Alium that
Byrd should purchase from Purcell? What range of transfer prices will result in the managers of both
division making the decision that would benefit Tallis Corporation as a whole?

During the year, Byrd receives a special order for 5,000 units of processed SpAlium from a foreign
company that is not part of the normal customer base, and won’t be seeking orders in the future. The
customer is willing to pay only € 95, instead of the normal price of € 140.

Question d (6 points)
Should Byrd accept this order? What range of transfer prices will lead to the correct decision with
respect to this order that would benefit Tallis Corporation as a whole? Support your answers with
calculations

Question e (4 points)
Since Tallis management has given its departments freedom to choose its buyers or suppliers, which
of the three transfer pricing methods discussed in the course (market price, cost-based, negotiations)
will lead to the correct decision in both question c and question d?

This is the end of the exam. Hand in this exam and all materials you have used. Please check
again whether you have written your name, your student number, and the serial number on
each worksheet you hand in.

Resit MA 1 for Business (6012B0421) 7 January 2020 5