13163764 ACCA F2 Management Accountant Solved Past Papers 0107

Fundamentals Fundamentals Pilot Paper – Knowledge module

Management Accounting

Time allowed: 2 hours

ALL FIFTY questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

2 F r e p a P

This question paper must not be removed from the examination hall .

The Association of Chartered Certified Accountants

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ALL 50 questions are compulsory and MUST be attempted.

1

The following break-even chart has been drawn showing lines for total cost (TC), total variable cost (TVC), total fixed cost (TFC) and total sales revenue (TSR): £ TSR

TC

TVC TFC

0

675

1,200

1,500

1,700

Units

What is the margin of safety at the 1,700 units level of activity? A

200 units

B

300 units

C

500 units

D

1,025 units (2 marks)

2

The following assertions relate to financial accounting and to cost accounting: (i) The main users of financial accounting information are external to an an organisation. organisation. (ii) Cost accounting is that part of financial accounting which records records the cash received and payments made by an organisation. Whic Which hof oft the hef fol ollo lowi wing ngs sta tate teme ment nts sar are etr true ue?? A

Assertions (i) and (ii) are both correct.

B

Only assertion (i) is correct.

C

Only assertion (ii) is correct. (1 mark)

3

Regression analysis is being used to find the line of best fit (y = a + bx) from eleven pairs of data. The calculations have produced the following information: 2 2 Σx = 440, Σy = 330, Σx = 17,986, Σy = 10,366, Σxy = 13,467 and b = 0.69171 What is the value of ‘a’ in the equation for the line of best fit (to 2 decimal places)? A

0.63

B

0.69

C

2.33

D

5.33 (2 marks) 2


4

The purchase price of a stock item is $25 per unit. In each three month period the usage of the item is 20,000 units. The annual holding costs associated with one unit equate to 6% of its purchase price. The cost of placing an order for the item is $20. What is the Economic Order Quantity (EOQ) for the stock item to the nearest whole unit? A

730

B

894

C

1,461

D

1,633 (2 marks)

5

A company uses an overhead absorption rate of $3.50 per machine hour, based on 32,000 budgeted machine hours for the period. During the same period the actual total overhead expenditure amounted to $108,875 and 30,000 machine hours were recorded on actual production. By how much was the total overhead under or over absorbed for the period? A

Under absorbed by $3,875

B

Under absorbed by $7,000

C

Over absorbed by $3,875

D

Over absorbed by $7,000 (2 marks)

6

For which of the following is a profit centre manager responsible? A

Costs only

B

Revenues only

C

Costs and revenues. (1 mark)

7

An organisation has the following total costs at two activity levels: Activity level (units) Total costs ($)

16,000 135,000

22,000 170,000

Variable cost per unit is constant within this range of activity but there is a step up of $5,000 in the total fixed costs when the activity exceeds 17,500 units. What is the total cost at an activity of 20,000 units? A

$155,000

B

$158,000

C

$160,000

D

$163,000 (2 marks)




8

A company manufactures and sells a single product. In two consecutive months the following following levels of production and sales (in units) occurred: Month 1 3,800 3,900

Sales Production

Month2 4,400 4,200

The opening inventory for Month 1 was 400 units. Profits or losses have been calculated for each month using both absorption and marginal costing principles. Which of the following combination of profits and losses for the two months is consistent with the above data?

Absorption costing profit/(loss) Month 1 Month 2 $ $

Marginal costing profit/(loss) Month 1 Month 2 $ $

A

200

4,400

(400)

3,200

B

(400)

4,400

200

3,200

C

200

3,200

(400)

4,400

D

(400)

3,200

200

4,400 (2 marks)

9

Which of the following best describes a flexible budget? A

A budget which shows variable production costs only. only.

B

A monthly budget which is changed to reflect the number of days in the month.

C

A budget which shows sales revenue and costs at different levels of activity. activity.

D

A budget that is updated halfway through the year to in corporate the actual results for the first half of the year. year. (2 marks)

10 Information relating to two processes (F and G) was as follows:

Process   F G

Normal loss as % of input 8 5

Input litres 65,000 37,500

Output litres 58,900 35,700

For each process, was there an abnormal loss or an abnormal gain? A

Process F Abnormal gain

Process G Abnormal gain

B

Abnormal gain

Abnormal loss

C

Abnormal loss

Abnormal gain

D

Abnormal loss

Abnormal loss (2 marks)




11 An organisation manufactures a single product which is sold for $80 per unit. The organisation’s total monthly fixed

costs are $99,000 and it has a contribution to sales ratio of 45%. This month it plans to manufacture and sell 4,000 units. What is the organisation’s margin of safety this month (in units)? A

1,250

B

1,750

C

2,250

D

2,750 (2 marks)

12 Which one of the following should be classified as indirect labour? A Assembly workers on a car production line B Bricklayers in a house building company C Machinists in a factory producing clothes

company. D Forklift truck drivers in the stores of an engineering company. (2 marks)

13 A company is evaluating a project that requires 400kg of raw material X. The company has 150kg of X in stock that

were purchased six months ago for $55 per kg. The company no longer has any use for X. The i nventory of X could be sold for $40 per kg. The current purchase price for X is $53 per kg. What is the total relevant cost of raw material X for the project? A

$17,950

B

$19,250

C

$21,200

D

$21,500 (2 marks)

14 Which of the following following is NOT NOT a feasible value value for the correlation correlation coefficient? coefficient? A

+1.4

B

+0.7

C

0

D

−0.7 (2 marks)

15 The following statements relate to aspects of budget administration:

Statement (1): An important task of a budget committee is to ensure that budgets are properly coordinated. Statement (2): A budget manual is the document produced at the end of the budget setting process. Which of the following is true? A

Only statement (1) is correct.

B

Only statement (2) is correct.

C

Both statements are correct. (1 mark)




16 Up to a given level of activity in each period the purchase price per unit of a raw material is constant. After that point

a lower price per unit applies both to further units purchased and also retrospectively to all units already purchased. Which of the following graphs depicts the total cost of the raw materials for a period?

£

A

0 £

£

B

0 C

0

£

D

0 (2 marks)

17 A manufacturing organisation incurs costs relating to the following:

(1) Commission payable to salespersons. (2) Inspecting all products. (3) Packing the products at the end of the manufacturing process prior to moving them to the warehouse. Which of these costs are classified as production costs? A

(1) and (2) only

B

(1) and (3) only

C

(2) and (3) only

D

(1), (2) and (3) (2 marks)

18 Which of the following is correct with regard to expected values? A

Expected values provide a weighted average of anticipated outcomes.

B

The expected value will always equal one of the possible outcomes.

C

Expected values will show the decision maker’s attitude to risk.

D

The expected value will never equal one of the possible outcomes. (2 marks)



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19 There is a 60% chance that a company will make a profit of $300,000 next year and a 40% chance of making a loss

of $400,000. What is the expected profit or loss for next year? A

$120,000 Loss

B

$20,000 Loss

C

$20,000 Profit

D

$120,000 Profit (2 marks)

20 A company’s budgeted sales for last month were 10,000 units with a standard selling price of $20 per unit and a

standard contribution of $8 per unit. Last month actual sales of 10,500 units at an average selling price of $19.50 per unit were achieved. What were the sales price and sales volume contribution variances for last month?

 Salespricevariance($) A 5,250 Adverse

Salesvolumecontributionvariance($) 4,000 Favourable

B

5,250 Adverse

4,000 Adverse

C

5,000 Adverse

4,000 Favourable

D

5,000 Adverse

4,000 Adverse (2 marks)

21 A company manufactures and sells one product which requires 8 kg of raw material in its manufacture. The budgeted

data relating to the next period are as follows: Sales Opening inventory of finished goods Closing inventory of finished goods Opening inventory of raw materials Closing inventory of raw materials

Units 19,000 4,000 3,000 Kg 50,000 53,000

What is the budgeted raw material purchases for next period (in kg)? A

141,000

B

147,000

C

157,000

D

163,000 (2 marks)

22 The following statements refer to spreadsheets:

(i) A spreadsheet is the most suitable software for the storage of large volumes of data. (ii) A spreadsheet could be used to produce a flexible budget. (iii) Most spreadsheets contain a facility to display the data in them within them in a graphical form. Which of these statements are correct? A

(i) and (ii) only

B

(i) and (iii) only

C

(ii) and (iii) only

D

(i), (ii) and (iii) (2 marks)




23 A company always determines its order quantity for a raw material by using the Economic Order Quantity (EOQ)

model. What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of ordering a batch of raw material?

 A

EOQ Higher

Annual holding cost Lower

B

Higher

Higher

C

Lower

Higher

D

Lower

Lower (2 marks)

24 Which one of the following is most likely to operate a system of service costing? A

A printing company

B

A hospital

C

A firm of solicitors. (1 mark)

25 The following budgeted information relates to a manufacturing company for next period:

Production Sales

Units 14,000 12,000

Fixed production costs Fixed selling costs

$ 63,000 12,000

The normal level of activity is 14,000 units per period. Using absorption costing the profit for next period has been calculated as $36,000. What would the profit for next period be using marginal costing? A

$25,000

B

$27,000

C

$45,000

D

$47,000 (2 marks)

26 A company manufactures a single product which it sells for $20 per unit. The product has a contribution to sales ratio

of 40%. The company’s weekly breakeven point is sales revenue of $18,000. What would be the profit in a week when 1,200 units are sold? A

$1,200

B

$2,400

C

$3,600

D

$6,000 (2 marks)




27 The following graph relates to a li near programming problem:

Y (1)

(2)

(3)

0

X

The objective is to maximise contribution and the dotted line on the graph depicts this function. There are three constraints which are all of the “less than or equal to” type which are depicted on the graph by the three solid lines labelled (1), (2) and (3). At which of the following intersections is contribution maximised? A

Constraints (1) and (2)

B


C


D

Constraint (1) and the x-axis (2 marks)

28 In an organisation manufacturing a number of different products in one large factory, the rent of that factory is an

example of a direct expense when costing a product. Is this statement true or false? A

True

B

False (1 mark)




29 A company operates a process in which no losses are incurred. The process account for last month, when there was

no opening work-in-progress, was as follows: Process Account Costs arising

$ 624,000

$ Finished output (10,000 units) Closing work-in progress (4,000 units)

624,000

480,000 144,000 624,000

The closing work-in-progress was complete to the same degree for all elements of cost. What was the percentage degree of completion of the closing work-in-progress? A

12%

B

30%

C

40%

D

75% (2 marks)

30 A company manufactures and sells two products (X and Y) both of which utilise the same skilled labour. For the

coming period, the supply of skilled labour is limited to 2,000 hours. Data relating to each product are as follows: ProductXY Selling price per unit $20 $40 Variable cost per unit $12 $30 Skilled labour hours per unit 2 4 Maximum demand (units) per period 800 400 In order to maximise profit in the coming period, how many units of each product should the company manufacture and sell? A

200 units of X and 400 units of Y

B


C


D

800 units of X and 100 units of Y (2 marks)

31 The following statements refer to organisations using job costing:

(i) Work is done to customer specification. (ii) Work is usually completed within a relatively short period of time. (iii) Products manufactured tend to be all identical. Which two of these statements are CORRECT? A

(i) and (ii)

B

(i) and (iii)

C

(ii) and (iii) (1 mark)

10


Thefollowinginformationrelatestoquestions32and33: A company uses standard costing and the standard variable overhead cost for a product i s: 6 direct labour hours @ $10 per hour Last month when 3,900 units of the product were manufactured, the actual expenditure on variable overheads was $235,000 and 24,000 hours were actually worked.

32 What was the variable overhead expenditure variance for last month? A $5,000 Adverse B $5,000 Favourable C $6,000 Adverse D $6,000 Favourable (2 marks)

33 What was the variable overhead efficiency variance for last month? A

$5,000 Adverse

B

$5,000 Favourable

C

$6,000 Adverse

D

$6,000 Favourable (2 marks)

34 When a manufacturing company operates a standard marginal costing system there are no fixed production overhead

variances. Is this statement true or false? A

True

B

False (1 mark)

35 A company operates a standard costing system. The variance analysis for last month shows a favourable materials price

variance and an adverse labour efficiency variance. The following four statements, which make comparisons with the standards, have been made: (1) Inferior quality materials were purchased and used. (2) Superior quality materials were purchased and used. (3) Lower graded workers were used on production. (4) Higher graded workers were used on production. Which statements are consistent with the variance analysis? A

(1) and (3)

B

(1) and (4)

C

(2) and (3)

D

(2) and (4) (2 marks)

11


36 Which of the following best describes a principal budget factor? A

A factor that affects all budget centres.

B

A factor that is controllable by a budget centre manager.

C

A factor which limits the activities of an organisation.

D

A factor that the management accountant builds into all budgets. (2 marks)

37 Four vertical lines have been labelled G, H, J and K at different levels of activity on the following profit-volume chart:

K 0

Output G H

J

Which line represents the total contribution at that level of activity? A

Line G

B

Line H

C

Line J

D

Line K (2 marks)

38 Data is information that has been processed in such a way as to be meaningful to its recipients. Is this statement true or false? A

True

B

False (1 mark)

12


39 Two products G and H are created from a joint process. G can be sold immediately after split-off. H requires further

processing into product HH before it is in a saleable condition. There are no opening inventories and no work in progress of products G, H or HH. The following data are available for last period: Total joint production costs Further processing costs of product H Product

Production units 420,000 330,000

G HH

$ 350,000 66,000 Closing inventory units 20,000 30,000

Using the physical unit method for apportioning joint production costs, what was the cost value of the closing inventory of product HH for last period? A

$16,640

B

$18,625

C

$20,000

D

$21,600 (2 marks)

40 A company purchased a machine several years ago for $50,000. Its written down value is now $10,000. The machine

is no longer used on normal production work and it could be sold now for $8,000. A project is being considered which would make use of this machine for six months. After this time the machine would be sold for $5,000. What is the relevant cost of the machine to the project? A $2,000 B $3,000 C $5,000 D $10,000 (2 marks)

41 A company operates a standard absorption costing system. The standard fixed production overhead rate is $15 per

hour. The following data relate to last m onth: Actual hours worked Budgeted hours Standard hours for actual production

5,500 5,000 4,800

What was the fixed production overhead capacity variance? A

$7,500 Adverse

B

$7,500 Favourable

C

$10,500 Adverse

D

$10,500 Favourable (2 marks)

1


42 The following statements relate to relevant cost concepts in decision-making:

(i) Materials can never have an opportunity cost whereas labour can. (ii) The annual depreciation charge is not a relevant cost. (iii) Fixed costs would have a relevant cost element if a decision causes a change in their total expenditure Which statements are correct? A

(i) and (ii) only

B

(i) and (iii) only

C

(ii) and (iii) only

D

(i), (ii) and (iii) (2 marks)

43 A contract is under consideration which requires 600 labour hours to complete. There are 350 hours of spare labour

capacity for which the workers are still being paid the normal rate of pay. The remaining hours for the contract can be found either by weekend overtime working paid at double the normal rate of pay or by diverting labour from other production. This other production makes a contribution, net of labour cost, of $5 per hour. The normal rate of pay is $9 per hour. What is the total relevant cost of labour for the contract? A

$1,250

B

$3,500

C

$4,500

D

$4,900 (2 marks)

44 An organisation operates a piecework system of remuneration, but also guarantees its em ployees 80% of a time-based

rate of pay which is based on $20 per hour for an eight hour working day. Three minutes is the standard time allowed per unit of output. Piecework is paid at the rate of $18 per standard hour. If an employee produces 200 units in eight hours on a particular day, what is the employee’s gross pay for that day? A

$128

B

$144

C

$160

D

$180 (2 marks)

45 A semi-variable cost is one that, in the short term, remains the same over a given range of activity but beyond that

increases and then remains constant at the higher level of activity. Is this statement true or false? A

True

B

False (1 mark)

1


46 A factory consists of two production cost centres (P and Q) and two service cost centres (X and Y). The total allocated

and apportioned overhead for each is as follows: P $95,000

Q $82,000

X $46,000

Y $30,000

It has been estimated that each service cost centre does work for other cost centres in the following proportions: P Q X Y Percentage of service cost centre X to 50 50 – – Percentage of service cost centre Y to 30 60 10 – The reapportionment of service cost centre costs to other cost centres fully reflects the above proportions. After the reapportionment of service cost centre costs has been carried out, what is the total overhead for production cost centre P? A

$124,500

B

$126,100

C

$127,000

D

$128,500 (2 marks)

Thefollowinginformationrelatestoquestions47and48: A company manufactures and sells two products (X and Y) which have contributions per unit of $8 and $20 respectively. The company aims to maximise profit. Two materials (G and H) are used in the manufacture of each product. Each material is in short supply – 1,000 kg of G and 1,800 kg of H are available next period. The company holds no inventories and it can sell all the units produced. The management accountant has drawn the following graph accurately showing the constraints for materials G and H. Product Y (units)

100 090

Material G

Material H

000

125

150

Product X (units)

47 What is the amount (in kg) of material G and material H used in each unit of product Y? A

Material G 10

Material H 20

B

10

10

C

20

20

D

20

10 (2 marks)

1


48 What is the optimal mix of production (in units) for the next period?

 A

Product X 0

Product Y 90

B

50

60

C

60

50

D

125

0 (2 marks)

49 The following statement refers to a quality of good information:

The cost of producing information should be greater than the value of the benefits of that information to management. Is this statement true or false? A

True

B

False (1 mark)

50 A company which operates a process costing system had work-in-progress at the start of last month of 300 units

(valued at £1,710) which were 60% complete in respect of all costs. Last month a total of 2,000 units were completed and transferred to the finished goods warehouse. The cost per equivalent unit for costs arising last month was $10. The company uses the FIFO method of cost allocation. What was the total value of the 2,000 units transferred to the finished goods warehouse last month? A

$19,910

B

$20,000

C

$20,510

D

$21,710 (2 marks)

1


FORMULAE SHEET

Regression analysis a=

∑y b∑x n n

b=

n∑xy-∑x∑y n∑x2 -(∑x)2

r=

n∑xy-∑x∑y 2

(n∑x -(∑x)2 )(n∑y 2 -(∑y)2 )

Economic order quantity =

2C0D Ch

Economic batch quantity =

2C0D D Ch (1- ) R

1


1


Answers

1


Pilot Paper F2 Management Accounting

Answers

Summarised 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

C B C C A C C C C C A D B A A D C A C A B C D B B

26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

B D B D D A B C B A C C B C B B C B D B D A A B A

In detail 1

C

2

B

3

C

a = (Σy ÷ n) − [(bΣx) ÷ n] = (330 ÷ 11) − [(0.69171 × 440) ÷ 11] = (30 −27.6684) = 2.3316 (2.33 to 2 decimal places)

4

C

{[ 2 × 20 × (4 ×20,000) ] ÷ [0.06 ×25]}0.5 = 1,461 units

5

A

Actual cost Absorbed cost (30,000 × 3.50) Under absorption

6

C

7

C

Variable cost per unit: [(170,000 − 5,000) − 135,000] ÷ (22,000 − 16,000) = $5 Total fixed cost (below 17,500 units): [135,000 − (16,000 × 5)] = $55,000 Total cost for 20,000 units: 55,000 + 5,000 + (20,000 × 5) = $160,000

8

C

Month 1: Production > Sales Absorption costing profit > Marginal costing profit Month 2: Sales > Production Marginal costing profit > absorption costing profit A and C satisfy Month 1, C and D satisfy Month 2. Therefore C satisfies both.

9

C

$108,875 $105,000 $ 3,875

20


10

C Process F Process G

Normal loss litres 5,200 1,875

Actual loss litres 6,100 1,800

Abnormalloss litres 900 –

Abnormal gain litres – 75

11

A

Contribution per unit (CPU): (80 × 0.45) = $36 Break even point (units): (99,000 ÷ 36) = 2,750 Margin of safety: (4,000 − 2,750) = 1,250 units

12

D

13

B

14

A

15

A

16

D

17

C

18

A

19

C

(300,000 × 0.60) − (400,000 × 0.40) = +$20,000 (profit)

20

A

Price variance: (0.50 × 10,500) = $5,250 Adverse Volume variance: (500 × 8) = $4,000 Favourable

21

B

Budgeted production: (19,000 + 3,000 − 4,000) = 18,000 units Raw materials required for budgeted production: (18,000 × 8) = 144,000 kg Budgeted raw material purchases: (144,000 + 53,000 − 50,000) = 147,000 kg

22

C

23

D

24

B

25

B

Production > Sales Absorption costing profit > Marginal costing profit Marginal costing profit: {36,000 − [2,000 × (63,000 ÷14,000)]} = $27,000

26

B

CPU: (20 ×0.4) = $8 Break even point: (18,000 ÷ 20) = 900 units Profit when 1,200 units produced and sold: (300 × 8) = $2,400

27

D

28

B

29

D

30

D

(150 × 40) + (250 × 53) = $19,250

Cost per equivalent unit: (480,000 ÷10,000) = $48 Closing work in progress valuation: (4,000 × Degree of completion × 48) = 144,000 Degree of completion = (144,000 ÷ 4,000 ÷ 48) = 0.75 = 75%

X Y CPU $8 $10 Contribution per hour $4 $2.50 Ranking 1st 2nd Therefore produce and sell the maximum 800 units of X using 1,600 hours and with the remaining 400 hours produce and sell 100 units of Y. 31

A

21


32

B $ 235,000

Actual expenditure Actual hours × standard rate (24,000 × 10)

240,000

Expenditure variance

5,000 Favourable

33 C  $

Actual hours × standard rate Standard cost of actual production (3,900 × 6 × 10)

240,000 234,000

Efficiency variance

6,000 Adverse

34

B

35

A

36

C

37

C

38

B

39

C

Joint costs apportioned to H: [330,000 ÷ (420,000 + 330,000)] × 350,000 = $154,000 Closing inventory valuation (HH): (30,000 ÷ 330,000) × (154,000 + 66,000) = $20,000

40

B

Relevant cost: (8,000 − 5,000) = $3,000

41

B

Budgeted hours Actual hours worked

Capacity variance

5,000 5,500

500 hours × 15 = $7,500 Favourable

42

C

43

B

Overtime cost for 250 hours: (250 × 9 × 2) = $4,500 Cost of diverting labour: 250 × (9 + 5) = $3,500 Relevant cost (lowest alternative) = $3,500

44

D

200 units × (3 ÷ 60) × 18 = $180

45

B, this is a stepped fixed cost

46

D TotaloverheadtocostcentreP: Direct Proportion of cost centre X [46,000 + (0.10 × 30,000)] × 0.50 Proportion of cost centre Y [30,000 × 0.3]

$ 95,000 24,500 9,000

128,500 47

A 100 units of Y with all of material G (1,000 kg) = 10 kg per unit 90 units of Y with all of material H (1,800 kg) = 20 kg per unit

48

A Total contributions: A [(0 × 8) + (90 × 20)] = $1,800 B [(50 × 8) + (60 × 20)] = $1,600 C [(60 × 8) + (50 × 20)] = $1,480 D [(125 × 8) + (0 × 20)] = $1,000

22


49

B

50

A $

Value of 2,000 units transferred: 1,700 units × 10 300 units × 0.40 × 10 Opening work in progress value

17,000 1,200 1,710 19,910

2


Financial Information for Management PART 1 FRIDAY 7 DECEMBER 2001

QUESTION PAPER Time allowed 3 hours

This paper is divided into two sections Section A ALL 25 questions are compulsory and MUST be answered Section B ALL FIVE questions are compulsory and MUST be answered

2 . 1 r e p a P

Formulae Sheet, Present Value and Annuity Tables are on pages 12, 13 and 14.


Section A  ALL 25 questions are compulsory and MUST be attempted. Please use the answer sheet provided to indicate your choice in each question. Each question within this section is worth 2 marks. 1

Which of the following statements are correct with regard to marginal costing?

(i) Period costs are costs treated as expenses in the period incurred. (ii) Product costs can be identified with goods produced. (iii) Unavoidable costs are relevant for decision making. A B C D

2

(i), (ii) and (iii) (i) and (ii) only (i) and (iii) only (ii) and (iii) only.

Canberra has established the following information regarding fixed overheads for the coming month: Budgeted information: Fixed overheads Labour hours Machine hours Units of production

£180,000 3,000 hours 10,000 hours 5,000 units

Actual fixed costs for the last month were £160,000. Canberra produces many different products using highly automated manufacturing processes and absorbs overheads on the most appropriate basis. What will be the pre-determined overhead absorption rate? A B C D

3

£16 £18 £36 £60.

Which of the following are correct with regard to service organisations?

(i) Activity based costing would not be considered appropriate. (ii) The cost of materials will be relatively small. (iii) A significant proportion of the costs incurred will be fixed and indirect. A B C D

4


Which of the following statements is correct with regard to time series analysis? A B C D

The trend is the general upward movement of the variable over time. The multiplicative model assumes that the different variations are independent of one another. Time series can be completely predicted by regression analysis. The cyclical variation is the regular periodic variation that exists over a long duration.

2 FOR FREE ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com

5

Which of the following is NOT CORRECT? A B C D

6

Cost accounting can be used for stock valuation to meet the requirements of internal reporting only. Management accounting provides appropriate information for decision-making, planning, control and performance evaluation. Routine information can be used for both short-term and long run decisions. Financial accounting information can be used for internal reporting purposes.

Melbourne wishes to make a comparison between the sales revenue figures for two different time periods. The following figures were recorded:

Year 7 Year 10

Sales £000 325 435

Inflation Index

124 130

What is the real increase in the sales revenue over this period in % terms? A B C D

7

7·9% 27·7% 33·8% 40·3%.

Darwin uses decision tree analysis in order to evaluate potential projects. The company has been looking at the launch of a new product which it believes has a 70% probability of success. The company is, however, considering undertaking an advertising campaign costing £50,000, which would increase the probability of success to 95%. If successful the product would generate income of £200,000 otherwise £70,000 would be received. What is the maximum that the company would be prepared to pay for the advertising? A B C D

8

Which of the following relates to the cost of replacing (rather than retaining) labour due to high employee turnover? A B C D

9

£32,500 £29,000 £17,500 £50,000.

Improving working conditions Suffering the learning curve effect Provision of a pension Provision of welfare services.

Which of the following is NOT CORRECT? A B C D

Contract costing is appropriate if each unit of production is unique and takes a considerable length of time to complete. Batch costing refers to a system where either job or process costing techniques are used to manufacture a product. Rectification costs should be charged to production overheads if the costs can not be specifically traced to a job. Job costing is required when each unit of production is unique and production is of long duration.


[P.T.O.

10 Taree Limited uses linear programming to establish the optimal production plan for the production of its two products, A and U, given that it has the objective of minimising costs. The following graph has been established bearing in mind the various constraints of the business. The clear area indicates the feasible region.

A units

A

E B

D

C

U units

Which points are most likely to give the optimal solution? A B C D

A and B only A, B and C only D and E only B, D and E only.

11 Dalby is currently considering an investment that gives a positive net present value of £3,664 at 15%. At a discount rate of 20% it has a negative net present value of £21,451. What is the internal rate of return of this investment? A B C D

15·7% 16·0% 19·3% 19·9%.

12 The management accountant of Gympie Limited has already allocated and apportioned the fixed overheads for the period although she has yet to reapportion the service centre costs. Information for the period is as follows:

Allocated and apportioned Work done by: Stores Maintenance

Production departments 1 2 £17,500 £32,750

60% 75%

30% 20%

Service departments Total Stores Maintenance £6,300 £8,450 £65,000

 5%

10% 

What are the total overheads included in production department 1 if the reciprocal method is used to reapportion service centre costs? A B C D

£27,618 £28,171 £28,398 £28,453.


13 Moura uses the economic order quantity formula (EOQ) to establish its optimal reorder quantity for its single raw material. The following data relates to the stock costs:

Purchase price: Carriage costs: Ordering costs: Storage costs:

£15 per item £50 per order £5 per order 10% of purchase price plus £0·20 per unit per annum

Annual demand is 4,000 units. What is the EOQ to the nearest whole unit? A B C D

153 units 170 units 485 units 509 units.

14 Bollon uses residual income to appraise its divisions using a cost of capital of 10%. It gives the managers of these divisions considerable autonomy although it retains the cash control function at head office.

The following information was available for one of the divisions: Net profit after tax £000 47

Division 1

Profit before interest and tax £000 69

Divisional net assets £000 104

Cash/ (overdraft) £000 (21)

What is the residual income for this division based on controllable profit and controllable net assets? A B C D

£36,600 £56,500 £58,600 £60,700.

15 Ayr is planning on paying £300 into a fund on a monthly basis starting three months from now, for twelve months.

The interest earned will be at a rate of 3% per month. What is the present value of these payments? A B C D

£2,816 £2,733 £2,541 £2,986.

16 Which of the following are true with regard to expected values?

Expected values (i) represents the single most likely estimate of an outcome. (ii) take no account of decision-makers risk. (iii) are reliant on the accuracy of the probability distribution. A B C D



[P.T.O.

17 Charleville operates a continuous process producing three products and one by-product. Output from the process for a month was as follows: Product

1 2 3 4 (by-product)

Selling price per unit £18 £25 £20 £2

Units of output from process 10,000 20,000 20,000 3,500

Total output costs were £277,000. What was the unit valuation for product 3 using the sales revenue basis for allocating joint cost? A B C D

£4·70 £4·80 £5·00 £5·10.

18 Bowen has established the following with regard to fixed overheads for the past month:

Actual costs incurred Actual units produced Actual labour hours worked Budgeted costs Budgeted units of production Budgeted labour hours

£132,400 5,000 units 9,750 hours £135,000 4,500 units 9,000 hours

Overheads are absorbed on a labour hour basis. What was the fixed overhead capacity variance? A B C D

£750 favourable £11,250 favourable £22,500 favourable £11,250 adverse.

19 Which of the following statements is correct? A B C D

A stores ledger account will be updated from a goods received note only. A stores requisition will only detail the type of product required by a customer. The term lead time is best used to describe the time between receiving an order and paying for it. To make an issue from stores authorisation should be required.

20 Perth operates a process costing system. The process is expected to lose 25% of input and this can be sold for £8 per kg.

Inputs for the month were: Direct materials 3,500 kg at a total cost of £52,500 Direct labour £9,625 for the period There is no opening or closing work in progress in the period. Actual output was 2,800 kg. What is the valuation of the output? A B C D

£44,100 £49,700 £58,800 £56,525.


21 Camden has three divisions. Information for the year ended 30 September is as follows: Division A £000 350 280

Sales Variable costs Contribution Fixed costs

Division B £000 420 210

70

Division C £000 150 120

210

30

Net profit

Total £000 920 610

310 262·5 47·5

General fixed overheads are allocated to each division on the basis of sales revenue; 60% of the total fixed costs incurred by the company are specific to each division being split equally between them. Using relevant costing techniques, which divisions should remain open if Camden wishes to maximise profits? A B C D

A, B and C A and B only B only B and C only.

22 Brisbane Limited has recorded the following sales information for the past six months: Month

Advertising expenditure £000 1·5 2 1·75 3 2·5 2·75

1 2 3 4 5 6

Sales revenue £000 30 27 25 40 32 38

The following has also been calculated: S(Advertising

expenditure) = £13,500 S(Sales revenue) = £192,000 S(Advertising expenditure x Sales revenue) = £447,250,000 2 S(Sales revenue ) = £6,322,000,000 2 S(Advertising expenditure ) = £32,125,000 What is the value of b, i.e. the gradient of the regression line? A B C D

0·070 0·086 8·714 14·286.

23 Which of the following could be carried out by higher level management?

(i) making short term decisions (ii) defining the objectives of the business (iii) making long run decisions A B C D



[P.T.O.

24 The following process account has been drawn up for the last month: Process account

Opening WIP Input: Materials Labour

Units 250

£ 3,000

4,500

22,500 37,500

Normal loss Output Abnormal Loss Closing WIP

4,750

Units 225 4,100 275 150

£ 450

4,750

Work in progress has the following level of completion: Material 100% 100%

Opening WIP Closing WIP

Labour 40% 30%

The company uses the FIFO method for valuing the output from the process and all losses occurred at the end of the process. What were the equivalent units for labour? A B C D

4,380 units 4,270 units 4,320 units 4,420 units.

25 Sydney is considering making a monthly investment for her son who will be five years old on his next birthday. She wishes to make payments until his 18th birthday and intends to pay £50 per month into an account yielding an APR of 12·68%. She plans to start making payments into the account the month af ter her sons fifth birthday. How much will be in the account immediately after the final payment has been made? A B C D

£18,847 £18,377 £17,606 £18,610.

(50 marks)


Section B  ALL FIVE questions are compulsory and MUST be attempted 1

Albany has recently spent some time on researching and developing a new product for which they are trying to establish a suitable price. Previously they have used cost plus 20% to set the selling price. The standard cost per unit has been estimated as follows: £

Direct materials Material 1 Material 2 Direct labour Fixed overheads

10 7 13 7

(4 (1 (2 (2

kg at £2·50/kg) kg at £7/kg) hours at £6·50/hour) hours at £3·50/hour)

37 Required: (a) Using the standard costs calculate two different cost plus prices using two different bases and explain an (6 marks) advantage and disadvantage of each method. (b) Give two other possible pricing strategies that could be adopted and describe the impact of each one on the (4 marks) price of the product. (10 marks)

2

Newcastle Limited uses variance analysis as a method of cost control. The following information is available for the year ended 30 September 2001: Budget

Production for the year

12,000 units

Standard cost per unit: Direct materials (3 kg at £10/kg) Direct labour (4 hours at £6/hour) Overheads (4 hours at £2/hour)

£ 30 24 8 62

Actual

Actual production units for year Labour  hours for the year  cost for the year Materials  kg used in the year  cost for the year

11,500 units 45,350 hours £300,000 37,250 kg £345,000

Required: (a) Prepare a reconciliation statement between the original budgeted and actual prime costs.

(7 marks)

(b) Explain what the labour variances calculated in (a) show and indicate the possible interdependence between (3 marks) these variances. (10 marks)


[P.T.O.

3

Toowomba manufactures various products and uses CVP analysis to establish the minimum level of production to ensure profitability. Fixed costs of £50,000 have been allocated to a specific product but are expected to increase to £100,000 once production exceeds 30,000 units, as a new factory will need to be rented in order to produce the extra units. Variable costs per unit are stable at £5 per unit over all levels of activity. Revenue from this product will be £7·50 per unit. Required: (a) Formulate the equations for the total cost at: (i) less than or equal to 30,000 units; (ii) more than 30,000 units.

(2 marks)

(b) Prepare a breakeven chart and clearly identify the breakeven point or points.

(6 marks)

(c) Discuss the implications of the results from your graph in (b) with regard to Toowombas production plans. (2 marks) (10 marks)

4

Wollongong wishes to calculate an operating budget for the forthcoming period. Information regarding products, costs and sales levels is as follows: Product Materials required X (kg) Y (litres) Labour hours required Skilled (hours) Semi skilled (hours) Sales level (units) Opening stocks (units)

A

B

2 1

3 4

4 2 2,000 100

2 5 1,500 200

Closing stock of materials and finished goods will be sufficient to meet 10% of demand. Opening stocks of material X was 300 kg and for material Y was 1,000 litres. Material prices are £10 per kg for material X and £7 per litre for material Y. Labour costs are £12 per hour for the skilled workers and £8 per hour for the semi skilled workers. Required: Produce the following budgets: (a) (b) (c) (d)

production (units); materials usage (kg and litres); materials purchases (kg, litres and £); and labour (hours and £). (10 marks)


5

Surat is a small business which has the following budgeted marginal costing profit and loss account for the month ended 31 December 2001: £000

Sales Cost of sales: Opening stock Production costs Closing stock

£000 48

3 36 (7) (32) 16

Other variable costs: Selling

(3·2)

Contribution Fixed costs: Production overheads Administration Selling

12·8 (4) (3·6) (1·2)

Net profit

4·0

The standard cost per unit is: £ 8 9 3

Direct materials (1 kg) Direct labour (3 hours) Variable overheads (3 hours)

20 Budgeted selling price per unit

30

The normal level of activity is 2,000 units per month. Fixed production costs are budgeted at £4,000 per month and absorbed on the normal level of activity of uni ts produced. Required: (a) Prepare a budgeted profit and loss account under absorption costing for the month ended 31 December 2001. (6 marks) (b) Reconcile the profits under these two methods and explain why a business may prefer to use marginal costing (4 marks) rather than absorption costing. (10 marks)


[P.T.O.

Formulae Sheet


Present Value Table Present value of 1 i.e. (1 + r)

Where

n

r = discount rate n = number of periods until payment Discount rate (r)

Periods (n)

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1 2 3 4 5

0·990 0·980 0·971 0·961 0·951

0·980 0·961 0·942 0·924 0·906

0·971 0·943 0·915 0·888 0·863

0·962 0·925 0·889 0·855 0·822

0·952 0·907 0·864 0·823 0·784

0·943 0·890 0·840 0·792 0·747

0·935 0·873 0·816 0·763 0·713

0·926 0·857 0·794 0·735 0·681

0·917 0·842 0·772 0·708 0·650

0·909 0·826 0·751 0·683 0·621

1 2 3 4 5

6 7 8 9 10

0·942 0·933 0·923 0·941 0·905

0·888 0·871 0·853 0·837 0·820

0·837 0·813 0·789 0·766 0·744

0·790 0·760 0·731 0·703 0·676

0·746 0·711 0·677 0·645 0·614

0·705 0·665 0·627 0·592 0·558

0·666 0·623 0·582 0·544 0·508

0·630 0·583 0·540 0·500 0·463

0·596 0·547 0·502 0·460 0·422

0·564 0·513 0·467 0·424 0·386

6 7 8 9 10

11 12 13 14 15

0·896 0·887 0·879 0·870 0·861

0·804 0·788 0·773 0·758 0·743

0·722 0·701 0·681 0·661 0·642

0·650 0·625 0·601 0·577 0·555

0·585 0·557 0·530 0·505 0·481

0·527 0·497 0·469 0·442 0·417

0·475 0·444 0·415 0·388 0·362

0·429 0·397 0·368 0·340 0·315

0·388 0·356 0·326 0·299 0·275

0·305 0·319 0·290 0·263 0·239

11 12 13 14 15

(n)

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

1 2 3 4 5

0·901 0·812 0·731 0·659 0·593

0·893 0·797 0·712 0·636 0·567

0·885 0·783 0·693 0·613 0·543

0·877 0·769 0·675 0·592 0·519

0·870 0·756 0·658 0·572 0·497

0·862 0·743 0·641 0·552 0·476

0·855 0·731 0·624 0·534 0·456

0·847 0·718 0·609 0·516 0·437

0·840 0·706 0·593 0·499 0·419

0·833 0·694 0·579 0·482 0·402

1 2 3 4 5

6 7 8 9 10

0·535 0·482 0·434 0·391 0·352

0·507 0·452 0·404 0·361 0·322

0·480 0·425 0·376 0·333 0·295

0·456 0·400 0·351 0·308 0·270

0·432 0·376 0·327 0·284 0·247

0·410 0·354 0·305 0·263 0·227

0·390 0·333 0·285 0·243 0·208

0·370 0·314 0·266 0·225 0·191

0·352 0·296 0·249 0·209 0·176

0·335 0·279 0·233 0·194 0·162

6 7 8 9 10

11 12 13 14 15

0·317 0·286 0·258 0·232 0·209

0·287 0·257 0·229 0·205 0·183

0·261 0·231 0·204 0·181 0·160

0·237 0·208 0·182 0·160 0·140

0·215 0·187 0·163 0·141 0·123

0·195 0·168 0·145 0·125 0·108

0·178 0·152 0·130 0·111 0·095

0·162 0·137 0·116 0·099 0·084

0·148 0·124 0·104 0·088 0·074

0·135 0·112 0·093 0·078 0·065

11 12 13 14 15


[P.T.O.

