TA
Time allowed: 2 hours
H
A
PO
PA
TI
A
Management
Accounting
Paper F2
Fundamentals Pilot Paper – Knowledge module
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.
The Association of Chartered Certified Accountants
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ALL 50 questions are compulsory and MUST be attempted.
1
The following break-even chart has been drawn showing lines for total cost (TC), total variable cost (TVC), total fixed
cost (TFC) and total sales revenue (TSR):
£
TSR
TC
TVC
0
675
1,200
200 units
B
300 units
C
500 units
Units
(2 marks)
H
A
D 1,025 units
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.
TA
2
1,700
PO
A
1,500
PA
What is the margin of safety at the 1,700 units level of activity?
TI
A
TFC
Which of the following statements are true?
A
Assertions (i) and (ii) are both correct.
B
Only assertion (i) is correct.
C Only assertion (ii) is correct.
3
(1 mark)
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)
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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
5
(2 marks)
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.
Under absorbed by $3,875
B
Under absorbed by $7,000
C
Over absorbed by $3,875
PA
A
TI
A
By how much was the total overhead under or over absorbed for the period?
For which of the following is a profit centre manager responsible?
A
Costs only
B
Revenues only
7
TA
C Costs and revenues.
H
A
6
(2 marks)
PO
D Over absorbed by $7,000
(1 mark)
An organisation has the following total costs at two activity levels:
Activity level (units)
Total costs ($)
16,000
135,000
22,000
170,000
Variable cost per unit is constant within this range of activity but there is a step up of $5,000 in the total fixed costs
when the activity exceeds 17,500 units.
What is the total cost at an activity of 20,000 units?
A
$155,000
B
$158,000
C
$160,000
D $163,000
(2 marks)
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8
A company manufactures and sells a single product. In two consecutive months the following levels of production and
sales (in units) occurred:
Sales
Production
Month 1 Month 2
3,800
4,400
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?
Absorption costing profit/(loss)
Month 1
Month 2
$
$
Marginal costing profit/(loss)
Month 1
Month 2
$
$
A
200
4,400
(400)
3,200
B
(400)
4,400
200
3,200
C
200
3,200
(400)
4,400
D
(400)
3,200
200
4,400
TI
A
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.
PA
9
(2 marks)
PO
D A budget that is updated halfway through the year to incorporate the actual results for the first half of the year.
(2 marks)
F
G
Normal loss as
% of input
8
5
Input
litres
65,000
37,500
TA
Process H
A
10 Information relating to two processes (F and G) was as follows:
Output litres
58,900
35,700
For each process, was there an abnormal loss or an abnormal gain?
A
Process F
Abnormal gain
Process G
Abnormal gain
B
Abnormal gain
Abnormal loss
C
Abnormal loss
Abnormal gain
D Abnormal loss
Abnormal loss
(2 marks)
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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
D Forklift truck drivers in the stores of an engineering company.
TI
A
C Machinists in a factory producing clothes
(2 marks)
PA
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.
$17,950
B
$19,250
C
$21,200
D $21,500
H
A
A
PO
What is the total relevant cost of raw material X for the project?
(2 marks)
A
+1.4
B
+0.7
C
0
TA
14 Which of the following is NOT a feasible value for the correlation coefficient?
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)
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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
£
D
0
(2 marks)
PO
0
PA
TI
A
£
17 A manufacturing organisation incurs costs relating to the following:
H
A
(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?
(1) and (2) only
B
(1) and (3) only
C
(2) and (3) only
TA
A
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.
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(2 marks)
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19 There is a 60% chance that a company will make a profit of $300,000 next year and a 40% chance of making a loss
of $400,000.
What is the expected profit or loss for next year?
A
$120,000 Loss
B
$20,000 Loss
C
$20,000 Profit
D $120,000 Profit
(2 marks)
20 A company’s budgeted sales for last month were 10,000 units with a standard selling price of $20 per unit and a
standard contribution of $8 per unit. Last month actual sales of 10,500 units at an average selling price of $19.50 per
unit were achieved.
What were the sales price and sales volume contribution variances for last month?
Sales volume contribution variance ($) 4,000 Favourable
B
5,250 Adverse
4,000 Adverse
C
5,000 Adverse
4,000 Favourable
D 5,000 Adverse
TI
A
Sales price variance ($) A 5,250 Adverse
PA
4,000 Adverse
(2 marks)
H
A
PO
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
A
141,000
B
147,000
C
157,000
TA
What is the budgeted raw material purchases for next period (in kg)?
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)
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23 A company always determines its order quantity for a raw material by using the Economic Order Quantity (EOQ)
model.
What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of ordering a
batch of raw material?
A
EOQ
Higher
Annual holding cost
Lower
B
Higher
Higher
C
Lower
Higher
D Lower
Lower
(2 marks)
24 Which one of the following is most likely to operate a system of service costing?
A
A printing company
B
A hospital
TI
A
C A firm of solicitors.
(1 mark)
25 The following budgeted information relates to a manufacturing company for next period:
Units 14,000
12,000
$
63,000
12,000
PA
Production
Sales
Fixed production costs
Fixed selling costs
PO
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.
$25,000
B
$27,000
C
$45,000
D $47,000
TA
A
H
A
What would the profit for next period be using marginal costing?
(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 break- even 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)
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27 The following graph relates to a linear programming problem:
Y
(1)
(2)
(3)
0
X
Constraints (1) and (2)
B
Constraints (2) and (3)
C
Constraints (1) and (3)
D Constraint (1) and the x-axis
PO
A
PA
At which of the following intersections is contribution maximised?
TI
A
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).
(2 marks)
H
A
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.
A
True
B False
TA
Is this statement true or false?
(1 mark)
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29 A company operates a process in which no losses are incurred. The process account for last month, when there was
no opening work-in-progress, was as follows:
Process Account
$
Finished output
(10,000 units)
Closing work-in progress (4,000 units)
480,000
144,000
Costs arising
$ 624,000
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%
TI
A
(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:
PO
PA
Product X Y
Selling price per unit
$20
$40
Variable cost per unit
$12
$30
Skilled labour hours per unit
2
4
Maximum demand (units) per period
800
400
In order to maximise profit in the coming period, how many units of each product should the company manufacture
and sell?
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
H
A
A
TA
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)
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The following information relates to questions 32 and 33:
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)
A
$5,000 Adverse
B
$5,000 Favourable
C
$6,000 Adverse
TI
A
33 What was the variable overhead efficiency variance for last month?
PA
D $6,000 Favourable
(2 marks)
Is this statement true or false?
True
B False
H
A
A
PO
34 When a manufacturing company operates a standard marginal costing system there are no fixed production overhead
variances.
(1 mark)
TA
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)
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36 Which of the following best describes a principal budget factor?
A
A factor that affects all budget centres.
B
A factor that is controllable by a budget centre manager.
C
A factor which limits the activities of an organisation.
D A factor that the management accountant builds into all budgets.
(2 marks)
37 Four vertical lines have been labelled G, H, J and K at different levels of activity on the following profit-volume chart:
K
0
Output
G
TI
A
J
PA
H
A
Line G
B
Line H
C
Line J
PO
Which line represents the total contribution at that level of activity?
(2 marks)
H
A
D Line K
38 Data is information that has been processed in such a way as to be meaningful to its recipients.
A
True
B False
TA
Is this statement true or false?
(1 mark)
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39 Two products G and H are created from a joint process. G can be sold immediately after split-off. H requires further
processing into product HH before it is in a saleable condition. There are no opening inventories and no work in
progress of products G, H or HH. The following data are available for last period:
Total joint production costs
Further processing costs of product H
Product $
350,000
66,000
Production Closing inventory
units units
420,000
20,000
330,000
30,000
G
HH
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
TI
A
(2 marks)
PA
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.
PO
What is the relevant cost of the machine to the project?
A $2,000
B $3,000
H
A
C $5,000
(2 marks)
TA
D $10,000
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?
A
$7,500 Adverse
B
$7,500 Favourable
C
$10,500 Adverse
D $10,500 Favourable
(2 marks)
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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)
A
$1,250
B
$3,500
C
$4,500
PA
What is the total relevant cost of labour for the contract?
TI
A
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.
(2 marks)
PO
D $4,900
H
A
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.
A
$128
B
$144
C
$160
TA
If an employee produces 200 units in eight hours on a particular day, what is the employee’s gross pay for that
day?
D $180
(2 marks)
45 A semi-variable cost is one that, in the short term, remains the same over a given range of activity but beyond that
increases and then remains constant at the higher level of activity.
Is this statement true or false?
A
True
B False
(1 mark)
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46 A factory consists of two production cost centres (P and Q) and two service cost centres (X and Y). The total allocated
and apportioned overhead for each is as follows:
P
$95,000
Q
$82,000
X
$46,000
Y
$30,000
It has been estimated that each service cost centre does work for other cost centres in the following proportions:
P Q
X
Y
Percentage of service cost centre X to
50
50
–
–
Percentage of service cost centre Y to
30
60
10
–
The reapportionment of service cost centre costs to other cost centres fully reflects the above proportions.
After the reapportionment of service cost centre costs has been carried out, what is the total overhead for production
cost centre P?
$124,500
B
$126,100
C
$127,000
D
$128,500
(2 marks)
TI
A
A
PA
The following information relates to questions 47 and 48:
A company manufactures and sells two products (X and Y) which have contributions per unit of $8 and $20 respectively.
The company aims to maximise profit. Two materials (G and H) are used in the manufacture of each product. Each material
is in short supply – 1,000 kg of G and 1,800 kg of H are available next period. The company holds no inventories and it
can sell all the units produced.
PO
The management accountant has drawn the following graph accurately showing the constraints for materials G and H.
100
090
TA
Material G
H
A
Product Y
(units)
000
Material H
125
150
Product X
(units)
47 What is the amount (in kg) of material G and material H used in each unit of product Y?
A
Material G Material H
10
20
B
10
10
C
20
20
D
20
10
(2 marks)
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48 What is the optimal mix of production (in units) for the next period?
A
Product X 0
Product Y
90
B
50
60
C
60
50
D
125
0
(2 marks)
49 The following statement refers to a quality of good information:
The cost of producing information should be greater than the value of the benefits of that information to management.
Is this statement true or false?
A
True
B False
(1 mark)
PA
TI
A
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.
A
$19,910
B
$20,000
C
$20,510
PO
What was the total value of the 2,000 units transferred to the finished goods warehouse last month?
(2 marks)
TA
H
A
D $21,710
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Formulae Sheet
Regression analysis
a=
∑y b∑x
n
n
∑y b∑x
a= n∑xy-∑x∑y
n
n
2
n∑x2 -(∑x)
∑y b∑x
a= nn∑xy-∑x∑y
n
b=
n∑xy-∑x∑y
2
n∑x -(∑x)2
r=
2 n∑xy-∑x∑y
(n∑xb=
-(∑x)2 )(n∑y 2 -(∑y)2 )
n∑x2 -(∑x)2
n∑xy-∑x∑y
r=
2
2
2C0D
(
n
∑x
-(∑x)
)(n∑y 2 -(∑y)2 )
=
Economic order n∑xy-∑x∑y
quantity
Ch r=
(n∑x2 -(∑x)2 )(n∑y 2 -(∑y)2 )
2C0D
=
2C0D
Ch
=
2C0D
D
Ch (1-= ) C
h
R batch
Economic
2C0Dquantity
=
D
Ch (12C
DR)
0
=
D
Ch (1- )
R
TA
H
A
PO
PA
TI
A
b=
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TI
A
PA
PO
H
A
TA
8
18 of1 298
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TA
H
A
PO
PA
TI
A
Answers
19 of1 298
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Pilot Paper F2
Management Accounting
Answers
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
C
B
C
C
A
C
C
C
C
C
A
D
B
A
A
D
C
A
C
A
B
C
D
B
B
2
B
H
A
C
PO
In detail
1
B
D
B
D
D
A
B
C
B
A
C
C
B
C
B
B
C
B
D
B
D
A
A
B
A
PA
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
TI
A
Summarised
a = (Σy ÷ n) − [(bΣx) ÷ n] = (330 ÷ 11) − [(0.69171 × 440) ÷ 11]
= (30 −27.6684)
= 2.3316 (2.33 to 2 decimal places)
4
{[ 2 × 20 × (4 ×20,000) ] ÷ [0.06 ×25]}0.5 = 1,461 units
C
5
A
TA
3
C
Actual cost
Absorbed cost (30,000 × 3.50)
Under absorption
$108,875
$105,000
$ 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
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10 C
Process F
Process G
11 A
Normal loss litres
5,200
1,875
Actual loss
litres
6,100
1,800
Abnormal loss
litres
900
–
Abnormal gain
litres
–
75
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
(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
PA
TI
A
19 C
PO
22 C
23 D
24 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
28 B
29 D
TA
27 D
H
A
25 B
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
21 of21298
TAHA POPATIA
32 B
$
235,000
Actual expenditure
Actual hours × standard rate
(24,000 × 10)
240,000
5,000 Favourable
Expenditure variance
33 C
$
Actual hours × standard rate
240,000
Standard cost of actual production
(3,900 × 6 × 10)
234,000
6,000 Adverse
Efficiency variance
34 B
35 A
36 C
TI
A
37 C
38 B
Joint costs apportioned to H: [330,000 ÷ (420,000 + 330,000)] × 350,000 = $154,000
Closing inventory valuation (HH): (30,000 ÷ 330,000) × (154,000 + 66,000) = $20,000
40 B
Relevant cost: (8,000 − 5,000) = $3,000
41 B
Budgeted hours
Actual hours worked
PO
5,000
5,500
Capacity variance
500 hours × 15 = $7,500 Favourable
PA
39 C
42 C
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
TA
H
A
43 B
45 B, this is a stepped fixed cost
$
95,000
24,500
9,000
46 D
Total overhead to cost centre P:
Direct
Proportion of cost centre X [46,000 + (0.10 × 30,000)] × 0.50
Proportion of cost centre Y [30,000 × 0.3]
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
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49 B
50 A
Value of 2,000 units transferred:
1,700 units × 10
300 units × 0.40 × 10
Opening work in progress value
$
17,000
1,200
1,710
TA
H
A
PO
PA
TI
A
19,910
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3
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Paper 1.2
TI
A
Financial
Information for
Management
PO
PA
PART 1
FRIDAY 7 DECEMBER 2001
TA
Time allowed 3 hours
H
A
QUESTION PAPER
This paper is divided into two sections
Section A ALL 25 questions are compulsory and MUST be
answered
Section B ALL FIVE questions are compulsory and MUST be
answered
Formulae Sheet, Present Value and Annuity Tables are on
pages 12, 13 and 14.
24 of 298
TAHA POPATIA
Section A – ALL 25 questions are compulsory and MUST be attempted.
Please use the answer sheet provided to indicate your choice in each question.
Each question within this section is worth 2 marks.
1
Which of the following statements are correct with regard to marginal costing?
(i) Period costs are costs treated as expenses in the period incurred.
(ii) Product costs can be identified with goods produced.
(iii) Unavoidable costs are relevant for decision making.
A
B
C
D
Canberra has established the following information regarding fixed overheads for the coming month:
Budgeted information:
Fixed overheads
Labour hours
Machine hours
Units of production
£180,000
3,000 hours
10,000 hours
5,000 units
TI
A
2
(i), (ii) and (iii)
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only.
PO
PA
Actual fixed costs for the last month were £160,000.
Canberra produces many different products using highly automated manufacturing processes and absorbs overheads on
the most appropriate basis.
What will be the pre-determined overhead absorption rate?
A
Which of the following are correct with regard to service organisations?
TA
3
£16
£18
£36
£60.
H
A
B
C
D
(i) Activity based costing would not be considered appropriate.
(ii) The cost of materials will be relatively small.
(iii) A significant proportion of the costs incurred will be fixed and indirect.
A
B
C
D
4
(i), (ii) and (iii)
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only.
Which of the following statements is correct with regard to time series analysis?
A
B
C
D
The trend is the general upward movement of the variable over time.
The multiplicative model assumes that the different variations are independent of one another.
Time series can be completely predicted by regression analysis.
The cyclical variation is the regular periodic variation that exists over a long duration.
2
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5
Which of the following is NOT CORRECT?
A
B
C
D
6
Cost accounting can be used for stock valuation to meet the requirements of internal reporting only.
Management accounting provides appropriate information for decision-making, planning, control and
performance evaluation.
Routine information can be used for both short-term and long run decisions.
Financial accounting information can be used for internal reporting purposes.
Melbourne wishes to make a comparison between the sales revenue figures for two different time periods. The following
figures were recorded:
Year 7
Year 10
Inflation
Index
Sales
£’000
325
435
124
130
What is the real increase in the sales revenue over this period in % terms?
7
TI
A
7·9%
27·7%
33·8%
40·3%.
PO
PA
A
B
C
D
Darwin uses decision tree analysis in order to evaluate potential projects. The company has been looking at the launch
of a new product which it believes has a 70% probability of success. The company is, however, considering undertaking
an advertising campaign costing £50,000, which would increase the probability of success to 95%.
If successful the product would generate income of £200,000 otherwise £70,000 would be received.
8
H
Which of the following relates to the cost of replacing (rather than retaining) labour due to high employee turnover?
A
B
C
D
9
£32,500
£29,000
£17,500
£50,000.
TA
A
B
C
D
A
What is the maximum that the company would be prepared to pay for the advertising?
Improving working conditions
Suffering the learning curve effect
Provision of a pension
Provision of welfare services.
Which of the following is NOT CORRECT?
A
B
C
D
Contract costing is appropriate if each unit of production is unique and takes a considerable length of time to
complete.
Batch costing refers to a system where either job or process costing techniques are used to manufacture a
product.
Rectification costs should be charged to production overheads if the costs can not be specifically traced to a
job.
Job costing is required when each unit of production is unique and production is of long duration.
3
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[P.T.O.
10 Taree Limited uses linear programming to establish the optimal production plan for the production of its two products, A
and U, given that it has the objective of minimising costs. The following graph has been established bearing in mind the
various constraints of the business. The clear area indicates the feasible region.
A
units
A
E
B
D
TI
A
C
U units
A
B
C
D
PO
PA
Which points are most likely to give the optimal solution?
A and B only
A, B and C only
D and E only
B, D and E only.
A
11 Dalby is currently considering an investment that gives a positive net present value of £3,664 at 15%. At a discount rate
of 20% it has a negative net present value of £21,451.
15·7%
16·0%
19·3%
19·9%.
TA
A
B
C
D
H
What is the internal rate of return of this investment?
12 The management accountant of Gympie Limited has already allocated and apportioned the fixed overheads for the
period although she has yet to reapportion the service centre costs. Information for the period is as follows:
Allocated and apportioned
Work done by:
Stores
Maintenance
Production departments
1
2
£17,500
£32,750
60%
75%
30%
20%
Service departments
Total
Stores
Maintenance
£6,300
£8,450
£65,000
—
5%
10%
—
What are the total overheads included in production department 1 if the reciprocal method is used to reapportion
service centre costs?
A
B
C
D
£27,618
£28,171
£28,398
£28,453.
4
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13 Moura uses the economic order quantity formula (EOQ) to establish its optimal reorder quantity for its single raw
material. The following data relates to the stock costs:
Purchase price:
Carriage costs:
Ordering costs:
Storage costs:
£15 per item
£50 per order
£5 per order
10% of purchase price plus £0·20 per unit per annum
Annual demand is 4,000 units.
What is the EOQ to the nearest whole unit?
A
B
C
D
153 units
170 units
485 units
509 units.
The following information was available for one of the divisions:
Division 1
Profit before
interest and tax
£’000
69
Divisional net
assets
£’000
104
PO
PA
Net profit
after tax
£’000
47
TI
A
14 Bollon uses residual income to appraise its divisions using a cost of capital of 10%. It gives the managers of these
divisions considerable autonomy although it retains the cash control function at head office.
Cash/
(overdraft)
£’000
(21)
What is the residual income for this division based on controllable profit and controllable net assets?
£36,600
£56,500
£58,600
£60,700.
A
A
B
C
D
H
15 Ayr is planning on paying £300 into a fund on a monthly basis starting three months from now, for twelve months.
TA
The interest earned will be at a rate of 3% per month.
What is the present value of these payments?
A
B
C
D
£2,816
£2,733
£2,541
£2,986.
16 Which of the following are true with regard to expected values?
Expected values
(i) represents the single most likely estimate of an outcome.
(ii) take no account of decision-maker’s risk.
(iii) are reliant on the accuracy of the probability distribution.
A
B
C
D
(i), (ii) and (iii)
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only.
5
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[P.T.O.
17 Charleville operates a continuous process producing three products and one by-product. Output from the process for a
month was as follows:
Product
1
2
3
4 (by-product)
Selling price per
unit
£18
£25
£20
£2
Units of output
from process
10,000
20,000
20,000
3,500
Total output costs were £277,000.
What was the unit valuation for product 3 using the sales revenue basis for allocating joint cost?
A
B
C
D
£4·70
£4·80
£5·00
£5·10.
£132,400
5,000 units
9,750 hours
£135,000
4,500 units
9,000 hours
PO
PA
Actual costs incurred
Actual units produced
Actual labour hours worked
Budgeted costs
Budgeted units of production
Budgeted labour hours
TI
A
18 Bowen has established the following with regard to fixed overheads for the past month:
Overheads are absorbed on a labour hour basis.
£750 favourable
£11,250 favourable
£22,500 favourable
£11,250 adverse.
H
A
B
C
D
A
What was the fixed overhead capacity variance?
A
B
C
D
TA
19 Which of the following statements is correct?
A stores ledger account will be updated from a goods received note only.
A stores requisition will only detail the type of product required by a customer.
The term ‘lead time’ is best used to describe the time between receiving an order and paying for it.
To make an issue from stores authorisation should be required.
20 Perth operates a process costing system. The process is expected to lose 25% of input and this can be sold for £8
per kg.
Inputs for the month were:
Direct materials
3,500 kg at a total cost of £52,500
Direct labour
£9,625 for the period
There is no opening or closing work in progress in the period. Actual output was 2,800 kg.
What is the valuation of the output?
A
B
C
D
£44,100
£49,700
£58,800
£56,525.
6
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21 Camden has three divisions. Information for the year ended 30 September is as follows:
Division A
£’000
350
280
Sales
Variable costs
Contribution
Fixed costs
Division B
£’000
420
210
70
Division C
£’000
150
120
210
30
Total
£’000
920
610
310
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 incurred
by the company are specific to each division being split equally between them.
Using relevant costing techniques, which divisions should remain open if Camden wishes to maximise profits?
A, B and C
A and B only
B only
B and C only.
TI
A
A
B
C
D
22 Brisbane Limited has recorded the following sales information for the past six months:
Advertising expenditure
£’000
1·5
2
1·75
3
2·5
2·75
1
2
3
4
5
6
A
The following has also been calculated:
Sales revenue
£’000
30
27
25
40
32
38
PO
PA
Month
TA
H
S(Advertising expenditure) = £13,500
S(Sales revenue) = £192,000
S(Advertising expenditure x Sales revenue) = £447,250,000
S(Sales revenue2) = £6,322,000,000
S(Advertising expenditure2) = £32,125,000
What is the value of b, i.e. the gradient of the regression line?
