acca | f2 - management accountant solved past papers [01-07]

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.

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

Fundamentals Pilot Paper – Knowledge module

Pape

r F2

The Association of Chartered Certified Accountants

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

http://kaka-pakistani.blogspot.com

2

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):

0 675 1,200 1,500 1,700 Units

£TSR

TC

TVC

TFC

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 organisation.(ii) Cost accounting is that part of financial accounting which records the cash received and payments made by an

organisation.

Whichofthefollowingstatementsaretrue?

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:

Σx = 440, Σy = 330, Σx2 = 17,986, Σy2 = 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)



�

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) 16,000 22,000 Total costs ($) 135,000 170,000

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 levels of production and sales (in units) occurred:

Month1Month2 Sales 3,800 4,400 Production 3,900 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?

Absorptioncostingprofit/(loss) Marginalcostingprofit/(loss) Month1 Month2 Month1 Month2 $ $ $ $

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.

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.

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

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

Process Normallossas Input Output %ofinput litres litres F 8 65,000 58,900 G 5 37,500 35,700

For each process, was there an abnormal loss or an abnormal gain? ProcessF ProcessG A Abnormal gain 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 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 inventory 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 is NOT a feasible value for the correlation 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)



�

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?

Salespricevariance($) Salesvolumecontributionvariance($) A 5,250 Adverse 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:

Units Sales 19,000 Opening inventory of finished goods 4,000 Closing inventory of finished goods 3,000 Kg Opening inventory of raw materials 50,000 Closing inventory of raw materials 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?

EOQ Annualholdingcost A Higher 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:

Units $ Production 14,000 Fixed production costs 63,000 Sales 12,000 Fixed selling costs 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 linear programming problem:

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 Constraints (2) and (3) C Constraints (1) and (3) 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)

Y

0 X

(1)

(2)

(3)



10

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:

ProcessAccount $ $ Costs arising 624,000 Finished output (10,000 units) 480,000 Closing work-in progress (4,000 units) 144,000 624,000 624,000

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:

ProductXY 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 400 units of X and 300 units of Y C 600 units of X and 200 units of Y 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)



11

Thefollowinginformationrelatestoquestions32and33: A company uses standard costing and the standard variable overhead cost for a product is: 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?


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)



12

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:

0

GH J

K

Output

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.


A True

B False (1 mark)



1�

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 350,000 Further processing costs of product H 66,000 Product Production Closinginventory units units G 420,000 20,000 HH 330,000 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 month: Actual hours worked 5,500 Budgeted hours 5,000 Standard hours for actual production 4,800 What was the fixed production overhead capacity variance?




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 employees 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.


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 Q X Y $95,000 $82,000 $46,000 $30,000

It has been estimated that each service cost centre does work for other cost centres in the following proportions:

PQ 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)

Thefollowinginformationrelatestoquestions47and48: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)

100090

000 125 150

Material G

Material H

Product X(units)

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

MaterialG MaterialH A 10 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?

ProductX ProductY A 0 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.


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

Economic order quantity

Economic batch quantity

a=∑yn

-b∑xn

b=n∑xy-∑x∑yn∑x -(∑x)

r=n∑xy-∑x∑y

(

2 2

nn∑x -(∑x) )(n∑y -(∑y) )

=2C D

C

=2C D

C (1-DR

2 2 2 2

0

h

0

h ))

a=∑yn

-b∑xn


r=n∑xy-∑x∑y

(

2 2

nn∑x -(∑x) )(n∑y -(∑y) )

=2C D

C

=2C D

C (1-DR

2 2 2 2

0

h

0

h ))

a=∑yn

-b∑xn


r=n∑xy-∑x∑y

(

2 2

nn∑x -(∑x) )(n∑y -(∑y) )

=2C D

C

=2C D

C (1-DR

2 2 2 2

0

h

0

h ))



1�



1�

Answers



20

Pilot Paper F2 AnswersManagement Accounting

Summarised

1 C 26 B 2 B 27 D3 C 28 B 4 C 29 D5 A 30 D6 C 31 A7 C 32 B8 C 33 C 9 C 34 B10 C 35 A11 A 36 C 12 D 37 C13 B 38 B14 A 39 C 15 A 40 B16 D 41 B 17 C 42 C 18 A 43 B 19 C 44 D20 A 45 B 21 B 46 D 22 C 47 A 23 D 48 A 24 B 49 B 25 B 50 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 $108,875 Absorbed cost (30,000 × 3.50) $105,000 Under absorption $ 3,875

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



21

10 C Normalloss Actualloss Abnormalloss Abnormalgain litres litres litres litres Process F 5,200 6,100 900 – Process G 1,875 1,800 – 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 (150 × 40) + (250 × 53) = $19,250

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 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%

30 D 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



22

32 B $ Actual expenditure 235,000 Actual hours × standard rate (24,000 × 10) 240,000 Expenditure variance 5,000 Favourable

33 C $ Actual hours × standard rate 240,000 Standard cost of actual production (3,900 × 6 × 10) 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 5,000 Actual hours worked 5,500 Capacity variance 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 TotaloverheadtocostcentreP: $ Direct 95,000 Proportion of cost centre X [46,000 + (0.10 × 30,000)] × 0.50 24,500 Proportion of cost centre Y [30,000 × 0.3] 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



2�

49 B

50 A $ Value of 2,000 units transferred: 1,700 units × 10 17,000 300 units × 0.40 × 10 1,200 Opening work in progress value 1,710 19,910



QUESTION PAPER

Time allowed 3 hours

This paper is divided into two sections

Section A ALL 25 questions are compulsory and MUST beanswered

Section B ALL FIVE questions are compulsory and MUST beanswered

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

PART 1

FRIDAY 7 DECEMBER 2001

FinancialInformation forManagement

Pape

r 1.2



2

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 (i), (ii) and (iii)B (i) and (ii) onlyC (i) and (iii) onlyD (ii) and (iii) only.

2 Canberra has established the following information regarding fixed overheads for the coming month:

Budgeted information:Fixed overheads £180,000Labour hours 3,000 hoursMachine hours 10,000 hoursUnits of production 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 onthe most appropriate basis.

What will be the pre-determined overhead absorption rate?

A £16B £18C £36D £60.

3 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.


4 Which of the following statements is correct with regard to time series analysis?

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



3 [P.T.O.

5 Which of the following is NOT CORRECT?

A Cost accounting can be used for stock valuation to meet the requirements of internal reporting only.B Management accounting provides appropriate information for decision-making, planning, control and

performance evaluation.C Routine information can be used for both short-term and long run decisions.D Financial accounting information can be used for internal reporting purposes.

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

InflationSales Index£�000

Year 7 325 124Year 10 435 130

What is the real increase in the sales revenue over this period in % terms?

A 7·9%B 27·7%C 33·8%D 40·3%.

7 Darwin uses decision tree analysis in order to evaluate potential projects. The company has been looking at the launchof a new product which it believes has a 70% probability of success. The company is, however, considering undertakingan 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 £32,500B £29,000C £17,500D £50,000.

8 Which of the following relates to the cost of replacing (rather than retaining) labour due to high employee turnover?

A Improving working conditionsB Suffering the learning curve effectC Provision of a pensionD Provision of welfare services.

9 Which of the following is NOT CORRECT?

A Contract costing is appropriate if each unit of production is unique and takes a considerable length of time tocomplete.

B Batch costing refers to a system where either job or process costing techniques are used to manufacture aproduct.

C Rectification costs should be charged to production overheads if the costs can not be specifically traced to ajob.

D Job costing is required when each unit of production is unique and production is of long duration.



4

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

Which points are most likely to give the optimal solution?

A A and B onlyB A, B and C onlyC D and E onlyD 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 rateof 20% it has a negative net present value of £21,451.

What is the internal rate of return of this investment?

A 15·7%B 16·0%C 19·3%D 19·9%.

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

Production departments Service departments Total1 2 Stores Maintenance

Allocated and apportioned £17,500 £32,750 £6,300 £8,450 £65,000Work done by:Stores 60% 30% � 10%Maintenance 75% 20% 5% �

What are the total overheads included in production department 1 if the reciprocal method is used to reapportionservice centre costs?

A £27,618B £28,171C £28,398D £28,453.

A

B

CD

E

Aunits

U units



5 [P.T.O.

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

Purchase price: £15 per itemCarriage costs: £50 per orderOrdering costs: £5 per orderStorage costs: 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 153 unitsB 170 unitsC 485 unitsD 509 units.

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

The following information was available for one of the divisions:

Net profit Profit before Divisional net Cash/after tax interest and tax assets (overdraft)£�000 £�000 £�000 £�000

Division 1 47 69 104 (21)

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

A £36,600B £56,500C £58,600D £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 £2,816B £2,733C £2,541D £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.




6

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

Product Selling price per Units of outputunit from process

1 £18 10,0002 £25 20,0003 £20 20,0004 (by-product) £2 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 £4·70B £4·80C £5·00D £5·10.

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

Actual costs incurred £132,400Actual units produced 5,000 unitsActual labour hours worked 9,750 hoursBudgeted costs £135,000Budgeted units of production 4,500 unitsBudgeted labour hours 9,000 hours

Overheads are absorbed on a labour hour basis.

What was the fixed overhead capacity variance?

A £750 favourableB £11,250 favourableC £22,500 favourableD £11,250 adverse.

19 Which of the following statements is correct?

A A stores ledger account will be updated from a goods received note only.B A stores requisition will only detail the type of product required by a customer.C The term �lead time� is best used to describe the time between receiving an order and paying for it.D 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 £8per kg.

Inputs for the month were:Direct materials 3,500 kg at a total cost of £52,500Direct 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 £44,100B £49,700C £58,800D £56,525.



7 [P.T.O.

21 Camden has three divisions. Information for the year ended 30 September is as follows:

Division A Division B Division C Total£�000 £�000 £�000 £�000

Sales 350 420 150 920Variable costs 280 210 120 610

Contribution 70 210 30 310Fixed costs 262·5

Net profit 47·5

General fixed overheads are allocated to each division on the basis of sales revenue; 60% of the total fixed costs incurredby 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 A, B and CB A and B onlyC B onlyD B and C only.

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

Month Advertising expenditure Sales revenue£�000 £�000

1 1·5 302 2 273 1·75 254 3 405 2·5 326 2·75 38

The following has also been calculated:

S(Advertising expenditure) = £13,500S(Sales revenue) = £192,000S(Advertising expenditure x Sales revenue) = £447,250,000S(Sales revenue2) = £6,322,000,000S(Advertising expenditure2) = £32,125,000

What is the value of b, i.e. the gradient of the regression line?

A 0·070B 0·086C 8·714D 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




8

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

Process account

Units £ Units £Opening WIP 250 3,000 Normal loss 225 450Input: Output 4,100Materials 4,500 22,500 Abnormal Loss 275Labour 37,500 Closing WIP 150

4,750 4,750

Work in progress has the following level of completion:

Material LabourOpening WIP 100% 40%Closing WIP 100% 30%

The company uses the FIFO method for valuing the output from the process and all losses occurred at the end of theprocess.

What were the equivalent units for labour?

A 4,380 unitsB 4,270 unitsC 4,320 unitsD 4,420 units.

25 Sydney is considering making a monthly investment for her son who will be five years old on his next birthday. Shewishes to make payments until his 18th birthday and intends to pay £50 per month into an account yielding an APR of12·68%. She plans to start making payments into the account the month after her son�s fifth birthday.

How much will be in the account immediately after the final payment has been made?

A £18,847B £18,377C £17,606D £18,610.

(50 marks)



9 [P.T.O.

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 establisha 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 10 (4 kg at £2·50/kg)Material 2 7 (1 kg at £7/kg)

Direct labour 13 (2 hours at £6·50/hour)Fixed overheads 7 (2 hours at £3·50/hour)

37

Required:

(a) Using the standard costs calculate two different cost plus prices using two different bases and explain anadvantage and disadvantage of each method. (6 marks)

(b) Give two other possible pricing strategies that could be adopted and describe the impact of each one on theprice of the product. (4 marks)

(10 marks)

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

Budget Production for the year 12,000 units

Standard cost per unit: £Direct materials (3 kg at £10/kg) 30Direct labour (4 hours at £6/hour) 24Overheads (4 hours at £2/hour) 8

62

Actual Actual production units for year 11,500 unitsLabour � hours for the year 45,350 hours

� cost for the year £300,000Materials � kg used in the year 37,250 kg

� cost for the year £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 betweenthese variances. (3 marks)

(10 marks)



10

3 Toowomba manufactures various products and uses CVP analysis to establish the minimum level of production toensure profitability.

Fixed costs of £50,000 have been allocated to a specific product but are expected to increase to £100,000 onceproduction exceeds 30,000 units, as a new factory will need to be rented in order to produce the extra units. Variablecosts 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, costsand sales levels is as follows:

Product A BMaterials required

X (kg) 2 3Y (litres) 1 4

Labour hours requiredSkilled (hours) 4 2Semi skilled (hours) 2 5

Sales level (units) 2,000 1,500Opening stocks (units) 100 200

Closing stock of materials and finished goods will be sufficient to meet 10% of demand. Opening stocks of material Xwas 300 kg and for material Y was 1,000 litres. Material prices are £10 per kg for material X and £7 per litre formaterial 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) production (units);(b) materials usage (kg and litres);(c) materials purchases (kg, litres and £); and(d) labour (hours and £).

(10 marks)



11 [P.T.O.

5 Surat is a small business which has the following budgeted marginal costing profit and loss account for the month ended31 December 2001:

£�000 £�000Sales 48Cost of sales:

Opening stock 3Production costs 36Closing stock (7)

(32)

16Other variable costs:

Selling (3·2)

Contribution 12·8Fixed costs:

Production overheads (4)Administration (3·6)Selling (1·2)

Net profit 4·0

The standard cost per unit is:

£Direct materials (1 kg) 8Direct labour (3 hours) 9Variable overheads (3 hours) 3

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 andabsorbed on the normal level of activity of units 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 costingrather than absorption costing. (4 marks)

(10 marks)



12

Formulae Sheet



13 [P.T.O.

Present Value Table

Present value of 1 i.e. (1 + r)�n

Where r = discount raten = number of periods until payment

Discount rate (r)

Periods(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 12 0·980 0·961 0·943 0·925 0·907 0·890 0·873 0·857 0·842 0·826 23 0·971 0·942 0·915 0·889 0·864 0·840 0·816 0·794 0·772 0·751 34 0·961 0·924 0·888 0·855 0·823 0·792 0·763 0·735 0·708 0·683 45 0·951 0·906 0·863 0·822 0·784 0·747 0·713 0·681 0·650 0·621 5

6 0·942 0·888 0·837 0·790 0·746 0·705 0·666 0·630 0·596 0·564 67 0·933 0·871 0·813 0·760 0·711 0·665 0·623 0·583 0·547 0·513 78 0·923 0·853 0·789 0·731 0·677 0·627 0·582 0·540 0·502 0·467 89 0·941 0·837 0·766 0·703 0·645 0·592 0·544 0·500 0·460 0·424 9

10 0·905 0·820 0·744 0·676 0·614 0·558 0·508 0·463 0·422 0·386 10

11 0·896 0·804 0·722 0·650 0·585 0·527 0·475 0·429 0·388 0·305 1112 0·887 0·788 0·701 0·625 0·557 0·497 0·444 0·397 0·356 0·319 1213 0·879 0·773 0·681 0·601 0·530 0·469 0·415 0·368 0·326 0·290 1314 0·870 0·758 0·661 0·577 0·505 0·442 0·388 0·340 0·299 0·263 1415 0·861 0·743 0·642 0·555 0·481 0·417 0·362 0·315 0·275 0·239 15

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 12 0·812 0·797 0·783 0·769 0·756 0·743 0·731 0·718 0·706 0·694 23 0·731 0·712 0·693 0·675 0·658 0·641 0·624 0·609 0·593 0·579 34 0·659 0·636 0·613 0·592 0·572 0·552 0·534 0·516 0·499 0·482 45 0·593 0·567 0·543 0·519 0·497 0·476 0·456 0·437 0·419 0·402 5

6 0·535 0·507 0·480 0·456 0·432 0·410 0·390 0·370 0·352 0·335 67 0·482 0·452 0·425 0·400 0·376 0·354 0·333 0·314 0·296 0·279 78 0·434 0·404 0·376 0·351 0·327 0·305 0·285 0·266 0·249 0·233 89 0·391 0·361 0·333 0·308 0·284 0·263 0·243 0·225 0·209 0·194 9

10 0·352 0·322 0·295 0·270 0·247 0·227 0·208 0·191 0·176 0·162 10

11 0·317 0·287 0·261 0·237 0·215 0·195 0·178 0·162 0·148 0·135 1112 0·286 0·257 0·231 0·208 0·187 0·168 0·152 0·137 0·124 0·112 1213 0·258 0·229 0·204 0·182 0·163 0·145 0·130 0·116 0·104 0·093 1314 0·232 0·205 0·181 0·160 0·141 0·125 0·111 0·099 0·088 0·078 1415 0·209 0·183 0·160 0·140 0·123 0·108 0·095 0·084 0·074 0·065 15



14

Annuity Table

Present value of an annuity of 1 i.e.

Where r = discount raten = number of periods

Discount rate (r)

Periods(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 12 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 23 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2·487 34 3·902 3·808 3·717 3·630 3·546 3·465 3·387 3·312 3·240 3·170 45 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3·890 3·791 5

6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4·486 4·355 67 6·728 6·472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 78 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 89 8·566 8·162 7·786 7·435 7·108 6·802 6·515 6·247 5·995 5·759 9

10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6·418 6·145 10

11 10·37 9·787 9·253 8·760 8·306 7·887 7·499 7·139 6·805 6·495 1112 11·26 10·58 9·954 9·385 8·863 8·384 7·943 7·536 7·161 6·814 1213 12·13 11·35 10·63 9·986 9·394 8·853 8·358 7·904 7·487 7·103 1314 13·00 12·11 11·30 10·56 9·899 9·295 8·745 8·244 7·786 7·367 1415 13·87 12·85 11·94 11·12 10·38 9·712 9·108 8·559 8·061 7·606 15

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 12 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 23 2·444 2·402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 34 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2·690 2·639 2·589 45 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5

6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3·498 3·410 3·326 67 4·712 4·564 4·423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 78 5·146 4·968 4·799 4·639 4·487 4·344 4·207 4·078 3·954 3·837 89 5·537 5·328 5·132 4·946 4·772 4·607 4·451 4·303 4·163 4·031 9

10 5·889 5·650 5·426 5·216 5·019 4·833 4·659 4·494 4·339 4·192 10

11 6·207 5·938 5·687 5·453 5·234 5·029 4·836 4·656 4·486 4·327 1112 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4·439 1213 6·750 6·424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 1314 6·982 6·628 6·302 6·002 5·724 5·468 5·229 5·008 4·802 4·611 1415 7·191 6·811 6·462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15

End of Question Paper

1 � (1 + r)�n

�� r



Answers



Part 1 Examination � Paper 1.2Financial 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 hour10,000

3 D Service organisations are more likely to use ABC.

4 D The trend is the general upward or downward movement of the 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 figure124

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 short 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% +é 3,664 ù

x (20% � 15%)ê úê úê úë 3,664 + 21,451 û

= 15·7%

17

( )



18

12 C S = 6,300 + 0·05MM = 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 =2ChD

=2 x (50 + 5) x 4,000

= 509 unitsÖ Co Ö (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 orPV = (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 x20 x 20,000

=100,000

= £5/unit1,080,000 20,000 units

18 B OAR/labour hour =135,000

= £15/labour hour9,000

Capacity variance:Actual 9,750 hoursBudget 9,000 hours

750 hoursx £15 = £11,250 favourable

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

20 C Process account

Units £ Units £Materials 3,500 52,000 Normal loss 875 7,000Labour 9,625Abnormal gain 175 Output 2,800

3,675 3,675

Cost/unit =52,500 + 9,625 � 7,000

=55,125

= £213,500 � 875 2,625

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



19

21 B Specific fixed overheads per division = 262,500 x 60%

=157,500

= 52,5003

Division A Division B Division C Total£�000 £�000 £�000

Contribution 70·5) 210·5) 30·5) 310·5)Fixed costs � specific (52·5) (52·5) (52·5) (157·5)

Profit after specific costs 17·5) 157·5) (22·5) 245·5)

22 C (6 x 447,250,000) � (13,500 x 192,000)= 8·714

(6 x 32,125,000) � 13,5002

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 UnitsTotal Labour

Opening WIP 250 150 = 60% x 250Units started and finished 3,850 3,850

4,100Normal loss 225 �Abnormal loss 275 275Closing WIP 150 45 = 30% x 45

4,750 4,320

25 D12

Ö1·1268 = 1·01

50 x 1·0113x12 � 1 = £18,610

1·01 � 1



20

Section B

1 (a) Marginal cost plus = £30 x 120% = £36Advantage � 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 = £37 x 120% = £44·40Advantage � 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

Disadvantage � fixed costs need to be allocated to the cost unit which may be ambiguous� ignores price/demand relationship

(b) 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.

2 (a) £Budgeted prime cost (30 + 24) x 12,000 (648,000)Cost volume variance (500 x 54) 27,000

(621,000)MaterialsPrice: Did cost £345,000

Should cost (37,250 x £10) £372,500

27,500FUsage: Did use 37,250 kg

Should use (11,500 x 3) 34,500 kg

2,750 kgx £10 (27,500)A

LabourRate: Did cost £300,000

Should cost (45,350 x £6) £272,100

(27,900)AEfficiency: Did take 45,350 hours

Should take (11,500 x 4 hours) 46,000 hours

650 hoursx £6 3,900F

Actual prime cost (£300,000 + £345,000) (645,000)

(b) Labour rate variance � this shows that labour were paid at a higher rateLabour efficiency variance � this shows that labour worked harder than expected as they made more in less timeInterdependence � since labour were paid more they were motivated to work harder



21

3 (a) (i) Total cost for 30,000 units or less = 50,000 + 5 x Q(ii) Total cost for more than 30,000 units = 100,000 + 5 x Q

(b)

(c) Implications of having two breakeven points: the product is only profitable between 20,000 and 30,000 units and above40,000 units, so the production plan should be set accordingly.

4 (a) Production budgetProduct A BSales 2,000 1,500Opening stock (100) (200)Closing stock(10% x sales level) 200 150

2,100 1,450

(b) Materials usage budgetMaterial type X Y

Kg LitresUsage(2,100 x 2 + 1,450 x 3) 8,550(2,100 x 1 + 1,450 x 4) 7,900

(c) Materials purchases budgetUsage 8,550 7,900Opening stock (300) (1,000)Closing stock (W) 850 800

9,100 7,700x £10 x £7

£91,000 £53,900

(d) Labour budgetSkilled Semi skilledhours hours

(2,100 x 4 + 1,450 x 2) 11,300(2,100 x 2 + 1,450 x 5) 11,450

x £12 x £8

£135,600 £91,600

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



22

5 (a)£�000 £�000

Sales 48·6Cost of sales:

Opening stock (150 x 22) 3·3Production costs

Variable costs 36·0Fixed costs (1,800 x 2) 3·6

42·9Closing stock (350 x 22) (7·7)

Under absorption (W2) 0·4

(35·6)

Gross profit 12·4Administration (3·6)Selling (1·2 + 3·2) (4·4)

Net profit 4·4

Workings1. Standard cost per unit

£Direct variable costs 20

Fixed overheads£4,000

= 22,000 units

22

2. Budgeted costs £4,000Absorbed fixed overheads £3,600

Budgeted under absorbed £400

(b) £Profit under absorption costing 4,400Add fixed costs in opening stock (150 x 2) 300Less fixed costs in closing stock (350 x 2) (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 thebusiness may not have significant fixed overheads and so marginal costing could be more appropriate.



23

Part 1 Examination � Paper 1.2Financial Information for Management Marking Scheme

MarksSection A

Each question within this section is worth 2 marks 25 x 2

50

Section B1 (a) Calculation of marginal cost plus 1

Advantage of marginal cost plus 1Disadvantage of marginal cost plus 1Calculation of fixed cost plus 1Advantage of fixed cost plus 1Disadvantage of fixed cost plus 1

6

(b) Pricing strategy 1Impact of pricing strategy on price 1

2Two strategies and impacts required 2 x 2 4

10

2 (a) Calculation of budgeted prime cost 1Calculation of cost volume variance 1Calculation of the materials price variance 1Calculation of the materials usage variance 1Calculation of the labour rate variance 1Calculation of the labour efficiency variance 1Calculation of actual prime cost ½Well presented reconciliation statement ½

7

(b) What the rate variance indicates 1What the efficiency variance indicates 1Discussion of interdependence 1

3

10

3 (a) (i) Total cost equation at 30,000 units or less 1(ii) Total cost equation at above 30,000 units 1

2(b) Labelled axes on graph ½

Plotting the total cost line correctly 2Plotting the total revenue line correctly 1Breakeven point at 20,000 indicated 1Breakeven point at 40,000 indicated 1Good presentation ½

6(c) Discussion of implications 2

10



24

Marks4 (a) Production budget

Sales units for both products ½Opening stock figures for both products ½Closing stock figure for product A ½Closing stock figure for product B ½

2(b) Materials usage budget

Figure for material X 1Figure for material Y 1

2(c) Material purchases budget

Opening stock figures for both materials ½Closing stock figure for material X 1Closing stock figure for material Y 1Showing material costs per kg or litre ½

3(d) Labour budget

Total hours for skilled labour 1Total hours for semi skilled labour 1Showing labour cost per hour ½

2½Presentation ½

10

5 (a) Calculation of FOAR ½Calculation of standard cost under AC ½Opening stock units figure ½Opening stock valuation ½Calculation of production units ½Fixed production costs absorbed ½Closing stock units figure ½Closing stock valuation ½Under absorption calculation 1Selling costs ½Presentation ½

6(b) Reconciliation statement

Absorption costing profit ½Fixed costs in opening stock ½Fixed costs in closing stock ½Marginal costing profit ½

Discussion of why MC could be preferred 2

4

10




PART 1

FRIDAY 14 JUNE 2002

QUESTION PAPER





Pape

r 1.2



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 AverageEarnings Index (AEI). He has obtained the following:

Year Jim’s wage increase Retail Price Average Earningson prior year Index Index

%1998 – 157·5 108·01999 5·0 162·9 113·52000 3·0 165·4 119·02001 4·0 170·3 124·4

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(to one decimal place). (2 marks)

(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)

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


2 Mike Limited has been asked to quote a price for a one off contract. Management have drawn up the followingschedule:

£Contract price (cost plus 20%) 60,780Costs:Materials: V (300 kg at £10/kg) 3,000Materials: I (1,000 litres at £7/litre) 7,000Materials: C (550 kg at £3/kg) 1,650Labour: Department 1 (1,500 hours at £8/hour) 12,000Labour: Department 2 (2,000 hours at £10/hour) 20,000Overheads: absorbed on a budgeted labour hour basisLabour: (3,500 hours at £2/labour hour) 7,000

Total costs 50,650

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 althoughcurrent 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 currentstocks are not used for the contract then they would be used as a substitute for material Y inanother 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 beretained.

Department 2 This department is currently working at full capacity. Mike Limited could get the men to workovertime to complete the contract paid at time and a half, or they could divert labour hours fromthe 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 costsincurred.

Required:

Calculate the minimum contract price that Mike Limited could accept to breakeven using relevant costingtechniques.

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


4

4 (a) James is considering paying £50 into a fund on a monthly basis for 10 years starting in one year’s time. Theinterest earned will be 1% per month. Once all of these payments have been made the investment will betransferred immediately to an account that will earn interest at 15% per annum until maturity. The fund maturesfive 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 informationrecommend 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’sprocess 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 100 units, 30% complete Closing work in progress 200 units, 40% completeNormal loss 10% of input valued at £2 per unitOutput 1,250 units

The losses were as expected and Adam has a record of there being 150 units scrapped during the month. All materialsare input at the start of the process. The cost per equivalent unit for materials was £2·60 and for conversion costswas £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 marks)

(10 marks)



5 [P.T.O.