Annuity Table

1  (1 + r ) Present value of an annuity of 1 i.e.  r

n

Where

r = discount rate n = number of periods Discount rate (r)

Periods (n)

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1 2 3 4 5

0·990 1·970 2·941 3·902 4·853

0·980 1·942 2·884 3·808 4·713

0·971 1·913 2·829 3·717 4·580

0·962 1·886 2·775 3·630 4·452

0·952 1·859 2·723 3·546 4·329

0·943 1·833 2·673 3·465 4·212

0·935 1·808 2·624 3·387 4·100

0·926 1·783 2·577 3·312 3·993

0·917 1·759 2·531 3·240 3·890

0·909 1·736 2·487 3·170 3·791

1 2 3 4 5

6 7 8 9 10

5·795 6·728 7·652 8·566 9·471

5·601 6·472 7·325 8·162 8·983

5·417 6·230 7·020 7·786 8·530

5·242 6·002 6·733 7·435 8·111

5·076 5·786 6·463 7·108 7·722

4·917 5·582 6·210 6·802 7·360

4·767 5·389 5·971 6·515 7·024

4·623 5·206 5·747 6·247 6·710

4·486 5·033 5·535 5·995 6·418

4·355 4·868 5·335 5·759 6·145

6 7 8 9 10

11 12 13 14 15

10·37 11·26 12·13 13·00 13·87

9·787 10·58 11·35 12·11 12·85

9·253 9·954 10·63 11·30 11·94

8·760 9·385 9·986 10·56 11·12

8·306 8·863 9·394 9·899 10·38

7·887 8·384 8·853 9·295 9·712

7·499 7·943 8·358 8·745 9·108

7·139 7·536 7·904 8·244 8·559

6·805 7·161 7·487 7·786 8·061

6·495 6·814 7·103 7·367 7·606

11 12 13 14 15

(n)

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

1 2 3 4 5

0·901 1·713 2·444 3·102 3·696

0·893 1·690 2·402 3·037 3·605

0·885 1·668 2·361 2·974 3·517

0·877 1·647 2·322 2·914 3·433

0·870 1·626 2·283 2·855 3·352

0·862 1·605 2·246 2·798 3·274

0·855 1·585 2·210 2·743 3·199

0·847 1·566 2·174 2·690 3·127

0·840 1·547 2·140 2·639 3·058

0·833 1·528 2·106 2·589 2·991

1 2 3 4 5

6 7 8 9 10

4·231 4·712 5·146 5·537 5·889

4·111 4·564 4·968 5·328 5·650

3·998 4·423 4·799 5·132 5·426

3·889 4·288 4·639 4·946 5·216

3·784 4·160 4·487 4·772 5·019

3·685 4·039 4·344 4·607 4·833

3·589 3·922 4·207 4·451 4·659

3·498 3·812 4·078 4·303 4·494

3·410 3·706 3·954 4·163 4·339

3·326 3·605 3·837 4·031 4·192

6 7 8 9 10

11 12 13 14 15

6·207 6·492 6·750 6·982 7·191

5·938 6·194 6·424 6·628 6·811

5·687 5·918 6·122 6·302 6·462

5·453 5·660 5·842 6·002 6·142

5·234 5·421 5·583 5·724 5·847

5·029 5·197 5·342 5·468 5·575

4·836 4·988 5·118 5·229 5·324

4·656 4·793 4·910 5·008 5·092

4·486 4·611 4·715 4·802 4·876

4·327 4·439 4·533 4·611 4·675

11 12 13 14 15

End of Question Paper


Answers


Part 1 Examination  Paper 1.2 Financial Information for Management

Answers

Section A 1

B

Unavoidable costs are not relevant for decision making.

2

B

OAR/machine hour =

£180,000

= £18/machine hour

10,000 3

D

Service organisations are more likely to use ABC.

4

D

The trend is the general upward or downward movement of t he variable over time. The additive model assumes independence, not the multiplicative model. Regression analysis can be used to predict the trend but adjustments still need to be made regarding variations.

5

A

Cost accounting can be used for stock valuation to meet the requirements of both internal and external reporting.

6

B

325,000 x

130

= 340,726 adjusted year 7 sales figure

124 435,000 % = 127·7%  100% = 27·7% 340,726 7

A

(

)

Value of imperfect information = (£200,000 x 0·95 + £70,000 x 0·05)  (£200,000 x 0·7 + £70,000 x 0·3) = £32,500

8

B

Working conditions, pension provisions and welfare are all costs relating to retaining, not replacing, labour.

9

D

Job costing applies to units that take a shor t duration to complete.

10

C

Since the company has an objective of minimising costs the potential optimal solutions will be the points closest to the origin i.e. D and E.

11

A

IRR = 15% + êêê

é

ù úúú x (20%  15%) ë 3,664 + 21,451 û 3,664

= 15·7%

17


12

C

S = 6,300 + 0·05M M = 8,450 + 0·1S S = 6,300 + 0·05 x (8,450 + 0·1S) = 6,300 + 422·5 + 0·005S 0·995S = 6,722·5 \ S = £6,756 \ M = £9,126 For production department 1, the total overheads are = 17,500 + 6,756 x 60% + 9,126 x 75% = £28,398

13

D

EOQ =

Ö

2ChD Co

Ö

=

2 x (50 + 5) x 4,000

= 509 units

(15 x 0·1) + 0·2

14

B

RI = 69  (104 + 21) x 10% = 56·5

15

A

PV = 300 x 11·30  300 x 1·913 (from tables) = £2,816 or PV = (300 x 9·954) x 0·943 = £2,816

16

D

The expected value represents the weighted average outcome.

17

C

Total sales revenue = 18 x 10,000 + 25 x 20,000 + 20 x 20,000 = 1,080,000 Joint costs to be allocated = 277,000  2 x 3,500 = 270,000 Costs to product 3 = 270,000 x

20 x 20,000

100,000

=

1,080,000 18

B

OAR/labour hour =

135,000

= £5/ unit

20,000 units

= £15/labour hour

9,000 Capacity variance: Actual 9,750 hours Budget 9,000 hours 750 hours x £15 = £11,250 favourable

19

D

20

C

Authorisation should be obtained if the stores function is to be properly maintained.

Process account Materials Labour Abnormal gain

Units 3,500

£ 52,000 9,625

175

Normal loss

Units 875

Output

2,800

3,675

Cost/unit =

52,500 + 9,625  7,000

£ 7,000

3,675

=

55,125

3,500  875

= £21

2,625

Valuation of output = £21 x 2,800 = £58,800

18


21

B

Specific fixed overheads per division = 262,500 x 60% 157,500 = = 52,500 3

Contribution Fixed costs  specific

Division A

Division B

Division C

£000

£000

£000

70·5) (52·5)

210·5) (52·5)

30·5) (52·5)

310·5) (157·5)

17·5)

157·5)

(22·5)

245·5)

Profit after specific costs

22

C

(6 x 447,250,000)  (13,500 x 192,000)

Total

= 8·714

2

(6 x 32,125,000)  13,500 Advertising expenditure is the independent variable.

23

A

Higher level management could be involved with all level of decision making within a business.

24

C

Statement of Equivalent Units Opening WIP Units started and finished

Total 250 3,850

Labour 150 3,850

Normal loss Abnormal loss Closing WIP

4,100 225 275 150

 275 45

4,750

4,320

= 60% x 250

= 30% x 45

12

25

D

Ö1·1268 = 1·01

50 x 1·0113x12  1 = £18,610 1·01  1

19


Section B 1

(a)

Marginal cost plus = £30 x 120% = £36 Advantage  simple and easy to calculate  focuses on contribution  can easily adjust the mark-up Disadvantage  may not cover fixed costs  ignores price/demand relationship Total cost plus = Advantage     Disadvantage  

(b)

2

£37 x 120% = £44·40 more likely to ensure a profit is made product is not sold below full cost simple and easy to calculate can easily adjust the mark-up fixed costs need to be allocated to the cost unit which may be ambiguous ignores price/demand relationship

Any two of the following pricing strategies should be included:  price skimming  tends to lead to a high price initially, useful if the product is completely new,  penetration pricing  go to market with a low price initially to gain market share,  price discrimination  use two different prices in two different markets if there are barriers between the markets e.g. age, time and location,  premium pricing  charging a higher price than the competitors as the product can be differentiated,  cost plus pricing  leads to a price that will cover costs although care needs to be taken with regard to marginal cost plus to ensure that the plus is large enough to cover fixed costs,  market price  leads to an acceptable price but one which may vary,  price to maximise profits although a demand function will need to be established  leads to an optimal price but may not affect the market price.

(a)

£ (648,000) 27,000

Budgeted prime cost (30 + 24) x 12,000 Cost volume variance (500 x 54)

(621,000) Materials Price: Did cost Should cost (37,250 x £10)

£345,000 £372,500 27,500F

Usage:

Did use Should use (11,500 x 3)

37,250 kg 34,500 kg 2,750 kg x £10

Labour Rate:

Did cost Should cost (45,350 x £6)

(27,500)A

£300,000 £272,100 (27,900)A

Efficiency: Did take Should take (11,500 x 4 hours)

45,350 hours 46,000 hours 650 hours x £6

Actual prime cost (£300,000 + £345,000) (b)

3,900F (645,000)

Labour rate variance  this shows t hat labour were paid at a higher rate Labour efficiency variance  this shows that labour worked harder than expected as they made more in less time Interdependence  since labour were paid more they were motivated to work harder

20


3

(a)

(i) (ii)

Total cost for 30,000 units or less = 50,000 + 5 x Q Total cost for more than 30,000 units = 100,000 + 5 x Q

(b)

(c)

4

(a)

(b)

Implications of having two breakeven points: the product is only profitable between 20,000 and 30,000 units and above 40,000 units, so the production plan should be set accordingly.

Production budget Product Sales Opening stock Closing stock (10% x sales level)

Materials usage budget Material type Usage (2,100 x 2 + 1,450 x 3) (2,100 x 1 + 1,450 x 4)

(c)

(d)

Materials purchases budget Usage Opening stock Closing stock (W)

A 2,000 (100)

B 1,500 (200)

200

150

2,100

1,450

X Kg

Y Litres

8,550 7,900

8,550 (300) 850

7,900 (1,000) 800

9,100 x £10

7,700 x £7

£91,000

£53,900

Labour budget

(2,100 x 4 + 1,450 x 2) (2,100 x 2 + 1,450 x 5)

Skilled hours 11,300

Semi skilled hours

x £12

11,450 x £8

£135,600

£91,600

Working for Material Closing Stock: Material X (2,000 x 2 + 1,500 x 3) x 10% = 850 Material Y (2,000 x 1 + 1,500 x 4) x 10% = 800

21


5

(a) £000 Sales Cost of sales: Opening stock (150 x 22) Production costs Variable costs Fixed costs (1,800 x 2)

36·0 3·6

Closing stock (350 x 22) Under absorption (W2)

42·9 (7·7) 0·4

£000 48·6

3·3

(35·6) Gross profit Administration Selling (1·2 + 3·2)

12·4 (3·6) (4·4)

Net profit

4·4

Workings 1. Standard cost per unit Direct variable costs £4,000 Fixed overheads 2,000 units

£ 20 =

2 22

2.

Budgeted costs Absorbed fixed overheads

£4,000 £3,600

Budgeted under absorbed

£400

(b) Profit under absorption costing Add fixed costs in opening stock (150 x 2) Less fixed costs in closing stock (350 x 2)

£ 4,400 300 (700)

Profit under marginal costing

4,000

A business may prefer marginal costing as it only includes costs that are relevant for decision making i.e. variable ones. Also the business may not have significant fixed overheads and so marginal costing could be more appropriate.

22


Part 1 Examination  Paper 1.2 Financial Information for Management

Marking Scheme Marks

Section A Each question within this section is worth 2 marks

25 x 2 50

Section B 1 (a) Calculation of marginal cost plus Advantage of marginal cost plus Disadvantage of marginal cost plus Calculation of fixed cost plus Advantage of fixed cost plus Disadvantage of fixed cost plus

1 1 1 1 1 1 6

(b)

Pricing strategy Impact of pricing strategy on price

1 1

Two strategies and impacts required

2x2

2 4 10

2

(a)

Calculation of budgeted prime cost Calculation of cost volume variance Calculation of the materials price variance Calculation of the materials usage variance Calculation of the labour rate variance Calculation of the labour efficiency variance Calculation of actual prime cost Well presented reconciliation statement

1 1 1 1 1 1 ½ ½ 7

(b)

What the rate variance indicates What the efficiency variance indicates Discussion of interdependence

1 1 1 3 10

3

(a)

(b)

(i) (ii)

Total cost equation at 30,000 units or less Total cost equation at above 30,000 units

1 1 2 ½ 2 1 1 1 ½

Labelled axes on graph Plotting the total cost line correctly Plotting the total revenue line correctly Breakeven point at 20,000 indicated Breakeven point at 40,000 indicated Good presentation

6 (c)

Discussion of implications

2 10

23


Marks 4

(a)

Production budget Sales units for both products Opening stock figures for both products Closing stock figure for product A Closing stock figure for product B

½ ½ ½ ½ 2

(b)

Materials usage budget Figure for material X Figure for material Y

1 1 2

(c)

Material purchases budget Opening stock figures for both materials Closing stock figure for material X Closing stock figure for material Y Showing material costs per kg or litre

½ 1 1 ½ 3

(d)

Labour budget Total hours for skilled labour Total hours for semi skilled labour Showing labour cost per hour

1 1 ½ 2½ ½

Presentation

10

5

(a)

Calculation of FOAR Calculation of standard cost under AC Opening stock units figure Opening stock valuation Calculation of production units Fixed production costs absorbed Closing stock units figure Closing stock valuation Under absorption calculation Selling costs Presentation

½ ½ ½ ½ ½ ½ ½ ½ 1 ½ ½ 6

(b)

Reconciliation statement Absorption costing profit Fixed costs in opening stock Fixed costs in closing stock Marginal costing profit Discussion of why MC could be preferred

½ ½ ½ ½ 2 4 10

24


Financial Information for Management PART 1 FRIDAY 14 JUNE 2002

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A

ALL 25 questions are compulsory and MUST be answered

Section B

ALL FIVE questions are compulsory and MUST be answered

2 . 1 r e p a P


Section B – ALL FIVE questions are compulsory and MUST be attempted 1

Jim is reviewing his pay rises over the last four years compared with the Retail Price Index (RPI) and the Average Earnings Index (AEI). He has obtained the following: Year

1998 1999 2000 2001

Jim’s wage increase on prior year % – 5·0 3·0 4·0

Retail Price Index

Average Earnings Index

157·5 162·9 165·4 170·3

108·0 113·5 119·0 124·4

Jim earned £150 per week in 1998 and is carrying out the review in the year 2001 after receiving the 4% increase. Required: (a) Calculate Jim’s actual weekly earnings in each year from 1998 to 2001 using the percentage wage increase (2 marks) (to one decimal place). (b) Using your answer from part (a) calculate Jim’s weekly earnings in each year in year 2001 terms using: (i)

the Retail Price Index (RPI); and

(ii) the Average Earnings Index (AEI). Your calculations should be to one decimal place.

(4 marks)

(c) Comment on the results obtained from parts (a) and (b).

(2 marks)

(d) The Average Earnings Index for 1995 is 100. What does this mean?

(2 marks) (10 marks)

2


2

Mike Limited has been asked to quote a price for a one off contract. Management have drawn up the following schedule: £ 60,780

Contract price (cost plus 20%) Costs: Materials: V (300 kg at £10/kg) Materials: I (1,000 litres at £7/litre) Materials: C (550 kg at £3/kg) Labour: Department 1 (1,500 hours at £8/hour) Labour: Department 2 (2,000 hours at £10/hour) Overheads: absorbed on a budgeted labour hour basis Labour: (3,500 hours at £2/labour hour)

3,000 7,000 1,650 12,000 20,000

Total costs

50,650

7,000

The following is also relevant: Material V The cost of £10 is the original purchase cost incurred some years ago. This material is no longer in use by the company and if not used in the contract then it would be sold for scrap at £3/kg. Material I This is in continuous use by the business. £7 is the historic cost of the material although current supplies are being purchased at £6·50. Material C Mike Limited has 300 kg of this material in stock and new supplies would cost £4/kg. If current stocks are not used for the contract then they would be used as a substitute for material Y in another production process costing £7/kg. 2 kg of C replaces 1 kg of Y. Department 1 This department has spare labour capacity sufficient for the contract and labour would be retained. Department 2 This department is currently working at full capacity. Mike Limited could get the men to work overtime to complete the contract paid at time and a half, or they could divert labour hours from the production of other units that currently average £3 contribution per labour hour. Overheads These are arbitrarily absorbed at a pre-determined rate. There will be no incremental costs incurred. Required: Calculate the minimum contract price that Mike Limited could accept to breakeven using relevant costing techniques. (10 marks)

3

(a) Define the terms ‘operational planning’ and ‘strategic planning’ and explain how one impacts upon the other. (3 marks) (b) List the stages in a planning and control process and briefly explain what is involved at each stage. (7 marks) (10 marks)

3


[P.T.O.

4

(a) James is considering paying £50 into a fund on a monthly basis for 10 years starting in one year’s time. The interest earned will be 1% per month. Once all of these payments have been made the investment will be transferred immediately to an account that will earn interest at 15% per annum until maturity. The fund matures five years after the last payment is made into the fund. Required: Calculate the terminal value of the fund in 15 years’ time to the nearest £.

(3 marks)

(b) Doug wishes to take out a loan for £2,000. He has the choice of two loans: Loan 1:

monthly payments for 36 months at an APR of 9·38%

Loan 2:

monthly payments for 24 months at an APR of 12·68%

Required: (i)

Calculate the monthly repayments for loans 1 and 2 to two decimal places.

(5 marks)

(ii) Calculate the total amount repaid under each loan and purely on the basis of this information recommend which loan Doug should choose. (2 marks) (10 marks)

5

Adam, the management accountant of Mark Limited, has on file the costs per equivalent unit for the company’s process for the last month but the input costs and quantities appear to have been mislaid. Information that is available to Adam for last month is as follows: Opening work in progress Closing work in progress Normal loss Output

100 units, 30% complete 200 units, 40% complete 10% of input valued at £2 per unit 1,250 units

The losses were as expected and Adam has a record of there being 150 units scrapped during the month. All materials are input at the start of the process. The cost per equivalent unit for materials was £2·60 and for conversion costs was £1·50. Mark Limited uses the FIFO method of stock valuation in its process account. Required: (a) Calculate the units input into the process.

(2 marks)

(b) Calculate the equivalent units for materials and conversion costs.

(4 marks)

(c) Using your answer from (b) calculate the input costs.


4


Formulae Sheet

5


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    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

6


Annuity Table

3UHVHQW YDOXH RI DQ DQQXLW\ RI  LH :KHUH

 ²   U ²Q ³³³³²² U

U  GLVFRXQW UDWH Q  QXPEHU RI SHULRGV 'LVFRXQW UDWH U

3HULRGV

Q





















    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

Q





















    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    


7



Answers



Part 1 Examination – Paper 1.2 FInancial Information for Management

Answers

Section B 1 (a) Earnings 1998 = £150 (given in the question) 1999 = £150 × 1·05 = £157·5 2000 = £157·5 × 1·03 = £162·2 2001 = £162·2 × 1·04 = £168·7 (b) Year 1998

162·2

=

(i) RPI 150 157·5

1999

164·7

=

157·5 162·9

2000

167·0

=

162·2 165·4

2001

168·7

=

168·7 170·3

(c)

× 170·3

172·8

× 170·3

172·6

× 170·3

169·6

× 170·3

168·7

=

(ii) AEI 150 108

=

157·5 113·5

=

162·2 119

=

168·7 124·4

× 124·4 × 124·4 × 124·4 × 124·4

Using the RPI it shows that Jim has had a real increase in his wages over the four year period. Using the AEI shows that Jim has actually seen a reduction in his earnings compared to the average wages earned.

(d)

2

1995 is the base year for the Average Earnings Index. This means that all figures are compared to the average earnings in the year.

Relevant cost statement Note 1 2 3 4 5 6

Material V Material I Material C Department 1 Department 2 Overheads Minimum contract price

£ 900 6,500 2,050 – 26,000 – 35,450

Notes: 1 The historic cost of £10 is not relevant as it is sunk. The relevant cost is the opportunity cost relating to lost scrap proceeds = 300 × £3 = £900. 2

Again the historic cost is irrelevant as it is a sunk cost. Since the material is in continuous use in the business the relevant cost will be the current replacement cost of the material = 1,000 × £6·50 = £6,500.

3

Since there is only 300 kg in stock 250 kg would need to be purchased at the current replacement cost = 250 × £4 = £1,000. If the stock of 300 kg is not used for the contract it would be used to replace material Y in an alternative production process. £7 Therefore the relevant cost for the stock of 300 kg is = 300 × = £1,050 bearing in mind the 2 for 1 substitution. 2 Total relevant cost for material C = £1,000 + £1,050 = £2,050

4

Since there is spare capacity in this department there is no relevant cost.

5

For this department the two alternatives need to be considered: Cost of working overtime = 2,000 × £10 × 1·5 = £30,000 Cost of diverting labour = 2,000 × (£10 + £3) = £26,000 It would be cheaper to divert the labour from the other production processes so the relevant cost for department 2 is £26,000.

6

Since the overheads are absorbed and there is no mention of the overheads actually increasing as a direct result of the contract there is no relevant cost for overheads.

11


3

(a)

Operational planning

This is often referred to as short term budgeting and looks at the resources, production etc for a financial period, usually a year. It provides a detailed plan of what the organisation hopes will be achieved within the next financial year.

Strategic planning

This is often referred to as the long term plan and looks at where the organisation is heading over a number of years, for example a five year plan would be a long term plan. It presents the organisation with an idea of the broad direction that it hopes to be heading in.

The strategic plan will incorporate the operational plans of the organisation. The operational plan translating the strategic plan into achievable short term goals.

4

(b)

1. 2. 3. 4. 5. 6. 7.

identify objectives – defines what the organisation hopes to achieve look at alternative courses of action – looks at different ways that the goals might be achieved evaluate the alternatives using relevant data – look at the information that has been obtained select the most appropriate course of action – from information make the best choice to achieve corporate goals implement the long term plan in the form of a budget – prepare detailed budget monitor actual results – collect data regarding what is actually happening with the organisation compare actual to planned results – look at actual versus budget and see whether control action needs to be taken

(a)

Future value = £50

1 0×1 2 1 ⋅ 01 – 1 ×  = £50 × 230·039 = £11,501·95  1 ⋅ 01 – 1  

Compound forward for 5 years at 15% = £11,501·95 × (1·15)5 = £11,501·95 × 2·011 = £23,130·421 ≈ £23,130 (if the student keeps the numbers in their calculator the solution is £23,135) (b)

(i)

Loan 1 –1 12 APR = 9·38%, then the monthly rate is 1·0938 – 1 = 0·0075% £2,000 = A1

1  ×  1  –   0 ⋅ 0075  0 ⋅ 00 75 × 1 ⋅ 0 075 36 

£2,000 = A1

× 31·447

∴ A1 =

£2,000

= £63·60

31·447

Loan 2 APR = 12·68%, then the monthly rate is 1·1268 £2,000 = A2

1   1  ×   0 ⋅ 001 –  0 ⋅ 0 01 × 1 ⋅ 0124 

£2,000 = A2

× 21·243

∴ A2 = (ii)

£2,000

–1

12

– 1 = 0·01%

= £94·15

21·243

Loan 1 total amount repaid = £63·60 Loan 2 total amount repaid = £94·15

× 36 = £2,289·6 ≈ £2,290 × 24 = £2,259·6 ≈ £2,260

Although loan 2 is more expensive on a monthly basis, slightly less money is paid over the two year period than with loan 1 over the three year period.

12


5

(a) Process account Units 100 1,500β

Opening WIP Input

£

Units 15 1,250 200

Normal loss Output Closing WIP

1,600

Or from the normal loss figure =

£

1,600

150

units

= 1,500

units

0·1 (b) Statement of equivalent units Opening WIP (to complete)

Total

Material

100

– = 100 × 70% 1,150

Conversion costs 70 = 100 × 70% 1,150

– 200 = 200 × 10%

– 80 = 200 × 10%

1,350

1,300

Costs incurred in period

Materials

Add scrap proceeds from normal loss

£ 3,510 = 1,350 × 2·60 300 = 150 × £2

Conversion costs £ 1,950 = 1,300 × £1·50

Units started and finished Output Normal loss Closing WIP

β

1,150 1,250 150 200

(c)

3,810

1,950

13



Part 1 examination – Part 1.2 Financial Information for Management

1

(a)

Marking Scheme Marks 1 / 2 1 / 2 1 / 2 1 / 2

Noting Jim’s wages for 1998 Calculating the figure for 1999 Calculating the figure for 2000 Calculating the figure for 2001

—

(b)

(c)

(d)

Calculating the wage figures adjusted for the RPI for: 1998 1999 2000 2001

1 / 2 1 / 2 1 / 2 1 / 2

Calculating the wage figure adjusted for the AEI for: 1998 1999 2000 2001

1 / 2 1 / 2 1 / 2 1 / 2

Comment on Jim’s wages compared to the: RPI AEI Mentioning the words ‘base period’ Explaining what this means

—

4

1 1 —

2

1 1 —

15


2

2 — 10 —

2

Marks 1 / 2 1 / 2

Calculation of relevant cost for material V Explanation of historic cost as sunk Explanation of relevant cost being opportunity cost relating to lost scrap proceeds

1 / 2 1 / 2

Calculation of relevant cost for material I Explanation of relevant costs being current purchase cost as in continuous use in business

1 / 2

Calculation of relevant cost for material C Explanation of need to buy extra units and relevant cost Explanation of the relevant cost of the alternative use for material C

1 / 2

Calculation of relevant cost of labour in dept 1 Explanation of there being spare capacity so no relevant cost

1 / 2

Calculation of relevant cost of labour in dept 2 Explanation including the need to compare overtime costs with cost of diverting labour

3

1 1 / 2 1 / 2

1 1

Calculation of relevant cost of overheads Explanation of there being no incremental costs

1 / 2 1 / 2

Presentation of statement and notes Stating minimum price being the total of the relevant costs

1 / 2

(a)

(b)

1 —

Definition of short term plan to include the word ‘budget’ and to mention a time period Definition of a long term plan to include the word ‘strategy’and to mention a time period Explanation to include short term plan included within the long term plan

1 / 2 1 / 2

1 1 1 — 3 1 / 2 31 / 2 ––—

for each stage in the planning process for a brief explanation of each stage

16


10 –—

3

7 –— 10 –—

4

(a)

Marks 1 / 2 1 / 2 1 / 2 1 / 2 1 / 2 1 / 2

Using the correct formula Using an interest rate of 1% Using n = 120 time periods Putting numbers into formula and generating a solution Compounding forward for an extra 5 years Using correct rate of 15%

–––

(b)

(i)

Loan 1 Calculating the correct monthly rate Using the correct formula Using the correct time period Calculating the correct discount factor Calculating the correct annuity figure

1 / 2 1 / 2 1 / 2 1 / 2 1 / 2

Loan 2 Calculating the correct monthly rate Using the correct formula Using the correct time period Calculating the correct discount factor Calculating the correct annuity figure

1 / 2 1 / 2 1 / 2 1 / 2 1 / 2

––– (ii)

5

(a)

(b)

(c)

3

5

1 / 2 1 / 2

Calculation of total repaid amount for loan 1 Calculation of total repaid amount for loan 2 Explanation regarding which one Doug should choose based on these figures

1 –––

Calculation of input units Stating the input units

1 1 –––

Equivalent units for opening WIP Calculation of units started and finished Equivalent units for started and finished units Equivalent units for normal loss Equivalent units for closing WIP

2 ––– 10 –––

2

1 1 / 2 1 / 2

1 1 –––

Calculation of costs for materials Adjusting for scrap proceeds Calculation of costs for conversion costs Stating the input costs

1 1 1 1 –––

17


4

4 ––– 10 –––




Section B


2 . 1 r e p a P


Section A – ALL 25 questions are compulsory and MUST be attempted Please use the candidate registration sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1

Consider the following graph for total costs and total revenue: Total costs £ Costs/revenue Total revenue

A B

C

D

Units

At which point on the above graph is it most likely that profits will be maximised? A B C D

2

A company has established a budgeted sales revenue for the forthcoming period of £500,000 with an associated contribution of £275,000. Fixed production costs are £137,500 and fixed selling costs are £27,500. What is the breakeven sales revenue? A B C D

£75,625 £90,750 £250,000 £300,000

2


3

A company has just purchased a new machine, costing £150,000, for a contract. It has an installation cost of £25,000 and is expected to have a scrap value of £10,000 in five years’ time. The machine will be depreciated on a straight line basis over five years. What is the relevant cost of the machine for the contract? A B C D

4

£140,000 £150,000 £165,000 £175,000

A company uses process costing to value output. During the last month the following information was recorded: Output: Normal loss: Actual loss:

2,800 kg valued at £7·50/kg 300 kg which has a scrap value of £3/kg 200 kg

What was the value of the input? A B C D

£22,650 £21,900 £21,600 £21,150

3


[P.T.O.

5

A company produces three products which have the following details: Product II Per unit 5 kg £25 £5 5,000

I Per unit 8 kg £35 £4·375 3,000

Direct materials (at £5/kg) Contribution per unit Contribution per kg of material Demand (excluding special contract) (units)

III Per unit 6 kg £48 £8 2,000

The company must produce 1,000 units of Product I for a special contract before meeting normal demand. Unfortunately there are only 35,000 kg of material available. What is the optimal production plan? I 1,000 1,000 2,875 3,000

A B C D

Product II 4,600 3,000 – 2,200

III 2,000 2,000 2,000 –

The following information relates to questions 6 and 7: A company has established the following budgeted fixed overheads for the forthcoming period: £’000 Heating and Lighting Welfare costs Power Total

12 7 42 –– 61 ––

Bases of apportionment Cubic capacity Number of employees Kwh usage

Other information: 3

Cubic capacity (m ) Employees (number) Power (kwh usage) Labour hours Machine hours

Department 1 6,000 20

Department 2 7,500 30

35,000 28,000 40,000

25,000 48,500 39,000

Maintenance 2,500 6

Total 16,000 56 60,000 76,500 79,000

The maintenance department splits its time between Department 1 and Department 2 on a ratio of 2:3. The management accountant has partially completed an allocation and apportionment statement:

Heat and Light Welfare Power Total

Department 1 £ 4,500 2,500 24,500 ––––––– 31,500 –––––––

Department 2 £ 5,625

Maintenance £ 1,875

4


6

What would be the total cost allocated and apportioned to Department 2 excluding the reapportionment of the maintenance costs? A B C D

£21,250 £26,875 £27,625 £29,500

7

What would be the overhead absorption rate in Department 1 (to 3 decimal places)? A £0·788/machine hour B £0·814/machine hour C £1·125/labour hour D £1·163/labour hour

8

The following statements relate to long-term contracts: (i)

Levels of completion of the contract can be estimated using either costs to date or work certified to date.

(ii) Any anticipated losses should be taken as soon as they are expected. (iii) If the contract is half complete it is expected that half the expected profit will always be taken. Which of the above are correct? A B C D

9

(i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii)

The following relate to procedures for materials: 1. 2. 3. 4.

Check the goods received note Raise a stores requisition note Update the stores ledger account for the purchase Raise a purchase order

What would be the correct order of the above when in the process of purchasing and using materials? A B C D

4, 2, 4, 1,

2, 1, 1, 4,

1, 3, 3, 3,

3 4 2 2

5


[P.T.O.

10 A company has a budget for two products A and B as follows: Sales (units) Production (units) Labour: Skilled at £10/hour Unskilled at £7/hour

Product A 2,000 1,750

Product B 4,500 5,000

2 hours/unit 3 hours/unit

2 hours/unit 4 hours/unit

What is the budgeted cost for unskilled labour for the period? A B C D

£105,000 £135,000 £176,750 £252,500

11 Augustine wishes to take out a loan for £2,000. The interest rate on this loan would be 10% per annum and Augustine wishes to make equal monthly repayments, comprising interest and principal, over three years starting one month after the loan is taken out. What would be the monthly repayment on the loan (to the nearest £)? A B C D

£56 £64 £66 £67

12 Which of the following best describes the term ‘equivalent units’ when using the FIFO method? A B C D

The number of units worked on during a period including the opening and closing stock units. The number of whole units worked on during a period ignoring the levels on completion of opening and closing stock units. The number of effective whole units worked on during a period allowing for the levels of completion of opening and closing stock units. The total number of whole units started during a period ignoring the opening stock units as these were started in the previous period.

13 A company has established the following information for the costs and revenues at an activity level of 500 units: Direct materials Direct labour Production overheads Selling costs Total cost Sales revenue Profit

£ 2,500 5,000 1,000 1,250 –––––– 9,750 17,500 –––––– 7,750 ––––––

20% of the selling costs and 50% of the production overheads are fixed over all levels of activity. What would be the profit at an activity level of 1,000 units? A B C D

£15,500 £16,250 £16,500 £17,750

6


14 A company has been reviewing its total costs over the last few periods and has established the following: Period 1 2 3

Sales (units) 225 150 350

Total cost £ 2,300 1,500 2,800

The company is aware that fixed costs increase by £500 when sales exceed 200 units. What would be the total cost at a sales level of 180 units? A B C D

£2,120 £1,800 £1,695 £1,620

15 The following statements relate to business objectives: (i)

The short-term objectives of an organisation are described in very general terms.

(ii) Corporate objectives relate to the organisation as a whole. (iii) It is possible for a division of an organisation to have its own specific objectives. Which of the above are correct? A B C D


16 The following information relates to prices and units over two different periods:

Time 0

Product 1 Product 2

Prices £/unit 75 50

Time 1

Product 1 Product 2

80 45

Units sold

250 150

300 100

What would be the Laspeyre price index? A B C D

93·8 95·5 101·9 103·6

7


[P.T.O.

17 The statements below relate to the internal rate of return: The internal rate of return (i)

calculates the highest possible net present value.

(ii) represents the intrinsic discount rate of an investment over its life. (iii) will always give the investor the correct decision when comparing well behaved projects. Which of the above are NOT CORRECT? A B C D


The following information relates to questions 18 and 19: The following variations and trend have been calculated for sales over a period of time using the additive model:

Quarter Quarter Quarter Quarter

1 2 3 4

Trend

Seasonal variation +25 –10 –30 ? +50 per quarter

The last known trend reading was taken in year 3, quarter 3 and was £1,750.

18 What would be the seasonal variation for quarter 4? A B C D

+15 –15 +35 –35

19 What would be the time series value for year 4 quarter 3? A B C D

£1,950 £1,920 £1,900 £1,870

8


20 The following statements relate to labour costs: There would be an increase in the total cost for labour as a result of (i)

additional labour being employed on a temporary basis.

(ii) a department with spare capacity being made to work more hours. (iii) a department which is at full capacity switching from the production of one product to another. Which of the above is/are correct? A B C D

(i) only (ii) only (iii) only (i) and (iii) only

21 A company achieves bulk buying discounts on quantities above a certain level. These discounts are only available for the units above the specified level and not on all the units purchased. Which of the following graphs of total purchase cost against units best illustrates the above situation? B

A £

£

units

units

D

C £

£

units

units

22 Mr Manaton has recently won a competition where he has the choice between receiving £5,000 now or an annual amount forever starting now (i.e. a level perpetuity starting immediately). The interest rate is 8% per annum. What would be the value of the annual perpetuity to the nearest £? A B C D

£370 £500 £400 £620

23 When considering the economic batch quantity model what does (1–D/R) represent? A B C D

The The The The

rate rate rate rate

at at at at

which which which which

production decreases. production increases. stock decreases. stock increases.

9


[P.T.O.

24 A company has calculated its margin of safety as 20% on budgeted sales and budgeted sales are 5,000 units per month. What would be the budgeted fixed costs if the budgeted contribution was £25 per unit? A B C D

£100,000 £125,000 £150,000 £160,000

25 A company is reviewing actual performance to budget to see where there are differences. The following standard information is relevant: £ per unit Selling price 50 –– Direct materials 4 Direct labour 16 Fixed production overheads 5 Variable production overheads 10 Fixed selling costs 1 Variable selling cost 1 –– Total costs 37 –– Budgeted sales units Actual sales units

3,000 3,500

What was the favourable sales volume variance using marginal costing? A B C D

£9,500 £7,500 £7,000 £6,500 (50 marks)

10



A company is seeking to establish whether there is a linear relationship between the level of advertising expenditure and the subsequent sales revenue generated. Figures for the last eight months are as follows: Month

1 2 3 4 5 6 7 8 Total

Advertising Expenditure £000 2·65 4·25 1·00 5·25 4·75 1·95 3·50 3·00

Sales Revenue £000 30·0 45·0 17·5 46·0 44·5 25·0 43·0 38·5

–––––

–––––

26·35

289·5

–––––

–––––

Further information is available as follows: ∑ (Advertising Expenditure × Sales Revenue) = £1,055·875 ∑ (Advertising Expenditure) 2 = £101·2625 ∑ (Sales Revenue)2 = £11,283·75

All of the above are given in £ million. Required: (a) On a suitable graph plot advertising expenditure against sales revenue or your choice of axes.

vice versa

as appropriate. Explain (5 marks)

(b) Using regression analysis calculate a line of best fit. Plot this on your graph from (a).