A
B
C
D
0·070
0·086
8·714
14·286.
23 Which of the following could be carried out by higher level management?
(i) making short term decisions
(ii) defining the objectives of the business
(iii) making long run decisions
A
B
C
D
(i), (ii) and (iii)
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only.
7
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[P.T.O.
24 The following process account has been drawn up for the last month:
Process account
Opening WIP
Input:
Materials
Labour
Units
250
£
3,000
4,500
22,500
37,500
Normal loss
Output
Abnormal Loss
Closing WIP
4,750
Units
225
4,100
275
150
£
450
4,750
Work in progress has the following level of completion:
Opening WIP
Closing WIP
Material
100%
100%
Labour
40%
30%
The company uses the FIFO method for valuing the output from the process and all losses occurred at the end of the
process.
4,380 units
4,270 units
4,320 units
4,420 units.
PO
PA
A
B
C
D
TI
A
What were the equivalent units for labour?
25 Sydney is considering making a monthly investment for her son who will be five years old on his next birthday. She
wishes to make payments until his 18th birthday and intends to pay £50 per month into an account yielding an APR of
12·68%. She plans to start making payments into the account the month after her son’s fifth birthday.
H
£18,847
£18,377
£17,606
£18,610.
TA
A
B
C
D
A
How much will be in the account immediately after the final payment has been made?
(50 marks)
8
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Section B – ALL FIVE questions are compulsory and MUST be attempted
1
Albany has recently spent some time on researching and developing a new product for which they are trying to establish
a suitable price. Previously they have used cost plus 20% to set the selling price.
The standard cost per unit has been estimated as follows:
Direct materials
Material 1
Material 2
Direct labour
Fixed overheads
£
10
7
13
7
(4 kg at £2·50/kg)
(1 kg at £7/kg)
(2 hours at £6·50/hour)
(2 hours at £3·50/hour)
37
Required:
TI
A
(a) Using the standard costs calculate two different cost plus prices using two different bases and explain an
advantage and disadvantage of each method.
(6 marks)
(10 marks)
Newcastle Limited uses variance analysis as a method of cost control. The following information is available for the year
ended 30 September 2001:
Budget
Production for the year
12,000 units
H
A
Standard cost per unit:
Direct materials (3 kg at £10/kg)
Direct labour (4 hours at £6/hour)
Overheads (4 hours at £2/hour)
Actual
£
30
24
8
62
TA
2
PO
PA
(b) Give two other possible pricing strategies that could be adopted and describe the impact of each one on the
price of the product.
(4 marks)
Actual production units for year
Labour
– hours for the year
– cost for the year
Materials – kg used in the year
– cost for the year
11,500 units
45,350 hours
£300,000
37,250 kg
£345,000
Required:
(a) Prepare a reconciliation statement between the original budgeted and actual prime costs.
(7 marks)
(b) Explain what the labour variances calculated in (a) show and indicate the possible interdependence between
these variances.
(3 marks)
(10 marks)
9
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[P.T.O.
3
Toowomba manufactures various products and uses CVP analysis to establish the minimum level of production to
ensure profitability.
Fixed costs of £50,000 have been allocated to a specific product but are expected to increase to £100,000 once
production exceeds 30,000 units, as a new factory will need to be rented in order to produce the extra units. Variable
costs per unit are stable at £5 per unit over all levels of activity. Revenue from this product will be £7·50 per unit.
Required:
(a) Formulate the equations for the total cost at:
(i) less than or equal to 30,000 units;
(ii) more than 30,000 units.
(2 marks)
(b) Prepare a breakeven chart and clearly identify the breakeven point or points.
(6 marks)
(c) Discuss the implications of the results from your graph in (b) with regard to Toowomba’s production plans.
(2 marks)
Wollongong wishes to calculate an operating budget for the forthcoming period. Information regarding products, costs
and sales levels is as follows:
A
B
A
PO
PA
Product
Materials required
X (kg)
Y (litres)
Labour hours required
Skilled (hours)
Semi skilled (hours)
Sales level (units)
Opening stocks (units)
2
1
3
4
4
2
2,000
100
2
5
1,500
200
H
Closing stock of materials and finished goods will be sufficient to meet 10% of demand. Opening stocks of material X
was 300 kg and for material Y was 1,000 litres. Material prices are £10 per kg for material X and £7 per litre for
material Y. Labour costs are £12 per hour for the skilled workers and £8 per hour for the semi skilled workers.
Required:
TA
4
TI
A
(10 marks)
Produce the following budgets:
(a)
(b)
(c)
(d)
production (units);
materials usage (kg and litres);
materials purchases (kg, litres and £); and
labour (hours and £).
(10 marks)
10
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Surat is a small business which has the following budgeted marginal costing profit and loss account for the month ended
31 December 2001:
£’000
Sales
Cost of sales:
Opening stock
Production costs
Closing stock
£’000
48
3
36
(7)
(32)
16
Other variable costs:
Selling
(3·2)
Contribution
Fixed costs:
Production overheads
Administration
Selling
12·8
TI
A
(4)
(3·6)
(1·2)
Net profit
4·0
The standard cost per unit is:
PO
PA
£
8
9
3
Direct materials (1 kg)
Direct labour (3 hours)
Variable overheads (3 hours)
20
Budgeted selling price per unit
30
Required:
H
A
The normal level of activity is 2,000 units per month. Fixed production costs are budgeted at £4,000 per month and
absorbed on the normal level of activity of units produced.
TA
5
(a) Prepare a budgeted profit and loss account under absorption costing for the month ended 31 December 2001.
(6 marks)
(b) Reconcile the profits under these two methods and explain why a business may prefer to use marginal costing
rather than absorption costing.
(4 marks)
(10 marks)
11
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[P.T.O.
TA
H
A
PO
PA
TI
A
Formulae Sheet
12
35 of 298
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Present Value Table
Present value of 1 i.e. (1 + r)–n
Where
r = discount rate
n = number of periods until payment
Discount rate (r)
3%
4%
5%
6%
7%
8%
9%
10%
1
2
3
4
5
0·990
0·980
0·971
0·961
0·951
0·980
0·961
0·942
0·924
0·906
0·971
0·943
0·915
0·888
0·863
0·962
0·925
0·889
0·855
0·822
0·952
0·907
0·864
0·823
0·784
0·943
0·890
0·840
0·792
0·747
0·935
0·873
0·816
0·763
0·713
0·926
0·857
0·794
0·735
0·681
0·917
0·842
0·772
0·708
0·650
0·909
0·826
0·751
0·683
0·621
1
2
3
4
5
6
7
8
9
10
0·942
0·933
0·923
0·941
0·905
0·888
0·871
0·853
0·837
0·820
0·837
0·813
0·789
0·766
0·744
0·790
0·760
0·731
0·703
0·676
0·746
0·711
0·677
0·645
0·614
0·705
0·665
0·627
0·592
0·558
0·666
0·623
0·582
0·544
0·508
0·630
0·583
0·540
0·500
0·463
0·596
0·547
0·502
0·460
0·422
0·564
0·513
0·467
0·424
0·386
6
7
8
9
10
11
12
13
14
15
0·896
0·887
0·879
0·870
0·861
0·804
0·788
0·773
0·758
0·743
0·722
0·701
0·681
0·661
0·642
0·650
0·625
0·601
0·577
0·555
0·585
0·557
0·530
0·505
0·481
0·527
0·497
0·469
0·442
0·417
0·475
0·444
0·415
0·388
0·362
0·429
0·397
0·368
0·340
0·315
0·388
0·356
0·326
0·299
0·275
0·305
0·319
0·290
0·263
0·239
11
12
13
14
15
(n)
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
1
2
3
4
5
0·901
0·812
0·731
0·659
0·593
0·893
0·797
0·712
0·636
0·567
0·885
0·783
0·693
0·613
0·543
0·877
0·769
0·675
0·592
0·519
0·870
0·756
0·658
0·572
0·497
0·862
0·743
0·641
0·552
0·476
0·855
0·731
0·624
0·534
0·456
0·847
0·718
0·609
0·516
0·437
0·840
0·706
0·593
0·499
0·419
0·833
0·694
0·579
0·482
0·402
1
2
3
4
5
6
7
8
9
10
0·535
0·482
0·434
0·391
0·352
0·507
0·452
0·404
0·361
0·322
0·480
0·425
0·376
0·333
0·295
0·456
0·400
0·351
0·308
0·270
0·432
0·376
0·327
0·284
0·247
0·410
0·354
0·305
0·263
0·227
0·390
0·333
0·285
0·243
0·208
0·370
0·314
0·266
0·225
0·191
0·352
0·296
0·249
0·209
0·176
0·335
0·279
0·233
0·194
0·162
6
7
8
9
10
11
12
13
14
15
0·317
0·286
0·258
0·232
0·209
0·287
0·257
0·229
0·205
0·183
0·261
0·231
0·204
0·181
0·160
0·237
0·208
0·182
0·160
0·140
0·215
0·187
0·163
0·141
0·123
0·195
0·168
0·145
0·125
0·108
0·178
0·152
0·130
0·111
0·095
0·162
0·137
0·116
0·099
0·084
0·148
0·124
0·104
0·088
0·074
0·135
0·112
0·093
0·078
0·065
11
12
13
14
15
TA
PO
PA
TI
A
2%
H
1%
A
Periods
(n)
13
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[P.T.O.
Annuity Table
1 – (1 + r)–n
Present value of an annuity of 1 i.e. ————––
r
Where
r = discount rate
n = number of periods
Discount rate (r)
Periods
(n)
2%
3%
4%
5%
6%
7%
8%
9%
10%
1
2
3
4
5
0·990
1·970
2·941
3·902
4·853
0·980
1·942
2·884
3·808
4·713
0·971
1·913
2·829
3·717
4·580
0·962
1·886
2·775
3·630
4·452
0·952
1·859
2·723
3·546
4·329
0·943
1·833
2·673
3·465
4·212
0·935
1·808
2·624
3·387
4·100
0·926
1·783
2·577
3·312
3·993
0·917
1·759
2·531
3·240
3·890
0·909
1·736
2·487
3·170
3·791
1
2
3
4
5
6
7
8
9
10
5·795
6·728
7·652
8·566
9·471
5·601
6·472
7·325
8·162
8·983
5·417
6·230
7·020
7·786
8·530
5·242
6·002
6·733
7·435
8·111
5·076
5·786
6·463
7·108
7·722
4·917
5·582
6·210
6·802
7·360
4·767
5·389
5·971
6·515
7·024
4·623
5·206
5·747
6·247
6·710
4·486
5·033
5·535
5·995
6·418
4·355
4·868
5·335
5·759
6·145
6
7
8
9
10
11
12
13
14
15
10·37
11·26
12·13
13·00
13·87
9·787
10·58
11·35
12·11
12·85
9·253
9·954
10·63
11·30
11·94
8·760
9·385
9·986
10·56
11·12
8·306
8·863
9·394
9·899
10·38
7·887
8·384
8·853
9·295
9·712
7·499
7·943
8·358
8·745
9·108
7·139
7·536
7·904
8·244
8·559
6·805
7·161
7·487
7·786
8·061
6·495
6·814
7·103
7·367
7·606
11
12
13
14
15
(n)
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
1
2
3
4
5
0·901
1·713
2·444
3·102
3·696
0·893
1·690
2·402
3·037
3·605
0·885
1·668
2·361
2·974
3·517
0·877
1·647
2·322
2·914
3·433
0·870
1·626
2·283
2·855
3·352
0·862
1·605
2·246
2·798
3·274
0·855
1·585
2·210
2·743
3·199
0·847
1·566
2·174
2·690
3·127
0·840
1·547
2·140
2·639
3·058
0·833
1·528
2·106
2·589
2·991
1
2
3
4
5
6
7
8
9
10
4·231
4·712
5·146
5·537
5·889
4·111
4·564
4·968
5·328
5·650
3·998
4·423
4·799
5·132
5·426
3·889
4·288
4·639
4·946
5·216
3·784
4·160
4·487
4·772
5·019
3·685
4·039
4·344
4·607
4·833
3·589
3·922
4·207
4·451
4·659
3·498
3·812
4·078
4·303
4·494
3·410
3·706
3·954
4·163
4·339
3·326
3·605
3·837
4·031
4·192
6
7
8
9
10
11
12
13
14
15
6·207
6·492
6·750
6·982
7·191
5·938
6·194
6·424
6·628
6·811
5·687
5·918
6·122
6·302
6·462
5·453
5·660
5·842
6·002
6·142
5·234
5·421
5·583
5·724
5·847
5·029
5·197
5·342
5·468
5·575
4·836
4·988
5·118
5·229
5·324
4·656
4·793
4·910
5·008
5·092
4·486
4·611
4·715
4·802
4·876
4·327
4·439
4·533
4·611
4·675
11
12
13
14
15
PO
PA
A
H
TA
TI
A
1%
End of Question Paper
14
37 of 298
TAHA POPATIA
TI
A
TA
H
A
PO
PA
Answers
38 of 298
TAHA POPATIA
Part 1 Examination – Paper 1.2
Financial Information for Management
Answers
Section A
1
B
Unavoidable costs are not relevant for decision making.
2
B
OAR/machine hour =
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
= £18/machine hour
= 340,726 adjusted year 7 sales figure
435,000
% = 127·7% – 100% = 27·7%
340,726
A
)
TA
H
(
A
7
TI
A
124
10,000
PO
PA
130
£180,000
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
é
3,664
IRR = 15% + êêê
ë 3,664 + 21,451
ù
úúú x (20% – 15%)
û
= 15·7%
17
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TAHA POPATIA
12
C
S = 6,300 + 0·05M
M = 8,450 + 0·1S
S = 6,300 + 0·05 x (8,450 + 0·1S)
= 6,300 + 422·5 + 0·005S
0·995S = 6,722·5
\ S = £6,756
\ M = £9,126
For production department 1, the total overheads are
= 17,500 + 6,756 x 60% + 9,126 x 75%
= £28,398
Ö
EOQ =
14
B
RI = 69 – (104 + 21) x 10% = 56·5
15
A
PV = 300 x 11·30 – 300 x 1·913 (from tables) = £2,816 or
PV = (300 x 9·954) x 0·943 = £2,816
16
D
The expected value represents the weighted average outcome.
17
C
Total sales revenue = 18 x 10,000 + 25 x 20,000 + 20 x 20,000
= 1,080,000
Joint costs to be allocated = 277,000 – 2 x 3,500
= 270,000
20 x 20,000
Costs to product 3 = 270,000 x
OAR/labour hour =
135,000
9,000
Capacity variance:
Actual
9,750 hours
Budget
9,000 hours
19
D
20
C
20,000 units
= £5/unit
= £15/labour hour
TA
750 hours
1,080,000
A
B
100,000
=
H
18
= 509 units
(15 x 0·1) + 0·2
PO
PA
Co
=
2 x (50 + 5) x 4,000
D
TI
A
Ö
2ChD
13
x £15 = £11,250 favourable
Authorisation should be obtained if the stores function is to be properly maintained.
Process account
Materials
Labour
Abnormal gain
Units
3,500
175
£
52,000
9,625
Normal loss
Units
875
Output
2,800
3,675
Cost/unit =
52,500 + 9,625 – 7,000
3,500 – 875
£
7,000
3,675
=
55,125
2,625
= £21
Valuation of output = £21 x 2,800 = £58,800
18
40 of 298
TAHA POPATIA
21
B
Specific fixed overheads per division = 262,500 x 60%
157,500
=
= 52,500
3
Division A
£’000
70·5)
(52·5)
Contribution
Fixed costs – specific
Profit after specific costs
22
C
17·5)
(6 x 447,250,000) – (13,500 x 192,000)
Division B
£’000
210·5)
(52·5)
Division C
£’000
30·5)
(52·5)
Total
310·5)
(157·5)
157·5)
(22·5)
245·5)
= 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 Units
Normal loss
Abnormal loss
Closing WIP
4,100
225
275
150
4,750
12
Ö1·1268 = 1·01
50 x 1·0113x12 – 1 = £18,610
4,320
A
1·01 – 1
= 30% x 45
H
D
–
275
45
= 60% x 250
TA
25
Labour
150
3,850
TI
A
Total
250
3,850
PO
PA
Opening WIP
Units started and finished
19
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Section B
1
(a)
Marginal cost plus = £30 x 120% = £36
Advantage
– simple and easy to calculate
– focuses on contribution
– can easily adjust the mark-up
Disadvantage – may not cover fixed costs
– ignores price/demand relationship
Total cost plus = £37 x 120% = £44·40
Advantage
– 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
Any two of the following pricing strategies should be included:
–
price skimming – tends to lead to a high price initially, useful if the product is completely new,
–
penetration pricing – go to market with a low price initially to gain market share,
–
price discrimination – use two different prices in two different markets if there are barriers between the markets e.g. age,
time and location,
–
premium pricing – charging a higher price than the competitors as the product can be differentiated,
–
cost plus pricing – leads to a price that will cover costs although care needs to be taken with regard to marginal cost plus
to ensure that the plus is large enough to cover fixed costs,
–
market price – leads to an acceptable price but one which may vary,
–
price to maximise profits although a demand function will need to be established – leads to an optimal price but may not
affect the market price.
(a)
Budgeted prime cost (30 + 24) x 12,000
Cost volume variance (500 x 54)
Labour
Rate:
Did use
Should use (11,500 x 3)
37,250 kg
34,500 kg
H
Usage:
2,750 kg
x £10
Did cost
Should cost (45,350 x £6)
Efficiency: Did take
Should take (11,500 x 4 hours)
(621,000)
27,500F
(27,500)A
£300,000
£272,100
45,350 hours
46,000 hours
650 hours
x £6
Actual prime cost (£300,000 + £345,000)
(b)
£
(648,000)
27,000
£345,000
£372,500
A
Materials
Price:
Did cost
Should cost (37,250 x £10)
TA
2
PO
PA
TI
A
(b)
(27,900)A
3,900F
(645,000)
Labour rate variance – this shows that labour were paid at a higher rate
Labour efficiency variance – this shows that labour worked harder than expected as they made more in less time
Interdependence – since labour were paid more they were motivated to work harder
20
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TAHA POPATIA
3
(a)
(i)
(ii)
Total cost for 30,000 units or less = 50,000 + 5 x Q
Total cost for more than 30,000 units = 100,000 + 5 x Q
Materials usage budget
Material type
Usage
(2,100 x 2 + 1,450 x 3)
(2,100 x 1 + 1,450 x 4)
(c)
(d)
PO
PA
(b)
Production budget
Product
Sales
Opening stock
Closing stock
(10% x sales level)
A
(a)
TA
4
Implications of having two breakeven points: the product is only profitable between 20,000 and 30,000 units and above
40,000 units, so the production plan should be set accordingly.
H
(c)
TI
A
(b)
Materials purchases budget
Usage
Opening stock
Closing stock (W)
Labour budget
(2,100 x 4 + 1,450 x 2)
(2,100 x 2 + 1,450 x 5)
A
2,000
(100)
B
1,500
(200)
200
150
2,100
1,450
X
Kg
Y
Litres
8,550
7,900
8,550
(300)
850
7,900
(1,000)
800
9,100
x £10
7,700
x £7
£91,000
£53,900
Skilled
hours
11,300
Semi skilled
hours
x £12
11,450
x £8
£135,600
£91,600
Working for Material Closing Stock:
Material X (2,000 x 2 + 1,500 x 3) x 10% = 850
Material Y (2,000 x 1 + 1,500 x 4) x 10% = 800
21
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TAHA POPATIA
(a)
£’000
Sales
Cost of sales:
Opening stock (150 x 22)
Production costs
Variable costs
Fixed costs (1,800 x 2)
£’000
48·6
3·3
36·0
3·6
42·9
(7·7)
0·4
Closing stock (350 x 22)
Under absorption (W2)
(35·6)
Gross profit
Administration
Selling (1·2 + 3·2)
12·4
(3·6)
(4·4)
Net profit
4·4
Workings
1. Standard cost per unit
2.
=
Budgeted costs
Absorbed fixed overheads
22
£400
£
4,400
300
(700)
4,000
A
Profit under absorption costing
Add fixed costs in opening stock (150 x 2)
Less fixed costs in closing stock (350 x 2)
Profit under marginal costing
2
£4,000
£3,600
Budgeted under absorbed
A business may prefer marginal costing as it only includes costs that are relevant for decision making i.e. variable ones. Also the
business may not have significant fixed overheads and so marginal costing could be more appropriate.
H
(b)
TI
A
£
20
PO
PA
Direct variable costs
£4,000
Fixed overheads
2,000 units
TA
5
22
44 of 298
TAHA POPATIA
Part 1 Examination – Paper 1.2
Financial Information for Management
Marking Scheme
Marks
Section A
Each question within this section is worth 2 marks
25 x 2
50
Section B
1
(a) Calculation of marginal cost plus
Advantage of marginal cost plus
Disadvantage of marginal cost plus
Calculation of fixed cost plus
Advantage of fixed cost plus
Disadvantage of fixed cost plus
1
1
1
1
1
1
6
(b)
Pricing strategy
Impact of pricing strategy on price
1
1
2x2
2
4
TI
A
Two strategies and impacts required
(a)
What the rate variance indicates
What the efficiency variance indicates
Discussion of interdependence
(a)
(i) Total cost equation at 30,000 units or less
(ii) Total cost equation at above 30,000 units
(b)
Labelled axes on graph
Plotting the total cost line correctly
Plotting the total revenue line correctly
Breakeven point at 20,000 indicated
Breakeven point at 40,000 indicated
Good presentation
(c)
Discussion of implications
7
3
TA
3
1
1
1
1
1
1
½
½
1
1
1
H
(b)
Calculation of budgeted prime cost
Calculation of cost volume variance
Calculation of the materials price variance
Calculation of the materials usage variance
Calculation of the labour rate variance
Calculation of the labour efficiency variance
Calculation of actual prime cost
Well presented reconciliation statement
A
2
PO
PA
10
10
1
1
2
½
2
1
1
1
½
6
2
10
23
45 of 298
TAHA POPATIA
(a)
Production budget
Sales units for both products
Opening stock figures for both products
Closing stock figure for product A
Closing stock figure for product B
(b)
Materials usage budget
Figure for material X
Figure for material Y
(c)
Material purchases budget
Opening stock figures for both materials
Closing stock figure for material X
Closing stock figure for material Y
Showing material costs per kg or litre
(d)
Labour budget
Total hours for skilled labour
Total hours for semi skilled labour
Showing labour cost per hour
Marks
½
½
½
½
2
1
1
2
½
1
1
½
3
1
1
½
TI
A
4
2½
½
Presentation
Calculation of FOAR
Calculation of standard cost under AC
Opening stock units figure
Opening stock valuation
Calculation of production units
Fixed production costs absorbed
Closing stock units figure
Closing stock valuation
Under absorption calculation
Selling costs
Presentation
(b)
Reconciliation statement
Absorption costing profit
Fixed costs in opening stock
Fixed costs in closing stock
Marginal costing profit
Discussion of why MC could be preferred
H
A
(a)
½
½
½
½
½
½
½
½
1
½
½
6
TA
5
PO
PA
10
½
½
½
½
2
4
10
24
46 of 298
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Paper 1.2
TI
A
Financial
Information for
Management
PO
PA
PART 1
FRIDAY 14 JUNE 2002
TA
Time allowed 3 hours
H
A
QUESTION PAPER
This paper is divided into two sections
Section A
ALL 25 questions are compulsory and MUST be
answered
Section B
ALL FIVE questions are compulsory and MUST be
answered
47 of 298
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Section B – ALL FIVE questions are compulsory and MUST be attempted
Jim is reviewing his pay rises over the last four years compared with the Retail Price Index (RPI) and the Average
Earnings Index (AEI). He has obtained the following:
Year
1998
1999
2000
2001
Jim’s wage increase
on prior year
%
–
5·0
3·0
4·0
Retail Price
Index
Average Earnings
Index
157·5
162·9
165·4
170·3
108·0
113·5
119·0
124·4
Jim earned £150 per week in 1998 and is carrying out the review in the year 2001 after receiving the 4% increase.