Formulae Sheet



6

��

��

��

��

!�" �# $# �# %# &# '# �# (# )# ��#

� �*))� �*)(� �*)�� *)'$ �*)&$ �*)%� �*)�& �*)$' �*)�� *)�) �

$ �*)(� �*)'� �*)%� �*)$& �*)�� *()� �*(�� *(&� �*(%$ �*($' $

� �*)�� *)%$ �*)�& �*(() �*('% �*(%� �*(�' �*�)% �*��$ �*�&� �

% �*)'� �*)$% �*((( �*(&& �*($� �*�)$ �*�'� �*��& �*��( �*'(� %

& �*)&� �*)�' �*('� �*($$ �*�(% �*�%� �*�� *'(� �*'&� �*'$� &

' �*)%$ �*((( �*(�� *�)� �*�%' �*��& �*''' �*'�� *&)' �*&'% '

� �*)�� *(�� *(�� *�'� �*�� *''& �*'$� �*&(� �*&%� �*&��

( �*)$� �*(&� �*�() �*�� *'�� *'$� �*&($ �*&%� �*&�$ �*%'� (

) �*)�% �*(�� *�'' �*�� *'%& �*&)$ �*&%% �*&�� *%'� �*%$% )

�� *)�& �*($� �*�%% �*'�' �*'�% �*&&( �*&�( �*%'� �*%$$ �*�(' ��

�� *()' �*(�% �*�$$ �*'&� �*&(& �*&$� �*%�& �*%$) �*�(( �*�&� ��

�$ �*((� �*�(( �*�� *'$& �*&&� �*%)� �*%%% �*�)� �*�&' �*��) �$

�� *(�) �*�� *'(� �*'�� *&�� *%') �*%�& �*�'( �*�$' �*$)� ��

�% �*(�� *�&( �*''� �*&�� *&�& �*%%$ �*�(( �*�%� �*$)) �*$'� �%

�& �*('� �*�%� �*'%$ �*&&& �*%(� �*%�� *�'$ �*��& �*$�& �*$�) �&

!�" ��# �$# ��# �%# �&# �'# ��# �(# �)# $�#

� �*)�� *()� �*((& �*(�� *(�� *('$ �*(&& �*(%� �*(%� �*(��

$ �*(�$ �*�)� �*�(� �*�') �*�&' �*�%� �*�� *��( �*��' �*')% $

� �*�� *��$ �*')� �*'�& �*'&( �*'%� �*'$% �*'�) �*&)� �*&�) �

% �*'&) �*'�' �*'�� *&)$ �*&�$ �*&&$ �*&�% �*&�' �*%)) �*%($ %

& �*&)� �*&'� �*&%� �*&�) �*%)� �*%�' �*%&' �*%�� *%�) �*%�$ &

' �*&�& �*&�� *%(� �*%&' �*%�$ �*%�� *�)� �*�� *�&$ �*��& '

� �*%($ �*%&$ �*%$& �*%�� *��' �*�&% �*�� *��% �*$)' �*$�) �

( �*%�% �*%�% �*��' �*�&� �*�$� �*��& �*$(& �*$'' �*$%) �*$�� (

) �*�)� �*�'� �*�� *��( �*$(% �*$'� �*$%� �*$$& �*$�) �*�)% )

�� *�&$ �*�$$ �*$)& �*$�� *$%� �*$$� �*$�( �*�)� �*��' �*�'$ ��

�� *�� *$(� �*$'� �*$�� *$�& �*�)& �*��( �*�'$ �*�%( �*��& ��

�$ �*$(' �*$&� �*$�� *$�( �*�(� �*�'( �*�&$ �*�� *�$% �*��$ �$

�� *$&( �*$$) �*$�% �*�($ �*�'� �*�%& �*�� *��' �*��% �*�)� ��

�% �*$�$ �*$�& �*�(� �*�'� �*�%� �*�$& �*�� *�)) �*�(( �*��( �%

�& �*$�) �*�(� �*�'� �*�%� �*�$� �*��( �*�)& �*�(% �*��% �*�'& �&

Present Value Table



7

��

��

��

��

!�" �# $# �# %# &# '# �# (# )# ��#

� �*))� �*)(� �*)�� *)'$ �*)&$ �*)%� �*)�& �*)$' �*)�� *)�) �

$ �*)�� *)%$ �*)�� *((' �*(&) �*(�� *(�( �*�(� �*�&) �*��' $

� $*)%� $*((% $*($) $*��& $*�$� $*'�� $*'$% $*&�� $*&�� $*%(� �

% �*)�$ �*(�( �*�� *'�� *&%' �*%'& �*�(� �*��$ �*$%� �*�� %

& %*(&� %*�� %*&(� %*%&$ %*�$) %*$�$ %*�� *))� �*()� �*�)� &

' &*�)& &*'�� &*%�� &*$%$ &*��' %*)�� %*�'� %*'$� %*%(' %*�&& '

� '*�$( '*%�$ '*$�� '*��$ &*�(' &*&($ &*�() &*$�' &*�� %*('( �

( �*'&$ �*�$& �*�$� '*�� '*%'� '*$�� &*)�� &*�%� &*&�& &*��& (

) (*&'' (*�'$ �*�(' �*%�& �*��( '*(�$ '*&�& '*$%� &*))& &*�&) )

�� )*%�� (*)(� (*&�� (*�� *�$$ �*�'� �*�$% '*�� '*%�( '*�%& ��

�� *�� )*�(� )*$&� (*�'� (*��' �*((� �*%)) �*��) '*(�& '*%)& ��

�$ ��*$' ��*&( )*)&% )*�(& (*('� (*�(% �*)%� �*&�' �*�'� '*(�% �$

�� $*�� *�& ��*'� )*)(' )*�)% (*(&� (*�&( �*)�% �*%(� �*��

�% ��*�� $*�� *�� *&' )*()) )*$)& (*�%& (*$%% �*�(' �*�'� �%

�& ��*(� �$*(& ��*)% ��*�$ ��*�( )*��$ )*��( (*&&) (*�'� �*'�' �&

!�" ��# �$# ��# �%# �&# �'# ��# �(# �)# $�#

� �*)�� *()� �*((& �*(�� *(�� *('$ �*(&& �*(%� �*(%� �*(��

$ �*�� *')� �*''( �*'%� �*'$' �*'�& �*&(& �*&'' �*&%� �*&$( $

� $*%%% $*%�$ $*�'� $*�$$ $*$(� $*$%' $*$�� $*��% $*�%� $*��' �

% �*��$ �*�� $*)�% $*)�% $*(&& $*�)( $*�%� $*')� $*'�) $*&() %

& �*')' �*'�& �*&�� *%�� *�&$ �*$�% �*�)) �*�$� �*�&( $*))� &

' %*$�� %*�� *))( �*(() �*�(% �*'(& �*&() �*%)( �*%�� *�$' '

� %*��$ %*&'% %*%$� %*$(( %*�'� %*��) �*)$$ �*(�$ �*��' �*'�& �

( &*�%' %*)'( %*�)) %*'�) %*%(� %*�%% %*$�� %*��( �*)&% �*(�� (

) &*&�� &*�$( &*��$ %*)%' %*��$ %*'�� %*%&� %*�� %*�'� %*�� )

�� &*(() &*'&� &*%$' &*$�' &*��) %*(�� %*'&) %*%)% %*��) %*�)$ ��

�� '*$�� &*)�( &*'(� &*%&� &*$�% &*�$) %*(�' %*'&' %*%(' %*�$� ��

�$ '*%)$ '*�)% &*)�( &*''� &*%$� &*�)� %*)(( %*�)� %*'�� %*%�) �$

�� '*�&� '*%$% '*�$$ &*(%$ &*&(� &*�%$ &*��( %*)�� %*��& %*&��

�% '*)($ '*'$( '*��$ '*��$ &*�$% &*%'( &*$$) &*��( %*(�$ %*'�� %

�& �*�)� '*(�� '*%'$ '*�%$ &*(%� &*&�& &*�$% &*�)$ %*(�' %*'�& �&

� - !� . "-�////--


Annuity Table



Answers



Part 1 Examination – Paper 1.2FInancial Information for Management Answers

Section B1 (a) Earnings

1998 = £150 (given in the question)1999 = £150 × 1·05 = £157·52000 = £157·5 × 1·03 = £162·22001 = £162·2 × 1·04 = £168·7

(b)Year (i) RPI (ii) AEI

1998 162·2 =150

× 170·3 172·8 =150

× 124·4157·5 108

1999 164·7 =157·5

× 170·3 172·6 =157·5

× 124·4162·9 113·5

2000 167·0 =162·2

× 170·3 169·6 =162·2

× 124·4165·4 119

2001 168·7 =168·7

× 170·3 168·7 =168·7

× 124·4170·3 124·4

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

2 Relevant cost statementNote £

Material V 1 900Material I 2 6,500Material C 3 2,050Department 1 4 –Department 2 5 26,000Overheads 6 –

Minimum contract price 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 relevantcost 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 productionprocess.

Therefore the relevant cost for the stock of 300 kg is = 300 ×£7

= £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 = £30,000Cost of diverting labour = 2,000 × (£10 + £3) = £26,000It 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 contractthere is no relevant cost for overheads.



12

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 ofwhat 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 organisationis heading over a number of years, for example a five year plan would be a longterm plan. It presents the organisation with an idea of the broad direction that ithopes to be heading in.

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

(b) 1. identify objectives – defines what the organisation hopes to achieve2. look at alternative courses of action – looks at different ways that the goals might be achieved3. evaluate the alternatives using relevant data – look at the information that has been obtained4. select the most appropriate course of action – from information make the best choice to achieve corporate goals5. implement the long term plan in the form of a budget – prepare detailed budget6. monitor actual results – collect data regarding what is actually happening with the organisation7. compare actual to planned results – look at actual versus budget and see whether control action needs to be taken

4 (a) Future value

= £50 × = £50 × 230·039 = £11,501·95

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 1APR = 9·38%, then the monthly rate is 1·0938 – 1 = 0·0075%

£2,000 = A1 ×

£2,000 = A1 × 31·447

∴ A1 =£2,000

= £63·6031·447

Loan 2

APR = 12·68%, then the monthly rate is 1·1268 – 1 = 0·01%

£2,000 = A2 ×

£2,000 = A2 × 21·243

∴ A2 =£2,000

= £94·1521·243

(ii) Loan 1 total amount repaid = £63·60 × 36 = £2,289·6 ≈ £2,290Loan 2 total amount repaid = £94·15 × 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 1over the three year period.

1 01 11 01 1

10 12⋅⋅

× ––

10 0075

10 0075 1 007536⋅

⋅ × ⋅

–

10 001

10 001 1 0124⋅

⋅ × ⋅

–

1–12

1–12



13

5 (a)Process account

Units £ Units £Opening WIP 100 Normal loss 15Input 1,500β Output 1,250

Closing WIP 200

1,600 1,600

Or from the normal loss figure =150 units

= 1,500 units0·1

(b)Statement of equivalent Total Material Conversion units costsOpening WIP (to complete) 100 – 70

= 100 × 70% = 100 × 70%Units started and finished β 1,150 1,150 1,150

Output 1,250Normal loss 150 – –Closing WIP 200 200 80

= 200 × 10% = 200 × 10%

1,350 1,300

(c)Costs incurred in period Materials Conversion

costs £ £

3,510 1,950= 1,350 × 2·60 = 1,300 × £1·50

Add scrap proceeds from 300normal loss = 150 × £2

3,810 1,950



15

Part 1 examination – Part 1.2Financial Information for Management Marking Scheme

Marks1 (a) Noting Jim’s wages for 1998 1/2

Calculating the figure for 1999 1/2Calculating the figure for 2000 1/2Calculating the figure for 2001 1/2

— 2

(b) Calculating the wage figures adjusted for the RPI for:1998 1/21999 1/22000 1/22001 1/2

Calculating the wage figure adjusted for the AEI for:1998 1/21999 1/22000 1/22001 1/2

— 4

(c) Comment on Jim’s wages compared to the:RPI 1AEI 1

— 2

(d) Mentioning the words ‘base period’ 1Explaining what this means 1

— 2—10—



16

Marks2 Calculation of relevant cost for material V 1/2

Explanation of historic cost as sunk 1/2Explanation of relevant cost being opportunity cost relatingto lost scrap proceeds 1/2

Calculation of relevant cost for material I 1/2Explanation of relevant costs being current purchase costas in continuous use in business 1/2

Calculation of relevant cost for material C 1Explanation of need to buy extra units and relevant cost 1/2Explanation of the relevant cost of the alternative use for material C 1/2

Calculation of relevant cost of labour in dept 1 1/2Explanation of there being spare capacity so no relevantcost 1/2

Calculation of relevant cost of labour in dept 2 1Explanation including the need to compare overtimecosts with cost of diverting labour 1

Calculation of relevant cost of overheads 1/2Explanation of there being no incremental costs 1/2

Presentation of statement and notes 1Stating minimum price being the total of the relevant costs 1/2— 10

–—

3 (a) Definition of short term plan to include the word ‘budget’and to mention a time period 1Definition of a long term plan to include the word ‘strategy’and to mention a time period 1Explanation to include short term plan included within the long term plan 1

— 3

(b) 1/2 for each stage in the planning process 31/21/2 for a brief explanation of each stage 31/2

––— 7–—10–—



Marks4 (a) Using the correct formula 1/2

Using an interest rate of 1% 1/2Using n = 120 time periods 1/2Putting numbers into formula and generating a solution 1/2Compounding forward for an extra 5 years 1/2Using correct rate of 15% 1/2

––– 3

(b) (i) Loan 1Calculating the correct monthly rate 1/2Using the correct formula 1/2Using the correct time period 1/2Calculating the correct discount factor 1/2Calculating the correct annuity figure 1/2

Loan 2Calculating the correct monthly rate 1/2Using the correct formula 1/2Using the correct time period 1/2Calculating the correct discount factor 1/2Calculating the correct annuity figure 1/2

––– 5

(ii) Calculation of total repaid amount for loan 1 1/2Calculation of total repaid amount for loan 2 1/2Explanation regarding which one Doug shouldchoose based on these figures 1

––– 2–––10–––

5 (a) Calculation of input units 1Stating the input units 1

––– 2

(b) Equivalent units for opening WIP 1Calculation of units started and finished 1/2Equivalent units for started and finished units 1/2Equivalent units for normal loss 1Equivalent units for closing WIP 1

––– 4

(c) Calculation of costs for materials 1Adjusting for scrap proceeds 1Calculation of costs for conversion costs 1Stating the input costs 1

––– 4–––10–––




PART 1


QUESTION PAPER





Pape

r 1.2



Section A – ALL 25 questions are compulsory and MUST be attemptedPlease 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:

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

ABCD

2 A company has established a budgeted sales revenue for the forthcoming period of £500,000 with an associatedcontribution of £275,000. Fixed production costs are £137,500 and fixed selling costs are £27,500.

What is the breakeven sales revenue?

A £75,625B £90,750C £250,000D £300,000

2

£Costs/revenue

UnitsA B C D

Total revenue

Total costs



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 ona straight line basis over five years.

What is the relevant cost of the machine for the contract?

A £140,000B £150,000C £165,000D £175,000

4 A company uses process costing to value output. During the last month the following information was recorded:

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

What was the value of the input?

A £22,650B £21,900C £21,600D £21,150

3 [P.T.O.



4

5 A company produces three products which have the following details:Product

I II IIIPer unit Per unit Per unit

Direct materials (at £5/kg) 8 kg 5 kg 6 kg Contribution per unit £35 £25 £48Contribution per kg of material £4·375 £5 £8Demand (excluding special contract) (units) 3,000 5,000 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?

ProductI II III

A 1,000 4,600 2,000B 1,000 3,000 2,000C 2,875 – 2,000D 3,000 2,200 –

The following information relates to questions 6 and 7:

A company has established the following budgeted fixed overheads for the forthcoming period:

£’000 Bases of apportionment

Heating and Lighting 12 Cubic capacityWelfare costs 7 Number of employeesPower 42 Kwh usage

––Total 61

––

Other information:Department 1 Department 2 Maintenance Total

Cubic capacity (m3) 6,000 7,500 2,500 16,000Employees (number) 20 30 6 56Power (kwh usage) 35,000 25,000 60,000Labour hours 28,000 48,500 76,500Machine hours 40,000 39,000 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:

Department 1 Department 2 Maintenance£ £ £

Heat and Light 4,500 5,625 1,875Welfare 2,500Power 24,500

–––––––Total 31,500

–––––––



6 What would be the total cost allocated and apportioned to Department 2 excluding the reapportionment of themaintenance costs?

A £21,250B £26,875C £27,625D £29,500

7 What would be the overhead absorption rate in Department 1 (to 3 decimal places)?A £0·788/machine hourB £0·814/machine hourC £1·125/labour hourD £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 (i) and (ii) onlyB (i) and (iii) onlyC (ii) and (iii) onlyD (i), (ii) and (iii)

9 The following relate to procedures for materials:

1. Check the goods received note2. Raise a stores requisition note3. Update the stores ledger account for the purchase4. Raise a purchase order

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

A 4, 2, 1, 3B 2, 1, 3, 4C 4, 1, 3, 2D 1, 4, 3, 2

5 [P.T.O.



10 A company has a budget for two products A and B as follows:

Product A Product BSales (units) 2,000 4,500Production (units) 1,750 5,000

Labour:Skilled at £10/hour 2 hours/unit 2 hours/unitUnskilled at £7/hour 3 hours/unit 4 hours/unit

What is the budgeted cost for unskilled labour for the period?

A £105,000B £135,000C £176,750D £252,500

11 Augustine wishes to take out a loan for £2,000. The interest rate on this loan would be 10% per annum andAugustine wishes to make equal monthly repayments, comprising interest and principal, over three years starting onemonth after the loan is taken out.

What would be the monthly repayment on the loan (to the nearest £)?

A £56B £64C £66D £67

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

A The number of units worked on during a period including the opening and closing stock units.B The number of whole units worked on during a period ignoring the levels on completion of opening and closing

stock units.C The number of effective whole units worked on during a period allowing for the levels of completion of opening

and closing stock units.D 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 2,500Direct labour 5,000Production overheads 1,000Selling costs 1,250

––––––Total cost 9,750Sales revenue 17,500

––––––Profit 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 £15,500B £16,250C £16,500D £17,750

6



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

Period Sales Total cost(units) £

1 225 2,3002 150 1,5003 350 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 £2,120B £1,800C £1,695D £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.



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

Prices Units sold£/unit

Time 0 Product 1 75 300Product 2 50 100

Time 1 Product 1 80 250Product 2 45 150

What would be the Laspeyre price index?

A 93·8B 95·5C 101·9D 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?



The following variations and trend have been calculated for sales over a period of time using the additive model:

Seasonalvariation

Quarter 1 +25Quarter 2 –10Quarter 3 –30Quarter 4 ?

Trend +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 +15B –15C +35D –35

19 What would be the time series value for year 4 quarter 3?

A £1,950B £1,920C £1,900D £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 (i) onlyB (ii) onlyC (iii) onlyD (i) and (iii) only

21 A company achieves bulk buying discounts on quantities above a certain level. These discounts are only available forthe 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?

22 Mr Manaton has recently won a competition where he has the choice between receiving £5,000 now or an annualamount 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 £370B £500C £400D £620

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

A The rate at which production decreases.B The rate at which production increases.C The rate at which stock decreases.D The rate at which stock increases.

9 [P.T.O.

units

A B

C D

units

units

units

£ £

£ £



24 A company has calculated its margin of safety as 20% on budgeted sales and budgeted sales are 5,000 units permonth.

What would be the budgeted fixed costs if the budgeted contribution was £25 per unit?

A £100,000B £125,000C £150,000D £160,000

25 A company is reviewing actual performance to budget to see where there are differences. The following standardinformation is relevant:

£per unit

Selling price 50––

Direct materials 4Direct labour 16Fixed production overheads 5Variable production overheads 10Fixed selling costs 1Variable selling cost 1

––Total costs 37

––

Budgeted sales units 3,000Actual sales units 3,500

What was the favourable sales volume variance using marginal costing?

A £9,500B £7,500C £7,000D £6,500

(50 marks)

10




1 A company is seeking to establish whether there is a linear relationship between the level of advertising expenditureand the subsequent sales revenue generated.

Figures for the last eight months are as follows:

Month Advertising SalesExpenditure Revenue

£000 £0001 2·65 30·02 4·25 45·03 1·00 17·54 5·25 46·05 4·75 44·56 1·95 25·07 3·50 43·08 3·00 38·5

––––– –––––Total 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 vice versa as appropriate. Explainyour choice of axes. (5 marks)

(b) Using regression analysis calculate a line of best fit. Plot this on your graph from (a). (5 marks)

(10 marks)

2 Firlands Limited, a retail outlet, is faced with a decision regarding whether or not to expand and build small or largepremises 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 theprobability 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 agood or bad response to the size of the premises. The likelihood of there being a good response, from previoussurveys, has been estimated at 0·8.

If the survey indicates a good response then the company will build the large premises. If the survey does give a goodresult 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 costingto report its budgeted profit in its management accounts.

The following information is available:

£/unit Direct materials 4Direct labour 15

––19––

Selling price 50––

Fixed production overheads are budgeted to be £300,000 per month and are absorbed on an activity level of100,000 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. Clearlyshow 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. Clearlyshow 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 recordall 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 stock-takes take place once a month, during which the business shuts down for the day, and the information from thestock-take is used to check that the store bin cards are correct. The stock-take information is also used to prepare aprofit 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 toa 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 touse 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



13 [P.T.O.

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 twodivisions 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 moreuseful 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)



14

Formulae Sheet



15

��

��

��

��

!�" �# $# �# %# &# '# �# (# )# ��#

� �*))� �*)(� �*)�� *)'$ �*)&$ �*)%� �*)�& �*)$' �*)�� *)�) �

$ �*)(� �*)'� �*)%� �*)$& �*)�� *()� �*(�� *(&� �*(%$ �*($' $

� �*)�� *)%$ �*)�& �*(() �*('% �*(%� �*(�' �*�)% �*��$ �*�&� �

% �*)'� �*)$% �*((( �*(&& �*($� �*�)$ �*�'� �*��& �*��( �*'(� %

& �*)&� �*)�' �*('� �*($$ �*�(% �*�%� �*�� *'(� �*'&� �*'$� &

' �*)%$ �*((( �*(�� *�)� �*�%' �*��& �*''' �*'�� *&)' �*&'% '

� �*)�� *(�� *(�� *�'� �*�� *''& �*'$� �*&(� �*&%� �*&��

( �*)$� �*(&� �*�() �*�� *'�� *'$� �*&($ �*&%� �*&�$ �*%'� (

) �*)�% �*(�� *�'' �*�� *'%& �*&)$ �*&%% �*&�� *%'� �*%$% )

�� *)�& �*($� �*�%% �*'�' �*'�% �*&&( �*&�( �*%'� �*%$$ �*�(' ��

�� *()' �*(�% �*�$$ �*'&� �*&(& �*&$� �*%�& �*%$) �*�(( �*�&� ��

�$ �*((� �*�(( �*�� *'$& �*&&� �*%)� �*%%% �*�)� �*�&' �*��) �$

�� *(�) �*�� *'(� �*'�� *&�� *%') �*%�& �*�'( �*�$' �*$)� ��

�% �*(�� *�&( �*''� �*&�� *&�& �*%%$ �*�(( �*�%� �*$)) �*$'� �%

�& �*('� �*�%� �*'%$ �*&&& �*%(� �*%�� *�'$ �*��& �*$�& �*$�) �&

!�" ��# �$# ��# �%# �&# �'# ��# �(# �)# $�#

� �*)�� *()� �*((& �*(�� *(�� *('$ �*(&& �*(%� �*(%� �*(��

$ �*(�$ �*�)� �*�(� �*�') �*�&' �*�%� �*�� *��( �*��' �*')% $

� �*�� *��$ �*')� �*'�& �*'&( �*'%� �*'$% �*'�) �*&)� �*&�) �

% �*'&) �*'�' �*'�� *&)$ �*&�$ �*&&$ �*&�% �*&�' �*%)) �*%($ %

& �*&)� �*&'� �*&%� �*&�) �*%)� �*%�' �*%&' �*%�� *%�) �*%�$ &

' �*&�& �*&�� *%(� �*%&' �*%�$ �*%�� *�)� �*�� *�&$ �*��& '

� �*%($ �*%&$ �*%$& �*%�� *��' �*�&% �*�� *��% �*$)' �*$�) �

( �*%�% �*%�% �*��' �*�&� �*�$� �*��& �*$(& �*$'' �*$%) �*$�� (

) �*�)� �*�'� �*�� *��( �*$(% �*$'� �*$%� �*$$& �*$�) �*�)% )

�� *�&$ �*�$$ �*$)& �*$�� *$%� �*$$� �*$�( �*�)� �*��' �*�'$ ��

�� *�� *$(� �*$'� �*$�� *$�& �*�)& �*��( �*�'$ �*�%( �*��& ��

�$ �*$(' �*$&� �*$�� *$�( �*�(� �*�'( �*�&$ �*�� *�$% �*��$ �$

�� *$&( �*$$) �*$�% �*�($ �*�'� �*�%& �*�� *��' �*��% �*�)� ��

�% �*$�$ �*$�& �*�(� �*�'� �*�%� �*�$& �*�� *�)) �*�(( �*��( �%

�& �*$�) �*�(� �*�'� �*�%� �*�$� �*��( �*�)& �*�(% �*��% �*�'& �&

Present Value Table

[P.T.O.



��

��

��

��

!�" �# $# �# %# &# '# �# (# )# ��#

� �*))� �*)(� �*)�� *)'$ �*)&$ �*)%� �*)�& �*)$' �*)�� *)�) �

$ �*)�� *)%$ �*)�� *((' �*(&) �*(�� *(�( �*�(� �*�&) �*��' $

� $*)%� $*((% $*($) $*��& $*�$� $*'�� $*'$% $*&�� $*&�� $*%(� �

% �*)�$ �*(�( �*�� *'�� *&%' �*%'& �*�(� �*��$ �*$%� �*�� %

& %*(&� %*�� %*&(� %*%&$ %*�$) %*$�$ %*�� *))� �*()� �*�)� &

' &*�)& &*'�� &*%�� &*$%$ &*��' %*)�� %*�'� %*'$� %*%(' %*�&& '

� '*�$( '*%�$ '*$�� '*��$ &*�(' &*&($ &*�() &*$�' &*�� %*('( �

( �*'&$ �*�$& �*�$� '*�� '*%'� '*$�� &*)�� &*�%� &*&�& &*��& (

) (*&'' (*�'$ �*�(' �*%�& �*��( '*(�$ '*&�& '*$%� &*))& &*�&) )

�� )*%�� (*)(� (*&�� (*�� *�$$ �*�'� �*�$% '*�� '*%�( '*�%& ��

�� *�� )*�(� )*$&� (*�'� (*��' �*((� �*%)) �*��) '*(�& '*%)& ��

�$ ��*$' ��*&( )*)&% )*�(& (*('� (*�(% �*)%� �*&�' �*�'� '*(�% �$

�� $*�� *�& ��*'� )*)(' )*�)% (*(&� (*�&( �*)�% �*%(� �*��

�% ��*�� $*�� *�� *&' )*()) )*$)& (*�%& (*$%% �*�(' �*�'� �%

�& ��*(� �$*(& ��*)% ��*�$ ��*�( )*��$ )*��( (*&&) (*�'� �*'�' �&

!�" ��# �$# ��# �%# �&# �'# ��# �(# �)# $�#

� �*)�� *()� �*((& �*(�� *(�� *('$ �*(&& �*(%� �*(%� �*(��

$ �*�� *')� �*''( �*'%� �*'$' �*'�& �*&(& �*&'' �*&%� �*&$( $

� $*%%% $*%�$ $*�'� $*�$$ $*$(� $*$%' $*$�� $*��% $*�%� $*��' �

% �*��$ �*�� $*)�% $*)�% $*(&& $*�)( $*�%� $*')� $*'�) $*&() %

& �*')' �*'�& �*&�� *%�� *�&$ �*$�% �*�)) �*�$� �*�&( $*))� &

' %*$�� %*�� *))( �*(() �*�(% �*'(& �*&() �*%)( �*%�� *�$' '

� %*��$ %*&'% %*%$� %*$(( %*�'� %*��) �*)$$ �*(�$ �*��' �*'�& �

( &*�%' %*)'( %*�)) %*'�) %*%(� %*�%% %*$�� %*��( �*)&% �*(�� (

) &*&�� &*�$( &*��$ %*)%' %*��$ %*'�� %*%&� %*�� %*�'� %*�� )

�� &*(() &*'&� &*%$' &*$�' &*��) %*(�� %*'&) %*%)% %*��) %*�)$ ��

�� '*$�� &*)�( &*'(� &*%&� &*$�% &*�$) %*(�' %*'&' %*%(' %*�$� ��

�$ '*%)$ '*�)% &*)�( &*''� &*%$� &*�)� %*)(( %*�)� %*'�� %*%�) �$

�� '*�&� '*%$% '*�$$ &*(%$ &*&(� &*�%$ &*��( %*)�� %*��& %*&��

�% '*)($ '*'$( '*��$ '*��$ &*�$% &*%'( &*$$) &*��( %*(�$ %*'�� %

�& �*�)� '*(�� '*%'$ '*�%$ &*(%� &*&�& &*�$% &*�)$ %*(�' %*'�& �&

� - !� . "-�////--

Annuity Table


16



Answers



19

Part 1 Examination – Paper 1.2FInancial 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



20

Section B1 (a)

(b) Regression line: y = a + bx

b =n ∑ xy – ∑ x ∑ y–––––––––––––––n ∑ x2 – (∑ x)2

a =∑ y b ∑ x––– – ––– n n

In this example the advertising expenditure is the independent variable (x) and the sales revenue the dependent variable (y).

b =(8 × 1,055·875) – (26·35 × 289·5) 818·675–––––––––––––––––––––––––––––– = –––––––– = 7·07

(8 × 101·2625) – 26·352 115·7775

a =289·5 26·35––––– – 7·07 × ––––– = 12·9

8 8regression line: y = 12·9 + 7·07x where x and y are in £000

Line drawn on above graph.

