University of Toronto

Rotman School of Management

RSM222H1S – Management Accounting I
Midterm Examination – PRACTICE

Midterm Details
Duration 110 minutes (1 hour 50 minutes)
Total Number of pages 14
Total number of marks 92

 Please write clearly, illegible responses may result in a mark of zero.

 When giving a quantitative answer, please show your supporting calculation in order to receive
part marks.
 You may use a pen and / or pencil. Note however, that any contents written in pencil or over
white out will NOT be remarked.
 This is a closed book mid-term. The only aid allowed is a non-programmable calculator. The use
of any other aid may result in an academic offense.
 You may not leave during the first 30 minutes, or the last 15 minutes of this mid-term.

Summary Score for the examination:

Problem 1: Cost Classification & Behaviour 8 marks
Problem 2: CVP Analysis 12 marks
Problem 3: Traditional & Variable Costing 19 marks
Problem 4: Process Costing 13 marks
Problem 5: ABC costing 31 marks
Problem 6: Costing Methodology - Conceptual 9 marks
TOTAL /92

STUDENT INFORMATION

LAST name (print)_______________________________________

FIRST name (print)_______________________________________

STUDENT #_____________________________________________

SECTION #______________________________________________

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QUESTION 1: COST BEHAVIOUR & CLASSIFICATION – 8 marks
The costs detailed in the grid below are associated with your
RSM 222 Management Accounting course. Assume that the
cost object is one section of the course. Indicate whether the
following costs are direct or indirect and whether they are
variable or fixed.

Description of the cost Classification

Direct or Variable or
Indirect Fixed
Payments made to faculty
member for classroom teaching
– the faculty member receives a
pre-determined amount per
class.
Salary of academic advisor at
the Rotman Commerce office
Paper and photocopies for in-
class handouts
Depreciation of audio-visual
equipment in the classroom

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QUESTION 2: COST VOLUME PROFIT ANALYSIS – 12 marks
Mindy started a dog boarding facility called Puppy Plaza (PP) two
years ago. They built the facility on their one-acre property
located in a suburb of Toronto. PP is a well-maintained facility
where owners can leave their dogs for a period ranging from one
day to a maximum of one month. During their stay, each dog is
provided with its own kennel*, plenty of food and treats, and
proper supervision from the PP staff.
The capacity of PP is 20 dogs per day and they are open 300 days
per year.
Despite increasing the number of bookings to 4,000 in the past
year, Mindy has been unable to make a profit for the second year
in a row. Mindy approached you as she would like to know how
many booking units she would need to break even.
Mindy provides you with the following information about PP’s
operations:
 A booking unit represents an owner who booked a kennel for
her/his dog for 1 day. PP charges a fixed rate of $28 dollar
per booking.
 The cost of dog food is $5.25 per day.
 Each dog requires 30 minutes per day of direct labour from a
PP staff member.
 The variable overhead costs of one booking unit is estimated
to be $4.75
 The fixed costs of operations are $4,200 per month.
 PP Plaza employees are paid $18 per hour.
 The capacity of PP is 20 dogs per day and they are open 300
days per year.
*A kennel is a small shelter for a dog

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Required
1: Determine the number of booking units PP would need to
break-even on a yearly basis. (5 marks)

2: To become profitable, Mindy has suggested that the price

per booking be increased to $35. Determine the number of
booking units PP would need to break-even on a yearly basis,
under this scenario. (2 marks)

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QUESTION 2: COST VOLUME PROFIT ANALYSIS – 12 marks
(continued)

3. Should Mindy go ahead with the price increase? Support

your position with case facts and ensure to mention important
factors that should be considered when making this decision.
(5 marks)

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QUESTION 3 – TRADITIONAL (ABSORPTION) COSTING & VARIABLE
COSTING – 19 marks

Golf Simulator Pro (GSP) is a company that manufactures golf

simulators. The golf simulator consists of a large screen with multiple
sensors and a computer that analyzes the trajectory of the ball to
provide statistics and feedback to the user.

GSP’s best selling simulator is the ProGolf Reality 222. This is

considered to be one of the best simulators in terms of the accuracy of
the statistics and the feedback provided to the golfer. As this is their
best selling model, the owner of GSP asked you to determine the cost
of the simulator.

The owner provides you with the following information pertaining to

the production of a ProGolf Reality 222:

Direct Materials $11,750 per unit

Direct Labour (50 hours) $1,400 per unit
Variable Manufacturing Overhead $280 per unit
Costs
Sales Commission to Vendors $600 per unit
Rent of Factory $8,000 per month
Equipment Depreciation $320,000 per year
Plant Manager Salary $135,000 per year
Selling and Administrative Costs $1,780,000 per year

The company allocates the fixed manufacturing overhead costs on the

basis of direct labour hours. GSP estimates that the factory will use
84,000 direct labour hours in total for the year.

