Answers
ACCA Certified Accounting Technician Examination, Paper T10
Managing Finances
June 2010 Answers
Section A
1
D
2
A
 100 
 100 – 1

1 
1 + 99 
365 / 23
– 1 = 17·3 %
365 / 23
– 1 = 17·3 %
Candidates should answer it as above, therefore getting answer A. Otherwise, they will just try and guess it, in which case any
of the answers is feasible!
3
Maximum inventory level = reorder level + reorder quantity – (min. usage x min. lead time)
B
Reorder level = max. usage x max. lead time = 1,000 x 10 = 10,000 kg.
Max. inventory level = 10,000 + 1,000 – (300 x 5) = 11,000 – 1,500 = 9,500.
Distractor A = 10 x 1,000
Distractor C = 5 x 300
Distractor D = A – C.
4
C
5
A
Admin fee: $5,000,000 x 1%
Cost of financing receivables
$5,000,000 x 30/365 x 8%
Total cost with factor
Less cost before factor
Net cost of factor
$
50,000
32,877
––––––––
82,877
65,753
––––––––
–17,124
––––––––
––––––––
Distractor B: Candidate gets it wrong way round.
Distractors C & D: Candidate only compares admin fee to cost without factor.
6
C
Both statements are true.
7
D
8
B
Only statement 2 is true.
9
A
Interest yield = coupon rate/market price x 100% = 4/102·25 x 100% = 3·91%
Distractor B: Candidate does not understand term interest yield and thinks it is same as coupon rate.
Distractor C: is the redemption yield not the interest yield.
Loss on redemption = $102·25 – $100 = $2·25.
$2·25/102·25 = 2·2%
Therefore, redemption yield = 3·91 – 2·2 = 1·71%
Distractor D: is redemption LOSS as percentage (see above).
13
10 C
 a

IRR = A + 
× (B – A)
a– b

Where A is the lower rate and B is the higher rate; a is the NPV at the lower rate and b is the NPV at the higher rate.
24,800
5% + –––––––– x (5%)
37,200
= approx. 8%
Other distracters: feasible IRRs for candidates who haven’t learnt the formula!
Section B
1
(a)
Cash budget for the six months ended 31 December 2010.
Jul
Aug
Sep
Oct
Nov
$
$
$
$
$
Cash inflows (w.s1–3)
Course fees – new customers
– 19,200 19,200 28,800 19,200
– returning customers
–
7,200
7,200 10,800
7,200
––––––– ––––––– ––––––– ––––––– –––––––
Total cash inflows
– 26,400 26,400 39,600 26,400
––––––– ––––––– ––––––– ––––––– –––––––
Cash outflows
Tutor costs (w.4)
–
6,000 12,000
9,000 12,000
Staff costs (w.5)
1,000
4,000
4,200
4,200
4,200
Property costs (w.6)
6,000
Food costs (w.7)
1,100
–
1,200
1,224
1,872
General overheads (w.8)
2,585
1,185
1,185
1,185
1,185
Capital expenditure (w.9)
2,430
2,430
––––––– ––––––– ––––––– ––––––– –––––––
Total cash outflows
4,685 13,615 24,585 18,039 19,257
––––––– ––––––– ––––––– ––––––– –––––––
Net cash flow
(4,685) 12,785
1,815 21,561
7,143
Cash b/f
–
(4,685)
8,100
9,915 31,476
––––––– ––––––– ––––––– ––––––– –––––––
Cash c/f
(4,685)
8,100
9,915 31,476 38,619
–––––––
––––––– –––––––
––––––– –––––––
––––––– –––––––
––––––– –––––––
–––––––
(b)
Dec
$
28,800
10,800
–––––––
39,600
–––––––
12,000
4,200
6,300
3,216
1,185
–––––––
26,901
–––––––
12,699
38,619
–––––––
51,318
–––––––
–––––––
Motives for holding cash
The three motives for holding cash, as identified by Keynes, are:
(i)
The transactions motive. This means that a business holds cash in order to make the payments that are necessary
to keep the business going, such as wages, taxes and payments to suppliers. If the business cannot meet its financial
obligations as they arise, it may cease to be a going concern. It is therefore the main motive for holding cash.