60

50

40

30

20

10

£’000

£’0001 2 3 4 5 6

x

x

x

x

xx

xx

SalesRevenue

£000

Advertisingexpenditure

£000



21

2

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 premises with no survey = EV(C) – large 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.

Good0·8

Survey(50,000)

LargePremises

LargePremises

SmallPremises

(550,000)

(550,000)A

D

C

B

EF

Lo0·05

Bad0·2

Hi0·75

Hi0·6

Lo0·4

Hi0·95 1,500,000

600,000

1,500,000

600,000

1,500,000

600,000

Abandon project

(300,000)

Lo0·25



22

3 (a)Absorption costing £000 £000Sales (£50 × 100,000) 5,000Cost of sales:Opening stock – Production costsVariable (£19 × 120,000) 2,280Fixed (£3(w) × 120,000) 360

––––––2,640

Closing stock (£22 × 20,000) (440)Under/over absorption (60)

(2,140)––––––

Gross profit 2,860Selling costsFixed (150)Variable (£2 × 100,000) (200)

––––––Net profit 2,510

––––––––––––Working

Overhead absorption rate = £300,000/100,000 = £3 per unit

(b)Marginal costing £000 £000Sales (£50 × 100,000) 5,000Cost of sales:Opening stock –Production costsVariable (£19 × 120,000) 2,280

––––––2,280

Closing stock (£19 × 20,000) (380) Variable selling costs 200

(2,100)––––––

Contribution 2,900Fixed costsProduction (300)Selling (150)

––––––Net profit 2,450

––––––––––––



23

4 ReportTo: Ms SwainsthorpeFrom: AN AccountantRe: Computerised accounts and stock controlDate: December 2002

The following report addresses the advantages and disadvantages of implementing a computer system. It also explains what amanagement information system is and how it can be used. Finally it addresses your current stock control procedures.

Computer systemThe advantages of a computer system is that it will be quicker to input entries to the accounting system and easier to extractmanagement information. Another advantage is that fewer errors are likely to occur as the computer can check that all the debitsequal the credits.

The disadvantages are the expense of the new system. Also the training costs involved may be high and you may also experiencesome resistance from the employees to this new way of working. Finally you would not be able to switch over immediately as youwould 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 requiredby the organisation. It is expected that management will be able to effectively utilise the output from the system to make efficientuse 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 decision-making, planning and control and coordination of the organisation. The type of information extracted will depend on the needs ofyou, the user.

StockThe current stock-take procedures seem onerous as they require the business to be closed once a month. This results in a loss ofa 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 acomplete stock-take spot checks could be carried out comparing actual stock to the bin card value and any errors noted and thesystem updated. High value or high usage items could be checked more often than slower moving stock. In this way the businessneed not close so often.

5 (a) Return on investmentDivision A £Profit 35,000Net assets 150,000

Return on investment = 35,000/150,000% = 23·3%

Division B £Profit 70,000Net assets 325,000

Return on investment = 70,000/325,000% = 21·5%

Using this method Divisions A’s project is better.

Residual IncomeDivision A = 35,000 – 150,000 × 0·15 = 12,500Division 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:CompetitivenessFinancial performanceQuality of service InnovationEffective and efficient utilisation of resources



24

Part 1 Examination – Part 1.2Financial Information for Management December 2002 Marking Scheme

Section A

Each question is worth 2 marks each total 50.

Section B

1 (a) points plotted correctly 21/2labelled axes 1/2presentation 1/2explanation of axes used 11/2

— 5

(b) calculation of b 2calculation of a 11/2stating the regression line 1/2putting the regression line on the graph from (a) 1

— 5—10—

2 correct formulation of the small premises branch 2correct formulation of the large premises branch 2correct formulation of the survey branch 2calculation of expected value at F 1/2calculation of cost at E 1/2calculation of expected value at B 1/2calculation of expected value at C 1/2calculation of expected value at D 1/2correct decision at A 1stating a conclusion 1/2 10

—

3 (a) correct sales figure 1/2variable production cost figure 1/2fixed overhead absorption rate 1/2fixed production cost figure 1/2calculation of closing stock units 1/2calculation of closing stock value 1/2variable and fixed selling costs 1under/over absorption 1including the term gross profit 1/2layout/presentation 1/2

— 6

(b) including variable production costs only 1/2closing stock valuation 1including variable selling costs before contribution 1/2including the term contribution 1/2correct fixed costs 1layout/presentation 1/2

— 4—10—



Marks4 report format 1/2

introduction to report 1/2three advantages of computer system (1/2 each point) 11/2three disadvantages of computer system (1/2 each point) 11/2definition of an MIS 2how it could be useful 1critical comment on current stock control methods 11/2suggestion for improvement 11/2 10

—

5 (a) calculation of ROI for A and B 11/2comment 1calculation of RI for A and B 11/2comment 1

— 5

(b) stating the preferred performance measure 1reason for choice 1

— 2

(c) three examples of general performance measures1 mark each measure 3

—10—

25




PART 1

FRIDAY 6 JUNE 2003

QUESTION PAPER





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

Pape

r 1.2



2

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 choicequestion.

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 is750 units. The fixed production overhead absorption rate has been calculated as £5/unit.

What was the profit under absorption costing?

A £67,050B £70,050C £74,550D £77,550

2 The following data relates to a wage index for a company:

Year Wages per week Index 1997 £275 117 2002 £315 157

What were the 2002 weekly wages at 1997 prices (to the nearest £)?

A £201B £235C £275D £369

3 Which of the following is correct?

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

4 Which of the following are purposes of a budget?

(i) establishing strategic options(ii) motivating management(iii) establishing long term objectives(iv) planning operations

A (i) and (iii) onlyB (i) and (iv) onlyC (ii) and (iv) onlyD (ii), (iii) and (iv) only



3 [P.T.O.


A company has a budgeted material cost of £125,000 for the production of 25,000 units per month. Each unit isbudgeted 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 £1,000B £3,500C £7,500D £11,000

6 What was the favourable material usage variance?

A £2,500B £4,000C £7,500D £10,000

7 A company is preparing a production budget for the next year. The following information is relevant:

Budgeted Sales 10,000 unitsOpening stock 600 unitsClosing stock 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 8,900 unitsB 9,900 unitsC 10,900 unitsD 11,000 units

8 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 £2per 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 £500,000B £600,000C £900,000D £1,000,000

9 Which of the following would be considered to be a pricing strategy?

(i) target costing (ii) price skimming(iii) discrimination pricing




4

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 3,000 unitsOpening stock 400 unitsLosses 10% of input is expected to be lostClosing stock 200 units

How many good units were output from the process if actual losses were 400 units?


11 James wants to invest his pocket money. He receives £5 a month which he puts into a savings account earningcompound 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 £303B £338C £349D £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.


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 sellingprice of £10 per unit.

How many units would the company need to sell in order to achieve the required level of profit?




5 [P.T.O.

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 Total cost Quantity Produced £’000 ’000

1 57·5 1·25 2 37·5 1·00 3 45·0 1·50 4 60·0 2·00

–––––– ––––– 200·00 5·75

–––––– –––––

The gradient of the regression line is 17·14.

What is the value of a?

A 25·36B 48·56C 74·64D 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 £105,000B £90,000C £75,000D £60,000



6

16

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.


17 What is the economic batch quantity used to establish?

OptimalA reorder quantityB reorder levelC cumulative production quantityD stock level for production

NetPresent Value

0Interest rate5% 10% 15%



7 [P.T.O.

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

Profit and Loss account £’000Sales 500

––––– Gross profit 200 Other costs (80)

––––– Net profit 120

––––– –––––

Balance Sheet £’000Fixed assets 750 Current assets 350 Current liabilities (450)

––––– Net assets 650

––––– –––––

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

A £3,000B £21,600C £83,000D £117,000

19 Which of the following is correct when considering the allocation, apportionment and reapportionment ofoverheads in an absorption costing situation?

A Only production related costs should be considered.B Allocation is the situation where part of an overhead is assigned to a cost centre.C Costs may only be reapportioned from production centres to service centres.D 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 I II III £ £ £

Direct materials (at £6/kg) 36 24 15 Direct labour (at £10/hour) 40 25 10 Variable overheads (£2/hour) 8 5 2

–––––– –––––– –––––– 84 54 27

–––––– –––––– –––––––––––– –––––– –––––– Maximum demand (units) 2,000 4,000 4,000 Optimal production plan 2,000 1,500 4,000

How many kg of material were available for use in production?

A 15,750 kgB 28,000 kgC 30,000 kgD 38,000 kg



21 A company uses the Economic Order Quantity (EOQ) model to establish reorder quantities. The following informationrelates to the forthcoming period:

Order costs = £25 per orderHolding costs = 10% of purchase price = £4/unitAnnual demand = 20,000 unitsPurchase price = £40 per unitEOQ = 500 unitsNo 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 £22,000B £33,500C £802,000D £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


23 The following information for advertising and sales has been established over the past six months:

Month Sales Revenue Advertising expenditure£’000 £’000

1 155 32 125 2·53 200 64 175 5·55 150 4·56 225 6·5

Using the high-low method which of the following is the correct equation for linking advertising and sales fromthe above data?

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

8



9 [P.T.O.

24 A company uses decision tree analysis to evaluate potential options. The management accountant for the companyhas established the following:

What would be the cost of the upgrade that would make the company financially indifferent between buildingnew premises and upgrading the old one?

A £100,000B £900,000C £1,000,000D £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.


(50 marks)

Cash flows from sales revenue

Build new premisesCost £1,000,000

Upgrade oldpremisesCost = ?

High sales = £2,000,000

Low sales = £1,000,000

High sales = £2,000,000

Low sales = £1,000,000

0·8

0·2

0·7

0·3



10


1 A company uses absorption costing for both internal and external reporting purposes as it has a considerable level offixed production costs.

The following information has been recorded for the past year:

Budgeted fixed production overheads £2,500,000Budgeted (Normal) activity levels:

Units 62,500 unitsLabour hours 500,000 hours

Actual fixed production overheads £2,890,350Actual levels of activity:

Units produced 70,000 unitsLabour hours 525,000 hours

Required:

(a) Calculate the fixed production overhead expenditure and volume variances and briefly explain what eachvariance shows. (5 marks)

(b) Calculate the fixed production overhead efficiency and capacity variances and briefly explain what eachvariance shows. (5 marks)

(10 marks)

2 A business uses process costing to establish stock valuations and profitability of its products. Output from the processconsists of three separate products: two joint products and a by-product. Details of the process is as follows:

Input costs:Materials £45,625 for 12,500 kgLabour £29,500Overheads £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 Type % of output Final sales Further costsvalue per unit to complete

A Joint 50% £20 £10B Joint 40% £25C By-product 10% £2

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. (6 marks)

(10 marks)



11 [P.T.O.

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 B£ £

Materials (at £2 per kg) 6 8Labour (at £6 per hour) 30 18Variable overheads (at £1 per hour) 5 3

––– –––Variable cost 41 29Selling price 50 52

––– –––Contribution 9 23

––– –––––– –––

There are only 30,000 kg of material and 36,000 labour hours available. The company also has an agreement tosupply 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. (6 marks)

(10 marks)



5 A company has to choose between three investments with details as follows:

Investment 1 Investment 2 Investment 3Timing of Cash Flows Timing of Cash Flows Timing of Cash Flows

flows per annum flows per annum flows per annum Year Year Year

£ £ £0 (75,000) 0 (100,000) 0 (125,000)

1–4 25,000 A perpetuity 11,000 1 30,0005 5,000 starting at time 1 2 40,000

3 50,0004 60,0005 (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 whichinvestment would be preferred.

(10 marks)

12



13 [P.T.O.

Formulae Sheet

Laspeyre’s price index

Paasche price index

Laspeyre’s quantity index

Paasche quantity index



14

��

��

��

��

!�" �# $# �# %# &# '# �# (# )# ��#

� �*))� �*)(� �*)�� *)'$ �*)&$ �*)%� �*)�& �*)$' �*)�� *)�) �

$ �*)(� �*)'� �*)%� �*)$& �*)�� *()� �*(�� *(&� �*(%$ �*($' $

� �*)�� *)%$ �*)�& �*(() �*('% �*(%� �*(�' �*�)% �*��$ �*�&� �

% �*)'� �*)$% �*((( �*(&& �*($� �*�)$ �*�'� �*��& �*��( �*'(� %

& �*)&� �*)�' �*('� �*($$ �*�(% �*�%� �*�� *'(� �*'&� �*'$� &

' �*)%$ �*((( �*(�� *�)� �*�%' �*��& �*''' �*'�� *&)' �*&'% '

� �*)�� *(�� *(�� *�'� �*�� *''& �*'$� �*&(� �*&%� �*&��

( �*)$� �*(&� �*�() �*�� *'�� *'$� �*&($ �*&%� �*&�$ �*%'� (

) �*)�% �*(�� *�'' �*�� *'%& �*&)$ �*&%% �*&�� *%'� �*%$% )

�� *)�& �*($� �*�%% �*'�' �*'�% �*&&( �*&�( �*%'� �*%$$ �*�(' ��

�� *()' �*(�% �*�$$ �*'&� �*&(& �*&$� �*%�& �*%$) �*�(( �*�&� ��

�$ �*((� �*�(( �*�� *'$& �*&&� �*%)� �*%%% �*�)� �*�&' �*��) �$

�� *(�) �*�� *'(� �*'�� *&�� *%') �*%�& �*�'( �*�$' �*$)� ��

�% �*(�� *�&( �*''� �*&�� *&�& �*%%$ �*�(( �*�%� �*$)) �*$'� �%

�& �*('� �*�%� �*'%$ �*&&& �*%(� �*%�� *�'$ �*��& �*$�& �*$�) �&

!�" ��# �$# ��# �%# �&# �'# ��# �(# �)# $�#

� �*)�� *()� �*((& �*(�� *(�� *('$ �*(&& �*(%� �*(%� �*(��

$ �*(�$ �*�)� �*�(� �*�') �*�&' �*�%� �*�� *��( �*��' �*')% $

� �*�� *��$ �*')� �*'�& �*'&( �*'%� �*'$% �*'�) �*&)� �*&�) �

% �*'&) �*'�' �*'�� *&)$ �*&�$ �*&&$ �*&�% �*&�' �*%)) �*%($ %

& �*&)� �*&'� �*&%� �*&�) �*%)� �*%�' �*%&' �*%�� *%�) �*%�$ &

' �*&�& �*&�� *%(� �*%&' �*%�$ �*%�� *�)� �*�� *�&$ �*��& '

� �*%($ �*%&$ �*%$& �*%�� *��' �*�&% �*�� *��% �*$)' �*$�) �

( �*%�% �*%�% �*��' �*�&� �*�$� �*��& �*$(& �*$'' �*$%) �*$�� (

) �*�)� �*�'� �*�� *��( �*$(% �*$'� �*$%� �*$$& �*$�) �*�)% )

�� *�&$ �*�$$ �*$)& �*$�� *$%� �*$$� �*$�( �*�)� �*��' �*�'$ ��

�� *�� *$(� �*$'� �*$�� *$�& �*�)& �*��( �*�'$ �*�%( �*��& ��

�$ �*$(' �*$&� �*$�� *$�( �*�(� �*�'( �*�&$ �*�� *�$% �*��$ �$

�� *$&( �*$$) �*$�% �*�($ �*�'� �*�%& �*�� *��' �*��% �*�)� ��

�% �*$�$ �*$�& �*�(� �*�'� �*�%� �*�$& �*�� *�)) �*�(( �*��( �%

�& �*$�) �*�(� �*�'� �*�%� �*�$� �*��( �*�)& �*�(% �*��% �*�'& �&

Present Value Table



15

��

��

��

��

!�" �# $# �# %# &# '# �# (# )# ��#

� �*))� �*)(� �*)�� *)'$ �*)&$ �*)%� �*)�& �*)$' �*)�� *)�) �

$ �*)�� *)%$ �*)�� *((' �*(&) �*(�� *(�( �*�(� �*�&) �*��' $

� $*)%� $*((% $*($) $*��& $*�$� $*'�� $*'$% $*&�� $*&�� $*%(� �

% �*)�$ �*(�( �*�� *'�� *&%' �*%'& �*�(� �*��$ �*$%� �*�� %

& %*(&� %*�� %*&(� %*%&$ %*�$) %*$�$ %*�� *))� �*()� �*�)� &

' &*�)& &*'�� &*%�� &*$%$ &*��' %*)�� %*�'� %*'$� %*%(' %*�&& '

� '*�$( '*%�$ '*$�� '*��$ &*�(' &*&($ &*�() &*$�' &*�� %*('( �

( �*'&$ �*�$& �*�$� '*�� '*%'� '*$�� &*)�� &*�%� &*&�& &*��& (

) (*&'' (*�'$ �*�(' �*%�& �*��( '*(�$ '*&�& '*$%� &*))& &*�&) )

�� )*%�� (*)(� (*&�� (*�� *�$$ �*�'� �*�$% '*�� '*%�( '*�%& ��

�� *�� )*�(� )*$&� (*�'� (*��' �*((� �*%)) �*��) '*(�& '*%)& ��

�$ ��*$' ��*&( )*)&% )*�(& (*('� (*�(% �*)%� �*&�' �*�'� '*(�% �$

�� $*�� *�& ��*'� )*)(' )*�)% (*(&� (*�&( �*)�% �*%(� �*��

�% ��*�� $*�� *�� *&' )*()) )*$)& (*�%& (*$%% �*�(' �*�'� �%

�& ��*(� �$*(& ��*)% ��*�$ ��*�( )*��$ )*��( (*&&) (*�'� �*'�' �&

!�" ��# �$# ��# �%# �&# �'# ��# �(# �)# $�#

� �*)�� *()� �*((& �*(�� *(�� *('$ �*(&& �*(%� �*(%� �*(��

$ �*�� *')� �*''( �*'%� �*'$' �*'�& �*&(& �*&'' �*&%� �*&$( $

� $*%%% $*%�$ $*�'� $*�$$ $*$(� $*$%' $*$�� $*��% $*�%� $*��' �

% �*��$ �*�� $*)�% $*)�% $*(&& $*�)( $*�%� $*')� $*'�) $*&() %

& �*')' �*'�& �*&�� *%�� *�&$ �*$�% �*�)) �*�$� �*�&( $*))� &

' %*$�� %*�� *))( �*(() �*�(% �*'(& �*&() �*%)( �*%�� *�$' '

� %*��$ %*&'% %*%$� %*$(( %*�'� %*��) �*)$$ �*(�$ �*��' �*'�& �

( &*�%' %*)'( %*�)) %*'�) %*%(� %*�%% %*$�� %*��( �*)&% �*(�� (

) &*&�� &*�$( &*��$ %*)%' %*��$ %*'�� %*%&� %*�� %*�'� %*�� )

�� &*(() &*'&� &*%$' &*$�' &*��) %*(�� %*'&) %*%)% %*��) %*�)$ ��

�� '*$�� &*)�( &*'(� &*%&� &*$�% &*�$) %*(�' %*'&' %*%(' %*�$� ��

�$ '*%)$ '*�)% &*)�( &*''� &*%$� &*�)� %*)(( %*�)� %*'�� %*%�) �$

�� '*�&� '*%$% '*�$$ &*(%$ &*&(� &*�%$ &*��( %*)�� %*��& %*&��

�% '*)($ '*'$( '*��$ '*��$ &*�$% &*%'( &*$$) &*��( %*(�$ %*'�� %

�& �*�)� '*(�� '*%'$ '*�%$ &*(%� &*&�& &*�$% &*�)$ %*(�' %*'�& �&

� - !� . "-�////--

Annuity Table




Answers



19

Part 1 Examination – Paper 1.2Financial Information for Management June 2003 Answers

1 C Marginal costing profit £72,300Less: fixed costs in opening stock

(300 x £5) (£1,500)Add: fixed costs in closing stock

(750 x £5) £3,750––––––––£74,550––––––––

2 B£315

x 117 = £235–––––157

3 D

4 C

5 B Price varianceDid cost £136,000Should cost (53,000 kg x £2·50) £132,500

–––––––––––––£3,500 adverse–––––––––––––

6 A Usage varianceDid use 53,000 kgShould use(27,000 units x 2 kg) 54,000 kg

–––––––––1,000 kgx £2·50

£2,500 favourable––––––––––––––––

7 D Sales 10,000 unitsLess: opening stock (600 units)Add: closing stock(5% x 10,000) 500 units

––––––––––Good production required 9,900 units

Good production = 90% of total production, therefore

Total production =9,900

= 11,000 units–––––– 90%

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

= £1,000,000 – £400,000 = £600,000

9 C



20

10 AProcess

Units UnitsOpening stock 400 Losses 400Input 3,000 Output 2,800

Closing stock 200–––––– ––––––3,400 3,400

–––––– –––––––––––– ––––––

11 C

12 D

13 D 150,000 + 75,000–––––––––––––––––– = £300,000 Breakeven revenue

0·75300,000––––––– = 30,000 units

£10

14 A

15 B Lower of

replacement cost higher of £105,000

NRV Economic value75,000 90,000

16 A

17 C

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

19 A

20 B Total material required =

(2,000 x36

) + (1,500 x 24) + (4,000 x 15) = 28,000 kg–– –– ––6 6 6

21 C Total cost of having stock =

(p x D) + (D

x Co) + (Ch xQ

)–– ––Q 2

= (40 x 20,00) + (20,000 x 25) + (4 x 500)–––––– –––500 2

= 800,000 + 1,000 + 1,000 = 802,000

22 D

5 1 005 10 005

348 85 34960

× ⋅⋅

= ⋅ ≈– £ £

a yn

b x

a

= ∑ − ∑

= ⋅ × ⋅ = ⋅

n200

417 14 5 75

425 36– ( )



21

23 A As advertising will hopefully generate sales, advertising is the independent variable and sales the dependent; i.e. advertisingis x and sales is y.

225,000 = a + (6,500 x b)125,000 = a + (2,500 x b)–––––––– ––––––––––––––100,000 = 0 + (4,000 x b)

therefore b =100,000

= £25–––––––4,000

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

24 B Expected value of new building = (0·8 x £2 million )+(0·2 x £1 million) – £1 million = £0·8 millionExpected value of the upgrade= (0·7 x £2 million) + (0·3 x £1 million) – cost of upgradeSo,New build = £0·8 million Upgrade = £1·7 million – costsEquating the two expressions:£0·8 million = £1·7 million – costs, givingCosts = £1·7 million – £0·8 million = £0·9 million = £900,000

25 D



22

1 (a) Fixed Production Overhead Expenditure variance

£Actual costs incurred 2,890,350Budgeted costs 2,500,000

––––––––––Variance 390,350 adverse

This variance indicates that the company have spent more than originally budgeted.

Fixed Production Overhead Volume variance

Labour hoursActual flexed 560,000Budget 500,000

––––––––Variance 60,000 favourable

x £5 (W1)= £300,000 favourable

W1 FOAR =£2,500,000

= £5–––––––––––––500,000 hours

This variance indicates that the company has used more labour hours than originally budgeted.

Or based on unitsUnits

Actual 70,000Budget 62,500

–––––––Variance 7,500 favourable

x £40 (W2)= £300,000 favourable

W2 FOAR =£2,500,000

= £40–––––––––––––62,500 units

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

(b) Fixed Production Overhead Efficiency Variance

HoursDid work 525,000Should have worked 560,000

––––––––35,000 favourable


W3 FOAR/hour =£2,500,000

= £5–––––––––––––500,000 hours

This variance shows that labour were more efficient than originally budgeted as they took less time than expected to achievethe production of 70,000 units.

Fixed Production Overhead Capacity Variance

HoursActual hours worked 525,000Budgeted hours of work 500,000

––––––––25,000 favourable


This variance shows that labour worked for more hours than was originally budgeted thus exceeding the budgeted capacity.



23

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= 92,000or

Process

Units £ Units £Materials 12,500 45,625 Normal loss 2,500 10,000Labour 29,500 Output 10,000 β 92,000 βOverheads 26,875

––––––– –––––––– ––––––– ––––––––12,500 102,000 12,500 102,000––––––– –––––––– ––––––– ––––––––––––––– –––––––– ––––––– ––––––––

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

Product Units % NRV at Total Joint cost Total Profitsplit-off NRV allocation profit per

unit

A 5,000 50 20–10 50,000 30,000 =50,000

20,000 4––––––––=10 150,000

B 4,000 40 25 100,000 60,000 =100,000

40,000 10––––––––150,000

C 1,000 10 2–––––– ––– –––––––– –––––––

Total 10,000 100 150,000 90,000–––––– ––– –––––––– –––––––

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 weldingdepartment.

Although a service will have overheads allocated and apportioned to it, these will be reapportioned to the production centresso that, at the end of a period, all overheads are included in the production centres only. Once all the overheads are includedin 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 absorptioncosting 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 perunit basis but will be incurred each time the machine has to be set-up. It would not, therefore, be sensible to allocate costsper unit since that is not how the cost is incurred. It is, however, better to use the number of set-ups for this particular costto allocate costs to units.

4 (a) Objective is to maximise profit:Let a = the number of units of A to be producedLet b = the number of units of B to be producedObjective function: 9a + 23b

Constraints:Non-negativity b ≥ 0Restriction on A a ≥ 1,000Materials 3a + 4b ≤ 30,000Labour 5a + 3b ≤ 36,000



(b)

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 = 30,0003,000 + 4b = 30,000 therefore 4b = 30,000 – 3,000 giving 4b = 27,000so 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

a units’000

10

1

2

3

4

5

6

7

8

9

10

11

12

13

2 3 4 5 6 7 8 9 10 11 12

b units’000

5a + 3b = 36,000

a = 1,000

3a + 4b = 30,000lso-contribution

line



5 Investment 1Time Cash Flows Discount factor Present Value

£’000 at 10% £’0000 (75) 1 (75)

1-4 25 3·17 79·255 5 0·621 3·105

––––––7·355

––––––––––––

Investment 2Time Cash Flows Discount factor Present Value

£’000 at 10% £’0000 (100) 1 (100)

1– ∞ 11 1/0·1=10 110––––––

10––––––––––––

Investment 3Time Cash Flows Discount factor Present Value

£’000 at 10% £’0000 (125) 1 (125)1 30 0·909 27·272 40 0·826 33·043 50 0·751 37·554 60 0·683 40·985 (10) 0·621 (6·21)

––––––7·63

––––––––––––

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

25



Part 1 Examination – Paper 1.2Financial information for Management June 2003 Marking Scheme

Marks1 (i) C 2

(ii) B 2(iii) D 2(iv) C 2(v) B 2(vi) A 2(vii) D 2(viii) B 2(ix) C 2(x) A 2(xi) C 2(xii) D 2(xiii) D 2(xiv) A 2(xv) B 2(xvi) A 2(xvii) C 2(xviii) A 2(xix) A 2(xx) B 2(xxi) C 2(xxii) D 2(xxiii) A 2(xxiv) B 2(xxv) D 2

–––50–––

1 (a) Fixed production overhead expenditure variance £ 1/2Fixed production overhead expenditure variance adverse 1/2Explanation of variance 1Fixed production overhead volume variance £ 1/2Fixed production overhead volume variance favourable 1/2Calculation of the FOAR/unit 1Explanation of variance 1

–––5

(b) Efficiency variance £ 1/2Efficiency variance favourable 1/2Calculating FOAR/labour hour 1Explanation of variance 1Capacity variance £ 1/2Capacity variance favourable 1/2Explanation of variance 1

–––5

–––10–––

27



Marks2 (a) Calculating the total cost of output to include:

material cost 1/2labour costs 1/2overhead cost 1/2deduct normal loss scrap proceeds 1Calculation of 92,000 11/2–––

4

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

–––6

–––10–––

3 (a) Definition of service centre 1Example of a service centre 1Definition of production centre 1Example of a production centre 1Explanation of the differing treatments of overheads:Service centre cost reapportioned 1Production centre costs absorbed 1

–––6

(b) Explanation of difference including the use of the term cost driver 2Example 2

–––4

–––10–––

4 (a) Defining variables 1/2Objective function 1/2Non-negativity constraint for b 1/2Variable a greater than 1,000 1Material constraint 1Labour constraint 1/2–––

4

(b) labelled axes on graph 1/2good presentation 1/2correctly drawn material line 1correctly drawn labour line 1restriction on a 1/2plotting the objective function 1establishing the optimal point 11/2–––

6–––10–––

28



Marks5 Investment 1

Correct discount factors 1For using a cumulative discount factor 1/2Calculation of present value 1/2 per line in table 11/2

Investment 2Correct value at To 1/2Calculation of present value of the perpetuity 11/2

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

Preferred investment stated 1–––

10–––

29




PART 1


QUESTION PAPER





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

Pape

r 1.2




Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choicequestion.