Required:

1. Compute the cost of one unit of the ProGolf Reality 222

under traditional (absorption) costing. Show your
computations for part marks. Round your computation to
2 decimals. (9 marks)

6
QUESTION 3 – TRADITIONAL (ABSORPTION) COSTING &
VARIABLE COSTING – 19 marks - (continued)

2. Compute the total cost of one unit of the ProGolf Reality

222 under variable costing. Show your computations for
part marks. Round your computation to 2 decimals. (5
marks)

3. While reviewing the accounting reports from last year, the

owner of GSP noticed that the company’s net income was
higher when computed under variable costing than when it
was computed under the traditional (absorption) costing
method. He therefore suggests that GSP should use the
variable costing method to compute their net income. (5
marks)

Prepare a response to the owner of the company. Can

variable costing be used for external reporting? Why or
why not? In addition, discuss what could explain the
difference in net income between variable and traditional
costing. You may use bullet points for your answer.

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8
QUESTION 4 – PROCESS COSTING – 13 marks

Packer Manufacturing is a large manufacturing company

specialising in the production of seatbelt products for
automobiles. Below is production data pertaining to Process A
of the manufacturing of seatbelts products for their factory
located north of Toronto. This factory produces only seatbelts
and therefore uses process costing and the weighted average
inventory method to track the cost of their inventory.

Production and cost data for the month of February for Process
A:
Production record:  
Units in process, February 1 (100% 2,000
complete with respect to materials;
25% complete with respect to
conversion cost)
New units started in process 8,000
Units completed and transferred to 7,000
next department
Units in process, February 28 (100% 3,000
complete with respect to materials;
1/3 complete with respect to
conversion cost)

Cost record:    
Work in process    
inventory,
February 1:
Materials $600  
Conversion 100 $ 700
Costs for    
February:
Materials issued   2,560

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Conversion   1,500
Total cost to be   $4,760
accounted for

Required:

1. Calculate the equivalent units AND unit costs for February

for materials and for conversion. (9 marks)
EU Materials EU Conversion

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QUESTION 4 – PROCESS COSTING - 13 marks - (continued)

2. Determine the cost transferred to the next department’s

work-in-process inventory. (2 marks)

3. Determine the amount of cost that should be assigned to

the ending work-in-process and finished goods inventories.  (2
marks)

11
QUESTION 5: ABC COSTING – 31 marks
Knowles Processors (KP) is a technology company specialising in
the production of computer products. They are known for a
superior customer experience and for the futuristic design of
their devices which has made them a favourite among
customers aged 14 to 34.
KP manufactures 3 products: a Tablet, a PC, and a Laptop. All
three products are manufactured at the same facility and
therefore share some of the same resources. The Laptop has
been their best seller for the past few years with 155,000 units
sold last year. The Tablet sold 140,000 units while the PC only
sold 78,000 units.
Mr. Banks, the CFO of KP, approached you to help him review
the current cost of each product. Although the revenues did
increase last year, the profit remained fairly stable. He is
wondering if a better understanding of the cost of all three
products would help him understand how profitability could be
improved in the next year.
The company currently uses a single cost pool method where
all the overhead costs are grouped and then allocated based on
Direct Labour Hours. A summary of the current cost analysis is
provided in the table below:
Tablet PC Laptop
Production 140,000 78,000.00 155,000.00

Selling Price $ 670.00 $ 930.00 $ 1,035.00

Direct Materials $ 175.00 $ 220.00 $ 245.00

Direct Labour* $ 30.00 $ 30.00 $ 40.00
Allocated OH (based on DLH) $ 256.53 $ 256.53 $ 342.04
Total Cost $ 461.53 $ 506.53 $ 627.04

Profit per unit $ 208.47 $ 423.47 $ 407.96

Profit margin 31.1% 45.5% 39.4%

The Direct Labour cost is $20 per hour.