Required:
TI
A
(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
PO
PA
(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)
H
A
(10 marks)
TA
1
48 of2 298
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2
Mike Limited has been asked to quote a price for a one off contract. Management have drawn up the following
schedule:
£
60,780
Contract price (cost plus 20%)
Costs:
Materials: V (300 kg at £10/kg)
Materials: I (1,000 litres at £7/litre)
Materials: C (550 kg at £3/kg)
Labour: Department 1 (1,500 hours at £8/hour)
Labour: Department 2 (2,000 hours at £10/hour)
Overheads: absorbed on a budgeted labour hour basis
Labour: (3,500 hours at £2/labour hour)
3,000
7,000
1,650
12,000
20,000
Total costs
50,650
7,000
PO
PA
TI
A
The following is also relevant:
Material V
The cost of £10 is the original purchase cost incurred some years ago. This material is no
longer in use by the company and if not used in the contract then it would be sold for scrap at
£3/kg.
Material I
This is in continuous use by the business. £7 is the historic cost of the material although
current supplies are being purchased at £6·50.
Material C
Mike Limited has 300 kg of this material in stock and new supplies would cost £4/kg. If current
stocks are not used for the contract then they would be used as a substitute for material Y in
another production process costing £7/kg. 2 kg of C replaces 1 kg of Y.
Department 1
This department has spare labour capacity sufficient for the contract and labour would be
retained.
Department 2
This department is currently working at full capacity. Mike Limited could get the men to work
overtime to complete the contract paid at time and a half, or they could divert labour hours from
the production of other units that currently average £3 contribution per labour hour.
Overheads
These are arbitrarily absorbed at a pre-determined rate. There will be no incremental costs
incurred.
A
Required:
H
Calculate the minimum contract price that Mike Limited could accept to breakeven using relevant costing
techniques.
TA
3
(10 marks)
(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)
49 of3 298
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4
(a) James is considering paying £50 into a fund on a monthly basis for 10 years starting in one year’s time. The
interest earned will be 1% per month. Once all of these payments have been made the investment will be
transferred immediately to an account that will earn interest at 15% per annum until maturity. The fund matures
five years after the last payment is made into the fund.
Required:
Calculate the terminal value of the fund in 15 years’ time to the nearest £.
(3 marks)
(b) Doug wishes to take out a loan for £2,000. He has the choice of two loans:
Loan 1:
monthly payments for 36 months at an APR of 9·38%
Loan 2:
monthly payments for 24 months at an APR of 12·68%
Required:
(i)
Calculate the monthly repayments for loans 1 and 2 to two decimal places.
(5 marks)
(ii) Calculate the total amount repaid under each loan and purely on the basis of this information
recommend which loan Doug should choose.
(2 marks)
Adam, the management accountant of Mark Limited, has on file the costs per equivalent unit for the company’s
process for the last month but the input costs and quantities appear to have been mislaid.
PO
PA
Information that is available to Adam for last month is as follows:
Opening work in progress
Closing work in progress
Normal loss
Output
100 units, 30% complete
200 units, 40% complete
10% of input valued at £2 per unit
1,250 units
A
The losses were as expected and Adam has a record of there being 150 units scrapped during the month. All materials
are input at the start of the process. The cost per equivalent unit for materials was £2·60 and for conversion costs
was £1·50.
Required:
H
Mark Limited uses the FIFO method of stock valuation in its process account.
TA
5
TI
A
(10 marks)
(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)
50 of4 298
TAHA POPATIA
TA
H
A
PO
PA
TI
A
Formulae Sheet
51 of5 298
TAHA POPATIA [P.T.O.
Present Value Table
3UHVHQW YDOXH RI LH U
:KHUH
U
Q
²Q
GLVFRXQW UDWH
QXPEHU RI SHULRGV XQWLO SD\PHQW
'LVFRXQW UDWH U
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PO
PA
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H
TA
TI
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52 of6 298
TAHA POPATIA
Annuity Table
3UHVHQW YDOXH RI DQ DQQXLW\ RI LH
:KHUH
U
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U
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QXPEHU RI SHULRGV
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PA
A
H
TA
TI
A
End of Question Paper
53 of7 298
TAHA POPATIA
TI
A
PO
PA
A
H
TA
54 of 298
TAHA POPATIA
TI
A
TA
H
A
PO
PA
Answers
55 of 298
TAHA POPATIA
TI
A
PO
PA
A
H
TA
56 of 298
TAHA POPATIA
Part 1 Examination – Paper 1.2
FInancial Information for Management
Answers
Section B
1
(a) Earnings
1998 = £150 (given in the question)
1999 = £150 × 1·05 = £157·5
2000 = £157·5 × 1·03 = £162·2
2001 = £162·2 × 1·04 = £168·7
(b)
1998
162·2
=
(i) RPI
150
157·5
1999
164·7
=
157·5
162·9
2000
167·0
=
162·2
165·4
2001
168·7
=
168·7
170·3
(c)
× 170·3
172·8
× 170·3
172·6
× 170·3
169·6
× 170·3
168·7
=
(ii) AEI
150
108
=
157·5
113·5
=
162·2
119
=
168·7
TI
A
Year
124·4
× 124·4
× 124·4
× 124·4
× 124·4
Using the RPI it shows that Jim has had a real increase in his wages over the four year period.
(d)
1995 is the base year for the Average Earnings Index. This means that all figures are compared to the average earnings in
the year.
Minimum contract price
H
Note
1
2
3
4
5
6
Material V
Material I
Material C
Department 1
Department 2
Overheads
A
Relevant cost statement
TA
2
PO
PA
Using the AEI shows that Jim has actually seen a reduction in his earnings compared to the average wages earned.
£
900
6,500
2,050
–
26,000
–
35,450
Notes:
1
The historic cost of £10 is not relevant as it is sunk. The relevant cost is the opportunity cost relating to lost scrap proceeds
= 300 × £3 = £900.
2
Again the historic cost is irrelevant as it is a sunk cost. Since the material is in continuous use in the business the relevant
cost will be the current replacement cost of the material = 1,000 × £6·50 = £6,500.
3
Since there is only 300 kg in stock 250 kg would need to be purchased at the current replacement cost = 250 × £4 =
£1,000. If the stock of 300 kg is not used for the contract it would be used to replace material Y in an alternative production
process.
£7
Therefore the relevant cost for the stock of 300 kg is = 300 ×
= £1,050 bearing in mind the 2 for 1 substitution.
2
Total relevant cost for material C = £1,000 + £1,050 = £2,050
4
Since there is spare capacity in this department there is no relevant cost.
5
For this department the two alternatives need to be considered:
Cost of working overtime = 2,000 × £10 × 1·5 = £30,000
Cost of diverting labour = 2,000 × (£10 + £3) = £26,000
It would be cheaper to divert the labour from the other production processes so the relevant cost for department 2 is £26,000.
6
Since the overheads are absorbed and there is no mention of the overheads actually increasing as a direct result of the contract
there is no relevant cost for overheads.
57 of11298
TAHA POPATIA
3
(a)
Operational planning
This is often referred to as short term budgeting and looks at the resources,
production etc for a financial period, usually a year. It provides a detailed plan of
what the organisation hopes will be achieved within the next financial year.
Strategic planning
This is often referred to as the long term plan and looks at where the organisation
is heading over a number of years, for example a five year plan would be a long
term plan. It presents the organisation with an idea of the broad direction that it
hopes to be heading in.
The strategic plan will incorporate the operational plans of the organisation. The operational plan translating the strategic plan
into achievable short term goals.
identify objectives – defines what the organisation hopes to achieve
look at alternative courses of action – looks at different ways that the goals might be achieved
evaluate the alternatives using relevant data – look at the information that has been obtained
select the most appropriate course of action – from information make the best choice to achieve corporate goals
implement the long term plan in the form of a budget – prepare detailed budget
monitor actual results – collect data regarding what is actually happening with the organisation
compare actual to planned results – look at actual versus budget and see whether control action needs to be taken
(a)
Future value
= £50 ×
 1 ⋅ 0110 ×12 – 1

 = £50 × 230·039 = £11,501·95
 1 ⋅ 01 – 1 
Compound forward for 5 years at 15%
TI
A
1.
2.
3.
4.
5.
6.
7.
(b)
(i)
PO
PA
= £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)
Loan 1
–1
APR = 9·38%, then the monthly rate is 1·0938 12 – 1 = 0·0075%
1

£2,000 = A1 ×  1  – 
 0 ⋅ 0075   0 ⋅ 0075 × 1 ⋅ 007536 
∴ A1 =
£2,000
= £63·60
31·447
H
Loan 2
A
£2,000 = A1 × 31·447
–1
APR = 12·68%, then the monthly rate is 1·1268 12 – 1 = 0·01%
TA
4
(b)
1  
1

£2,000 = A2 × 
–
 0 ⋅ 001  0 ⋅ 001 × 1 ⋅ 0124 
£2,000 = A2 × 21·243
∴ A2 =
(ii)
£2,000
= £94·15
21·243
Loan 1 total amount repaid = £63·60 × 36 = £2,289·6 ≈ £2,290
Loan 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 1
over the three year period.
58 of12298
TAHA POPATIA
(a)
Process account
Units
100
1,500β
Opening WIP
Input
£
Units
15
1,250
200
Normal loss
Output
Closing WIP
1,600
Or from the normal loss figure =
£
1,600
150 units
= 1,500 units
0·1
(b)
Statement of equivalent
units
Opening WIP (to complete)
Total
Material
100
–
= 100 × 70%
1,150
Conversion
costs
70
= 100 × 70%
1,150
–
200
= 200 × 10%
–
80
= 200 × 10%
1,350
1,300
1,150
Output
Normal loss
Closing WIP
1,250
150
200
TI
A
Units started and finished β
PO
PA
(c)
Costs incurred in period
Materials
£
3,510
= 1,350 × 2·60
300
= 150 × £2
Add scrap proceeds from
normal loss
1,950
H
A
3,810
Conversion
costs
£
1,950
= 1,300 × £1·50
TA
5
59 of13298
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TI
A
PO
PA
A
H
TA
60 of 298
TAHA POPATIA
Part 1 examination – Part 1.2
Financial Information for Management
(a)
(b)
Marks
1/
2
1/
2
1/
2
1/
2
—
Noting Jim’s wages for 1998
Calculating the figure for 1999
Calculating the figure for 2000
Calculating the figure for 2001
Calculating the wage figures adjusted for the RPI for:
1998
1999
2000
2001
1/
1/
1/
1/
Calculating the wage figure adjusted for the AEI for:
1998
1999
2000
2001
TI
A
1/
PO
PA
Mentioning the words ‘base period’
Explaining what this means
1/
2
2
2
2
2
2
2
—
4
1
1
—
2
1
1
—
2
—
10
—
A
(d)
Comment on Jim’s wages compared to the:
RPI
AEI
1/
2
H
(c)
1/
2
TA
1
Marking Scheme
61 of15298
TAHA POPATIA
2
Marks
1/
2
1/
2
Calculation of relevant cost for material V
Explanation of historic cost as sunk
Explanation of relevant cost being opportunity cost relating
to lost scrap proceeds
1/
2
1/
2
Calculation of relevant cost for material I
Explanation of relevant costs being current purchase cost
as in continuous use in business
1/
2
Calculation of relevant cost for material C
Explanation of need to buy extra units and relevant cost
Explanation of the relevant cost of the alternative use for material C
1
1/
2
1/
2
1/
2
Calculation of relevant cost of labour in dept 1
Explanation of there being spare capacity so no relevant
cost
1/
2
Calculation of relevant cost of labour in dept 2
Explanation including the need to compare overtime
costs with cost of diverting labour
1
1
1/
2
1/
2
1/
2
1/
2
for each stage in the planning process
for a brief explanation of each stage
A
(b)
Definition of short term plan to include the word ‘budget’
and to mention a time period
Definition of a long term plan to include the word
‘strategy’and to mention a time period
Explanation to include short term plan included within
the long term plan
H
(a)
1
1/
2
—
10
–—
1
1
1
—
31/2
31/2
––—
3
7
–—
10
–—
TA
3
PO
PA
Presentation of statement and notes
Stating minimum price being the total of the relevant costs
TI
A
Calculation of relevant cost of overheads
Explanation of there being no incremental costs
62 of16298
TAHA POPATIA
4
(a)
(b)
Marks
1/
2
1/
2
1/
2
1/
2
1/
2
1/
2
–––
Using the correct formula
Using an interest rate of 1%
Using n = 120 time periods
Putting numbers into formula and generating a solution
Compounding forward for an extra 5 years
Using correct rate of 15%
(i)
Loan 1
Calculating the correct monthly rate
Using the correct formula
Using the correct time period
Calculating the correct discount factor
Calculating the correct annuity figure
1/
1/
1/
1/
1/
Loan 2
Calculating the correct monthly rate
Using the correct formula
Using the correct time period
Calculating the correct discount factor
Calculating the correct annuity figure
1/
1/
1/
1/
1/
3
2
2
2
2
2
2
2
2
2
2
(a)
Equivalent units for opening WIP
Calculation of units started and finished
Equivalent units for started and finished units
Equivalent units for normal loss
Equivalent units for closing WIP
H
A
(b)
Calculation of input units
Stating the input units
(c)
TA
5
Calculation of total repaid amount for loan 1
Calculation of total repaid amount for loan 2
Explanation regarding which one Doug should
choose based on these figures
PO
PA
(ii)
TI
A
–––
Calculation of costs for materials
Adjusting for scrap proceeds
Calculation of costs for conversion costs
Stating the input costs
1/
1/
2
2
1
–––
2
–––
10
–––
1
1
–––
2
1
1/
1/
2
2
1
1
–––
1
1
1
1
–––
63 of17298
5
4
4
–––
10
–––
TAHA POPATIA
Paper 1.2
TI
A
Financial
Information for
Management
PO
PA
PART 1
FRIDAY 6 DECEMBER 2002
TA
Time allowed 3 hours
H
A
QUESTION PAPER
This paper is divided into two sections
Section A
ALL 25 questions are compulsory and MUST be
answered
Section B
ALL FIVE questions are compulsory and MUST be
answered
64 of 298
TAHA POPATIA
Section A – ALL 25 questions are compulsory and MUST be attempted
Please use the candidate registration sheet provided to indicate your chosen answer to each multiple choice question.
Each question within this section is worth 2 marks.
1
Consider the following graph for total costs and total revenue:
Total costs
£
Costs/revenue
Total revenue
D
C
Units
TI
A
A B
At which point on the above graph is it most likely that profits will be maximised?
A company has established a budgeted sales revenue for the forthcoming period of £500,000 with an associated
contribution of £275,000. Fixed production costs are £137,500 and fixed selling costs are £27,500.
£75,625
£90,750
£250,000
£300,000
H
A
B
C
D
A
What is the breakeven sales revenue?
TA
2
PO
PA
A
B
C
D
2
65 of 298
TAHA POPATIA
3
A company has just purchased a new machine, costing £150,000, for a contract. It has an installation cost of
£25,000 and is expected to have a scrap value of £10,000 in five years’ time. The machine will be depreciated on
a straight line basis over five years.
What is the relevant cost of the machine for the contract?
A
B
C
D
A company uses process costing to value output. During the last month the following information was recorded:
Output:
Normal loss:
Actual loss:
2,800 kg valued at £7·50/kg
300 kg which has a scrap value of £3/kg
200 kg
What was the value of the input?
A
PO
PA
TI
A
£22,650
£21,900
£21,600
£21,150
H
A
B
C
D
TA
4
£140,000
£150,000
£165,000
£175,000
3
66 of 298
TAHA POPATIA
[P.T.O.
A company produces three products which have the following details:
Product
II
Per unit
5 kg
£25
£5
5,000
I
Per unit
8 kg
£35
£4·375
3,000
Direct materials
(at £5/kg)
Contribution per unit
Contribution per kg of material
Demand (excluding special contract) (units)
III
Per unit
6 kg
£48
£8
2,000
The company must produce 1,000 units of Product I for a special contract before meeting normal demand.
Unfortunately there are only 35,000 kg of material available.
What is the optimal production plan?
Product
II
4,600
3,000
–
2,200
III
2,000
2,000
2,000
–
The following information relates to questions 6 and 7:
TI
A
A
B
C
D
I
1,000
1,000
2,875
3,000
£’000
Heating and Lighting
Welfare costs
Power
Total
12
7
42
––
61
––
Cubic capacity (m )
Employees (number)
Power
(kwh usage)
Labour hours
Machine hours
Department 1
6,000
20
H
3
Bases of
apportionment
Cubic capacity
Number of employees
Kwh usage
A
Other information:
PO
PA
A company has established the following budgeted fixed overheads for the forthcoming period:
TA
5
35,000
28,000
40,000
Department 2
7,500
30
Maintenance
2,500
6
25,000
48,500
39,000
Total
16,000
56
60,000
76,500
79,000
The maintenance department splits its time between Department 1 and Department 2 on a ratio of 2:3.
The management accountant has partially completed an allocation and apportionment statement:
Heat and Light
Welfare
Power
Total
Department 1
£
4,500
2,500
24,500
–––––––
31,500
–––––––
4
67 of 298
Department 2
£
5,625
Maintenance
£
1,875
TAHA POPATIA
6
What would be the total cost allocated and apportioned to Department 2 excluding the reapportionment of the
maintenance costs?
A
B
C
D
£21,250
£26,875
£27,625
£29,500
7
What would be the overhead absorption rate in Department 1 (to 3 decimal places)?
A £0·788/machine hour
B £0·814/machine hour
C £1·125/labour hour
D £1·163/labour hour
8
The following statements relate to long-term contracts:
(i)
Levels of completion of the contract can be estimated using either costs to date or work certified to date.
TI
A
(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?
The following relate to procedures for materials:
A
Check the goods received note
Raise a stores requisition note
Update the stores ledger account for the purchase
Raise a purchase order
H
1.
2.
3.
4.
What would be the correct order of the above when in the process of purchasing and using materials?
A
B
C
D
4,
2,
4,
1,
2,
1,
1,
4,
1,
3,
3,
3,
3
4
2
2
TA
9
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
PO
PA
A
B
C
D
5
68 of 298
TAHA POPATIA
[P.T.O.
10 A company has a budget for two products A and B as follows:
Sales (units)
Production (units)
Labour:
Skilled at £10/hour
Unskilled at £7/hour
Product A
2,000
1,750
Product B
4,500
5,000
2 hours/unit
3 hours/unit
2 hours/unit
4 hours/unit
What is the budgeted cost for unskilled labour for the period?
A
B
C
D
£105,000
£135,000
£176,750
£252,500
TI
A
11 Augustine wishes to take out a loan for £2,000. The interest rate on this loan would be 10% per annum and
Augustine wishes to make equal monthly repayments, comprising interest and principal, over three years starting one
month after the loan is taken out.
What would be the monthly repayment on the loan (to the nearest £)?
£56
£64
£66
£67
PO
PA
A
B
C
D
12 Which of the following best describes the term ‘equivalent units’ when using the FIFO method?
TA
D
A
C
The number of units worked on during a period including the opening and closing stock units.
The number of whole units worked on during a period ignoring the levels on completion of opening and closing
stock units.
The number of effective whole units worked on during a period allowing for the levels of completion of opening
and closing stock units.
The total number of whole units started during a period ignoring the opening stock units as these were started
in the previous period.
H
A
B
13 A company has established the following information for the costs and revenues at an activity level of 500 units:
Direct materials
Direct labour
Production overheads
Selling costs
Total cost
Sales revenue
Profit
£
2,500
5,000
1,000
1,250
––––––
9,750
17,500
––––––
7,750
––––––
20% of the selling costs and 50% of the production overheads are fixed over all levels of activity.
What would be the profit at an activity level of 1,000 units?
A
B
C
D
£15,500
£16,250
£16,500
£17,750
6
69 of 298
TAHA POPATIA
14 A company has been reviewing its total costs over the last few periods and has established the following:
Period
Sales
(units)
225
150
350
1
2
3
Total cost
£
2,300
1,500
2,800
The company is aware that fixed costs increase by £500 when sales exceed 200 units.
What would be the total cost at a sales level of 180 units?
A
B
C
D
£2,120
£1,800
£1,695
£1,620
15 The following statements relate to business objectives:
The short-term objectives of an organisation are described in very general terms.
(ii) Corporate objectives relate to the organisation as a whole.
TI
A
(i)
(iii) It is possible for a division of an organisation to have its own specific objectives.
Which of the above are correct?
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
PO
PA
A
B
C
D
16 The following information relates to prices and units over two different periods:
Product 1
Product 2
Units sold
80
45
250
150
A
Time 1
H
Product 1
Product 2
TA
Time 0
Prices
£/unit
75
50
300
100
What would be the Laspeyre price index?
A
B
C
D
93·8
95·5
101·9
103·6
7
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TAHA POPATIA
[P.T.O.
17 The statements below relate to the internal rate of return:
The internal rate of return
(i)
calculates the highest possible net present value.
(ii) represents the intrinsic discount rate of an investment over its life.
(iii) will always give the investor the correct decision when comparing well behaved projects.
Which of the above are NOT CORRECT?
A
B
C
D
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
The following information relates to questions 18 and 19:
1
2
3
4
Trend
+50 per quarter
PO
PA
Quarter
Quarter
Quarter
Quarter
Seasonal
variation
+25
–10
–30
?
TI
A
The following variations and trend have been calculated for sales over a period of time using the additive model:
The last known trend reading was taken in year 3, quarter 3 and was £1,750.
H
+15
–15
+35
–35
TA
A
B
C
D
A
18 What would be the seasonal variation for quarter 4?
19 What would be the time series value for year 4 quarter 3?
A
B
C
D
£1,950
£1,920
£1,900
£1,870
8
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TAHA POPATIA
20 The following statements relate to labour costs:
There would be an increase in the total cost for labour as a result of
(i)
additional labour being employed on a temporary basis.
(ii) a department with spare capacity being made to work more hours.
(iii) a department which is at full capacity switching from the production of one product to another.