(ii)
The precautionary motive. The second motive for holding cash is so that the business does not find itself in financial
difficulties should some unforeseen expenses arise. In practice, businesses tend to cover themselves against this by
arranging overdraft facilities with their banks. These do not cost businesses anything unless they are used.
(iii) The speculative motive. This refers to businesses holding cash in case an opportunity to invest and earn money arises.
Few businesses are likely to do this in practice as they will lose money whilst waiting for an opportunity to arise.
Working 1: budgeted attendees
No. of courses
Prov. attendees
Budgeted confirmed
attendees per course
Budgeted total
attendees per month
Jul
–
–
Aug
2
16
Sep
4
8
Oct
3
16
Nov
4
8
Dec
4
12
–
–––
–
–––
12
–––
24
–––
6
–––
24
–––
12
–––
36
–––
6
–––
24
–––
9
–––
36
–––
Working 2: budgeted fees from full-priced customers
Standard fees $
No. of attendees for month
paying standard fee (2/3)
Total full-priced fees $
Jul
–
Aug
1,200
Sep
1,200
Oct
1,200
Nov
1,200
Dec
1,200
–
–––––––
–
–––––––
16
–––––––
19,200
–––––––
16
–––––––
19,200
–––––––
24
–––––––
28,800
–––––––
16
–––––––
19,200
–––––––
24
–––––––
28,800
–––––––
14
Working 3: budgeted fees from returning customers
Fees with 25% reduction $
Jul
Aug
900
–
Sep
900
Oct
900
Nov
900
Dec
900
No. of attendees for month
paying reduced fee (1/3)
–
8
8
12
8
12
––––––– ––––––– ––––––– ––––––– ––––––– –––––––
Total reduced price fees $
–
7,200
7,200 10,800
7,200 10,800
––––––– ––––––– ––––––– ––––––– ––––––– –––––––
Working 4: Tutor Costs
No. of courses
Cost per course $
Jul
Aug
2
3,000
Sep
Oct
Nov
Dec
–
–
4
3,000
3
3,000
4
3,000
4
3,000
Cost of assistant (irrelevant
– paid by Oliver James) $
Total cost per month $
–
–––––––
–
–––––––
0
–––––––
6,000
–––––––
0
–––––––
12,000
–––––––
0
–––––––
9,000
–––––––
0
–––––––
12,000
–––––––
0
–––––––
12,000
–––––––
Working 5: staff costs $
(Increase of 5% from September)
–––––––
1,000
–––––––
–––––––
4,000
–––––––
–––––––
4,200
–––––––
–––––––
4,200
–––––––
–––––––
4,200
–––––––
–––––––
4,200
–––––––
Oct
36
52
1,872
–––––––
1,224
–––––––
Nov
24
53
1,272
–––––––
1,872
–––––––
Dec
36
54
1,944
–––––––
3,216
–––––––
Working 6: Rental payments
Current quarterly payments = $24,000/4 = $6,000 per annum.
From December, annual rent = $24,000 x 1·05 = $25,200.
Therefore, quarterly rent = $6,300 in December.
Working 7: food costs
Budgeted attendees (w.1)
Food cost per head $
Total food cost per month $
Payable one month later $
Jul
–
–
–
–––––––
1,100
–––––––
Aug
24
50
1,200
–––––––
–
–––––––
Sep
24
51
1,224
–––––––
1,200
–––––––
Working 8: General overheads
Business rates = $8,350/10 = $835 for each of the six months.
Fuel = $4,200/12 = $350 per month. In July, = $350 + (4 x $350)
= $1,750.
Total = $2,585 for July. $1,185 for each month August to December inclusive.
Working 9: Capital expenditure
Total cost = 3 x (1,800 x 90%) = $4,860.
Half = $2,430 – payable in August and October.