Each question within this section is worth 2 marks.

1 A cost is described as staying the same over a certain activity range and then increasing but remaining stable over arevised activity range in the short term.

What type of cost is this?

A A fixed costB A variable costC A semi-variable costD A stepped fixed cost

2 The following quarterly adjustments have been calculated using the multiplicative model for time series analysis:

Quarter 1 Quarter 2 Quarter 30·95 1·25 0·70

What would be the adjustment for quarter 4 to two decimal places?

A 0·83B 0·91C 1·10D 1·20

3 A company which uses marginal costing has a profit of £37,500 for a period. Opening stock was 100 units andclosing stock was 350 units.

The fixed production overhead absorption rate is £4 per unit.

What is the profit under absorption costing?

A £35,700B £36,500C £38,500D £39,300

4 The following could relate to contract costing:

(i) Work is for a period of long duration.

(ii) Progress payments are amounts paid for the contract throughout the course of the contract.

(iii) Architects’ certificates are provided to establish the amount of work certified.



2



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

Date Receipts Issues

Units £/unit Valuation Units

Brought forward 100 £5 £500

4th 150 £5·50 £825

16th 100

20th 100 £6 £600

21st 75

What is the value of the closing stock using this weighted average method?

A £1,012·50B £976·50C £962·50D £925·00

6 Sydney wishes to make an investment on a monthly basis starting next month for five years. The payments into thefund 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 £75B £86C £100D £117

7 A company has the following budget for the next month:

Finished ProductSales 7,000 unitsProduction units 7,200 units

MaterialsUsage per unit 3 kg Opening stock 400 kgClosing stock 500 kg

What is the material purchases budget for the month?

A 20,900 kgB 21,100 kgC 21,500 kgD 21,700 kg

3 [P.T.O.



4

8 The following could relate to optical mark readers:(i) Specialist pens are always required for use.(ii) Data entry is quick.(iii) Computers carry out most of the work.

Which of the above would be considered to be advantages of using optical mark readers?


9 Which of the following would be best described as a short term tactical plan?

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

10 A company incurs the following costs at various activity levels:

Total cost Activity level£ Units

250,000 5,000312,500 7,500400,000 10,000

Using the high-low method what is the variable cost per unit?

A £25B £30C £35D £40

11 An investment gives the following results:

Net present value Discount rate£000383 10%

(246) 15%

What is the estimated internal rate of return to the nearest whole percentage?

A 12%B 13%C 14%D 17%



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 10,000Output units 9,850Opening stock 300 units, 100% complete for materials and 70%

complete for conversion costsClosing stock 450 units, 100% complete for materials and 30%

complete for conversion costs

The company uses the weighted average method of valuing stock.

What were the equivalent units for conversion costs?


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

A Expected values provide a weighted average of anticipated outcomesB The expected value will always equal one of the possible outcomesC Expected values will show whether the decision maker is risk averse, risk seeking or risk neutralD 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:

The objective function (OF) for the company has also been plotted on the graph and the feasible region is boundedby the area ABCD.

At which point on the graph will profits be maximised?

ABCD

15 The following information has been obtained for sales of two products for a three year period:

Price QuantityProduct A Product B Product A Product B

2000 (base year) 100 150 3 42001 125 140 2 32002 130 135 2 4

What is the Paasche quantity index for 2002?

A 0·86B 0·89C 1·19D 1·20

6

300

200

100

100 200 3000

y

x

OF

A

B C

D



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 halfor labour could be diverted from the production of product X. Product X currently earns a contribution of £4 in twolabour 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 £200B £1,200C £1,400D £1,800

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



18 A company uses variance analysis to control costs and revenues.

Information concerning sales is as follows:

Budgeted selling price £15 per unitBudgeted sales units 10,000 unitsBudgeted profit per unit £5 per unit

Actual sales revenue £151,500Actual units sold 9,800 units

What is the sales volume profit variance?

A £500 favourableB £1,000 favourableC £1,000 adverseD £3,000 adverse

19 A company has the following budgeted information for the coming month:

Budgeted sales revenue £500,000Budgeted contribution £200,000Budgeted profit £ 50,000

What is the budgeted break-even sales revenue?

A £125,000B £350,000C £375,000D £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 (£2,416)B £7,046C £6,981D £2,351

21 Which of the following is correct?

A When considering limiting factors the products should always be ranked according to contribution per unit soldB If there is only one scarce resource linear programming should be usedC In linear programming the point furthest from the origin will always be the point of profit maximisationD 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 overheadabsorption rate was £8 per unit and is based on the normal level of activity of 5,000 units. Actual production was4,500 units.

What was the actual fixed production overheads incurred for the period?

A £30,000B £36,000C £40,000D £42,000

23 A company uses process costing to value its output. The following was recorded for the period:

Input materials 2,000 units at £4·50 per unitConversion costs £13,340Normal loss 5% of input valued at £3 per unitActual loss 150 units

There were no opening or closing stocks.

What was the valuation of one unit of output to one decimal place?

A £11·8B £11·6C £11·2D £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 £10 per hourProduction time 15,000 hoursTime per unit 3 hoursProduction units 5,000 units

Actual Wages paid £176,000Production 5,500 unitsTotal hours worked 14,000 hours

There was no idle time.

What were the labour rate and efficiency variances?

Rate variance Efficiency varianceA £26,000 adverse £25,000 favourableB £26,000 adverse £10,000 favourableC £36,000 adverse 1£2,500 favourableD £36,000 adverse £25,000 favourable

(50 marks)

9 [P.T.O.




1 A business operates with two production centres and three service centres. Costs have been allocated and apportionedto these centres as follows:

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

Information concerning production requirements in the two production centres is as follows:

Centre 1 Centre 2Units produced 1,500 units 2,000 unitsMachine hours 3,000 hours 4,500 hoursLabour hours 2,000 hours 6,000 hours

Required:

(a) Using the reciprocal method calculate the total overheads in production centres 1 and 2 afterreapportionment of the service centre costs. (7 marks)

(b) Using the most appropriate basis establish the overhead absorption rate for production centre 1. Brieflyexplain the reason for your chosen absorption basis. (3 marks)

(10 marks)

10

Production Centres Service Centres

1 2 A B C

£2,000 £3,500 £300 £500 £700

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% – – –



2 Break-even charts and profit-volume charts are commonly associated with cost-volume-profit analysis (break-evenanalysis).

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)? (6 marks)

(b) (i) 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 10,000 unitsProduction 12,000 units

Standard cost per unit:£

Direct materials 5Direct labour 9Fixed production overheads 8

–––22–––

Selling price 30

Actual results:Sales 9,750 unitsRevenue £325,000Production 11,000 unitsMaterial cost £65,000Labour cost £100,000Fixed production overheads £95,000

There were no opening stocks.

Required:

(a) Produce a flexed budget statement showing the flexed budget and actual results. Calculate the variancesbetween 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. (3 marks)

(10 marks)

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 EconomicOrder Quantity method to establish an optimal reorder quantity.

Information regarding stocks is given below:Purchase price £15/unitFixed cost per order £200Holding cost 8% of the purchase price per annumAnnual demand 12,000 units

Current annual total stock costs are £183,000, being the total of the purchasing, ordering and holding costs ofproduct 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 establishthe difference compared to the current ordering policy. (4 marks)

(c) List ways in which discounts might affect this Economic Order Quantity calculation and subsequent stockcosts. (4 marks)

(10 marks)

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

Required:

Using a tabular approach calculate the marginal revenues and marginal costs for product Y at the different levelsof demand, and so determine the selling price at which the company profits are maximised.

(10 marks)

12

Demand Selling price per Cost per unitunit

Units £ £

1,100 48 24

1,200 46 21

1,300 45 20

1,400 42 19



13 [P.T.O.

Formulae Sheet

Laspeyres’ price index =

Paasche price index =

Laspeyres’ quantity index =

Paasche quantity index =



14

��

��

��

��

!�" �# $# �# %# &# '# �# (# )# ��#

� �*))� �*)(� �*)�� *)'$ �*)&$ �*)%� �*)�& �*)$' �*)�� *)�) �

$ �*)(� �*)'� �*)%� �*)$& �*)�� *()� �*(�� *(&� �*(%$ �*($' $

� �*)�� *)%$ �*)�& �*(() �*('% �*(%� �*(�' �*�)% �*��$ �*�&� �

% �*)'� �*)$% �*((( �*(&& �*($� �*�)$ �*�'� �*��& �*��( �*'(� %

& �*)&� �*)�' �*('� �*($$ �*�(% �*�%� �*�� *'(� �*'&� �*'$� &

' �*)%$ �*((( �*(�� *�)� �*�%' �*��& �*''' �*'�� *&)' �*&'% '

� �*)�� *(�� *(�� *�'� �*�� *''& �*'$� �*&(� �*&%� �*&��

( �*)$� �*(&� �*�() �*�� *'�� *'$� �*&($ �*&%� �*&�$ �*%'� (

) �*)�% �*(�� *�'' �*�� *'%& �*&)$ �*&%% �*&�� *%'� �*%$% )

�� *)�& �*($� �*�%% �*'�' �*'�% �*&&( �*&�( �*%'� �*%$$ �*�(' ��

�� *()' �*(�% �*�$$ �*'&� �*&(& �*&$� �*%�& �*%$) �*�(( �*�&� ��

�$ �*((� �*�(( �*�� *'$& �*&&� �*%)� �*%%% �*�)� �*�&' �*��) �$

�� *(�) �*�� *'(� �*'�� *&�� *%') �*%�& �*�'( �*�$' �*$)� ��

�% �*(�� *�&( �*''� �*&�� *&�& �*%%$ �*�(( �*�%� �*$)) �*$'� �%

�& �*('� �*�%� �*'%$ �*&&& �*%(� �*%�� *�'$ �*��& �*$�& �*$�) �&

!�" ��# �$# ��# �%# �&# �'# ��# �(# �)# $�#

� �*)�� *()� �*((& �*(�� *(�� *('$ �*(&& �*(%� �*(%� �*(��

$ �*(�$ �*�)� �*�(� �*�') �*�&' �*�%� �*�� *��( �*��' �*')% $

� �*�� *��$ �*')� �*'�& �*'&( �*'%� �*'$% �*'�) �*&)� �*&�) �

% �*'&) �*'�' �*'�� *&)$ �*&�$ �*&&$ �*&�% �*&�' �*%)) �*%($ %

& �*&)� �*&'� �*&%� �*&�) �*%)� �*%�' �*%&' �*%�� *%�) �*%�$ &

' �*&�& �*&�� *%(� �*%&' �*%�$ �*%�� *�)� �*�� *�&$ �*��& '

� �*%($ �*%&$ �*%$& �*%�� *��' �*�&% �*�� *��% �*$)' �*$�) �

( �*%�% �*%�% �*��' �*�&� �*�$� �*��& �*$(& �*$'' �*$%) �*$�� (

) �*�)� �*�'� �*�� *��( �*$(% �*$'� �*$%� �*$$& �*$�) �*�)% )

�� *�&$ �*�$$ �*$)& �*$�� *$%� �*$$� �*$�( �*�)� �*��' �*�'$ ��

�� *�� *$(� �*$'� �*$�� *$�& �*�)& �*��( �*�'$ �*�%( �*��& ��

�$ �*$(' �*$&� �*$�� *$�( �*�(� �*�'( �*�&$ �*�� *�$% �*��$ �$

�� *$&( �*$$) �*$�% �*�($ �*�'� �*�%& �*�� *��' �*��% �*�)� ��

�% �*$�$ �*$�& �*�(� �*�'� �*�%� �*�$& �*�� *�)) �*�(( �*��( �%

�& �*$�) �*�(� �*�'� �*�%� �*�$� �*��( �*�)& �*�(% �*��% �*�'& �&

Present Value Table



15

��

��

��

��

!�" �# $# �# %# &# '# �# (# )# ��#

� �*))� �*)(� �*)�� *)'$ �*)&$ �*)%� �*)�& �*)$' �*)�� *)�) �

$ �*)�� *)%$ �*)�� *((' �*(&) �*(�� *(�( �*�(� �*�&) �*��' $

� $*)%� $*((% $*($) $*��& $*�$� $*'�� $*'$% $*&�� $*&�� $*%(� �

% �*)�$ �*(�( �*�� *'�� *&%' �*%'& �*�(� �*��$ �*$%� �*�� %

& %*(&� %*�� %*&(� %*%&$ %*�$) %*$�$ %*�� *))� �*()� �*�)� &

' &*�)& &*'�� &*%�� &*$%$ &*��' %*)�� %*�'� %*'$� %*%(' %*�&& '

� '*�$( '*%�$ '*$�� '*��$ &*�(' &*&($ &*�() &*$�' &*�� %*('( �

( �*'&$ �*�$& �*�$� '*�� '*%'� '*$�� &*)�� &*�%� &*&�& &*��& (

) (*&'' (*�'$ �*�(' �*%�& �*��( '*(�$ '*&�& '*$%� &*))& &*�&) )

�� )*%�� (*)(� (*&�� (*�� *�$$ �*�'� �*�$% '*�� '*%�( '*�%& ��

�� *�� )*�(� )*$&� (*�'� (*��' �*((� �*%)) �*��) '*(�& '*%)& ��

�$ ��*$' ��*&( )*)&% )*�(& (*('� (*�(% �*)%� �*&�' �*�'� '*(�% �$

�� $*�� *�& ��*'� )*)(' )*�)% (*(&� (*�&( �*)�% �*%(� �*��

�% ��*�� $*�� *�� *&' )*()) )*$)& (*�%& (*$%% �*�(' �*�'� �%

�& ��*(� �$*(& ��*)% ��*�$ ��*�( )*��$ )*��( (*&&) (*�'� �*'�' �&

!�" ��# �$# ��# �%# �&# �'# ��# �(# �)# $�#

� �*)�� *()� �*((& �*(�� *(�� *('$ �*(&& �*(%� �*(%� �*(��

$ �*�� *')� �*''( �*'%� �*'$' �*'�& �*&(& �*&'' �*&%� �*&$( $

� $*%%% $*%�$ $*�'� $*�$$ $*$(� $*$%' $*$�� $*��% $*�%� $*��' �

% �*��$ �*�� $*)�% $*)�% $*(&& $*�)( $*�%� $*')� $*'�) $*&() %

& �*')' �*'�& �*&�� *%�� *�&$ �*$�% �*�)) �*�$� �*�&( $*))� &

' %*$�� %*�� *))( �*(() �*�(% �*'(& �*&() �*%)( �*%�� *�$' '

� %*��$ %*&'% %*%$� %*$(( %*�'� %*��) �*)$$ �*(�$ �*��' �*'�& �

( &*�%' %*)'( %*�)) %*'�) %*%(� %*�%% %*$�� %*��( �*)&% �*(�� (

) &*&�� &*�$( &*��$ %*)%' %*��$ %*'�� %*%&� %*�� %*�'� %*�� )

�� &*(() &*'&� &*%$' &*$�' &*��) %*(�� %*'&) %*%)% %*��) %*�)$ ��

�� '*$�� &*)�( &*'(� &*%&� &*$�% &*�$) %*(�' %*'&' %*%(' %*�$� ��

�$ '*%)$ '*�)% &*)�( &*''� &*%$� &*�)� %*)(( %*�)� %*'�� %*%�) �$

�� '*�&� '*%$% '*�$$ &*(%$ &*&(� &*�%$ &*��( %*)�� %*��& %*&��

�% '*)($ '*'$( '*��$ '*��$ &*�$% &*%'( &*$$) &*��( %*(�$ %*'�� %

�& �*�)� '*(�� '*%'$ '*�%$ &*(%� &*&�& &*�$% &*�)$ %*(�' %*'�& �&

� - !� . "-�////--

Annuity Table




Answers



19

Part 1 Examination – Paper 1.2Financial Information for Management December 2003 Answers

Section A

11 D12 C13 C14 D15 B16 C17 D18 C19 C10 B11 B12 D13 A14 D15 A16 C17 A18 C19 C20 D21 D22 A23 B24 A25 D

1 D

2 C 4–(0·95 + 1·25 + 0·7) = 1·1

3 C £Marginal costing profit 37,500Add: fixed costs in closing stock

(350 × 4) 11,400Less: fixed costs in opening stock

(100 × 4) 1,1(400)–––––––

Absorption costing profit 38,500–––––––

4 D

5 BReceipts and issues

Units Price per unit Cost100 5·00 500150 5.50 825–––– –––– ––––––250 5·30 1,325

(100) 5·30 (530)100 6·00 600–––– –––– ––––––250 5·58 1,395(75) 5·58 (418·5)–––– –––– ––––––175 5·58 976·50–––– –––– ––––––



20

6 C

1·00512×5 – 1 = 7,000A –––––––––––

0·005

A A × 69·77 = 7,000

7,000A –––––– A =

69·77 = 100·33 ≈ 100

7 D MaterialsUsage 7,200 × 3 kg = 21,600 kg

kgUsage 21,600Opening stock (400)Closing stock 500

–––––––Purchases 21,700

–––––––

8 C

9 C

10 B hi 400,000 = fixed cost + variable cost per unit × 10,000low 250,000 = fixed cost + variable cost per unit × 5,000

difference 150,000 = variable cost per unit × 5,000

variable cost per unit =150,000

= £30–––––––5,000

11 B

IRR = 10% +383

(15% – 10%)–––––––––––383 – (– 246)

IRR = 10% +383

× 5%––––––––––383 + 246

IRR = 10% +383

× 5%––––629

IRR = 10% + 3% = 13%

12 D conversion costsOutput 9,850Closing stock 135 = 450 × 30%

–––––9,985–––––

13 A



21

14 D

15 A∑p3q3 =

(130 × 2) + (135 × 4) =

800 = 0·86–––––– ––––––––——––––––– ––––

∑p3q1 (130 × 3) + (135 × 4) =

930

16 C Labour required 500 hoursSpare capacity 400 hours no relevant costRemaining hours required 100 hours

100 hours from either:overtime 100 × 1·5 × 12 = £1,800

100production of X (100 × 12) + (—— × 4) = 1,400

2

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

17 A

18 C Volume varianceBudgeted volume 10,000 unitsActual volume 9,800 units

–––––––––––Difference 200 units

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

19 C Breakeven sales revenue =fixed costs–––––––––C/S ratio

Fixed costs = £200,000 – £50,000 = £150,000

C/S ratio =£200,000

= 0·4–––––––––£500,000

Breakeven sales revenue =£150,000

= £375,000–––––––––0·4

300

200

100

0

OF

CB

A D

200 300

OF

100

y

x



22

20 DTime Flow Discount Present

factor value

£000 8% £000

0 (20,000) 1 (20,000)

1–4 13,000 3·312 19,936

5·747 – 3·312=5–8 17,000 2·435 17,045

10 (10,000) 0·463 (4,630)

Net Present Value 12,351

21 D

22 A £Over absorbed fixed production overheads (6,000)Absorbed overheads(4,500 × £8) 36,000

–––––––Actual overheads incurred 30,000

23 Bcost/unit =

(2,000 × £4·50) + 13,340 – (2,000 × 5% × £3)––––––––––––––––––––––––––––––––––––––––––

2,000 – (2,000 × 5%)

cost/unit =£22,040

= £11·6––––––––1,900

24 A

25 D Rate variance £Did cost 176,000Should cost(14,000 × £10) 140,000

––––––––36,000 adverse

Efficiency variance hoursDid take 14,000Should take(5,500 × 3) 16,500

–––––––2,500 favourable

At standard cost × £10£25,000 favourable–––––––––––––––––



23

Section B

1 (a) Centre 1 Centre 2 Service A Service B Service C2,000 3,500 300 500 700500 × 50% = 500 × 20% = 500 × 20% = 500 × 10% =250 100 100 (500) 50–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––2,250 3,600 400 0 750400 × 45% = 400 × 45% = 400 × 10% = 180 180 (400) 40–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––2,430 3,780 0 40 750750 × 60% = 750 × 40% = 450 300 (750)–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––2,880 4,080 0 40 040 × 50% = 20 40 × 20% = 8 40 × 20% = 8 (40) 40 × 10% = 4

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––2,900 4,088 8 0 48 × 45% = 4 8 × 45% = 4 (8) 8 × 10% = 0

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––2,904 4,092 0 0 44 × 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.

(b) Centre 1The most appropriate basis is to use machine hours as it is machine intensive.

£2,906––––––––––Overhead absorption rate =3,000 hours

= £0·969/machine hour

2 (a) (i)

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

Total revenue

Total costs

Variable costs

Fixed costs

unitsBreakevenvolume

Break-evenrevenue

Costs andrevenue

£

0



(b) (i)

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

3 (a) Flexed budget Actual results VariancesSales – units 9,750 9,750Production – units 11,000 11,000

£000 £000 £000Sales price 292·5 = 30 × 9,750 325 32·5 favourableCost of salesOpening stock 0 0Production costs:Materials 55 = 5 × 11,000 65 10 adverseLabour 99 = 9 × 11,000 100 1 adverseFixed production overheads 96 (note) = 8 × 12,000 95 1 favourable

–––––––– ––––––––––– –––––––––––––250 260 10 adverse

Closing stock 27·5 = 22 × (11,000 – 9,750) 27·5–––––––– –––––––––––222·5 232·5–––––––– ––––––––––– –––––––––––––

Profit 70 92·5 22·5 favourable–––––––– ––––––––––– –––––––––––––

Note: This figure can also be established by taking the absorbed fixed production overheads of 8 × 11,000 = £88,000 andadding the under absorbed amount of £8,000.

(b) 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 amountpaid per kg was higher than expected.

24

Fixed costs

Units0

Breakeven point

Profit

Profit£

Loss£



4 (a) EOQ =

EOQ = = 2,000 units

(b) Revised stock costs £Purchase costs (12,000 × £15) 180,000

Order costs12,000

× 200 1,200––––––2,000

Holding costs2,000

× 15 × 0·08 1,200–––––2 ––––––––

182,400Original stock costs 183,000

––––––––Saving 600

––––––––

(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 Total Marginal Cost Total Marginalper unit Revenue Revenue per unit Cost Cost

Units £ £ £ £ £ £

=units × =units ×unit cost per

selling unitprice

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

2C DC

o

h

2 200 12 0001 2

× ×⋅

,£



Part 1 Examination – Paper 1.2Financial Information for Management December 2003 Marking Scheme

MarksSection A

2 marks per question giving a total of 50 marks.

Section B

1 (a) reapportionment1 mark for each correct line using correct %’s max 6Note: any method with sound bases for allocation should be accepted and given full credit.Conclusion 1

––– 7

(b) reason for using basis 1using correct overhead figure from (a) 1/2using machine hours as a basis 1/2using the correct machine hours figure 1/2correct calculation 1/2

––– 3–––10–––

2 (a) (i) correctly labelled axes 1total revenue line 1/2variable cost line 1/2fixed cost line 1/2total cost line 1/2break-even point 1

–––4

(ii) total revenue – variable costs 2––– 6

(b) (i) correctly labelled axes 1/2profit line 1/2fixed costs 1/2break-even point 1/2

–––2

(ii) profit – fixed costs 2––– 4

–––10–––

27



Marks3 (a) Flexed budget

Sales units 1/2Production units 1/2Sales revenue 1/2Material cost 1/2Labour cost 1/2Fixed cost 1/2Closing stock 1

Actual figures – all of them 1

VariancesSales revenue 1/2Material cost 1/2Labour cost 1/2Fixed cost 1/2

––– 7

(b) Sales price 1Mentioning materials price 1Mentioning materials usage 1

––– 3–––10–––

4 (a) correctly putting in the order cost 1/2correctly putting in the annual demand 1/2correctly putting in the holding cost 1/2calculation 1/2

––-– 2

(b) Purchase cost 1Order cost 1Holding cost 1Saving 1

––– 4

(c) Effect on EOQ 1Effect on purchase costs 1Effect on order costs 1Effect on holding costs 1

––– 4–––10–––

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

––– 10–––

28




PART 1

FRIDAY 11 JUNE 2004

QUESTION PAPER





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 examinationhall


Pape

r 1.2




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

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

A Annual factory power cost where the electricity supplier sets a tariff based on a fixed charge plus a constant unitcost 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 apremium rate.

C Total direct material cost for a period if the supplier charges a lower unit cost on all units once a certain quantityhas 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 suppliedup to a maximum charge for the period.

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

At the specific levels of activity indicated, what do the lines depicted as ‘T’ and ‘V’ represent?Line ‘T’ Line ‘V’

A Loss ProfitB Loss ContributionC Total fixed costs ProfitD Total fixed costs Contribution

2

£Totalcost

0 Volume of activity

V

T

£

0 Units



3 An organisation manufactures and sells a single product. At the budgeted level of output of 2,400 units per week, theunit cost and selling price structure is as follows:

£ per unit £ per unitSelling price 60Less – variable production cost 15Less – other variable cost 15Less – fixed cost 30

–––(50)–––

Profit 10–––

What is the breakeven point (in units per week)?

A 1,200

B 1,600

C 1,800

D 2,400

4 A company manufactures one product which it sells for £40 per unit. The product has a contribution to sales ratio of40%. Monthly total fixed costs are £60,000. At the planned level of activity for next month, the company has amargin of safety of £64,000 expressed in terms of sales value.

What is the planned activity level (in units) for next month?

A 3,100

B 4,100

C 5,350

D 7,750

5 A company manufactures and sells two products (X and Y) both of which utilise the same skilled labour. For thecoming period, the supply of skilled labour is limited to 2,000 hours. Data relating to each product are as follows:

Product X YSelling price per unit £20 £40Variable cost per unit £12 £30 Skilled labour hours per unit 2 4Maximum demand (units) per period 800 400

In order to maximise profit in the coming period, how many units of each product should the companymanufacture and sell?

A 200 units of X and 400 units of Y

B 400 units of X and 300 units of Y

C 600 units of X and 200 units of Y

D 800 units of X and 100 units of Y

3 [P.T.O.



4

6 An organisation manufactures a single product. The total cost of making 4,000 units is £20,000 and the total costof 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 £0·80B £1·20C £1·25D £2·00

7 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.

8 The stock records for one specific stores item for last month show the following information:

Date Receipts Issuesunits units

14th 15013th 60015th 20022nd 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?

A £18,200

B £18,300

C £18,525

D £19,500

9 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



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 abatch 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 andFinishing. The following budgeted data are available:

Cost centre Primary FinishingAllocated and apportioned fixed overhead costs £96,000 £82,500Direct labour minutes per unit:

– product X 36 25– product Y 48 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 hoursfor the period. During the same period the actual total overhead expenditure amounted to £108,875 and 30,000machine 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 theeffect 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 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 usagevariance 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 aservice 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 calculationshave 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 £40Salary cost per hour for junior consultants £25Overhead absorption rate per hour applied to all hours £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 furtherprocessing before it is in a saleable condition. There are no opening stocks and no work in progress. The followingdata are available for last period:

£Total joint production costs 384,000Further processing costs (product H) 159,600

Product Selling price Sales Productionper unit units units

G £0·84 400,000 412,000H £1·82 200,000 228,000

Using the physical unit method for apportioning joint production costs, what was the cost value of the closingstock 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 allproduction each month is sold at a price of £3·70 per unit. A potential new customer has offered to buy 6,000 unitsper month at a price of £2·95 per unit. The company has sufficient spare capacity to produce this quantity. If the newbusiness is accepted, sales to existing customers are expected to fall by two units for every 15 units sold to the newcustomer.