Which of the above is/are correct?
A
B
C
D
(i) only
(ii) only
(iii) only
(i) and (iii) only
21 A company achieves bulk buying discounts on quantities above a certain level. These discounts are only available for
the units above the specified level and not on all the units purchased.
B
A
£
PO
PA
£
TI
A
Which of the following graphs of total purchase cost against units best illustrates the above situation?
units
units
D
C
£
TA
H
A
£
units
units
22 Mr Manaton has recently won a competition where he has the choice between receiving £5,000 now or an annual
amount forever starting now (i.e. a level perpetuity starting immediately). The interest rate is 8% per annum.
What would be the value of the annual perpetuity to the nearest £?
A
B
C
D
£370
£500
£400
£620
23 When considering the economic batch quantity model what does (1–D/R) represent?
A
B
C
D
The
The
The
The
rate
rate
rate
rate
at
at
at
at
which
which
which
which
production decreases.
production increases.
stock decreases.
stock increases.
9
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TAHA POPATIA
[P.T.O.
24 A company has calculated its margin of safety as 20% on budgeted sales and budgeted sales are 5,000 units per
month.
What would be the budgeted fixed costs if the budgeted contribution was £25 per unit?
A
B
C
D
£100,000
£125,000
£150,000
£160,000
Budgeted sales units
Actual sales units
3,000
3,500
PO
PA
TI
A
25 A company is reviewing actual performance to budget to see where there are differences. The following standard
information is relevant:
£
per unit
Selling price
50
––
Direct materials
4
Direct labour
16
Fixed production overheads
5
Variable production overheads
10
Fixed selling costs
1
Variable selling cost
1
––
Total costs
37
––
What was the favourable sales volume variance using marginal costing?
A
£9,500
£7,500
£7,000
£6,500
H
(50 marks)
TA
A
B
C
D
10
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TAHA POPATIA
Section B – ALL FIVE questions are compulsory and MUST be attempted
1
A company is seeking to establish whether there is a linear relationship between the level of advertising expenditure
and the subsequent sales revenue generated.
Figures for the last eight months are as follows:
1
2
3
4
5
6
7
8
Total
Advertising
Expenditure
£000
2·65
4·25
1·00
5·25
4·75
1·95
3·50
3·00
–––––
26·35
–––––
Sales
Revenue
£000
30·0
45·0
17·5
46·0
44·5
25·0
43·0
38·5
–––––
289·5
–––––
Further information is available as follows:
All of the above are given in £ million.
Required:
PO
PA
∑ (Advertising Expenditure × Sales Revenue) = £1,055·875
∑ (Advertising Expenditure)2 = £101·2625
∑ (Sales Revenue)2 = £11,283·75
TI
A
Month
(a) On a suitable graph plot advertising expenditure against sales revenue or vice versa as appropriate. Explain
your choice of axes.
(5 marks)
A
(b) Using regression analysis calculate a line of best fit. Plot this on your graph from (a).
H
(10 marks)
Firlands Limited, a retail outlet, is faced with a decision regarding whether or not to expand and build small or large
premises at a prime location. Small premises would cost £300,000 to build and large premises would cost
£550,000.
TA
2
(5 marks)
Regardless of the type of premises built, if high demand exists then the net income is expected to be £1,500,000.
Alternatively, if low demand exists, then net income is expected to be £600,000.
If large premises are built then the probability of high demand is 0·75. If the smaller premises are built then the
probability of high demand falls to 0·6.
Firlands has the option of undertaking a survey costing £50,000. The survey predicts whether there is likely to be a
good or bad response to the size of the premises. The likelihood of there being a good response, from previous
surveys, has been estimated at 0·8.
If the survey indicates a good response then the company will build the large premises. If the survey does give a good
result then the probability that there will be high demand from the large premises increases to 0·95.
If the survey indicates a bad response then the company will abandon all expansion plans.
Required:
Using decision tree analysis, establish the best course of action for Firlands Limited.
(10 marks)
11
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TAHA POPATIA
[P.T.O.
3
Oathall Limited, which manufactures a single product, is considering whether to use marginal or absorption costing
to report its budgeted profit in its management accounts.
The following information is available:
£/unit
4
15
––
19
––
50
––
Direct materials
Direct labour
Selling price
Fixed production overheads are budgeted to be £300,000 per month and are absorbed on an activity level of
100,000 units per month.
For the month in question, sales are expected to be 100,000 units although production units will be 120,000 units.
Fixed selling costs of £150,000 per month will need to be included in the budget as will the variable selling costs of
£2 per unit.
TI
A
There are no opening stocks.
Required:
PO
PA
(a) Prepare the budgeted profit and loss account for a month for Oathall Limited using absorption costing. Clearly
show the valuation of any stock figures.
(6 marks)
(b) Prepare the budgeted profit and loss account for a month for Oathall Limited using marginal costing. Clearly
show the valuation of any stock figures.
(4 marks)
A
Swainsthorpe Limited is a small old-fashioned company. They have a very simple manual accounting system to record
all of the information of the business.
H
A bookkeeper comes in once a week to make all the relevant entries to the various manual ledgers. Complete stocktakes take place once a month, during which the business shuts down for the day, and the information from the
stock-take is used to check that the store bin cards are correct. The stock-take information is also used to prepare a
profit and loss account and balance sheet for the owners of the business.
TA
4
(10 marks)
The business has just been taken over by Ms Swainsthorpe who wishes to change the manual accounting system to
a computerised management information system.
Required:
Prepare a report for Ms Swainsthorpe that:
(a) gives three advantages and three disadvantages of introducing a computer system;
(b) explains what a management information system is and what Ms Swainsthorpe should hope to be able to
use it for in general terms;
(c) comments critically on the current stock-take procedures and explains how the system could be improved.
(10 marks)
12
75 of 298
TAHA POPATIA
South Plc has two divisions, A and B, whose respective performances are under review.
Division A is currently earning a profit of £35,000 and has net assets of £150,000.
Division B currently earns a profit of £70,000 with net assets of £325,000.
South Plc has a current cost of capital of 15%.
Required:
(a) Using the information above, calculate the return on investment and residual income figures for the two
divisions under review and comment on your results.
(5 marks)
(b) State which method of performance evaluation (i.e. return on investment or residual income) would be more
useful when comparing divisional performance and why.
(2 marks)
(c) List three general aspects of performance measures that would be appropriate for a service sector company.
(3 marks)
H
A
PO
PA
TI
A
(10 marks)
TA
5
13
76 of 298
TAHA POPATIA
[P.T.O.
TA
H
A
PO
PA
TI
A
Formulae Sheet
14
77 of 298
TAHA POPATIA
Present Value Table
3UHVHQW YDOXH RI LH U
:KHUH
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15
78 of 298
TAHA POPATIA
[P.T.O.
Annuity Table
3UHVHQW YDOXH RI DQ DQQXLW\ RI LH
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PO
PA
A
H
TA
TI
A
End of Question Paper
16
79 of 298
TAHA POPATIA
TI
A
TA
H
A
PO
PA
Answers
80 of 298
TAHA POPATIA
TI
A
PO
PA
A
H
TA
81 of 298
TAHA POPATIA
Part 1 Examination – Paper 1.2
FInancial Information for Management
December 2002 Answers
Section A
11 C
12 D
13 C
14 D
15 B
16 B
17 B
18 A
19 C
10 C
11 B
12 C
TI
A
13 B
14 D
15 C
PO
PA
16 D
17 B
18 A
19 B
20 A
21 C
22 A
A
23 D
TA
25 A
H
24 A
19
82 of 298
TAHA POPATIA
Section B
1
(a)
60
Sales
Revenue
£’000
£000
50
x
x
x
x
40
x
x
TI
A
30
x
20
PO
PA
x
10
4
H
3
5
6
Advertising
£’000
expenditure
£000
Regression line: y = a + bx
n ∑ xy – ∑ x ∑ y
b = –––––––––––––––
n ∑ x2 – (∑ x)2
TA
(b)
2
A
1
∑y b∑x
a = ––– – –––
n
n
In this example the advertising expenditure is the independent variable (x) and the sales revenue the dependent variable (y).
(8 × 1,055·875) – (26·35 × 289·5)
818·675
b = ––––––––––––––––––––––––––––––
= –––––––– = 7·07
2
(8 × 101·2625) – 26·35
115·7775
289·5
26·35
a = ––––– – 7·07 × ––––– = 12·9
8
8
regression line: y = 12·9 + 7·07x where x and y are in £000
Line drawn on above graph.
20
83 of 298
TAHA POPATIA
Hi
0·95
2
Large
Premises
F
E
Good
0·8
Hi
0·75
(550,000)
1,500,000
C
Large
Premises
Lo
0·25
(300,000)
600,000
Small
Premises
Hi
0·6
TI
A
A
Lo
0·05
Abandon project
Bad
0·2
Survey
(50,000)
600,000
(550,000)
B
1,500,000
1,500,000
D
EV(F) = 0·95 × 1,500 + 0·05 × 600 = 1,455
600,000
PO
PA
Lo
0·4
Cost at E = EV(F) – 550 = 1,455 – 550 = 905
EV(C) = 0·75 × 1,500 + 0·25 × 600
= 1,275
TA
Decision at A:
Survey = EV(B) – survey costs
= 724 – 50
= 674
H
EV(D) = 0·6 × 1,500 + 0·4 × 600
=1,140
A
EV(B) = 0·8 × cost at (E) + 0·2 × 0
= 0·8 × 905 + 0·2 × 0
= 724
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.
21
84 of 298
TAHA POPATIA
(a)
Absorption costing
Sales (£50 × 100,000)
Cost of sales:
Opening stock
Production costs
Variable (£19 × 120,000)
Fixed (£3(w) × 120,000)
£000
£000
5,000
–
2,280
360
––––––
2,640
(440)
(60)
Closing stock (£22 × 20,000)
Under/over absorption
(2,140)
––––––
2,860
Gross profit
Selling costs
Fixed
Variable (£2 × 100,000)
(150)
(200)
––––––
2,510
––––––
––––––
Net profit
Working
(b)
Marginal costing
Sales (£50 × 100,000)
Cost of sales:
Opening stock
Production costs
Variable (£19 × 120,000)
£000
PO
PA
–
(2,100)
––––––
2,900
A
(300)
(150)
––––––
2,450
––––––
––––––
H
Net profit
£000
5,000
2,280
––––––
2,280
(380)
200
Closing stock (£19 × 20,000)
Variable selling costs
Contribution
Fixed costs
Production
Selling
TI
A
Overhead absorption rate = £300,000/100,000 = £3 per unit
TA
3
22
85 of 298
TAHA POPATIA
4
Report
To: Ms Swainsthorpe
From: AN Accountant
Re: Computerised accounts and stock control
Date: December 2002
The following report addresses the advantages and disadvantages of implementing a computer system. It also explains what a
management information system is and how it can be used. Finally it addresses your current stock control procedures.
Computer system
The advantages of a computer system is that it will be quicker to input entries to the accounting system and easier to extract
management information. Another advantage is that fewer errors are likely to occur as the computer can check that all the debits
equal the credits.
The disadvantages are the expense of the new system. Also the training costs involved may be high and you may also experience
some resistance from the employees to this new way of working. Finally you would not be able to switch over immediately as you
would have a cost of running two parallel systems for a short time to check that everything is working correctly.
Management Information System (MIS)
A MIS is an accounting system that will provide management with appropriate information both routine and non-routine as required
by the organisation. It is expected that management will be able to effectively utilise the output from the system to make efficient
use of the resources of the business.
TI
A
The MIS will help you run the business as it will provide you with relevant information. This information will help with decisionmaking, planning and control and coordination of the organisation. The type of information extracted will depend on the needs of
you, the user.
Stock
The current stock-take procedures seem onerous as they require the business to be closed once a month. This results in a loss of
a day’s production and so will eventually impact on profit.
Return on investment
Division A
Profit
Net assets
£
35,000
150,000
A
(a)
Return on investment = 35,000/150,000% = 23·3%
£
70,000
325,000
H
Division B
Profit
Net assets
TA
5
PO
PA
If the bin card system is working effectively then an entire stock-take should only be necessary once or twice a year. Instead of a
complete stock-take spot checks could be carried out comparing actual stock to the bin card value and any errors noted and the
system updated. High value or high usage items could be checked more often than slower moving stock. In this way the business
need not close so often.
Return on investment = 70,000/325,000% = 21·5%
Using this method Divisions A’s project is better.
Residual Income
Division A = 35,000 – 150,000 × 0·15 = 12,500
Division B = 70,000 – 325,000 × 0·15 = 21,250
Using this method Division B’s project is better.
(b)
Return on investment would be the better measure when comparing divisions as it is a relative measure (i.e. a % figure).
(c)
Service industry performance measures, in general terms, could include any of the following:
Competitiveness
Financial performance
Quality of service
Innovation
Effective and efficient utilisation of resources
23
86 of 298
TAHA POPATIA
Part 1 Examination – Part 1.2
Financial Information for Management
December 2002 Marking Scheme
Section A
Each question is worth 2 marks each total 50.
Section B
(a)
correct sales figure
variable production cost figure
fixed overhead absorption rate
fixed production cost figure
calculation of closing stock units
calculation of closing stock value
variable and fixed selling costs
under/over absorption
including the term gross profit
layout/presentation
A
3
correct formulation of the small premises branch
correct formulation of the large premises branch
correct formulation of the survey branch
calculation of expected value at F
calculation of cost at E
calculation of expected value at B
calculation of expected value at C
calculation of expected value at D
correct decision at A
stating a conclusion
2
11/2
1/
2
1
—
(b)
2
2
2
1/
2
1/
2
1/
2
1/
2
1/
2
1
1/
2
5
5
—
10
—
10
—
1/
2
1/
2
1/
2
1/
2
1/
2
1/
2
TA
2
calculation of b
calculation of a
stating the regression line
putting the regression line on the graph from (a)
TI
A
(b)
21/2
1/
2
1/
2
11/2
—
points plotted correctly
labelled axes
presentation
explanation of axes used
PO
PA
(a)
H
1
1
1
1/
2
1/
2
—
6
1/
2
including variable production costs only
closing stock valuation
including variable selling costs before contribution
including the term contribution
correct fixed costs
layout/presentation
1
1/
2
1/
2
1
1/
2
—
24
87 of 298
4
—
10
—
TAHA POPATIA
three examples of general performance measures
1 mark each measure
TI
A
(c)
stating the preferred performance measure
reason for choice
11/2
1
11/2
1
—
5
1
1
—
2
3
—
10
—
PO
PA
(b)
calculation of ROI for A and B
comment
calculation of RI for A and B
comment
10
—
A
(a)
Marks
1/
2
1/
2
11/2
11/2
2
1
11/2
11/2
H
5
report format
introduction to report
three advantages of computer system (1/2 each point)
three disadvantages of computer system (1/2 each point)
definition of an MIS
how it could be useful
critical comment on current stock control methods
suggestion for improvement
TA
4
25
88 of 298
TAHA POPATIA
Paper 1.2
TI
A
Financial
Information for
Management
PO
PA
PART 1
FRIDAY 6 JUNE 2003
H
TA
Time allowed 3 hours
A
QUESTION PAPER
This paper is divided into two sections
Section A
ALL 25 questions are compulsory and MUST be
answered
Section B
ALL FIVE questions are compulsory and MUST be
answered
Formulae Sheet, Present Value and Annuity Tables are on
pages 13, 14 and 15
89 of 298
TAHA POPATIA
Section A – ALL 25 questions are compulsory and MUST be attempted
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice
question.
Each question within this section is worth 2 marks.
1
A company has established a marginal costing profit of £72,300. Opening stock was 300 units and closing stock is
750 units. The fixed production overhead absorption rate has been calculated as £5/unit.
What was the profit under absorption costing?
A
B
C
D
The following data relates to a wage index for a company:
Year
1997
2002
Wages per week
£275
£315
Index
117
157
TI
A
2
£67,050
£70,050
£74,550
£77,550
What were the 2002 weekly wages at 1997 prices (to the nearest £)?
Which of the following is correct?
Qualitative data is numerical information only.
Information can only be extracted from external sources.
Operational information gives details of long-term plans only.
Data can be either discrete or continuous.
4
TA
H
A
B
C
D
A
3
£201
£235
£275
£369
PO
PA
A
B
C
D
Which of the following are purposes of a budget?
(i)
(ii)
(iii)
(iv)
establishing strategic options
motivating management
establishing long term objectives
planning operations
A
B
C
D
(i) and (iii) only
(i) and (iv) only
(ii) and (iv) only
(ii), (iii) and (iv) only
2
90 of 298
TAHA POPATIA
The following information relates to questions 5 and 6:
A company has a budgeted material cost of £125,000 for the production of 25,000 units per month. Each unit is
budgeted to use 2 kg of material. The standard cost of material is £2·50 per kg.
Actual materials in the month cost £136,000 for 27,000 units and 53,000 kg were purchased and used.
What was the adverse material price variance?
A
B
C
D
6
What was the favourable material usage variance?
A
B
C
D
7
£1,000
£3,500
£7,500
£11,000
£2,500
£4,000
£7,500
£10,000
TI
A
5
A company is preparing a production budget for the next year. The following information is relevant:
10,000 units
600 units
5% of budgeted sales
PO
PA
Budgeted Sales
Opening stock
Closing stock
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
A company produces and sells a single product whose variable cost is £6 per unit.
TA
8
8,900 units
9,900 units
10,900 units
11,000 units
H
A
B
C
D
Fixed costs have been absorbed over the normal level of activity of 200,000 units and have been calculated as £2
per unit.
The current selling price is £10 per unit.
How much profit is made under marginal costing if the company sells 250,000 units?
A
B
C
D
9
£500,000
£600,000
£900,000
£1,000,000
Which of the following would be considered to be a pricing strategy?
(i) target costing
(ii) price skimming
(iii) discrimination pricing
A
B
C
D
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
3
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TAHA POPATIA
[P.T.O.
10 A company uses process costing to value its output and all materials are input at the start of the process.
The following information relates to the process for one month:
Input
Opening stock
Losses
Closing stock
3,000 units
400 units
10% of input is expected to be lost
200 units
How many good units were output from the process if actual losses were 400 units?
A
B
C
D
2,800
2,900
3,000
3,200
units
units
units
units
11 James wants to invest his pocket money. He receives £5 a month which he puts into a savings account earning
compound interest at 0·5% per month.
If James saves his money, how much will be in the account in five years’ time (to the nearest £)?
TI
A
£303
£338
£349
£354
PO
PA
A
B
C
D
12 Which of the following is correct with regard to stocks?
(i) Stock-outs arise when too little stock is held.
(ii) Safety stocks are the level of units maintained in case there is unexpected demand.
(iii) A reorder level can be established by looking at the maximum usage and the maximum lead-time.
A
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
TA
H
A
B
C
D
13 A company wishes to make a profit of £150,000. It has fixed costs of £75,000 with a C/S ratio of 0·75 and a selling
price of £10 per unit.
How many units would the company need to sell in order to achieve the required level of profit?
A
B
C
D
10,000
15,000
22,500
30,000
units
units
units
units
4
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TAHA POPATIA
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
£’000
57·5
37·5
45·0
60·0
––––––
200·00
––––––
1
2
3
4
Quantity Produced
’000
1·25
1·00
1·50
2·00
–––––
5·75
–––––
The gradient of the regression line is 17·14.
What is the value of a?
25·36
48·56
74·64
101·45
TI
A
A
B
C
D
15 A company is considering its options with regard to a machine which cost £60,000 four years ago.
PO
PA
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?
H
A
£105,000
£90,000
£75,000
£60,000
TA
A
B
C
D
5
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TAHA POPATIA
[P.T.O.
16
Net
Present
Value
0
5%
15%
Interest rate
PO
PA
TI
A
10%
Which of the following is correct with regard to the above graph?
(i) The IRR is 10%.
(ii) The NPV at 15% is positive.
(iii) The project’s total inflows exceed the total outflows.
A
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
H
A
B
C
D
TA
17 What is the economic batch quantity used to establish?
Optimal
A reorder quantity
B reorder level
C cumulative production quantity
D stock level for production
6
94 of 298
TAHA POPATIA
18 A company wishes to evaluate a division which has the following profit and loss account and balance sheet:
Profit and Loss account
Sales
£’000
500
–––––
200
(80)
–––––
120
–––––
–––––
Gross profit
Other costs
Net profit
Balance Sheet
Fixed assets
Current assets
Current liabilities
£’000
750
350
(450)
–––––
650
–––––
–––––
Net assets
What is the residual income for the division if the company has a cost of capital of 18%?
£3,000
£21,600
£83,000
£117,000
TI
A
A
B
C
D
A
B
C
D
PO
PA
19 Which of the following is correct when considering the allocation, apportionment and reapportionment of
overheads in an absorption costing situation?
Only production related costs should be considered.
Allocation is the situation where part of an overhead is assigned to a cost centre.
Costs may only be reapportioned from production centres to service centres.
Any overheads assigned to a single department should be ignored.
A
20 A company uses limiting factor analysis to calculate an optimal production plan given a scarce resource.
H
The following applies to the three products of the company:
TA
Product
Direct materials (at £6/kg)
Direct labour (at £10/hour)
Variable overheads (£2/hour)
Maximum demand (units)
Optimal production plan
I
£
36
40
8
––––––
84
––––––
––––––
2,000
2,000
II
£
24
25
5
––––––
54
––––––
––––––
4,000
1,500
III
£
15
10
2
––––––
27
––––––
––––––
4,000
4,000
How many kg of material were available for use in production?
A
B
C
D
15,750
28,000
30,000
38,000
kg
kg
kg
kg
7
95 of 298
TAHA POPATIA
[P.T.O.
21 A company uses the Economic Order Quantity (EOQ) model to establish reorder quantities. The following information
relates to the forthcoming period:
Order costs = £25 per order
Holding costs = 10% of purchase price = £4/unit
Annual demand = 20,000 units
Purchase price = £40 per unit
EOQ = 500 units
No safety stocks are held.
What are the total annual costs of stock (i.e. the total purchase cost plus total order cost plus total holding cost)?
A
B
C
D
£22,000
£33,500
£802,000
£803,000
22 Which of the following would be considered a service industry?
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
PO
PA
A
B
C
D
TI
A
(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:
Advertising expenditure
£’000
3
2·5
6
5·5
4·5
6·5
H
TA
1
2
3
4
5
6
Sales Revenue
£’000
155
125
200
175
150
225
A
Month
Using the high-low method which of the following is the correct equation for linking advertising and sales from
the above data?
A
B
C
D
sales revenue = 62,500 + (25 x advertising expenditure)
advertising expenditure = –2,500 + (0·04 x sales revenue)
sales revenue = 95,000 + (20 x advertising expenditure)
advertising expenditure = –4,750 + (0·05 x sales revenue)
8
96 of 298
TAHA POPATIA
24 A company uses decision tree analysis to evaluate potential options. The management accountant for the company
has established the following:
Cash flows from sales revenue
High sales = £2,000,000
0·8
Build new premises
Cost £1,000,000
0·2
Low sales = £1,000,000
High sales = £2,000,000
0·7
Upgrade old
premises
Cost = ?