2

Firlands Limited, a retail outlet, is faced with a decision regarding whether or not to expand and build small or large premises at a prime location. Small premises would cost £300,000 to build and large premises would cost £550,000. Regardless of the type of premises built, if high demand exists then the net income is expected to be £1,500,000. Alternatively, if low demand exists, then net income is expected to be £600,000. If large premises are built then the probability of high demand is 0·75. If the smaller premises are built then the probability of high demand falls to 0·6. Firlands has the option of undertaking a survey costing £50,000. The survey predicts whether there is likely to be a good or bad response to the size of the premises. The likelihood of there being a good response, from previous surveys, has been estimated at 0·8. If the survey indicates a good response then the company will build the large premises. If the sur vey does give a good result then the probability that there will be high demand from the large premises increases to 0·95. If the survey indicates a bad response then the company will abandon all expansion plans. Required: Using decision tree analysis, establish the best course of action for Firlands Limited. (10 marks)

11


[P.T.O.

3

Oathall Limited, which manufactures a single product, is considering whether to use marginal or absorption costing to report its budgeted profit in its management accounts. The following information is available: £/unit 4 15 –– 19 ––

Direct materials Direct labour

Selling price

50 ––

Fixed production overheads are budgeted to be £300,000 per month and are absorbed on an activity level of 100,000 units per month. For the month in question, sales are expected to be 100,000 units although production units will be 120,000 units. Fixed selling costs of £150,000 per month will need to be included in the budget as will the variable selling costs of £2 per unit. There are no opening stocks. Required: (a) Prepare the budgeted profit and loss account for a month for Oathall Limited using absorption costing. Clearly show the valuation of any stock figures. (6 marks) (b) Prepare the budgeted profit and loss account for a month for Oathall Limited using marginal costing. Clearly show the valuation of any stock figures. (4 marks) (10 marks)

4

Swainsthorpe Limited is a small old-fashioned company. They have a very simple manual accounting system to record all of the information of the business. A bookkeeper comes in once a week to make all the relevant entries to the various manual ledgers. Complete stocktakes take place once a month, during which the business shuts down for the day, and the information from the stock-take is used to check that the store bin cards are correct. The stock-take information is also used to prepare a profit and loss account and balance sheet for the owners of the business. The business has just been taken over by Ms Swainsthorpe who wishes to change the manual accounting system to a computerised management information system. Required: Prepare a report for Ms Swainsthorpe that: (a) gives three advantages and three disadvantages of introducing a computer system; (b) explains what a management information system is and what Ms Swainsthorpe should hope to be able to use it for in general terms; (c) comments critically on the current stock-take procedures and explains how the system could be improved. (10 marks)

12


5

South Plc has two divisions, A and B, whose respective performances are under review. Division A is currently earning a profit of £35,000 and has net assets of £150,000. Division B currently earns a profit of £70,000 with net assets of £325,000. South Plc has a current cost of capital of 15%. Required: (a) Using the information above, calculate the return on investment and residual income figures for the two divisions under review and comment on your results. (5 marks) (b) State which method of performance evaluation (i.e. return on investment or residual income) would be more useful when comparing divisional performance and why. (2 marks) (c) List three general aspects of performance measures that would be appropriate for a service sector company. (3 marks) (10 marks)

13


[P.T.O.

Formulae Sheet

14




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

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

15


[P.T.O.

Annuity Table


 ²   U ²Q ³³³³²² U


3HULRGV

Q





















    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

Q





















    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    


16


Answers



Part 1 Examination – Paper 1.2 FInancial Information for Management

December 2002 Answers

Section A 11

C

12

D

13

C

14

D

15

B

16

B

17

B

18

A

19

C

10

C

11

B

12

C

13

B

14

D

15

C

16

D

17

B

18

A

19

B

20

A

21

C

22

A

23

D

24

A

25

A

19


Section B 1 (a)

60 Sales Revenue £’000 £000 50

x x

x

x 40

x x

30

x 20

x

10

1

(b)

2

3

4

5

6

Advertising £’000 expenditure £000

Regression line: y = a + bx n ∑ xy – ∑ x ∑ y b = ––––––––––––––– n ∑ x2 – (∑ x)2

∑ y b ∑ x a = ––– – ––– n n In this example the adver tising expenditure is the independent variable (x) and the sales revenue the dependent variable (y). (8 × 1,055·875) – (26·35 × 289·5) 818·675 b = –––––––––––––––––––––––––––––– = –––––––– = 7·07 2 (8 × 101·2625) – 26·35 115·7775 289·5 26·35 a = ––––– – 7·07 × ––––– = 12·9 8 8 regression line: y = 12·9 + 7·07x where x and y are in £000 Line drawn on above graph.

20


Hi 0·95

2

E Good 0·8

Large Premises

Bad 0·2

Survey (50,000)

600,000

Large Premises

Lo 0·05

Abandon project

Hi 0·75

(550,000) A

F

(550,000)

B

1,500,000

1,500,000

C Lo 0·25

(300,000) Small Premises

600,000 Hi 0·6 1,500,000

D

Lo 0·4

600,000

EV(F) = 0·95 × 1,500 + 0·05 × 600 = 1,455 Cost at E = EV(F) – 550 = 1,455 – 550 = 905 EV(B) = 0·8 × cost at (E) + 0·2 × 0 = 0·8 × 905 + 0·2 × 0 = 724 EV(C) = 0·75 × 1,500 + 0·25 × 600 = 1,275 EV(D) = 0·6 × 1,500 + 0·4 × 600 =1,140 Decision at A: Survey = EV(B) – survey costs = 724 – 50 = 674 Build large large premises premises with no survey = EV(C) – large large premises premises costs = 1,275 – 550 = 725 Build small premises with no survey = EV(D) – small premises = 1,140 – 300 = 840 Better to build small premises without a survey. Conclusion: It would be better to build the small premises without any survey as this gives the largest expected value.

21

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3

(a) Absorption costing Sales (£50 × 100,000) Cost of sales: Opening stock Production costs Variable (£19 × 120,000) Fixed (£3(w) × 120,000) Closing stock (£22 × 20,000) Under/over absorption

£000

£000 5,000

– 2,280 360 –––––– 2,640 (440) (60) (2,140) –––––– 2,860

Gross profit Selling costs Fixed Variable (£2 × 100,000)

(150) (200) –––––– 2,510 –––––– ––––––

Net profit Working Overhead absorption rate = £300,000/100,000 = £3 per unit (b) Marginal costing Sales (£50 × 100,000) Cost of sales: Opening stock Production costs Variable (£19 × 120,000) Closing stock (£19 × 20,000) Variable selling costs

£000

£000 5,000

– 2,280 –––––– 2,280 (380) 200 (2,100) –––––– 2,900

Contribution Fixed costs Production Selling

(300) (150) –––––– 2,450 –––––– ––––––

Net profit

22


4

Report To: Ms Swainsthorpe From: AN Accountant Re: Computerised accounts and stock control Date: December 2002 The following report addresses the advantages and disadvantages of implementing a computer system. It also explains what a management information system is and how it can be used. Finally it addresses your current stock control procedures. Computer system The advantages of a computer system is that it will be quicker to input entries to the accounting system and easier to extract management information. Another advantage is that fewer errors are likely to occur as the computer can check that all the debits equal the credits. The disadvantages are the expense of the new system. Also the training costs involved may be high and you may also experience some resistance from the employees to this new way of working. Finally you would not be able to switch over immediately as you would have a cost of running two parallel systems for a short time to check that everything is working correctly. Management Information System (MIS) A MIS is an accounting system that will provide management with appropriate information both routine and non-routine as required by the organisation. It is expected that management will be able to effectively utilise the output from the system to make efficient use of the resources of the business. The MIS will help you run the business as it will provide you with relevant information. This information will help with decisionmaking, planning and control and coordination of the organisation. The type of information extracted will depend on the needs of you, the user. Stock The current stock-take procedures seem onerous as they require the business to be closed once a month. This results in a loss of a day’s production and so will eventually impact on profit. If the bin card system is working effectively then an entire stock-take should only be necessary once or twice a year. Instead of a complete stock-take spot checks could be carried out comparing actual stock to the bin card value and any errors noted and the system updated. High value or high usage items could be checked more often than slower moving stock. In this way the business need not close so often.

5

(a)

Return on investment Division A Profit Net assets

£ 35,000 150,000

Return on investment = 35,000/150,000% = 23·3% Division B Profit Net assets

£ 70,000 325,000

Return on investment = 70,000/325,000% = 21·5% Using this method Divisions A’s project is better. Residual Income Division A = 35,000 – 150,000 × 0·15 = 12,500 Division B = 70,000 – 325,000 × 0·15 = 21,250 Using this method Division B’s project is better. (b)

Return on investment would be the better measure when comparing divisions as it is a relative measure (i.e. a % figure).

(c)

Service industry performance measures, in general terms, could include any of the following: Competitiveness Financial performance Quality of service Innovation Effective and efficient utilisation of resources

23


Part 1 Examination – Part 1.2 Financial Information for Management

December 2002 Marking Scheme

Section A Each question is worth 2 marks each total 50.

Section B 1

(a)

(b)

2

3

2 1 / 2 1 / 2 1 / 2 11 / 2 —

points plotted correctly labelled axes presentation explanation of axes used

calculation of b calculation of a stating the regression line putting the regression line on the graph from (a)

2 11 / 2 1 / 2 1 —

correct formulation of the small premises branch correct formulation of the large premises branch correct formulation of the sur vey branch calculation of expected value at F calculation of cost at E calculation of expected value at B calculation of expected value at C calculation of expected value at D correct decision at A stating a conclusion

2 2 2 1 / 2 1 / 2 1 / 2 1 / 2 1 / 2 1 1 / 2

(a)

1 / 2 1 / 2 1 / 2 1 / 2 1 / 2 1 / 2

(b)

5

correct sales figure variable production cost figure fixed overhead absorption rate fixed production cost figure calculation of closing stock units calculation of closing stock value variable and fixed selling costs under/over absorption including the term gross profit layout/presentation

1 1 1 / 2 1 / 2 —

5 — 10 —

10 —

6

1 / 2

including variable production costs only closing stock valuation including variable selling costs before contribution including the term contribution correct fixed costs layout/presentation

1 1 / 2 1 / 2

1 1 / 2

—

24


4 — 10 —

4

5

Marks 1 / 2 1 / 2 1 1 / 2 1 1 / 2 2 1 11 / 2 11 / 2

report format introduction to report three advantages of computer system ( 1 / 2 each point) three disadvantages of computer system ( 1 / 2 each point) definition of an MIS how it could be useful critical comment on current stock control methods suggestion for improvement

(a)

(b)

(c)

calculation of ROI for A and B comment calculation of RI for A and B comment

stating the preferred per formance measure reason for choice

three examples of general performance measures 1 mark each measure

10 —

11 / 2 1 11 / 2 1 —

5

1 1 —

2

3 — 10 —

25





Section B


2 . 1 r e p a P

Formulae Sheet, Present Value and Annuity Tables are on pages 13, 14 and 15


Section A – ALL 25 questions are compulsory and MUST be attempted Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1

A company has established a marginal costing profit of £72,300. Opening stock was 300 units and closing stock is 750 units. The fixed production overhead absorption rate has been calculated as £5/unit. What was the profit under absorption costing? A B C D

2

£67,050 £70,050 £74,550 £77,550

The following data relates to a wage index for a company: Year 1997 2002

Wages per week £275 £315

Index 117 157

What were the 2002 weekly wages at 1997 prices (to the nearest £)? A B C D

3

Which of the following is correct? A B C D

4

£201 £235 £275 £369

Qualitative data is numerical information only. Information can only be extracted from external sources. Operational information gives details of long-term plans only. Data can be either discrete or continuous.

Which of the following are purposes of a budget? (i) (ii) (iii) (iv)

establishing strategic options motivating management establishing long term objectives planning operations

A B C D

(i) and (iii) only (i) and (iv) only (ii) and (iv) only (ii), (iii) and (iv) only

2


The following information relates to questions 5 and 6: A company has a budgeted material cost of £125,000 for the production of 25,000 units per month. Each unit is budgeted to use 2 kg of material. The standard cost of material is £2·50 per kg. Actual materials in the month cost £136,000 for 27,000 units and 53,000 kg were purchased and used. 5

What was the adverse material price variance? A B C D

6

What was the favourable material usage variance? A B C D

7

£1,000 £3,500 £7,500 £11,000

£2,500 £4,000 £7,500 £10,000

A company is preparing a production budget for the next year. The following information is relevant: Budgeted Sales Opening stock Closing stock

10,000 units 600 units 5% of budgeted sales

The production process is such that 10% of the units produced are rejected. What is the number of units required to be produced to meet demand? A B C D

8

8,900 units 9,900 units 10,900 units 11,000 units

A company produces and sells a single product whose variable cost is £6 per unit. Fixed costs have been absorbed over the normal level of activity of 200,000 units and have been calculated as £2 per unit. The current selling price is £10 per unit. How much profit is made under marginal costing if the company sells 250,000 units? A B C D

9

£500,000 £600,000 £900,000 £1,000,000

Which of the following would be considered to be a pricing strategy? (i) target costing (ii) price skimming (iii) discrimination pricing A B C D

(i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii) 3


[P.T.O.

10 A company uses process costing to value its output and all materials are input at the start of the process. The following information relates to the process for one month: Input Opening stock Losses Closing stock

3,000 units 400 units 10% of input is expected to be lost 200 units

How many good units were output from the process if actual losses were 400 units? A B C D

2,800 2,900 3,000 3,200

units units units units

11 James wants to invest his pocket money. He receives £5 a month which he puts into a savings account earning compound interest at 0·5% per month. If James saves his money, how much will be in the account in five years’ time (to the nearest £)? A B C D

£303 £338 £349 £354

12 Which of the following is correct with regard to stocks? (i) Stock-outs arise when too little stock is held. (ii) Safety stocks are the level of units maintained in case there is unexpected demand. (iii) A reorder level can be established by looking at the maximum usage and the maximum lead-time. A B C D


13 A company wishes to make a profit of £150,000. It has fixed costs of £75,000 with a C/S ratio of 0·75 and a selling price of £10 per unit. How many units would the company need to sell in order to achieve the required level of profit? A B C D

10,000 15,000 22,500 30,000


4


14 A company uses regression analysis to establish a total cost equation for budgeting purposes. Data for the past four months is as follows: Month 1 2 3 4

Total cost £’000 57·5 37·5 45·0 60·0 –––––– 200·00 ––––––

Quantity Produced ’000 1·25 1·00 1·50 2·00 ––––– 5·75 –––––

The gradient of the regression line is 17·14. What is the value of a? A B C D

25·36 48·56 74·64 101·45

15 A company is considering its options with regard to a machine which cost £60,000 four years ago. If sold the machine would generate scrap proceeds of £75,000. If kept, this machine would generate net income of £90,000. The current replacement cost for this machine is £105,000. What is the deprival value of the machine? A B C D

£105,000 £90,000 £75,000 £60,000

5


[P.T.O.

16 Net Present Value

0 5%

10%

15%

Interest rate

Which of the following is correct with regard to the above graph? (i) The IRR is 10%. (ii) The NPV at 15% is positive. (iii) The project’s total inflows exceed the total outflows. A B C D


17 What is the economic batch quantity used to establish? Optimal A reorder quantity B reorder level C cumulative production quantity D stock level for production

6


18 A company wishes to evaluate a division which has the following profit and loss account and balance sheet: Profit and Loss account Sales

£’000 500 ––––– 200 (80) ––––– 120 ––––– –––––

Gross profit Other costs Net profit Balance Sheet Fixed assets Current assets Current liabilities

£’000 750 350 (450) ––––– 650 ––––– –––––

Net assets

What is the residual income for the division if the company has a cost of capital of 18%? A B C D

£3,000 £21,600 £83,000 £117,000

19 Which of the following is correct when considering the allocation, apportionment and reapportionment of overheads in an absorption costing situation? A B C D

Only production related costs should be considered. Allocation is the situation where part of an overhead is assigned to a cost centre. Costs may only be reapportioned from production centres to service centres. Any overheads assigned to a single department should be ignored.

20 A company uses limiting factor analysis to calculate an optimal production plan given a scarce resource. The following applies to the three products of the company: Product Direct materials (at £6/kg) Direct labour (at £10/hour) Variable overheads (£2/hour)

Maximum demand (units) Optimal production plan

I £ 36 40 8 –––––– 84 –––––– –––––– 2,000 2,000

II £ 24 25 5 –––––– 54 –––––– –––––– 4,000 1,500

III £ 15 10 2 –––––– 27 –––––– –––––– 4,000 4,000

How many kg of material were available for use in production? A B C D

15,750 28,000 30,000 38,000

kg kg kg kg

7


[P.T.O.

21 A company uses the Economic Order Quan tity (EOQ) model to establish reorder quantities. The following information relates to the forthcoming period: Order costs = £25 per order Holding costs = 10% of purchase price = £4/unit Annual demand = 20,000 units Purchase price = £40 per unit EOQ = 500 units No safety stocks are held. What are the total annual costs of stock (i.e. the total purchase cost plus total order cost plus total holding cost)? A B C D

£22,000 £33,500 £802,000 £803,000

22 Which of the following would be considered a service industry? (i) an airline company (ii) a railway company (iii) a firm of accountants A B C D


23 The following information for advertising and sales has been established over the past six months: Month 1 2 3 4 5 6

Sales Revenue £’000 155 125 200 175 150 225

Advertising expenditure £’000 3 2·5 6 5·5 4·5 6·5

Using the high-low method which of the following is the correct equation for linking advertising and sales from the above data? A B C D

sales revenue = 62,500 + (25 x advertising expenditure) advertising expenditure = –2,500 + (0·04 x sales revenue) sales revenue = 95,000 + (20 x advertising expenditure) advertising expenditure = –4,750 + (0·05 x sales revenue)

8


24 A company uses decision tree analysis to evaluate potential options. The management accountant for the company has established the following: Cash flows from sales revenue High sales = £2,000,000 0·8 Build new premises Cost £1,000,000

0·2

Low sales = £1,000,000

High sales = £2,000,000 0·7 Upgrade old premises Cost = ?

0·3

Low sales = £1,000,000

What would be the cost of the upgrade that would make the company financially indifferent between building new premises and upgrading the old one? A B C D

£100,000 £900,000 £1,000,000 £1,700,000

25 Which of the following could be true with regard to a management information system (MIS)? An MIS is (i) a database system. (ii) used for planning, directing and controlling activities. (iii) a hierarchy of information within an organisation. A B C D

(i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii) (50 marks)

9


[P.T.O.


A company uses absorption costing for both internal and external reporting purposes as it has a considerable level of fixed production costs. The following information has been recorded for the past year: Budgeted fixed production overheads Budgeted (Normal) activity levels: Units Labour hours

£2,500,000 62,500 units 500,000 hours

Actual fixed production overheads Actual levels of activity: Units produced Labour hours

£2,890,350 70,000 units 525,000 hours

Required: (a) Calculate the fixed production overhead expenditure and volume variances and briefly explain what each (5 marks) variance shows. (b) Calculate the fixed production overhead efficiency and capacity variances and briefly explain what each variance shows. (5 marks) (10 marks)

2

A business uses process costing to establish stock valuations and profitability of its products. Output from the process consists of three separate products: two joint products and a by-product. Details of the process is as follows: Input costs: Materials Labour Overheads

£45,625 for 12,500 kg £29,500 £26,875

The process is expected to lose 20% of the input. This is sold for scrap for £4 per unit. The following details relate to the output from the process: Product A B C

Type Joint Joint By-product

% of output 50% 40% 10%

Final sales value per unit £20 £25 £2

Further costs to complete £10

Joint costs are allocated on the basis of net realisable value at split-off. Required: (a) Establish the total cost of the output from the process.

(4 marks)

(b) Calculate the profit per unit for each of the joint products, A and B.


10


3

(a) Explain the following terms giving an example of each: (i) service centre; and (ii) production centre. Explain how the treatment of overheads differs between the two different types of centre.

(6 marks)

(b) Explain how Activity Based Costing differs from traditional absorption costing, giving an example. (4 marks) (10 marks)

4

A company uses linear programming to establish an optimal production plan in order to maximise profit. The company finds that for the next year materials and labour are likely to be in short supply. Details of the company’s products are as follows: A £ 6 30 5 ––– 41 50 ––– 9 ––– –––

Materials (at £2 per kg) Labour (at £6 per hour) Variable overheads (at £1 per hour) Variable cost Selling price Contribution

B £ 8 18 3 ––– 29 52 ––– 23 ––– –––

There are only 30,000 kg of material and 36,000 labour hours available. The company also has an agreement to supply 1,000 units of product A which must be met. Required: (a) Formulate the objective function and constraint equations for this problem.

(4 marks)

(b) Plot the constraints on a suitable graph and determine the optimal production plan.


11


[P.T.O.

5

A company has to choose between three investments with details as follows: Investment 1 Timing of Cash Flows flows per annum Year £ 0 (75,000) 1–4 25,000 5 5,000

Investment 2 Timing of Cash Flows flows per annum Year £ 0 (100,000) A perpetuity 11,000 starting at time 1

Investment 3 Timing of Cash Flows flows per annum Year £ 0 (125,000) 1 30,000 2 40,000 3 50,000 4 60,000 5 (10,000)

The company has a cost of capital of 10%. Required: Calculate the net present value of each of the three investments at the company’s cost of capital and state which investment would be preferred. (10 marks)

12


Formulae Sheet

Laspeyre’s price index

Paasche price index Laspeyre’s quantity index

Paasche quantity index

13


[P.T.O.



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    

    

    

    

Q





















    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

14


Annuity Table


 ²   U ²Q ³³³³²² U


3HULRGV

Q





















    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

Q





















    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

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    

    

    


15


Answers



Part 1 Examination – Paper 1.2 Financial Information for Management 1

C

2

B

3

D

4

C

5

B

6

7

A

D

June 2003 Answers

Marginal costing profit Less: fixed costs in opening stock (300 x £5) Add: fixed costs in closing stock (750 x £5)

£72,300 (£1,500) £3,750 –––––––– £74,550 ––––––––

£315 ––––– x 117 = £235 157

Price variance Did cost Should cost (53,000 kg x £2·50)

£136,000 £132,500 ––––––––––––– £3,500 adverse –––––––––––––

Usage variance Did use Should use (27,000 units x 2 kg)

53,000 kg 54,000 kg ––––––––– 1,000 kg x £2·50 £2,500 favourable ––––––––––––––––

Sales Less: opening stock Add: closing stock (5% x 10,000)

10,000 units (600 units) 500 units –––––––––– 9,900 units

Good production required Good production = 90% of total production, therefore 9,900 Total production = –––––– = 11,000 units 90% 8

B

9

C

Total Contribution = (£10 – £6) x 250,000 = £1,000,000 Fixed Overheads = 200,000 x £2 = £400,000 Profit = Total contribution less fixed costs = £1,000,000 – £400,000 = £600,000

19


10

A Process Units 400 3,000

Opening stock Input

Losses Output Closing stock

–––––– 3,400 –––––– ––––––

11

C

12

D

13

D

14

A

 1⋅ 00560 – 1  = £348 ⋅ 85 ≈ £349  0 ⋅ 005 

5×

150,000 + 75,000 –––––––––––––––––– 0·75 300,000 ––––––– £10

a= a=

15

= £300,000

Breakeven revenue

= 30,000 units

∑y −b∑x

n 200

4

n

– (17 ⋅ 14 ×

5 ⋅ 75 4

) = 25 ⋅ 36 Lower of

B

replacement cost £105,000

higher of

NRV 75,000 16

A

17

C

18

A

19

A

20

B

Units 400 2,800 200 –––––– 3,400 –––––– ––––––

Economic value 90,000

Residual income for the division = £120,000 – (£650,000 x 18%) Residual income = £3,000

Total material required = 36 24 15 (2,000 x ––) + (1,500 x ––) + (4,000 x ––) = 28,000 kg 6 6 6

21

C

Total cost of having stock = D Q ( p x D) + (–– x Co) + ( Ch x ––) Q 2

20,000 500 = (40 x 20,00) + ( –––––– x 25) + (4 x ––– ) 500 2 = 800,000 + 1,000 + 1,000 = 802,000 22

D

20


23

A

As advertising will hopefully generate sales, advertising is the independent variable and sales the dependent; i.e. advertising is x and sales is y. 225,000 = 125,000 = –––––––– 100,000 =

a + (6,500 x b) a + (2,500 x b) –––––––––––––– 0 + (4,000 x b)

100,000 therefore b = ––––––– 4,000 so,

24

B

25

D

= £25

225,000 = a + (6,500 x 25) 225,000 = a + 162,500 a = 225,000 – 162,500 a = 62,500

Expected value of new building = (0·8 x £2 million )+(0·2 x £1 million) – £1 million = £0·8 million Expected value of the upgrade = (0·7 x £2 million) + (0·3 x £1 million) – cost of upgrade So, New build = £0·8 million Upgrade = £1·7 million – costs Equating the two expressions: £0·8 million = £1·7 million – costs, giving Costs = £1·7 million – £0·8 million = £0·9 million = £900,000

21


1

(a)

Fixed Production Overhead Expenditure variance £ 2,890,350 2,500,000 –––––––––– 390,350 adverse

Actual costs incurred Budgeted costs Variance

This variance indicates that the company have spent more than originally budgeted. Fixed Production Overhead Volume variance Labour hours 560,000 500,000 –––––––– 60,000 favourable

Actual flexed Budget Variance

x £5 (W1) = £300,000 favourable W1

£2,500,000 FOAR = ––––––––––––– = £5 500,000 hours

This variance indicates that the company has used more labour hours than originally budgeted. Or based on units Units 70,000 62,500 ––––––– 7,500 favourable

Actual Budget Variance

x £40 (W2) = £300,000 favourable W2

£2,500,000 FOAR = ––––––––––––– = £40 62,500 units

This variance indicates that the company has produced more units than originally budgeted.

(b)

Fixed Production Overhead Efficiency Variance Hours 525,000 560,000 –––––––– 35,000 favourable

Did work Should have worked

x £5 (W3) = £175,000 favourable W3

£2,500,000 FOAR/hour = ––––––––––––– = £5 500,000 hours

This variance shows that labour were more efficient than originally budgeted as they took less time than expected to achieve the production of 70,000 units. Fixed Production Overhead Capacity Variance Hours 525,000 500,000 –––––––– 25,000 favourable

Actual hours worked Budgeted hours of work

x £5 (W3) = £125,000 favourable This variance shows that labour worked for more hours than was originally budgeted thus exceeding the budgeted capacity.

22


2

(a)

Total cost of output = 45,625 + 29,500 + 26,875 – (12,500 x 20% x 4)

2

(a)

Total cost of output = 102,000 – 10,000= 92,000 or Process Units 12,500

Materials Labour Overheads

(b)

––––––– 12,500 ––––––– –––––––

£ 45,625 29,500 26,875 –––––––– 102,000 –––––––– ––––––––

Normal loss Output

Units 2,500 10,000 ––––––– 12,500 ––––––– –––––––

β

£ 10,000 92,000

β

–––––––– 102,000 –––––––– ––––––––

Joint costs to be allocated = (£9·20 x 10,000) – 1,000 x £2 = £92,000 – £2,000 = £90,000 Product

Units

%

NRV at split-off

Total NRV

A

5,000

50

20–10 =10

50,000

30,000 =

B

4,000

40

25

100,000

60,000 =

C

1,000 –––––– 10,000 ––––––

10 ––– 100 –––

2

–––––––– 150,000 ––––––––

––––––– 90,000 –––––––

Total

Joint cost allocation

Total profit 50,000 –––––––– 150,000 100,000 –––––––– 150,000

Profit per unit

20,000

4

40,000

10

The profit per unit for product A is £4 and for B is £10.

3

(a)

A service centre is a department that does not directly produce units but is required to support the other departments. Examples include maintenance departments, stores or a canteen. A production centre is a centre where units are actually made, examples being a machining department or a welding department. Although a service will have overheads allocated and apportioned to it, these will be reapportioned to the production centres so that, at the end of a period, all overheads are included in the production centres only. Once all the overheads are included in the production centres they can be absorbed into production.

(b)

Activity based costing uses a number of different cost drivers to absorb different overheads, whereas traditional absorption costing only uses one, for example labour hours, machine hours or per unit. In activity based costing fixed overhead costs may include machine set-up costs. These costs will not be incurred on a per unit basis but will be incurred each time the machine has to be set-up. It would not, therefore, be sensible to allocate costs per unit since that is not how the cost is incurred. It is, however, better to use the number of set-ups for this par ticular cost to allocate costs to units.

4

(a)

Objective is to maximise profit: Let a = the number of units of A to be produced Let b = the number of units of B to be produced Objective function: 9a + 23b Constraints: Non-negativity Restriction on A Materials Labour

b≥0 a ≥ 1,000 3a + 4b ≤ 30,000 5a + 3b ≤ 36,000

23


(b) b units ’000

a = 1,000

13

12

11 10

9 5a + 3b = 36,000 8

7

6

5

4

3

3a + 4b = 30,000

lso-contribution line

2

1

0 1

2

3

4

5

6

7

8

9

10

11

12 a units ’000

Optimal point is the intersect of the a = 1,000 line and the materials constraint line 3a + 4b = 30,000. (3 x 1,000) + 4b = 30,000 3,000 + 4b = 30,000 therefore 4b = 30,000 – 3,000 giving 4b = 27,000 so b = 27,000/4,000 therefore b= 6,750 units The optimal production plan is to make 1,000 units of A and 6,750 units of B.

24


5

Investment 1 Time 0 1-4 5

Investment 2 Time 0 1– ∞

Investment 3 Time 0 1 2 3 4 5

Cash Flows £’000 (75) 25 5

Discount factor at 10% 1 3·17 0·621

Present Value £’000 (75) 79·25 3·105 –––––– 7·355 –––––– ––––––

Cash Flows £’000 (100) 11

Discount factor at 10% 1 1/0·1=10

Present Value £’000 (100) 110 –––––– 10 –––––– ––––––

Cash Flows £’000 (125) 30 40 50 60 (10)

Discount factor at 10% 1 0·909 0·826 0·751 0·683 0·621

Present Value £’000 (125) 27·27 33·04 37·55 40·98 (6·21) –––––– 7·63 –––––– ––––––

Since investment 2 has the highest net present value it would be the preferred investment.

25



Part 1 Examination – Paper 1.2 Financial information for Management

1

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) (xvi) (xvii) (xviii) (xix) (xx) (xxi) (xxii) (xxiii) (xxiv) (xxv)

June 2003 Marking Scheme Marks 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 –––

C B D C B A D B C A C D D A B A C A A B C D A B D

50 –––

1

(a)

Fixed production overhead expenditure variance £ Fixed production overhead expenditure variance adverse Explanation of variance Fixed production overhead volume variance £ Fixed production overhead volume variance favourable Calculation of the FOAR/unit Explanation of variance

1 / 2 1 / 2

1 1 / 2 1 / 2

1 1 ––– 5

(b)

1 / 2 1 / 2

Efficiency variance £ Efficiency variance favourable Calculating FOAR/labour hour Explanation of variance Capacity variance £ Capacity variance favourable Explanation of variance

1 1 1 / 2 1 / 2 1 ––– 5 ––– 10 –––

27


Marks 2

(a)

Calculating the total cost of output to include: material cost labour costs overhead cost deduct normal loss scrap proceeds Calculation of 92,000

1 / 2 1 / 2 1 / 2

1 11 / 2 ––– 4

(b)

Calculating joint costs less by-product proceeds Calculating number of units for A,B and C from output NRV at split-off for A NRV at split-off for B and C Total NRV calculation 1 / 2 mark each A and B Joint cost allocation 1 / 2 mark each A and B Profit per unitv 1 / 2 mark each A and B

1 1 1 / 2 1 / 2 1 1 1 ––– 6 ––– 10 –––

3

(a)

Definition of ser vice centre Example of a ser vice centre Definition of production centre Example of a production centre Explanation of the differing treatments of overheads: Ser vice centre cost reappor tioned Production centre costs absorbed

1 1 1 1 1 1 ––– 6

(b)

Explanation of difference including the use of the term cost driver Example

2 2 ––– 4 ––– 10 –––

4

(a)

1 / 2 1 / 2 1 / 2

Defining variables Objective function Non-negativity constraint for b Variable a greater than 1,000 Material constraint Labour constraint

1 1 1 / 2 ––– 4

(b)

1 / 2 1 / 2

labelled axes on graph good presentation correctly drawn material line correctly drawn labour line restriction on a plotting the objective function establishing the optimal point

1 1 1 / 2 1 1 1 / 2 ––– 6 ––– 10 –––

28


Marks 5

Investment 1 Correct discount factors For using a cumulative discount factor Calculation of present value 1/2 per line in table

1 / 2 11 / 2

Investment 2 Correct value at To Calculation of present value of the perpetuity

1 / 2 1 1 / 2

1

Investment 3 Correct discount factors Calculation of present value 1/2 per line in table

1 3

Preferred investment stated

1 ––– 10 –––

29





Section B

ALL FIVE questions questions are are compulsory compulsory and MUST be answered

2 . 1 r e p a P

Formulae Sheet, Present Value and Annuity Tables are on pages 13, 14 and 15



A cost is described as staying the same over a certain activity range and then increasing but remaining stable over a revised activity range in the short term. What type of cost is this? A B C D

2

A A A A

fixed cost variable cost semi-variable cost stepped fixed cost

The following quarterly adjustments have been calculated using the multiplicative model for time series analysis: Quarter 1 0·95

Quarter 2 1·25

Quarter 3 0·70

What would be the adjustment for quarter 4 to two decimal places? A B C D

3

0·83 0·91 1·10 1·20

A company which uses marginal costing has a profit of £37,500 for a period. Opening stock was 100 units and closing stock was 350 units. The fixed production overhead absorption rate is £4 per unit. What is the profit under absorption costing? A B C D

4

£35,700 £36,500 £38,500 £39,300

The following could relate to contract costing: (i)

Work is for for a period period of long long durati duration on..

(ii) Progress payments are are amounts paid for the contract throughout the course of the contract. (iii) Architects Architects’’ certificates certificates are provided provided to establish the the amount of work certified. certified. Which of the above are correct? A B C D


2


5

A company values stocks using the weighted average value after each purchase. The following receipts and issues have been made with regards to materials for the last month: Date

Receipts

Issues

Units

£/unit

Valuation

Brought forward

100

£5

£500

4th

150

£5·50

£825

16th

Units

100

20th

100

£6

£600

21st

75

What is the value of the closing stock using this weighted average method? A B C D

6

£1,012·50 £976·50 £962·50 £925·00

Sydney wishes to make an investment on a monthly basis starting next month for five years. The payments into the fund would be made on the first day of each month. The interest rate will be 0·5% per month. Sydney needs a terminal value of £7,000. What should be the monthly payments into the fund to the nearest £? A B C D

7

£75 £86 £100 £117

A company has the following budget for the next month: Finished Product Sales Production units

7,000 units 7,200 units

Materials Usage per unit Opening stock Closing stock

3 kg 400 kg 500 kg

What is the material purchases budget for the month? A B C D

20,900 21,100 21,500 21,700

kg kg kg kg

3


[P.T.O.

8

The (i) (ii) (iii)

following could relate to optical mark readers: Specialist pens are always required for use. Data entry is quick. Computers carry out most of the work.

Which of the above would be considered to be advantages of using optical mark readers? A B C D

9


Which of the following would be best described as a short term tactical plan? A B C D

Reviewing cost variances and investigate as appropriate Comparing actual market share to budget Lowering the selling price by 15% Monitoring actual sales to budget

10 A company incurs the following costs at various activity levels: Total cost £ 250,000 312,500 400,000

Activity level Units 5,000 7,500 10,000

Using the high-low method what is the variable cost per unit? A B C D

£25 £30 £35 £40

11 An investment gives the following results: Net present value £000 383 (246)

Discount rate 10% 15%

What is the estimated internal rate of return to the nearest whole percentage? A B C D

12% 13% 14% 17%

4


12 A company uses process costing to establish the cost per unit of its output. The following information was available for the last month: Input units Output units Opening stock

10,000 9,850 300 units, 100% complete for materials and 70% complete for conversion costs 450 units, 100% complete for materials and 30% complete for conversion costs

Closing stock

The company uses the weighted average method of valuing stock. What were the equivalent units for conversion costs? A B C D

9,505 9,715 9,775 9,985


13 Which of the following is correct with regard to expected values? A B C D

Expected values provide a weighted average of anticipated outcomes The expected value will always equal one of the possible outcomes Expected values will show whether the decision maker is risk averse, risk seeking or risk neutral The expected value will never equal one of the possible outcomes

5


[P.T.O.

14 The following graph has been established for a given set of constraints:

300

y 200

B

100 A

C

D

OF

0

100

200

x

300

The objective function (OF) for the company has also been plotted on the graph and the feasible region is bounded by the area ABCD. At which point on the graph will profits be maximised? A B C D

15 The following information has been obtained for sales of two products for a three year period: Price 2000 (base year) 2001 2002

Product A 100 125 130

Quantity Product B 150 140 135

Product A 3 2 2

What is the Paasche quantity index for 2002? A B C D

0·86 0·89 1·19 1·20

6


Product B 4 3 4

16 A company has just secured a new contract which requires 500 hours of labour. There are 400 hours of spare labour capacity. The remaining hours could be worked as overtime at time and a half or labour could be diverted from the production of product X. Product X currently earns a contribution of £4 in two labour hours and direct labour is currently paid at a rate of £12 per normal hour. What is the relevant cost of labour for the contract? A B C D

17 The (i) (ii) (iii)

£200 £1,200 £1,400 £1,800

following statements relate to performance evaluation methods: Residual income is not a relative measure. The return on investment figure is a relative measure. Residual income cannot be calculated for an individual project.