15
2
(a)
Working capital requirements:
Current assets:
$
Raw materials
(8/52 x $13m)
Finished goods:
– raw material element
(6/52 x $13m)
1,500,000
– labour element
(6/52 x $16·25m)
1,875,000
– variable overhead element
(6/52 x $9·75m)
1,125,000
––––––––––
WIP:
– raw material element
(2/52 x $13m x 75%)
375,000
– labour element
(2/52 x $16·25m x 50%)
312,500
– variable overhead element
(2/52 x $9·75m x 50%)
187,500
––––––––––
Accounts receivable
(9/52 x $65m)
Total current assets
875,000
11,250,000
–––––––––––
18,625,000
(4,687,500)
–––––––––––
13,937,500
–––––––––––
–––––––––––
Working 1: Annual costs
Turnover:
$65,000,000
Direct materials
$65m x 20%
Direct labour
$65m x 25%
Variable overheads
$65m x 15%
Fixed overheads
$65m x 18%
Selling and distribution costs
$65m x 5%
(b)
4,500,000
Less current liabilities:
Accounts payables:
Direct materials
(6/52 x $13m)
(1,500,000)
Direct labour
(1/52 x $16·25m)
(312,500)
Variable overheads
(8/52 x $9·75m)
(1,500,000)
Fixed overheads
(5/52 x $11·7m)
(1,125,000)
Selling and distribution
(4/52 x $3·25)
(250,000)
––––––––––
Working capital requirement
$
2,000,000
$
13,000,000
16,250,000
9,750,000
11,700,000
3,250,000
Factors to take into account before lending
The character of the borrower
Since Bulb Co is a company, the bank will need to assess the experience and integrity of the directors of Bulb Co. In order to do
this, the bank is likely to require a personal interview with at least some of the directors of Bulb Co. The bank will also assess
integrity by reading the financial press and searching the internet for any signs of any disputes between the company or its
directors with any other companies, organisations or individuals.
The ability to borrow and repay
The bank wants to be sure that Bulb Co will be in a position to repay the money. This assessment of the ability to repay will
include an assessment of the company’s key ratios, in order to ascertain its financial health. The fact that Bulb Co has been
making losses for the two years ended 20 November 2009 and 30 November 2008 will be a cause for concern for the bank.
However, given the financial climate that the company has been working in, these losses will not be surprising. The bank
will also look at the increase in sales that has taken place over the last six months, which is an indicator that the company is
recovering.
In considering the company’s ability to repay, the bank will take into account the fact that Bulb Co does not currently have any
outstanding debt.
Also, the bank may check whether the company has the authority to borrow the funds it is requesting. The company’s articles
of association provide this information.
The margin of profits
The bank lends money in order to make money. It needs to ensure that it makes enough of a profit to warrant the risk that it
takes by lending. Therefore, it will only lend money to Bulb Co if it can make a return that warrants the risk of lending. Most
banks have lending policies which require them to charge different interest rates to customers depending on the reason for the
borrowing. This is because some types of lending are more risky than others, therefore higher interest rate reflects higher risk.
The bank may want to take some form of security for the lending, probably over the company’s property.
16
Purpose of the borrowing
The purpose of the borrowing affects not only the interest rate but also the bank’s decision as to whether or not to lend in
the first place. It will normally lend in order to finance working capital, provided that the company’s liquidity position is still
manageable. The bank will carry out some financial analysis, looking at Bulb Co’s key ratios, in order to assess this.
Amount of the borrowing
Firstly, the bank will need to make sure that Bulb Co is not asking for more money than it needs for the purpose specified. If it
is, this casts doubt over its ability to repay.
Secondly, the bank needs to be sure that Bulb Co is asking for enough money. If it is not, the bank may well end up having to
lend more in order to safeguard the original loan.
Repayment terms
Banks will pay close attention to the repayment terms when considering granting a loan. Obviously, being sure that a borrower
will repay is critical and a bank should not lend money just because the borrower has security for the loan. Taking ownership
of and selling any of the borrower’s assets would be a cumbersome process and is really a last resort.
Payment terms need to be clearly agreed, documented and realistic, given the borrower’s financial position.
Insurance
The bank will need to be satisfied that Bulb Co’s business is adequately insured. An underinsured business can be disastrous.
In addition, Bulb Co may wish to obtain payment protection insurance just to make sure that it can meet all of its loan
repayments. Having said that, the bank must be satisfied that this is the case, without relying on any payment protection plan
taken out by the company.