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. Weeklydemand is 1,500 units of each component but only 24,000 machine hours are available each week. A decisionhas to be made on which component to buy in from an outside supplier. The following data are available:

11 L M N PVariable production cost (£ per unit) 45 40 30 20General purpose machinery hours per unit 13 15 14 16Purchase price from outside supplier (£ per unit) 57 55 54 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




The objective is to maximise contribution and the dotted line on the graph depicts this function. There are threeconstraints which are all of the ‘less than or equal to’ type which are depicted on the graph by the three solid lineslabelled (1), (2) and (3).

At which of the following intersections is contribution maximised?

A Constraints (1) and (2)

B Constraints (2) and (3)

C Constraints (1) and (3)

D Constraint (1) and the x-axis

(50 marks)

9 [P.T.O.

y

x0

(1)

(2)(3)




1 Duddon Ltd makes a product that has to pass through two manufacturing processes, I and II. All the material is inputat the start of process I. No losses occur in process I but there is a normal loss in process II equal to 7% of the inputinto 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. Allcompleted production from process I is transferred into process II in the same month. There is no work in progress inprocess II.

Information for last month for each process is as follows:

Process IOpening work in progress 200 units (40% complete for conversion

costs) valued in total at £16,500Input into the process 1,900 units with a material cost of £133,000Conversion costs incurred £93,500Closing work in progress 50% complete for conversion costs

Process IITransfer from process I 1,800 unitsConversion costs incurred £78,4501,650 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. (2 marks)

(10 marks)

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

Direct material 20Direct labour (6 hours at £7·50 per hour) 45Variable production overheads 27

–––92–––

The budgeted and actual activity levels for the last quarter were as follows:Budget Actualunits units

Sales 20,000 19,000Production 20,000 21,000

The actual costs incurred last quarter were:£

Direct material 417,900Direct labour (124,950 hours) 949,620Variable production overheads 565,740

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). (4 marks)

(10 marks)

3 Braithwaite Ltd manufactures and sells a single product. The following data have been extracted from the currentyear’s budget:

Contribution per unit £8Total weekly fixed costs £10,000 Weekly profit £22,000Contribution to sales ratio 40%

The company’s production capacity is not being fully utilised in the current year and three possible strategies are underconsideration. Each strategy involves reducing the unit selling price on all units sold with a consequential effect onthe budgeted volume of sales. Details of each strategy are as follows:

Strategy Reduction in unit Expected increase in weekly selling price sales volume over budget

% %A 2 10B 5 18C 7 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 companyin order to maximise weekly profits. (4 marks)

(c) Briefly explain the practical problems that a management accountant might encounter in separating costsinto 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 hasasked for your advice on the relevant costs for the contract. The following information is available:

MaterialsThe 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 fornormal production. This material originally cost a total of £3,125. If not used on this contract, the stock of materialL would be sold for £11 per kg.

LabourThe contract requires 800 hours of skilled labour. Skilled labour is paid £9·50 per hour. There is a shortage of skilledlabour and all the available skilled labour is fully employed in the company in the manufacture of product P. Thefollowing information relates to product P:

£ per unit £ per unitSelling price 100Less

Skilled labour 38Other variable costs 22

–––(60)–––40–––

Required:

(a) Prepare calculations showing the total relevant costs for making a decision about the contract in respect ofthe following cost elements:(i) materials K and L; and(ii) skilled labour. (7 marks)

(b) Explain how you would decide which overhead costs would be relevant in the financial appraisal of thecontract. (3 marks)

(10 marks)

12



5 Langdale Ltd is a small company manufacturing and selling two different products – the Lang and the Dale. Eachproduct passes through two separate production cost centres – a machining department, where all the work is carriedout on the same general purpose machinery, and a finishing section. There is a general service cost centre providingfacilities for all employees in the factory.

The company operates an absorption costing system using budgeted overhead absorption rates. The managementaccountant has calculated the machine hour absorption rate for the machining department as £3·10 but a directlabour 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 DaleSales (units) 6,000 19,000Production (units) 7,200 10,400Direct material cost per unit £52 £44Direct labour cost per unit:

– machining department (£8 per hour) £72 £40– finishing section (£6 per hour) £42 £36

Machining department – machine hours per unit £15 £13

Fixed production overhead costs: £– machining department 183,120– finishing section 241,320– general service cost centre 182,800

Number of employees:– machining department 14– finishing section 32– general service cost centre 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 elementseparately. (2 marks)

(c) The company is considering a change over to marginal costing. State with reasons, whether the total profitfor the coming year calculated using marginal costing would be higher or lower than the profit calculatedusing absorption costing. No calculations are required. (3 marks)

(10 marks)

13 [P.T.O.



14

Formulae Sheet




Answers



17


Section A

1 A2 D3 C4 C5 D6 C7 B8 A9 D

10 D11 D12 A13 B14 C15 B16 C17 C18 C19 B20 C21 C22 A23 A24 B25 D

1 A

2 D

3 C Contribution per unit (CPU) £(60 – 15 – 5) £40Total fixed cost £(30 x 2,400) £72,000Breakeven point (72,000 ÷ 40) 1,800 units

4 C CPU (40 x 0·40) £16Breakeven point (60,000 ÷ 16) 3,750 unitsMargin of safety (64,000 ÷ 40) 1,600 units

––––––––––Planned activity level 5,350 units

––––––––––

5 D X YCPU £8 £10Contribution per hour £4 £2·50Ranking 1st 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 £(40,000 – 20,000) ÷ (20,000 – 4,000) units = £1·25 per unit

7 B

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

9 D

EOQ = = 1,155

10 D

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

(2 x 20 x (4 x 12,500)0 10 x 15⋅



12 A £Actual overhead 108,875 Absorbed overhead (30,000 ÷ 3·50) 105,000

–––––––- Under absorption 113,875

––––––––

13 B Sales < production by 280 unitsMarginal costing profit would be lower by 280 x (48,000 ÷ 12,000) = £1,120

14 C

15 B Adverse price variance (0·04 x 2·50 x 12,000) = £1,200

16 C £12,000 litres at £2·50 per litre 30,000 Add Favourable usage variance 11,815

–––––––- Standard cost of actual production 31,815

–––––––- Actual production £31,815 ÷ (10·5 x 2·50) 1,212 units

–––––––-

17 C Let x = budgeted expenditure1·1x – x = 136,0001.1x – x = 360,000

1·1 x = 396,000 = actual expenditure (£)

18 C £Actual sales at standard selling price 112,500

(9,000 x £12·50)Actual sales at actual selling price 117,000

–––––––- Sales price variance 4,500 favourable

–––––––-

19 B

20 C 11 x 13,467 – (440 x 330)

b = –––––––––––––––––––––––– = 0·6917 (11 x 17,986) – (440)2

a = (330 ÷ 11) – 0·6917 (440 ÷ 11) = 2·33

21 C £Salary costs (54 x 40) + (110 x 25) 4,910Overhead cost (164 x 20) 3,280

–––––––- Total cost 8,190Mark-up (40% on total cost) 3,276

–––––––- Final fee 11,466

–––––––-

22 A Joint costs apportioned to product H: £(228 ÷ 640) x 384,000 136,800Further processing costs 159,600

–––––––- Total cost of H production (228,000 units) 296,400

–––––––- Closing stock: 28,000 x (296,400 ÷ 228,000) = £36,400

23 A CPU from existing business (3·70 – 2·50) £1·20New business CPU (2·95 – 2.50) £0·45

£Total contribution from new business (6,000 x 0·45) 2,700Less Lost contribution from existing business

2 x (6,000 ÷ 15) x 1·20 (960)––––––-

Overall increase in contribution and profit 1,740––––––-

24 B L M N PAdditional cost of buying in one unit (£) 12 15 24 30Machine hours per unit 13 15 14 16Additional cost of buying in per machine hour (£) 14 13 16 15Ranking for buying in 2nd 1st 4th 3rd Buy in component M.

25 D

18



Section B

1 (a) Cost per equivalent unit (EU) calculations for Process I:Materials Conversion

EU EUCompletion of opening work in progress – 120Started and finished units last month 1,600 1,600Closing work in progress 300 150

–––––– ––––––Work done last month 1,900 1,870

–––––– ––––––£133,000 £93,500

Cost per EU ––––––––– ––––––––1,900 1,870= £70 = £50

(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) Process II Account

Units £ Units £Transfer from Process I 1,800 214,500 Normal loss 126 –Conversion costs 78,450 Abnormal loss 24 4,200

Finished production 1,650 288,750–––––– –––––––– –––––– ––––––––1,800 292,950 1,800 292,950

–––––– –––––––– –––––– ––––––––

Workings214,500 + 78,450

Cost per unit = –––––––––––––––––––– = £175(0·93 x 1,800)

Valuations:Abnormal loss = 24 x 175 = £4,200Finished production = 1,650 x 175 = £288,750

(c) – In job costing each job is costed separately whereas in process costing it is the process itself which is costed. The totalcost 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 costingall units are identical in any one process.

2 (a)Total

varianceDirect material £ £Actual quantity at actual price 417,900

2,100 FStandard quantity for actual production at standard price 420,000

Direct labourActual hours at actual rate 949,620

4,620 AStandard hours for actual production at standard rate 945,000

Variable production overheadsActual expenditure 565,740

1,260 FStandard cost of actual production 567,000

19



20

(b) £ Variance (£)Actual hours at actual rate 949,620

Rate 12,495 AActual hours at standard rate 937,125

Efficiency 7,875 FStandard hours for actual production at standard rate 945,000

(c) 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) (i) Selling price per unit = £8 ÷ 0·40 = £20

(ii) Weekly contribution = 10,000 + 22,000 = £32,000Weekly sales = 32,000 ÷ 8 = 4,000 units

(b) Strategy A B CUnits per week 4,400 4,720 5,000

–––––– –––––– ––––––£/unit £/unit £/unit

Selling price 19·60 19·00 18·60Less Variable cost (12·00) (12·00) (12·00)

–––––– –––––– ––––––Contribution 7·60 7·00 6·60

–––––– –––––– –––––– £ £ £

Total contribution 33,440 33,040 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 costsoften 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 3,000 kg at (£19,600 ÷ 2,000) x 1·05 30,870 L 200 kg at £11 2,200

––––––––£33,070––––––––

(ii) Skilled labour£

Labour cost 800 hours at £9·50 7,600Opportunity cost of labour 800 hours at (£40 ÷ 4) 8,000

––––––––£15,600––––––––

(b) Any variable overhead costs associated with the contract would be relevant because they would represent additional orincremental 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 consequenceof the contract being undertaken. In that case the relevant amount would be the specific increase in the total fixed overheadcosts caused by the acceptance of the contract.

Arbitrary apportionments of existing fixed overhead costs would not be relevant. Similarly sunk and committed costs wouldnot be relevant.



21

5 (a) £Fixed production overhead costs (finishing section) 241,320+Reapportionment of general service centre costs

£82,800 x (32 ÷ 46) 57,600––––––––298,920––––––––

Direct labour hours in finishing section: hoursLang 7,200 units x (42 ÷ 6 ) 50,400Dale 10,400 units x (36 ÷ 6) 62,400

––––––––112,800––––––––

Direct labour hour absorption rate for the finishing section:£298,920 ÷ 112,800 = £2·65

(b) Cost per unit for a Dale: £ per unit £ per unit

Direct material 44·00Direct labour

– machining department 40·00 – finishing section 36·00

–––––– 76·00–––––––

Prime cost 120·00Production overhead costs:

– machining department (3 x £3·10) 9·30– finishing section (6 x £2·65) 15·90

––––––––Total cost per unit for Dale £145·20

––––––––

(c) For both products – Lang and Dale – production is greater than sales for the coming year. In other words, stocks of finishedproducts will be increasing. In this situation, profits calculated using marginal costing principles will be lower than the profitscalculated using absorption costing principles.

Fixed production costs are written off as they arise under marginal costing whereas under absorption costing they form partof the product cost and the inventory valuation. Therefore in the coming year with stocks increasing and using absorptioncosting, a higher amount of fixed production cost will be carried forward at the year end than was brought forward in anyopening stocks. The effect is that some of the costs that would have been written off and would have reduced the profit undermarginal costing are being carried forward under absorption costing to be written off against profits in later years.



23

Part 1 Examination – Paper 1.2Financial Information for Management June 2004 Marking Scheme

MarksSection AEach of the 25 questions in this section is worth 2 marks 50

Section B1 (a) Equivalent units of work done 1

Cost per equivalent unit 1Value of work in progress 1Value of transfer 1

––– 4(b) Transfer in from Process I 1/2

Conversion costs 1/2Normal loss 1Abnormal loss 1Finished production 1

––– 4(c) Two differences – 1 mark for each 2

––– 10–––

2 (a) Three total variances – 1 mark for each 3(b) Rate and efficiency variances – 11/2 marks for each 3(c) Four causes (two for each variance in (b)) – 1 mark for each 4

––– 10–––

3 (a) Selling price 1Weekly sales 2

––– 3(b) Units for each strategy 1

Selling price for each strategy 1Contribution for each strategy 1Recommendation (best strategy) 1

––– 4(c) Mixed or semi-variable costs 1

Example 1Methods 1

––– 3––– 10–––

4 (a) Material K 2Material L 2Skilled labour: – cost 1Skilled labour: – opportunity cost 2

––– 7(b) Explanation of relevant cost concept 1

Variable overhead costs 1Fixed overhead costs 1

––– 3––– 10–––



24

Marks5 (a) Reapportionment of general service centre costs 11/2

Original cost of finishing section 1/2Total direct labour hours in finishing section 2Direct labour hour rate 1

––– 5(b) Prime cost 1

Overhead costs (2 x 1/2 mark) 1––– 2

(c) Production > sales/increasing stocks 1Marginal costing profit lower than absorption costing profit 1Explanation 1

––– 3––– 10–––




PART 1


QUESTION PAPER









Pape

r 1.2



Section A – ALL 25 questions are compulsory and MUST be attemptedPlease 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 When total purchases of raw material exceed 30,000 units in any one period then all units purchased, including theinitial 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?

2 A break-even chart for a company is depicted as follows:

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

£

30,000UNITS

0

£

30,000UNITS

0

£

30,000UNITS

0

£

30,000UNITS

0

B

DC

A

£

UNITS0

SALES REVENUE

TOTAL COSTS

4,000



3 Which of the following is a feasible value for the correlation coefficient?

A – 2·0

B – 1·2

C 0

D + 1·2

4 An organisation’s records for last month show the following in respect of one particular stores item:

Date Receipts Issues Stockunits units units

1st 2004th 150 5012th 500 55019th 200 35027th 300 50

The opening stock for last month was valued at a total of £4,000 and all receipts during the month were purchasedat a cost of £26·60 per unit.

The organisation uses the weighted average method of valuation and calculates a new weighted average price aftereach stores receipt.

What was the total value of the issues during last month?

A £16,000

B £16,900

C £17,000

D £17,290

5 The total cost of production for two levels of activity is as follows:

Level 1 Level 2Production (units) 3,000 5,000Total cost (£) 6,750 9,250

The variable production cost per unit and the total fixed production cost both remain constant in the range of activityshown.

What is the variable production cost per unit?

A £0·80

B £1·25

C £1·85

D £2·25

6 Monthly variance reports are an example of which one of the following types of management information?

A Tactical

B Strategic

C Planning

D Operational



7 A company uses a standard absorption costing system. Last month budgeted production was 8,000 units and thestandard fixed production overhead cost was £15 per unit. Actual production last month was 8,500 units and theactual 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


A company operating a standard costing system has the following direct labour standards per unit for one of itsproducts:

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 hoursworked was £110,750.

8 What was the direct labour rate variance for last month?


B £4,250 adverse


D £5,250 adverse

9 What was the direct labour efficiency variance for last month?


B £4,250 adverse


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 of12,400 machine hours.

In the period covered by the budget, actual machine hours worked were 2% more than the budgeted hours and theactual 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



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 perequivalent 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 Activity level (units) Total cost (£)7 300 17,5008 360 19,5009 400 20,50010 320 18,50011 280 17,000

The equation for total cost is being calculated using regression analysis on the above data. The equation for total costis 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 directlabour. Direct labour is paid at the rate of £7·50 per hour. Production overheads are absorbed at a rate of £12·50per 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



14 Data relating to a particular stores item are as follows:

Average daily usage 400 unitsMaximum daily usage 520 unitsMinimum daily usage 180 unitsLead time for replenishment of stock 10 to 15 daysReorder quantity 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 profitusing 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






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 Quantity needed Quantity Original cost of Current Currenttype for project currently quantity in stock purchase resale

in stock price pricekg kg £/kg £/kg £/kg

T 500 100 40 45 44V 400 200 55 52 40

Material T is regularly used by the company in normal production. Material V is no longer in use by the companyand 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 whichis under consideration. The net book value of the machine is £1,000. If not used on this contract, the machinecould be sold now for a net amount of £1,200. After use on the contract, the machine would have no saleable valueand 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




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



25 A factory consists of two production cost centres (P and Q) and two service cost centres (X and Y). The total allocatedand apportioned overhead for each is as follows:

P Q X Y£95,000 £82,000 £46,000 £30,000

It has been estimated that each service cost centre does work for the other cost centres in the following proportions:

P Q X YPercentage of service cost centre X to 40 40 – 20Percentage of service cost centre Y to 30 60 10 –

After the reapportionment of service cost centre costs has been carried out using a method that fully recognisesthe 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)




1 Maybud Ltd operates Process X which creates two joint products, A and B, in the ratio of 3:2 by volume. There isno 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 costswere £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 endof 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, bothproduct A and product B are further processed at a cost of £2 per litre and £3 per litre respectively. The final sellingprices of the products are as follows:

Product £ per litreA 8B 12

Required:

(a) Prepare the process account for last month including the output volume and cost of products A and Bseparately. (7 marks)

(b) Explain clearly how an abnormal gain arises in a process. Indicate where it would appear in a processaccount and how it would be valued. (3 marks)

(10 marks)

2 Despard Ltd manufactures and sells a single product. The following data have been extracted from the current year’sbudget:

Sales and production (units) 5,000Variable cost per unit £50Fixed cost per unit £70Contribution to sales ratio 75%

The selling price per unit for next year is to be 8% above the current year’s budgeted figure, whereas both the variablecost 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 thetarget level of profit. (4 marks)

(c) Explain, with an example, the term semi-variable (mixed) cost. How would such a cost be dealt with inundertaking the analysis in (a)? (3 marks)

(10 marks)



3 Oakapple Ltd manufactures a single product which has a standard selling price of £15 per unit. It operates a standardabsorption costing system. The total standard production cost is £9 per unit of which £4 per unit represents thevariable cost element. Non-production costs of £44,000 per month are all fixed.

The following data relate to the month just ended:Budget Actualunits units

Production 48,000 47,000Sales 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 anorganisation.

(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. (3 marks)

(10 marks)

4 The following data for the current year relate to a sterile pack purchased by the Goodheart Hospital:

Annual demand 90,000 unitsAnnual holding cost per unit £8Cost of placing an order £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 sterilepacks. (4 marks)

(c) Identify TWO major costs associated with each of the following:

(i) holding stock;(ii) ordering stock. (2 marks)

(10 marks)



5 Dauntless Ltd aims to maximise its profits from the two products (X and Y) which it manufactures and sells. Theselling prices per unit for products X and Y are £220 and £206 respectively. At these prices the company can sellall that it can produce. The following product cost data is available:

Product X Product Y£/unit £/unit

Material L (£6 per litre) 30 36Material M (£7·50 per litre) 45 30Other 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 secondthree 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 totalcontribution. (4 marks)

The company’s management accountant has already carried out some preliminary calculations relating to the secondthree month period. Using linear programming, she has determined that the optimal production plan for that quarterinvolves 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 theresultant total contribution. (6 marks)

(10 marks)



13

Formulae Sheet




Answers




Section A

1 A2 A3 C4 A5 B6 A7 C8 A9 D10 B11 A12 B13 A14 C15 C16 B17 A18 B19 D20 D21 C22 A23 D24 C25 D

1 A

2 A

3 C

4 ADate Units Average price (£) £1st 200 20·00 4,0004th (150) 20·00 (3,000)

––––– –––––––50 1,000

12th 500 26·60 13,300––––– –––––––

550 26·00 14,30019th (200) 26·00 (5,200)27th (300) 26·00 (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£

Actual cost 144,500Standard cost of actual production (8,500 x 15) 127,500

––––––––Total overhead variance 17,000 Adverse

––––––––

8 A



9 D£ Variance (£)

Actual cost 110,7504,250 F Rate

Actual hours at standard rate (9,200 x 12·50) 115,0005,250 A Efficiency

Standard hours for actual production at standard rate (2,195 x 4 x 12·50) 109,750

10 B£

Actual expenditure 56,389Absorbed cost (12,400 x 1·02 x 4·25) 53,754

–––––––Total under absorption 2,635

–––––––

11 A£

Opening WIP 1,710Completion of opening WIP (300 x 0·40 x 10) 1,200Units started and completed in the month (2,000 – 300) x 10 17,000

–––––––Total value (2,000 units) 19,910

–––––––

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£

Direct materials 45Direct labour (4 hours) 30

––––Prime cost 75Production overheads (4 x 12·50) 50

––––Total production cost 125Non-production overheads (75 x 0·6) 45

––––Total cost 170

––––

14 CMaximum usage x Longest lead time = 520 x 15 = 7,800

15 C

16 B £Absorption costing profit 40,000Less Increase in stock at fixed overhead cost per unit

(18,000 – 16,500) x 10 (15,000)–––––––

Marginal costing profit 25,000–––––––

17 A

18 BMaterial £T (500 x 45) 22,500V (200 x 40) + (200 x 52) 18,400

–––––––Total relevant cost 40,900

–––––––



19 D£

Opportunity cost now 1,200Cost of disposal in one year’s time 800

––––––2,000

––––––

20 D

21 CProfits maximised when Marginal revenue (MR) = Marginal cost (MC)MR = 40 – 0·06QMC = 10MR = MC Therefore 10 = 40 – 0·06Q

Q = 30 ÷ 0·6 = 500Price (P) = 40 – 0·03(500) = 25

22 AProfit = Total revenue (TR) – Total cost (TC)When P = 31 then 31 = 40 – 0·03Q and Q = 300

£TR = P x Q = 31 x 300 = 9,300TC = 3,500 + (10 x 300) = (6,500)

–––––––Profit 2,800

–––––––

23 DCPU = £27Contribution to sales ratio = 45%Selling price = 27 ÷ 0·45 = £60Margin of safety in units = 13,500 ÷ 60 = 225Break-even point (BEP) = 1,000 – 225 = 775 unitsAt BEP: total contribution = total fixed costsTotal fixed costs = 775 x 27 = £20,925

24 C

25 DP = 95,000 + 0·4X + 0·3YX = 46,000 + 0·1YY = 30,000 + 0·2X

X = 46,000 + 0·1(30,000 + 0·2X) = 46,000 + 3,000 + 0·02X0·98X = 49,000 and X = 50,000

Y = 30,000 + 0·2(50,000) = 40,000P = 95,000 + 0·4(50,000) + 0·3(40,000) = 127,000



Section B

1 (a) Process X AccountLitres £ Litres £

Raw materials input 80,000 158,800 Joint products (W1)Product A 44,700 141,550Product B 29,800 141,550

Conversion costs – 133,000 Normal loss (W2) 4,000 3,000Abnormal loss (W3) 1,500 5,700

––––––– –––––––– ––––––– ––––––––80,000 291,800 80,000 291,800––––––– –––––––– ––––––– ––––––––

Cost per equivalent litre (EL):Materials and conversion

ELOutput (joint products combined) 74,500Abnormal loss 1,500

–––––––Total work done 76,000

–––––––£

Costs arising 291,800Less: Normal loss (scrap value) (3,000)

––––––––288,800––––––––

Cost per equivalent litre:Materials and conversion (288,800 ÷ 76,000) £3·80

Workings:W1 Product Selling price Further Net Production Net realisable

£/litre processing realisable (ratio 3:2) value ofcost value litres production

£/litre £/litre £A 8 2 6 44,700 268,200B 12 3 9 29,800 268,200

Total joint production cost (A + B) = 74,500 litres at £3·80 = £283,100Apportioned 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

(b) An abnormal gain occurs when the actual loss is less than the normal loss expected. In other words the actual output ofgood 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.

2 (a) Calculations for the current year:

(i) Contribution per unit £50 x (75 ÷ 25) = £150

£’000(ii) Total contribution (5,000 x £150) 750

Less Total fixed costs (5,000 x £70) (350)––––

Total profit 400––––

(b) Calculations for next year:£/unit

Selling price 50 x (100 ÷ 25) x 1·08 216Less Variable cost (50 x 1·12) (56)

––––Contribution 160

––––£’000

Total fixed costs (5,000 x £70) x 1·12 392Target/required profit [as per (a)(ii)] 400

––––Required contribution for next year 792

––––

Number of units required = (792,000 ÷ 160) = 4,950 units.



(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 avariable 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 highlow method or linear regression. Each would then be considered along with the other variable and other fixed costs in theanalysis.

3 (a) Sales variances:£

Actual sales units at actual selling price 678,500Actual sales units at standard selling price (46,000 x £15) 690,000

––––––––Sales price variance 11,500 A

––––––––

Sales volume profit variance: (46,000 – 45,000) x £(15 – 9) 6,000 F––––––––

(b) The person (or persons) who should receive the information generated by any system in an organisation should be the personwith responsibility for that aspect or part of the business to which the information relates. In the case of sales varianceinformation, it would be the person responsible for sales in the organisation. This could be the sales manager or marketingmanager. In a large divisionalised company it may be the divisional manager. A summary of the sales and cost varianceswould be issued to senior management in the organisation.

(c) (i) Absorption costing profit: £Gross profit 45,000 x £(15 – 9) 270,000Less Non-production costs (44,000)

––––––––Absorption costing net profit 226,000

––––––––

(ii) Marginal costing profit: £Total contribution 45,000 x £(15 – 4) 495,000Less Fixed production costs (48,000 x £5) (240,000)

Fixed non-production costs (44,000)––––––––

Marginal costing net profit 211,000––––––––

Alternative answer: £Absorption costing net profit [as above in (i)] 226,000Deduct Increase in stocks at standard fixed

production cost per unit(3,000 units at £5 per unit) (15,000)

––––––––Marginal costing net profit 211,000

––––––––

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 Annual Annualholding cost ordering cost total cost

£ £ £Current year(750 ÷ 2) x 8 3,000 3,000(90,000 ÷ 750) x 25 3,000 3,000

––––––6,000

––––––

Next year(900 ÷ 2) x 8 3,600 3,600(90,000 ÷ 900) x 36 3,600 3,600

––––––7,200

––––––

Total extra cost of holding and ordering stock for next year £1,200(compared with current year)



(c) 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.

5 (a) Product X Product YContribution per unit (£) 90 96Litres of Material L per unit 5 6Contribution per litre of Material L 18 16Ranking 1st 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 5x + 6y = 24,000 ……….(1)and 6x + 4y = 24,000 ……….(2)

Solving these simultaneously gives:

(1) X 6 30x + 36y = 144,000(2) X 5 30x + 20y = 120,000

––––––––––––––––––––(1) – (2) 16y = 24,000

y = 1,500and 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 unitsof product Y. This will give a resultant total contribution of [(3,000 x 90) + (1,500 x 96)] = £414,000.