Which of the above are correct? A B C D


18 A company uses variance analysis to control costs and revenues. Information concerning sales is as follows: Budgeted selling price Budgeted sales units Budgeted profit per unit

£15 per unit 10,000 units £5 per unit

Actual sales revenue Actual units sold

£151,500 9,800 units

What is the sales volume profit variance? A B C D

£500 favourable £1,000 favourable £1,000 adverse £3,000 adverse

19 A company has the following budgeted information for the coming month: Budgeted sales revenue Budgeted contribution Budgeted profit

£500,000 £200,000 £ 50,000

What is the budgeted break-even sales revenue? A B C D

£125,000 £350,000 £375,000 £450,000

7


[P.T.O.

20 An investment has the following cash inflows and cash outflows: Time

Cash flow per annum £000

0

(20,000)

1-4

13,000

5-8

17,000

10

(10,000)

What is the net present value of the investment at a discount rate of 8%? A B C D

(£2,416) £7,046 £6,981 £2,351

21 Which of the following is correct? A B C D

When considering limiting factors the products should always be ranked according to contribution per unit sold If there is only one scarce resource linear programming should be used In linear programming the point furthest from the origin will always be the point of profit maximisation The slope of the objective function depends on the contributions of the products

22 A company has over absorbed fixed production overheads for the period by £6,000. The fixed production overhead absorption rate was £8 per unit and is based on the normal level of activity of 5,000 units. Actual production was 4,500 units. What was the actual fixed production overheads incurred for the period? A B C D

£30,000 £36,000 £40,000 £42,000

23 A company uses process costing to value its output. The following was recorded for the period: Input materials Conversion costs Normal loss Actual loss

2,000 units at £4·50 per unit £13,340 5% of input valued at £3 per unit 150 units

There were no opening or closing stocks. What was the valuation of one unit of output to one decimal place? A B C D

£11·8 £11·6 £11·2 £11·0

8


24 Which of the following are correct with regard to regression analysis? (i)

In regression analysis the n stands for the number of pairs of data.

(ii) ∑ x2 is not the same calculation as (∑ x)2 (iii) ∑ xy is calculated by multiplying the total value of x and the total value of y A

(i) and (ii) only

B

(i) and (iii) only

C

(ii) and (iii) only

D

(i), (ii) and (iii)

25 The following information relates to labour costs for the past month: Budget

Labour rate Production time Time per unit Production units

£10 per hour 15,000 hours 3 hours 5,000 units

Actual

Wages paid Production Total hours worked

£176,000 5,500 units 14,000 hours

There was no idle time. What were the labour rate and efficiency variances? A B C D

Rate variance £26,000 adverse £26,000 adverse £36,000 adverse £36,000 adverse

Efficiency variance £25,000 favourable £10,000 favourable 1£2,500 favourable £25,000 favourable (50 marks)

9


[P.T.O.


A business operates with two production centres and three service centres. Costs have been allocated and apportioned to these centres as follows: Production Centres

Service Centres

1

2

A

B

C

£2,000

£3,500

£300

£500

£700

Information regarding how the service centres work for each other and for the production centres is given as:

Work done for: Production Centres

Service Centres

1

2

A

B

C

By A

45%

45%

–

10%

–

By B

50%

20%

20%

–

10%

By C

60%

40%

–

–

–

Information concerning production requirements in the two production centres is as follows: Units produced Machine hours Labour hours

Centre 1 1,500 units 3,000 hours 2,000 hours

Centre 2 2,000 units 4,500 hours 6,000 hours

Required: (a) Using the reciprocal method calculate the total overheads in production centres 1 and 2 after reapportionment of the service centre costs. (7 marks) (b) Using the most appropriate basis establish the overhead absorption rate for production centre 1. Briefly (3 marks) explain the reason for your chosen absorption basis. (10 marks)

10


2

Break-even charts and profit-volume charts are commonly associated with cost-volume-profit analysis (break-even analysis). Required: (a) (i)

Sketch a break-even chart and indicate where the break-even point would be for a single product firm. Clearly label the axes and indicate the following lines: – total revenue; – variable cost; – fixed costs; and – total cost.

(ii) How would contribution be established from your chart in (a)(i)? (b) (i)

(6 marks)

Sketch a profit-volume chart and indicate where the break-even point would be for a single product firm. Clearly label the axes and indicate the profit line and fixed costs.

(ii) How would contribution be established from your chart in (b)(i)?

(4 marks)

[Note: no specific numbers are required.] (10 marks)

3

A company has obtained the following information regarding costs and revenue for the past financial year: Original budget: Sales Production

10,000 units 12,000 units

Standard cost per unit: Direct materials Direct labour Fixed production overheads

Selling price Actual results: Sales Revenue Production Material cost Labour cost Fixed production overheads

£ 5 9 8 ––– 22 ––– 30 9,750 units £325,000 11,000 units £65,000 £100,000 £95,000

There were no opening stocks. Required: (a) Produce a flexed budget statement showing the flexed budget and actual results. Calculate the variances between the actual and flexed figures for the following: – sales; – materials; – labour; and – fixed production overhead. (7 marks) (b) Explain briefly how the sales and materials variances calculated in (a) may have arisen.


11


[P.T.O.

4

A business currently orders 1,000 units of product X at a time. It has decided that it may be better to use the Economic Order Quantity method to establish an optimal reorder quantity. Information regarding stocks is given below: Purchase price £15/unit Fixed cost per order £200 Holding cost 8% of the purchase price per annum Annual demand 12,000 units Current annual total stock costs are £183,000, being the total of the purchasing, ordering and holding costs of product X. Required: (a) Calculate the Economic Order Quantity.

(2 marks)

(b) Using your answer to (a) above calculate the revised annual total stock costs for product X and so establish the difference compared to the current ordering policy. (4 marks) (c) List ways in which discounts might affect this Economic Order Quantity calculation and subsequent stock costs. (4 marks) (10 marks)

5

A company manufactures a single product, product Y. It has documented levels of demand at certain selling prices for this product as follows: Demand

Selling price per unit

Cost per unit

Units

£

£

1,100

48

24

1,200

46

21

1,300

45

20

1,400

42

19

Required: Using a tabular approach calculate the marginal revenues and marginal costs for product Y at the different levels of demand, and so determine the selling price at which the company profits are maximised. (10 marks)

12


Formulae Sheet

Laspeyres’ price index =

Paasche price index =

Laspeyres’ quantity index =

Paasche quantity index =

13


[P.T.O.



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    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

Q





















    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

14


Annuity Table


 ²   U ²Q ³³³³²² U


3HULRGV

Q





















    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

Q





















    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    


15


Answers


Part 1 Examination – Paper 1.2 Financial Information for Management


Section A 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

D C C D B C D C C B B D A D A C A C C D D A B A D

1

D

2

C

3

C

4–(0·95 + 1·25 + 0·7) = 1·1 £ 37,500

Marginal costing profit Add: fixed costs in closing stock (350 × 4) Less: fixed costs in opening stock (100 × 4)

11,400 1,1(400) ––––––– 38,500 –––––––

Absorption costing profit 4

D

5

B Units 100 150 –––– 250 (100) 100 –––– 250 (75) –––– 175 ––––

Receipts and issues Price per unit 5·00 5.50 –––– 5·30 5·30 6·00 –––– 5·58 5·58 –––– 5·58 ––––

Cost 500 825 –––––– 1,325 (530) 600 –––––– 1,395 (418·5) –––––– 976·50 ––––––

19


6

C

 1·00512×5 – 1  = 7,000  –––––––––––   0·005  

A

7

× 69·77 = 7,000

A

A

A

7,000 A = –––––– = 100·33 69·77

D

Materials Usage 7,200

× 3 kg = 21,600 kg kg 21,600 (400) 500 ––––––– 21,700 –––––––

Usage Opening stock Closing stock Purchases

8

C

9

C

10

B

11

B

hi low difference

≈ 100

400,000 = fixed cost + variable cost per unit 250,000 = fixed cost + variable cost per unit 150,000 = variable cost per unit × 5,000 150,000 variable cost per unit = ––––––– = £30 5,000

 383 IRR = 10% +  –––––––––––  383 – (– 246)  383 IRR = 10% +  ––––––––––  383 + 246 

IRR = 10% +

× 10,000 × 5,000

 (15% – 10%)   

 × 5%   

 383  × 5%  ––––  629   

IRR = 10% + 3% = 13%

12

D Output Closing stock

13

conversion costs 9,850 135 ––––– 9,985 –––––

= 450

× 30%

A

20


14

D

300

OF

y

200 C B

100

A

D

OF

0

15

A

∑ p q (130 × 2) + (135 × 4) –––––– = ––––––––——––––––– = ∑ p q (130 × 3) + (135 × 4) = 3 3 3 1

16

C

300

x

800 –––– = 0·86 930

Labour required Spare capacity Remaining hours required

500 hours 400 hours 100 hours

100 hours from either: overtime

100

production of X

200

100

no relevant cost

× 1·5 × 12 = £1,800

(100

× 12) +

(

100 —— 2

×4

) = 1,400

therefore it is cheaper to take the hours from the production of X 17

A

18

C

Volume variance Budgeted volume Actual volume Difference

10,000 units 9,800 units ––––––––––– 200 units

× £5 At standard profit per unit Variance £1,000 adverse 19

C

fixed costs Breakeven sales revenue = ––––––––– C/S ratio Fixed costs = £200,000 – £50,000 = £150,000 £200,000 C/S ratio = ––––––––– = 0·4 £500,000 £150,000 Breakeven sales revenue = ––––––––– = £375,000 0·4

21


20

D Time

21

D

22

A

Flow

Discount factor

Present value

£000

8%

£000

0

(20,000)

1

(20,000)

1–4

13,000

3·312

19,936

5–8

17,000

5·747 – 3·312= 2·435

17,045

10

(10,000)

0·463

(4,630)

Net Present Value

12,351

Over absorbed fixed production overheads Absorbed overheads (4,500 × £8) Actual overheads incurred 23

B

24

A

25

D

£ (6,000) 36,000 ––––––– 30,000

(2,000 × £4·50) + 13,340 – (2,000 × 5% × £3) cost/unit = –––––––––––––––––––––––––––––––––––––––––– 2,000 – (2,000 × 5%) £22,040 cost/unit = –––––––– = £11·6 1,900

Rate variance Did cost Should cost (14,000 × £10)

Efficiency variance Did take Should take (5,500 × 3)

£ 176,000 140,000 –––––––– 36,000 adverse hours 14,000 16,500 ––––––– 2,500 favourable

× £10

At standard cost

£25,000 favourable –––––––––––––––––

22


Section B 1

(a)

Centre 1 Centre 2 Service A Service B Service C 2,000 3,500 300 500 700 500 × 50% = 500 × 20% = 500 × 20% = 500 × 10% = 250 100 100 (500) 50 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2,250 3,600 400 0 750 400 × 45% = 400 × 45% = 400 × 10% = 180 180 (400) 40 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2,430 3,780 0 40 750 750 × 60% = 750 × 40% = 450 300 (750) ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2,880 4,080 0 40 0 40 × 50% = 20 40 × 20% = 8 40 × 20% = 8 (40) 40 × 10% = 4 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2,900 4,088 8 0 4 8 × 45% = 4 8 × 45% = 4 (8) 8 × 10% = 0 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2,904 4,092 0 0 4 4 × 60% = 2 4 × 40% = 2 (4) ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2,906 4,094 0 0 0 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– The total amount for overheads in production centre 1 is £2,906 and in production centre 2 is £4,094.

2

(b)

Centre 1 The most appropriate basis is to use machine hours as it is machine intensive. £2,906 Overhead absorption rate = –––––––––– = £0·969/machine hour 3,000 hours

(a)

(i) £

Total revenue

Costs and revenue

Total costs

Break-even revenue

Variable costs

Fixed costs

0

(ii)

Breakeven volume

units

Contribution would be established by taking the difference between the sales revenue line and the variable costs line.

23


(b)

(i) Profit Profit £

Breakeven point 0 Units Loss £

Fixed costs

(ii)

3

Contribution would be established by taking the difference between profit and fixed costs.

(a) Sales – units Production – units Sales price Cost of sales Opening stock Production costs: Materials Labour Fixed production overheads

Closing stock

Profit

Flexed budget 9,750 11,000 £000 292·5 = 30

Actual results 9,750 11,000 £000 325

× 9,750

0

£000 32·5 favourable

0

55 99

=5 =9

× 11,000 × 11,000

65 100

10 adverse 1 adverse

96 (note) –––––––– 250 27·5 –––––––– 222·5 –––––––– 70 ––––––––

=8

× 12,000

95 ––––––––––– 260 27·5 ––––––––––– 232·5 ––––––––––– 92·5 –––––––––––

1 favourable ––––––––––––– 10 adverse

= 22

× (11,000 – 9,750)

Note: This figure can also be established by taking the absorbed fixed production overheads of 8 adding the under absorbed amount of £8,000. (b)

Variances

––––––––––––– 22·5 favourable –––––––––––––

× 11,000 = £88,000 and

The sales price variance will have arisen due to a higher selling price than budgeted being obtained. The material variance may have arisen either because the number of kg used were more than expected, and/or the amount paid per kg was higher than expected.

24


4

(a)

EOQ =

EOQ =

(b)

2CoD Ch

2 × 200 × 12, 000 = 2,000 units £1 ⋅ 2

Revised stock costs Purchase costs (12,000 × £15) 12,000 Order costs –––––– × 200 2,000 2,000 Holding costs ––––– × 15 × 0·08 2

£ 180,000 1,200 1,200 –––––––– 182,400 183,000 –––––––– 600 ––––––––

Original stock costs Saving

(c)

Discounts are likely to increase the EOQ as the holding cost will be reduced. Since the purchase price is lower the total purchase cost will be reduced. As the order cost uses the EOQ to divide the total demand, this cost will be reduced as the EOQ has increased. The holding cost will change as it uses both the increased EOQ and a reduced purchase price.

5

Demand

Selling Price per unit

Total Revenue

Marginal Revenue

Cost per unit

Total Cost

Marginal Cost

Units

£

£

£

£

£

£

=units × unit selling price

=units × cost per unit

1,100

48

52,800

52,800

22

24,200

24,200

1,200

46

55,200

12,400

21

25,200

11,000

1,300

45

58,500

13,300

20

26,000

11,800

1,400

42

58,800

1,1300

19

26,600

11,600

MR

≥

MC at 1,300 units, therefore profits will be maximised at this point which is a selling price of £45.

25



December 2003 Marking Scheme Marks

Section A 2 marks per question giving a total of 50 marks.

Section B 1

(a)

(b)

reapportionment 1 mark for each correct line using correct %’s max Note: any method with sound bases for allocation should be accepted and given full credit. Conclusion

6

1 –––

reason for using basis using correct overhead figure from (a) using machine hours as a basis using the correct machine hours figure correct calculation

1 1 / 2 1 / 2 1 / 2 1 / 2

–––

2

(a)

(i)

(ii)

(b)

(i)

7

correctly labelled axes total revenue line variable cost line fixed cost line total cost line break-even point

3 ––– 10 –––

1 1 / 2 1 / 2 1 / 2 1 / 2

1 ––– 4

total revenue – variable costs

2 –––

correctly labelled axes profit line fixed costs break-even point

6

1 / 2 1 / 2 1 / 2 1 / 2

––– 2 (ii)

profit – fixed costs

2 –––

27


4 ––– 10 –––

Marks

3

(a)

Flexed budget Sales units Production units Sales revenue Material cost Labour cost Fixed cost Closing stock

1 / 2 1 / 2 1 / 2 1 / 2 1 / 2 1 / 2

1

Actual figures – all of them

1

Variances Sales revenue Material cost Labour cost Fixed cost

1 / 2 1 / 2 1 / 2 1 / 2

––– (b)

4

(a)

(b)

(c)

5

Sales price Mentioning materials price Mentioning materials usage

1 1 1 –––

correctly putting in the order cost correctly putting in the annual demand correctly putting in the holding cost calculation

on on on on

3 ––– 10 –––

1 / 2 1 / 2 1 / 2 1 / 2

Purchase cost Order cost Holding cost Saving

Effect Effect Effect Effect

7

EOQ purchase costs order costs holding costs

––-–

2

1 1 1 1 –––

4

1 1 1 1 –––

Calculation of total revenue ( 1 / 2 per correct entry) Calculation of marginal revenue ( 1 / 2 per correct entry) Calculation of total cost ( 1 / 2 per correct entry) Calculation of marginal revenue ( 1 / 2 per correct entry) Profit maximising point

2 2 2 2 2 –––

28


4 ––– 10 –––

10 –––




Section B


2 . 1 r e p a P

Formulae Sheet is on page 14

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

The Association of Chartered Certified Accountants FOR FREE ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com


The following diagram represents the behaviour of one element of cost: £ Total cost

Volume of activity

0

Which ONE of the following statements is consistent with the above diagram?

2

A

Annual factory power cost where the e lectricity supplier sets a tariff based on a fixed charge plus a constant unit cost for consumption but subject to a maximum annual charge.

B

Weekly total labour cost when there is a fixed wage for a standard 40 hour week but overtime is paid at a premium rate.

C

Total direct material cost for a period if the supplier charges a lower unit cost on all units once a certain quantity has been purchased in that period.

D

Total direct material cost for a period where the supplier charges a constant amount per unit for all units supplied up to a maximum charge for the period.

The following represents a profit/volume graph for an organisation: £

V Units

0 T

At the specific levels of activity indicated, what do the lines depicted as ‘T’ and ‘V’ represent? Line ‘T’ Line ‘V’ A Loss Profit Loss Contribution B C Total fixed costs Profit D Total fixed costs Contribution

2


3

An organisation manufactures and sells a single product. At the budgeted level of output of 2,400 units per week, the unit cost and selling price structure is as follows: £ per unit £ per unit Selling price 60 Less – variable production cost 15 Less – other variable cost 15 Less – fixed cost 30 ––– (50) ––– Profit 10 ––– What is the breakeven point (in units per week)?

4

A

1,200

B

1,600

C

1,800

D

2,400

A company manufactures one product which it sells for £40 per unit. The product has a contribution to sales ratio of 40%. Monthly total fixed costs are £60,000. At the planned level of activity for next month, the company has a margin of safety of £64,000 expressed in terms of sales value. What is the planned activity level (in units) for next month?

5

A

3,100

B

4,100

C

5,350

D

7,750

A company manufactures and sells two products (X and Y) both of which utilise the same skilled labour. For the coming period, the supply of skilled labour is limited to 2,000 hours. Data relating to each product are as follows: Product X Y Selling price per unit £20 £40 Variable cost per unit £12 £30 Skilled labour hours per unit 2 4 Maximum demand (units) per period 800 400 In order to maximise profit in the coming period, how many units of each product should the company manufacture and sell? A


B


C


D


3


[P.T.O.

6

An organisation manufactures a single product. The total cost of making 4,000 units is £20,000 and the total cost of making 20,000 units is £40,000. Within this range of activity the total fixed costs remain unchanged. What is the variable cost per unit of the product? A B C D

7

8

£0·80 £1·20 £1·25 £2·00

In a short-term decision-making context, which ONE of the following would be a relevant cost? A

Specific development costs already incurred.

B

The cost of special material which will be purchased.

C

Depreciation on existing fixed assets.

D

The original cost of raw materials currently in stock which will be used on the project.

The stock records for one specific stores item for last month show the following information: Date 14th 13th 15th 22nd

Receipts units

Issues units 150

600 200 250

The stock at the beginning of last month consisted of 200 units valued at £5,200. The receipts last month cost £32·50 per unit. Using the FIFO method of valuation, what was the total cost of last month’s issues?

9

A

£18,200

B

£18,300

C

£18,525

D

£19,500

The demand for a product is 12,500 units for a three month period. Each unit of product has a purchase price of £15 and ordering costs are £20 per order placed. The annual holding cost of one unit of product is 10% of its purchase price. What is the Economic Order Quantity (to the nearest unit)? A

1,577

B

1,816

C

1,866

D

1,155

4


10 A company determines its order quantity for a raw material by using the Economic Order Quantity (EOQ) model. What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of ordering a batch of raw material? EOQ

Total annual holding cost

A

Higher

Lower

B

Higher

Higher

C

Lower

Higher

D

Lower

Lower

11 A company manufactures two products, X and Y, in a factory divided into two production cost centres, Primary and Finishing. The following budgeted data are available: Cost centre Allocated and apportioned fixed overhead costs Direct labour minutes per unit: – product X – product Y

Primary

Finishing

£96,000

£82,500

36 48

25 35

Budgeted production is 6,000 units of product X and 7,500 units of product Y. Fixed overhead costs are to be absorbed on a direct labour hour basis. What is the budgeted fixed overhead cost per unit for product Y? A

£11

B

£12

C

£14

D

£15

12 A company uses an overhead absorption rate of £3·50 per machine hour, based on 32,000 budgeted machine hours for the period. During the same period the actual total overhead expenditure amounted to £108,875 and 30,000 machine hours were recorded on actual production. By how much was the total overhead under or over absorbed for the period? A

Under absorbed by £3,875

B

Under absorbed by £7,000

C

Over absorbed by £3,875

D

Over absorbed by £7,000

13 A company manufactures and sells a single product. For this month the budgeted fixed production overheads are £48,000, budgeted production is 12,000 units and budgeted sales are 11,720 units. The company currently uses absorption costing. If the company used marginal costing principles instead of absorption costing for this month, what would be the effect on the budgeted profit? A

£1,120 higher

B

£1,120 lower

C

£3,920 higher

D

£3,920 lower 5


[P.T.O.

14 For which of the following is a profit centre manager normally responsible? A

Costs only

B

Revenues only

C

Costs and revenues

D

Costs, revenues and investment.

The following information relates to questions 15 and 16: The standard direct material cost per unit for a product is calculated as follows: 10·5 litres at £2·50 per litre Last month the actual price paid for 12,000 litres of material used was 4% above standard and the direct material usage variance was £1,815 favourable. No stocks of material are held.

15 What was the adverse direct material price variance for last month? A

£1,000

B

£1,200

C

£1,212

D

£1,260

16 What was the actual production last month (in units)? A

1,074

B

1,119

C

1,212

D

1,258

17 A company operates a standard marginal costing system. Last month its actual fixed overhead expenditure was 10% above budget resulting in a fixed overhead expenditure variance of £36,000. What was the actual expenditure on fixed overheads last month? A

£324,000

B

£360,000

C

£396,000

D

£400,000

18 Last month a company budgeted to sell 8,000 units at a price of £12·50 per unit. Actual sales last month were 9,000 units giving a total sales revenue of £117,000. What was the sales price variance for last month? A

£4,000 favourable

B

£4,000 adverse

C

£4,500 favourable

D

£4,500 adverse 6


19 Which department would normally be responsible for completing a standard purchase requisition for goods in a service organisation? A

The buying (purchasing) department

B

The department that requires the goods

C

The goods inwards department

D

The accounting department staff.

20 Regression analysis is being used to find the line of best fit (y = a + bx) from eleven pairs of data. The calculations have produced the following information: ∑ x = 440, ∑ y = 330, ∑ x2 = 17,986, ∑ y2 = 10,366 and ∑ xy = 13,467

What is the value of ‘a’ in the equation for the line of best fit (to 2 decimal places)? A

0·63

B

0·69

C

2·33

D

5·33

21 The following information relates to a management consultancy organisation: Salary cost per hour for senior consultants Salary cost per hour for junior consultants Overhead absorption rate per hour applied to all hours

£40 £25 £20

The organisation adds 40% to total cost to arrive at the final fee to be charged to a client. Assignment number 789 took 54 hours of a senior consultant’s time and 110 hours of junior consultants’ time. What is the final fee to be charged for Assignment 789? A

£6,874

B

£10,696

C

£11,466

D

£12,642

7


[P.T.O.

22 Two products G and H are created from a joint process. G can be sold immediately after split-off. H requires further processing before it is in a saleable condition. There are no opening stocks and no work in progress. The following data are available for last period: £ Total joint production costs 384,000 Further processing costs (product H) 159,600 Product

Selling price per unit £0·84 £1·82

G H

Sales units 400,000 200,000

Production units 412,000 228,000

Using the physical unit method for apportioning joint production costs, what was the cost value of the closing stock of product H for last period? A

£36,400

B

£37,520

C

£40,264

D

£45,181

23 A company manufactures and sells a single product. The variable cost of the product is £2·50 per unit and all production each month is sold at a price of £3·70 per unit. A potential new customer has offered to buy 6,000 units per month at a price of £2·95 per unit. The company has sufficient spare capacity to produce this quantity. If the new business is accepted, sales to existing customers are expected to fall by two units for every 15 units sold to the new customer. What would be the overall increase in monthly profit which would result from accepting the new business? A

£1,740

B

£2,220

C

£2,340

D

£2,700

24 A company manufactures four components (L, M, N and P) using the same general purpose machinery. Weekly demand is 1,500 units of each component but only 24,000 machine hours are available each week. A decision has to be made on which component to buy in from an outside supplier. The following data are available: 11

L 45 13 57

Variable production cost (£ per unit) General purpose machinery hours per unit Purchase price from outside supplier (£ per unit)

M 40 15 55

N 30 14 54

P 20 16 50

In order to minimise total cost, which component should be purchased from the outside supplier each week? A

Component L

B

Component M

C

Component N

D

Component P

8


25 The following graph relates to a linear programming problem: y

(1)

(3)

(2)

0

x

The objective is to maximise contribution and the dotted line on the graph depicts this function. There are three constraints which are all of the ‘less than or equal to’ type which are depicted on the graph by the three solid lines labelled (1), (2) and (3). At which of the following intersections is contribution maximised? A


B


C


D

Constraint (1) and the x-axis (50 marks)

9


[P.T.O.


Duddon Ltd makes a product that has to pass through two manufacturing processes, I and II. All the m aterial is input at the start of process I. No losses occur in process I but there is a n ormal loss in process II equal to 7% of the input into that process. Losses have no realisable value. Process I is operated only in the first part of every month followed by process II in the second part of the month. All completed production from process I is transferred into process II in the same month. There is no work in progress in process II. Information for last month for each process is as follows: Process I Opening work in progress Input into the process Conversion costs incurred Closing work in progress

200 units (40% complete for conversion costs) valued in total at £16,500 1,900 units with a material cost of £133,000 £93,500 50% complete for conversion costs

Process II Transfer from process I 1,800 units Conversion costs incurred £78,450 1,650 completed units were transferred to the finished goods warehouse. Required: (a) Calculate for process I: (i) the value of the closing work in progress; and (ii) the total value of the units transferred to process II.

(4 marks)

(b) Prepare the process II account for last month.

(4 marks)

(c) Identify TWO main differences between process costing and job costing.


10


2

Coledale Ltd manufactures and sells product CC. The company operates a standard marginal costing system. The standard cost card for CC includes the following: £ per unit 20 45 27 ––– 92 –––

Direct material Direct labour (6 hours at £7·50 per hour) Variable production overheads

The budgeted and actual activity levels for the last quarter were as follows: Budget units Sales 20,000 Production 20,000

Actual units 19,000 21,000

The actual costs incurred last quarter were: £ 417,900 949,620 565,740

Direct material Direct labour (124,950 hours) Variable production overheads Required: (a) Calculate the

total variances

for direct material, direct labour and variable production overheads. (3 marks)

(b) Provide an appropriate breakdown of the total variance for direct labour calculated in (a).

(3 marks)

(c) Suggest TWO possible causes for EACH variance calculated in (b).


3

Braithwaite Ltd manufactures and sells a single product. The following data have been extracted from the current year’s budget: Contribution per unit £8 Total weekly fixed costs £10,000 Weekly profit £22,000 Contribution to sales ratio 40% The company’s production capacity is not bein g fully utilised in the current year and three possible strategies are under consideration. Each strategy involves reducing the unit selling price on all units sold with a consequential effect on the budgeted volume of sales. Details of each strategy are as follows: Strategy

A B C

Reduction in unit selling price % 2 5 7

Expected increase in weekly sales volume over budget % 10 18 25

The company does not hold stocks of finished goods. Required: (a) Calculate for the current year: (i) the selling price per unit for the product; and (ii) the weekly sales (in units).

(3 marks)

(b) Determine, with supporting calculations, which one of the three strategies should be adopted by the company in order to maximise weekly profits. (4 marks) (c) Briefly explain the practical problems that a management accountant might encounter in separating costs into their fixed and variable components. (3 marks) (10 marks) 11


[P.T.O.

4

Ennerdale Ltd has been asked to quote a price for a one-off contract. The company’s management accountant has asked for your advice on the relevant costs for the contract. The following information is available: Materials The contract requires 3,000 kg of material K, which is a material used regularly by the company in other production. The company has 2,000 kg of material K currently in stock which had been purchased last month for a total cost of £19,600. Since then the price per kilogram for material K has increased by 5%. The contract also requires 200 kg of material L. There are 250 kg of material L in stock which are not required for normal production. This material originally cost a total of £3,125. If not used on this contract, the stock of material L would be sold for £11 per kg. Labour The contract requires 800 hours of skilled labour. Skilled labour is paid £9·50 per hour. There is a shortage of skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product P. The following information relates to product P: £ per unit £ per unit Selling price 100 Less Skilled labour 38 Other variable costs 22 ––– (60) ––– 40 ––– Required: (a) Prepare calculations showing the total relevant costs for making a decision about the contract in respect of the following cost elements: (i) materials K and L; and (7 marks) (ii) skilled labour. (b) Explain how you would decide which overhead costs would be relevant in the financial appraisal of the contract. (3 marks) (10 marks)

12


5

Langdale Ltd is a small company manufacturing and selling two different products – the Lang and the Dale. Each product passes through two separate production cost centres – a machinin g department, where all the work is carried out on the same general purpose machinery, and a finishing section. There is a general service cost centre providing facilities for all employees in the factory. The company operates an absorption costing system using budgeted overhead absorption rates. The management accountant has calculated the machine hour absorption rate for the machining department as £3·10 but a direct labour hour absorption rate for the finishing section has yet to be calculated. The following data have been extracted from the budget for the coming year: Product Lang Sales (units) 6,000 Production (units) 7,200 Direct material cost per unit £52 Direct labour cost per unit: – machining department (£8 per hour) £72 – finishing section (£6 per hour) £42 Machining department – machine hours per unit £15 Fixed production overhead costs: – machining department – finishing section – general service cost centre Number of employees: – machining department – finishing section – general service cost centre

Dale 19,000 10,400 £44 £40 £36 £13

£ 183,120 241,320 182,800 14 32 14

Service cost centre costs are reapportioned to production cost centres. Required: (a) Calculate the direct labour hour absorption rate for the finishing section.

(5 marks)

(b) Calculate the budgeted total cost for one unit of product Dale only, showing each main cost element separately. (2 marks) (c) The company is considering a change over to marginal costing. State with reasons, whether the total profit for the coming year calculated using marginal costing would be higher or lower than the profit calculated using absorption costing. No calculations are required. (3 marks) (10 marks)

13


[P.T.O.

Formulae Sheet


14


Answers




June 2004 Answers

Section A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A D C C D C B A D D D A B C B C C C B C C A A B D

1

A

2

D

3

C

Contribution per unit (CPU) £(60 – 15 – 5) Total fixed cost £(30 x 2,400) Breakeven point (72,000 ÷ 40)

4

C

CPU (40 x 0·40) Breakeven point (60,000 ÷ 16) Margin of safety (64,000 ÷ 40)

£40 £72,000 1,800 units £16 3,750 units 1,600 units –––––––––– 5,350 units ––––––––––

Planned activity level 5

D

X £8 £4 1st

CPU Contribution per hour Ranking

Y £10 £2·50 2nd

800 units of product X uses 1,600 hours and in the remaining 400 hours, 100 units of product Y can be manufactured. 6

C

7

B

8

A

9

D

£(40,000 – 20,000) ÷ (20,000 – 4,000) units = £1·25 per unit

Closing stock (units) = 200 + 600 – 150 – 200 – 250 = 200 Issues = £5,200 + (600 – 200) x £32·50 = £18,200

EOQ =

10

D

11

D

(2 x 20 x (4 x 12,500) 0 ⋅ 10 x 15

= 1,155

Total direct labour hours: Primary (6,000 x 36 ÷ 60) + (7,500 x 48 ÷ 60) 9,600 Finishing (6,000 x 25 ÷ 60) + (7,500 x 35 ÷ 60) 6,875 Absorption rates: Primary (96,000 ÷ 9,600) £10 per hour Finishing (82,500 ÷ 6,875) £12 per hour Fixed cost per unit (Y): (48 ÷ 60) x 10 + (35 ÷ 60) x 12 = £15

17


12

A

£ 108,875 105,000 –––––––113,875 ––––––––

Actual overhead Absorbed overhead (30,000 ÷ 3·50) Under absorption 13

B

14

C

15

B

16

C

Sales < production by 280 units Marginal costing profit would be lower by 280 x (48,000 ÷ 12,000) = £1,120 Adverse price variance (0·04 x 2·50 x 12,000) = £1,200 £ 30,000 11,815 –––––––31,815 –––––––1,212 units –––––––-

12,000 litres at £2·50 per litre Add Favourable usage variance Standard cost of actual production Actual production £31,815 ÷ (10·5 x 2·50) 17

C

18

C

Let x = budgeted expenditure 1·1x – x = 136,000 1.1x – x = 360,000 1·1 x = 396,000 = actual expenditure (£) £ 112,500

Actual sales at standard selling price (9,000 x £12·50) Actual sales at actual selling price

117,000 –––––––4,500 favourable –––––––-

Sales price variance 19

B

20

C

21

b

=

11 x 13,467 – (440 x 330) –––––––––––––––––––––––– (11 x 17,986) – (440) 2

=

0·6917

a

=

(330 ÷ 11) – 0·6917 (440 ÷ 11)

=

2·33

C Salary costs (54 x 40) + (110 x 25) Overhead cost (164 x 20) Total cost Mark-up (40% on total cost) Final fee

22

A

Joint costs apportioned to product H: (228 ÷ 640) x 384,000 Further processing costs

23

A

CPU from existing business (3·70 – 2·50) New business CPU (2·95 – 2.50)

£ 4,910 3,280 –––––––8,190 3,276 –––––––11,466 –––––––-

£ 136,800 159,600 –––––––Total cost of H production (228,000 units) 296,400 –––––––Closing stock: 28,000 x (296,400 ÷ 228,000) = £36,400

Total contribution from new business (6,000 x 0·45) Less Lost contribution from existing business 2 x (6,000 ÷ 15) x 1·20 Overall increase in contribution and profit 24

B Additional cost of buying in one unit (£) Machine hours per unit Additional cost of buying in per machine hour (£) Ranking for buying in Buy in component M.

25

£1·20 £0·45 £ 2,700 (960) ––––––1,740 ––––––L 12 13 14 2nd

M 15 15 13 1st

N 24 14 16 4th

P 30 16 15 3rd

D

18


Section B 1

(a)

Cost per equivalent unit (EU) calculations for Process I: Materials EU – 1,600 300 –––––– 1,900 –––––– £133,000 ––––––––– 1,900 = £70

Completion of opening work in progress Started and finished units last month Closing work in progress Work done last month Cost per EU

(i)

Value of closing work in progress = (300 x 70) + (150 x 50) = £28,500

(ii)

Value of transfer of 1,800 units to Process II = 1,600 x (70 + 50) + (120 x 50) + 16,500 = £214,500

(b)

Conversion EU 120 1,600 150 –––––– 1,870 –––––– £93,500 –––––––– 1,870 = £50

Process II Account Transfer from Process I Conversion costs

Units 1,800

£ 214,500 78,450

–––––– 1,800 ––––––

–––––––– 292,950 ––––––––

Normal loss Abnormal loss Finished production

Units 126 24 1,650 –––––– 1,800 ––––––

£ – 4,200 288,750 –––––––– 292,950 ––––––––

Workings 214,500 + 78,450 Cost per unit = –––––––––––––––––––– = £175 (0·93 x 1,800) Valuations: Abnormal loss = 24 x 175 = £4,200 Finished production = 1,650 x 175 = £288,750 (c)

2

–

In job costing each job is costed separately whereas in process costing it is the process itself which is costed. The total cost of the process is then averaged over all the units of production.

–

In job costing production is to customer specification and therefore each job is likely to be different. In process costing all units are identical in any one process.

(a)

Direct material Actual quantity at actual price

£ 417,900

Total variance £ 2,100 F

Standard quantity for actual production at standard price

420,000

Direct labour Actual hours at actual rate

949,620

Standard hours for actual production at standard rate

945,000

Variable production overheads Actual expenditure

565,740

4,620 A

1,260 F Standard cost of actual production

567,000

19


(b)

£ 949,620

Actual hours at actual rate

Variance (£) Rate 12,495 A

Actual hours at standard rate

937,125 Efficiency 7,875 F

Standard hours for actual production at standard rate (c)

945,000

Rate: – Higher graded workers paid at a higher rate. – Higher than expected wage settlement for the company. Efficiency: – The higher graded workers being more skilled took less than the standard time. – Highly motivated workers.

3

(a)

(b)

(i)

Selling price per unit = £8 ÷ 0·40 = £20

(ii)

Weekly contribution = 10,000 + 22,000 = £32,000 Weekly sales = 32,000 ÷ 8 = 4,000 units

Strategy Units per week Selling price Less Variable cost Contribution

Total contribution

A 4,400 –––––– £/unit 19·60 (12·00) –––––– 7·60 –––––– £ 33,440 –––––––

B 4,720 –––––– £/unit 19·00 (12·00) –––––– 7·00 –––––– £ 33,040 –––––––

C 5,000 –––––– £/unit 18·60 (12·00) –––––– 6·60 –––––– £ 33,000 –––––––

Contribution and therefore profit is maximised when Strategy A is adopted. (c)

Some costs do not fall clearly into being either variable or fixed. They are the costs that are a mix of variable and fixed – sometimes called semi-variable or mixed costs. The following techniques could be used to separate the fixed and variable components of semi-variable or mixed costs: – the high-low method – linear regression. Many costs are a mix of variable and fixed elements, for example power costs (gas or electricity). The tariffs for power costs often consist of a fixed charge irrespective of the amount of power consumed and a variable charge per unit of consumption.

4

(a)

(i)

Materials K L

(ii)

3,000 kg at (£19,600 ÷ 2,000) x 1·05 200 kg at £11

Skilled labour Labour cost Opportunity cost of labour

(b)

£ 30,870 2,200 –––––––– £33,070 ––––––––

800 hours at £9·50 800 hours at (£40 ÷ 4)

£ 7,600 8,000 –––––––– £15,600 ––––––––

Any variable overhead costs associated with the contract would be relevant because they would represent additional or incremental costs caused directly by the contract. Fixed overhead costs would only be relevant if the total fixed overhead costs of the company increased as a direct consequence of the contract being undertaken. In that case the relevant amount would be the specific increase in the total fixed overhead costs caused by the acceptance of the contract. Arbitrary apportionments of existing fixed overhead costs would not be relevant. Similarly sunk and committed costs would not be relevant.