NOTE: Only four factors were required.
3
(a)
ARR and payback
(a)
Current methods
Accounting rate of return (ARR)
ARR measures the project’s annual average profit against the project’s annual average investment, expressed as a
percentage.
It is calculated by reference to the formula:
average annual profits
––––––––––––––––––– x 100%
average investment
Payback period (PP)
Payback period assesses how long it will take for the initial outlay on the equipment to be recouped, in cash terms. Cash
flows are deemed to accrue evenly over each year.
Calculations
(b)
ARR
Increased revenues (5 x $5m)
Less increased costs (5 x [1,500 + 1,000])
Profit before depreciation
Less depreciation ($8m – 0·5m)
Profit after depreciation
Average annual profits ($5m/5)
Average investment = (initial investment + residual value)/2
= ($8,000,000 + $500,000)/2
= $4,250,000
Therefore, ARR
= 1,000,000/4,250,000
= 23·53%
17
$’000
25,000
–12,500
––––––––
12,500
–7,500
––––––––
5,000
1,000
(b) Payback period
Initial outlay
Year 1
Year 2
Year 3
Year 4
Year 5
Cash flow
$’000
–8,000
2,500
2,500
2,500
2,500
2,500
Cumulative cash flow
$’000
–8,000
–5,500
–3,000
–500
2,000
4,500
Payback occurs 500/2,500 through year 4 i.e. After 3·2 years.
Since the hospital has a minimum ARR of 20% and a minimum PP of 4 years and this project has an ARR of 23·53% and a
PP of 3·2 years, using these methods of appraisal, the investment should proceed.
(c)
Disadvantages
Disadvantages of ARR
–
–
–
–
NOTE: Only TWO disadvantages were required.
Disadvantages of payback period
–
–
–
NOTE: Only TWO disadvantages were required.
(d)
Ignores time value of money
Uses subjective ‘profits’ rather than cash flows
Does not aim to maximise shareholder wealth
Ignores how profits distributed over the period
Ignores the time value of money.
Ignores cash flows after the payback date.
Does not take into account how cash flows are distributed during the payback period.
NPV
(i)
The net present value of an investment is the sum of the present values of all future cash flows less the initial amount
invested. The method therefore takes into account the timing of cash flows by taking future cash flows and discounting
them to reflect the fact that, for example, $1 received in five years’ time is not worth the same as $1 received today. The
discount rate used is the company’s cost of capital i.e. the rate it pays on keeping money tied up in the business.
(ii)
Calculations
Time
Cash flow
D.F/A.F
$’000
0
(8,000)
1
1–5
2,500
3·791
5
500
0·621
4
(a)
Present value
$’000
(8,000)
9,478
311
––––––––
1,789
––––––––
The net present value of the project is $1·789 million. Since this is positive, the project should be undertaken.
Current break-even point
Fixed overheads = $35,000 x 12 months = $420,000.
Sales price = $1,800,000/12,000,000 = $0·15 per photo.
Contribution per unit = $0·15 – $0·11 = $0·04 per photo.
Break-even point:
Fixed costs
–––––––––––––––––
Contribution per unit
$420,000
= ––––––––– = 10,500,000 photos.
$0·04
18
(b)
New break-even sales revenue
Direct materials
$
– Paper
0·04
– Ink (0·3 x 90%)
0·027
––––––
Direct labour
Variable overheads (0·02 x 70%)
Variable cost per unit
Selling price per unit
Contribution per unit
0·067
0·01
0·014
––––––
0·091
0·15
––––––
0·059
––––––
––––––
Fixed overheads would increase by $60,000 (12 x $5,000)
Therefore, the new break-even sales revenue is:
Fixed costs
––––––––––––––––– x selling price
Contribution per unit
$420,000 + $60,000
= –––––––––––––––––––– x $0·15 = $1,220,339.
$0·059
(c)
Output level at which co would be indifferent
The company would be indifferent about hiring the new machines where the total cost (fixed costs and variable costs) for
production using the old machines is the same as total cost for production using the new machines. This can be calculated as
follows:
Increase in fixed costs/decrease in variable costs
= $5,000 x 12/0·019 = 3,157,895.