–––

Section B1 (a) Inputs into process 1

Normal loss 2Abnormal loss 1Joint products 3

–––7

(b) Actual loss less than normal loss 1Debit entry in process account 1Valuation at full process cost 1

–––3

–––10–––

2 (a) Contribution per unit 1Total profit 2

–––3

(b) Contribution per unit 2Total fixed costs 1Required contribution 1/2Number of units 1/2–––

4

(c) Partly fixed/partly variable 1Example 1Separation of fixed/variable elements 1

–––3

–––10–––

3 (a) Sales price variance 2Sales volume profit variance 2

–––4

(b) General principle/suggested person(s) 3

(c) Absorption costing profit 1Marginal costing profit 2

–––3

–––10–––



Marks4 (a) (i) EOQ this year 2

(ii) EOQ next year 2–––

4

(b) Annual holding costs 2Annual ordering costs 2

–––4

(c) 1/2 mark for each of four costs identified 2–––10–––

5 (a) Contribution per unit 1Contribution per litre (L) 1Optimal units for product X 1Resultant contribution 1

–––4

(b) Equations/formulations 3Optimal units for products X and Y 2Resultant contribution 1

–––6

–––10–––




PART 1

FRIDAY 10 JUNE 2005

QUESTION PAPER









Pape

r 1.2



Section A – ALL 25 questions are compulsory and MUST be attemptedPlease 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 Four lines representing expected costs and revenue have been drawn on a break-even chart:

Which line represents total variable cost?

A Line A

B Line B

C Line C

D Line D

2 Four lines have been labelled as J, K, L and M at different levels of output on the following profit-volume chart:

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

0

£A

B

C

D

Output

0

£

JK

L

M

Output



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:

Total cost for Total cost forCost type 125 units 180 units

£ £T1 1,000 1,260T2 1,750 2,520T3 2,475 2,826T4 3,225 4,644

Which two cost types would be classified as being semi-variable?

A T1 and T3

B T1 and T4

C T2 and T3

D T2 and T4

4 A company manufactures and sells a single product. The following data relate to a weekly output of 2,880 units:

£ per unit £ per unitSelling price 80Less costs:

Variable production 30Other variable 10Fixed 25

—–(65)—–

Profit 15—–

What is the weekly break-even point (in units)?

A 1,900

B 1,440

C 1,800

D 4,800

5 An organisation manufactures a single product which is sold for £60 per unit. The organisation’s total monthly fixedcosts are £54,000 and it has a contribution to sales ratio of 40%. This month it plans to manufacture and sell4,000 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



6 An organisation is using linear regression analysis to establish an equation that shows a relationship betweenadvertising expenditure and sales. It will then use the equation to predict sales for given levels of advertisingexpenditure. Data for the last five periods are as follows:

Period Advertising Salesnumber expenditure

£000 £0001 17 1082 19 1163 24 1414 22 1235 18 112

What are the values of ‘Σx’, ‘Σy’ and ‘n’ that need to be inserted into the appropriate formula?

Σx Σy nA £600,000 £100,000 5

B £100,000 £600,000 5

C £600,000 £100,000 10

D £100,000 £600,000 10

7 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

8 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 examinationquestions.

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.

9 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






10 A company manufactures two products P1 and P2 in a factory divided into two cost centres, X and Y. The followingbudgeted data are available:

Cost centreX Y

Allocated and apportioned fixedoverhead costs £88,000 £96,000

Direct labour hours per unit:Product P1 3·0 1·0Product P2 2·5 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 wererecorded.

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



13 The following data relate to material QQ2 for last month:

£Opening stock 300kg valued at 2,700Purchases:

3rd 500kg for 5,50017th 400kg for 4,200

Issues:12th 600kg19th 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 directlabour. Direct labour is paid at the rate of £8 per hour. Production overheads are absorbed at a rate of £26 per directlabour hour and non-production overheads are absorbed at a rate of 120% of prime cost.


A £2,000

B £2,400

C £2,840

D £4,400


A company operates a process costing system using the first in first out (FIFO) method of valuation. No losses occur in theprocess.

The following data relate to last month:

Units Degree of completion ValueOpening work in progress 100 60% £680Completed during the month 900Closing work in progress 150 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



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 acontribution to sales ratio of 40%. Last month actual sales of 10,500 units with total revenue of £204,750 wereachieved.

What were the sales price and sales volume contribution variances?

Sales price variance (£) Sales volume contribution variance (£)A 5,250 adverse 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 perhour.


Actual hours worked 5,500Budgeted hours 5,000Standard hours for actual production 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 labourcapacity. The remaining hours for the contract can be found either by weekend overtime working paid at double thenormal rate of pay or by diverting labour from the manufacture of product QZ. If the contract is undertaken and labouris diverted, then sales of product QZ will be lost. Product QZ takes three labour hours per unit to manufacture andmakes 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



20 A company purchased a machine several years ago for £50,000. Its written down value is now £10,000. Themachine 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. After this time themachine would be sold for £5,000.

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 maximiseprofit. The following information is available:

ComponentA B C D

Variable production cost per unit (£) 60 64 70 68 Purchase cost per unit from

an outside supplier (£) 100 120 130 110Machine hours per unit to manufacture 4 7 5 6

As it has insufficient machine hours available to manufacture all the components required, the company will need tobuy 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



22 A company has three branches (X, Y and Z) to which the following budgeted information relates:

Branch Branch BranchX Y Z Total

£000 £000 £000 £000Sales 200 200 200 600

—— —— —— ——Contribution 60 50 20 130Less: Fixed costs (35) (35) (30) (100)

—— —— —— ——Profit/(loss) 25 15 (10) 30

—— —— —— ——

60% of the total fixed costs are general overheads. General overheads are apportioned to the branches on the basisof 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 revisedbudgeted 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. Hereceives 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. Decisionsinvolving 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



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. Eachmaterial is in short supply – 1,000 kg of G and 1,800 kg of H are available next period. The company holds no stocksand it can sell all the units produced.

The management accountant has drawn the following graph accurately showing the constraints for materials G and H.

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

Material G Material HA 10 20

B 10 10

C 20 20

D 20 10

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

Product X Product YA 0 90

B 50 60

C 60 50

D 125 0

(50 marks)

10

Product Y(units)

Material G

Material H

100

90

125 1500

Product X(units)




1 Saphir Ltd operates a process which creates two joint products, X and Y, in the ratio of 7 : 5 by weight. No stocksof work in progress are held in the process and there is a normal process loss equal to 5% of input. Losses have arealisable 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 productsare:

Product Selling price per unitX £25·00Y £37·50

Required:

(a) Prepare the process account for last month in which both the output weight and value for each of the jointproducts are shown. (8 marks)

(b) Explain briefly the characteristics of a by-product. (2 marks)

(10 marks)

2 Murgatroyd Ltd, which manufactures a single product, uses standard absorption costing. A summary of the standardproduct cost is as follows:

£ per unitDirect materials 15Direct labour 20Fixed overheads 12

Budgeted and actual production for last month were 10,000 units and 9,000 units respectively. The actual costsincurred were:

£Direct materials 138,000Direct labour 178,000Fixed overheads 103,000

Required:

(a) Prepare a statement that reconciles the standard cost of actual production with its actual cost for last monthand highlights the total variance for each of the three elements of cost. (4 marks)

Last month 24,000 litres of direct material were purchased and used by the company. The standard allows for2·5 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 statementin (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)



3 Jane plc purchases its requirements for component RB at a price of £80 per unit. Its annual usage of componentRB is 8,760 units. The annual holding cost of one unit of component RB is 5% of its purchase price and the cost ofplacing 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 timefrom placing an order to its receipt is 21 days, calculate the stock level (in units) at which an order shouldbe 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 componentRB. (4 marks)

(8 marks)

4 Archibald Ltd manufactures and sells one product. Its budgeted profit statement for the first month of trading is asfollows:

£ £Sales (1,200 units at £180 per unit) 216,000Less: Cost of sales:Less: Production (1,800 units at £100 per unit) 180,000Less: Less Closing stock (600 units at £100 per unit) (60,000)

————(120,000)————

Gross profit 96,000Less Fixed selling and distribution costs (41,000)

————Net profit 55,000

————

The budget was prepared using absorption costing principles. If budgeted production in the first month had been2,000 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 ormarginal costing principles. (2 marks)

(10 marks)



5 Ella Ltd recently started to manufacture and sell product DG. The variable cost of product DG is £4 per unit and thetotal 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 hasassumed 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 theweekly 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.



14

Formulae Sheet




Answers




Section A

1 C2 C3 A4 C5 B6 B7 B8 A9 D10 D11 A12 A13 B14 C15 B16 C17 A18 B19 C20 B21 D22 B23 A24 A25 A

1 C

2 C

3 A Total cost per unit (£) Total cost per unit (£)(125 units) (180 units)

T1 8·00 7·00T2 14·00 14·00T3 19·80 15·70T4 25·80 25·80Cost types T2 and T4 are variable and T1 and T3 are semi-variable.

4 C Contribution per unit (CPU) = (80 – 30 – 10) = £40Total fixed cost = 2,880 × 25 = £72,000Break-even point = 72,000 ÷ 40 = 1,800 units

5 B CPU = 0·40 × 60 = £24Break-even point = 54,000 ÷ 24 = 2,250 unitsMargin of safety = 4,000 – 2,250 = 1,750 units

6 B Σx = Σ Advertising expenditure = 100,000Σy = Σ Sales = 600,000n = number of pairs of data = 5

7 B

8 A

9 D



10 D Total hours in cost centre X = 8,000 × (3 + 2·5) = 44,000Total hours in cost centre Y = 8,000 × (1 + 2) = 24,000Overhead rate (X) = £88,000 ÷ 44,000 = £2 per hourOverhead rate (Y) = £96,000 ÷ 24,000 = £4 per hourOverhead cost per unit (P2) = (2·5 × 2) + (2·0 × 4) = £13

11 A £Actual overheads 128,480Absorbed overhead (8,800 × 14·50) 127,600Under absorption 880

12 A

13 B Date Units £ per unit £1st 300 9 2,7003rd 500 11 5,500

12th (600) (6,400) [5,500 + 900]——– ———

200 9 1,80017th 400 10·5 4,20019th (300) 10·5 (3,150)

——– ———300 2,850

——– ———

14 C £Prime cost (300 + 400) 700Production overheads (50 × £26) 1,300

———Total production cost 2,000Non-production overheads (1·20 × 700) 840

———Total cost 2,840

———

15 B (150 × 0·48) equivalent units × £12 = £864

16 C £Units started and finished last month (900 – 100) = 800 × £12 9,600Opening work in progress (WIP) value 680Work done to complete opening WIP (100 × 0·40) × £12 480

———10,760———

17 A Price variance: £Actual sales revenue 204,750Actual sales units at standard selling price (10,500 × £20) 210,000

————Sales price variance 5,250 A

———Volume variance (500 units × £20 × 0·40) 4,000 F

18 B Capacity variance (5,000 – 5,500) hours at £15 per hour 7,500 F

19 C 250 hours at [£9 per hour + the opportunity cost £(12 ÷ 3) per hour] = £3,250The incremental labour cost of weekend working is £4,500 (250 × £18) andbeing higher than £3,250 is therefore not relevant.

20 B Opportunity cost now £8,000Realisable value in six months £5,000Relevant cost £3,000

21 D Additional cost of buying in (compared with manufacture) per hour:A B C D

£10 £8 £12 £7Buy in component with the lowest additional cost per hour (limiting factor).



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 unit1,800 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) 1,800B 50 units of X + 60 units of Y (50 × 8) + (60 × 20) 1,600C 60 units of X + 50 units of Y (60 × 8) + (50 × 20) 1,480D 125 units of X (125 × 8) 1,000Optimal mix is the one giving the highest total contribution (£1,800)

Section B

1 (a) Process AccountKg £ Kg £

Raw materials input 10,000 18,750 Joint products (W1):Direct labour 50,000 Product X 5,600 67,200Overheads (140% of 70,000 Product Y 4,000 72,000

direct labour) ——— ————9,600 139,200

Abnormal gain (W3) 100 1,450 Normal loss (W2) 500 1,000––––––– –––––––– ––––––– ––––––––10,100 140,200 10,100 140,200––––––– –––––––– ––––––– ––––––––

Cost per kg £Costs arising (18,750 + 50,000 + 70,000) 138,750Less: Normal loss (realisable value) (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 Selling price Production Sales value of

(ratio 7:5) production£/kg kg £

X 25·00 5,600 140,000Y 37·50 4,000 150,000

Total joint production cost (X + Y) = 9,600 kg at £14·50 = £139,200Apportioned A : B in the ratio 140,000:150,000 (= 14:15)Product X = £67,200 and Product Y = £72,000

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

(b) 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 isalso created, which has a relatively low value compared to the main products.



20

2 (a) £ £Standard cost of actual production9,000 units × £(15 + 20 + 12) 423,000Total variances:Direct materials (W1) 3,000 ADirect labour (W2) 2,000 FFixed overheads (W3) 5,000 F

———— 4,000 F————

Actual cost 419,000————

Workings:W1 £ Variance (£)Actual 138,000

3,000 AStandard cost of actual production (9,000 × £15) 135,000

W2Actual 178,000

2,000 FStandard cost of actual production (9,000 × £20) 180,000

W3Actual 103,000

5,000 FStandard cost of actual production (9,000 × £20) 108,000

(b) Actual quantity × actual cost 138,000Price

6,000 F

Actual quantity × standard cost 144,000(24,000 × £6) Usage

9,000 AStandard quantity for actual productionX standard cost [(as in (a)] 135,000

(c) (i) The standard price per litre is set by the person in the organisation with the specialist knowledge about the pricescharged by suppliers for the raw materials used by Murgatroyd Ltd. This would be the manager responsible forpurchasing (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 productspecification 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.

3 (a) EOQ = [(2 × 12·50 × 8,760) ÷ (0·05 × 80)]0·5 = 234 units

(b) Usage per day = 8,760 ÷ 365 = 24Re-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 lostsales, for example. In order to avoid a stockout the company could set a buffer stock – in effect a safety level of stockto cover emergency situations such as demand and/or lead times exceeding their average levels. The holding of a bufferstock 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 toperiod (at present it is constant) and/or the lead time starts to fluctuate from its present constant level of 21 days.



4 (a) (i) Units Total cost£

Higher level 2,000 188,000Lower level 1,800 180,000

——— ————Difference 200 8,000

——— ————

Variable production cost per unit = 8,000 ÷ 200 = £40

(ii) £Total production cost for 2,000 units 188,000Less total variable production cost (2,000 × 40) (80,000)

————Total monthly fixed production cost 108,000

————

(b) (i) Contribution per unit (180 – 40) = £140Total contribution from sales = 1,200 × 140 = £168,000

(ii) £Total contribution [as in (b)(i)] 168,000Less Total fixed costs (108,000 + 41,000) (149,000)

————Net profit 19,000

————

(c) When the number of units produced and the number of units sold in a month are identical, the net profit or loss determinedby using absorption and marginal costing principles will also be the same. In other words the net profit or loss will be thesame when the opening and closing stocks for a month are unchanged.

5 (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 × £4 profit per unit = £12,000

(b) Profits are maximised when:Marginal cost (MC) = Marginal revenue (MR)MC = variable cost = 4MR = 20 – 0·004Q4 = 20 – 0·004QQ = 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 sellingprice is set high.





–––

Section B1 (a) Inputs into process 11/2

Normal loss 11/2Abnormal gain 2Joint products 3

–––8

(b) Incidental to main products 1Insignificant in value terms 1

–––2

–––10–––

2 (a) Each total variance 1 mark 3Reconciliation statement 1

–––4

(b) Price variance 11/2Usage variance 11/2

–––3

(c) Purchasing management 11/2Production management 11/2

–––3

–––10–––

3 (a) EOQ calculation 2

(b) Stock level for re-ordering 2

(c) (i) Stockout 1Buffer stock 1

(ii) Variable demand and fluctuating lead time 2–––

4–––

8–––

4 (a) (i) Variable production cost per unit 2

(ii) Total monthly fixed production cost 2–––

4

(b) (i) Total contribution 2

(ii) Net profit 2–––

4

(c) Production = sales and/or opening stock = closing stock 2–––10–––



Marks5 (a) (i) Initial selling price 2

(ii) Resultant weekly profit 1–––

3

(b) Marginal cost (MC) = Marginal revenue (MR) 1MC 1Optimal quantity (via MC = MR) 3Optimal price 2

–––7

(c) Penetration price 1Skimming price 1

–––2

–––12–––




PART 1


QUESTION PAPER









Pape

r 1.2



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 pointa 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?

2 The following breakeven chart has been drawn showing lines for total cost (TC), total variable cost (TVC), total fixedcost (TFC) and total sales revenue (TSR):

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

£

0 Units

£

0 Units

£

0 Units

£

0 Units

A B

C D

TSR

TC

TVC

TFC

Units1,7001,5001,200675

0

£



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)?

A 4,950

B 9,000

C 11,000

D 20,000


Activity level (units) 17,000 22,000Total costs (£) 140,000 170,000

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 whenactivity exceeds 18,000 units.

What is the total cost at an activity level of 20,000 units?

A £155,000

B £158,000

C £160,000

D £163,000

5 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?

A (i) and (ii) only




6 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






7 An organisation’s stock records for last month show the following transactions in respect of one item:

Date Receipts Issues Stock(units) (units) (units)

1st 3005th 100 20013th 600 80020th 300 50028th 200 300

The opening stock was valued at a total cost of £9,300 and all receipts on the 13th were purchased at a cost of £33per unit.The organisation uses the weighted average method of valuation and calculates a new weighted average after eachstores receipt.

What was the total value of the closing stock?

A £9,500

B £9,700

C £9,750

D £9,900

8 A company uses 9,000 units of a component per annum. The component has a purchase price of £40 per unit andthe 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?

A 530

B 671

C 949

D 1,342

9 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 ofholding one unit of the component in stock?

EOQ Total annual ordering costA Lower Higher

B Higher Lower

C Lower No effect

D Higher No effect



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?

Statement (i) Statement (ii)A False 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 30,000machine hours with a total overhead cost of £247,500. Actual results showed that 28,000 machine hours wererecorded 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:

Units £Production 14,000 Fixed production costs 63,000Sales 12,000 Fixed selling costs 12,000

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



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

Process Normal loss as Input Output% of input litres litres

F 8 65,000 58,900G 5 37,500 35,700

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

Process F Process GA Abnormal gain 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 labourhours 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 standardcontribution 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?

Sales price Sales volume contribution£ £

A 2,325 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



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 theformulae 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


A (i) and (ii) only




19 The correlation coefficient (r) for measuring the connection between two variables (x and y) has been calculated as0·6.

How much of the variation in the dependent variable (y) is explained by the variation in 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


A (i) and (ii) only






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 priceof the material has increased by 21/2%.

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 (inunits) relating to last month is as follows:

Product Sales Opening stock of Closing stock offinished goods finished goods

J 6,000 100 300K 4,000 400 200

Joint production costs last month were £110,000 and these were apportioned to joint products based on the numberof 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. Informationabout the variable costs and maximum demands are as follows:

Product L Product M£/unit £/unit

Material (£4 per litre) 13 19Labour (£7 per hour) 35 28

Units UnitsMaximum monthly demand 6,000 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.




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)



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 permonth, which represents 85% of its full capacity. Total monthly costs are £619,000 but at full capacity these wouldbe £700,000. Total fixed costs would remain unchanged at all activity levels up to full capacity. The normal sellingprice 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 normalselling price. If this new business is accepted, existing sales are expected to fall by one unit for every six units soldto this new customer.

Required:

(a) For the current production and sales level, calculate:

(i) the variable cost per unit;(ii) the total monthly fixed costs;(iii) the selling price per unit;(iv) the contribution per unit. (6 marks)

(b) Calculate the net increase or decrease in monthly profit which would result from acceptance of the newbusiness. (4 marks)

(c) In the context of decision making, explain the term ‘opportunity cost’ and illustrate your answer by referenceto Pointdextre Ltd. (2 marks)

(12 marks)

2 Partlet Ltd makes a product that passes through two manufacturing processes. A normal loss equal to 8% of the rawmaterial 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 eachmonth 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 IRaw material input 50,000 litres at a cost of £365,000Conversion costs £256,000Output to Process II 47,000 litres Process IIOpening work in progress 5,000 litres (40% complete for conversion costs) valued at £80,000Conversion costs £392,000Closing work in progress 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 howthe disposal costs associated with the normal loss would have been recorded in the Process I account. Nocalculations are required. (2 marks)

(12 marks)



3 JWW Ltd manufactures two products, X and Y, and any quantities produced can be sold for £60 per unit and £25per unit respectively. Variable costs of the two products are:

X Y£ per unit £ per unit

Materials (at £5 per kg) 15 5Labour (at £6 per hour) 24 3Other variable costs 6 5

––– –––Total 45 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 costper unit is as follows:

£Direct materials 11Direct labour 24Fixed production overhead 18

Budgeted and actual production for last month were 12,000 units and 12,500 units respectively. The actual costsincurred last month were:

£Direct materials 142,700Direct labour 291,300Fixed production overhead 230,800

Required:

(a) Prepare a statement that reconciles the standard cost of actual production with its actual cost for last monthand highlights the total variance for each of the three cost elements. (4 marks)

(b) Provide a breakdown of the total fixed production overhead variance in your statement in (a) by calculatingtwo sub variances. (2 marks)

(c) If Ploverleigh Ltd uses standard marginal costing instead of standard absorption costing, explain how ANDwhy any of the three total variances calculated in (a) would be different and state clearly which, if any, ofthe variances would remain unchanged. No calculations are required. (3 marks)

(9 marks)



5 Sangazure Ltd manufactures many different products in a factory that has two production cost centres (T and W) andseveral service cost centres.

The total budgeted overhead costs (after the allocation, apportionment and reapportionment of service cost centrecosts), and other information for production cost centres T and W are as follows:

Cost centre Budgeted Basis of overhead Budgeted activityoverheads absorption

T £780,000 Machine hours 16,250 machine hoursW £173,400 Direct labour 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:

£ per unitDirect material 10Direct labour:

Cost centre T 14Cost centre W 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. Whichmethod of reapportionment fully recognises the work that service cost centres do for each other?

(3 marks)

(8 marks)



13

Formulae Sheet




Answers




Section A

1 D2 C3 C4 C5 B6 D7 C8 C9 A10 B11 A12 B13 C14 D15 A16 C17 D18 A19 A20 C21 D22 D23 D24 D25 B

1 D

2 C 1,700 units – Breakeven level units (1,200) = 500 units

3 C Contribution per unit = 22 ÷ 0·55 × 0·45 = £18Breakeven point = 198,000 ÷ 18 = 11,000

4 C Variable cost per unit = [(170,000 – 5,000) – 140,000)] ÷ (22,000 –17,000) = £5Total fixed cost above 18,000 units = 170,000 – (22,000 × 5) = £60,000Total 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 × 33)] ÷ (200 + 600) = £32·50Closing stock valuation = 300 × 32·50 = £9,750

8 C EOQ = [(2 × 160 × 9,000) ÷ (0·08 × 40)]0·5 = 949

9 A

10 B



11 A Absorption rate = 247,500 ÷ 30,000 = £8·25Absorbed cost = 28,000 × 8·25 = £231,000Actual cost = £238,000Under absorption = £7,000

12 B Marginal costing profit = 36,000 – (2,000 × 63,000 ÷ 14,000) = £27,000

13 C Process F: expected output = 0·92 × 65,000 = 59,800actual output = 58,900∴ abnormal loss

Process G: expected output = 0·95 × 37,500 = 35,625actual output = 35,700∴ abnormal gain

14 D £Actual hours at standard rate (27,000 × 8·50) 229,500Standard hours of production at standard rate 253,980

––––––––∴Labour efficiency variance is 24,480 Favourable

––––––––

15 A Sales price variance: £Actual sales at standard price (4,650 × 6) 27,900Actual sales at actual price 30,225

–––––––Favourable price variance 2,325

–––––––Adverse sales volume contribution variance:350 units × (6 × 0·60) 1,260

16 C

17 D

18 A

19 A Coefficient of determination = r2 = 0·6 × 0·6 = 0·36 = 36%

20 C

21 D 4,000 × [(20,000 ÷ 2,500) × 1·025] = £32,800

22 D Production (units):J: (6,000 – 100 + 300) = 6,200K: (4,000 – 400 + 200) = 3,800

––––––10,000––––––

Joint costs apportioned to J: (6,200 ÷ 10,000) × 110,000 = £68,200

23 D Material required to meet maximum demand:6,000 × (13 ÷ 4) + 8,000 × (19 ÷ 4) = 57,500 litres Material available: 50,000 litres∴ Material is a limiting factorLabour required to meet maximum demand:6,000 × (35 ÷ 7) + 8,000 × (28 ÷ 7) = 62,000 hoursLabour available: 60,000 hours∴ Labour is a limiting factor



24 D Profits maximised when: marginal revenue (MR) = marginal cost (MC)MR = 50 – 0·05QMC = 15MR = MC ∴ 50 – 0·05Q = 15

and Q = 700P = 50 – (0·025 × 700) = £32·50

25 B When P = 20 then 20 = 50 – 0·025Qand Q = 1,200

£Total revenue (P × Q) = 1,200 × 20 = 24,000Less total costs 2,000 + (15 × 1,200) = 20,000

––––––∴Profit 4,000

––––––

Section B

1 (a) Using the high-low method:

Units Total cost (£)120,000 (W1) 700,000102,000 619,000–––––––– ––––––––

18,000 81,000–––––––– ––––––––

Working (W1)

Full capacity = 102,000 ÷ 0·85 = 120,000

(i) Variable cost per unit = 81,000 ÷ 18,000 = £4·50

(ii) Total fixed costs = 700,000 – (120,000 × 4·50) = £160,000

(iii) Selling price per unit = variable cost per unit ÷ (1·00 – 0·40)= 4·50 ÷ 0·6 = £7·50

(iv) Contribution per unit = (7·50 – 4·50) = £3·00

(b) New business: £ per unitSelling price (0·80 × 7·50) 6·00Less variable cost (4·50)

–––––Contribution 1·50

–––––

£Contribution from 15,000 units (15,000 × 1·50) 22,500Less opportunity cost (15,000 ÷ 6) × £3·00 (7,500)

–––––––Net increase in contribution (and profit) 15,000

–––––––

(c) An opportunity cost is the cost of the best alternative forgone in a situation of 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) thecontribution from some existing sales. This lost contribution is an opportunity cost relevant to the decision.

2 (a) Process ILitres £ Litres £

Input 50,000 365,000 Output (W1) 47,000 634,500Conversion 256,000 Normal loss (0·08 × 50,000) 4,000 –Abnormal gain (W2) 1,000 13,500

––––––– –––––––– ––––––– ––––––––51,000 634,500 51,000 634,500––––––– –––––––– ––––––– ––––––––

Workings:W1 Cost per litre (365,000 + 256,000) ÷ (50,000 × 0·92) = £13·50

Output value = 47,000 × 13·50 = £634,500

W2 Abnormal gain = 47,000 – (50,000 × 0·92) = 1,000Valuation (1,000 × 13·50) = £13,500



(b) Workings:

Cost per equivalent litre (EL): ConversionEL

Completion of opening WIP 3,000Started and finished within the month (50,000 – 5,000) 45,000Work done so far on closing WIP 1,000

–––––––49,000–––––––

∴Cost per EL = 392,000 ÷ 49,000 = £8

(i) Output = 80,000 + (45,000 × 13·50) + (48,000 × 8·00) = £1,071,500

(ii) Closing WIP = (2,000 × 13·50) + (1,000 × 8·00) = £35,000

(c) The disposal costs would be debited to the process account. Alternatively, they could be shown as a negative value on thecredit side of the account.

3 Let X = the number of units of product Xand Y = the number of units of product Y

Contribution per unit:Product X Product Y£ per unit £ per unit

Selling price 60 25Less variable cost (45) (13)

–––– ––––Contribution 15 12

–––– ––––

Objective function:Total contribution = 15X + 12Y

Constraints:

Material (£5 per kg) 3X + Y ≤ 4,200

Labour (£6 per hour) 4X + 0·5Y ≤ 3,000

Non negative X, Y ≥ 0

Using a graphical approach, the constraints (solid lines) and the objective function (dotted line) can be shown as follows:

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 thesame 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

B

A

C0

750

600

4,200

6,000

Yunits

750 1,400X units

Material

Labour



An alternative approach would be to calculate the total contributions at points A, B and C shown on the graph and select the pointgiving the highest total contribution, as follows:

Point ATotal 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 – 3XSubstituting into (2) 4X + 0·5(4,200 – 3X) = 3,000∴ 4X + 2,100 – 1·5X = 3,000∴ 2·5X = 900∴ X = 360Substituting into (1) (3 × 360) + Y = 4,200∴ Y = 3,120Total contribution from 360 units of X and 3,120 units of Y is (360 × £15) + (3,120 × £12) = £42,840

Point CTotal contribution from 750 units of X is (750 × £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 optimalsolution (as before).