0·3
Low sales = £1,000,000
£100,000
£900,000
£1,000,000
£1,700,000
PO
PA
A
B
C
D
TI
A
What would be the cost of the upgrade that would make the company financially indifferent between building
new premises and upgrading the old one?
25 Which of the following could be true with regard to a management information system (MIS)?
H
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
TA
A
B
C
D
A
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)
9
97 of 298
TAHA POPATIA
[P.T.O.
Section B – ALL FIVE questions are compulsory and MUST be attempted
1
A company uses absorption costing for both internal and external reporting purposes as it has a considerable level of
fixed production costs.
The following information has been recorded for the past year:
Budgeted fixed production overheads
Budgeted (Normal) activity levels:
Units
Labour hours
£2,500,000
62,500 units
500,000 hours
Actual fixed production overheads
Actual levels of activity:
Units produced
Labour hours
£2,890,350
70,000 units
525,000 hours
Required:
TI
A
(a) Calculate the fixed production overhead expenditure and volume variances and briefly explain what each
variance shows.
(5 marks)
(10 marks)
A business uses process costing to establish stock valuations and profitability of its products. Output from the process
consists of three separate products: two joint products and a by-product. Details of the process is as follows:
Input costs:
Materials
Labour
Overheads
H
A
£45,625 for 12,500 kg
£29,500
£26,875
The process is expected to lose 20% of the input. This is sold for scrap for £4 per unit.
The following details relate to the output from the process:
Product
A
B
C
TA
2
PO
PA
(b) Calculate the fixed production overhead efficiency and capacity variances and briefly explain what each
variance shows.
(5 marks)
Type
Joint
Joint
By-product
% of output
50%
40%
10%
Final sales
value per unit
£20
£25
£2
Further costs
to complete
£10
Joint costs are allocated on the basis of net realisable value at split-off.
Required:
(a) Establish the total cost of the output from the process.
(4 marks)
(b) Calculate the profit per unit for each of the joint products, A and B.
(6 marks)
(10 marks)
10
98 of 298
TAHA POPATIA
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)
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:
Materials (at £2 per kg)
Labour (at £6 per hour)
Variable overheads (at £1 per hour)
PO
PA
Variable cost
Selling price
B
£
8
18
3
–––
29
52
–––
23
–––
TI
A
A
£
6
30
5
–––
41
50
–––
9
–––
Contribution
There are only 30,000 kg of material and 36,000 labour hours available. The company also has an agreement to
supply 1,000 units of product A which must be met.
A
Required:
H
(a) Formulate the objective function and constraint equations for this problem.
(b) Plot the constraints on a suitable graph and determine the optimal production plan.
TA
4
(4 marks)
(6 marks)
(10 marks)
11
99 of 298
TAHA POPATIA
[P.T.O.
A company has to choose between three investments with details as follows:
Investment 1
Timing of
Cash Flows
flows
per annum
Year
£
0
(75,000)
1–4
25,000
5
5,000
Investment 2
Timing of
Cash Flows
flows
per annum
Year
£
0
(100,000)
A perpetuity
11,000
starting at time 1
Investment 3
Timing of
Cash Flows
flows
per annum
Year
£
0
(125,000)
1
30,000
2
40,000
3
50,000
4
60,000
5
(10,000)
The company has a cost of capital of 10%.
Required:
(10 marks)
H
A
PO
PA
TI
A
Calculate the net present value of each of the three investments at the company’s cost of capital and state which
investment would be preferred.
TA
5
12
100 of 298
TAHA POPATIA
TA
H
A
PO
PA
TI
A
Formulae Sheet
Laspeyre’s price index
Paasche price index
Laspeyre’s quantity index
Paasche quantity index
13
101 of 298
TAHA POPATIA
[P.T.O.
Present Value Table
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PO
PA
A
H
TA
TI
A
14
102 of 298
TAHA POPATIA
Annuity Table
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PO
PA
A
H
TA
TI
A
End of Question Paper
15
103 of 298
TAHA POPATIA
TI
A
TA
H
A
PO
PA
Answers
104 of 298
TAHA POPATIA
TI
A
PO
PA
A
H
TA
105 of 298
TAHA POPATIA
Part 1 Examination – Paper 1.2
Financial Information for Management
3
D
4
C
5
B
6
7
A
D
(£1,500)
£3,750
––––––––
£74,550
––––––––
£315
––––– x 117 = £235
157
Price variance
Did cost
Should cost
(53,000 kg x £2·50)
£136,000
£132,500
–––––––––––––
£3,500 adverse
–––––––––––––
TI
A
B
£72,300
Usage variance
Did use
Should use
(27,000 units x 2 kg)
PO
PA
2
Marginal costing profit
Less: fixed costs in opening stock
(300 x £5)
Add: fixed costs in closing stock
(750 x £5)
Sales
Less: opening stock
Add: closing stock
(5% x 10,000)
Good production required
53,000 kg
54,000 kg
–––––––––
1,000 kg
x £2·50
£2,500 favourable
––––––––––––––––
A
C
10,000 units
(600 units)
500 units
––––––––––
9,900 units
H
1
June 2003 Answers
8
B
9
C
TA
Good production = 90% of total production, therefore
9,900
Total production = –––––– = 11,000 units
90%
Total Contribution = (£10 – £6) x 250,000 = £1,000,000
Fixed Overheads = 200,000 x £2 = £400,000
Profit = Total contribution less fixed costs
= £1,000,000 – £400,000 = £600,000
19
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10 A
Process
Units
400
3,000
Opening stock
Input
––––––
3,400
––––––
––––––
11 C
Units
400
2,800
200
––––––
3,400
––––––
––––––
Losses
Output
Closing stock
 1⋅ 00560 – 1
5×
 = £348 ⋅ 85 ≈ £349
 0 ⋅ 005 
12 D
= £300,000
= 30,000 units
∑y
∑x
−b
n
n
200
5 ⋅ 75
a=
– (17 ⋅ 14 ×
) = 25 ⋅ 36
4
4
a=
15 B
Lower of
replacement cost
£105,000
higher of
NRV
75,000
20 B
H
17 C
Residual income for the division = £120,000 – (£650,000 x 18%)
Residual income = £3,000
TA
19 A
Economic value
90,000
A
16 A
18 A
Breakeven revenue
TI
A
14 A
150,000 + 75,000
––––––––––––––––––
0·75
300,000
–––––––
£10
PO
PA
13 D
Total material required =
36
24
15
(2,000 x ––) + (1,500 x ––) + (4,000 x ––) = 28,000 kg
6
6
6
21 C
Total cost of having stock =
D
Q
(p x D) + (–– x Co) + (Ch x ––)
Q
2
20,000
500
= (40 x 20,00) + (–––––– x 25) + (4 x ––– )
500
2
= 800,000 + 1,000 + 1,000 = 802,000
22 D
20
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23 A
As advertising will hopefully generate sales, advertising is the independent variable and sales the dependent; i.e. advertising
is x and sales is y.
225,000 = a + (6,500 x b)
125,000 = a + (2,500 x b)
–––––––– ––––––––––––––
100,000 = 0 + (4,000 x b)
100,000
therefore b = –––––––
4,000
= £25
so, 225,000 = a + (6,500 x 25)
225,000 = a + 162,500
a = 225,000 – 162,500
a = 62,500
Expected value of new building
= (0·8 x £2 million )+(0·2 x £1 million) – £1 million = £0·8 million
Expected value of the upgrade
= (0·7 x £2 million) + (0·3 x £1 million) – cost of upgrade
So,
New build = £0·8 million
Upgrade = £1·7 million – costs
Equating the two expressions:
£0·8 million = £1·7 million – costs, giving
Costs = £1·7 million – £0·8 million = £0·9 million = £900,000
TI
A
24 B
TA
H
A
PO
PA
25 D
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(a)
Fixed Production Overhead Expenditure variance
£
2,890,350
2,500,000
––––––––––
390,350 adverse
Actual costs incurred
Budgeted costs
Variance
This variance indicates that the company have spent more than originally budgeted.
Fixed Production Overhead Volume variance
Labour hours
560,000
500,000
––––––––
60,000 favourable
Actual flexed
Budget
Variance
x £5 (W1)
= £300,000 favourable
W1
£2,500,000
FOAR = ––––––––––––– = £5
500,000 hours
This variance indicates that the company has used more labour hours than originally budgeted.
Or based on units
TI
A
Units
70,000
62,500
–––––––
7,500 favourable
Actual
Budget
Variance
W2
£2,500,000
FOAR = ––––––––––––– = £40
62,500 units
PO
PA
x £40 (W2)
= £300,000 favourable
This variance indicates that the company has produced more units than originally budgeted.
Fixed Production Overhead Efficiency Variance
W3
Hours
525,000
560,000
––––––––
35,000 favourable
A
Did work
Should have worked
H
(b)
x £5 (W3)
= £175,000 favourable
TA
1
£2,500,000
FOAR/hour = ––––––––––––– = £5
500,000 hours
This variance shows that labour were more efficient than originally budgeted as they took less time than expected to achieve
the production of 70,000 units.
Fixed Production Overhead Capacity Variance
Hours
525,000
500,000
––––––––
25,000 favourable
Actual hours worked
Budgeted hours of work
x £5 (W3)
= £125,000 favourable
This variance shows that labour worked for more hours than was originally budgeted thus exceeding the budgeted capacity.
22
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2
(a)
Total cost of output = 45,625 + 29,500 + 26,875 – (12,500 x 20% x 4)
2
(a)
Total cost of output = 102,000 – 10,000= 92,000
or
Process
Units
12,500
Materials
Labour
Overheads
–––––––
12,500
–––––––
–––––––
Normal loss
Output
–––––––
12,500
–––––––
–––––––
Product
Units
%
NRV at
split-off
Total
NRV
––––––––
102,000
––––––––
––––––––
A
5,000
50
20–10
=10
50,000
B
4,000
40
25
100,000
C
1,000
––––––
10,000
––––––
10
–––
100
–––
2
––––––––
150,000
––––––––
Joint cost
allocation
Total
profit
50,000
30,000 = ––––––––
150,000
100,000
60,000 = ––––––––
150,000
Profit
per
unit
20,000
4
40,000
10
–––––––
90,000
–––––––
PO
PA
The profit per unit for product A is £4 and for B is £10.
(a)
£
10,000
92,000 β
Joint costs to be allocated = (£9·20 x 10,000) – 1,000 x £2
= £92,000 – £2,000
= £90,000
Total
3
Units
2,500
10,000 β
TI
A
(b)
£
45,625
29,500
26,875
––––––––
102,000
––––––––
––––––––
A service centre is a department that does not directly produce units but is required to support the other departments.
Examples include maintenance departments, stores or a canteen.
A production centre is a centre where units are actually made, examples being a machining department or a welding
department.
Activity based costing uses a number of different cost drivers to absorb different overheads, whereas traditional absorption
costing only uses one, for example labour hours, machine hours or per unit.
TA
(b)
H
A
Although a service will have overheads allocated and apportioned to it, these will be reapportioned to the production centres
so that, at the end of a period, all overheads are included in the production centres only. Once all the overheads are included
in the production centres they can be absorbed into production.
In activity based costing fixed overhead costs may include machine set-up costs. These costs will not be incurred on a per
unit basis but will be incurred each time the machine has to be set-up. It would not, therefore, be sensible to allocate costs
per unit since that is not how the cost is incurred. It is, however, better to use the number of set-ups for this particular cost
to allocate costs to units.
4
(a)
Objective is to maximise profit:
Let a = the number of units of A to be produced
Let b = the number of units of B to be produced
Objective function:
9a + 23b
Constraints:
Non-negativity
Restriction on A
Materials
Labour
b≥0
a ≥ 1,000
3a + 4b ≤ 30,000
5a + 3b ≤ 36,000
23
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(b)
b units
’000
a = 1,000
13
12
11
10
9
5a + 3b = 36,000
TI
A
8
7
PO
PA
6
5
4
3
A
2
TA
H
1
0
3a + 4b = 30,000
lso-contribution
line
1
2
3
4
5
6
7
8
9
10
11
12
a units
’000
Optimal point is the intersect of the a = 1,000 line and the materials constraint line 3a + 4b = 30,000.
(3 x 1,000) + 4b = 30,000
3,000 + 4b = 30,000 therefore 4b = 30,000 – 3,000 giving 4b = 27,000
so b = 27,000/4,000 therefore b= 6,750 units
The optimal production plan is to make 1,000 units of A and 6,750 units of B.
24
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Investment 2
Time
0
1– ∞
Investment 3
Time
0
1
2
3
4
5
Discount factor
at 10%
1
3·17
0·621
Present Value
£’000
(75)
79·25
3·105
––––––
7·355
––––––
––––––
Cash Flows
£’000
(100)
11
Discount factor
at 10%
1
1/0·1=10
Present Value
£’000
(100)
110
––––––
10
––––––
––––––
Cash Flows
£’000
(125)
30
40
50
60
(10)
Discount factor
at 10%
1
0·909
0·826
0·751
0·683
0·621
Present Value
£’000
(125)
27·27
33·04
37·55
40·98
(6·21)
––––––
7·63
––––––
––––––
TI
A
0
1-4
5
Cash Flows
£’000
(75)
25
5
PO
PA
Investment 1
Time
H
A
Since investment 2 has the highest net present value it would be the preferred investment.
TA
5
25
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TI
A
PO
PA
A
H
TA
113 of 298
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Part 1 Examination – Paper 1.2
Financial information for Management
(b)
Marks
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
–––
TI
A
PO
PA
Fixed production overhead expenditure variance £
Fixed production overhead expenditure variance adverse
Explanation of variance
Fixed production overhead volume variance £
Fixed production overhead volume variance favourable
Calculation of the FOAR/unit
Explanation of variance
A
(a)
C
B
D
C
B
A
D
B
C
A
C
D
D
A
B
A
C
A
A
B
C
D
A
B
D
H
1
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
(xiv)
(xv)
(xvi)
(xvii)
(xviii)
(xix)
(xx)
(xxi)
(xxii)
(xxiii)
(xxiv)
(xxv)
50
–––
1/
1/
2
2
1
1/
2
1/
2
1
1
–––
5
TA
1
June 2003 Marking Scheme
1/
Efficiency variance £
Efficiency variance favourable
Calculating FOAR/labour hour
Explanation of variance
Capacity variance £
Capacity variance favourable
Explanation of variance
1/
2
2
1
1
1/
2
1/
2
1
–––
5
–––
10
–––
27
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Marks
2
(a)
Calculating the total cost of output to include:
material cost
labour costs
overhead cost
deduct normal loss scrap proceeds
Calculation of 92,000
1/
2
1/
2
1/
2
1
11/2
–––
4
(b)
Calculating joint costs less by-product proceeds
Calculating number of units for A,B and C from output
NRV at split-off for A
NRV at split-off for B and C
Total NRV calculation 1/2 mark each A and B
Joint cost allocation 1/2 mark each A and B
Profit per unitv 1/2 mark each A and B
1
1
1/
2
1/
2
1
1
1
–––
(a)
1
1
1
1
Explanation of difference including the use of the term cost driver
Example
1
1
–––
6
2
2
–––
4
–––
10
–––
(a)
1/
2
1/
2
1/
2
Defining variables
Objective function
Non-negativity constraint for b
Variable a greater than 1,000
Material constraint
Labour constraint
TA
4
H
A
(b)
Definition of service centre
Example of a service centre
Definition of production centre
Example of a production centre
Explanation of the differing treatments of overheads:
Service centre cost reapportioned
Production centre costs absorbed
PO
PA
3
TI
A
6
–––
10
–––
1
1
1/
2
–––
4
(b)
1/
2
1/
2
labelled axes on graph
good presentation
correctly drawn material line
correctly drawn labour line
restriction on a
plotting the objective function
establishing the optimal point
1
1
1/
2
1
11/2
–––
6
–––
10
–––
28
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Marks
Investment 1
Correct discount factors
For using a cumulative discount factor
Calculation of present value 1/2 per line in table
11/2
Investment 2
Correct value at To
Calculation of present value of the perpetuity
1/
2
11/2
1
1/
Investment 3
Correct discount factors
Calculation of present value 1/2 per line in table
2
1
3
Preferred investment stated
1
–––
H
A
PO
PA
TI
A
10
–––
TA
5
29
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Paper 1.2
TI
A
Financial
Information for
Management
PO
PA
PART 1
FRIDAY 5 DECEMBER 2003
TA
Time allowed 3 hours
H
A
QUESTION PAPER
This paper is divided into two sections
Section A
ALL 25 questions are compulsory and MUST be
answered
Section B
ALL FIVE questions are compulsory and MUST be
answered
Formulae Sheet, Present Value and Annuity Tables are on
pages 13, 14 and 15
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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 cost is described as staying the same over a certain activity range and then increasing but remaining stable over a
revised activity range in the short term.
What type of cost is this?
A
B
C
D
fixed cost
variable cost
semi-variable cost
stepped fixed cost
The following quarterly adjustments have been calculated using the multiplicative model for time series analysis:
Quarter 1
0·95
Quarter 2
1·25
Quarter 3
0·70
TI
A
2
A
A
A
A
What would be the adjustment for quarter 4 to two decimal places?
3
0·83
0·91
1·10
1·20
PO
PA
A
B
C
D
A company which uses marginal costing has a profit of £37,500 for a period. Opening stock was 100 units and
closing stock was 350 units.
The fixed production overhead absorption rate is £4 per unit.
4
H
£35,700
£36,500
£38,500
£39,300
TA
A
B
C
D
A
What is the profit under absorption costing?
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.
Which of the above are correct?
A
B
C
D
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
2
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5
A company values stocks using the weighted average value after each purchase. The following receipts and issues
have been made with regards to materials for the last month:
Date
Receipts
Issues
Units
£/unit
Valuation
Brought forward
100
£5
£500
4th
150
£5·50
£825
Units
16th
100
20th
100
£6
£600
21st
75
What is the value of the closing stock using this weighted average method?
Sydney wishes to make an investment on a monthly basis starting next month for five years. The payments into the
fund would be made on the first day of each month.
PO
PA
6
£1,012·50
£976·50
£962·50
£925·00
TI
A
A
B
C
D
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 £?
Finished Product
Sales
Production units
Materials
Usage per unit
Opening stock
Closing stock
H
A company has the following budget for the next month:
TA
7
£75
£86
£100
£117
A
A
B
C
D
7,000 units
7,200 units
3 kg
400 kg
500 kg
What is the material purchases budget for the month?
A
B
C
D
20,900
21,100
21,500
21,700
kg
kg
kg
kg
3
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[P.T.O.
8
The
(i)
(ii)
(iii)
following could relate to optical mark readers:
Specialist pens are always required for use.
Data entry is quick.
Computers carry out most of the work.
Which of the above would be considered to be advantages of using optical mark readers?
A
B
C
D
Which of the following would be best described as a short term tactical plan?
A
B
C
D
Reviewing cost variances and investigate as appropriate
Comparing actual market share to budget
Lowering the selling price by 15%
Monitoring actual sales to budget
10 A company incurs the following costs at various activity levels:
Activity level
Units
5,000
7,500
10,000
PO
PA
Total cost
£
250,000
312,500
400,000
TI
A
9
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
Using the high-low method what is the variable cost per unit?
£25
£30
£35
£40
H
A
A
B
C
D
11 An investment gives the following results:
TA
Net present value
£000
383
(246)
Discount rate
10%
15%
What is the estimated internal rate of return to the nearest whole percentage?
A
B
C
D
12%
13%
14%
17%
4
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12 A company uses process costing to establish the cost per unit of its output.
The following information was available for the last month:
Input units
Output units
Opening stock
Closing stock
10,000
9,850
300 units, 100% complete for materials and 70%
complete for conversion costs
450 units, 100% complete for materials and 30%
complete for conversion costs
The company uses the weighted average method of valuing stock.
What were the equivalent units for conversion costs?
9,505
9,715
9,775
9,985
units
units
units
units
13 Which of the following is correct with regard to expected values?
H
A
PO
PA
Expected values provide a weighted average of anticipated outcomes
The expected value will always equal one of the possible outcomes
Expected values will show whether the decision maker is risk averse, risk seeking or risk neutral
The expected value will never equal one of the possible outcomes
TA
A
B
C
D
TI
A
A
B
C
D
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[P.T.O.
14 The following graph has been established for a given set of constraints:
300
y
200
B
C
100
D
A
TI
A
OF
100
200
x
300
PO
PA
0
The objective function (OF) for the company has also been plotted on the graph and the feasible region is bounded
by the area ABCD.
At which point on the graph will profits be maximised?
H
A
A
B
C
D
2000 (base year)
2001
2002
TA
15 The following information has been obtained for sales of two products for a three year period:
Price
Product A
100
125
130
Quantity
Product B
150
140
135
Product A
3
2
2
Product B
4
3
4
What is the Paasche quantity index for 2002?
A
B
C
D
0·86
0·89
1·19
1·20
6
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16 A company has just secured a new contract which requires 500 hours of labour.
There are 400 hours of spare labour capacity. The remaining hours could be worked as overtime at time and a half
or labour could be diverted from the production of product X. Product X currently earns a contribution of £4 in two
labour hours and direct labour is currently paid at a rate of £12 per normal hour.
What is the relevant cost of labour for the contract?
A
B
C
D
17 The
(i)
(ii)
(iii)
£200
£1,200
£1,400
£1,800
following statements relate to performance evaluation methods:
Residual income is not a relative measure.
The return on investment figure is a relative measure.
Residual income cannot be calculated for an individual project.
Which of the above are correct?
TI
A
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
PO
PA
A
B
C
D
18 A company uses variance analysis to control costs and revenues.
Information concerning sales is as follows:
£15 per unit
10,000 units
£5 per unit
Actual sales revenue
Actual units sold
£151,500
9,800 units
A
Budgeted selling price
Budgeted sales units
Budgeted profit per unit
£500 favourable
£1,000 favourable
£1,000 adverse
£3,000 adverse
TA
A
B
C
D
H
What is the sales volume profit variance?
19 A company has the following budgeted information for the coming month:
Budgeted sales revenue
Budgeted contribution
Budgeted profit
£500,000
£200,000
£ 50,000
What is the budgeted break-even sales revenue?
A
B
C
D
£125,000
£350,000
£375,000
£450,000
7
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[P.T.O.
20 An investment has the following cash inflows and cash outflows:
Time
Cash flow per annum
£000
0
(20,000)
1-4
13,000
5-8
17,000
10
(10,000)
What is the net present value of the investment at a discount rate of 8%?
A
B
C
D
(£2,416)
£7,046
£6,981
£2,351
When considering limiting factors the products should always be ranked according to contribution per unit sold
If there is only one scarce resource linear programming should be used
In linear programming the point furthest from the origin will always be the point of profit maximisation
The slope of the objective function depends on the contributions of the products
PO
PA
A
B
C
D
TI
A
21 Which of the following is correct?
22 A company has over absorbed fixed production overheads for the period by £6,000. The fixed production overhead
absorption rate was £8 per unit and is based on the normal level of activity of 5,000 units. Actual production was
4,500 units.