Answer can also be found by solving an equation, where ‘a’ = level of output.
Total cost using old machines = ($35,000 x 12) + 0·11a
Total Cost using new machines = ($40,000 x 12) + 0·091a
Therefore:
420,000 + 0·11a = 480,000 + 0·091a
0·019a = 60,000
Therefore, a = 60,000/0·019 = 3,157,895.
The co would be indifferent between which method was used if the number of good photos printed and sold was
3,157,895.
(d)
Marginal costing
Advantages
–
–
–
–
–
–
Note: Only three advantages were required.
Disadvantages
–
–
–
–
–
Note: Only three disadvantages were required.
It concentrates on controllable aspects of business by separating costs into their fixed and variable elements.
Inventory valuations are not distorted with present year’s fixed costs.
By its nature, it gives the most relevant costs to assist a decision-maker. Marginal costs are usually differential, incremental
costs that are important for pricing decisions, or make or buy decisions or decisions involving a limiting factor.
No adjustments need to be made for under/over absorption of overheads since these simply do not arise when using
marginal costing techniques.
It is simple to understand.
It shows the relationship between cost, price and volume.
It totally ignores fixed costs to products as if they are not important to production, which they are.
Inventory valued using marginal costing is not an acceptable method for financial reporting purposes.
It fails to recognise that, in the long run, most fixed costs become variable.
Not all costs can be simply categorised as fixed or variable, since some costs have a fixed and variable element.
In the long run, when making pricing decisions, fixed costs cannot be ignored since all costs must be covered if the
business is to survive.
19
ACCA Certified Accounting Technician Examination, Paper T10
Managing Finances
June 2010 Marking Scheme
Section A
Answers 1 to 10
2 marks per question
Total
Marks
2
–––
20
–––
Answer 1
1
(a) Cash budget
Budgeted attendees
Budgeted fees – new
Budgeted fees – returning
Tutor costs (incl. ignore Mark)
Staff costs
Property costs
Food costs
General overheads
Capital expenditure
Net cash flow
Cash b/f
Cash c/f
2
2
2
1
2
1
2
2
1·5
0·5
0·5
0·5
–––
17
–––
(b) Motives for holding cash
1 mark for each
Total marks
Overall total
1
–––
3
–––
20
–––
–––
21
Marks
2
(a) Working capital requirements
Calculation of costs (Wg 1):
Direct materials
Direct labour
Variable overheads
Fixed overheads
Selling and distribution costs
Calculation of current assets:
Raw materials
WIP
Finished goods
Receivables
0·5
0·5
0·5
0·5
0·5
–––
2·5
–––
0·5
3
1·5
1
–––
6
–––
Calculation of current liabilities
Accounts payable:
Direct materials
Direct labour
Variable overheads
Fixed overheads
S&D
Working capital required
Total marks for (a)
0·5
0·5
0·5
0·5
0·5
–––
2·5
–––
1
–––
12
–––
(b) Factors
Each factor well described
Overall total
2
–––
8
–––
20
–––
–––
22
Marks
3
(a) ARR and PP
Each definition
1
–––
2
–––
(b) Calculations
Calculation of average profits
Calculation of average investment
ARR
Calculations of cash flows
PP
Recommendation
2
1
1
2
1
1
–––
8
–––
(c) Disadvantages
Per valid disadvantage
Maximum marks
1
–––
4
–––
(d) NPV
(i) Explanation
–––
2
–––
(ii) NPV calculation
Investment
Revenues
Residual value
NPV and recommendation
Overall total
1
1
1
1
–––
4
–––
20
–––
–––
4
(a) Current B/E sales revenue
Annual overheads
Contribution
BEP
1
1
1
–––
3
–––
(b) New B/E sales revenue
New contribution
New overheads
BE sales revenue
2
1
2
–––
5
–––
(c) Indifference
Explanation
Calculation
2
4
–––
6
–––
(d) Advantages and disadvantages
Each advantage
Max. marks
1
–––
3
–––
Each disadvantage
Max. marks
Overall total
1
–––
3
–––
20
–––
–––
23