4 (a) £Standard cost of actual production [12,500 × (11 + 24 + 18)] 662,500Total variances: Adverse Favourable

£ £Materials (W1) 5,200Labour (W2) 8,700Fixed overhead (W3) 5,800

––––––– ––––––11,000 8,700 2,300 A––––––– –––––– ––––––––

Actual cost (142,700 + 291,300 + 230,800) 664,800––––––––

Workings:W1 Variance

£ £Actual cost 142,700

5,200 AStandard cost of actual production 137,500

W2Actual cost 291,300


W3Actual cost 230,800

5,800 AStandard cost of actual production 225,000

(b) £ £Expenditure variance:Actual cost 230,800

14,800 ABudgeted cost (12,000 × 18) 216,000

Volume variance:Budgeted cost 216,000


(c) The total direct materials and labour variances would be the same under absorption and marginal costing. The total fixedoverhead variance under marginal costing would be different and would be the same as the expenditure variance underabsorption costing (£14,800 A). There is no volume variance under marginal costing as fixed production costs are treatedas period costs and not treated as product costs.



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 10Direct labour:

Cost centre T 14Cost centre W 21

––––45

Production overheads:Cost centre T: (35 ÷ 60) × 48 28Cost centre W: (21 ÷ 6) × 12 42

––––115––––

(c) 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, servicecost 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 reciprocalmethod. There are two techniques for applying the reciprocal method – a repeated distribution approach or the use ofsimultaneous equations.





–––

Section B

1 (a) (i) Variable cost per unit 2(ii) Total monthly fixed costs 2(iii) Selling price per unit 1(iv) Contribution per unit 1

–––6

(b) Contribution from new business 2Opportunity cost 11/2Net increase in profit 1/2

–––4

(c) Explanation of opportunity cost 1Reference to Pointdextre Ltd 1

–––2

–––12–––

2 (a) Input and conversion 1Normal loss 11/2Abnormal gain 11/2Output 1

–––5

(b) Equivalent units for conversion 11/2Cost per equivalent unit for conversion 1/2Valuation of output 2Valuation of closing work in progress 1

–––5

(c) Debit entry 2–––12–––

3 (a) Contributions per unit 1Objective function 1Constraints 3

–––5

(b) Graph (or total contributions at feasible points) 3Optimal plan 1

–––4

–––9

–––



Marks4 (a) Total materials variance 1

Total labour variance 1Total fixed overhead variance 1Reconciliation statement 1

–––4

(b) Expenditure variance 1Volume variance 1

–––2

(c) Direct materials and labour variances the same 1Total variance = expenditure variance 1No volume variance with reason 1

–––3

–––9

–––

5 (a) Cost centre T absorption rate 1Cost centre W absorption rate 1

–––2

(b) Prime cost 1/2Production overheads (T) 1Production overheads (W) 1Total unit cost 1/2

–––3

(c) Reapportionment explanation 2Reapportionment method 1

–––3

–––8

–––




PART 1

FRIDAY 9 JUNE 2006

QUESTION PAPER









Pape

r 1.2



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 supplier of telephone services charges a fixed line rental per period. The first 10 hours of telephone calls by thecustomer are free, after that all calls are charged at a constant rate per minute up to a maximum, thereafter all callsin the period are again free.

Which of the following graphs depicts the total cost to the customer of the telephone services in a period?

2 Four vertical lines have been labelled P, Q, R and S at different levels of activity on the following profit-volume chart:

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

A Line PB Line QC Line RD Line S

2

A B

C D

£ £

£ £

0 Hours 0 Hours

0 Hours 0 Hours

£

P

Q R

S

Output0

A

C D

B



3 A company manufactures a single product which it sells for £15 per unit. The product has a contribution to sales ratioof 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 £900B £1,800C £2,700D £4,500

4 The following production and total cost information relates to a single product organisation for the last three months:

Month Production Total costunits £

1 1,200 66,6002 1,900 58,2003 1,400 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 inthe 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 £54,200B £55,000C £59,000D £60,200

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

A + 1·2B + 0·6 C + 0D – 0·6

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 (i) onlyB (ii) onlyC (iii) onlyD None of them

7 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 orderfor the item is £20.

What is the Economic Order Quantity (EOQ) for the stock item to the nearest whole unit?

A 1,730B 1,894C 1,461D 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 ofplacing an order for the raw material?

EOQ Total annualstockholding cost

A Increase No effectB Decrease No effectC Increase IncreaseD Decrease Decrease

9 A company uses standard absorption costing. The following data relate to last month: Budget Actual

Sales and production (units) 1,000 900Standard Actual

£ £Selling price per unit 50 52Total production cost per unit 39 40

What was the adverse sales volume profit variance last month?

A £1,000B £1,100C £1,200D £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 £61,250 B £62,475 C £62,500 D £63,750

11 An organisation’s stock records show the following transactions for a specific item during last month:

Date Receipts Issuesunits units

4th 5013th 20020th 5027th 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 – once using a FIFO valuation and once usinga LIFO valuation.

Which of the following statements about the valuation of closing stock for last month is correct?

A The FIFO valuation is higher than the LIFO valuation by £250.B The LIFO valuation is higher than the FIFO valuation by £250.C The FIFO valuation is higher than the LIFO valuation by £500.D The LIFO valuation is higher than the FIFO valuation by £500.

4



12 A company uses absorption costing with a predetermined hourly overhead absorption rate. The following situationsarose last month: (i) Actual hours worked exceeded planned hours.(ii) Actual overhead expenditure exceeded planned expenditure.

Which of the following statements is correct?

A Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be underabsorbed.

B Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be overabsorbed.

C Both situations would cause overheads to be over absorbed.D 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 overheadsallocated 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 anywork 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 centrecosts?

A £58,000 B £58,540 C £59,000 D £59,540

14 The following statements refer to strategic planning: (i) It is concerned with quantifiable and qualitative matters.(ii) It is mainly undertaken by middle management in an organisation.(iii) It is concerned predominantly with the long term.


A (i) and (ii) onlyB (i) and (iii) only C (ii) and (iii) only D (i), (ii) and (iii)

15 The following statements refer to situations occurring in Process Q of an organisation which operates a series ofconsecutive 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?


5 [P.T.O.



16 The following terms relate to computers:(i) Spreadsheets(ii) Floppy disks(iii) Operating systems

Which of these terms are examples of computer software?


17 A company operates a job costing system. Job number 506 requires £64 of direct materials and 7 hours of directlabour. Direct labour is paid £8 per hour. Production overheads are absorbed at the rate of £20 per direct labour hourand non-production overheads at a rate of 60% of prime cost.


A £332B £352C £416D £448

18 All of a company’s skilled labour, which is paid £8 per hour, is fully employed manufacturing a product to which thefollowing data refer:

£ per unit £ per unitSelling price 60Less Variable costs:Less Skilled labour 20Less Others 15

–––(35)–––

Contribution 25–––

The company is evaluating a contract which requires 90 skilled labour hours to complete. No other supplies of skilledlabour are available.

What is the total relevant skilled labour cost of the contract?

A £720B £900C £1,620D £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 whichwere purchased last month. Since then the purchase price of material Z has risen by 8% to £27 per kg. Raw materialZ is used regularly by the company in normal production.

What is the total relevant cost of raw material Z to the contract?

A £15,336B £15,400C £16,200D £17,496

6




A company operates a process costing system using the first-in-first-out (FIFO) method of valuation. No losses occur in theprocess. All materials are input at the commencement of the process. Conversion costs are incurred evenly through theprocess.The following data relate to last period:

Units Degree of completionOpening work in progress 12,000 60%Total number of units completed 14,000 Closing work in progress 13,000 30%

£Costs arising:

Materials 151,000Conversion 193,170

20 What was the total number of units input during last period?

A 12,000B 13,000C 15,000D 17,000

21 What was the value of the closing work in progress for last period?

A £21,330B £21,690C £22,530D £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 Premium pricingB Price skimming C Price discriminationD Penetration pricing

23 A company has established the following equations for one of its products:

Selling price (£ per unit) = 40 – 0·008QMarginal revenue (£ per unit) = 40 – 0·016QTotal cost per week (£) = 2,500 + 8Q Q in each case represents the number of units produced and sold per week.

At what selling price per unit will weekly profits be maximised?

A £8B £16C £24 D £32

7 [P.T.O.




A company which manufactures and sells two products (X and Y) aims to maximise its profits. It holds no stocks. ProductX 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:

24 Which of the following points shown on the graph is optimal for next period?

A Point HB Point JC Point KD Point L

25 Which of the following constraint formulations is represented by the line labelled (2) on the graph?

A 10X + 17Y ≤ 70,000B 17X + 10Y ≤ 70,000C 17X + 13Y ≤ 91,000D 13X + 1 7Y ≤ 91,000

(50 marks)

8

H

(2)

(3)

(1)

J

K

L

Product Yunits’000

1

2

3

4

5

6

7

8

9

10

11

1 2 3 4 5 6 7 8 9 10 11 12 13 14 Product Xunits’000




1 Corcoran Ltd operates several manufacturing processes. In process G, joint products (P1 and P2) are created in theratio 5:3 by volume from the raw materials input. In this process a normal loss of 5% of the raw material input isexpected. Losses have a realisable value of £5 per litre. The company holds no work in progress. The joint costs areapportioned 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 litresOther costs incurred:

Direct labour £180,000Direct expenses 1£54,000Production 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 thejoint 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 furtherprocess product P1 in process H in order to create product PP1. Process H has sufficient spare capacity to do thiswork. The further processing in process H would cost £4 per litre input from process G. In process H there wouldbe a normal loss in volume of 10% of the input to that process. This loss has no realisable value. Product PP1 couldthen be sold for £26 per litre.

(b) Determine, based on financial considerations only, whether product P1 should be further processed to createproduct PP1. (3 marks)

(c) In the context of process G in Corcoran Ltd, explain the difference between ‘direct expenses’ and ‘productionoverheads’. (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 samemachinery. The total machining time available each month is 10,500 hours but this is insufficient to produce all theunits of R, S and T required to meet maximum demands. No stocks of these products are held.

The following information is available:Product R Product S Product T

Selling price per unit £60 £75 £84Contribution to sales ratio 20% 24% 25% Machining minutes per unit 40 54 75Maximum monthly demand (units) 9,000 6,000 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 fromproducts 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 directmaterial 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 usedonly in the manufacture of product MS.

The following information relates to last month:Material H:

Purchased 40,000 kg for £294,000Issued 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 costof 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? (4 marks)

(10 marks)

10



4 The management accountant at Josephine Ltd is trying to predict the quarterly total maintenance cost for a group ofsimilar machines. She has extracted the following information for the last eight quarters:Quarter number 1 2 3 4 5 6 7 8Total maintenancecost (£’000) 265 302 222 240 362 295 404 400Production units(‘000) 20 24 16 18 26 22 32 30The 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 hasproduced 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 maintenancecosts 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 plannedproduction is 44,000 units. Suggest a major reservation, other than the effect of inflation, you would haveabout 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 beenprepared using marginal costing principles, is as follows:

£’000 £’000Sales (24,000 units) 864Less Variable production cost of sales:Less Opening stock (3,000 units) 169Less Production (22,000 units) 506Less Closing stock (1,000 units) 1(23)

–––– (552)––––312

Less Variable selling cost 1(60)––––

Contribution 252Less Fixed overhead costs:Less Production 125Less 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 thatfixed production overhead costs are absorbed using the normal level of activity. (6 marks)

(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,and why? (2 marks)

(10 marks)

12



13

Formulae Sheet




Answers




Section A

1 A 2 C 3 B 4 C 5 A 6 D 7 C 8 D 9 B

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

1 A

2 C

3 B Contribution per unit = 15 x 0·4 = £6Break even point = 18,000 ÷ 15 = 1,200 unitsProfit when 1,500 units sold = (1,500 – 1,200) x 6 = £1,800

4 C Units Total cost (£)1,400 68,2001,200 66,600––––– ––––––––1,200 1,600––––– ––––––––

Variable cost per unit = (1,600 ÷ 200) = £8Total fixed cost (above 1,000 units) = [68,200 – (1,400 x 8)] = £57,000Total cost for 1,000 units = [(57,000 – 6,000) + (1,000 x 8)] = £59,000

5 A

6 D

7 C EOQ = {[ 2 x 20 x (4 x 20,000) ] ÷ [0·06 x 25]}0·5 = 1,461 units

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 = 1,250Actual overhead = 0·98 x Budgeted overhead Budgeted overhead – (0·98 x Budgeted overhead) = 1,250Budgeted overhead = 1,250 ÷ 0·02 = 62,500Actual overhead = 62,500 – 1,250 = £61,250

17



11 B Closing stock = 100 – 50 + 200 – 50 – 50 = 150 unitsFIFO = 150 x 62 = £9,300LIFO = (100 x 62) + (50 x 67) = £9,550 LIFO valuation greater than FIFO valuation by £250

12 A

13 B Cost centre G = 40,000 + (0·50 x 18,000) + 0·30 [30,000 + (0·10 x 18,000)]13 B Cost centre G = £58,540

14 B

15 C

16 B

17 A £Prime cost [64 + (7 x 8)] 120Production overhead (7 x 20) 140

––––260

Non-production overhead (0·60 x 120) 72––––

Total cost 332––––

18 C Opportunity cost per skilled labour hour = [25 ÷ (20 ÷ 8)] = £10Relevant cost: £Skilled labour cost (90 x 8) 1,720Opportunity 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)] = £3·40Conversion: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 = £14·10Closing 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 = 8MR = (40 – 0·016Q)MR = MC 40 – 0·016Q = 8,000MR = MC 40 – 0·016 Q = 2,000When Q = 2,000 Price = 40 – (0·008 x 2,000) = £24

24 C Objective function (maximisation of contribution) = 4X + YLet 4X + Y = 40,000 (assumed)When X = 0, Y = 40,000When Y = 0, X = 10,000These two points are plotted on the graph and joined by a (dotted) line. This line is then moved away from the origin keepingit 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 = 70,000When X = 0, Y = 10,000When Y = 0, X = 7,000Constraint line (2) joins these two points on the axes.

18



Section B

1 (a) Process GLitres £ Litres £

Raw material 60,000 381,000 Output (W3): Direct labour 180,000 P1 (W4) 36,250 507,500Direct expenses 54,000 P2 (W4) 21,750 304,500 Production Normal loss (W2) 3,000 15,000overheads (W1) 198,000Abnormal gain (W4) 1,000 14,000

––––––– –––––––– ––––––– –––––––– 61,000 827,000 61,000 827,000––––––– –––––––– ––––––– ––––––––

Workings:W1 Production overheads = 110% x 180,000 = £198,000W2 Normal loss = 5% x 60,000 = 3,000 litres at 5 = £15,000W3 Total output = 61,000 – 3,000 = 58,000W3 Split P1 : P2 in ratio 5 : 3W3 P1 = (5 ÷ 8) x 58,000 = 36,250 litresW3 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 = £798,000W3 Expected output = 60,000 x 95% = 57,000 litresW3 Cost per litre = 798,000 ÷ 57,000 = £14W3 Valuations:W3 Abnormal gain = 1,000 x 14 = £14,000W3 Joint products:W3 Joint prodP1 36,250 x 14 = £507,500W3 Joint prodP2 21,750 x 14 = £304,500

(b) Assuming 100 litres of product P1 £Revenue if sold at point of split-off withoutfurther processing (100 x 20) 2,000 Revenue (from PP1) if sold afterfurther processing (100 x 90%) x 26 2,340

–––––Additional revenue 1,340

––––– Additional cost (in process H) 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 P1 last month were further processed to make product PP1 then the additional costswould exceed the additional revenue by (36,250 ÷ 100 x 60) = £21,750. Therefore product P1 should not be further processed into product PP1.

(c) (i) Direct expenses are costs, other than material and labour, which are specifically traceable to the process (G). An exampleof 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 benefitfrom them. An example of production overhead would be factory rates.

2 (a) Monthly machining hours required to meet maximum demand:Product Units Hours/unit Total hours

R 9,000 (40 ÷ 60) = 0·667 16,000 S 6,000 (54 ÷ 60) = 0·900 15,400T 3,000 (75 ÷ 60) = 1·250 13,750

–––––– 15,150

Available hours 10,500––––––

Shortfall in machining hours 14,650––––––

19



(b) Calculation of the contribution per machining hour for each product:R S T

Selling price per unit £60 £75 £84Contribution to sales ratio 20% 24% 25%Contribution per unit £12 £18 £21Machining hours per unit 0·667 0·900 1·250 Contribution per machine hour £18 £20 £16·80Ranking 2nd 1st 3rd

Optimal production plan and resultant contribution:Product Units Machine hours used Contribution (£)

S 6,000 15,400 108,000R 7,650 15,100 (balance) 191,800

––––––– –––––––– Total 10,500 199,800

––––––– ––––––––

3 (a) Direct material variances: £ Variance (£)Actual quantity purchased at actual price 294,000

6,000 F PriceActual quantity purchased at standard price 300,000 (40,000 kg at 7·50 )Actual quantity used at standard price 273,750(36,500 kg at 7·50 ) 14,550 A UsageStandard quantity for actual production at 259,200standard price [(7,200 units x 4·8) at 7·50]

(b) Reconciliation: £ £Actual cost of purchases 294,000Less: Adverse/Plus: Favourable variances:Less: Price variance [as in (a)] 6,000 FLess: Usage variance [as in (a)] 14,550 A

–––––––(8,550) A

Less: Increase in stock at standard costLess: [(40,000 – 36,500) x 7·50] (26,250)

––––––––Standard material cost of actual production [per (a)] 259,200

––––––––

(c) (i) Price variance (£6,000 F)Cheaper materials, but with a lower quality than standard, may have been purchased because the normal supplier wasunable 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 withinthe organisation who is responsible for buying the materials. This manager would be able to take any appropriate action.

4 (a) In the linear regression equation y = a + bx:

y = maintenance cost in £’000 (dependent variable), andx = 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.

20



(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 toestablish the linear regression equation. The data related to a range 16,000 to 32,000 units per quarter. The behaviour ofcosts 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 £’000

Sales (24,000 units) 864Less: Production cost of sales:Less: Opening stock (3,000 x 28) [W1] 84Less: Production (22,000 x 28) 616Less: Closing stock (1,000 x 28) (28)

–––– (672)––––192

Less: Under absorption of fixed Less: production overhead cost [W2]Less: (3,000 x 5) (15)

––––Gross profit 177Less: Non-production costs:Less: Variable selling cost 60Less: Fixed selling and admin costs 40

––– (100)––––

Net profit 77––––

Workings: £W1 Variable production cost per unit 23W1 [For example, from opening stock underW1 marginal costing: (69,000 ÷ 3,000)]W1 Fixed production cost per unit 5W1 [125,000 ÷ 25,000] –––W1 28

–––W2 Under absorption (25,000 – 22,000) = 3,000 units

(b) Reconciliation: £’000

Net profit per absorption costing (a) 77Add: Decrease in stocks x fixed production overhead Add: cost per unit [2,000 x 5] 10

–––Net profit per marginal costing (per question) 87

–––

(c) Marginal costing is more relevant for short-term decision-making as it separates fixed and variable costs. In the short-termfixed costs are more likely to remain unchanged and therefore would not be relevant.

21





–––

Section B

1 (a) Inputs 2 Abnormal gain 11/2Normal loss 11/2Joint products 2

––– 7

(b) Additional revenue 11/2Additional cost 1 Conclusion 1/2

––– 3

(c) Direct expenses 1 Production overheads 1

––– 2

––– 12–––

2 (a) Required hours 11/2Shortfall 1/2

––– 2

(b) Contribution per unit 11/2Contribution per machining hour 11/2Ranking 1/2Optimal plan 11/2Resultant contribution 1

––– 6

––– 8

–––

3 (a) Price variance 11/2Usage variance 11/2

––– 3

(b) Variances 1 Change in stock 1Layout/presentation of statement 1

––– 3

(c) (i) Causes (1 mark for each) 2(ii) Purchasing manager 1

Responsibility for buying 1–––

4––– 10–––

23



Marks

4 (a) Σy 1Σx 1Calculation of ‘b’ 21/2Calculation of ‘a’ 11/2Fixed/variable costs 1

––– 7

(b) Total cost for 44,000 units 11/2Reservation 11/2

––– 3

––– 10–––

5 (a) Sales 1/2Cost of sales 3Under absorption of overhead 11/2Variable selling cost 1/2Fixed selling and admin costs 1/2

––– 6

(b) Layout/presentation of statement 1 Change in stock and its evaluation 1

––– 2

(c) Marginal costing 1Separation of fixed and variable costs 1/2Fixed costs not relevant to short term decisions 1/2

––– 2

––– 10–––

24




PART 1


QUESTION PAPER









Pape

r 1.2





1 The following diagram represents a profit/volume chart for an organisation:

At the specific levels indicated what do the lines ‘G’ and ‘H’ represent?

Line ‘G’ Line ‘H’A Loss ProfitB Loss ContributionC Contribution ProfitD Contribution Contribution

2 The following diagram represents the behaviour of one element of cost:

Which one of the following descriptions is consistent with the above diagram?

A Annual total cost of factory power where the supplier sets a tariff based on a fixed charge plus a constant unitcost for consumption which is subject to a maximum annual charge.

B Total annual direct material cost where the supplier charges a constant amount per unit which then reduces toa lower amount per unit after a certain level of purchases.

C Total annual direct material cost where the supplier charges a constant amount per unit but when purchasesexceed a certain level a lower amount per unit applies to all purchases in the year.

D Annual total cost of telephone services where the supplier makes a fixed charge and then a constant unit rate forcalls up to a certain level. This rate then reduces for all calls above this level.

2

£

G

H

0 Output

£

0

Totalcost

Volume ofactivity



3 An organisation has the following total costs at three activity levels:

Activity level (units) 8,000 12,000 15,000Total cost £204,000 £250,000 £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 whenthe activity level exceeds 11,000 units.

What is the total cost at an activity level of 10,000 units?

A £220,000B £224,000C £227,000D £234,000

4 An organisation manufactures and sells a single product which has a variable cost of £24 per unit and a contributionto sales ratio of 40%. Total monthly fixed costs are £720,000.

What is the monthly breakeven point (in units)?

A 18,000B 20,000C 30,000D 45,000

5 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?


6 A company is considering the launch of a new product at a high initial selling price.


A This is an example of strategic planning involving the application of penetration pricing.B This is an example of operational planning involving the application of penetration pricing.C This is an example of strategic planning involving the application of price skimming.D This is an example of 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.



8 Regression analysis is being used to find the line of best fit (y = a + bx) from five pairs of data. The calculations haveproduced 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 146B 152C 210D 245

9 Which of the following is a feasible value for a correlation coefficient?

A +1·2B 0C –1·2D –2·0

10 The following data relate to material J for last month:

£Opening stock 300 kg valued at 3,300Purchases:4th 400 kg for 4,80018th 500 kg for 6,500Issues:13th 600 kg25th 300 kg

Using the LIFO valuation method, what was the value of the closing stock for last month?

A £3,300B £3,500C £3,700D £3,900

4



11 A jobbing company operates a premium bonus scheme for its employees of 75% of the time saved compared withthe standard time allowance for a job, at the normal hourly rate. The data relating to Job 1206 completed by anemployee is as follows:

Allowed time for Job 1206 4 hoursTime taken to complete Job 1206 3 hoursNormal hourly rate of pay £8

What is the total pay of the employee for Job 1206?

A £24B £30C £32D £38

12 A paint manufacturer has a number of departments. Each department is located in a separate building on the samefactory site. In the mixing department the basic raw materials are mixed together in very large vessels. These are thenmoved on to the colour adding department where paints of different colours are created in these vessels. In the nextdepartment – the pouring department – the paint is poured from these vessels into litre sized tins. The tins then goon 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 (i) onlyB (i) and (ii) onlyC (i) and (iii) onlyD (ii) and (iii) only

13 The following statements relate to spreadsheets:

(i) A spreadsheet consists of records and files.(ii) Most spreadsheets have a facility to allow data within them to be displayed graphically.(iii) A spreadsheet could be used to prepare a budgeted profit and loss account.(iv) A spreadsheet is the most suitable software for storing large volumes of data.


A (i) and (ii) onlyB (i), (iii) and (iv) onlyC (ii) and (iii) onlyD (iii) and (iv) only

5 [P.T.O.



14 A company uses absorption costing with a predetermined hourly overhead absorption rate. The following situationshave both occurred:

(i) Actual overhead expenditure exceeded planned expenditure; and(ii) Actual hours worked were less than the planned hours.


A Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be underabsorbed.

B Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be overabsorbed.


15 A company operates a job costing system. Job 812 requires £60 of direct materials, £40 of direct labour and £20 ofdirect expenses. Direct labour is paid £8 per hour. Production overheads are absorbed at a rate of £16 per directlabour hour and non-production overheads are absorbed at a rate of 60% of prime cost.

What is the total cost of Job 812?

A £240B £260C £272D £320

16 At the end of manufacturing in Process I, product K can be sold for £10 per litre. Alternatively product K could befurther processed into product KK in Process II at an additional cost of £1 per litre input into this process. Process IIis an existing process with spare capacity in which a loss of 10% of the input volume occurs. At the end of the furtherprocessing, 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 Further processing into product KK would increase profits by £9,000.B Further processing into product KK would increase profits by £8,100.C Further processing into product KK would decrease profits by £900.D Further processing into product KK would decrease profits by £1,800.


The standard direct material cost for a product is £50 per unit (12·5 kg at £4 per kg). Last month the actual amount paidfor 45,600 kg of material purchased and used was £173,280 and the direct material usage variance was £15,200adverse.

17 What was the direct material price variance last month?

A £8,800 AdverseB £8,800 FavourableC £9,120 AdverseD £9,120 Favourable

6



18 What was the actual production last month?


19 Equipment owned by a company has a net book value of £1,800 and has been idle for some months. It could nowbe used on a six months contract which is being considered. If not used on this contract, the equipment would besold now for a net amount of £2,000. After use on the contract, the equipment would have no saleable value andwould 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 £1,200B £1,800C £2,000D £2,800

20 A contract is under consideration which requires 800 labour hours to complete. There are 450 hours of spare labourcapacity for which the workers are still being paid the normal rate of pay. The remaining hours required for the contractcan be found either by overtime working paid at 50% above the normal rate of pay or by diverting labour from themanufacture 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 normalrate of pay for labour is £8 per hour.

What is the total relevant labour cost to the contract?

A £3,500B £4,200C £4,500D £4,900


In the following price, revenue and cost functions, 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 – 0·025QMarginal revenue (£ per unit) = 50 – 0·05QTotal weekly cost = 1,000 + 15Q

21 What price per unit should be set in order to maximise weekly profit?

A £15·00B £17·50C £25·00D £32·50

22 What would the weekly total contribution be if the price of the product was set at £20 per unit?

A £2,000B £3,000C £5,000D £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 Shop S Shop T Total£000 £000 £000 £000

Sales 400 500 600 1,500–––– –––– –––– ––––––

Contribution 100 60 120 280Less: Fixed costs (60) (70) (70) (200)

–––– –––– –––– ––––––Profit/(Loss) 40 (10) 50 80

–––– –––– –––– ––––––

60% of the total fixed costs are general company overheads. These are apportioned to the shops on the basis of salesvalue. 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 revisedbudgeted profit for the company?

A £50,000B £60,000C £70,000D £90,000

24 Which of the following statements correctly describes the shadow price of a resource in linear programming?

A The minimum sum payable for one more unit of the scarce resource.B The maximum sum payable for one more unit of the scarce resource.C The increase in total contribution if one more unit of a non-binding constraint is made available.D The increase in total contribution if one more unit of a binding constraint is made available.


The objective is to maximise total contribution and the dotted line on the graph depicts this function. There are threeconstraints which are all of the ‘less than or equal’ type which are depicted on the graph as the three solid lineslabelled (1), (2) and (3).

At which of the following intersections is total contribution maximised?

A Constraint (3) and the x-axisB Constraint (2) and constraint (3)C Constraint (1) and constraint (2)D Constraint (1) and constraint (3)

(50 marks)

8

y

x0

(3)

(2)

(1)



9 [P.T.O.


1 Fairfax Ltd manufactures a single product which has a standard selling price of £22 per unit. It operates a standardmarginal costing system. The standard variable production cost is £9 per unit. Budgeted annual production is360,000 units and budgeted non-production costs of £1,152,000 per annum are all fixed.