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In order to apply ABC costing to the three products produced
by KP, Mr. Banks provides you with some additional
information about the shared costs:

Total units of
Total Cost Units of allocation base used by
Cost Description Allocation Basis the allocation
basis
($) Tablet PC Laptop
Quality Control $ 165,000 # of inspections 1,865 700 390 775
Warranty Costs $ 12,000,000 # of repairs 76,400 25,400 19,000 32,000
Equipment Depreciation $ 30,000,000 Machine Hours 4,200,000 1,355,000 895,000 1,950,000
Utilities $ 27,800,000 Machine Hours 4,200,000 1,355,000 895,000 1,950,000
Other Manufacturing OH $ 38,975,000 # of units sold 373,000 140,000 78,000 155,000

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QUESTION 5: ABC COSTING – 31 marks - (Continued)
Required
1. Compute the cost per unit under ABC costing for the tablet,
the PC and the laptop based on the information provided
above. Show supporting computations to receive part marks
and ensure that your computations are clear and easy to
follow. Round your computations to 2 decimals. (19 marks)

14
QUESTION 5: ABC COSTING – 31 marks - (Continued)
2. Compute the profit and profit margin per unit under ABC
Costing. Compare the results with the current results Mr.
Banks obtained when applying traditional costing. When
looking at the results, specifically for the PC, would you
recommend that Mr. Banks adjusts the price of the PC based
on the new information provided by the ABC costing?
Support your position with references to specific case facts
and by providing two separate arguments. Ensure that your
discussion is balanced by including at least one argument in
favor or increasing the price and one argument in favor of not
increasing the price. (9 marks)

15
QUESTION 5: ABC COSTING – 31 marks - (Continued)
3. During your meeting, Mr. Banks also told you that he
invested $9,000,000 two years ago in R&D to upgrade the
processing system of the tablet to differentiate it from
the competition. He expects that this type of investment
in R&D will be needed every three years to ensure that
the tablet stays ahead of competitors. Mr. Banks was to
know if he could add this cost to the unit cost of the
tablet under ABC costing.

Provide a short response to Mr. Banks’ question and

indicate if you foresee any issues with the possibility of
allocating such a cost. (3 marks)

QUESTION 6 – COSTING METHODOLOGY – CONCEPTUAL – 9

marks
The Following are extracts from the following articles in the
Globe & Mail with regards to the financial performance of
Roots, a Canadian clothing manufacturing and retail company.

16
Article 1: Roots quarterly loss widens on costs of new
distribution centre; by Aleksandra Saga, Toronto, The Canadian
Press (June 12, 2019)
Article 2: Roots second-quarter loss grows as ‘store traffic
continues to be a challenge’; by Aleksandra Saga, Toronto, The
Canadian Press (September 11, 2019)

Please read and answer the questions below the article:

Roots Corp.'s first quarter loss was 75 per cent bigger than last
year as inventory costs associated with a new distribution
centre offset gains from higher sales. The costs of the
distribution centre are the primary reason for the increase in
the Selling, General and Administrative Expenses.
Mr. Gabel pointed to additional challenges of moving the
company into its new distribution centre, which involved
implementing new warehouse management systems and
integrating more than 20 information-technology platforms. The
move prompted some delays in the flow of products to stores,
despite testing of the new system before it went live.

Right now, the centre is operating is at 60 per cent of where

Roots wants its capacity to be, he said, and the company is
taking steps that include incurring overtime costs and adding a
second shift at the centre.
The company’s direct-to-consumer gross margin fell to 54.7 per
cent in its first quarter, compared with 59.1 per cent in the same
quarter of its 2018 financial year as it engaged in deeper
discounting before moving to a new integrated distribution
centre in the second quarter. Overall gross margin fell by 4.5
percentage points to 52.5 per cent.
“An important focus for (the first quarter) was improving our
overall inventory position, using higher, deeper discounts to
achieve two goals,” said chief executive officer Jim Gabel
during a conference call with investors Wednesday.

17
The first goal is to prepare for the transition to the new centre,
he said, and the second is to move through the company’s
seasonal inventory.
The company expects it’ll lower freight and fulfilment costs with
the new consolidated centre.
Currently, one order that includes multiple items could result in
a customer receiving several shipments, said Mr. Gabel, but the
number of deliveries will be reduced once the company is
fulfiling orders from the new centre.
The company also expects the profitability of its e-commerce
business will improve thanks to this transition, Mr. Gabel said.

REQUIRED:
1 – Referring the Cost-Volume-Profit relationship, how can
Roots experience growth in sales revenue and an overall
decrease in profit for the same period? (2 marks)

18
QUESTION 6 – COSTING METHODOLOGY – CONCEPTUAL – 9
marks (continued)
2- How is the cost of the new distribution centre affecting the
2019 financial results of Roots? Is the cost of the new
distribution centre related in any way to the decrease in gross
margin that the article is referring to? (3 marks)

3 – It is clear from the article that the cost of the distribution

centre has negatively impacted the overall profits of Roots for
the year. Do you think the new distribution center was a
good decision on the part of management? Support your
answer with references to the article. (4 marks)

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**END OF EXAMINATION**

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