20


5

(a)

£ 241,320

Fixed production overhead costs (finishing section) + Reapportionment of general service centre costs £82,800 x (32 ÷ 46)

57,600 –––––––– 298,920 –––––––– hours 50,400 62,400 –––––––– 112,800 ––––––––

Direct labour hours in finishing section: Lang 7,200 units x (42 ÷ 6 ) Dale 10,400 units x (36 ÷ 6)

Direct labour hour absorption rate for the finishing section: £298,920 £298,920 ÷ 112,800 112,800 = £2·65 (b)

Cost per unit for a Dale: £ per unit Direct material Direct labour – –

machining depar tment finishing section

Prime cost Production overhead costs: – machining department – finishing section

40·00 36·00 – – – –– –

(3 x £3·10) (6 x £2·65)

Total cost per unit for Dale

(c)

£ per unit 44·00

76·00 ––––––– 120·00 9·30 15·90 –––––––– £145·20 ––––––––

For both products – Lang and Dale – production is greater than sales for the coming year. In other words, stocks of finished products will be increasing. In this situation, profits calculated using marginal costing principles will be lower than the profits calculated using absorption costing principles. Fixed production costs are written off as they arise under marginal costing whereas under absorption costing they form part of the product cost and the inventory valuation. Therefore in the coming year with stocks increasing and using absorption costing, a higher amount of fixed production cost will be carried forward at the year end than was brought forward in any opening stocks. The effect is that some of the costs that would have been written off and would have reduced the profit under marginal costing are being carried forward under absorption costing to be written off against profits in later years.

21




June 2004 Marking Scheme Marks

Section A Each of the 25 questions in this section is worth 2 marks

50

Section B 1 (a) Equivalent units of work done Cost per equivalent unit Value of work in progress Value of transfer (b)

2

3

1 1 1 –––

Two differences – 1 mark for each

(a) (b) (c)

Three total variances – 1 mark for each Rate and efficiency variances – 1 1 / 2 marks for each Four causes (two for each variance in (b)) – 1 mark for each

(a)

(c)

Selling price Weekly sales

Mixed or semi-variable costs Example Methods

Material K Material L Skilled labour: – cost Skilled labour: – opportunity cost

(b)

Explanation of relevant cost concept Variable overhead costs Fixed overhead costs

3 3 4 –––

1 2 ––– 1 1 1 1 ––– 1 1 1 –––

Units for each strategy Selling price for each strategy Contribution for each strategy Recommendation Recommendation (best strategy)

(a)

4

1 / 2 1 / 2

Transfer in from Process I Conversion costs Normal loss Abnormal loss Finished production

(c)

(b)

4

1 1 1 1 –––

2 2 1 2 ––– 1 1 1 –––

23


4 2 ––– 10 –––

10 –––

3

4

3 ––– 10 –––

7

3 ––– 10 –––

Marks 5

(a)

(b)

(c)

1 1 / 2 1 / 2

Reapportionment of general service centre costs Original cost of finishing section Total direct labour hours in finishing section Direct labour hour rate Prime cost Overhead costs (2 x

1 / 2

mark)

Production > sales/increasing sales/increasing stocks Marginal costing profit lower than absorption costing profit Explanation

24


2 1 ––– 1 1 ––– 1 1 1 –––

5

2

3 ––– 10 –––




Section B

ALL FIVE questions questions are are compulsory compulsory and MUST be answered

2 . 1 r e p a P



The Association of Chartered Certified Accountants FOR FREE ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.co http://kaka-pakistani.blogspot.com m


When total purchases of raw material exceed 30,000 units in any one period then all units purchased, including the initial 30,000, are invoiced at a lower cost per unit. Which of the following graphs is consistent with the behaviour of the total materials cost in a period? £

0 £

0

2

£

A

UNITS 30,000

B

UNITS

0

30,000

£

C

UNITS 30,000

D

UNITS

0

30,000

A break-even chart for a company is depicted as follows: £

SALES REVENUE TOTAL COSTS

0

UNITS 4,000

Which one of the following statements is consistent with the above chart? A

Both selling price per unit and variable cost per unit are constant.

B

Selling price per unit is constant but variable cost per unit increases for sales over 4,000 units.

C

Variable cost per unit is constant but the selling price per unit increases for sales over 4,000 units.

D

Selling price per unit increases for sales over 4,000 units and there is an increase in the total fixed costs at 4,000 units. 2


3

4

Which of the following is a feasible value for the correlation coefficient? A

– 2·0

B

– 1·2

C

0

D

+ 1·2

An organisation’s records for last month show the following in respect of one particular stores item: Date

Receipts units

1st 4th 12th 19th 27th

Issues units

Stock units 200 50 550 350 50

150 500 200 300

The opening stock for last month was valued at a total of £4,000 and all receipts during the month were purchased at a cost of £26·60 per unit. The organisation uses the weighted average method of valuation and calculates a new weighted average price after each stores receipt. What was the total value of the issues during last month?

5

A

£16,000

B

£16,900

C

£17,000

D

£17,290

The total cost of production for two levels of activity is as follows: Production (units) Total cost (£)

Level 1 3,000 6,750

Level 2 5,000 9,250

The variable production cost per unit and the total fixed production cost both remain constant in the range of activity shown. What is the variable production cost per unit?

6

A

£0·80

B

£1·25

C

£1·85

D

£2·25

Monthly variance reports are an example of which one of the following types of management information? A

Tactical

B

Strategic

C

Planning

D

Operational

3


[P.T.O.

7

A company uses a standard absorption costing system. Last month budgeted production was 8,000 units and the standard fixed production overhead cost was £15 per unit. Actual production last month was 8,500 units and the actual fixed production overhead cost was £17 per unit. What was the total adverse fixed production overhead variance for last month? A

£7,500

B

£16,000

C

£17,000

D

£24,500

The following information relates to questions 8 and 9: A company operating a standard costing system has the following direct labour standards per unit for one of its products: 4 hours at £12·50 per hour Last month when 2,195 units of the product were manufactured, the actual direct labour cost for the 9,200 hours worked was £110,750.

8

9

What was the direct labour rate variance for last month? A

£4,250 favourable

B

£4,250 adverse

C

£5,250 favourable

D

£5,250 adverse

What was the direct labour efficiency variance for last month? A

£4,250 favourable

B

£4,250 adverse

C

£5,250 favourable

D

£5,250 adverse

10 A cost centre has an overhead absorption rate of £4·25 per machine hour, based on a budgeted activity level of 12,400 machine hours. In the period covered by the budget, actual machine hours worked were 2% more than the budgeted hours and the actual overhead expenditure incurred in the cost centre was £56,389. What was the total over or under absorption of overheads in the cost centre for the period? A

£1,054 over absorbed

B

£2,635 under absorbed

C

£3,689 over absorbed

D

£3,689 under absorbed

4


11 A company which operates a process costing system had work in progress at the start of last month of 300 units (valued at £1,710) which were 60% complete in respect of all costs. Last month a total of 2,000 units were completed and transferred to the finished goods warehouse. The cost per equivalent unit for costs arising last month was £10. The company uses the FIFO method of cost allocation. What was the total value of the 2,000 units transferred to the finished goods warehouse last month? A

£19,910

B

£20,000

C

£20,510

D

£21,710

12 A company has recorded its total cost for different levels of activity over the last five months as follows: Month 7 8 9 10 11

Activity level (units) 300 360 400 320 280

Total cost (£) 17,500 19,500 20,500 18,500 17,000

The equation for total cost is being calculated using regression analysis on the above data. The equation for total cost is of the general form ‘y = a + bx’ and the value of ‘b’ has been calculated correctly as 29·53. What is the value of ‘a’ (to the nearest £) in the total cost equation? A

7,338

B

8,796

C

10,430

D

10,995

13 A company operates a job costing system. Job number 1012 requires £45 of direct materials and £30 of direct labour. Direct labour is paid at the rate of £7·50 per hour. Production overheads are absorbed at a rate of £12·50 per direct labour hour and non-production overheads are absorbed at a rate of 60% of prime cost. What is the total cost of job number 1012? A

£170

B

£195

C

£200

D

£240

5


[P.T.O.

14 Data relating to a particular stores item are as follows: Average daily usage Maximum daily usage Minimum daily usage Lead time for replenishment of stock Reorder quantity

400 units 520 units 180 units 10 to 15 days 8,000 units

What is the reorder level (in units) which avoids stockouts? A

5,000

B

6,000

C

7,800

D

8,000

15 Which one of the following statements correctly describes the shadow price of a resource in linear programming? A

The maximum sum payable for one more unit of the scarce resource.

B

The minimum sum payable for one more unit of the scarce resource.

C

The increase in total contribution if one extra unit of a binding constraint is made available.

D

The increase in total contribution if one extra unit of a non-binding constraint is made available.

16 Last month, when a company had an opening stock of 16,500 units and a closing stock of 18,000 units, the profit using absorption costing was £40,000. The fixed production overhead rate was £10 per unit. What would the profit for last month have been using marginal costing? A

£15,000

B

£25,000

C

£55,000

D

£65,000

17 The following terms relate to computers: (i) application packages (ii) operating systems (iii) point-of-sale devices Which of these terms are categorised as software? A

(i) and (ii) only

B

(i) and (iii) only

C

(ii) and (iii) only

D

(i), (ii) and (iii)

6


18 A company is evaluating a project that requires two types of material (T and V). Data relating to the material requirements are as follows: Material type

Quantity needed for project kg 500 400

T V

Quantity currently in stock kg 100 200

Original cost of quantity in stock £/kg 40 55

Current purchase price £/kg 45 52

Current resale price £/kg 44 40

Material T is regularly used by the company in normal production. Material V is no longer in use by the company and has no alternative use within the business. What is the total relevant cost of materials for the project? A

£40,400

B

£40,900

C

£43,400

D

£43,900

19 A machine owned by a company has been idle for some months but could now be used on a one year contract which is under consideration. The net book value of the machine is £1,000. If not used on this contract, the machine could be sold now for a net amount of £1,200. After use on the contract, the machine would have no saleable value and the cost of disposing of it in one year’s time would be £800. What is the total relevant cost of the machine to the contract? A

£400

B

£800

C

£1,200

D

£2,000

20 An organisation launching a new product has set a relatively high initial selling price. Which one of the following pricing policies is this an example of? A

Premium pricing

B

Price differentiation

C

Penetration pricing

D

Price skimming

7


[P.T.O.

The following information relates to questions 21 and 22: In the following price, cost and revenue functions, which have been established by a company for one of its products, Q represents the number of units produced and sold per week: Price (£ per unit) = 40 – 0·03Q Marginal revenue (£ per unit) = 40 – 0·06Q Total cost per week (£) = 3,500 + 10Q

21 What price should be set in order to maximise weekly profits? A

£10

B

£15

C

£25

D

£30

22 What would be the profit per week if the selling price of the product was set at £31 per unit? A

£2,800

B

£3,150

C

£5,490

D

£5,800

23 A company sells a single product which has a contribution of £27 per unit and a contribution to sales ratio of 45%. This period it is forecast to sell 1,000 units giving it a margin of safety of £13,500 in sales revenue terms. What are the company’s total fixed costs per period? A

£6,075

B

£7,425

C

£13,500

D

£20,925

24 Which one of the following groups of workers would be classified as indirect labour? A

Machinists in an organisation manufacturing clothes

B

Bricklayers in a house building company

C

Maintenance workers in a shoe factory

D

Assembly workers in a vehicle manufacturing business

8


25 A factory consists of two production cost centres (P and Q) and two service cost centres (X and Y). The total allocated and apportioned overhead for each is as follows: P £95,000

Q £82,000

X £46,000

Y £30,000

It has been estimated that each service cost centre does work for the other cost centres in the following proportions: Percentage of service cost centre X to Percentage of service cost centre Y to

P 40 30

Q 40 60

X – 10

Y 20 –

After the reapportionment of service cost centre costs has been carried out using a method that fully recognises the reciprocal service arrangements in the factory, what is the total overhead for production cost centre P? A

£122,400

B

£124,716

C

£126,000

D

£127,000 (50 marks)

9


[P.T.O.


Maybud Ltd operates Process X which creates two joint products, A and B, in the ratio of 3:2 by volume. There is no work in progress. The following information relates to Process X for last month: (i)

80,000 litres of raw materials with a total cost of £158,800 were input into the process and conversion costs were £133,000.

(ii) A normal process loss of 5% of the input was expected. An actual loss of 5,500 litres was identified at the end of the process. Losses have a realisable value of 75p per litre. It is company policy to apportion joint costs to products using the net realisable value method. After Process X, both product A and product B are further processed at a cost of £2 per litre and £3 per litre respectively. The final selling prices of the products are as follows: Product £ per litre A 8 B 12 Required: (a) Prepare the process account for last month including the output volume and cost of products A and B separately. (7 marks) (b) Explain clearly how an abnormal gain arises in a process. Indicate where it would appear in a process (3 marks) account and how it would be valued. (10 marks)

2

Despard Ltd manufactures and sells a single product. The following data have been extracted from the current year’s budget: Sales and production (units) Variable cost per unit Fixed cost per unit Contribution to sales ratio

5,000 £50 £70 75%

The selling price per unit for next year is to be 8% above the current year’s budgeted figure, whereas both the variable cost per unit and the total fixed costs are forecast to increase by 12% above their budgeted level in the current year. The target for next year is that total profit should remain the same as that budgeted for the current year. Required: (a) Calculate for the CURRENT YEAR the budgeted: (i) contribution per unit; (ii) total profit.

(3 marks)

(b) Calculate the number of units which the company should produce and sell next year in order to achieve the target level of profit. (4 marks) (c) Explain, with an example, the term semi-variable (mixed) cost. How would such a cost be dealt with in undertaking the analysis in (a)? (3 marks) (10 marks)

10


3

Oakapple Ltd manufactures a single product which has a standard selling price of £15 per unit. It operates a standard absorption costing system. The total standard production cost is £9 per unit of which £4 per unit represents the variable cost element. Non-production costs of £44,000 per month are all fixed. The following data relate to the month just ended: Budget Actual units units Production 48,000 47,000 Sales 45,000 46,000 The actual total sales revenue for the month just ended was £678,500. Required: (a) Calculate the sales price and sales volume profit variances for the month just ended.

(4 marks)

One of the qualities of good information is that it should be communicated to the right person or persons in an organisation. (b) To whom should the variances calculated in (a) be communicated and why?

(3 marks)

The company is also considering a change from absorption costing to marginal costing. (c) Calculate the BUDGETED profit for the month just ended under: (i) absorption costing; (ii) marginal costing.


4

The following data for the current year relate to a sterile pack purchased by the Goodheart Hospital: Annual demand Annual holding cost per unit Cost of placing an order

90,000 units £8 £25

From the start of next year the cost of placing an order will rise by £11 but all the other data will remain the same. The hospital bases its purchasing decisions on the Economic Order Quantity (EOQ) model. Required: (a) Calculate the EOQ for: (i) the current year (ii) next year.

(4 marks)

(b) Calculate the total extra annual cost to the hospital for next year of ordering and holding stock of the sterile (4 marks) packs. (c) Identify TWO major costs associated with each of the following: (i) holding stock; (ii) ordering stock.


11


[P.T.O.

5

Dauntless Ltd aims to maximise its profits from the two products (X and Y) which it manufactures and sells. The selling prices per unit for products X and Y are £220 and £206 respectively. At these prices the company can sell all that it can produce. The following product cost data is available: Product X Product Y £/unit £/unit Material L (£6 per litre) 30 36 Material M (£7·50 per litre) 45 30 Other variable costs 55 44 –––– –––– Total variable cost 130 110 –––– –––– In the first three months of next year the supply of material L will be limited to 24,000 litres. However in the second three month period both material L and material M will be in short supply and each will be limited to 24,000 litres. The company holds no stocks. Required: (a) Determine the optimal production plan in units for the first three months of next year and the resultant total contribution. (4 marks) The company’s management accountant has already carried out some preliminary calculations relating to the second three month period. Using linear programming, she has determined that the optimal production plan for that quarter involves a combination of product X and product Y. (b) Determine the optimal production plan in units for the second three month period of next year and the resultant total contribution. (6 marks) (10 marks)

12


Formulae Sheet


13


Answers





Section A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A A C A B A C A D B A B A C C B A B D D C A D C D

1

A

2

A

3

C

4

A Date 1st 4th 12th 19th 27th

Units 200 (150) ––––– 50 500 ––––– 550 (200) (300)

Average price (£) 20·00 20·00 26·60 26·00 26·00 26·00

£ 4,000 (3,000) ––––––– 1,000 13,300 ––––––– 14,300 (5,200) (7,800)

Total value of issues = 3,000 + 5,200 + 7,800 = £16,000 5

B (9,250 – 6,750) ÷ (5,000 – 3,000) = £1·25

6

A

7

C £ 144,500 127,500 –––––––– 17,000 Adverse ––––––––

Actual cost Standard cost of actual production (8,500 x 15) Total overhead variance 8

A

17


9

D Actual cost

£ 110,750

Actual hours at standard rate (9,200 x 12·50)

115,000

Variance (£) 4,250 F Rate 5,250 A Efficiency

Standard hours for actual production at standard rate (2,195 x 4 x 12·50) 10

109,750

B £ 56,389 53,754 ––––––– 2,635 –––––––

Actual expenditure Absorbed cost (12,400 x 1·02 x 4·25) Total under absorption 11

A £ 1,710 1,200

Opening WIP Completion of opening WIP (300 x 0·40 x 10) Units started and completed in the month (2,000 – 300) x 10

17,000 ––––––– 19,910 –––––––

Total value (2,000 units) 12

B ∑y = 17,500 + 19,500 + 20,500 + 18,500 + 17,000 = 93,000 ∑x = 300 + 360 + 400 + 320 + 280 = 1,660

a = (93,000 ÷ 5) – 29·53(1,660 ÷ 5) = 8,796·04 13

A £ 45 30 –––– 75 50 –––– 125 45 –––– 170 ––––

Direct materials Direct labour (4 hours) Prime cost Production overheads (4 x 12·50) Total production cost Non-production overheads (75 x 0·6) Total cost 14

C Maximum usage x Longest lead time = 520 x 15 = 7,800

15

C

16

B Absorption costing profit Less Increase in stock at fixed overhead cost per unit (18,000 – 16,500) x 10

£ 40,000 (15,000) ––––––– 25,000 –––––––

Marginal costing profit 17

A

18

B Material T (500 x 45) V (200 x 40) + (200 x 52)

£ 22,500 18,400 ––––––– 40,900 –––––––

Total relevant cost

18


19

D £ 1,200 800 –––––– 2,000 ––––––

Opportunity cost now Cost of disposal in one year’s time

20

D

21

C Profits MR = MC = MR =

maximised when Marginal revenue (MR) = Marginal cost (MC) 40 – 0·06Q 10 MC Therefore 10 = 40 – 0·06Q Q = 30 ÷ 0·6 = 500 Price (P) = 40 – 0·03(500) = 25

22

A Profit = Total revenue (TR) – Total cost (TC) When P = 31 then 31 = 40 – 0·03Q and Q = 300 £ 9,300 (6,500) ––––––– 2,800 –––––––

TR = P x Q = 31 x 300 = TC = 3,500 + (10 x 300) = Profit 23

D CPU = £27 Contribution to sales ratio = 45% Selling price = 27 ÷ 0·45 = £60 Margin of safety in units = 13,500 ÷ 60 = 225 Break-even point (BEP) = 1,000 – 225 = 775 units At BEP: total contribution = total fixed costs Total fixed costs = 775 x 27 = £20,925

24

C

25

D P = 95,000 + 0·4X + 0·3Y X = 46,000 + 0·1Y Y = 30,000 + 0·2X X = 46,000 + 0·1(30,000 + 0·2X) = 46,000 + 3,000 + 0·02X 0·98X = 49,000 and X = 50,000 Y = 30,000 + 0·2(50,000) = 40,000 P = 95,000 + 0·4(50,000) + 0·3(40,000) = 127,000

19


Section B 1

(a)

Process X Account Litres 80,000

Raw materials input

Conversion costs

£ 158,800

–

133,000

––––––– 80,000 –––––––

–––––––– 291,800 ––––––––

Joint products (W1) Product A Product B Normal loss (W2) Abnormal loss (W3)

Litres

£

44,700 29,800 4,000 1,500 ––––––– 80,000 –––––––

141,550 141,550 3,000 5,700 –––––––– 291,800 ––––––––

Cost per equivalent litre (EL): Materials and conversion EL 74,500 1,500 ––––––– 76,000 ––––––– £ 291,800 (3,000) –––––––– 288,800 ––––––––

Output (joint products combined) Abnormal loss Total work done Costs arising Less: Normal loss (scrap value)

Cost per equivalent litre: Materials and conversion (288,800 ÷ 76,000) Workings: W1 Product

Selling price £/litre

A B

8 12

£3·80

Further processing cost £/litre 2 3

Net realisable value £/litre 6 9

Production (ratio 3:2) litres 44,700 29,800

Net realisable value of production £ 268,200 268,200

Total joint production cost (A + B) = 74,500 litres at £3·80 = £283,100 Apportioned A:B in the ratio 268,200:268,200 (= 1:1) Product A = £141,550 and Product B = £141,550 W2 5% of 80,000 = 4,000 litres at 75p per litre = £3,000 W3 5,500 – 4,000 = 1,500 litres at £3·80 per litre = £5,700

2

(b)

An abnormal gain occurs when the actual loss is less than the normal loss expected. In other words the actual output of good production is higher than would normally be expected from the given level of input. The abnormal gain is shown as a debit entry in the process account. The abnormal gain is valued at its full process cost.

(a)

Calculations for the current year: (i)

Contribution per unit £50 x (75 ÷ 25) = £150

(ii)

Total contribution (5,000 x £150) Less Total fixed costs (5,000 x £70) Total profit

(b)

£’000 750 (350) –––– 400 ––––

Calculations for next year: Selling price Less Variable cost

50 x (100 ÷ 25) x 1·08 (50 x 1·12)

Contribution Total fixed costs (5,000 x £70) x 1·12 Target/required profit [as per (a)(ii)] Required contribution for next year

£/unit 216 (56) –––– 160 –––– £’000 392 400 –––– 792 ––––

Number of units required = (792,000 ÷ 160) = 4,950 units.

20


3

(c)

A mixed or semi-variable cost is one that is partly fixed and partly variable in behaviour. An example would be power costs (gas or electricity, for instance) which consist of a fixed charge irrespective of the number of units of power consumed and a variable charge based on the number of units of power consumed. For cost-volume-profit analysis the fixed and variable elements need to be separately identified by using, for example, the high low method or linear regression. Each would then be considered along with the other variable and other fixed costs in the analysis.

(a)

Sales variances: Actual sales units at actual selling price Actual sales units at standard selling price (46,000 x £15) Sales price variance Sales volume profit variance: (46,000 – 45,000) x £(15 – 9)

£ 678,500 690,000 –––––––– 11,500 A –––––––– 6,000 F ––––––––

(b)

The person (or persons) who should receive the information generated by any system in an organisation should be the person with responsibility for that aspect or part of the business to which the information relates. In the case of sales variance information, it would be the person responsible for sales in the organisation. This could be the sales manager or marketing manager. In a large divisionalised company it may be the divisional manager. A summary of the sales and cost variances would be issued to senior management in the organisation.

(c)

(i)

Absorption costing profit: Gross profit 45,000 x £(15 – 9) Less Non-production costs

£ 270,000 (44,000) –––––––– 226,000 ––––––––

Absorption costing net profit (ii)

Marginal costing profit: Total contribution 45,000 x £(15 – 4) Less Fixed production costs (48,000 x £5) Fixed non-production costs

£ 495,000 (240,000) (44,000) –––––––– 211,000 ––––––––

Marginal costing net profit Alternative answer: Absorption costing net profit [as above in (i)] Deduct Increase in stocks at standard fixed production cost per unit (3,000 units at £5 per unit)

£ 226,000

(15,000) –––––––– 211,000 ––––––––

Marginal costing net profit

4

(a)

(i)

EOQ for the current year = [(2 x 25 x 90,000) ÷ 8]0·5 = 750 units

(ii)

EOQ for next year = [(2 x 36 x 90,000) ÷ 8]0·5 = 900 units

(b)

Annual holding cost £ Current year (750 ÷ 2) x 8 (90,000 ÷ 750) x 25

3,000

Next year (900 ÷ 2) x 8 (90,000 ÷ 900) x 36

3,600

Annual ordering cost £

3,000

3,600

Total extra cost of holding and ordering stock for next year (compared with current year)

Annual total cost £ 3,000 3,000 –––––– 6,000 –––––– 3,600 3,600 –––––– 7,200 –––––– £1,200

21


(c)

5

Any two for each of the following: (i) Interest on net working capital, costs of storage space, insurance costs, obsolescence, pilferage and deterioration. (ii) Costs of contacting supplier to place an order, costs associated with checking goods received and transport costs.

(a)

Product X 90 5 18 1st

Contribution per unit (£) Litres of Material L per unit Contribution per litre of Material L Ranking

Product Y 96 6 16 2nd

Optimal production plan for first three months of next year is to produce and sell 4,800 units of Product X (24,000 litres ÷ 5 litres/unit) giving a total contribution of £432,000 (4,800 units at £90 per unit). (b)

Let x = the number of units of product X and y = the number of units of product Y Formulation of constraints: Material L

5x + 6y ≤ 24,000

Material M

6x + 4y ≤ 24,000

Optimal point is the intersection of and

5x + 6y = 24,000 ……….(1) 6x + 4y = 24,000 ……….(2)

Solving these simultaneously gives: (1) X 6 (2) X 5 (1) – (2)

30x + 36y = 144,000 30x + 20y = 120,000 –––––––––––––––––––– 16y = 24,000 y= 1,500 and x = 3,000

The optimal production plan for the second three months of next year is to produce 3,000 units of product X and 1,500 units of product Y. This will give a resultant total contribution of [(3,000 x 90) + (1,500 x 96)] = £414,000.

22





50 –––

Section B 1 (a) Inputs into process Normal loss Abnormal loss Joint products

1 2 1 3 ––– 7

(b)

Actual loss less than normal loss Debit entry in process account Valuation at full process cost

1 1 1 ––– 3 ––– 10 –––

2

(a)

Contribution per unit Total profit

1 2 ––– 3

(b)

Contribution per unit Total fixed costs Required contribution Number of units

2 1 1 / 2 1 / 2 ––– 4

(c)

Partly fixed/partly variable Example Separation of fixed/variable elements

1 1 1 ––– 3 ––– 10 –––

3

(a)

Sales price variance Sales volume profit variance

2 2 ––– 4

(b)

General principle/suggested person(s)

(c)

Absorption costing profit Marginal costing profit

3 1 2 ––– 3 ––– 10 –––

23


Marks 4

(a)

(i) (ii)

EOQ this year EOQ next year

2 2 ––– 4

(b)

Annual holding costs Annual ordering costs

2 2 ––– 4

5

(c)

1

(a)

Contribution per unit Contribution per litre (L) Optimal units for product X Resultant contribution

/ 2 mark for each of four costs identified

2 ––– 10 –––

1 1 1 1 ––– 4

(b)

Equations/formulations Optimal units for products X and Y Resultant contribution

3 2 1 ––– 6 ––– 10 –––

24





Section B


2 . 1 r e p a P





Four lines representing expected costs and revenue have been drawn on a break-even chart: A

£

B

C D

Output

0 Which line represents total variable cost?

2

A

Line A

B

Line B

C

Line C

D

Line D

Four lines have been labelled as J, K, L and M at different levels of output on the following profit-volume chart: £

M

Output

0 L J K

Which line represents the total contribution at the corresponding level of output? A

Line J

B

Line K

C

Line L

D

Line M

2


3

A manufacturing company has four types of cost (identified as T1, T2 , T3 and T4). The total cost for each type at two different production levels is: Cost type T1 T2 T3 T4

Total cost for 125 units £ 1,000 1,750 2,475 3,225

Total cost for 180 units £ 1,260 2,520 2,826 4,644

Which two cost types would be classified as being semi-variable?

4

A

T1 and T3

B

T1 and T4

C

T2 and T3

D

T2 and T4

A company manufactures and sells a single product. The following data relate to a weekly output of 2,880 units: £ per unit Selling price Less costs: Variable production Other variable Fixed

£ per unit 80

30 10 25 —– (65) —– 15 —–

Profit What is the weekly break-even point (in units)?

5

A

1,900

B

1,440

C

1,800

D

4,800

An organisation manufactures a single product which is sold for £60 per unit. The organisation’s total monthly fixed costs are £54,000 and it has a contribution to sales ratio of 40%. This month it plans to manufacture and sell 4,000 units. What is the organisation’s margin of safety this month (in units)? A

1,500

B

1,750

C

2,250

D

2,500

3


[P.T.O.

6

An organisation is using linear regression analysis to establish an equation that shows a relationship between advertising expenditure and sales. It will then use the equation to predict sales for given levels of advertising expenditure. Data for the last five periods are as follows: Period number

Advertising expenditure £000 17 19 24 22 18

1 2 3 4 5

Sales £000 108 116 141 123 112

What are the values of ‘Σx’, ‘Σy’ and ‘n’ that need to be inserted into the appropriate formula?

7

8

9

Σx

Σy

A

£600,000

£100,000

n 5

B

£100,000

£600,000

5

C

£600,000

£100,000

10

D

£100,000

£600,000

10

Which of the following correlation coefficients indicates the weakest relationship between two variables? A

+ 1·0

B

+ 0·4

C

– 0·6

D

– 1·0

Which of the following statements is NOT correct? A

Bar codes are only used by retailing organisations.

B

Optical mark recognition is used by some educational organisations to mark multiple choice examination questions.

C

Magnetic ink character recognition is used in the banking industry.

D

The keyboard is an input device used by many different types of organisation.

Which of the following statements are correct? (i)

Strategic information is mainly used by senior management in an organisation.

(ii) Productivity measurements are examples of tactical information. (iii) Operational information is required frequently by its main users. A

(i) and (ii) only

B

(i) and (iii) only

C

(ii) and (iii) only

D

(i), (ii) and (iii)

4


10 A company manufactures two products P1 and P2 in a factory divided into two cost centres, X and Y. The following budgeted data are available: Cost centre Allocated and apportioned fixed overhead costs Direct labour hours per unit: Product P1 Product P2

X

Y

£88,000

£96,000

3·0 2·5

1·0 2·0

Budgeted output is 8,000 units of each product. Fixed overhead costs are absorbed on a direct labour hour basis. What is the budgeted fixed overhead cost per unit for Product P2? A

£10

B

£11

C

£12

D

£13

11 A manufacturing company uses a machine hour rate to absorb production overheads, which were budgeted to be £130,500 for 9,000 machine hours. Actual overheads incurred were £128,480 and 8,800 machine hours were recorded. What was the total under absorption of production overheads? A

£880

B

£900

C

£2,020

D

£2,900

12 Which of the following would NOT be classified as a service cost centre in a manufacturing company? A

Product inspection department

B

Materials handling department

C

Maintenance department

D

Stores

5


[P.T.O.

13 The following data relate to material QQ2 for last month: Opening stock Purchases: 3rd 17th Issues: 12th 19th

300kg

valued at

£ 2,700

500kg 400kg

for for

5,500 4,200

600kg 300kg

Using the LIFO valuation method, what was the value of the closing stock for QQ2 last month? A

£2,700

B

£2,850

C

£3,150

D

£3,300

14 A company operates a job costing system. Job number 605 requires £300 of direct materials and £400 of direct labour. Direct labour is paid at the rate of £8 per hour. Production overheads are absorbed at a rate of £26 per direct labour hour and non-production overheads are absorbed at a rate of 120% of prime cost. What is the total cost of job number 605? A

£2,000

B

£2,400

C

£2,840

D

£4,400

The following information relates to questions 15 and 16: A company operates a process costing system using the first in first out (FIFO) m ethod of valuation. No losses occur in the process. The following data relate to last month: Opening work in progress Completed during the month Closing work in progress

Units 100 900 150

Degree of completion 60%

Value £680

48%

The cost per equivalent unit of production for last month was £12. 15 What was the value of the closing work in progress? A

£816

B

£864

C

£936

D

£1,800

6


16 What was the total value of the units completed last month? A

£10,080

B

£10,320

C

£10,760

D

£11,000

17 A company’s budgeted sales for last month were 10,000 units with a standard selling price of £20 per unit and a contribution to sales ratio of 40%. Last month actual sales of 10,500 units with total revenue of £204,750 were achieved. What were the sales price and sales volume contribution variances? A

Sales price variance (£) 5,250 adverse

Sales volume contribution variance (£) 4,000 favourable

B

5,250 adverse

4,000 adverse

C

5,000 adverse

4,000 favourable

D

5,000 adverse

4,000 adverse

18 A company operates a standard absorption costing system. The standard fixed production overhead rate is £15 per hour. The following data relate to last month: Actual hours worked Budgeted hours Standard hours for actual production

5,500 5,000 4,800

What was the fixed production overhead capacity variance? A

£7,500 adverse

B

£7,500 favourable

C

£10,500 adverse

D

£10,500 favourable

19 A contract is under consideration which requires 600 labour hours to complete. There are 350 hours of spare labour capacity. The remaining hours for the contract can be found either by weekend overtime working paid at double the normal rate of pay or by diverting labour from the manufacture of product QZ. If the contract is undertaken and labour is diverted, then sales of product QZ will be lost. Product QZ takes three labour hours per unit to manufacture and makes a contribution of £12 per unit. The normal rate of pay for labour is £9 per hour. What is the total relevant cost of labour for the contract? A

£1,000

B

£2,250

C

£3,250

D

£4,500

7


[P.T.O.

20 A company purchased a machine several years ago for £50,000. Its written down value is now £10,000. The machine is no longer used on normal production work and it could be sold now for £8,000. A one-off contract is being considered which would make use of this machine for six months. machine would be sold for £5,000.

After this time the

What is the relevant cost of the machine to the contract? A

£2,000

B

£3,000

C

£5,000

D

£10,000

21 A company, which manufactures four components (A, B, C and D) using the same machinery, aims to maximise profit. The following information is available: Component Variable production cost per unit (£) Purchase cost per unit from an outside supplier (£) Machine hours per unit to manufacture

A

B

C

D

60

64

70

68

100 4

120 7

130 5

110 6

As it has insufficient machine hours available to manufacture all the components required, the company will need to buy some units of one component from the outside supplier. Which component should be purchased from the outside supplier? A

Component A

B

Component B

C

Component C

D

Component D

8


22 A company has three branches (X, Y and Z) to which the following budgeted information relates:

Sales Contribution Less: Fixed costs Profit/(loss)

Branch X £000 200 —— 60 (35) —— 25 ——

Branch Y £000 200 —— 50 (35) —— 15 ——

Branch Z £000 200 —— 20 (30) —— (10) ——

Total £000 600 —— 130 (100) —— 30 ——

60% of the total fixed costs are general overheads. General overheads are apportioned to the branches on the basis of sales value. The other fixed overheads are specific to each branch and are avoidable if a branch closes down. If branch Z is closed down and the sales of the other two branches remained the same, what would be the revised budgeted profit for the company? A

£10,000

B

£20,000

C

£40,000

D

£50,000

23 Reginald is the manager of production department M in a factory which has ten other production departments. He receives monthly information that compares planned and actual expenditure for department M. After department M, all production goes into other factory departments to be completed prior to being despatched to customers. Decisions involving capital expenditure in department M are not taken by Reginald. Which of the following describes Reginald’s role in department M? A

A cost centre manager

B

An investment centre manager

C

A profit centre manager

D

A revenue centre manager

9


[P.T.O.

The following information relates to questions 24 and 25 A company manufactures and sells two products (X and Y) which have contributions per unit of £8 and £20 respectively. The company aims to maximise profit. Two materials (G and H) are used in the manufacture of each product. Each material is in short supply – 1,000 kg of G and 1,800 kg of H are available next period. The company holds no stocks and it can sell all the units produced. The management accountant has drawn the following graph accurately showing the constraints for materials G and H. Product Y (units)

Material G

100 90

Material H

0

125

150

Product X (units)

24 What is the amount (in kg) of material G and material H used in each unit of product Y? A

Material G 10

Material H 20

B

10

10

C

20

20

D

20

10

25 What is the optimal mix of production (in units) for the next period? A

Product X 0

Product Y 90

B

50

60

C

60

50

D

125

0 (50 marks)

10



Saphir Ltd operates a process which creates two joint products, X and Y, in the ratio of 7 : 5 by weight. No stocks of work in progress are held in the process and there is a normal process loss equal to 5% of input. Losses have a realisable value of £2 per kg. The following information relates to the process for last month: 10,000 kg of raw materials with a total cost of £18,750 were input into the process and the direct labour costs were £50,000. Overheads were absorbed at a rate of 140% of direct labour. The actual loss was 400 kg. Joint production costs are apportioned to products using the sales value method. Selling prices of the joint products are: Product X Y

Selling price per unit £25·00 £37·50

Required: (a) Prepare the process account for last month in which both the output weight and value for each of the joint products are shown. (8 marks) (b) Explain briefly the characteristics of a by-product.


2

Murgatroyd Ltd, which manufactures a single product, uses standard absorption costing. A summary of the standard product cost is as follows: Direct materials Direct labour Fixed overheads

£ per unit 15 20 12

Budgeted and actual production for last month were 10,000 units and 9,000 units respectively. The actual costs incurred were: Direct materials Direct labour Fixed overheads

£ 138,000 178,000 103,000

Required: (a) Prepare a statement that reconciles the standard cost of actual production with its actual cost for last month (4 marks) and highlights the total variance for each of the three elements of cost. Last month 24,000 litres of direct material were purchased and used by the company. The standard allows for 2·5 litres of the material, at £6 per litre, to be used in each unit of product. (b) Provide an appropriate breakdown of the total direct materials cost variance included in your statement in (a). (3 marks) (c) Explain who in the company should be involved in setting: (i)

the standard price; and

(ii) the standard quantity for direct materials.

(3 marks) (10 marks) 11


[P.T.O.