Budget Actualunits units

Production 30,000 33,000Sales 32,000 34,000

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 whethereach 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. Thecompany holds no buffer stock. Information relating to raw material Y is as follows:

Annual usage 48,000 unitsPurchase price £80 per unitOrdering costs £120 per orderAnnual holding costs 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)



3 Merryl Ltd manufactures four components (E, F, G and H) which are incorporated into different products made by thecompany. All the components are manufactured using the same general purpose machinery. The following productioncost and machine hour data are available:

E F G HVariable production cost (£ per unit) 32 27 34 35Fixed production cost (£ per unit) 6 14 8 16General purpose machine hours per unit 5 6 7 8

The fixed production costs represent a share of factory-wide costs that have been related to the individual componentsby 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. Themaximum 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 nextmonth:

E F G H£48 £51 £55 £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 finaldecision 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 relatesto 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:Direct materials £99,600 for 12,500 litres of inputConversion £155,250

Normal loss: 8% of input in the period. All losses, which are incurred evenly throughout theprocess, can be sold for £3 per litre.

Actual output: 10,000 litres were transferred from Process G to the finished goods warehouse. Closing work-in-progress: 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 eachone 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 fromthe budget for the coming year:

P1 P2 S1 S2Allocated and apportioned production overheads £477,550 £404,250 £132,000 £96,000Number of employees 30 65 10 15

Total machine hours 68,000 11,400Total direct labour hours 4,000 14,000

Service cost centre S1 costs are reapportioned to all other cost centres based on the number of employees. Servicecost centre S2 only does work for P1 and P2 and its costs are reapportioned to these centres in the ratio 5:3respectively.

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 powercosts to production cost centres, whereas others can only apportion them. (3 marks)

(9 marks)

11 [P.T.O.



12

Formulae Sheet




Answers




Section A

1 D2 D3 A4 D5 B6 C7 C8 A9 B10 C11 B12 A13 C14 D15 C16 D17 D18 A19 D20 A21 D22 D23 A24 D25 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)] = £154,000Total 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) = £16Breakeven 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) – (1292)] = 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 = 97,200Sales value without further processing = (9,000 x £10) 90,000

–––––––Increase in sales revenue 7,200Less: 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£

Actual usage at standard cost (45,600 x 4) 182,400Less: Adverse usage variance (15,200)

––––––––Standard cost for actual production 167,200

––––––––Actual production (units) = (167,200 ÷ 50) = 3,344

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) = 15Profit maximised when MC = MR15 = 50 – 0·05QQ = 700P = 50 – (0·025 x 700) = £32·50

16



22 D

When P = 20: 20 = 50 – 0·025QAnd Q = 1,200Total contribution = 1,200 x (20 – 15) = £6,000

23 A£

Total fixed costs for shop S 70,000Less: Apportioned general costs (200 x 0.60) ÷ (500 ÷ 1,500) (40,000)

–––––––Specific avoidable fixed costs for shop S 30,000

–––––––If shop S closed down net contribution lost (60,000 – 30,000) 30,000Revised budgeted profit for company (80,000 – 30,000) £50,000

24 D

25 A

Section B

1 (a) Sales price variance: £Actual sales at standard selling price (34,000 x £22) 748,000Actual sales at actual selling price 731,000

––––––––Sales price variance 17,000 A

––––––––

Sales volume contribution variance:Budgeted sales (units) 32,000Actual sales (units) 34,000

––––––––Volume variance (units) 2,000 FAt standard contribution per unit £(22 – 9) x £13Sales volume contribution variance £26,000 F

––––––––

(b) The actual selling price (£21·50) was lower than the standard selling price (£22·00) – hence the adverse sales pricevariance. This reduction in price may have directly encouraged customers to buy more units. The company sold 2,000 moreunits than planned giving the favourable sales volume contribution variance of £26,000. Thus the two variances may beinterrelated and if so the variances should be considered together – one partially offsetting the other.

(c) £Budgeted contribution (32,000 x £13) 416,000Less: Budgeted profit (marginal costing) (200,000)

–––––––––Budgeted fixed costs 216,000Less: Budgeted non-production fixed costs (1,152,000 ÷ 12) (96,000)

–––––––––Budgeted fixed production costs 120,000

–––––––––

Standard fixed production cost per unit (£120,000 ÷ 30,000) £4

Calculation of absorption costing profit: £Marginal costing profit 200,000Less: Decrease in stocks at standard fixed productioncost per unit [(32,000 – 30,000) x £4] (8,000)

–––––––––Absorption costing profit 192,000

–––––––––

Alternatively: £Budgeted absorption costing manufacturing profit32,000 x (13 – 4) 288,000Less: budgeted non-production fixed costs (96,000)

–––––––––Absorption costing profit 192,000

–––––––––

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) Purchasing cost (48,000 x £80) 3,840,000

Ordering cost (48,000 ÷ 1,200) x £120 4,800Holding costs [(1,200 ÷ 2) x £80 x 0·10] 4,800

––––––––––Total cost 3,849,600

––––––––––

(b) Purchasing cost (48,000 x £80 x 0·99) 3,801,600Ordering cost (48,000 ÷ 2,000) x £120 2,880Holding costs [(2,000 ÷ 2) x £80 x 0·99 x 0·10] 7,920

––––––––––Total cost 3,812,400

––––––––––

Annual total saving (3,849,600 – 3,812,400) £37,200

(c) Insurance costs of stock and warehouseRent of warehouseRates of warehouseInterest on capital tied up in stock

3 (a) Hours required [(5 + 6 + 7 + 8) x 2,000] 52,000Hours available 35,000Shortfall in hours 17,000

(b) E F G H£/unit £/unit £/unit £/unit

Variable production cost 32 27 34 35Buy-in price 48 51 55 63

––– ––– ––– –––Extra cost of buying in 16 24 21 28

––– ––– ––– –––

Machine hours per unit 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

Optimal plan for buying in components:Ranking Component Units Machine hours

saved1st G 2,000 14,0002nd E 600 3,000 (balancing figure)

–––––––Total shortfall of hours [as per (a)] 17,000

–––––––

(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.

4 (a) Process G Account

Litres £ Litres £Opening WIP 2,000 24,600 Output (W4):

Ex opening WIP 2,000Costs arising: Started and finishedDirect materials 12,500 99,600 in month 8,000

–––––––Conversion 155,250 10,000 221,520

Normal loss(0·08 x 12,500) 1,000 3,000Abnormal loss (W2) 500 11,100Closing WIP (W3) 3,000 43,830

––––––– –––––––– ––––––– ––––––––14,500 279,450 14,500 279,450––––––– –––––––– ––––––– ––––––––

18



Workings:

W1 Cost per equivalent litre (EL):Direct materials Conversion

EL ELCompletion of opening WIP – 1,400Units started and finished in month 8,000 8,000Abnormal loss 500 500Closing WIP 3,000 1,350

––––––– –––––––Work done last month 11,500 11,250

––––––– –––––––£ £

Costs arising last month 99,600 155,250Less: Scrap value of normal loss (3,000) –

––––––– –––––––96,600 155,250––––––– –––––––

Cost per EL £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 24,600Completion of opening WIP(1,400 x £13·80) 19,320Units started and finished in month[8,000 x £(8·40 + 13·80)] 177,600

––––––––221,520––––––––

(b) Type of organisation Unit cost measureHospital Inpatient dayHaulage transport Tonne mileHotel Occupied room nightRail transport Passenger mile

Note: only two examples were required and other answers were acceptable.

5 (a) Cost centre P1 P2 S1 S2£ £ £ £

Allocated and apportioned overheads 477,550 404,250 132,000 96,000Reapportionment of S1 (30:65:15) 36,000 78,000 (132,000) 18,000Reapportionment of S2 (5:3) 71,250 42,750 – (114,000)

–––––––– –––––––– –––––––– ––––––––584,800 525,000 – ––––––––– –––––––– –––––––– ––––––––

Machine hours (P1) 68,000Direct labour hours (P2) 14,000Absorption rate:

Per machine hour £8·60Per direct labour hour £37·50

(b) Allocated overheads are specifically traceable to cost centres. Apportioned overheads are those for which only a total factory-wide figure is available. Therefore in order to get such overheads related to individual cost centres, the total has to beapportioned on a logical but arbitrary basis to the cost centres. For example the total factory rates could be apportioned onthe basis of the floor area occupied by each cost centre. Electric power can be allocated if each cost centre is separatelymetered. Thus allowing an accurate measure of the amount of power used in each cost centre. Otherwise if there is only onemeter for the whole factory, then the total cost of electric power would need to be apportioned to the factory cost centres. Forexample by using the kilowatt hour rating of the machines and equipment in the various cost centres.

19





–––

Section B

1 (a) Price variance 2Volume variance 2

–––4

(b) An adverse and a favourable variance 1Possible interrelationship explained 2

–––3

(c) Budgeted fixed production costs 1Fixed production cost per unit 1Change in stock level effect 1Absorption costing profit 1

–––4

–––11–––

2 (a) (i) Economic order quantity 11/2(ii) Purchasing cost 1/2

Ordering cost 1Holding cost 1

–––4

(b) Purchasing cost 1/2Ordering cost 1Holding cost 1Annual saving 1/2–––

3

(c) 1/2 mark for each different example 2–––

9–––

3 (a) Hours required 1/2Hours available 1/2Shortfall 1

–––2

(b) Extra cost per unit of buying in 2Extra cost per machine hour 1Optimal buying in plan 1

–––4

(c) 1 mark per factor 3–––

9–––

21



Marks4 (a) Opening WIP 1

Costs arising 1Output 3Normal loss 1Abnormal loss 2Closing WIP 2

–––10

(b) 1/2 mark for each type of organisation 11/2 mark for each unit cost measure 1

–––2

–––12–––

5 (a) Reapportionment of S1 costs 2Reapportionment of S2 costs 2Machine hour rate 1Direct labour hour rate 1

–––6

(b) Allocation explained 1Apportionment explained 1Use, or not, of meters 1

–––3

–––9

–––

22




PART 1

FRIDAY 8 JUNE 2007

QUESTION PAPER









Pape

r 1.2





1 Four lines representing expected costs and revenue have been drawn on the following break-even chart:

Which statement is correct?

A Line F represents total variable cost.B The break-even point occurs at the intersection of lines E and F. C Line G represents total revenue.D The break-even point occurs at the intersection of lines G and H.

2 The following diagram depicts a line which relates the quantity demanded (Q) to the selling price (P):

What is the equation of the line?

A P = 25 – 0.000625QB P = 25 – 1,600QC P = 25 – 1·6QD P = 25 – 0·625Q

2

E

F

G

H

Output0

£

25

40,0000

Price(P)

Quantity (Q)



3 An organisation manufactures a single product which has a variable cost of £36 per unit. The organisation’s totalweekly fixed costs are £81,000 and it has a contribution to sales ratio of 40%. This week it plans to manufactureand sell 5,000 units.

What is the organisation’s margin of safety this week (in units)?

A 1,625B 2,750C 3,375D 3,500


Activity level (units) 15,000 24,000Total costs £380,000 £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 £404,000B £410,000C £422,000D £428,000

5 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.



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.



3 [P.T.O.



7 An organisation’s records for last month show the following in respect of one stores item:

Date Receipts Issues Stockunits units units

1st 2005th 100 1007th 400 500

19th 190 31027th 170 140

Last month’s opening stock was valued at a total of £2,900 and the receipts duringthe month were purchased at a cost of £17·50 per unit.The organisation uses the weighted average method of valuation and calculates anew weighted average after each stores receipt.

What was the total value of the issues last month?

A £7,360B £7,534C £7,590D £7,774

8 Data relating to one particular stores item are as follows:

Average daily issues 70 unitsMaximum daily issues 90 unitsMinimum daily issues 50 unitsLead time for the replenishment of stock 11 to 17 daysReorder quantity 2,000 unitsReorder level 1,800 units

What is the maximum stock level (in units) for this stores item?

A 2,950B 3,100C 3,250D 3,800

9 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 ofholding one unit of the component in stock?

EOQ Total annual ordering costA Lower No effectB Higher No effectC Lower HigherD Higher Lower

10 A company operates a job costing system. Job number 607 requires £300 of direct materials, £400 of direct labourand £100 of direct expenses. Direct labour is paid at a rate of £8 per hour. Production overheads are absorbed at arate of £40 per direct labour hour and non-production overheads are absorbed at a rate of 150% of prime cost.


A £3,750B £3,850C £4,000D £4,200

4



11 A company uses absorption costing with a predetermined hourly fixed overhead absorption rate. The followingsituations 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 Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be overabsorbed.

B Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be underabsorbed.


12 A company manufactures two products K1 and K2 in a factory consisting of two cost centres, Y and Z. The followingbudgeted data are available:

Cost centreY Z

Allocated and apportioned fixed overhead costs £576,000 £288,000Direct labour hours per unit:

Product K1 5 2Product 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 £34B £36C £38D £42

13 A factory consists of two production cost centres (P and Q) and two service cost centres (T and V). The total overheadsallocated and apportioned to each cost centre are as follows:

P Q T VTotal overheads £180,000 £120,000 £128,000 £140,000

The work done by the service cost centres can be represented as follows:P Q T V

Percentage of service cost centre T to: 70% 30% – –Percentage of service cost centre V to: 40% 30% 30% –

The service cost centre costs are apportioned to production cost centres using a method that fully recognises any workdone by one service cost centre for another.

What are the total overheads for production cost centre P after the reapportionment of all service cost centrecosts?

A £325,600B £349,600 C £355,000D £379,000

5 [P.T.O.




A company operates a process costing system using the first-in-first-out (FIFO) system of valuation. No losses occur in theprocess. The following data relate to last month:

UnitsOpening work-in-progress 200 with a total value of £1,530Input to the process 1,000Completed production 1,040Last month the cost per equivalent unit of production was £20 and the degree of completion of the work-in-progress was40% throughout the month.

14 What was the value (at cost) of last month’s closing work-in-progress?

A £1,224B £1,280C £1,836 D £1,920

15 What was the cost of the 1,040 units completed last month?

A £19,200B £19,930C £20,730D £20,800

16 The following statements relate to the calculation of the regression line y = a + bx using the information on theformulae 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.


A (i) and (ii) only B (i) and (iii) only C (ii) and (iii) onlyD (i), (ii) and (iii)

17 Which of the following correlation coefficients indicates the weakest relationship between two variables?

A +0·9B – 0·6C – 0·8D – 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 (i) onlyB (ii) only C (iii) only D None of them.

6



19 A company operates a standard absorption costing system in which the standard fixed production overhead rate is £9per hour.The following data relate to last month:Budgeted hours 8,000Standard hours for actual production 8,200Actual hours worked 8,400

What was the fixed production overhead capacity variance for last month?

A £1,800 AdverseB £1,800 FavourableC £3,600 AdverseD £3,600 Favourable

20 A company operates a standard marginal costing system. Last month the company sold 200 units more than itplanned to sell. The following data relate to last month:

Standard Actual£ £

Selling price per unit 40 38Variable cost per unit 30 29

What was the favourable sales volume contribution variance last month?

A £1,600B £1,800C £2,000D £2,200

21 Which of the following should be classified as indirect labour?

A Machine operators in a factory producing furniture B Lawyers in a legal firm C Maintenance workers in a power generation organisation D 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 Factory canteenB Stores C Materials handling departmentD 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 thesame rooms at weekends and on public holidays.

Which pricing policy is the hotel adopting?

A Penetration pricingB Price skimmingC Premium pricing D 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 atotal 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 £9·50B £10·00C £10·50D £11·00

25 A company which manufactures four components (A, B, C and D), using the same skilled labour, aims to maximiseits profits. The following information is available:

ComponentA B C D

Variable production cost per unit (£) 60 70 75 85Purchase price per unit from another supplier (£) 108 130 120 124Skilled labour hours per unitto manufacture 4 6 5 3

As it has insufficient skilled labour hours available to manufacture all the components required, the company will needto buy some units of one component from the other supplier.

Which component should be purchased from the other supplier?

A Component AB Component BC Component CD Component D

(50 marks)

8




1 Casilda Ltd manufactures gonds, which have a standard selling price of £120 per gond. The company operates astandard marginal costing system and values stocks at standard cost.

The standard variable cost of a gond is as follows:

£ per gond Direct material 20Direct labour (6 hours at £8 per hour) 48Production overhead 24

–––92–––

The budgeted and actual activity levels for last month were as follows:

Budget Actualunits units

Sales 25,000 25,000Production 25,000 26,000

The actual sales and variable costs for last month were as follows:

£Sales 2,995,000Direct material (purchased and used) 532,800Direct labour (150,000 hours) 1,221,000Variable production overhead 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 monthand 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 beinterrelated. (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 sellingprice for product X is £200 and the company can sell all the units that it can produce at this price. The unit sellingprice of product Y is £250 but, at this price, the annual demand is limited to 40,000 units. The company holds nostocks.

The following product cost data are available:

Product X Product Y£ per unit £ per unit

Direct material (£5 per kg) 60 40Direct labour (£10 per hour) 50 80Other variable costs 60 90

––– –––Total variable cost 170 210

––– –––

Next year the supply of direct material will be limited to 540,000 kg and the direct labour hours will be limited to400,000.

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 thecompany’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 anormal loss of 4% of the raw materials input is expected. Losses have a realisable value of £5 per litre. The joint costsof the process are apportioned to the joint products using the sales value basis. At the end of process K, P1 and P2can 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 £450,000Actual loss incurred 4,800 litresConversion costs incurred £216,000

Required:

(a) Prepare the process K account for last month in which both the output volumes and values for each jointproduct 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 perlitre input. Process L is an existing process with spare capacity. In process L a normal loss of 8% of input is incurredwhich 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 shouldbe 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 hasbeen drawn up using absorption costing principles, is as follows:

£000 £000 Sales (40,000 units) 4,400Less Cost of sales:

Production cost (45,000 units):Variable 1,800Fixed 1,476

––––––3,276

Less Closing stock (5,000 units) (364)––––––

(2,912)––––––

Gross profit 1,488Less Non-production expenses:

Variable selling costs 360Fixed selling, administration and distribution costs 598

––––––(958)

––––––Net profit 530

––––––

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 thatunder absorption costing. Under what conditions would the two net profits be the same? (3 marks)

(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 andlabour requirements of the contract:

MaterialsThe 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 kgand the other half was purchased last month for £25 per kg. The supplier has recently notified the company that theprice of R has risen by 8% compared with last month.

LabourThe contract requires 600 hours of skilled labour which is paid £10 per hour. The company’s existing skilled labouris all fully employed in the manufacture of product T and no further supply is available. The following informationrelates to product T:

£ per unit £ per unitSelling price 100Less Variable costs:

Direct materials 40Skilled labour 25Selling 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 theevaluation of the contract. Illustrate your answer with examples of such costs but no calculations arerequired. (3 marks)

(8 marks)

12



13

Formulae Sheet




Answers



17


Section A

1 B2 A3 A4 A5 D6 C7 B8 C9 D10 C11 C12 A13 C14 B15 C16 C17 B18 C19 D20 C21 C22 D23 D24 C25 C

1 B

2 A

3 A Contribution per unit (CPU) = (36 ÷ 0·60) × 0·40 = £24Break-even point = (81,000 ÷ 24) = 3,375 unitsMargin 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] = £8Total fixed costs (below 20,000 units) = 380,000 – (15,000 × 8) = £260,000Total 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 = 16·90Value 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 £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

––––––

11 C



18

12 A Absorption rate (Y) = 576,000 ÷ [(5 + 3) × 12,000] = £6 per hourAbsorption rate (Z) = 288,000 ÷ [(2 + 4) × 12,000] = £4 per hourFixed overhead cost per unit (K2) = [(3 × £6) + (4 × £4)] = £34

13 C Total overheads (T) = 128,000 + (0·30 × 140,000) = £170,000Total overheads (P) = 180,000 + (0·70 × 170,000) + (0·40 × 140,000) = £355,000

14 B Closing work in progress (WIP) = (200 + 1,000 – 1,040) = 160 units WIP valuation = (160 × 0·40 × 20) = £1,280

15 C £Opening WIP value 1,530+ Completion of opening WIP (200 × 0·60 × 20) 2,400+ Units started and finished in the month [(1,040 – 200) × 20] 16,800

–––––––Total value of 1,040 completed units 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 × standard contribution per unit = [200 × (40 – 30)] = £2,000 (F)

21 C

22 D

23 D

24 C CPU = (160,000 ÷ 40,000) = £4 and variable cost per unit = (10 – 4) = £6Units Selling price per unit CPU Total contribution

£ £ £00044,000 9·50 3·50 15440,000 10·00 4·00 16036,000 10·50 4·50 16231,000 11·00 5·00 155

25 C Additional cost of Hours per unit to Additional cost Component buying in per unit manufacture per hour

£ £A 48 4 12B 60 6 10C 45 5 9D 39 3 13

Lowest additional cost per hour saved is £9 and component C should be bought in.



19

Section B£

1 (a) (i) Actual cost 532,800Total variance £12,800 A

Standard cost of actual production 520,000(26,000 × 20)

(ii) Actual cost 614,000Total variance £10,000 F

Standard cost of actual production 624,000(26,000 × 24)

(iii) and (iv)Actual cost 1,221,000

Wage rate variance £21,000 A (iii)Actual hours at standard rate 1,200,000

(150,000 × 8)Efficiency variance £48,000 F (iv)

Standard cost of actual production 1,248,000(26,000 × 48)

(b) £Budgeted contribution 700,000[25,000 × £(120 – 92)]Sales variances:Price [(25,000 × 120) – 2,995,000] 5,000 ACost variances:Total direct materials [(a) (i)] 12,800 ATotal variable production overhead [(a) (ii)] 10,000 FDirect labour: – rate [(a) (iii)] 21,000 A

– efficiency [(a) (iv)] 48,000 F————

Total direct labour 27,000 F ————

Actual contribution (See workings) 719,200 ————

Workings: £ £Actual sales (25,000 units) 2,995,000Less: Actual production costs (26,000 units):Material + Labour + Production overhead 2,367,800Less: Closing stock at standard cost (1,000 × 92) (92,000)

—————(2,275,800)—————

Actual contribution 719,200 —————

(c) The rate variance is adverse (£21,000) and the efficiency variance is favourable (£48,000). A possible explanation of howthese could be interrelated is that higher graded, more skilled workers, were used last month to produce gonds and were paidat a higher wage rate than standard thus giving the adverse rate variance. These higher graded, more skilled workers weremore efficient and produced the gonds in less than the standard time allowed – 26,000 units should have taken 156,000hours (that is 6 hours per unit) to manufacture whereas they were produced in only 150,000 hours thus giving a favourableefficiency variance.



20

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 + 40yConstraint formulations:Materials: 12x + 8y � 540,000Labour: 5x + 8y � 400,000Demand (Y): y � 40,000Non-negative x, y � 0The constraints and objective function can be represented as follows:

The feasible region is OABCD. By moving the objective function line (dotted) away from the origin it can be determined thatthe optimal point is C (the intersection of the material and labour constraint lines). The values of x and y at this point can beread from the graph or found by solving the equations for the two constraint lines simultaneously, as follows:

(1) 12x + 8y = 540,000 (Materials)(2) 5x + 8y = 400,000 (Labour)

Subtracting (2) from (1) gives 7x = 140,000x = 20,000

Substituting for x in (1) gives (12 × 20,000) + 8y = 540,000 8y = 300,000

y = 37,500

The optimal production plan for next year is to manufacture and sell 20,000 units of product X and 37,500 units of productY. 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 40,000units which uses only 320,000 hours, leaving 80,000 hours for the production of 16,000 units of X. The totalcontribution 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 = 540,000and 5x + 8y = 400,000 This calculation has been done above under the graphical approach and gives a totalcontribution 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 Xand 37,500 units of product Y.

Demand (Y)

Labour

X Units’00080·045·020·00

40·0

15·0

50·0

67·5

YUnits’000

A

BC

Materials

D



21

(b) Any scarce resource that is fully utilised in the optimal solution will have a shadow price. It would be worth paying more thanthe ‘normal’ price to obtain more of the scarce resource because of the contribution foregone by not being able to satisfy thesales demand. Hence the shadow price of a so-called binding constraint is the amount by which the total contribution wouldincrease if one more unit of the scarce resource became available. In the case of Plaza Ltd there are two binding constraintsnext year – materials and labour (all available materials and labour are used in the optimal solution) – therefore each willhave a shadow price.

3 (a) Process K Account

Litres £ Litres £Materials input 90,000 450,000 Normal loss 3,600 18,000

(4% × 90,000)Conversion costs 216,000 Abnormal loss [W1] 1,200 9,000

(4,800 – 3,600) Output:Product P1 [W2] 56,800 355,000Product P2 [W2] 28,400 284,000

–––––––– –––––––– –––––––– ––––––––90,000 666,000 90,000 666,000

–––––––– –––––––– –––––––– ––––––––

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) = £7·50Abnormal 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 = 28,400Combined total output of P1 + P2 valued at: (85,200 × 7·50) = £639,000Split 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 : 1Product 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) 2,500Revenue from sale of (100 × 0·92) litres of XP1 (92 × 30) 2,760

––––––Additional revenue 260Further 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 forevery 100 litres of product P1.



4 (a) £ per unit £ per unitSelling price (4,400,000 ÷ 40,000) 110Less Variable costs:

Production (1,800,000 ÷ 45,000) 40 Selling, admin anddistribution (360,000 ÷ 40,000) 9

–– (49)–––

Contribution 61–––

(i) Total contribution (61 × 40,000) £2,440,000

£000(ii) Total contribution [as in (i)] 2,440

Less Total fixed costs:Production 1,476Selling, admin and distribution 598

––––– (2,074)––––––

Net profit 366––––––

Alternative calculation of marginal costing net profit:£000

Net profit (absorption costing) 530Less Increase in stock (5,000 units) at fixed

production cost per unit (1,476,000 ÷ 45,000) (164)––––––

Net profit (marginal costing) 366––––––

(b) Let x = number of units produced and sold at the break-even point.At the break-even point: Total contribution = Total fixed costs

61x = 2,074,000x = 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 valuationunder AC includes a share of the fixed production overhead costs whereas under MC stocks are valued only at variableproduction cost. Marco Ltd has no opening stock next year but a closing stock of 5,000 units. Under AC this closing stockwill contain an element of fixed production overhead costs which will be carried forward to the following year. Whereas underMC all the fixed production overhead costs will have been written off next year against profits and not included in the closingstock 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 changein stocks.

5 (a) (i) The relevant cost of material in regular usage will be its replacement cost. So the relevant cost of 2,500 kg of materialR 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 opportunity cost (lost contributionfrom its alternative use). The alternative use of the skilled labour is the production of product T which makes acontribution 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.

(b) Relevant costs are those future cash costs that change as a direct consequence of undertaking the contract. This generalapproach applies to variable and fixed production overhead costs as well as to materials and labour. Generally variableproduction overhead costs tend to be relevant because by definition they vary with activity. So if the contract involves moreactivity then more variable production overhead costs will be incurred. An example of a variable production overhead cost ispower charged at a rate per unit used (gas or electricity). On the other hand, if the fixed production overhead costs do notchange 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 arelevant cost to the contract.

22




MarksSection A

Each of the 25 questions in this section is worth 2 marks 50

Section B

1 (a) (i) to (iv) Variances (1 mark per variance) 4

(b) Budgeted contribution 1Sales price variance 1Variances from (a) 1Actual contribution 2Layout/presentation of statement 1

––– 6

(c) Explanation 2––12––

2 (a) Formulation of objective function 1Formulation of constraints 3Optimal production plan 3Resultant contribution 1

––– 8

(b) Explanation of shadow price 2Shadow prices 1

––– 3––11––

3 (a) Debit entries 1Normal loss 11/2Abnormal loss 2Outputs 21/2

––– 7

(b) Additional revenue 11/2Additional costs 1Decision 1/2

––– 3––10––

4 (a) Total contribution 21/2Net profit 11/2

––– 4

(b) Break-even point 2

(c) Explanation for profit difference 2Condition for equal profits 1

––– 3––9

––

23



Marks

5 (a) Relevant cost – material R 2Relevant cost – skilled labour 3

–– 5

(b) Explanation of relevant cost concept 1Application to variable and fixed production overhead costs 1Examples 1

–– 3––8

––

24



acca | f2 - management accountant solved past papers [01-07]

Documents