H
£30,000
£36,000
£40,000
£42,000
TA
A
B
C
D
A
What was the actual fixed production overheads incurred for the period?
23 A company uses process costing to value its output. The following was recorded for the period:
Input materials
Conversion costs
Normal loss
Actual loss
2,000 units at £4·50 per unit
£13,340
5% of input valued at £3 per unit
150 units
There were no opening or closing stocks.
What was the valuation of one unit of output to one decimal place?
A
B
C
D
£11·8
£11·6
£11·2
£11·0
8
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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)
Labour rate
Production time
Time per unit
Production units
£10 per hour
15,000 hours
3 hours
5,000 units
Actual
Wages paid
Production
Total hours worked
£176,000
5,500 units
14,000 hours
There was no idle time.
PO
PA
Budget
TI
A
25 The following information relates to labour costs for the past month:
What were the labour rate and efficiency variances?
Efficiency variance
£25,000 favourable
£10,000 favourable
1£2,500 favourable
£25,000 favourable
(50 marks)
H
A
Rate variance
£26,000 adverse
£26,000 adverse
£36,000 adverse
£36,000 adverse
TA
A
B
C
D
9
125 of 298
TAHA POPATIA
[P.T.O.
Section B – ALL FIVE questions are compulsory and MUST be attempted
A business operates with two production centres and three service centres. Costs have been allocated and apportioned
to these centres as follows:
Production Centres
Service Centres
1
2
A
B
C
£2,000
£3,500
£300
£500
£700
Information regarding how the service centres work for each other and for the production centres is given as:
Work done for:
Production Centres
Service Centres
2
A
B
C
By A
45%
45%
–
10%
–
By B
50%
20%
20%
–
By C
60%
40%
–
–
TI
A
1
PO
PA
10%
–
Information concerning production requirements in the two production centres is as follows:
Centre 1
1,500 units
3,000 hours
2,000 hours
Units produced
Machine hours
Labour hours
Required:
Centre 2
2,000 units
4,500 hours
6,000 hours
H
A
(a) Using the reciprocal method calculate the total overheads in production centres 1 and 2 after
reapportionment of the service centre costs.
(7 marks)
(b) Using the most appropriate basis establish the overhead absorption rate for production centre 1. Briefly
explain the reason for your chosen absorption basis.
(3 marks)
TA
1
(10 marks)
10
126 of 298
TAHA POPATIA
2
Break-even charts and profit-volume charts are commonly associated with cost-volume-profit analysis (break-even
analysis).
Required:
(a) (i)
Sketch a break-even chart and indicate where the break-even point would be for a single product firm.
Clearly label the axes and indicate the following lines:
– total revenue;
– variable cost;
– fixed costs; and
– total cost.
(ii) How would contribution be established from your chart in (a)(i)?
(b) (i)
(6 marks)
Sketch a profit-volume chart and indicate where the break-even point would be for a single product firm.
Clearly label the axes and indicate the profit line and fixed costs.
(ii) How would contribution be established from your chart in (b)(i)?
(4 marks)
[Note: no specific numbers are required.]
Original budget:
Sales
Production
10,000 units
12,000 units
Standard cost per unit:
Selling price
H
A
Direct materials
Direct labour
Fixed production overheads
PO
PA
A company has obtained the following information regarding costs and revenue for the past financial year:
TA
3
TI
A
(10 marks)
Actual results:
Sales
Revenue
Production
Material cost
Labour cost
Fixed production overheads
£
5
9
8
–––
22
–––
30
9,750 units
£325,000
11,000 units
£65,000
£100,000
£95,000
There were no opening stocks.
Required:
(a) Produce a flexed budget statement showing the flexed budget and actual results. Calculate the variances
between the actual and flexed figures for the following:
– sales;
– materials;
– labour; and
– fixed production overhead.
(7 marks)
(b) Explain briefly how the sales and materials variances calculated in (a) may have arisen.
(3 marks)
(10 marks)
11
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TAHA POPATIA
[P.T.O.
4
A business currently orders 1,000 units of product X at a time. It has decided that it may be better to use the Economic
Order Quantity method to establish an optimal reorder quantity.
Information regarding stocks is given below:
Purchase price
£15/unit
Fixed cost per order
£200
Holding cost
8% of the purchase price per annum
Annual demand
12,000 units
Current annual total stock costs are £183,000, being the total of the purchasing, ordering and holding costs of
product X.
Required:
(a) Calculate the Economic Order Quantity.
(2 marks)
(b) Using your answer to (a) above calculate the revised annual total stock costs for product X and so establish
the difference compared to the current ordering policy.
(4 marks)
(c) List ways in which discounts might affect this Economic Order Quantity calculation and subsequent stock
costs.
(4 marks)
Units
£
1,100
48
1,200
46
PO
PA
A company manufactures a single product, product Y. It has documented levels of demand at certain selling prices
for this product as follows:
1,300
45
20
1,400
42
19
Required:
Selling price per
unit
Cost per unit
£
24
21
A
H
Demand
TA
5
TI
A
(10 marks)
Using a tabular approach calculate the marginal revenues and marginal costs for product Y at the different levels
of demand, and so determine the selling price at which the company profits are maximised.
(10 marks)
12
128 of 298
TAHA POPATIA
TA
H
A
PO
PA
TI
A
Formulae Sheet
Laspeyres’ price index =
Paasche price index =
Laspeyres’ quantity index =
Paasche quantity index =
13
129 of 298
TAHA POPATIA
[P.T.O.
Present Value Table
3UHVHQW YDOXH RI LH U
:KHUH
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PO
PA
A
H
TA
TI
A
14
130 of 298
TAHA POPATIA
Annuity Table
3UHVHQW YDOXH RI DQ DQQXLW\ RI LH
:KHUH
U
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U
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QXPEHU RI SHULRGV
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3HULRGV
Q
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Q
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ă
PO
PA
A
H
TA
TI
A
End of Question Paper
15
131 of 298
TAHA POPATIA
TI
A
TA
H
A
PO
PA
Answers
132 of 298
TAHA POPATIA
Part 1 Examination – Paper 1.2
Financial Information for Management
December 2003 Answers
1
D
2
C
3
C
4–(0·95 + 1·25 + 0·7) = 1·1
D
5
B
11,400
1,1(400)
–––––––
38,500
–––––––
TA
Absorption costing profit
£
37,500
H
Marginal costing profit
Add: fixed costs in closing stock
(350 × 4)
Less: fixed costs in opening stock
(100 × 4)
4
PO
PA
D
C
C
D
B
C
D
C
C
B
B
D
A
D
A
C
A
C
C
D
D
A
B
A
D
A
11
12
13
14
15
16
17
18
19
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
TI
A
Section A
Units
100
150
––––
250
(100)
100
––––
250
(75)
––––
175
––––
Receipts and issues
Price per unit
5·00
5.50
––––
5·30
5·30
6·00
––––
5·58
5·58
––––
5·58
––––
Cost
500
825
––––––
1,325
(530)
600
––––––
1,395
(418·5)
––––––
976·50
––––––
19
133 of 298
TAHA POPATIA
C
 1·00512×5 – 1 
 –––––––––––  = 7,000

0·005


A
A × 69·77 = 7,000
A
7,000
A = –––––– = 100·33 ≈ 100
69·77
7
D
8
C
9
C
10 B
Materials
Usage 7,200 × 3 kg = 21,600 kg
kg
Usage
21,600
Opening stock
(400)
Closing stock
500
–––––––
Purchases
21,700
–––––––
hi
low
difference
 383
IRR = 10% +  –––––––––––
 383 – (– 246)


 (15% – 10%)


A
11 B
400,000 = fixed cost + variable cost per unit × 10,000
250,000 = fixed cost + variable cost per unit × 5,000
150,000 = variable cost per unit × 5,000
150,000
variable cost per unit = ––––––– = £30
5,000
TI
A
A
PO
PA
6
H

 383
IRR = 10% +  ––––––––––  × 5%
 383 + 246 
TA

 383 
IRR = 10% +  ––––  × 5%
 629 


IRR = 10% + 3% = 13%
12 D
Output
Closing stock
conversion costs
9,850
135
–––––
9,985
–––––
= 450 × 30%
13 A
20
134 of 298
TAHA POPATIA
14 D
300
OF
y
200
C
B
100
A
D
OF
0
300
200
x
16 C
∑ p3q3 (130 × 2) + (135 × 4) 800
–––––– = ––––––––——––––––– = –––– = 0·86
∑ p3q1 (130 × 3) + (135 × 4) 930
=
Labour required
Spare capacity
Remaining hours required
100 hours from either:
overtime
no relevant cost
100 × 1·5 × 12 = £1,800
100
(100 × 12) + —— × 4 = 1,400
2
H
production of X
500 hours
400 hours
100 hours
A
15 A
PO
PA
TI
A
100
(
)
TA
therefore it is cheaper to take the hours from the production of X
17 A
18 C
Volume variance
Budgeted volume
Actual volume
Difference
10,000 units
9,800 units
–––––––––––
200 units
At standard profit per unit
× £5
Variance
£1,000 adverse
19 C
fixed costs
Breakeven sales revenue = –––––––––
C/S ratio
Fixed costs = £200,000 – £50,000 = £150,000
£200,000
C/S ratio = ––––––––– = 0·4
£500,000
£150,000
Breakeven sales revenue = ––––––––– = £375,000
0·4
21
135 of 298
TAHA POPATIA
20 D
Time
Flow
Discount
factor
Present
value
£000
8%
£000
0
(20,000)
1
(20,000)
1–4
13,000
3·312
19,936
5–8
17,000
5·747 – 3·312=
2·435
17,045
10
(10,000)
0·463
(4,630)
Net Present Value
12,351
21 D
£
(6,000)
Over absorbed fixed production overheads
Absorbed overheads
(4,500 × £8)
36,000
–––––––
30,000
Actual overheads incurred
(2,000 × £4·50) + 13,340 – (2,000 × 5% × £3)
cost/unit = ––––––––––––––––––––––––––––––––––––––––––
2,000 – (2,000 × 5%)
£22,040
cost/unit = –––––––– = £11·6
1,900
PO
PA
23 B
24 A
Rate variance
Did cost
Should cost
(14,000 × £10)
At standard cost
A
140,000
––––––––
36,000 adverse
H
Efficiency variance
Did take
Should take
(5,500 × 3)
£
176,000
TA
25 D
TI
A
22 A
hours
14,000
16,500
–––––––
2,500 favourable
× £10
£25,000 favourable
–––––––––––––––––
22
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TAHA POPATIA
Section B
1
(a)
Centre 1
Centre 2
Service A
Service B
Service C
2,000
3,500
300
500
700
500 × 50% =
500 × 20% =
500 × 20% =
500 × 10% =
250
100
100
(500)
50
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
2,250
3,600
400
0
750
400 × 45% =
400 × 45% =
400 × 10% =
180
180
(400)
40
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
2,430
3,780
0
40
750
750 × 60% =
750 × 40% =
450
300
(750)
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
2,880
4,080
0
40
0
40 × 50% = 20 40 × 20% = 8 40 × 20% = 8 (40)
40 × 10% = 4
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
2,900
4,088
8
0
4
8 × 45% = 4
8 × 45% = 4
(8)
8 × 10% = 0
TI
A
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
2,904
4,092
0
0
4
4 × 60% = 2
4 × 40% = 2
(4)
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
2,906
4,094
0
0
0
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
(b)
Centre 1
The most appropriate basis is to use machine hours as it is machine intensive.
£2,906
Overhead absorption rate = –––––––––– = £0·969/machine hour
3,000 hours
(a)
(i)
A
£
Total revenue
H
Costs and
revenue
Total costs
TA
2
PO
PA
The total amount for overheads in production centre 1 is £2,906 and in production centre 2 is £4,094.
Break-even
revenue
Variable costs
Fixed costs
0
(ii)
Breakeven
volume
units
Contribution would be established by taking the difference between the sales revenue line and the variable costs line.
23
137 of 298
TAHA POPATIA
(b)
(i)
Profit
Profit
£
Breakeven point
0
Units
Loss
£
Fixed costs
Closing stock
Profit
Flexed budget
9,750
11,000
£000
292·5
= 30 × 9,750
Actual results
9,750
11,000
£000
325
0
Variances
£000
32·5 favourable
0
55
99
= 5 × 11,000
= 9 × 11,000
65
100
10 adverse
1 adverse
96 (note)
––––––––
250
27·5
––––––––
222·5
––––––––
70
––––––––
= 8 × 12,000
95
–––––––––––
260
27·5
–––––––––––
232·5
–––––––––––
92·5
–––––––––––
1 favourable
–––––––––––––
10 adverse
H
Sales price
Cost of sales
Opening stock
Production costs:
Materials
Labour
Fixed production
overheads
TI
A
Sales – units
Production – units
PO
PA
(a)
= 22 × (11,000 – 9,750)
TA
3
Contribution would be established by taking the difference between profit and fixed costs.
A
(ii)
–––––––––––––
22·5 favourable
–––––––––––––
Note: This figure can also be established by taking the absorbed fixed production overheads of 8 × 11,000 = £88,000 and
adding 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 amount
paid per kg was higher than expected.
24
138 of 298
TAHA POPATIA
4
(a)
EOQ =
EOQ =
(b)
2CoD
Ch
2 × 200 × 12, 000 = 2,000 units
£1 ⋅ 2
Revised stock costs
Purchase costs (12,000 × £15)
12,000
Order costs –––––– × 200
2,000
2,000
Holding costs ––––– × 15 × 0·08
2
£
180,000
1,200
1,200
––––––––
182,400
183,000
––––––––
600
––––––––
Original stock costs
Saving
Discounts are likely to increase the EOQ as the holding cost will be reduced.
TI
A
(c)
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.
Demand
Selling Price
per unit
Total
Revenue
Marginal
Revenue
Cost
per unit
Total
Cost
Marginal
Cost
Units
£
£
£
£
£
£
=units ×
unit
selling
price
1,200
46
1,300
45
1,400
42
=units ×
cost per
unit
52,800
52,800
22
24,200
24,200
55,200
12,400
21
25,200
11,000
58,500
13,300
20
26,000
11,800
58,800
1,1300
19
26,600
11,600
A
48
H
1,100
TA
5
PO
PA
The holding cost will change as it uses both the increased EOQ and a reduced purchase price.
MR ≥ MC at 1,300 units, therefore profits will be maximised at this point which is a selling price of £45.
25
139 of 298
TAHA POPATIA
Part 1 Examination – Paper 1.2
Financial Information for Management
December 2003 Marking Scheme
Marks
Section A
2 marks per question giving a total of 50 marks.
Section B
1
(a)
6
1
–––
reason for using basis
using correct overhead figure from (a)
using machine hours as a basis
using the correct machine hours figure
correct calculation
1
(b)
(i)
(ii)
PO
PA
(ii)
correctly labelled axes
total revenue line
variable cost line
fixed cost line
total cost line
break-even point
total revenue – variable costs
correctly labelled axes
profit line
fixed costs
break-even point
A
(i)
–––
3
–––
10
–––
1
1/
2
1/
2
1/
2
1/
2
1
–––
4
2
–––
6
1/
2
1/
2
1/
2
1/
2
H
(a)
TA
2
7
1/
2
1/
2
1/
2
1/
2
TI
A
(b)
reapportionment
1 mark for each correct line using correct %’s max
Note: any method with sound bases for allocation
should be accepted and given full credit.
Conclusion
–––
2
profit – fixed costs
2
–––
27
140 of 298
4
–––
10
–––
TAHA POPATIA
Marks
3
(a)
Flexed budget
Sales units
Production units
Sales revenue
Material cost
Labour cost
Fixed cost
Closing stock
1/
2
1/
2
1/
2
1/
2
1/
2
1/
2
1
Actual figures – all of them
1
Variances
Sales revenue
Material cost
Labour cost
Fixed cost
1/
2
1/
2
1/
2
1/
2
–––
(c)
5
Purchase cost
Order cost
Holding cost
Saving
Effect
Effect
Effect
Effect
on
on
on
on
EOQ
purchase costs
order costs
holding costs
TI
A
PO
PA
(b)
correctly putting in the order cost
correctly putting in the annual demand
correctly putting in the holding cost
calculation
A
(a)
1
1
1
–––
Calculation of total revenue (1/2 per correct entry)
Calculation of marginal revenue (1/2 per correct entry)
Calculation of total cost (1/2 per correct entry)
Calculation of marginal revenue (1/2 per correct entry)
Profit maximising point
2
1/
2
1/
2
1/
2
––-–
2
1
1
1
1
–––
4
2
2
2
2
2
–––
28
141 of 298
3
–––
10
–––
1/
1
1
1
1
–––
H
4
Sales price
Mentioning materials price
Mentioning materials usage
TA
(b)
7
4
–––
10
–––
10
–––
TAHA POPATIA
Paper 1.2
TI
A
Financial
Information for
Management
PA
PART 1
QUESTION PAPER
TA
Time allowed 3 hours
H
A
PO
FRIDAY 11 JUNE 2004
This paper is divided into two sections
Section A
ALL 25 questions are compulsory and MUST be
answered
Section B
ALL FIVE questions are compulsory and MUST be
answered
Formulae Sheet is on page 14
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
The Association of Chartered Certified Accountants
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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
The following diagram represents the behaviour of one element of cost:
£
Total
cost
Volume of activity
0
Annual factory power cost where the electricity supplier sets a tariff based on a fixed charge plus a constant unit
cost for consumption but subject to a maximum annual charge.
B
Weekly total labour cost when there is a fixed wage for a standard 40 hour week but overtime is paid at a
premium rate.
C
Total direct material cost for a period if the supplier charges a lower unit cost on all units once a certain quantity
has been purchased in that period.
D
Total direct material cost for a period where the supplier charges a constant amount per unit for all units supplied
up to a maximum charge for the period.
H
A
PO
PA
A
The following represents a profit/volume graph for an organisation:
£
TA
2
TI
A
Which ONE of the following statements is consistent with the above diagram?
V
Units
0
T
At the specific levels of activity indicated, what do the lines depicted as ‘T’ and ‘V’ represent?
Line ‘T’
Line ‘V’
A
Loss
Profit
B
Loss
Contribution
C
Total fixed costs
Profit
D
Total fixed costs
Contribution
2
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4
An organisation manufactures and sells a single product. At the budgeted level of output of 2,400 units per week, the
unit cost and selling price structure is as follows:
£ per unit
£ per unit
Selling price
60
Less – variable production cost
15
Less – other variable cost
15
Less – fixed cost
30
–––
(50)
–––
Profit
10
–––
What is the breakeven point (in units per week)?
A
1,200
B
1,600
C
1,800
D
2,400
A company manufactures one product which it sells for £40 per unit. The product has a contribution to sales ratio of
40%. Monthly total fixed costs are £60,000. At the planned level of activity for next month, the company has a
margin of safety of £64,000 expressed in terms of sales value.
B
4,100
C
5,350
D
7,750
PO
3,100
H
A
A
PA
What is the planned activity level (in units) for next month?
A company manufactures and sells two products (X and Y) both of which utilise the same skilled labour. For the
coming period, the supply of skilled labour is limited to 2,000 hours. Data relating to each product are as follows:
Product
X
Y
Selling price per unit
£20
£40
Variable cost per unit
£12
£30
Skilled labour hours per unit
2
4
Maximum demand (units) per period
800
400
TA
5
TI
A
3
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
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[P.T.O.
6
An organisation manufactures a single product. The total cost of making 4,000 units is £20,000 and the total cost
of making 20,000 units is £40,000. Within this range of activity the total fixed costs remain unchanged.
What is the variable cost per unit of the product?
A
B
C
D
8
In a short-term decision-making context, which ONE of the following would be a relevant cost?
A
Specific development costs already incurred.
B
The cost of special material which will be purchased.
C
Depreciation on existing fixed assets.
D
The original cost of raw materials currently in stock which will be used on the project.
The stock records for one specific stores item for last month show the following information:
Date
Receipts
units
14th
13th
15th
22nd
PA
600
TI
A
7
£0·80
£1·20
£1·25
£2·00
Issues
units
150
200
250
PO
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.
£18,200
B
£18,300
C
£18,525
D
£19,500
TA
9
A
H
A
Using the FIFO method of valuation, what was the total cost of last month’s issues?
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
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10 A company determines its order quantity for a raw material by using the Economic Order Quantity (EOQ) model.
What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of ordering a
batch of raw material?
EOQ
Total annual holding cost
A
Higher
Lower
B
Higher
Higher
C
Lower
Higher
D
Lower
Lower
11 A company manufactures two products, X and Y, in a factory divided into two production cost centres, Primary and
Finishing. The following budgeted data are available:
Primary
Finishing
£96,000
£82,500
TI
A
Cost centre
Allocated and apportioned fixed
overhead costs
Direct labour minutes per unit:
– product X
– product Y
36
48
25
35
PA
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.
£11
B
£12
C
£14
D
£15
H
A
A
PO
What is the budgeted fixed overhead cost per unit for product Y?
TA
12 A company uses an overhead absorption rate of £3·50 per machine hour, based on 32,000 budgeted machine hours
for the period. During the same period the actual total overhead expenditure amounted to £108,875 and 30,000
machine hours were recorded on actual production.
By how much was the total overhead under or over absorbed for the period?
A
Under absorbed by £3,875
B
Under absorbed by £7,000
C
Over absorbed by £3,875
D
Over absorbed by £7,000
13 A company manufactures and sells a single product. For this month the budgeted fixed production overheads are
£48,000, budgeted production is 12,000 units and budgeted sales are 11,720 units.
The company currently uses absorption costing.
If the company used marginal costing principles instead of absorption costing for this month, what would be the
effect on the budgeted profit?
A
£1,120 higher
B
£1,120 lower
C
£3,920 higher
D
£3,920 lower
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14 For which of the following is a profit centre manager normally responsible?
A
Costs only
B
Revenues only
C
Costs and revenues
D
Costs, revenues and investment.
The following information relates to questions 15 and 16:
The standard direct material cost per unit for a product is calculated as follows:
10·5 litres at £2·50 per litre
Last month the actual price paid for 12,000 litres of material used was 4% above standard and the direct material usage
variance was £1,815 favourable. No stocks of material are held.
£1,000
B
£1,200
C
£1,212
D
£1,260
1,074
B
1,119
C
1,212
D
1,258
H
A
A
PO
16 What was the actual production last month (in units)?
PA
A
TI
A
15 What was the adverse direct material price variance for last month?
TA
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
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19 Which department would normally be responsible for completing a standard purchase requisition for goods in a
service organisation?
A
The buying (purchasing) department
B
The department that requires the goods
C
The goods inwards department
D
The accounting department staff.
20 Regression analysis is being used to find the line of best fit (y = a + bx) from eleven pairs of data. The calculations
have produced the following information:
∑ x = 440, ∑ y = 330, ∑ x2 = 17,986, ∑ y2 = 10,366 and ∑ xy = 13,467
A
0·63
B
0·69
C
2·33
D
5·33
TI
A
What is the value of ‘a’ in the equation for the line of best fit (to 2 decimal places)?