3

Jane plc purchases its requirements for component RB at a price of £80 per unit. Its annual usage of component RB is 8,760 units. The annual holding cost of one unit of component RB is 5% of its purchase price and the cost of placing an order is £12·50. Required: (a) Calculate the economic order quantity (to the nearest unit) for component RB.

(2 marks)

(b) Assuming that usage of component RB is constant throughout the year (365 days) and that the lead time from placing an order to its receipt is 21 days, calculate the stock level (in units) at which an order should be placed. (2 marks) (c) (i)

Explain the terms ‘stockout’ and ‘buffer stock’.

(ii) Briefly describe the circumstances in which Jane plc should consider having a buffer stock of component RB. (4 marks) (8 marks)

4

Archibald Ltd manufactures and sells one product. Its budgeted profit statement for the first month of trading is as follows: £ Sales (1,200 units at £180 per unit) Less: Cost of sales: Less: Production (1,800 units at £100 per unit) Less: Less Closing stock (600 units at £100 per unit)

£ 216,000

180,000 (60,000) ———— (120,000) ———— 96,000 (41,000 ) ———— 55,000 ————

Gross profit Less Fixed selling and distribution costs Net profit

The budget was prepared using absorption costing principles. If budgeted production in the first month had been 2,000 units then the total production cost would have been £188,000. Required: (a) Using the high-low method, calculate: (i)

the variable production cost per unit; and

(ii) the total monthly fixed production cost.

(4 marks)

(b) If the budget for the first month of trading had been prepared using marginal costing principles, calculate: (i)

the total contribution; and

(ii) the net profit.

(4 marks)

(c) Explain clearly the circumstances in which the monthly profit or loss would be the same using absorption or marginal costing principles. (2 marks) (10 marks)

12


5

Ella Ltd recently started to manufacture and sell product DG. The variable cost of product DG is £4 per unit and the total weekly fixed costs are £18,000. The company has set the initial selling price of product DG by adding a mark up of 40% to its total unit cost. It has assumed that production and sales will be 3,000 units per week. The company holds no stocks of product DG. Required: (a) Calculate for product DG: (i) the initial selling price per unit; and (ii) the resultant weekly profit.

(3 marks)

The management accountant has established that a linear relationship beween the unit selling price (P in £) and the weekly demand (Q in units) for product DG is given by: P = 20 – 0·002Q The marginal revenue (MR in £ per unit) is related to weekly demand (Q in units) by the equation: MR = 20 – 0·004Q (b) Calculate the selling price per unit for product DG that should be set in order to maximise weekly profit. (7 marks) (c) Distinguish briefly between penetration and skimming pricing policies when launching a new product. (2 marks) (12 marks)

13


[P.T.O.

Formulae Sheet


14


Answers




June 2005 Answers

Section A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

C C A C B B B A D D A A B C B C A B C B D B A A A

1

C

2

C

3

A

Total cost per unit (£) Total cost per unit (£) (125 units) (180 units) T1 8·00 7·00 T2 14·00 14·00 T3 19·80 15·70 T4 25·80 25·80 Cost types T2 and T4 are variable and T1 and T3 are semi-variable.

4

C

Contribution per unit (CPU) = (80 – 30 – 10) = £40 Total fixed cost = 2,880 × 25 = £72,000 Break-even point = 72,000 ÷ 40 = 1,800 units

5

B

CPU = 0·40 × 60 = £24 Break-even point = 54,000 ÷ 24 = 2,250 units Margin of safety = 4,000 – 2,250 = 1,750 units

6

B

Σx

= Σ Advertising expenditure = 100,000 = Σ Sales = 600,000 n = number of pairs of data = 5 Σy

7

B

8

A

9

D

17


10

D

11

A

Total hours in cost centre X = 8,000 × (3 + 2·5) = 44,000 Total hours in cost centre Y = 8,000 × (1 + 2) = 24,000 Overhead rate (X) = £88,000 ÷ 44,000 = £2 per hour Overhead rate (Y) = £96,000 ÷ 24,000 = £4 per hour Overhead cost per unit (P2) = (2 ·5 × 2) + (2 ·0 × 4) = £13

Actual overheads Absorbed overhead (8,800 Under absorption 12

A

13

B

Date 1st 3rd 12th

Units 300 500 (600) ——– 200 400 (300) ——– 300 ——–

17th 19th

14

×

£ 128,480 127,600 880

14·50)

£ per unit 9 11

£ 2,700 5,500 (6,400) ——— 1,800 4,200 (3,150) ——— 2,850 ———

9 10 ·5 10 ·5

C Prime cost (300 + 400) Production overheads (50

×

£ 700 1,300 ——— 2,000 840 ——— 2,840 ———

£26)

Total production cost Non-production overheads (1 ·20

×

700)

Total cost

15

B

16

C

(150

×

0·48) equivalent units

×

[5,500 + 900]

£12 = £864

Units started and finished last month (900 – 100) = 800 Opening work in progress (WIP) value Work done to complete opening WIP (100 × 0·40) × £12

17

A

Price variance: Actual sales revenue Actual sales units at standard selling price (10,500

×

£20)

Sales price variance Volume variance (500 units

×

£20

×

×

0·40)

£12

£ 9,600 680 480 ——— 10,760 ——— £ 204,750 210,000 ———— 5,250 ——— 4,000

18

B

Capacity variance (5,000 – 5,500) hours at £15 per hour

7,500

19

C

250 hours at [£9 per hour + the opportunity cost £(12 ÷ 3) per hour] = £3,250 The incremental labour cost of weekend working is £4,500 (250 × £18) and being higher than £3,250 is therefore not relevant.

20

B

Opportunity cost now Realisable value in six months Relevant cost

21

D

Additional cost of buying in (compared with manufacture) per hour: A B C D £10 £8 £12 £7 Buy in component with the lowest additional cost per hour (limiting factor).

A F F

£8,000 £5,000 £3,000

18


22

B

Branch Z makes a net contribution (after specific branch fixed costs of £10,000) of £10,000. Closing branch Z will leave a revised profit of £20,000 for the company.

23

A

24

A

1,000 kg of material G produces 100 units of product Y = 10 kg per unit 1,800 kg of material H produces 90 units of product Y = 20 kg per unit

25

A

Total contribution from: £ A 90 units of Y (90 × £20) 1,800 B 50 units of X + 60 units of Y (50 × 8) + (60 × 20) 1,600 C 60 units of X + 50 units of Y (60 × 8) + (50 × 20) 1,480 D 125 units of X (125 × 8) 1,000 Optimal mix is the one giving the highest total contribution (£1,800)

Section B 1

(a)

Process Account Kg 10,000

Raw materials input Direct labour Overheads (140% of direct labour)

Abnormal gain (W3)

100 ––––––– 10,100 –––––––

£ 18,750 50,000 70,000

Joint products (W1): Product X Product Y

1,450 –––––––– 140,200 ––––––––

Cost per kg Costs arising (18,750 + 50,000 + 70,000) Less: Normal loss (realisable value)

Normal loss (W2)

Kg

£

5,600 4,000 ——— 9,600

67,200 72,000 ———— 139,200

500 ––––––– 10,100 –––––––

1,000 –––––––– 140,200 ––––––––

£ 138,750 (1,000) ———— 137,750 ————

Cost per kg: £137,750 ÷ (Normal yield from 10,000 kg) = £137,750 ÷ (0·95 × 10,000) = £14 ·50 Workings: W1 Product

X Y

Selling price £/kg 25·00 37·50

Production (ratio 7:5) kg 5,600 4,000

Sales value of production £ 140,000 150,000

Total joint production cost (X + Y) = 9,600 kg at £14·50 = £139,200 Apportioned A : B in the ratio 140,000:150,000 (= 14:15) Product X = £67,200 and Product Y = £72,000

(b)

W2

5% of 10,000 = 500 kg at £2 per kg = £1,000

W3

(500 – 400) = 100 kg at £14 ·50 per kg = £1,450

A by-product is an output from a process that occurs incidentally to the main production and is insignificant in value terms. The inputs to a process are intended to create the main product or products but sometimes quite incidentally a by-product is also created, which has a relatively low value compared to the main products.

19


2

(a)

£ Standard cost of actual production 9,000 units × £(15 + 20 + 12) Total variances: Direct materials (W1) Direct labour (W2) Fixed overheads (W3)

£ 423,000

3,000 A 2,000 F 5,000 F ————

Actual cost Workings: W1 Actual

£ 138,000

4,000 F ———— 419,000 ———— Variance (£) 3,000 A

Standard cost of actual production (9,000

×

£15)

135,000

W2 Actual

178,000 2,000 F

Standard cost of actual production (9,000

×

£20)

180,000

W3 Actual

103,000 5,000 F

Standard cost of actual production (9,000 (b)

Actual quantity

×

×

£20)

108,000

actual cost

138,000 Price 6,000 F

Actual quantity (24,000 × £6)

×

standard cost

144,000 Usage 9,000 A

Standard quantity for actual production X standard cost [(as in (a)] (c)

3

135,000

(i)

The standard price per litre is set by the person in the organisation with the specialist knowledge about the prices charged by suppliers for the raw materials used by Murgatroyd Ltd. This would be the manager responsible for purchasing (sometimes referred to as the Buying Manager or the Procurement Manager).

(ii)

The standard quantity per unit is set by the person in the organisation with the specialist knowledge about the product specification and the amount of each raw material that should be used in the manufacture of one unit of the product. This would be a manager in the production (manufacturing) function or technical department in Murgatroyd Ltd.

12·50

8,760) ÷ (0·05

80)] 0·5 = 234 units

(a)

EOQ = [(2

(b)

Usage per day = 8,760 ÷ 365 = 24 Re-order level = 24 × 21 = 504 units

(c)

(i)

A stockout occurs when a company runs out of stock. There are costs associated with this – lost contribution from lost sales, for example. In order to avoid a stockout the company could set a buffer stock – in effect a safety level of stock to cover emergency situations such as demand and/or lead times exceeding their average levels. The holding of a buffer stock involves an additional cost.

(ii)

Jane plc should consider having a buffer stock if either the usage of component RB starts to fluctuate from period to period (at present it is constant) and/or the lead time starts to fluctuate from its present constant level of 21 days.

×

×

×

20


4

(a)

(i)

Units Higher level Lower level Difference

2,000 1,800 ——— 200 ———

Total cost £ 188,000 180,000 ———— 8,000 ————

Variable production cost per unit = 8,000 ÷ 200 = £40 (ii) Total production cost for 2,000 units Less total variable production cost (2,000

×

£ 188,000 (80,000) ———— 108,000 ————

40)

Total monthly fixed production cost

(b)

(i)

Contribution per unit (180 – 40) = £140 Total contribution from sales = 1,200 × 140 = £168,000

(ii)

£ 168,000 (149,000) ———— 19,000 ————

Total contribution [as in (b)(i)] Less Total fixed costs (108,000 + 41,000) Net profit

5

(c)

When the number of units produced and the number of units sold in a month are identical, the net profit or loss determined by using absorption and marginal costing principles will also be the same. In other words the net profit or loss will be the same when the opening and closing stocks for a month are unchanged.

(a)

(i)

Initial selling price = (variable + fixed cost per unit) + mark up of 40% Initial selling price = [£4 + £(18,000 ÷ 3,000)] × 1·40 = £14

(ii)

Profit = 3,000 units

(b)

×

£4 profit per unit = £12,000

Profits are maximised when: Marginal cost (MC) = Marginal revenue (MR) MC = variable cost = 4 MR = 20 – 0·004Q 4 = 20 – 0·004Q Q = 4,000 units P = 20 – 0·002 (4,000) = £12 = profit maximising price.

(c)

A penetration price is an initially low selling price of a product, whereas a skimming price policy is one where the initial selling price is set high.

21






50 –––

Section B 1 (a) Inputs into process Normal loss Abnormal gain Joint products

11 / 2 11 / 2 2 3 ––– 8

(b)

Incidental to main products Insignificant in value terms

1 1 ––– 2 ––– 10 –––

2

(a)

Each total variance 1 mark Reconciliation statement

3 1 ––– 4

(b)

11 / 2 11 / 2 –––

Price variance Usage variance

3 (c)

11 / 2 11 / 2 –––

Purchasing management Production management

3 ––– 10 –––

3

(a)

EOQ calculation

2

(b)

Stock level for re-ordering

2

(c)

(i)

Stockout Buffer stock

(ii)

Variable demand and fluctuating lead time

1 1 2 ––– 4 ––– 8 –––

4

(a)

(i)

Variable production cost per unit

(ii)

Total monthly fixed production cost

2 2 ––– 4

(b)

(i)

Total contribution

(ii)

Net profit

2 2 ––– 4

(c)

Production = sales and/or opening stock = closing stock

23


2 ––– 10 –––

Marks 5

(a)

(i)

Initial selling price

(ii)

Resultant weekly profit

2 1 ––– 3

(b)

Marginal cost (MC) = Marginal revenue (MR) MC Optimal quantity (via MC = MR) Optimal price

1 1 3 2 ––– 7

(c)

Penetration price Skimming price

1 1 ––– 2 ––– 12 –––

24





Section B


2 . 1 r e p a P




Section A – ALL 25 questions are compulsory and MUST be attempted. Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1

Up to a given level of activity in each period the purchase price per unit of a raw material is constant. After that point a lower price per unit applies both to further units purchased and also retrospectively to all units already purchased. Which of the following graphs depicts the total cost of the raw materials for a period? A

£

Units

0

C

£

2

Units

0

D

£

Units

0

B

£

Units

0

The following breakeven chart has been drawn showing lines for total cost (TC), total variable cost (TVC), total fixed cost (TFC) and total sales revenue (TSR): TSR

£

TC

TVC TFC

Units

0 675

1,200

1,500

1,700

What is the margin of safety at the 1,700 units level of activity? A

200 units

B

300 units

C

500 units

D

1,025 units

2


3

A company manufactures a single product with a variable cost per unit of £22. The contribution to sales ratio is 45%. Monthly fixed costs are £198,000. What is the breakeven point (in units)?

4

A

4,950

B

9,000

C

11,000

D

20,000

An organisation has the following total costs at two activity levels: Activity level (units) Total costs (£)

17,000 140,000

22,000 170,000

Variable cost per unit is constant in this range of activity and there is a step up of £5,000 in the total fixed costs when activity exceeds 18,000 units. What is the total cost at an activity level of 20,000 units?

5

A

£155,000

B

£158,000

C

£160,000

D

£163,000

The following statements relate to financial accounting or to cost and management accounting: (i) The main users of financial accounting information are external to an organisation. (ii) Cost accounting is part of financial accounting and establishes costs incurred by an organisation. (iii) Management accounting is used to aid planning, control and decision making. Which of the statements are correct?

6

A

(i) and (ii) only

B

(i) and (iii) only

C

(ii) and (iii) only

D

(i), (ii) and (iii)

The following terms relate to computers: (i) Application package (ii) Operating system (iii) Spreadsheet Which of the above terms are examples of computer software? A

(i) and (ii) only

B

(i) and (iii) only

C

(ii) and (iii) only

D

(i), (ii) and (iii)

3


[P.T.O.

7

An organisation’s stock records for last month show the following transactions in respect of one item: Date 1st 5th 13th 20th 28th

Receipts (units)

Issues (units)

Stock (units) 300 200 800 500 300

100 600 300 200

The opening stock was valued at a total cost of £9,300 and all receipts on the 13th were purchased at a cost of £33 per unit. The organisation uses the weighted average method of valuation and calculates a new weighted average after each stores receipt. What was the total value of the closing stock?

8

A

£9,500

B

£9,700

C

£9,750

D

£9,900

A company uses 9,000 units of a component per annum. The component has a purchase price of £40 per unit and the cost of placing an order is £160. The annual holding cost of one component is equal to 8% of its purchase price. What is the Economic Order Quantity (to the nearest unit) of the component?

9

A

530

B

671

C

949

D

1,342

A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model. What would be the effects on the EOQ and the total annual ordering cost of an increase in the annual cost of holding one unit of the component in stock? A

EOQ Lower

Total annual ordering cost Higher

B

Higher

Lower

C

Lower

No effect

D

Higher

No effect

4


10 Consider the following statements: (i) Job costing is only applicable to service organisations. (ii) Batch costing can be used when a number of identical products are manufactured together to go into finished stock. Is each statement TRUE or FALSE? A

Statement (i) False

Statement (ii) False

B

False

True

C

True

True

D

True

False

11 An organisation absorbs overheads on a machine hour basis. The planned level of activity for last month was 30,000 machine hours with a total overhead cost of £247,500. Actual results showed that 28,000 machine hours were recorded with a total overhead cost of £238,000. What was the total under absorption of overheads last month? A

£7,000

B

£7,500

C

£9,500

D

£16,500

12 The following information relates to a manufacturing company for next period: Production Sales

Units 14,000 12,000

£ 63,000 12,000

Fixed production costs Fixed selling costs

Using absorption costing the profit for next period has been calculated as £36,000. What would the profit for next period be using marginal costing? A

£25,000

B

£27,000

C

£45,000

D

£47,000

5


[P.T.O.

13 Information relating to two processes (F and G) was as follows: Process F G

Normal loss as % of input 8 5

Input litres 65,000 37,500

Output litres 58,900 35,700

For each process, was there an abnormal loss or an abnormal gain? A

Process F Abnormal gain

Process G Abnormal gain

B

Abnormal gain

Abnormal loss

C

Abnormal loss

Abnormal gain

D

Abnormal loss

Abnormal loss

14 Last month 27,000 direct labour hours were worked at an actual cost of £236,385 and the standard direct labour hours of production were 29,880. The standard direct labour cost per hour was £8·50. What was the labour efficiency variance? A

£17,595 Adverse

B

£17,595 Favourable

C

£24,480 Adverse

D

£24,480 Favourable

15 Last month a company’s budgeted sales were 5,000 units. The standard selling price was £6 per unit with a standard contribution to sales ratio of 60%. Actual sales were 4,650 units with a total revenue of £30,225 What were the favourable sales price and adverse sales volume contribution variances?

A

Sales price £ 2,325

Sales volume contribution £ 1,260

B

2,500

1,260

C

2,325

2,100

D

2,500

2,100

16 Which of the following is an initial requirement of a management control system? A

Establishing the standard to be achieved

B

Measuring the actual performance

C

Setting organisational objectives

D

Taking appropriate corrective action

6


17 Which one of the following would be classified as indirect labour? A

Assembly workers on a car production line

B

Bricklayers in a house building company

C

Machinists in a factory producing clothes

D

Forklift truck drivers in the stores of an engineering company

18 The following statements relate to the calculation of the regression line y = a + bx using the information on the formulae sheet at the end of this examination paper: (i) n represents the number of pairs of data items used (ii) (∑ x)2 is calculated by multiplying ∑ x by ∑ x (iii) ∑ xy is calculated by multiplying ∑ x by ∑ y Which statements are correct? A

(i) and (ii) only

B

(i) and (iii) only

C

(ii) and (iii) only

D

(i), (ii) and (iii)

19 The correlation coefficient (r) for measuring the connection between two variables (x and y) has been calculated as 0·6. How much of the variation in the dependent variable (y) is explained by the variation i n the independent variable (x)? A

36%

B

40%

C

60%

D

64%

20 The following statements relate to relevant cost concepts in decision making: (i) Materials can never have an opportunity cost whereas labour can. (ii) The annual depreciation charge is not a relevant cost. (iii) Fixed costs would have a relevant cost element if a decision causes a change in their total expenditure Which statements are correct? A

(i) and (ii) only

B

(i) and (iii) only

C

(ii) and (iii) only

D

(i), (ii) and (iii)

7


[P.T.O.

21 A company is evaluating a project that requires 4,000 kg of a material that is used regularly in normal production. 2,500 kg of the material, purchased last month at a total cost of £20,000, are in stock. Since last month the price of the material has increased by 2 1 / 2%. What is the total relevant cost of the material for the project? A

£12,300

B

£20,500

C

£32,300

D

£32,800

22 In a process where there are no work-in-progress stocks, two joint products (J and K) are created. Information (in units) relating to last month is as follows: Product

Sales

J K

6,000 4,000

Opening stock of finished goods 100 400

Closing stock of finished goods 300 200

Joint production costs last month were £110,000 and these were apportioned to joint products based on the number of units produced. What were the joint production costs apportioned to product J for last month? A

£63,800

B

£64,000

C

£66,000

D

£68,200

23 A company manufactures two products (L and M) using the same material and labour. It holds no stocks. Information about the variable costs and maximum demands are as follows:

Material (£4 per litre) Labour (£7 per hour) Maximum monthly demand

Product L £/unit 13 35 Units 6,000

Product M £/unit 19 28 Units 8,000

Each month 50,000 litres of material and 60,000 labour hours are available. Which one of the following statements is correct? A

Material is a limiting factor but labour is not a limiting factor.

B

Material is not a limiting factor but labour is a limiting factor.

C

Neither material nor labour is a limiting factor.

D

Both material and labour are limiting factors.

8


The following information relates to questions 24 and 25: A company has established the following selling price, costs and revenue equations for one of its products: Selling price (£ per unit) = 50 – 0·025Q Marginal revenue (£ per unit) = 50 – 0·05Q Total costs per month (£) = 2,000 + 15Q Q represents the number of units produced and sold per month.

24 At what selling price will monthly profits be maximised? A

£15·00

B

£17·50

C

£25·00

D

£32·50

25 What would be the monthly profit if the selling price per unit was set at £20? A

£1,000

B

£4,000

C

£6,000

D

£12,000 (50 marks)

9


[P.T.O.

Section B – ALL FIVE questions are compulsory and MUST be attempted. 1

Pointdextre Ltd, which manufactures and sells a single product, is currently producing and selling 102,000 units per month, which represents 85% of its full capacity. Total monthly costs are £619,000 but at full capacity these would be £700,000. Total fixed costs would remain unchanged at all activity levels up to full capacity. The normal selling price of the product results in a contribution to sales ratio of 40%. A new customer has offered to take a monthly delivery of 15,000 units at a price per unit 20% below the normal selling price. If this new business is accepted, existing sales are expected to fall by one unit for every six units sold to this new customer. Required: (a) For the current production and sales level, calculate: (i) (ii) (iii) (iv)

the variable cost per unit; the total monthly fixed costs; the selling price per unit; the contribution per unit.

(6 marks)

(b) Calculate the net increase or decrease in monthly profit which would result from acceptance of the new business. (4 marks) (c) In the context of decision making, explain the term ‘opportunity cost’ and illustrate your answer by reference (2 marks) to Pointdextre Ltd. (12 marks)

2

Partlet Ltd makes a product that passes through two manufacturing processes. A normal loss equal to 8% of the raw material input occurs in Process I but no loss occurs in Process II. Losses have no realisable value. All the raw material required to make the product is input at the start of Process I. The output from Process I each month is input into Process II in the same month. Work in progress occurs in Process II only. Information for last month for each process is as follows: Process I Raw material input Conversion costs Output to Process II Process II Opening work in progress Conversion costs Closing work in progress

50,000 litres at a cost of £365,000 £256,000 47,000 litres 5,000 litres (40% complete for conversion costs) valued at £80,000 £392,000 2,000 litres (50% complete for conversion costs)

Required: (a) Prepare the Process I account for last month.

(5 marks)

(b) Calculate in respect of Process II for last month: (i) the value of the completed output; and (ii) the value of closing work in progress.

(5 marks)

(c) If the losses in Process I were toxic and the company incurred costs in safely disposing of them, state how the disposal costs associated with the normal loss would have been recorded in the Process I account. No calculations are required. (2 marks) (12 marks)

10


3

JWW Ltd manufactures two products, X and Y, and any quantities produced can be sold for £60 per unit and £25 per unit respectively. Variable costs of the two products are:

Materials (at £5 per kg) Labour (at £6 per hour) Other variable costs Total

X £ per unit 15 24 6 ––– 45 –––

Y £ per unit 5 3 5 ––– 13 –––

Next month only 4,200 kg of material and 3,000 labour hours will be available. The company holds no stocks and aims to maximise its profits each month. Required: (a) State the objective function and constraints in a form suitable for solving by linear programming. (5 marks) (b) Determine the optimal production plan for next month (in units).

(4 marks) (9 marks)

4

Ploverleigh Ltd, which manufactures a single product, uses standard absorption costing. The standard product cost per unit is as follows: Direct materials Direct labour Fixed production overhead

£ 11 24 18

Budgeted and actual production for last month were 12,000 units and 12,500 units respectively. The actual costs incurred last month were: Direct materials Direct labour Fixed production overhead

£ 142,700 291,300 230,800

Required: (a) Prepare a statement that reconciles the standard cost of actual production with its actual cost for last month (4 marks) and highlights the total variance for each of the three cost elements. (b) Provide a breakdown of the total fixed production overhead variance in your statement in (a) by calculating two sub variances. (2 marks) (c) If Ploverleigh Ltd uses standard marginal costing instead of standard absorption costing, explain how AND why any of the three total variances calculated in (a) would be different and state clearly which, if any, of the variances would remain unchanged. No calculations are required. (3 marks) (9 marks)

11


[P.T.O.

5

Sangazure Ltd manufactures many different products in a factory that has two production cost cen tres (T and W) and several service cost centres. The total budgeted overhead costs (after the allocation, apportionment and reapportionment of service cost centre costs), and other information for production cost centres T and W are as follows: Cost centre T W

Budgeted overheads £780,000 £173,400

Basis of overhead absorption Machine hours Direct labour hours

Budgeted activity 16,250 machine hours 14,450 direct labour hours

Required: (a) Calculate the overhead absorption rates for cost centres T and W.

(2 marks)

The prime cost of product PP, one of the products made by Sangazure Ltd, is as follows: Direct material Direct labour: Cost centre T Cost centre W

£ per unit 10 14 21

One unit of product PP takes 35 minutes of machine time in cost centre T. The direct labour in cost centre T is paid £7 per hour and £6 per hour in cost centre W. (b) Calculate the total production cost for one unit of PP.

(3 marks)

(c) Briefly explain why service cost centre costs need to be reapportioned to production cost centres. Which method of reapportionment fully recognises the work that service cost centres do for each other? (3 marks) (8 marks)

12


Formulae Sheet


13


Answers





Section A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

D C C C B D C C A B A B C D A C D A A C D D D D B

1

D

2

C

1,700 units – Breakeven level units (1,200) = 500 units

3

C

Contribution per Contribution per unit = 22 ÷ 0·55 × 0·45 = £18 Breakeven point = 198,000 ÷ 18 = 11,000 11,000

4

C

Variable cost per unit = [(170,000 [(170,000 – 5,000) – 140,000)] 140,000)] ÷ (22,000 –17,000) = £5 Total fixed cost above 18,000 units = 170,000 – (22,000 × 5) = £60,000 Total cost of 20,000 units = (20,000 × 5) + 60,000 = £160,000

5

B

6

D

7

C

Weighted average after 13th = [(200 × 9,300 ÷ 300) + (600 (600 Closing stock valuation = 300 × 32·50 = £9,750

8

C

EOQ = [(2

9

A

10

B

×

160

×

9,000) 9,0 00) ÷ (0· (0·08 08

×

×

33)] ÷ (200 + 600) 600) = £32·50 £32·50

40)]0·5 = 949

17


11

A

Absorption rate = 247,500 ÷ 30,000 = £8·25 Absorbed cost = 28,000 × 8·25 = £231,000 Actual cost = £238,000 Under absorption = £7,000

12

B

Marginal costing profit = 36,000 – (2,000

13

C

Proce Pr ocess ss F: expect expected ed output output = 0·92 0·92 actual output = ∴ abnormal loss Process Proc ess G: expec expected ted output = 0·95 0·95 actual output = ∴ abnormal gain

14

×

63,000 63,0 00 ÷ 14,0 14,000) 00) = £27,000 £27,000

×

65,000 =

59,800 58,900

×

37,500 =

35,625 35,700

D

£ 229,500 253,980 –––––––– 24,480 Favourable ––––––––

Actual hours at standard rate (27,000 × 8·50) Standard ho hours of of production at standard ra rate ∴Labour

15

A

efficiency variance is

Sales price variance: Actual sales at standard price (4,650 Actual sales at actual price

×

£ 27,900 30,225 ––––––– 2,325 –––––––

6)

Favourable price variance Adverse sales volume contribution variance: 350 units × (6 × 0·60)

16

C

17

D

18

A

19

A

20

C

21

D

4,000

22

D

Production (units): J: (6, 6,00 000 0 – 10 100 0 + 30 300) 0) = K: (4 (4,0 ,000 00 – 400 400 + 200 200)) =

Coefficient of determination = r 2 = 0·6

×

[(20,000 [(20, 000 ÷ 2,500 2,500))

×

×

0·6 = 0·36 = 36%

1·025] = £32,800

6,2 ,20 00 3,80 3, 800 0 –––––– 10,000 –––––– Joint costs costs apportione apportioned d to J: (6,20 (6,200 0 ÷ 10,000) 10,000)

23

D

1,260

×

110,000 = £68,200

Material required to meet maximum demand: 6,000 × (13 ÷ 4) + 8,00 8,000 0 × (1 (19 9 ÷ 4) = 57 57,5 ,500 00 li litr tres es Material available: 50,000 litres ∴ Material is a limiting factor Labour required to meet maximum demand: 6,000 × (35 ÷ 7) + 8,00 8,000 0 × (2 (28 8 ÷ 7) = 62 62,0 ,000 00 hou hours rs Labour available: 60,000 hours ∴ Labour is a limiting factor

18


24

D

Profits MR = MC = MR =

maximised when: marginal revenue (MR) = marginal cost (MC) 50 – 0·05Q 15 ∴ 50 – 0·05Q = 15 MC a nd Q = 700 P = 50 – (0·025 × 700) = £32·50

25

B

When P = 20

then a nd

20 = 50 – 0·025Q Q = 1,200 £ Total revenue (P × Q) = 1,200 × 20 = 24,000 Less total costs 2,000 + (15 × 1,2 1,200) 00) = 20,0 20,000 00 –––––– ∴Profit 4,000 ––––––

Section B 1

(a)

Using the high-low method: Units 120,000 (W1) 102,000 –– –– – –– – 18,000 –– –– – –– –

Total cost (£) 700,000 619,000 – –– – –– – – 81,000 – –– – –– – –

Working (W1) Full capacity capacity = 102,000 102,000 ÷ 0·85 = 120,000 120,000 (i)

Variable cost cost per unit = 81,000 81,000 ÷ 18,000 = £4·50

(ii)

Total fixed costs = 700,000 – (120,000

×

4·50) = £160,000

(iii) Selling price per per unit = variable cost per unit ÷ (1·00 – 0·40) = 4·50 4·50 ÷ 0·6 = £7·50 (iv) Contribution per unit = (7·50 – 4·50) = £3·00 (b)

New business: Selling price (0·80 Less variable cost

×

£ per unit 6·00 (4·50) ––––– 1·50 –––––

7·50)

Contribution

£ 22,500 (7,500) ––––––– 15,000 –––––––

Contribution from 15,000 units (15,000 × 1·50) Less opportun opportunity ity cost (15,000 (15,000 ÷ 6) × £3·00 Net increase in contribution (and profit) (c)

2

An opportunity cost is the cost of the best alternative forgone in a situation of choice. choice. Opportunity costs are relevant costs. In the situation of Pointdextre Ltd, if it goes ahead with the new business (that is the decision) then it will lose (forgo) the contribution from some existing sales. This lost contribution is is an opportunity cost relevant to the decision.

(a)

Process I Input Conversion Abnormal gain (W2)

Litres 50,000 1,000 –– – – – –– 51,000 –– – – – ––

£ 365,000 256,000 13,500 – – –– – –– – 634,500 – – –– – –– –

Workings: W1 Cos Costt per litre litre (365, (365,000 000 + 25 256,0 6,000) 00) ÷ (50 (50,00 ,000 0 Output value = 47,000 × 13·50 = £634,500

Output (W1) Normal loss (0·08

×

×

50,000)

Litres 47,000 4,000

£ 634,500 –

–– –– – –– 51,000 –– –– – ––

– – –– – –– – 634,500 – – –– – –– –

0·92) = £13·50

W2 Abnorma Abnormall gain gain = 47,000 47,000 – (50, (50,000 000 × 0·92) = 1,000 Valuation (1,000 × 13·50) = £13,500

19


(b)

Workings: Cost per equivalent litre (EL):

Conversion EL 3,000 45,000 1,000 ––––––– 49,000 –––––––

Completion of opening WIP Started and finished within the month (50,000 – 5,000) Work done so far on closing WIP

∴Cost

(c)

3

per EL = 392,000 ÷ 49,000 = £8

(i)

Output = 80,000 + (45,000

(ii)

Closing WIP = (2,000

×

×

13·50) + (48,000

13·50) + (1,000

×

×

8·00) = £1,071,500

8·00) = £35,000

The disposal costs would be debited to the process account. Alternatively, they could be shown as a negative value on the credit side of the account.

Let X = the number of units of product X and Y = the number of units of product Y Contribution per unit: Product X £ per unit 60 (45) –––– 15 ––––

Selling price Less variable cost Contribution

Product Y £ per unit 25 (13) –––– 12 ––––

Objective function: Total contribution = 15X + 12Y Constraints: Material (£5 per kg) Labour (£6 per hour)

3X + Y

≤

4,200

4X + 0·5Y

≤

3,000

X, Y

≥

0

Non negative

Using a graphical approach, the constraints (solid lines) and the objective function (dotted line) can be shown as follows: Y units 6,000

Labour 4,200

A

B

Material 750 0

C 600 750

X units 1,400

Note: the objective function line has been shown on the above graph for a total contribution of £9,000 (assumed). Thus 15X + 12Y = 9,000. Therefore when X = 0, Y = (9,000 ÷ 12) = 750 and when Y = 0, X = (9,000 ÷ 15) = 600 The ‘feasible region’ is the area OABC shown on the graph. If the objective function line is moved away from the origin (at the same gradient) the last point it reaches in the feasible region is point A which must therefore be the optimal point. Therefore the optimal production is to produce and sell 4,200 units of product Y and no units of product X.

20


An alternative approach would be to calculate the total contributions at points A, B and C shown on the graph and select the point giving the highest total contribution, as follows: Point A Total contribution from 4,200 units of Y is (4,200

×

£12) = £50,400

Point B To find the units at this point, solve the following equations simultaneously: 3X + Y = 4,200 … (1) 4X + 0·5Y = 3,000 … (2) From (1) Y = 4,200 – 3X Substituting into (2) 4X + 0·5(4,200 – 3X) = 3,000 ∴ 4X + 2,100 – 1·5X = 3,000 ∴ 2·5X = 900 ∴ X = 360 Substituting into (1) (3 × 360) + Y = 4,200 ∴ Y = 3,120 Total contribution from 360 units of X and 3,120 units of Y is (360 × £15) + (3,120 Point C Total contribution from 750 units of X is (750

×

×

£12) = £42,840

£15) = £11,250

Point A gives the highest contribution (£50,400 from producing 4,200 units of Y and no units of X) and is therefore the optimal solution (as before).

4

(a) Standard cost of actual production [12,500 × (11 + 24 + 18)] Total variances: Adverse Favourable £ £ Materials (W1) 5,200 Labour (W2) 8,700 Fixed overhead (W3) 5,800 ––––––– –––––– 11,000 8,700 ––––––– –––––– Actual cost (142,700 + 291,300 + 230,800) Workings: W1 Actual cost

£ 142,700

Standard cost of actual production

137,500

Actual cost

291,300

£ 662,500

2,300 A –––––––– 664,800 –––––––– Variance £ 5,200 A

W2 8,700 F Standard cost of actual production

300,000

Actual cost

230,800


225,000

W3 5,800 A

(b)

£ Expenditure variance: Actual cost

£

230,800 14,800 A

Budgeted cost (12,000

×

18)

216,000

Volume variance: Budgeted cost

216,000


225,000

9,000 F

(c)

The total direct materials and labour variances would be the same under absorption and marginal costing. The total fixed overhead variance under marginal costing would be different and would be the same as the expenditure variance under absorption costing (£14,800 A). There is no volume variance under marginal costing as fixed production costs are treated as period costs and not treated as product costs.

21


5

(a)

Absorption rates: Cost centre T: (780,000 ÷ 16,250) = £48 per machine hour Cost centre W: (173,400 ÷ 14,450) = £12 per direct labour hour

(b)

Prime costs: Direct materials Direct labour: Cost centre T Cost centre W Production overheads: Cost centre T: (35 ÷ 60) × 48 Cost centre W: (21 ÷ 6) × 12

(c)

£ 10 14 21 –––– 45 28 42 –––– 115 ––––

Products do not pass through service cost centres so the costs of such centres cannot be absorbed directly into products. Products only pass through production cost centres. Therefore in order to calculate a total production cost per unit, service cost centre costs have to be reapportioned to production cost centres for absorption. The method of reapportionment that fully recognises any work that service cost centres do for each is called the reciprocal method. There are two techniques for applying the reciprocal method – a repeated distribution approach or the use of simultaneous equations.