£40
£25
£20
PO
Salary cost per hour for senior consultants
Salary cost per hour for junior consultants
Overhead absorption rate per hour applied to all hours
PA
21 The following information relates to a management consultancy organisation:
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.
£6,874
B
£10,696
C
£11,466
D
£12,642
TA
A
H
A
What is the final fee to be charged for Assignment 789?
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22 Two products G and H are created from a joint process. G can be sold immediately after split-off. H requires further
processing before it is in a saleable condition. There are no opening stocks and no work in progress. The following
data are available for last period:
£
Total joint production costs
384,000
Further processing costs (product H)
159,600
Product
G
H
Selling price
per unit
£0·84
£1·82
Sales
units
400,000
200,000
Production
units
412,000
228,000
Using the physical unit method for apportioning joint production costs, what was the cost value of the closing
stock of product H for last period?
£36,400
B
£37,520
C
£40,264
D
£45,181
TI
A
A
PA
23 A company manufactures and sells a single product. The variable cost of the product is £2·50 per unit and all
production each month is sold at a price of £3·70 per unit. A potential new customer has offered to buy 6,000 units
per month at a price of £2·95 per unit. The company has sufficient spare capacity to produce this quantity. If the new
business is accepted, sales to existing customers are expected to fall by two units for every 15 units sold to the new
customer.
£1,740
B
£2,220
C
£2,340
D
£2,700
H
A
A
PO
What would be the overall increase in monthly profit which would result from accepting the new business?
TA
24 A company manufactures four components (L, M, N and P) using the same general purpose machinery. Weekly
demand is 1,500 units of each component but only 24,000 machine hours are available each week. A decision
has to be made on which component to buy in from an outside supplier. The following data are available:
11
L
45
13
57
Variable production cost (£ per unit)
General purpose machinery hours per unit
Purchase price from outside supplier (£ per unit)
M
40
15
55
N
30
14
54
P
20
16
50
In order to minimise total cost, which component should be purchased from the outside supplier each week?
A
Component L
B
Component M
C
Component N
D
Component P
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25 The following graph relates to a linear programming problem:
y
(1)
(3)
(2)
0
x
TI
A
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).
Constraints (1) and (2)
B
Constraints (2) and (3)
C
Constraints (1) and (3)
D
Constraint (1) and the x-axis
(50 marks)
TA
H
A
PO
A
PA
At which of the following intersections is contribution maximised?
9
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Section B – ALL FIVE questions are compulsory and MUST be attempted
Duddon Ltd makes a product that has to pass through two manufacturing processes, I and II. All the material is input
at 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 input
into that process. Losses have no realisable value.
Process I is operated only in the first part of every month followed by process II in the second part of the month. All
completed production from process I is transferred into process II in the same month. There is no work in progress in
process II.
Information for last month for each process is as follows:
Process I
Opening work in progress
200 units (40% complete for conversion
costs) valued in total at £16,500
1,900 units with a material cost of £133,000
£93,500
50% complete for conversion costs
Input into the process
Conversion costs incurred
Closing work in progress
Required:
PO
(b) Prepare the process II account for last month.
PA
(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.
TI
A
Process II
Transfer from process I
1,800 units
Conversion costs incurred
£78,450
1,650 completed units were transferred to the finished goods warehouse.
(4 marks)
(2 marks)
(10 marks)
H
A
(c) Identify TWO main differences between process costing and job costing.
(4 marks)
TA
1
10
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2
Coledale Ltd manufactures and sells product CC. The company operates a standard marginal costing system.
The standard cost card for CC includes the following:
£ per unit
20
45
27
–––
92
–––
Direct material
Direct labour (6 hours at £7·50 per hour)
Variable production overheads
The budgeted and actual activity levels for the last quarter were as follows:
Budget
units
Sales
20,000
Production
20,000
Actual
units
19,000
21,000
The actual costs incurred last quarter were:
£
417,900
949,620
565,740
TI
A
Direct material
Direct labour (124,950 hours)
Variable production overheads
Required:
(a) Calculate the total variances for direct material, direct labour and variable production overheads. (3 marks)
(3 marks)
(c) Suggest TWO possible causes for EACH variance calculated in (b).
(4 marks)
PA
(b) Provide an appropriate breakdown of the total variance for direct labour calculated in (a).
PO
H
A
Braithwaite Ltd manufactures and sells a single product. The following data have been extracted from the current
year’s budget:
Contribution per unit
£8
Total weekly fixed costs
£10,000
Weekly profit
£22,000
Contribution to sales ratio
40%
The company’s production capacity is not being fully utilised in the current year and three possible strategies are under
consideration. Each strategy involves reducing the unit selling price on all units sold with a consequential effect on
the budgeted volume of sales. Details of each strategy are as follows:
TA
3
(10 marks)
Strategy
A
B
C
Reduction in unit
selling price
%
2
5
7
Expected increase in weekly
sales volume over budget
%
10
18
25
The company does not hold stocks of finished goods.
Required:
(a) Calculate for the current year:
(i) the selling price per unit for the product; and
(ii) the weekly sales (in units).
(3 marks)
(b) Determine, with supporting calculations, which one of the three strategies should be adopted by the company
in order to maximise weekly profits.
(4 marks)
(c) Briefly explain the practical problems that a management accountant might encounter in separating costs
into their fixed and variable components.
(3 marks)
(10 marks)
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Ennerdale Ltd has been asked to quote a price for a one-off contract. The company’s management accountant has
asked for your advice on the relevant costs for the contract. The following information is available:
Materials
The contract requires 3,000 kg of material K, which is a material used regularly by the company in other production.
The company has 2,000 kg of material K currently in stock which had been purchased last month for a total cost of
£19,600. Since then the price per kilogram for material K has increased by 5%.
The contract also requires 200 kg of material L. There are 250 kg of material L in stock which are not required for
normal production. This material originally cost a total of £3,125. If not used on this contract, the stock of material
L would be sold for £11 per kg.
PA
TI
A
Labour
The contract requires 800 hours of skilled labour. Skilled labour is paid £9·50 per hour. There is a shortage of skilled
labour and all the available skilled labour is fully employed in the company in the manufacture of product P. The
following information relates to product P:
£ per unit
£ per unit
Selling price
100
Less
Skilled labour
38
Other variable costs
22
–––
(60)
–––
40
–––
Required:
PO
(a) Prepare calculations showing the total relevant costs for making a decision about the contract in respect of
the following cost elements:
(i) materials K and L; and
(ii) skilled labour.
(7 marks)
H
A
(b) Explain how you would decide which overhead costs would be relevant in the financial appraisal of the
contract.
(3 marks)
(10 marks)
TA
4
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Langdale Ltd is a small company manufacturing and selling two different products – the Lang and the Dale. Each
product passes through two separate production cost centres – a machining department, where all the work is carried
out on the same general purpose machinery, and a finishing section. There is a general service cost centre providing
facilities for all employees in the factory.
The company operates an absorption costing system using budgeted overhead absorption rates. The management
accountant has calculated the machine hour absorption rate for the machining department as £3·10 but a direct
labour hour absorption rate for the finishing section has yet to be calculated.
The following data have been extracted from the budget for the coming year:
Product
Lang
Sales (units)
6,000
Production (units)
7,200
Direct material cost per unit
£52
Direct labour cost per unit:
– machining department (£8 per hour)
£72
– finishing section (£6 per hour)
£42
Machining department – machine hours per unit
£15
Dale
19,000
10,400
£44
£40
£36
£13
14
32
14
TI
A
£
183,120
241,320
182,800
PA
Fixed production overhead costs:
– machining department
– finishing section
– general service cost centre
Number of employees:
– machining department
– finishing section
– general service cost centre
PO
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)
H
A
(b) Calculate the budgeted total cost for one unit of product Dale only, showing each main cost element
separately.
(2 marks)
(c) The company is considering a change over to marginal costing. State with reasons, whether the total profit
for the coming year calculated using marginal costing would be higher or lower than the profit calculated
using absorption costing. No calculations are required.
(3 marks)
TA
5
(10 marks)
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[P.T.O.
H
A
PO
PA
TI
A
Formulae Sheet
TA
End of Question Paper
14
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TI
A
TA
H
A
PO
PA
Answers
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A
PO
PA
A
H
TA
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Part 1 Examination – Paper 1.2
Financial Information for Management
June 2004 Answers
Section A
A
D
C
C
D
C
B
A
D
D
D
A
B
C
B
C
C
C
B
C
C
A
A
B
D
1
A
2
D
3
C
Contribution per unit (CPU) £(60 – 15 – 5)
Total fixed cost £(30 x 2,400)
Breakeven point (72,000 ÷ 40)
4
C
CPU (40 x 0·40)
Breakeven point (60,000 ÷ 16)
Margin of safety (64,000 ÷ 40)
PO
PA
TI
A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
5
D
A
£16
3,750 units
1,600 units
––––––––––
5,350 units
––––––––––
H
TA
Planned activity level
£40
£72,000
1,800 units
X
£8
£4
1st
CPU
Contribution per hour
Ranking
Y
£10
£2·50
2nd
800 units of product X uses 1,600 hours and in the remaining 400 hours, 100 units of product Y can be manufactured.
6
C
7
B
8
A
9
D
£(40,000 – 20,000) ÷ (20,000 – 4,000) units = £1·25 per unit
Closing stock (units) = 200 + 600 – 150 – 200 – 250 = 200
Issues = £5,200 + (600 – 200) x £32·50 = £18,200
EOQ =
(2 x 20 x (4 x 12,500)
0 ⋅ 10 x 15
= 1,155
10 D
11 D
Total direct labour hours:
Primary (6,000 x 36 ÷ 60) + (7,500 x 48 ÷ 60)
9,600
Finishing (6,000 x 25 ÷ 60) + (7,500 x 35 ÷ 60)
6,875
Absorption rates:
Primary
(96,000 ÷ 9,600) £10 per hour
Finishing (82,500 ÷ 6,875) £12 per hour
Fixed cost per unit (Y): (48 ÷ 60) x 10 + (35 ÷ 60) x 12 = £15
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12 A
£
108,875
105,000
–––––––113,875
––––––––
Actual overhead
Absorbed overhead (30,000 ÷ 3·50)
Under absorption
13 B
Sales < production by 280 units
Marginal costing profit would be lower by 280 x (48,000 ÷ 12,000) = £1,120
14 C
Adverse price variance (0·04 x 2·50 x 12,000) = £1,200
16 C
£
30,000
11,815
–––––––31,815
–––––––1,212 units
–––––––-
12,000 litres at £2·50 per litre
Add Favourable usage variance
Standard cost of actual production
Actual production £31,815 ÷ (10·5 x 2·50)
17 C
Let x = budgeted expenditure
1·1x – x = 136,000
1.1x – x = 360,000
1·1 x = 396,000 = actual expenditure (£)
18 C
£
112,500
Actual sales at standard selling price
(9,000 x £12·50)
Actual sales at actual selling price
19 B
20 C
b =
11 x 13,467 – (440 x 330)
––––––––––––––––––––––––
(11 x 17,986) – (440)2
a =
(330 ÷ 11) – 0·6917 (440 ÷ 11)
21 C
117,000
–––––––4,500 favourable
–––––––-
PO
PA
Sales price variance
Final fee
TA
H
A
Salary costs (54 x 40) + (110 x 25)
Overhead cost (164 x 20)
Total cost
Mark-up (40% on total cost)
TI
A
15 B
=
0·6917
=
2·33
£
4,910
3,280
–––––––8,190
3,276
–––––––11,466
–––––––-
22 A
Joint costs apportioned to product H:
(228 ÷ 640) x 384,000
Further processing costs
£
136,800
159,600
–––––––Total cost of H production (228,000 units)
296,400
–––––––Closing stock: 28,000 x (296,400 ÷ 228,000) = £36,400
23 A
CPU from existing business (3·70 – 2·50)
New business CPU
(2·95 – 2.50)
Total contribution from new business (6,000 x 0·45)
Less Lost contribution from existing business
2 x (6,000 ÷ 15) x 1·20
Overall increase in contribution and profit
24 B
Additional cost of buying in one unit (£)
Machine hours per unit
Additional cost of buying in per machine hour (£)
Ranking for buying in
Buy in component M.
£1·20
£0·45
£
2,700
(960)
––––––1,740
––––––L
12
13
14
2nd
M
15
15
13
1st
N
24
14
16
4th
P
30
16
15
3rd
25 D
18
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Section B
1
(a)
Cost per equivalent unit (EU) calculations for Process I:
Materials
EU
–
1,600
300
––––––
1,900
––––––
£133,000
–––––––––
1,900
= £70
Completion of opening work in progress
Started and finished units last month
Closing work in progress
Work done last month
Cost per EU
(i)
Value of closing work in progress =
(300 x 70) + (150 x 50) = £28,500
(ii)
Value of transfer of 1,800 units to Process II =
1,600 x (70 + 50) + (120 x 50) + 16,500 = £214,500
Process II Account
Units
1,800
£
214,500
78,450
––––––
1,800
––––––
––––––––
292,950
––––––––
Workings
Normal loss
Abnormal loss
Finished production
PO
PA
Transfer from Process I
Conversion costs
TI
A
(b)
Conversion
EU
120
1,600
150
––––––
1,870
––––––
£93,500
––––––––
1,870
= £50
Units
126
24
1,650
––––––
1,800
––––––
£
–
4,200
288,750
––––––––
292,950
––––––––
214,500 + 78,450
Cost per unit = –––––––––––––––––––– = £175
(0·93 x 1,800)
Valuations:
Abnormal loss
= 24 x 175
= £4,200
Finished production = 1,650 x 175 = £288,750
2
(a)
In job costing each job is costed separately whereas in process costing it is the process itself which is costed. The total
cost of the process is then averaged over all the units of production.
–
In job costing production is to customer specification and therefore each job is likely to be different. In process costing
all units are identical in any one process.
H
A
–
TA
(c)
Direct material
Actual quantity at actual price
£
417,900
Standard quantity for actual production at standard price
420,000
Direct labour
Actual hours at actual rate
949,620
Standard hours for actual production at standard rate
945,000
Variable production overheads
Actual expenditure
565,740
Standard cost of actual production
567,000
Total
variance
£
2,100 F
4,620 A
1,260 F
19
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(b)
Actual hours at actual rate
£
949,620
Actual hours at standard rate
937,125
Standard hours for actual production at standard rate
945,000
Variance (£)
Rate 12,495 A
Efficiency 7,875 F
(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 = £32,000
Weekly sales = 32,000 ÷ 8 = 4,000 units
A
4,400
––––––
£/unit
19·60
(12·00)
––––––
7·60
––––––
£
33,440
–––––––
Selling price
Less Variable cost
Contribution
Total contribution
B
4,720
––––––
£/unit
19·00
(12·00)
––––––
7·00
––––––
£
33,040
–––––––
C
5,000
––––––
£/unit
18·60
(12·00)
––––––
6·60
––––––
£
33,000
–––––––
TI
A
Strategy
Units per week
PO
PA
(b)
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.
A
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.
4
(a)
(i)
Materials
K
L
(ii)
TA
H
Many costs are a mix of variable and fixed elements, for example power costs (gas or electricity). The tariffs for power costs
often consist of a fixed charge irrespective of the amount of power consumed and a variable charge per unit of consumption.
Skilled labour
Labour cost
Opportunity cost of labour
(b)
£
30,870
2,200
––––––––
£33,070
––––––––
3,000 kg at (£19,600 ÷ 2,000) x 1·05
200 kg at £11
800 hours at £9·50
800 hours at (£40 ÷ 4)
£
7,600
8,000
––––––––
£15,600
––––––––
Any variable overhead costs associated with the contract would be relevant because they would represent additional or
incremental costs caused directly by the contract.
Fixed overhead costs would only be relevant if the total fixed overhead costs of the company increased as a direct consequence
of the contract being undertaken. In that case the relevant amount would be the specific increase in the total fixed overhead
costs caused by the acceptance of the contract.
Arbitrary apportionments of existing fixed overhead costs would not be relevant. Similarly sunk and committed costs would
not be relevant.
20
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(a)
£
241,320
Fixed production overhead costs (finishing section)
+
Reapportionment of general service centre costs
£82,800 x (32 ÷ 46)
57,600
––––––––
298,920
––––––––
hours
50,400
62,400
––––––––
112,800
––––––––
Direct labour hours in finishing section:
Lang
7,200 units x (42 ÷ 6 )
Dale
10,400 units x (36 ÷ 6)
Direct labour hour absorption rate for the finishing section:
£298,920 ÷ 112,800 = £2·65
(b)
Cost per unit for a Dale:
£ per unit
£ per unit
44·00
Direct material
Direct labour
machining department
finishing section
Total cost per unit for Dale
76·00
–––––––
120·00
9·30
15·90
––––––––
£145·20
––––––––
For both products – Lang and Dale – production is greater than sales for the coming year. In other words, stocks of finished
products will be increasing. In this situation, profits calculated using marginal costing principles will be lower than the profits
calculated using absorption costing principles.
A
Fixed production costs are written off as they arise under marginal costing whereas under absorption costing they form part
of the product cost and the inventory valuation. Therefore in the coming year with stocks increasing and using absorption
costing, a higher amount of fixed production cost will be carried forward at the year end than was brought forward in any
opening stocks. The effect is that some of the costs that would have been written off and would have reduced the profit under
marginal costing are being carried forward under absorption costing to be written off against profits in later years.
H
(c)
(3 x £3·10)
(6 x £2·65)
PO
PA
Prime cost
Production overhead costs:
–
machining department
–
finishing section
40·00
36·00
––––––
TI
A
–
–
TA
5
21
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A
PO
PA
A
H
TA
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Part 1 Examination – Paper 1.2
Financial Information for Management
June 2004 Marking Scheme
Marks
Section A
Each of the 25 questions in this section is worth 2 marks
50
Section B
1
(a) Equivalent units of work done
Cost per equivalent unit
Value of work in progress
Value of transfer
Two differences – 1 mark for each
(a)
(b)
(c)
Three total variances – 1 mark for each
Rate and efficiency variances – 11/2 marks for each
Four causes (two for each variance in (b)) – 1 mark for each
Selling price
Weekly sales
(b)
Units for each strategy
Selling price for each strategy
Contribution for each strategy
Recommendation (best strategy)
(c)
Mixed or semi-variable costs
Example
Methods
A
(a)
PO
PA
(c)
TA
3
1
1
1
–––
H
2
4
4
1/
2
1/
2
Transfer in from Process I
Conversion costs
Normal loss
Abnormal loss
Finished production
TI
A
(b)
1
1
1
1
–––
(a)
Material K
Material L
Skilled labour: – cost
Skilled labour: – opportunity cost
(b)
Explanation of relevant cost concept
Variable overhead costs
Fixed overhead costs
3
3
4
–––
1
2
–––
1
1
1
1
–––
1
1
1
–––
2
2
1
2
–––
1
1
1
–––
23
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4
2
–––
10
–––
10
–––
3
4
3
–––
10
–––
7
3
–––
10
–––
TAHA POPATIA
1/
2
2
1
–––
1
1
–––
1
1
1
–––
mark)
2
3
–––
10
–––
TI
A
Production > sales/increasing stocks
Marginal costing profit lower than absorption costing profit
Explanation
5
PO
PA
(c)
Prime cost
Overhead costs (2 x
1/
2
A
(b)
Marks
11/2
Reapportionment of general service centre costs
Original cost of finishing section
Total direct labour hours in finishing section
Direct labour hour rate
H
(a)
TA
5
24
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Paper 1.2
TI
A
Financial
Information for
Management
PO
PA
PART 1
FRIDAY 10 DECEMBER 2004
TA
Time allowed 3 hours
H
A
QUESTION PAPER
This paper is divided into two sections
Section A
ALL 25 questions are compulsory and MUST be
answered
Section B
ALL FIVE questions are compulsory and MUST be
answered
Formulae Sheet is on page 13
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
The Association of Chartered Certified Accountants
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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
When total purchases of raw material exceed 30,000 units in any one period then all units purchased, including the
initial 30,000, are invoiced at a lower cost per unit.
Which of the following graphs is consistent with the behaviour of the total materials cost in a period?
£
0
0
£
C
UNITS
30,000
D
UNITS
30,000
0
UNITS
30,000
A break-even chart for a company is depicted as follows:
H
A
£
SALES REVENUE
TOTAL COSTS
TA
2
UNITS
30,000
B
TI
A
0
£
A
PO
PA
£
UNITS
0
4,000
Which one of the following statements is consistent with the above chart?
A
Both selling price per unit and variable cost per unit are constant.
B
Selling price per unit is constant but variable cost per unit increases for sales over 4,000 units.
C
Variable cost per unit is constant but the selling price per unit increases for sales over 4,000 units.
D
Selling price per unit increases for sales over 4,000 units and there is an increase in the total fixed costs at
4,000 units.
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3
4
Which of the following is a feasible value for the correlation coefficient?
A
– 2·0
B
– 1·2
C
0
D
+ 1·2
An organisation’s records for last month show the following in respect of one particular stores item:
Date
1st
4th
12th
19th
27th
Receipts
units
Issues
units
Stock
units
200
50
550
350
50
150
500
200
300
TI
A
The opening stock for last month was valued at a total of £4,000 and all receipts during the month were purchased
at a cost of £26·60 per unit.
The organisation uses the weighted average method of valuation and calculates a new weighted average price after
each stores receipt.
B
£16,900
C
£17,000
D
£17,290
A
£16,000
The total cost of production for two levels of activity is as follows:
Level 1
3,000
6,750
H
Production (units)
Total cost (£)
TA
5
A
PO
PA
What was the total value of the issues during last month?
Level 2
5,000
9,250
The variable production cost per unit and the total fixed production cost both remain constant in the range of activity
shown.
What is the variable production cost per unit?
6
A
£0·80
B
£1·25
C
£1·85
D
£2·25
Monthly variance reports are an example of which one of the following types of management information?
A
Tactical
B
Strategic
C
Planning
D
Operational
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7
A company uses a standard absorption costing system. Last month budgeted production was 8,000 units and the
standard fixed production overhead cost was £15 per unit. Actual production last month was 8,500 units and the
actual fixed production overhead cost was £17 per unit.
What was the total adverse fixed production overhead variance for last month?
A
£7,500
B
£16,000
C
£17,000
D
£24,500
The following information relates to questions 8 and 9:
A company operating a standard costing system has the following direct labour standards per unit for one of its
products:
4 hours at £12·50 per hour
B
£4,250 adverse
C
£5,250 favourable
D
£5,250 adverse
PO
PA
£4,250 favourable
A
A
What was the direct labour efficiency variance for last month?
A
£4,250 favourable
B
£4,250 adverse
C
£5,250 favourable
D
£5,250 adverse
H
9
What was the direct labour rate variance for last month?
TA
8
TI
A
Last month when 2,195 units of the product were manufactured, the actual direct labour cost for the 9,200 hours
worked was £110,750.
10 A cost centre has an overhead absorption rate of £4·25 per machine hour, based on a budgeted activity level of
12,400 machine hours.
In the period covered by the budget, actual machine hours worked were 2% more than the budgeted hours and the
actual overhead expenditure incurred in the cost centre was £56,389.