22





50 –––

Section B 1

(a)

(i) (ii) (iii) (iv)

Variable cost per unit Total monthly fixed costs Selling price per unit Contribution per unit

2 2 1 1 ––– 6

(b)

Contribution from new business Opportunity cost Net increase in profit

2 / 2 1 / 2 –––

11

4 (c)

Explanation of opportunity cost Reference to Pointdextre Ltd

1 1 ––– 2 ––– 12 –––

2

(a)

Input and conversion Normal loss Abnormal gain Output

1 11 / 2 11 / 2 1 ––– 5

(b)

11 / 2 1 / 2 2 1 –––

Equivalent units for conversion Cost per equivalent unit for conversion Valuation of output Valuation of closing work in progress

5

3

(c)

Debit entry

(a)

Contributions per unit Objective function Constraints

2 ––– 12 –––

1 1 3 ––– 5

(b)

Graph (or total contributions at feasible points) Optimal plan

3 1 ––– 4 ––– 9 –––

23


Marks 4

(a)

Total materials variance Total labour variance Total fixed overhead variance Reconciliation statement

1 1 1 1 ––– 4

(b)

Expenditure variance Volume variance

1 1 ––– 2

(c)

Direct materials and labour variances the same Total variance = expenditure variance No volume variance with reason

1 1 1 ––– 3 ––– 9 –––

5

(a)

Cost centre T absorption rate Cost centre W absorption rate

1 1 ––– 2

(b)

1 / 2

Prime cost Production overheads (T) Production overheads (W) Total unit cost

1 1 1 / 2 ––– 3

(c)

Reapportionment explanation Reapportionment method

2 1 ––– 3 ––– 8 –––

24





Section B


2 . 1 r e p a P




Section A – ALL 25 questions are compulsory and MUST be attempted. Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice q uestion. Each question within this section is worth 2 marks. 1

A supplier of telephone services charges a fixed line rental per period. The first 10 hours of telephone calls by the customer are free, after that all calls are charged at a constant rate per minute up to a maximum, thereafter all calls in the period are again free. Which of the following graphs depicts the total cost to the customer of the telephone services in a period? AA

BB

£

£

0

Hours

0

Hours

CC

DD

£

£

0

2

Hours

0

Hours

Four vertical lines have been labelled P, Q, R and S at different levels of activity on the following profit-volume chart: £

S Output

0 P Q

R

Which line represents the total contribution at that level of activity? A B C D

Line Line Line Line

P Q R S 2


3

A company manufactures a single product which it sells for £15 per unit. The product has a contribution to sales ratio of 40%. The company’s weekly break-even point is sales of £18,000. What would be the profit in a week when 1,500 units are sold? A B C D

4

£900 £1,800 £2,700 £4,500

The following production and total cost information relates to a single product organisation for the last three months: Month 1 2 3

Production units 1,200 1,900 1,400

Total cost £ 66,600 58,200 68,200

The variable cost per unit is constant up to a production level of 2,000 units per month but a step up of £6,000 in the monthly total fixed cost occurs when production reaches 1,100 units per month. What is the total cost for a month when 1,000 units are produced? A B C D

5

Which of the following is NOT a feasible value for the correlation coefficient? A B C D

6

£54,200 £55,000 £59,000 £60,200

+ 1·2 + 0·6 +0 – 0·6

The following statements relate to responsibility centres: (i) Return on capital employed is a suitable measure of performance in both profit and investment centres. (ii) Cost centres are found in manufacturing organisations but not in service organisations. (iii) The manager of a revenue centre is responsible for both sales and costs in a part of an organisation. Which of the statements, if any, is true? A B C D

7

(i) only (ii) only (iii) only None of them

The purchase price of a stock item is £25 per unit. In each three month period the usage of the item is 20,000 units. The annual holding costs associated with one unit equate to 6% of its purchase price. The cost of placing an order for the item is £20. What is the Economic Order Quantity (EOQ) for the stock item to the nearest whole unit? A B C D

1,730 1,894 1,461 1,633

3


[P.T.O.

8

A company determines its order quantity for a raw material using the EOQ model. What would be the effects on the EOQ and on the total annual stockholding cost of a decrease in the cost of placing an order for the raw material? EOQ A B C D

9

Increase Decrease Increase Decrease

Total annual stockholding cost No effect No effect Increase Decrease

A company uses standard absorption costing. The following data relate to last month: Budget Actual Sales and production (units) 1,000 900 Standard Actual £ £ Selling price per unit 50 52 Total production cost per unit 39 40 What was the adverse sales volume profit variance last month? A B C D

£1,000 £1,100 £1,200 £1,300

10 A company operates a standard marginal costing system. Last month actual fixed overhead expenditure was 2% below budget and the fixed overhead expenditure variance was £1,250. What was the actual fixed overhead expenditure for last month? A B C D

£61,250 £62,475 £62,500 £63,750

11 An organisation’s stock records show the following transactions for a specific item during last month: Date 4th 13th 20th 27th

Receipts units

Issues units 50

200 50 50

The stock at the beginning of last month consisted of 100 units valued at £6,700. The receipts last month cost £62 per unit. The value of the closing stock for last month has been calculated twice – on ce using a FIFO valuation and once using a LIFO valuation. Which of the following statements about the valuation of closing stock for last month is correct? A B C D

The The The The

FIFO LIFO FIFO LIFO

valuation valuation valuation valuation

is is is is

higher higher higher higher

than than than than

the the the the

LIFO FIFO LIFO FIFO

valuation valuation valuation valuation

by by by by

£250. £250. £500. £500.

4


12 A company uses absorption costing with a predetermined hourly overhead absorption rate. The following situations arose last month: (i) Actual hours worked exceeded planned hours. (ii) Actual overhead expenditure exceeded planned expenditure. Which of the following statements is correct? A B C D

Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be under absorbed. Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be over absorbed. Both situations would cause overheads to be over absorbed. Both situations would cause overheads to be under absorbed.

13 A factory consists of two production cost centres (G and H) and two service cost centres (J and K). The total overheads allocated and apportioned to each centre are as follows: G H J K £40,000 £50,000 £30,000 £18,000 The work done by the service cost centres can be represented as follows: G H J K Percentage of service cost centre J to 30% 70% – – Percentage of service cost centre K to 50% 40% 10% – The company apportions service cost centre costs to production cost centres using a method that fully recognises any work done by one service cost centre for another. What are the total overheads for production cost centre G after the reapportionment of all service cost centre costs? A B C D


£58,000 £58,540 £59,000 £59,540

following statements refer to strategic planning: It is concerned with quantifiable and qualitative matters. It is mainly undertaken by middle management in an organisation. It is concerned predominantly with the long term.

Which of the statements are correct? A B C D


15 The following statements refer to situations occurring in Process Q of an organisation which operates a series of consecutive processes: (i) Direct labour is working at below the agreed productivity level. (ii) A machine breakdown has occurred. (iii) Direct labour is waiting for work to be completed in a previous process. Which of these situations could give rise to idle time? A B C D

(i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii) 5


[P.T.O.


following terms relate to computers: Spreadsheets Floppy disks Operating systems

Which of these terms are examples of computer software? A B C D


17 A company operates a job costing system. Job number 506 requires £64 of direct materials and 7 hours of direct labour. Direct labour is paid £8 per hour. Production overheads are absorbed at the rate of £20 per direct labour hour and non-production overheads at a rate of 60% of prime cost. What is the total cost of job number 506? A B C D

£332 £352 £416 £448

18 All of a company’s skilled labour, which is paid £8 per hour, is fully employed manufacturing a product to which the following data refer: £ per unit Selling price Less Variable costs: Less Skilled labour Less Others

Contribution

£ per unit 60

20 15 ––– (35) ––– 25 –––

The company is evaluating a contract which requires 90 skilled labour hours to complete. No other supplies of skilled labour are available. What is the total relevant skilled labour cost of the contract? A B C D

£720 £900 £1,620 £2,160

19 A company requires 600 kg of raw material Z for a contract it is evaluating. It has 400 kg of material Z in stock which were purchased last month. Since then the purchase price of material Z has risen by 8% to £27 per kg. Raw material Z is used regularly by the company in normal production. What is the total relevant cost of raw material Z to the contract? A B C D

£15,336 £15,400 £16,200 £17,496

6


The following information relates to questions 20 and 21: A company operates a process costing system using the first-in-first-out (FIFO) method of valuation. No losses occur in the process. All materials are input at the commencement of the process. Conversion costs are incurred evenly through the process. The following data relate to last period: Units Degree of completion Opening work in progress 12,000 60% Total number of units completed 14,000 Closing work in progress 13,000 30% £ Costs arising: Materials 151,000 Conversion 193,170

20 What was the total number of units input during last period? A B C D

12,000 13,000 15,000 17,000

21 What was the value of the closing work in progress for last period? A B C D

£21,330 £21,690 £22,530 £22,890

22 A company is attempting to break into an existing market by launching a new product at an initially low selling price. What pricing policy is the company following? A B C D

Premium pricing Price skimming Price discrimination Penetration pricing

23 A company has established the following equations for one of its products: Selling price (£ per unit) = Marginal revenue (£ per unit) = Total cost per week (£) = Q in each case represents the number

40 – 0·008Q 40 – 0·016Q 2,500 + 8Q of units produced and sold per week.

At what selling price per unit will weekly profits be maximised? A B C D

£8 £16 £24 £32

7


[P.T.O.

The following information relates to questions 24 and 25: A company which manufactures and sells two products (X and Y) aims to maximise its profits. It holds no stocks. Product X makes a contribution per unit of £4 and product Y makes a contribution per unit of £1. Next period the company faces three ‘less than’ production constraints and these are shown as the lines labelled (1), (2) and (3) on the following graph: Product Y units 11 ’000 10 (2)

9

(3) 8 7

H

6 J

5 4 3 2

K

(1)

1 L 1

2

3

4

5

6

7

8

9

10

11

12

13

14

Product X units ’000

24 Which of the following points shown on the graph is optimal for next period? A B C D

Point Point Point Point

H J K L

25 Which of the following constraint formulations is represented by the line labelled (2) on the graph? A 10X + 17Y B 17X + 10Y C 17X + 13Y D 13X + 1 7Y

≤ ≤ ≤ ≤

70,000 70,000 91,000 91,000

(50 marks)

8



Corcoran Ltd operates several manufacturing processes. In process G, joint products (P1 and P2) are created in the ratio 5:3 by volume from the raw materials input. In this process a normal loss of 5% of the raw material input is expected. Losses have a realisable value of £5 per litre. The company holds no work in progress. The joint costs are apportioned to the joint products using the physical measure basis. The following information relates to process G for last month: Raw materials input 60,000 litres (at a cost of £381,000) Abnormal gain 11,000 litres Other costs incurred: Direct labour £180,000 Direct expenses 1£54,000 Production overheads 110% of direct labour cost. Required: (a) Prepare the process G account for last month in which both the output volumes and values for each of the joint products are shown separately. (7 marks) The company can sell product P1 for £20 per litre at the end of process G. It is considering a proposal to further process product P1 in process H in order to create product PP1. Process H has sufficient spare capacity to do this work. The further processing in process H would cost £4 per litre input from process G. In process H there would be a normal loss in volume of 10% of the input to that process. This loss has no realisable value. Product PP1 could then be sold for £26 per litre. (b) Determine, based on financial considerations only, whether product P1 should be further processed to create product PP1. (3 marks) (c) In the context of process G in Corcoran Ltd, explain the difference between ‘direct expenses’ and ‘production overheads’. (2 marks) (12 marks)

9


[P.T.O.

2

Buttercup Ltd manufactures and sells three products (R, S and T). These products are made using the same machinery. The total machining time available each month is 10,500 hours but this is insufficient to produce all the units of R, S and T required to meet maximum demands. No stocks of these products are held. The following information is available: Selling price per unit Contribution to sales ratio Machining minutes per unit Maximum monthly demand (units)

Product R £60 20% 40 9,000

Product S £75 24% 54 6,000

Product T £84 25% 75 3,000

Required: (a) Calculate the monthly shortfall in machining hours.

(2 marks)

(b) Determine the monthly production plan in units that will maximise the company’s total contribution from products R, S and T and calculate this total contribution. (6 marks) (8 marks)

3

Deadeye Ltd operates a standard costing system in which all stocks are valued at standard cost. The standard direct material cost of one unit of product MS is £36, made up of 4·8 kg of material H at £7·50 per kg. Material H is used only in the manufacture of product MS. The following information relates to last month: Material H: Purchased 40,000 kg for £294,000 Issued into production 36,500 kg Finished output of MS 17,200 units Required: (a) Calculate the direct material price and usage variances for last month.

(3 marks)

(b) Prepare a statement that reconciles the actual cost of material H purchased with the standard material cost of actual production of MS for last month. The statement should incorporate the variances calculated in (a). (3 marks) (c) (i)

Suggest ONE possible cause for EACH of the variances calculated in (a).

(ii) Who should the direct material price variance be reported to, and why?


10


4

The management accountant at Josephine Ltd is trying to predict the quarterly total maintenance cost for a group of similar machines. She has extracted the following information for the last eight quarters: Quarter number 1 2 3 4 5 6 7 8 Total maintenance cost (£’000) 265 302 222 240 362 295 404 400 Production units (‘000) 20 24 16 18 26 22 32 30 The effects of inflation have been eliminated from the above costs. The management accountant is using linear regression to establish an equation of the form y = a + bx and has produced the following preliminary calculations: Σ

(total maintenance cost x production units)

= £61,250 million

Σ

(total maintenance cost)2

= £809,598 million

Σ

(production units)2

= 4,640 million

Required: (a) Establish the equation which will allow the management accountant to predict quarterly total maintenance costs for a given level of production. Interpret your answer in terms of fixed and variable maintenance costs. (7 marks) (b) Using the equation established in (a), predict the total maintenance cost for the next quarter when planned production is 44,000 units. Suggest a major reservation, other than the effect of inflation, you would have about this prediction. (3 marks) (10 marks)

11


[P.T.O.

5

Pinafore Ltd manufactures and sells a single product. The budgeted profit statement for this month, which has been prepared using marginal costing principles, is as follows: £’000 £’000 Sales (24,000 units) 864 Less Variable production cost of sales: Less Opening stock (3,000 units) 169 Less Production (22,000 units) 506 Less Closing stock (1,000 units) 1(23) –––– (552) –––– 312 1(60) Less Variable selling cost –––– Contribution 252 Less Fixed overhead costs: Less Production 125 Less Selling and administration 140 –––– (165) –––– Net profit 187 –––– The normal monthly level of production is 25,000 units and stocks are valued at standard cost. Required: (a) Prepare in full a budgeted profit statement for this month using absorption costing principles. Assume that (6 marks) fixed production overhead costs are absorbed using the normal level of activity. (b) Prepare a statement that reconciles the net profit calculated in (a) with the net profit using marginal costing. (2 marks) (c) Which of the two costing principles (absorption or marginal) is more relevant for short-run decision-making, (2 marks) and why? (10 marks)

12


Formulae Sheet


13


Answers



June 2006 Answers

Section A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A C B C A D C D B A B A B B C B A C C C D D C C A

1

A

2

C

3

B

Contribution per unit = 15 x 0·4 = £6 Break even point = 18,000 ÷ 15 = 1,200 units Profit when 1,500 units sold = (1,500 – 1,200) x 6 = £1,800

4

C

Units 1,400 1,200 ––––– 1,200 –––––

Total cost (£) 68,200 66,600 –––––––– 1,600 ––––––––

Variable cost per unit = (1,600 ÷ 200) = £8 Total fixed cost (above 1,000 units) = [68,200 – (1,400 x 8)] = £57,000 Total cost for 1,000 units = [(57,000 – 6,000) + (1,000 x 8)] = £59,000 5

A

6

D

7

C

8

D

9

B

(Budgeted quantity – Actual quantity) x standard profit per unit (1,000 – 900) x (50 – 39) = £1,100

10

A

Budgeted overhead – actual overhead = 1,250 Actual overhead = 0·98 x Budgeted overhead Budgeted overhead – (0·98 x Budgeted overhead) = 1,250 Budgeted overhead = 1,250 ÷ 0·02 = 62,500 Actual overhead = 62,500 – 1,250 = £61,250

EOQ = {[ 2 x 20 x (4 x 20,000) ] ÷ [0·06 x 25]}0·5 = 1,461 units


11

B

12

A

13 13

B B

14

B

15

C

16

B

17

A

Closing stock = 100 – 50 + 200 – 50 – 50 = 150 units FIFO = 150 x 62 = £9,300 LIFO = (100 x 62) + (50 x 67) = £9,550 LIFO valuation greater than FIFO valuation by £250

Cost centre G = 40,000 + (0·50 x 18,000) + 0·30 [30,000 + (0·10 x 18,000)] Cost centre G = £58,540

Prime cost [64 + (7 x 8)] Production overhead (7 x 20) Non-production overhead (0·60 x 120) Total cost 18

C

£ 120 140 –––– 260 72 –––– 332 ––––

Opportunity cost per skilled labour hour = [25 ÷ (20 ÷ 8)] = £10 Relevant cost: £ Skilled labour cost (90 x 8) 1,720 Opportunity cost (90 x 10) 1,900 ––––– 1,620 –––––

19

C

Relevant cost of a regularly used material in stock is its replacement cost (600 x 27) = £16,200

20

C

Input = (14,000 + 3,000 – 2,000) = 15,000 units

21

D

Material cost per unit = [51,000 ÷ (12,000 + 3,000)] = £3·40 Conversion: Cost per equivalent unit = [193,170 ÷ (12,000 + 0·40 x 2,000 + 0·30 x 3,000)] Cost per equivalent unit = 193,170 ÷ 13,700 = £14·10 Closing stock valuation = (3,000 x 3·40) + (900 x 14·1) = £22,890

22

D

23

C

Profits maximised when: Marginal revenue (MR) = Marginal cost (MC) MC = 8 MR = (40 – 0·016Q) MR = MC 40 – 0·016Q = 8,000 MR = MC 40 – 0·016 Q = 2,000 When Q = 2,000 Price = 40 – (0·008 x 2,000) = £24

24

C

Objective function (maximisation of contribution) = 4X + Y Let 4X + Y = 40,000 (assumed) When X = 0, Y = 40,000 When Y = 0, X = 10,000 These two points are plotted on the graph and joined by a (dotted) line. This line is then moved away from the origin keeping it parallel to the originally drawn dotted line until it reaches the furthest most point in the feasible area ((OHJKL). In this case that will be the point K which is optimal.

25

A

10X + 7Y = 70,000 When X = 0, Y = 10,000 When Y = 0, X = 7,000 Constraint line (2) joins these two points on the axes.


Section B 1

(a)

Process G

Raw material Direct labour Direct expenses Production overheads (W1) Abnormal gain (W4)

Litres 60,000

£ 381,000 180,000 54,000

Output (W3): P1 (W4) P2 (W4) Normal loss (W2)

Litres

£

36,250 21,750 3,000

507,500 304,500 15,000

––––––– 61,000 –––––––

–––––––– 827,000 ––––––––

198,000 1,000 ––––––– 61,000 –––––––

14,000 –––––––– 827,000 ––––––––

Workings: W1 Production overheads = 110% x 180,000 = £198,000 W2 Normal loss = 5% x 60,000 = 3,000 litres at 5 = £15,000 W3 Total output = 61,000 – 3,000 = 58,000 W3 Split P1 : P2 in ratio 5 : 3 W3 P1 = (5 ÷ 8) x 58,000 = 36,250 litres W3 P2 = (3 ÷ 8) x 58,000 = 21,750 litres W4 Cost per litre: W3 Net total cost = 381,000 + 180,000 + 54,000 + 198,000 – 15,000 W3 Net total cost = £798,000 W3 Expected output = 60,000 x 95% = 57,000 litres W3 Cost per litre = 798,000 ÷ 57,000 = £14 W3 Valuations: W3 Abnormal gain = 1,000 x 14 = £14,000 W3 Joint products: W3 Joint prodP1 36,250 x 14 = £507,500 W3 Joint prodP2 21,750 x 14 = £304,500 (b)

Assuming 100 litres of product P1 Revenue if sold at point of split-off without further processing (100 x 20) Revenue (from PP1) if sold after further processing (100 x 90%) x 26 Additional revenue Additional cost (in process H)

£

2,000 2,340 ––––– 1,340 ––––– 1,400 –––––

The additional cost exceeds the additional revenue by £60 for every 100 litres of product P1 further processed. For example, if the output of 36,250 litres of product P 1 last month were further processed to make product PP1 then the additional costs would exceed the additional revenue by (36,250 ÷ 100 x 60) = £21,750. Therefore product P1 should not be further processed into product PP1. (c)

2

(a)

(i)

Direct expenses are costs, other than material and labour, which are specifically traceable to the process (G). An example of such a cost would be the cost of hiring special equipment required for that process only.

(ii)

Production overheads are general factory wide costs which need to be apportioned to the various processes that benefit from them. An example of production overhead would be factory rates.

Monthly machining hours required to meet maximum demand: Product Units Hours/unit R 9,000 (40 ÷ 60) = 0·667 S 6,000 (54 ÷ 60) = 0·900 T 3,000 (75 ÷ 60) = 1·250 Available hours Shortfall in machining hours

Total hours 16,000 15,400 13,750 –––––– 15,150 10,500 –––––– 14,650 ––––––


(b)

Calculation of the contribution per machining hour for each product: R S Selling price per unit £60 £75 Contribution to sales ratio 20% 24% Contribution per unit £12 £18 Machining hours per unit 0·667 0·900 Contribution per machine hour £18 £20 Ranking 2nd 1st

T £84 25% £21 1·250 £16·80 3rd

Optimal production plan and r esultant contribution: Product Units Machine hours used Contribution (£) S 6,000 15,400 108,000 R 7,650 15,100 (balance) 191,800 ––––––– –––––––– Total 10,500 199,800 ––––––– –––––––– 3

(a)

Direct material variances: Actual quantity purchased at actual price

£ 294,000  

  300,000 

Actual quantity purchased at standard price (40,000 kg at 7·50 ) Actual quantity used at standard price (36,500 kg at 7·50 ) Standard quantity for actual production at standard price [(7,200 units x 4·8) at 7·50] (b)

Variance (£)

6,000 F Price

273,750  

  259,200 

Reconciliation: Actual cost of purchases Less: Adverse/ Plus: Favourable variances: Less: Price variance [as in (a)] Less: Usage variance [as in (a)]

£

14,550 A Usage

£ 294,000

6,000 F 14,550 A ––––––– (8,550) A

Less:

Increase in stock at standard cost Less: [(40,000 – 36,500) x 7·50]

(26,250) –––––––– 259,200 ––––––––

Standard material cost of actual production [per (a)]

(c)

4

(a)

(i)

Price variance (£6,000 F) Cheaper materials, but with a lower quality than standard, may have been purchased because the normal supplier was unable to deliver. Usage variance (£14,550 A) The lower quality materials purchased may have required higher than standard usage per unit in production.

(ii)

The purchase price variance should be reported to the purchasing (procurement) manager as this is the person within the organisation who is responsible for buying the materials. This manager would be able to take any appropriate action.

In the linear regression equation y = a + bx: y = maintenance cost in £’000 (dependent variable), and x = production units in ’000 (independent variable)

Σ y = (265 + 302 + 222 + 240 + 362 + 295 + 404 + 400) = 2,490 Σ x = (20 + 24 + 16 + 18 + 26 + 22 + 32 + 30) = 188 n=8 Using formulae provided in the examination: b = [(8 x 61,250) – (188 x 2,490)] ÷ [ (8 x 4,640) – (188 x 188)] b = 12·32 a = (2,490 ÷ 8) – (12·32 x 188 ÷ 8) = 21·73 Linear equation is: y = 21·73 + 12·32x where x and y are in ’000 The interpretation is that the fixed maintenance cost per quarter is £21,730 and the variable cost per unit of production is £12·32.


(b)

Predicted maintenance cost for next quarter (44,000 units) is: 21·730 + (12·320 x 44) = 563·81 or £563,810 The major reservation about this prediction is that 44,000 units of production is well outside the range of data used to establish the linear regression equation. The data related to a range 16,000 to 32,000 units per quarter. The behaviour of costs outside this range may be quite different. For example there may be a step in the fixed costs.

5

(a)

Budgeted profit statement (absorption costing): £’000

Sales (24,000 units) Less: Production cost of sales: Less: Opening stock (3,000 x 28) [W1] Less: Production (22,000 x 28) Less: Closing stock (1,000 x 28)

84 616 (28) ––––

Under absorption of fixed Less: production overhead cost [W2] Less: (3,000 x 5)

£’000 864

(672) –––– 192

Less:

(15) –––– 177

Gross profit Less: Non-production costs: Less: Variable selling cost Less: Fixed selling and admin costs

60 40 –––

Net profit Workings: W1 Variable production cost per unit W1 [For example, from opening stock under W1 marginal costing: (69,000 ÷ 3,000)] W1 Fixed production cost per unit W1 [125,000 ÷ 25,000] W1

(100) –––– 77 ––––

£ 23

5 ––– 28 –––

W2 Under absorption (25,000 – 22,000) = 3,000 units (b)

Reconciliation: £’000 77

Net profit per absorption costing (a) Add: Decrease in stocks x fixed production overhead Add: cost per unit [2,000 x 5]

10 ––– 87 –––

Net profit per marginal costing (per question)

(c)

Marginal costing is more relevant for short-term decision-making as it separates fixed and variable costs. In the short-term fixed costs are more likely to remain unchanged and therefore would not be relevant.





50 –––

Section B 1

(a)

Inputs Abnormal gain Normal loss Joint products

2 11 / 2 11 / 2 2 ––– 7

(b)

Additional revenue Additional cost Conclusion

11 / 2

Direct expenses Production overheads

1 1 –––

1 1 / 2

–––

3 (c)

2 ––– 12 –––

2

(a)

Required hours Shortfall

11 / 2 1 / 2 –––

Contribution per unit Contribution per machining hour Ranking Optimal plan Resultant contribution

1 1 / 2 1 1 / 2 1 / 2 11 / 2

2 (b)

1 ––– 6 ––– 8 –––

3

(a)

11 / 2 11 / 2 –––

Price variance Usage variance

3 (b)

Variances Change in stock Layout/presentation of statement

1 1 1 –––

(c)

(i) (ii)

2 1 1 –––

3

Causes (1 mark for each) Purchasing manager Responsibility for buying

4 ––– 10 –––


Marks 4

(a)

Σy Σx

1 1 21 / 2 11 / 2 1 –––

Calculation of ‘b’ Calculation of ‘a’ Fixed/variable costs

7 (b)

11 / 2 11 / 2 –––

Total cost for 44,000 units Reservation

3 ––– 10 –––

5

(a)

1 / 2

Sales Cost of sales Under absorption of overhead Variable selling cost Fixed selling and admin costs

3 11 / 2 1 / 2 1 / 2 ––– 6

(b)

Layout/presentation of statement Change in stock and its evaluation

1 1 –––

(c)

Marginal costing Separation of fixed and variable costs Fixed costs not relevant to short term decisions

1 1 / 2 1 / 2 –––

2

2 ––– 10 –––





Section B


2 . 1 r e p a P





The following diagram represents a profit/volume chart for an organisation: £

H Output

0 G

At the specific levels indicated what do the lines ‘G’ and ‘H’ represent? A B C D

2

Line ‘G’ Loss Loss Contribution Contribution

Line ‘H’ Profit Contribution Profit Contribution

The following diagram represents the behaviour of one element of cost: £ Total cost

Volume of activity

0

Which one of the following descriptions is consistent with the above diagram? A B C D

Annual total cost of factory power where the supplier sets a tariff based on a fixed charge plus a constant unit cost for consumption which is subject to a maximum annual charge. Total annual direct material cost where the supplier charges a constant amount per unit which then reduces to a lower amount per unit after a certain level of purchases. Total annual direct material cost where the supplier charges a constant amount per unit but when purchases exceed a certain level a lower amount per unit applies to all purchases in the year. Annual total cost of telephone services where the supplier makes a fixed charge and then a constant unit rate for calls up to a certain level. This rate then reduces for all calls above this level.

2


3

An organisation has the following total costs at three activity levels: Activity level (units) Total cost

8,000 £204,000

12,000 £250,000

15,000 £274,000

Variable cost per unit is constant within this activity range and there is a step up of 10% in the total fixed costs when the activity level exceeds 11,000 units. What is the total cost at an activity level of 10,000 units? A B C D

4

£220,000 £224,000 £227,000 £234,000

An organisation manufactures and sells a single product which has a variable cost of £24 per unit and a contribution to sales ratio of 40%. Total monthly fixed costs are £720,000. What is the monthly breakeven point (in units)? A B C D

5

18,000 20,000 30,000 45,000

The following statements refer to qualities of good information: (i) It should be communicated to the right person. (ii) It should always be completely accurate before it is used. (iii) It should be understandable by the recipient. Which of the above statements are correct? A B C D

6


A company is considering the launch of a new product at a high initial selling price. Which of the following statements is correct? A B C D

This This This This

is is is is

an an an an

example example example example

of of of of

strategic planning involving the application of penetration pricing. operational planning involving the application of penetration pricing. strategic planning involving the application of price skimming. operational planning involving the application of price skimming.

3


[P.T.O.

7

The following statements relate to an organisation’s management information system: (i) It is used only by top and middle management to aid in strategic and tactical decision-making. (ii) It generates both financial and non-financial information. (iii) It often uses a database system. Which of the above statements are correct? A B C D

8


Regression analysis is being used to find the line of best fit (y = a + bx) from five pairs of data. The calculations have produced the following information: Σx

= 129

Σy

= 890

Σxy

= 23,091

Σx2

= 3,433

Σy2

= 29,929

What is the value of ‘a’ in the equation for the line of best fit (to the nearest whole number)? A B C D

9

146 152 210 245

Which of the following is a feasible value for a correlation coefficient? A B C D

+1·2 0 –1·2 –2·0

10 The following data relate to material J for last month: Opening stock Purchases: 4th 18th Issues: 13th 25th

300 kg valued at

£ 3,300

400 kg for 500 kg for

4,800 6,500

600 kg 300 kg

Using the LIFO valuation method, what was the value of the closing stock for last month? A B C D

£3,300 £3,500 £3,700 £3,900

4


11 A jobbing company operates a premium bonus scheme for its employees of 75% of the time saved compared with the standard time allowance for a job, at the normal hourly rate. The data relating to Job 1206 completed by an employee is as follows: Allowed time for Job 1206 Time taken to complete Job 1206 Normal hourly rate of pay

4 hours 3 hours £8

What is the total pay of the employee for Job 1206? A B C D

£24 £30 £32 £38

12 A paint manufacturer has a number of departments. Each department is located in a separate building on the same factory site. In the mixing depar tment the basic raw materials are mixed together in very large vessels. These are then moved on to the colour adding department where paints of different colours are created in these vessels. In the next department – the pouring department – the paint is poured from these vessels into litre sized tins. The tins then go on to the labelling department prior to going on to the finished goods department. The following statements relate to the paint manufacturer: (i) The mixing department is a cost centre. (ii) A suitable cost unit for the colour adding department is a litre tin of paint. (iii) The pouring department is a profit centre. Which statement or statements is/are correct? A B C D

(i) only (i) and (ii) only (i) and (iii) only (ii) and (iii) only

13 The following statements relate to spreadsheets: (i) (ii) (iii) (iv)

A spreadsheet consists of records and files. Most spreadsheets have a facility to allow data within them to be displayed graphically. A spreadsheet could be used to prepare a budgeted profit and loss account. A spreadsheet is the most suitable software for storing large volumes of data.

Which of the above statements are correct? A B C D

(i) and (ii) only (i), (iii) and (iv) only (ii) and (iii) only (iii) and (iv) only

5


[P.T.O.

14 A company uses absorption costing with a predetermined hourly overhead absorption rate. The following situations have both occurred: (i) Actual overhead expenditure exceeded planned expenditure; and (ii) Actual hours worked were less than the planned hours. Which of the following statements is correct? A B C D

Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be under absorbed. Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be over absorbed. Both situations would cause overheads to be over absorbed. Both situations would cause overheads to be under absorbed.

15 A company operates a job costing system. Job 812 requires £60 of direct materials, £40 of direct labour and £20 of direct expenses. Direct labour is paid £8 per hour. Production overheads are absorbed at a rate of £16 per direct labour hour and non-production overheads are absorbed at a rate of 60% of prime cost. What is the total cost of Job 812? A B C D

£240 £260 £272 £320

16 At the end of manufacturing in Process I, product K can be sold for £10 per litre. Alternatively product K could be further processed into product KK in Process II at an additional cost of £1 per litre input into this process. Process II is an existing process with spare capacity in which a loss of 10% of the input volume occurs. At the end of the further processing, product KK could be sold for £12 per litre. Which of the following statements is correct in respect of 9,000 litres of product K? A B C D

Further Further Further Further

processing processing processing processing

into into into into

product product product product

KK KK KK KK

would would would would

increase profits by £9,000. increase profits by £8,100. decrease profits by £900. decrease profits by £1,800.

The following information relates to questions 17 and 18: The standard direct material cost for a product is £50 per unit (12·5 kg at £4 per kg). Last month the actual amount paid for 45,600 kg of material purchased and used was £173,280 and the direct material usage variance was £15,200 adverse. 17 What was the direct material price variance last month? A B C D

£8,800 £8,800 £9,120 £9,120

Adverse Favourable Adverse Favourable

6


18 What was the actual production last month? A B C D

3,344 3,520 3,952 4,160


19 Equipment owned by a company has a net book value of £1,800 and has been idle for some months. It could now be used on a six months contract which is being considered. If not used on this contract, the equipment would be sold now for a net amount of £2,000. After use on the contract, the equipment would have no saleable value and would be dismantled. The cost of dismantling and disposing of it would be £800. What is the total relevant cost of the equipment to the contract? A B C D

£1,200 £1,800 £2,000 £2,800

20 A contract is under consideration which requi res 800 labour hours to complete. There are 450 hours of spare labour capacity for which the workers are still being paid the normal rate of pay. The remaining hours required for the contract can be found either by overtime working paid at 50% above the normal rate of pay or by diverting labour from the manufacture of product OT. If the contract is undertaken and labour is diverted, then sales of product OT will be lost. Product OT takes seven labour hours per unit to manufacture and makes a contribution of £14 per unit. The normal rate of pay for labour is £8 per hour. What is the total relevant labour cost to the contract? A B C D

£3,500 £4,200 £4,500 £4,900

The following information relates to questions 21 and 22: In the following price, revenue and cost fu nctions, which have been established by an organisation for one of its products, Q represents the number of units produced and sold per week: Price (£ per unit) = 50 – 0·025Q Marginal revenue (£ per unit) = 50 – 0·05Q Total weekly cost = 1,000 + 15Q 21 What price per unit should be set in order to maximise weekly profit? A B C D

£15·00 £17·50 £25·00 £32·50

22 What would the weekly total contribution be if the price of the product was set at £20 per unit? A B C D

£2,000 £3,000 £5,000 £6,000

7


[P.T.O.

23 A company has three shops (R, S and T) to which the following budgeted information relates: Shop R £000 400 –––– 100 (60) –––– 40 ––––

Sales Contribution Less: Fixed costs Profit/(Loss)

Shop S £000 500 –––– 60 (70) –––– (10) ––––

Shop T £000 600 –––– 120 (70) –––– 50 ––––

Total £000 1,500 –––––– 280 (200) –––––– 80 ––––––

60% of the total fixed costs are general company overheads. These are apportioned to the shops on the basis of sales value. The other fixed costs are specific to each shop and are avoidable if the shop closes down. If shop S is closed down and the sales of the other two shops remained unchanged, what would be the revised budgeted profit for the company? A B C D

£50,000 £60,000 £70,000 £90,000

24 Which of the following statements correctly describes the shadow price of a resource in linear programming? A B C D

The The The The

minimum sum payable for one more unit of the scarce resource. maximum sum payable for one more unit of the scarce resource. increase in total contribution if one more unit of a non-binding constraint is made available. increase in total contribution if one more unit of a binding constraint is made available.

25 The following graph relates to a linear programming problem: y (3)

(2)

(1)

x

0

The objective is to maximise total contribution and the dotted line on the graph depicts this function. There are three constraints which are all of the ‘less than or equal’ type which are depicted on the graph as the three solid lines labelled (1), (2) and (3). At which of the following intersections is total contribution maximised? A B C D

Constraint Constraint Constraint Constraint

(3) (2) (1) (1)

and and and and

the x-axis constraint (3) constraint (2) constraint (3) (50 marks)

8



Fairfax Ltd manufactures a single product which has a standard selling price of £22 per unit. It operates a standard marginal costing system. The standard variable production cost is £9 per unit. Budgeted annual production is 360,000 units and budgeted non-production costs of £1,152,000 per annum are all fixed. The following data relate to last month: Budget units 30,000 32,000

Production Sales


Last month the budgeted profit was £200,000 and the actual total sales revenue was £731,000. Required: (a) Calculate the sales price and sales volume contribution variances for last month showing clearly whether each variance is favourable or adverse. (4 marks) (b) Explain how the two variances calculated in (a) could be interrelated.

(3 marks)

(c) Calculate the BUDGETED profit for last month assuming that the company was using absorption costing. (4 marks) (11 marks)

2

Point Ltd uses the economic order quantity (EOQ) model to establish the reorder quantity for raw material Y. The company holds no buffer stock. Information relating to raw material Y is as follows: Annual usage Purchase price Ordering costs Annual holding costs

48,000 units £80 per unit £120 per order 10% of the purchase price

Required: (a) Calculate: (i) the EOQ for raw material Y, and (ii) the total annual cost of purchasing, ordering and holding stocks of raw material Y.

(4 marks)

The supplier has offered Point Ltd a discount of 1% on the purchase price if each order placed is for 2,000 units. (b) Calculate the total annual saving to Point Ltd of accepting this offer.

(3 marks)

(c) List FOUR examples of holding costs.

(2 marks) (9 marks)

9


[P.T.O.

3

Merryl Ltd manufactures four components (E, F, G and H) which are incorporated into different products made by the company. All the components are manufactured using the same general purpose machinery. The following production cost and machine hour data are available: Variable production cost (£ per unit) Fixed production cost (£ per unit) General purpose machine hours per unit

E 32 6 5

F 27 14 6

G 34 8 7

H 35 16 8

The fixed production costs represent a share of factory-wide costs that have been related to the individual components by using a direct labour hour rate. There are no fixed costs which can be specifically related to individual components. From next month the company’s monthly manufacturing requirements are for 2,000 units of each component. The maximum number of machine hours available for component manufacture is 35,000 per month. The company can purchase any quantity of each component from Sergeant Ltd at the following unit prices next month: E £48

F £51

G £55

H £63

Merryl Ltd aims to minimise its monthly costs. Required: (a) Calculate the shortfall in general purpose machine hours next month.

(2 marks)

(b) Determine how many units of which components should be purchased from Sergeant Ltd next month. (4 marks) (c) Briefly explain THREE other factors that the management of Merryl Ltd should consider before making a final decision to buy in components from Sergeant Ltd for next month. (3 marks) (9 marks)

4

Yeomen Ltd uses process costing and the FIFO method of valuation. The following information for last month relates to Process G, where all the material is added at the beginning of the process: Opening work-in-progress:

2,000 litres (30% complete in respect of conversion costs) valued in total at £24,600 (£16,500 for direct materials; £8,100 for conversion).

Costs incurred:

Normal loss: Actual output: Closing work-in-progress:

Direct materials £99,600 for 12,500 litres of input Conversion £155,250 8% of input in the period. All losses, which are incurred evenly throughout the process, can be sold for £3 per litre. 10,000 litres were transferred from Process G to the finished goods warehouse. 3,000 litres (45% complete in respect of conversion costs).

Required: (a) Prepare the Process G Account for last month in £ and litres.

(10 marks)

(b) Identify TWO types of organisation where it would be appropriate to use service (operation) costing. For each one suggest a suitable unit cost measure. (2 marks) (12 marks)

10


5

Phoebe Ltd manufactures many different products which pass through two production cost centres (P1 and P2). There are also two service cost centres (S1 and S2) in the factory. The following information has been extracted from the budget for the coming year: Allocated and apportioned production overheads Number of employees Total machine hours Total direct labour hours

P1

P2

£477,550 30

£404,250 65

68,000 4,000

11,400 14,000

S1 £132,000 10

S2 £96,000 15

Service cost centre S1 costs are reapportioned to all other cost centres based on the number of employees. Service cost centre S2 only does work for P1 and P2 and its costs are reapportioned to these centres in the ratio 5:3 respectively. Required: (a) Calculate: (i) the machine hour absorption rate for cost centre P1, and (ii) the direct labour hour absorption rate for cost centre P2.

(6 marks)

(b) Explain the difference between production overheads that have been ‘allocated’ and those which have been ‘apportioned’ to cost centres. Explain why some manufacturing companies are able to allocate electric power costs to production cost centres, whereas others can only apportion them. (3 marks) (9 marks)

11


[P.T.O.

Formulae Sheet


12


Answers




Section A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

D D A D B C C A B C B A C D C D D A D A D D A D A

1

D

2

D

3

A Variable cost per unit = [(274,000 – 250,000) ÷ (15,000 – 12,000)] = £8 Total fixed cost above 11,000 units = [274,000 – (15,000 x 8)] = £154,000 Total fixed cost below 11,000 units = (10 ÷ 11) x 154,000 = £140,000 Total cost for 10,000 units = [(10,000 x 8) + 140,000] = £220,000

4

D Contribution per unit = (24 ÷ 0·60 x 0·40) = £16 Breakeven point = (720,000 ÷ 16) = 45,000 units

5

B

6

C

7

C

8

A b = [(5 x 23,091) – (129 x 890)] ÷ [(5 x 3,433) – (129 2)] = 1·231 a = (890 ÷ 5) – [(1·231 x 129) ÷ 5] = 146 (nearest whole number)

15


9

B

10

C Closing stock (units) = 300 + 400 + 500 – 600 – 300 = 300 Valuation = (100 x11) + (200 x 13) = £3,700

11

B (3 x £8) + [(4 – 3) x 0·75 x £8] = £30

12

A

13

C

14

D

15

C (60 + 40 + 20) + [(40 ÷ 8) x 16] + (0·60 x 120) = £272

16

D £ Sales value after further processing = (9,000 x 0·9) x £12 = 97,200 Sales value without further processing = (9,000 x £10) 90,000 ––––––– Increase in sales revenue 7,200 Less: Further processing cost = (9,000 x £1) (9,000) ––––––– Decrease in profit by further processing £1,800 –––––––

17

D [(45,600 x 4) – 173,280] = £9,120 Favourable

18

A £ 182,400 (15,200) –––––––– 167,200 –––––––– 3,344

Actual usage at standard cost (45,600 x 4) Less: Adverse usage variance Standard cost for actual production Actual production (units) = (167,200 ÷ 50) =

19

D Opportunity cost now + disposal cost at end of contract (2,000 + 800) = £2,800

20

A (800 – 450) x [8 + (14 ÷ 7)] = £3,500

21

D Marginal cost (MC) = 15 Profit maximised when MC = MR 15 = 50 – 0·05Q Q = 700 P = 50 – (0·025 x 700) = £32·50

16


22

D When P = 20: 20 = 50 – 0·025Q And Q = 1,200 Total contribution = 1,200 x (20 – 15) = £6,000

23

A Total fixed costs for shop S Less: Apportioned general costs (200 x 0.60) ÷ (500 ÷ 1,500) Specific avoidable fixed costs for shop S If shop S closed down net contribution lost (60,000 – 30,000) Revised budgeted profit for company (80,000 – 30,000)

24

D

25

A

£ 70,000 (40,000) ––––––– 30,000 ––––––– 30,000 £50,000

Section B 1

(a)

Sales price variance: Actual sales at standard selling price (34,000 x £22) Actual sales at actual selling price

£ 748,000 731,000 –––––––– 17,000 A ––––––––

Sales price variance Sales volume contribution variance: Budgeted sales (units) Actual sales (units)

32,000 34,000 –––––––– 2,000 F x £13 £26,000 F ––––––––

Volume variance (units) At standard contribution per unit £(22 – 9) Sales volume contribution variance (b)

The actual selling price (£21·50) was lower than the standard selling price (£22·00) – hence the adverse sales price variance. This reduction in price may have directly encouraged customers to buy more units. The company sold 2,000 more units than planned giving the favourable sales volume contribution variance of £26,000. Thus the two variances may be interrelated and if so the variances should be considered together – one partially offsetting the other.

(c) Budgeted contribution (32,000 x £13) Less: Budgeted profit (marginal costing) Budgeted fixed costs Less: Budgeted non-production fixed costs (1,152,000 ÷ 12) Budgeted fixed production costs

£ 416,000 (200,000) ––––––––– 216,000 (96,000) ––––––––– 120,000 –––––––––

Standard fixed production cost per unit (£120,000 ÷ 30,000) Calculation of absorption costing profit: Marginal costing profit Less: Decrease in stocks at standard fixed production cost per unit [(32,000 – 30,000) x £4]

£4 £ 200,000 (8,000) ––––––––– 192,000 –––––––––

Absorption costing profit Alternatively: Budgeted absorption costing manufacturing profit 32,000 x (13 – 4) Less: budgeted non-production fixed costs

£ 288,000 (96,000) ––––––––– 192,000 –––––––––

Absorption costing profit

17


2

(a)

(i)

Using the formula given: EOQ = [(2 x 120 x 48,000) ÷ (0·10 x 80)]0·5 = 1,200 units

(ii)

£ 3,840,000 4,800 4,800 –––––––––– 3,849,600 ––––––––––

Purchasing cost (48,000 x £80) Ordering cost (48,000 ÷ 1,200) x £120 Holding costs [(1,200 ÷ 2) x £80 x 0·10] Total cost

(b)

Purchasing cost (48,000 x £80 x 0·99) Ordering cost (48,000 ÷ 2,000) x £120 Holding costs [(2,000 ÷ 2) x £80 x 0·99 x 0·10]

3,801,600 2,880 7,920 –––––––––– 3,812,400 ––––––––––

Total cost Annual total saving (3,849,600 – 3,812,400)

3

(c)

Insurance costs of stock and warehouse Rent of warehouse Rates of warehouse Interest on capital tied up in stock

(a)

Hours required [(5 + 6 + 7 + 8) x 2,000] Hours available Shortfall in hours

(b)

£37,200

52,000 35,000 17,000

E £/unit 32 48 ––– 16 –––

F £/unit 27 51 ––– 24 –––

G £/unit 34 55 ––– 21 –––

H £/unit 35 63 ––– 28 –––

5

6

7

8

Extra cost per machine hour saved

3·2

4·0

3·0

3·5

Ranking for buying in

2nd

4th

1st

3rd

Variable production cost Buy-in price Extra cost of buying in Machine hours per unit

Optimal plan for buying in components: Ranking Component Units Machine hours saved 1st G 2,000 14,000 2nd E 600 3,000 (balancing figure) ––––––– Total shortfall of hours [as per (a)] 17,000 –––––––

4

(c)

(1) The quality of the components supplied by Sergeant Ltd. (2) The loss of control over all aspects of production and delivery of the components. (3) The possibility of increasing the number of machine hours available next month by working overtime.

(a)

Process G Account

Opening WIP Costs arising: Direct materials

Litres 2,000

12,500

Conversion

£ 24,600

99,600

Litres Output (W4): Ex opening WIP Started and finished in month

155,250

––––––– 14,500 –––––––

–––––––– 279,450 ––––––––

Normal loss (0·08 x 12,500) Abnormal loss (W2) Closing WIP (W3)

£

2,000 8,000 ––––––– 10,000

221,520

1,000 500 3,000 ––––––– 14,500 –––––––

3,000 11,100 43,830 –––––––– 279,450 ––––––––

18


Workings: W1 Cost per equivalent litre (EL):

Completion of opening WIP Units started and finished in month Abnormal loss Closing WIP Work done last month Costs arising last month Less: Scrap value of normal loss

Cost per EL

Direct materials EL – 8,000 500 3,000 ––––––– 11,500 ––––––– £ 99,600 (3,000) ––––––– 96,600 –––––––

Conversion EL 1,400 8,000 500 1,350 ––––––– 11,250 ––––––– £ 155,250 – ––––––– 155,250 –––––––

£8·40

£13·80

W2 Valuation of abnormal loss: 500 x (8·40 + 13·80) = £11,100 W3 Valuation of closing WIP: (3,000 x £8·40) + (1,350 x £13·80) = £43,830 W4 Valuation of output: Opening WIP value Completion of opening WIP (1,400 x £13·80) Units started and finished in month [8,000 x £(8·40 + 13·80)]

(b)

Type of organisation Hospital Haulage transport Hotel Rail transport

£ 24,600 19,320 177,600 –––––––– 221,520 ––––––––

Unit cost measure Inpatient day Tonne mile Occupied room night Passenger mile

Note: only two examples were required and other answers were acceptable.

5

(a)

Cost centre Allocated and apportioned overheads Reapportionment of S1 (30:65:15) Reapportionment of S2 (5:3)

Machine hours (P1) Direct labour hours (P2) Absorption rate: Per machine hour Per direct labour hour (b)

P1 £ 477,550 36,000 71,250 –––––––– 584,800 ––––––––

P2 £ 404,250 78,000 42,750 –––––––– 525,000 ––––––––

S1 £ 132,000 (132,000) – –––––––– – ––––––––

S2 £ 96,000 18,000 (114,000) –––––––– – ––––––––

68,000 14,000 £8·60 £37·50

Allocated overheads are specifically traceable to cost centres. Apportioned overheads are those for which only a total factorywide figure is available. Therefore in order to get such overheads related to individual cost centres, the total has to be apportioned on a logical but arbitrary basis to the cost centres. For example the total factory rates could be apportioned on the basis of the floor area occupied by each cost centre. Electric power can be allocated if each cost centre is separately metered. Thus allowing an accurate measure of the amou nt of power used in each cost centre. Otherwise if there is only one meter for the whole factory, then the total cost of electric power would need to be apportioned to the factory cost centres. For example by using the kilowatt hour rating of the machines and equipment in the various cost centres.

19





50 –––

Section B 1

(a)

Price variance Volume variance

2 2 ––– 4

(b)

An adverse and a favourable variance Possible interrelationship explained

1 2 ––– 3

(c)

Budgeted fixed production costs Fixed production cost per unit Change in stock level effect Absorption costing profit

1 1 1 1 ––– 4 ––– 11 –––

2

(a)

(i) (ii)

11 / 2 1 / 2 1 1 –––

Economic order quantity Purchasing cost Ordering cost Holding cost

4 (b)

1

Purchasing cost Ordering cost Holding cost Annual saving

/ 2 1 1 1 / 2 ––– 3

3

(c)

1 / 2

(a)

Hours required Hours available Shortfall

mark for each different example

2 ––– 9 –––

1

/ 2 / 2 1 ––– 1

2 (b)

Extra cost per unit of buying in Extra cost per machine hour Optimal buying in plan

2 1 1 ––– 4

(c)

1 mark per factor

3 ––– 9 –––

21


Marks 4

(a)

Opening WIP Costs arising Output Normal loss Abnormal loss Closing WIP

1 1 3 1 2 2 ––– 10

(b)

1

/ 2 mark for each type of organisation / 2 mark for each unit cost measure

1 1 –––

1

2 ––– 12 –––

5

(a)

Reapportionment of S1 costs Reapportionment of S2 costs Machine hour rate Direct labour hour rate

2 2 1 1 ––– 6

(b)

Allocation explained Apportionment explained Use, or not, of meters

1 1 1 ––– 3 ––– 9 –––

22





Section B


2 . 1 r e p a P





Four lines representing expected costs and revenue have been drawn on the following break-even chart: E £ F

G

H

Output

0 Which statement is correct? A B C D

2

Line F represents total variable cost. The break-even point occurs at the intersection of lines E and F. Line G represents total revenue. The break-even point occurs at the intersection of lines G and H.

The following diagram depicts a line which relates the quantity demanded (Q) to the selling price (P): Price (P)

25

0

40,000

Quantity (Q)

What is the equation of the line? A B C D

P P P P

= = = =

25 25 25 25

– – – –

0.000625Q 1,600Q 1·6Q 0·625Q

2


3

An organisation manufactures a single product which has a variable cost of £36 per unit. The organisation’s total weekly fixed costs are £81,000 and it has a contribution to sales ratio of 40%. This week it plans to manufacture and sell 5,000 units. What is the organisation’s margin of safety this week (in units)? A B C D

4

1,625 2,750 3,375 3,500

An organisation has the following total costs at two activity levels: Activity level (units) Total costs

15,000 £380,000

24,000 £470,000

Variable cost per unit is constant in this activity range but there is a step up of £18,000 in the total fixed costs when the activity exceeds 20,000 units. What are the total costs at an activity level of 18,000 units? A B C D

5

£404,000 £410,000 £422,000 £428,000

The following statements refer to different types of planning within a manufacturing organisation: (i) Operational planning includes the scheduling of work to be done in the short term. (ii) Tactical planning includes consideration of ways in which the productivity of the factory workforce could be improved. (iii) Strategic planning includes the setting of the organisation’s long term objectives. Which of the statements are correct? A B C D

6


The following statements relate to spreadsheets: (i) A spreadsheet is the most suitable software for the storage of large amounts of data. (ii) A spreadsheet consists of rows, columns and cells. (iii) A forecast profit and loss account could be prepared using a spreadsheet. Which of the statements are correct? A B C D


3


[P.T.O.

7

An organisation’s records for last month show the following in respect of one stores item: Date 1st 5th 7th 19th 27th

Receipts units

Issues units

Stock units 200 100 500 310 140

100 400 190 170

Last month’s opening stock was valued at a total of £2,900 and the receipts during the month were purchased at a cost of £17·50 per unit. The organisation uses the weighted average method of valuation and calculates a new weighted average after each stores receipt. What was the total value of the issues last month? A B C D

8

£7,360 £7,534 £7,590 £7,774

Data relating to one particular stores item are as follows: Average daily issues Maximum daily issues Minimum daily issues Lead time for the replenishment of stock Reorder quantity Reorder level

70 units 90 units 50 units 11 to 17 days 2,000 units 1,800 units

What is the maximum stock level (in units) for this stores item? A B C D

9

2,950 3,100 3,250 3,800

A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model. What would be the effects on the EOQ and the total annual ordering cost of a decrease in the annual cost of holding one unit of the component in stock? A B C D

EOQ Lower Higher Lower Higher

Total annual ordering cost No effect No effect Higher Lower

10 A company operates a job costing system. Job number 607 requires £300 of direct materials, £400 of direct labour and £100 of direct expenses. Direct labour is paid at a rate of £8 per hour. Production overheads are absorbed at a rate of £40 per direct labour hour and non-production overheads are absorbed at a rate of 150% of prime cost. What is the total cost of job number 607? A B C D

£3,750 £3,850 £4,000 £4,200 4


11 A company uses absorption costing with a predetermined hourly fixed overhead absorption rate. The following situations arose last month: (i) Actual overhead expenditure was less than the planned expenditure. (ii) Actual hours worked exceeded planned hours. Which statement is correct? A B C D

Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be over absorbed. Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be under absorbed. Both situations would cause overheads to be over absorbed. Both situations would cause overheads to be under absorbed.

12 A company manufactures two products K1 and K2 in a factory consisting of two cost centres, Y and Z. The following budgeted data are available: Cost centre Y Z Allocated and apportioned fixed overhead costs £576,000 £288,000 Direct labour hours per unit: Product K1 5 2 Product K2 3 4 Budgeted output is 12,000 units of each product. Fixed overhead costs are absorbed on a direct labour hour basis. What is the budgeted fixed overhead cost per unit for product K2? A B C D

£34 £36 £38 £42

13 A factory consists of two production cost cen tres (P and Q) and two service cost centres (T and V). The total overheads allocated and apportioned to each cost centre are as follows: Total overheads

P £180,000

Q £120,000

The work done by the service cost centres can be represented as follows: P Q Percentage of service cost centre T to: 70% 30% Percentage of service cost centre V to: 40% 30%

T £128,000

V £140,000

T – 30%

V – –

The service cost centre costs are apportioned to production cost centres using a method that fully recognises any work done by one service cost centre for another. What are the total overheads for production cost centre P after the reapportionment of all service cost centre costs? A B C D

£325,600 £349,600 £355,000 £379,000

5


[P.T.O.

The following information relates to questions 14 and 15: A company operates a process costing system using the first-in-first-out (FIFO) system of valuation. No losses occur in the process. The following data relate to last month: Units Opening work-in-progress 200 with a total value of £1,530 Input to the process 1,000 Completed production 1,040 Last month the cost per equivalent unit of production was £20 and the degree of completion of the work-in-progress was 40% throughout the month. 14 What was the value (at cost) of last month’s closing work-in-progress? A B C D

£1,224 £1,280 £1,836 £1,920

15 What was the cost of the 1,040 units completed last month? A B C D

£19,200 £19,930 £20,730 £20,800

16 The following statements relate to the calculation of the regression line y = a + bx using the information on the formulae sheet at the end of this examination paper: (i) ∑xy is calculated by multiplying ∑x by ∑y. (ii) ∑y2 is not the same as ( ∑y)2 . (iii) n represents the number of pairs of data items used. Which statements are correct? A B C D


17 Which of the following correlation coefficients indicates the weakest relationship between two variables? A B C D

+0·9 – 0·6 – 0·8 – 1·0

18 The following statements relate to responsibility centres: (i) The manager of a revenue centre is responsible for sales and costs in a segment of an organisation. (ii) Return on capital employed is a suitable measure of performance in a profit centre. (iii) Cost centres are found in manufacturing and service organisations. Which of the statements, if any, is correct? A B C D

(i) only (ii) only (iii) only None of them.

6


19 A company operates a standard absorption costing system in which the standard fixed production overhead rate is £9 per hour. The following data relate to last month: Budgeted hours 8,000 Standard hours for actual production 8,200 Actual hours worked 8,400 What was the fixed production overhead capacity variance for last month? A B C D

£1,800 Adverse £1,800 Favourable £3,600 Adverse £3,600 Favourable

20 A company operates a standard marginal costing system. Last month the company sold 200 units more than it planned to sell. The following data relate to last month:

Selling price per unit Variable cost per unit

Standard £ 40 30

Actual £ 38 29

What was the favourable sales volume contribution variance last month? A B C D

£1,600 £1,800 £2,000 £2,200

21 Which of the following should be classified as indirect labour? A B C D

Machine operators in a factory producing furniture Lawyers in a legal firm Maintenance workers in a power generation organisation Lorry drivers in a road haulage company.

22 Which of the following should NOT be classified as a service cost centre in a manufacturing organisation? A B C D

Factory canteen Stores Materials handling department Final product inspection department

23 A long established city centre hotel charges a higher price for its executive bedrooms on weekdays than it does for the same rooms at weekends and on public holidays. Which pricing policy is the hotel adopting? A B C D

Penetration pricing Price skimming Premium pricing Price discrimination

7


[P.T.O.

24 A company would sell 40,000 units of a product if the unit selling price was set at £10 and these would generate a total contribution of £160,000. If the unit selling price was reduced to £9·50 then sales of 44,000 units would result. Setting unit selling prices of £10·50 and £11 would result in sales of 36,000 and 31,000 units respectively. Which selling price would generate the highest total contribution? A B C D

£9·50 £10·00 £10·50 £11·00

25 A company which manufactures four components (A, B, C and D), using the same skilled labour, aims to maximise its profits. The following information is available: Component A B C D Variable production cost per unit (£) 60 70 75 85 Purchase price per unit from another supplier (£) 108 130 120 124 Skilled labour hours per unit to manufacture 4 6 5 3 As it has insufficient skilled labour hours available to manufacture all the components required, the company will need to buy some units of one component from the other supplier. Which component should be purchased from the other supplier? A B C D

Component Component Component Component

A B C D (50 marks)

8



Casilda Ltd manufactures gonds, which have a standard selling price of £120 per gond. The company operates a standard marginal costing system and values stocks at standard cost. The standard variable cost of a gond is as follows: Direct material Direct labour (6 hours at £8 per hour) Production overhead

£ per gond 20 48 24 ––– 92 –––

The budgeted and actual activity levels for last month were as follows:

Sales Production

Budget units 25,000 25,000


The actual sales and variable costs for last month were as follows: Sales Direct material (purchased and used) Direct labour (150,000 hours) Variable production overhead

£ 2,995,000 532,800 1,221,000 614,000

Required: (a) Calculate the following cost variances for last month: (i) Total direct materials; (ii) Total variable production overhead; (iii) Direct labour rate; (iv) Direct labour efficiency.

(4 marks)

(b) Prepare a statement that reconciles the budgeted contribution with the actual contribution for last month and which incorporates the variances calculated in (a). (6 marks) (c) Suggest ONE possible explanation of how the two direct labour variances calculated in (a) could be interrelated. (2 marks) (12 marks)

9


[P.T.O.

2

Plaza Ltd aims to maximise profit from the two products (X and Y) which it manufactures and sells. The unit selling price for product X is £200 and the company can sell all the units that it can produce at this price. The unit selling price of product Y is £250 but, at this price, the annual demand is limited to 40,000 units. The company holds no stocks. The following product cost data are available:

Direct material (£5 per kg) Direct labour (£10 per hour) Other variable costs Total variable cost

Product X £ per unit 60 50 60 ––– 170 –––

Product Y £ per unit 40 80 90 ––– 210 –––

Next year the supply of direct material will be limited to 540,000 kg and the direct labour hours will be limited to 400,000. Required: (a) Determine the optimal production plan in units for next year and calculate the resultant total contribution. Workings should be clearly shown. Note: Graph paper is available. (8 marks) (b) Explain the term ‘shadow price’ in the context of scarce resources. State clearly which, if any, of the company’s resources will have a shadow price next year. No calculations are required. (3 marks) (11 marks)

3

Luiz Ltd operates several manufacturing processes in which stocks of work-in-progress are never held. In process K, joint products (P1 and P2) are created in the ratio 2:1 by volume from the raw materials input. In this process a normal loss of 4% of the raw materials input is expected. Losses have a realisable value of £5 per litre. The joint costs of the process are apportioned to the joint products using the sales value basis. At the end of process K, P1 and P2 can be sold for £25 and £40 per litre respectively. The following information relates to process K for last month: Raw materials input 90,000 litres at a total cost of £450,000 Actual loss incurred 4,800 litres Conversion costs incurred £216,000 Required: (a) Prepare the process K account for last month in which both the output volumes and values for each joint product are shown separately. (7 marks) The company could further process product P1 in process L to create product XP1 at an incremental cost of £3 per litre input. Process L is an existing process with spare capacity. In process L a normal loss of 8% of input is incurred which has no value. Product XP1 could be sold for £30 per litre. Required: (b) Based on financial considerations only, determine, with supporting calculations, whether product P1 should be further processed in process L to create product XP1. (3 marks) (10 marks)

10


4

Marco Ltd manufactures and sells a single product. The budgeted profit and loss statement for next year, which has been drawn up using absorption costing principles, is as follows: £000 Sales (40,000 units) Less Cost of sales: Production cost (45,000 units): Variable Fixed

Less

Closing stock (5,000 units)

Gross profit Less Non-production expenses: Variable selling costs Fixed selling, administration and distribution costs

£000 4,400

1,800 1,476 –––––– 3,276 (364) –––––– (2,912) –––––– 1,488 360 598 –––––– (958) –––––– 530 ––––––

Net profit There will be no stock at the beginning of next year. Required:

(a) Using marginal costing principles, calculate the following for next year: (i) the total budgeted contribution from sales; and (ii) the budgeted net profit.

(4 marks)

(b) Calculate the break-even point (in units) for next year.

(2 marks)

(c) Explain clearly why Marco Ltd’s net profit for next year using marginal costing principles differs from that (3 marks) under absorption costing. Under what conditions would the two net profits be the same? (9 marks)

11


[P.T.O.

5

Inez Ltd is evaluating the relevant costs of a one-off contract. The following information relates to the materials and labour requirements of the contract: Materials The contract requires 2,500 kg of material R, which is a material regularly used by the company in other production. The company has 4,000 kg of R currently in stock. Half of that stock was purchased two months ago for £24 per kg and the other half was purchased last month for £25 per kg. The supplier has recently notified the company that the price of R has risen by 8% compared with last month. Labour The contract requires 600 hours of skilled labour which is paid £10 per hour. The company’s existing skilled labour is all fully employed in the manufacture of product T and no further supply is available. The following information relates to product T: £ per unit Selling price Less Variable costs: Direct materials Skilled labour Selling

£ per unit 100

40 25 5 ––– (70) ––– 30 –––

Required: (a) Calculate the total relevant costs for the contract in respect of: (i) Material R; and (ii) Skilled labour.

(5 marks)

(b) Explain the basis you would use to determine if any production overhead costs would be relevant to the evaluation of the contract. Illustrate your answer with examples of such costs but no calculations are (3 marks) required. (8 marks)

12


Formulae Sheet


13


Answers



June 2007 Answers

Section A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

B A A A D C B C D C C A C B C C B C D C C D D C C

1

B

2

A

3

A

Contribution per unit (CPU) = (36 ÷ 0·60) × 0·40 = £24 Break-even point = (81,000 ÷ 24) = 3,375 units Margin of safety = (5,000 – 3,375) = 1,625 units

4

A

Using the high low method: Variable cost per unit = [(470,000 – 18,000) – 380,000] ÷ [24,000 – 15,000] = £8 Total fixed costs (below 20,000 units) = 380,000 – (15,000 × 8) = £260,000 Total costs for 18,000 units = 260,000 + (18,000 × 8) = £404,000

5

D

6

C

7

B

Weighted average after receipts on 7th = [(2,900 ÷ 2) + (400 × 17·50)] ÷ 500 = 16·90 Value of issues = 100 × (2,900 ÷ 200) + [(190 + 170) × 16·90] = £7,534

8

C

Reorder level – (Minimum usage in shortest lead time) + Reorder quantity = 1,800 – (50 × 11) + 2,000 = 3,250 units = Maximum stock level

9

D

10

C

11

C

£ Prime cost (300 + 400 + 100) = 800 + Production overheads (400 ÷ 8) × 40 = 2,000 + Non-production overheads (1·5 × 800) = 1,200 –––––– Total cost 4,000 ––––––

17


12

A

Absorption rate (Y) = 576,000 ÷ [(5 + 3) × 12,000] = £6 per hour Absorption rate (Z) = 288,000 ÷ [(2 + 4) × 12,000] = £4 per hour Fixed overhead cost per unit (K2) = [(3 × £6) + (4 × £4)] = £34

13

C

Total overheads (T) = 128,000 + (0·30 Total overheads (P) = 180,000 + (0·70

14

B

Closing work in progress (WIP) = (200 + 1,000 – 1,040) = 160 units WIP valuation = (160 × 0·40 × 20) = £1,280

15

C

140,000) = £170,000 × 170,000) + (0·40 × 140,000) = £355,000

×

Opening WIP value + Completion of opening WIP (200 × 0·60 × 20) + Units started and finished in the month [(1,040 – 200)

×

Total value of 1,040 completed units

£ 1,530 2,400 20] 16,800 ––––––– 20,730 –––––––

16

C

17

B

18

C

19

D

Fixed production overhead capacity variance: (Budgeted hours – Actual hours worked) × Standard fixed overhead rate = (8,000 – 8,400) × 9 = £3,600 Favourable

20

C

200 units

21

C

22

D

23

D

24

C

25

C

×

standard contribution per unit = [200

×

(40 – 30)] = £2,000 (F)

CPU = (160,000 ÷ 40,000) = £4 and variable cost per unit = (10 – 4) = £6 Units Selling price per unit CPU Total contribution £ £ £000 44,000 9·50 3·50 154 40,000 10·00 4·00 160 36,000 10·50 4·50 162 31,000 11·00 5·00 155

Component A B C D

Additional cost of buying in per unit £ 48 60 45 39

Hours per unit to manufacture 4 6 5 3

Additional cost per hour £ 12 10 9 13

Lowest additional cost per hour saved is £9 and component C should be bought in.

18


Section B 1

(a)

(i)

Actual cost

£ 532,800 Total variance £12,800 A

(ii)

Standard cost of actual production (26,000 × 20)

520,000

Actual cost

614,000 Total variance £10,000 F

Standard cost of actual production (26,000 × 24) (iii) and (iv) Actual cost

624,000

1,221,000 Wage rate variance £21,000 A (iii)

Actual hours at standard rate (150,000 × 8)

1,200,000

Standard cost of actual production (26,000 × 48)

1,248,000

Efficiency variance £48,000 F (iv)

(b) Budgeted contribution [25,000 × £(120 – 92)] Sales variances: Price [(25,000 × 120) – 2,995,000] Cost variances: Total direct materials [(a) (i)] Total variable production overhead [(a) (ii)] Direct labour: – rate [(a) (iii)] – efficiency [(a) (iv)]

£ 700,000

5,000 A 12,800 A 10,000 F 21,000 A 48,000 F ————

Total direct labour

27,000 F ———— 719,200 ————

Actual contribution (See workings)

Workings: Actual sales (25,000 units) Less: Actual production costs (26,000 units): Material + Labour + Production overhead Less: Closing stock at standard cost (1,000 × 92)

£

2,367,800 (92,000) ————— (2,275,800) ————— 719,200 —————

Actual contribution

(c)

£ 2,995,000

The rate variance is adverse (£21,000) and the efficiency variance is favourable (£48,000). A possible explanation of how these could be interrelated is that higher graded, more skilled workers, were used last month to produce gonds and were paid at a higher wage rate than standard thus giving the adverse rate variance. These higher graded, more skilled workers were more efficient and produced the gonds in less than the standard time allowed – 26,000 units should have taken 156,000 hours (that is 6 hours per unit) to manufacture whereas they were produced in only 150,000 hours thus giving a favourable efficiency variance.

19


2

(a)

Let x = the number of units of product X and let y = the number of units of product Y. Objective function (maximisation of contribution): (200 – 170) x + (250 – 210) y = 30x + 40y Constraint formulations: Materials: 12x + 8y  540,000 Labour: 5x + 8y  400,000 Demand (Y): y  40,000 Non-negative x, y  0 The constraints and objective function can be represented as follows: Y Units ’000

67·5

Materials 50·0 40·0

A B

Demand (Y) C

15·0 Labour D 0

20·0

45·0

80·0

X Units ’000

The feasible region is OABCD. By moving the objective function line (dotted) away from the origin it can be determined that the optimal point is C (the intersection of the material and labour constraint lines). The values of x and y at this point can be read from the graph or found by solving the equations for the two constraint lines simultaneously, as follows: (1) (2) Subtracting (2) from (1) gives Substituting for x in (1) gives

(12

×

12x + 8y = 5x + 8y = 7x = x = 20,000) + 8y = 8y = y =

540,000 400,000 140,000 20,000 540,000 300,000 37,500

(Materials) (Labour)

The optimal production plan for next year is to manufacture and sell 20,000 units of product X and 37,500 units of product Y. The resultant total contribution is [(20,000 × 30) + (37,500 × 40)] = £2,100,000. Alternative approach (which does not involve drawing a graph): Each production possibility is evaluated in terms of total contribution, as follows: (1) Materials. Using all the materials available (540,000 kg), 45,000 units of X or 67,500 units of Y could be produced. For Y, this exceeds the demand constraint. The contribution from 45,000 units of X is (45,000 × 30) = £1,350,000. (2) Labour. Using all the labour hours available (400,000), 80,000 units of X or 50,000 units of Y could be produced. There is insufficient material available for this quantity of X [see (1)]. In the case of Y, production is restricted to 40,000 units which uses only 320,000 hours, leaving 80,000 hours for the production of 16,000 units of X. The total contribution from this production mix is [(16,000 × 30) + (40,000 × 40)] = £2,080,000. (3) The other production mix possibility is found by solving the following equations simultaneously: 12x + 8y = 540,000 and 5x + 8y = 400,000 This calculation has been done above under the graphical approach and gives a total contribution of £2,100,000. The optimal solution is (3) as it gives the highest total contribution. It involves the production of 20,000 units of product X and 37,500 units of product Y.


(b)

3

Any scarce resource that is fully utilised in the optimal solution will have a shadow price. It would be wor th paying more than the ‘normal’ price to obtain more of the scarce resource because of the contribution foregone by not being able to satisfy the sales demand. Hence the shadow price of a so-called binding constraint is the amount by which the total contribution would increase if one more unit of the scarce resource became available. In the case of Plaza Ltd there are two binding constraints next year – materials and labour (all available materials and labour are used in the optimal solution) – therefore each will have a shadow price.

(a)

Process K Account

Materials input

Litres 90,000

Conversion costs

£ 450,000 216,000

–––––––– 90,000 ––––––––

–––––––– 666,000 ––––––––

Litres Normal loss 3,600 (4% × 90,000) Abnormal loss [W1] 1,200 (4,800 – 3,600) Output: Product P1 [W2] 56,800 Product P2 [W2] 28,400 –––––––– 90,000 ––––––––

£ 18,000 9,000

355,000 284,000 –––––––– 666,000 ––––––––

Workings: W1 Valuation of abnormal loss and combined total output of 85,200 litres (P1 + P2) is at a cost per litre of: (666,000 – 18,000) ÷ (90,000 – 3,600) = £7·50 Abnormal loss valuation: (1,200 × 7·50) = £9,000 W2 Total output (85,200) split P1 : P2 in ratio 2 : 1, P1 = 56,800 and P2 = 28,400 Combined total output of P1 + P2 valued at: (85,200 × 7·50) = £639,000 Split between P1 and P2 in the ratio of the sales value of production : P1 : P2 is (56,800 × 25) : (28,400 × 40) = 1,420 : 1,136 = 1·25 : 1 Product P1 valuation = (1·25 ÷ 2·25) × 639,000 = £355,000 Product P2 valuation = (1·00 ÷ 2·25) × 639,000 = £284,000 (b)

Assuming 100 litres of product P1: Revenue from sale of 100 litres of P1 (100 × 25) Revenue from sale of (100 × 0·92) litres of XP1 (92

£ 2,500 2,760 × 30) –––––– Additional revenue 260 Further processing costs of converting P1 into XP1 (100 × 3) 300 –––––– Additional costs exceed additional revenue by (40) –––––– Product P1 should not be further processed to make product XP1 as additional costs exceed additional revenue by £40 for every 100 litres of product P1.

21


4

(a)

£ per unit Selling price (4,400,000 ÷ 40,000) Less Variable costs: Production (1,800,000 ÷ 45,000) Selling, admin and distribution (360,000 ÷ 40,000)

40 9 ––

Contribution (i)

Total contribution (61

×

40,000)

(ii) Total contribution [as in (i)] Less Total fixed costs: Production Selling, admin and distribution

£ per unit 110

(49) ––– 61 ––– £2,440,000 £000 2,440

1,476 598 –––––

Net profit

(2,074) –––––– 366 ––––––

Alternative calculation of marginal costing net profit:

£000 530

Net profit (absorption costing) Less Increase in stock (5,000 units) at fixed production cost per unit (1,476,000 ÷ 45,000)

(164) –––––– 366 ––––––

Net profit (marginal costing) (b)

Let x = number of units produced and sold at the break-even point. At the break-even point: Total contribution = Total fixed costs 61 x = 2,074,000 x = 34,000 units

(c)

When production units and sales units are not the same in a period, that is when opening and closing stocks are different, the profits calculated under absorption costing (AC) and marginal costing (MC) will not be the same. The stock valuation under AC includes a share of the fixed production overhead costs whereas under MC stocks are valued only at variable production cost. Marco Ltd has no opening stock next year but a closing stock of 5,000 units. Under AC this closing stock will contain an element of fixed production overhead costs which will be carried forward to the following year. Whereas under MC all the fixed production overhead costs will have been written off next year against profits and not included in the closing stock valuation. The effect of this is that next year’s MC profit (£366,000) will be lower than the AC profit (£530,000). The two profits will be the same in a period when production and sales units are the same, that is when there is no change in stocks.

5

(a)

(b)

(i)

The relevant cost of material in regular usage will be its replacement cost. So the relevant cost of 2,500 kg of material R will be: (2,500 × 25 × 1·08) = £67,500.

(ii)

The relevant cost of skilled labour in short supply will be the labour cost itself plus its oppor tunity cost (lost contribution from its alternative use). The alternative use of the skilled labour is the production of product T which makes a contribution of £30 using (25 ÷ 10) = 2·5 hours of the skilled labour. So the relevant cost of 600 hours of skilled labour will be: (600 × 10) + [600 × (30 ÷ 2·5)] = £13,200.

Relevant costs are those future cash costs that change as a direct consequence of undertaking the contract. This general approach applies to variable and fixed production overhead costs as well as to materials and labour. Generally variable production overhead costs tend to be relevant because by definition they vary with activity. So if the contract involves more activity then more variable production overhead costs will be incurred. An example of a variable production overhead cost is power charged at a rate per unit used (gas or electricity). On the other hand, if the fixed production overhead costs do not change as a result of undertaking the contract then they are not relevant. Examples of such costs would be rent or rates. However, if the contract causes a step up in the fixed production overhead costs then the amount by which they change is a relevant cost to the contract.

22





50

Section B 1

2

(a)

(i) to (iv) Variances (1 mark per variance)

(b)

Budgeted contribution Sales price variance Variances from (a) Actual contribution Layout/presentation of statement

(c)

Explanation

(a)

Formulation of objective function Formulation of constraints Optimal production plan Resultant contribution

(b)

3

(a)

(b)

4

(a)

4 1 1 1 2 1 –––

6 2 –– 12 ––

1 3 3 1 –––

Explanation of shadow price Shadow prices

2 1 –––

Debit entries Normal loss Abnormal loss Outputs

1 1 / 2 2 1 2 / 2 ––– 11 / 2 1 1 / 2 –––

21 / 2 11 / 2 –––

Total contribution Net profit

Break-even point

(c)

Explanation for profit difference Condition for equal profits

3 –– 11 ––

1

Additional revenue Additional costs Decision

(b)

8

7

3 –– 10 ––

4 2

2 1 –––

23


3 –– 9 ––

13163764 ACCA F2 Management Accountant Solved Past Papers 0107

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