What was the total over or under absorption of overheads in the cost centre for the period?
A
£1,054 over absorbed
B
£2,635 under absorbed
C
£3,689 over absorbed
D
£3,689 under absorbed
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11 A company which operates a process costing system had work in progress at the start of last month of 300 units
(valued at £1,710) which were 60% complete in respect of all costs.
Last month a total of 2,000 units were completed and transferred to the finished goods warehouse. The cost per
equivalent unit for costs arising last month was £10. The company uses the FIFO method of cost allocation.
What was the total value of the 2,000 units transferred to the finished goods warehouse last month?
A
£19,910
B
£20,000
C
£20,510
D
£21,710
Month
7
8
9
10
11
Activity level (units)
300
360
400
320
280
Total cost (£)
17,500
19,500
20,500
18,500
17,000
TI
A
12 A company has recorded its total cost for different levels of activity over the last five months as follows:
PO
PA
The equation for total cost is being calculated using regression analysis on the above data. The equation for total cost
is of the general form ‘y = a + bx’ and the value of ‘b’ has been calculated correctly as 29·53.
What is the value of ‘a’ (to the nearest £) in the total cost equation?
7,338
B
8,796
C
10,430
D
10,995
A
A
TA
H
13 A company operates a job costing system. Job number 1012 requires £45 of direct materials and £30 of direct
labour. Direct labour is paid at the rate of £7·50 per hour. Production overheads are absorbed at a rate of £12·50
per direct labour hour and non-production overheads are absorbed at a rate of 60% of prime cost.
What is the total cost of job number 1012?
A
£170
B
£195
C
£200
D
£240
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14 Data relating to a particular stores item are as follows:
Average daily usage
Maximum daily usage
Minimum daily usage
Lead time for replenishment of stock
Reorder quantity
400 units
520 units
180 units
10 to 15 days
8,000 units
What is the reorder level (in units) which avoids stockouts?
A
5,000
B
6,000
C
7,800
D
8,000
15 Which one of the following statements correctly describes the shadow price of a resource in linear programming?
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.
PO
PA
TI
A
A
16 Last month, when a company had an opening stock of 16,500 units and a closing stock of 18,000 units, the profit
using absorption costing was £40,000. The fixed production overhead rate was £10 per unit.
B
£25,000
C
£55,000
D
£65,000
H
£15,000
TA
A
A
What would the profit for last month have been using marginal costing?
17 The following terms relate to computers:
(i) application packages
(ii) operating systems
(iii) point-of-sale devices
Which of these terms are categorised as software?
A
(i) and (ii) only
B
(i) and (iii) only
C
(ii) and (iii) only
D
(i), (ii) and (iii)
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18 A company is evaluating a project that requires two types of material (T and V).
Data relating to the material requirements are as follows:
Material
type
Quantity needed
for project
kg
500
400
T
V
Quantity
currently
in stock
kg
100
200
Original cost of
quantity in stock
£/kg
40
55
Current
purchase
price
£/kg
45
52
Current
resale
price
£/kg
44
40
Material T is regularly used by the company in normal production. Material V is no longer in use by the company
and has no alternative use within the business.
What is the total relevant cost of materials for the project?
£40,400
B
£40,900
C
£43,400
D
£43,900
TI
A
A
PO
PA
19 A machine owned by a company has been idle for some months but could now be used on a one year contract which
is under consideration. The net book value of the machine is £1,000. If not used on this contract, the machine
could be sold now for a net amount of £1,200. After use on the contract, the machine would have no saleable value
and the cost of disposing of it in one year’s time would be £800.
What is the total relevant cost of the machine to the contract?
£400
B
£800
C
£1,200
D
£2,000
H
A
A
20 An organisation launching a new product has set a relatively high initial selling price.
TA
Which one of the following pricing policies is this an example of?
A
Premium pricing
B
Price differentiation
C
Penetration pricing
D
Price skimming
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The following information relates to questions 21 and 22:
In the following price, cost and revenue functions, which have been established by a company for one of its products,
Q represents the number of units produced and sold per week:
Price (£ per unit) = 40 – 0·03Q
Marginal revenue (£ per unit) = 40 – 0·06Q
Total cost per week (£) = 3,500 + 10Q
21 What price should be set in order to maximise weekly profits?
A
£10
B
£15
C
£25
D
£30
£2,800
B
£3,150
C
£5,490
D
£5,800
PO
PA
A
TI
A
22 What would be the profit per week if the selling price of the product was set at £31 per unit?
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.
B
£7,425
C
£13,500
D
£20,925
H
£6,075
TA
A
A
What are the company’s total fixed costs per period?
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
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25 A factory consists of two production cost centres (P and Q) and two service cost centres (X and Y). The total allocated
and apportioned overhead for each is as follows:
P
£95,000
Q
£82,000
X
£46,000
Y
£30,000
It has been estimated that each service cost centre does work for the other cost centres in the following proportions:
P
40
30
Percentage of service cost centre X to
Percentage of service cost centre Y to
Q
40
60
X
–
10
Y
20
–
C
£126,000
D
£127,000
(50 marks)
PO
PA
£124,716
A
B
H
£122,400
TA
A
TI
A
After the reapportionment of service cost centre costs has been carried out using a method that fully recognises
the reciprocal service arrangements in the factory, what is the total overhead for production cost centre P?
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Section B – ALL FIVE questions are compulsory and MUST be attempted
1
Maybud Ltd operates Process X which creates two joint products, A and B, in the ratio of 3:2 by volume. There is
no work in progress. The following information relates to Process X for last month:
(i)
80,000 litres of raw materials with a total cost of £158,800 were input into the process and conversion costs
were £133,000.
(ii) A normal process loss of 5% of the input was expected. An actual loss of 5,500 litres was identified at the end
of the process. Losses have a realisable value of 75p per litre.
It is company policy to apportion joint costs to products using the net realisable value method. After Process X, both
product A and product B are further processed at a cost of £2 per litre and £3 per litre respectively. The final selling
prices of the products are as follows:
Product
£ per litre
A
8
B
12
Required:
TI
A
(a) Prepare the process account for last month including the output volume and cost of products A and B
separately.
(7 marks)
(10 marks)
Despard Ltd manufactures and sells a single product. The following data have been extracted from the current year’s
budget:
5,000
£50
£70
75%
H
A
Sales and production (units)
Variable cost per unit
Fixed cost per unit
Contribution to sales ratio
The selling price per unit for next year is to be 8% above the current year’s budgeted figure, whereas both the variable
cost per unit and the total fixed costs are forecast to increase by 12% above their budgeted level in the current year.
TA
2
PO
PA
(b) Explain clearly how an abnormal gain arises in a process. Indicate where it would appear in a process
account and how it would be valued.
(3 marks)
The target for next year is that total profit should remain the same as that budgeted for the current year.
Required:
(a) Calculate for the CURRENT YEAR the budgeted:
(i) contribution per unit;
(ii) total profit.
(3 marks)
(b) Calculate the number of units which the company should produce and sell next year in order to achieve the
target level of profit.
(4 marks)
(c) Explain, with an example, the term semi-variable (mixed) cost. How would such a cost be dealt with in
undertaking the analysis in (a)?
(3 marks)
(10 marks)
10
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3
Oakapple Ltd manufactures a single product which has a standard selling price of £15 per unit. It operates a standard
absorption costing system. The total standard production cost is £9 per unit of which £4 per unit represents the
variable cost element. Non-production costs of £44,000 per month are all fixed.
The following data relate to the month just ended:
Budget
Actual
units
units
Production
48,000
47,000
Sales
45,000
46,000
The actual total sales revenue for the month just ended was £678,500.
Required:
(a) Calculate the sales price and sales volume profit variances for the month just ended.
(4 marks)
One of the qualities of good information is that it should be communicated to the right person or persons in an
organisation.
(3 marks)
TI
A
(b) To whom should the variances calculated in (a) be communicated and why?
The company is also considering a change from absorption costing to marginal costing.
(c) Calculate the BUDGETED profit for the month just ended under:
(3 marks)
(10 marks)
The following data for the current year relate to a sterile pack purchased by the Goodheart Hospital:
90,000 units
£8
£25
H
A
Annual demand
Annual holding cost per unit
Cost of placing an order
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:
TA
4
PO
PA
(i) absorption costing;
(ii) marginal costing.
(a) Calculate the EOQ for:
(i) the current year
(ii) next year.
(4 marks)
(b) Calculate the total extra annual cost to the hospital for next year of ordering and holding stock of the sterile
packs.
(4 marks)
(c) Identify TWO major costs associated with each of the following:
(i) holding stock;
(ii) ordering stock.
(2 marks)
(10 marks)
11
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Dauntless Ltd aims to maximise its profits from the two products (X and Y) which it manufactures and sells. The
selling prices per unit for products X and Y are £220 and £206 respectively. At these prices the company can sell
all that it can produce. The following product cost data is available:
Product X
Product Y
£/unit
£/unit
Material L (£6 per litre)
30
36
Material M (£7·50 per litre)
45
30
Other variable costs
55
44
––––
––––
Total variable cost
130
110
––––
––––
In the first three months of next year the supply of material L will be limited to 24,000 litres. However in the second
three month period both material L and material M will be in short supply and each will be limited to 24,000 litres.
The company holds no stocks.
Required:
TI
A
(a) Determine the optimal production plan in units for the first three months of next year and the resultant total
contribution.
(4 marks)
PO
PA
The company’s management accountant has already carried out some preliminary calculations relating to the second
three month period. Using linear programming, she has determined that the optimal production plan for that quarter
involves a combination of product X and product Y.
(b) Determine the optimal production plan in units for the second three month period of next year and the
resultant total contribution.
(6 marks)
H
A
(10 marks)
TA
5
12
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H
A
PO
PA
TI
A
Formulae Sheet
End of Question Paper
13
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A
TA
H
A
PO
PA
Answers
179 of 298
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A
PO
PA
A
H
TA
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Part 1 Examination – Paper 1.2
Financial Information for Management
December 2004 Answers
2
A
3
C
4
A
Date
1st
4th
12th
19th
27th
PO
PA
A
Units
200
(150)
–––––
50
500
–––––
550
(200)
(300)
A
1
Average price (£)
20·00
20·00
H
A
A
C
A
B
A
C
A
D
B
A
B
A
C
C
B
A
B
D
D
C
A
D
C
D
TA
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
TI
A
Section A
26·60
26·00
26·00
26·00
£
4,000
(3,000)
–––––––
1,000
13,300
–––––––
14,300
(5,200)
(7,800)
Total value of issues = 3,000 + 5,200 + 7,800 = £16,000
5
B
(9,250 – 6,750) ÷ (5,000 – 3,000) = £1·25
6
A
7
C
Actual cost
Standard cost of actual production (8,500 x 15)
Total overhead variance
8
£
144,500
127,500
––––––––
17,000 Adverse
––––––––
A
17
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9
D
Actual cost
£
110,750
Actual hours at standard rate (9,200 x 12·50)
115,000
Variance (£)
4,250 F Rate
5,250 A Efficiency
Standard hours for actual production at
standard rate (2,195 x 4 x 12·50)
109,750
10 B
£
56,389
53,754
–––––––
2,635
–––––––
Actual expenditure
Absorbed cost (12,400 x 1·02 x 4·25)
Total under absorption
11 A
£
1,710
1,200
Opening WIP
Completion of opening WIP (300 x 0·40 x 10)
Units started and completed in the month
(2,000 – 300) x 10
Total value (2,000 units)
12 B
∑y = 17,500 + 19,500 + 20,500 + 18,500 + 17,000 = 93,000
PO
PA
∑x = 300 + 360 + 400 + 320 + 280 = 1,660
TI
A
17,000
–––––––
19,910
–––––––
a = (93,000 ÷ 5) – 29·53(1,660 ÷ 5) = 8,796·04
13 A
Direct materials
Direct labour (4 hours)
H
Total production cost
Non-production overheads (75 x 0·6)
A
Prime cost
Production overheads (4 x 12·50)
£
45
30
––––
75
50
––––
125
45
––––
170
––––
TA
Total cost
14 C
Maximum usage x Longest lead time = 520 x 15 = 7,800
15 C
16 B
Absorption costing profit
Less Increase in stock at fixed overhead cost per unit
(18,000 – 16,500) x 10
Marginal costing profit
£
40,000
(15,000)
–––––––
25,000
–––––––
17 A
18 B
Material
T (500 x 45)
V (200 x 40) + (200 x 52)
Total relevant cost
£
22,500
18,400
–––––––
40,900
–––––––
18
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19 D
£
1,200
800
––––––
2,000
––––––
Opportunity cost now
Cost of disposal in one year’s time
20 D
21 C
Profits maximised when Marginal revenue (MR) = Marginal cost (MC)
MR = 40 – 0·06Q
MC = 10
MR = MC
Therefore 10 = 40 – 0·06Q
Q = 30 ÷ 0·6 = 500
Price (P) = 40 – 0·03(500) = 25
22 A
Profit = Total revenue (TR) – Total cost (TC)
When P = 31 then 31 = 40 – 0·03Q and Q = 300
Profit
PO
PA
23 D
CPU = £27
Contribution to sales ratio = 45%
Selling price = 27 ÷ 0·45 = £60
Margin of safety in units = 13,500 ÷ 60 = 225
Break-even point (BEP) = 1,000 – 225 = 775 units
At BEP: total contribution = total fixed costs
Total fixed costs = 775 x 27 = £20,925
TI
A
£
9,300
(6,500)
–––––––
2,800
–––––––
TR = P x Q = 31 x 300 =
TC = 3,500 + (10 x 300) =
H
TA
25 D
P = 95,000 + 0·4X + 0·3Y
X = 46,000 + 0·1Y
Y = 30,000 + 0·2X
A
24 C
X = 46,000 + 0·1(30,000 + 0·2X) = 46,000 + 3,000 + 0·02X
0·98X = 49,000 and X = 50,000
Y = 30,000 + 0·2(50,000) = 40,000
P = 95,000 + 0·4(50,000) + 0·3(40,000) = 127,000
19
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Section B
1
(a)
Litres
80,000
Raw materials input
Conversion costs
–
–––––––
80,000
–––––––
Process X Account
£
158,800
Joint products (W1)
Product A
Product B
133,000
Normal loss (W2)
Abnormal loss (W3)
––––––––
291,800
––––––––
Litres
£
44,700
29,800
4,000
1,500
–––––––
80,000
–––––––
141,550
141,550
3,000
5,700
––––––––
291,800
––––––––
Cost per equivalent litre (EL):
Output (joint products combined)
Abnormal loss
Total work done
Costs arising
Less: Normal loss (scrap value)
Cost per equivalent litre:
Materials and conversion (288,800 ÷ 76,000)
Selling price
£/litre
A
B
8
12
£3·80
Further
processing
cost
£/litre
2
3
Net
realisable
value
£/litre
6
9
PO
PA
Workings:
W1 Product
TI
A
Materials and conversion
EL
74,500
1,500
–––––––
76,000
–––––––
£
291,800
(3,000)
––––––––
288,800
––––––––
Production
(ratio 3:2)
litres
44,700
29,800
Net realisable
value of
production
£
268,200
268,200
Total joint production cost (A + B) = 74,500 litres at £3·80 = £283,100
Apportioned A:B in the ratio 268,200:268,200 (= 1:1)
Product A = £141,550 and Product B = £141,550
A
W2 5% of 80,000 = 4,000 litres at 75p per litre = £3,000
H
W3 5,500 – 4,000 = 1,500 litres at £3·80 per litre = £5,700
An abnormal gain occurs when the actual loss is less than the normal loss expected. In other words the actual output of
good production is higher than would normally be expected from the given level of input.
The abnormal gain is shown as a debit entry in the process account.
The abnormal gain is valued at its full process cost.
(a)
Calculations for the current year:
TA
(b)
2
(i)
Contribution per unit £50 x (75 ÷ 25) = £150
(ii)
Total contribution
(5,000 x £150)
Less Total fixed costs (5,000 x £70)
£’000
750
(350)
––––
400
––––
Total profit
(b)
Calculations for next year:
Selling price
Less Variable cost
50 x (100 ÷ 25) x 1·08
(50 x 1·12)
Contribution
Total fixed costs
(5,000 x £70) x 1·12
Target/required profit [as per (a)(ii)]
Required contribution for next year
£/unit
216
(56)
––––
160
––––
£’000
392
400
––––
792
––––
Number of units required = (792,000 ÷ 160) = 4,950 units.
20
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3
(c)
A mixed or semi-variable cost is one that is partly fixed and partly variable in behaviour. An example would be power costs
(gas or electricity, for instance) which consist of a fixed charge irrespective of the number of units of power consumed and a
variable charge based on the number of units of power consumed.
For cost-volume-profit analysis the fixed and variable elements need to be separately identified by using, for example, the high
low method or linear regression. Each would then be considered along with the other variable and other fixed costs in the
analysis.
(a)
Sales variances:
Actual sales units at actual selling price
Actual sales units at standard selling price (46,000 x £15)
Sales price variance
Sales volume profit variance: (46,000 – 45,000) x £(15 – 9)
£
678,500
690,000
––––––––
11,500 A
––––––––
6,000 F
––––––––
The person (or persons) who should receive the information generated by any system in an organisation should be the person
with responsibility for that aspect or part of the business to which the information relates. In the case of sales variance
information, it would be the person responsible for sales in the organisation. This could be the sales manager or marketing
manager. In a large divisionalised company it may be the divisional manager. A summary of the sales and cost variances
would be issued to senior management in the organisation.
(c)
(i)
TI
A
(b)
Absorption costing profit:
Gross profit 45,000 x £(15 – 9)
Less Non-production costs
£
270,000
(44,000)
––––––––
226,000
––––––––
(ii)
PO
PA
Absorption costing net profit
Marginal costing profit:
Total contribution 45,000 x £(15 – 4)
Less Fixed production costs (48,000 x £5)
Fixed non-production costs
Marginal costing net profit
£
495,000
(240,000)
(44,000)
––––––––
211,000
––––––––
£
226,000
A
Alternative answer:
Absorption costing net profit [as above in (i)]
Deduct Increase in stocks at standard fixed
production cost per unit
(3,000 units at £5 per unit)
H
(15,000)
––––––––
211,000
––––––––
4
(a)
TA
Marginal costing net profit
(i)
EOQ for the current year = [(2 x 25 x 90,000) ÷ 8]0·5 = 750 units
(ii)
EOQ for next year = [(2 x 36 x 90,000) ÷ 8]0·5 = 900 units
(b)
Annual
holding cost
£
Current year
(750 ÷ 2) x 8
(90,000 ÷ 750) x 25
3,000
Next year
(900 ÷ 2) x 8
(90,000 ÷ 900) x 36
3,600
Annual
ordering cost
£
3,000
3,600
Total extra cost of holding and ordering stock for next year
(compared with current year)
21
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Annual
total cost
£
3,000
3,000
––––––
6,000
––––––
3,600
3,600
––––––
7,200
––––––
£1,200
TAHA POPATIA
(c)
(a)
Product X
90
5
18
1st
Contribution per unit (£)
Litres of Material L per unit
Contribution per litre of Material L
Ranking
Product Y
96
6
16
2nd
Optimal production plan for first three months of next year is to produce and sell 4,800 units of Product X (24,000 litres ÷
5 litres/unit) giving a total contribution of £432,000 (4,800 units at £90 per unit).
Let x = the number of units of product X
and y = the number of units of product Y
Material L
5x + 6y ≤ 24,000
Material M
6x + 4y ≤ 24,000
Optimal point is the intersection of
and
5x + 6y = 24,000 ……….(1)
6x + 4y = 24,000 ……….(2)
Solving these simultaneously gives:
(1) – (2)
30x + 36y = 144,000
30x + 20y = 120,000
––––––––––––––––––––
16y = 24,000
y = 1,500
and x = 3,000
PO
PA
(1) X 6
(2) X 5
TI
A
Formulation of constraints:
A
The optimal production plan for the second three months of next year is to produce 3,000 units of product X and 1,500 units
of product Y. This will give a resultant total contribution of [(3,000 x 90) + (1,500 x 96)] = £414,000.
H
(b)
TA
5
Any two for each of the following:
(i) Interest on net working capital, costs of storage space, insurance costs, obsolescence, pilferage and deterioration.
(ii) Costs of contacting supplier to place an order, costs associated with checking goods received and transport costs.
22
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Part 1 Examination – Paper 1.2
Financial Information for Management
December 2004 Marking Scheme
Marks
Section A
Each of the 25 questions in this section is worth 2 marks
50
–––
Section B
1
(a) Inputs into process
Normal loss
Abnormal loss
Joint products
1
2
1
3
–––
7
(b)
Actual loss less than normal loss
Debit entry in process account
Valuation at full process cost
1
1
1
–––
(a)
(b)
Contribution per unit
Total fixed costs
Required contribution
Number of units
Partly fixed/partly variable
Example
Separation of fixed/variable elements
1
2
–––
3
2
1
1/
2
1/
–––2
4
1
1
1
–––
3
–––
10
–––
3
(a)
TA
H
A
(c)
Contribution per unit
Total profit
PO
PA
2
TI
A
3
–––
10
–––
Sales price variance
Sales volume profit variance
(b)
General principle/suggested person(s)
(c)
Absorption costing profit
Marginal costing profit
2
2
–––
4
3
1
2
–––
3
–––
10
–––
23
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Marks
4
(a)
(i)
(ii)
EOQ this year
EOQ next year
2
2
–––
4
(b)
Annual holding costs
Annual ordering costs
2
2
–––
4
1/
2
(a)
Contribution per unit
Contribution per litre (L)
Optimal units for product X
Resultant contribution
mark for each of four costs identified
2
–––
10
–––
1
1
1
1
–––
4
3
2
1
–––
6
–––
10
–––
A
PO
PA
TI
A
Equations/formulations
Optimal units for products X and Y
Resultant contribution
H
(b)
TA
5
(c)
24
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Paper 1.2
TI
A
Financial
Information for
Management
PO
PA
PART 1
FRIDAY 10 JUNE 2005
TA
Time allowed 3 hours
H
A
QUESTION PAPER
This paper is divided into two sections
Section A
ALL 25 questions are compulsory and MUST be
answered
Section B
ALL FIVE questions are compulsory and MUST be
answered
Formulae Sheet is on page 14
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
The Association of Chartered Certified Accountants
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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
Four lines representing expected costs and revenue have been drawn on a break-even chart:
A
£
B
C
D
TI
A
Output
0
Line A
B
Line B
C
Line C
D
Line D
A
Four lines have been labelled as J, K, L and M at different levels of output on the following profit-volume chart:
H
£
TA
2
A
PO
PA
Which line represents total variable cost?
M
Output
0
L
J
K
Which line represents the total contribution at the corresponding level of output?
A
Line J
B
Line K
C
Line L
D
Line M
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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
125 units
£
1,000
1,750
2,475
3,225
Cost type
T1
T2
T3
T4
Total cost for
180 units
£
1,260
2,520
2,826
4,644
4
A
T1 and T3
B
T1 and T4
C
T2 and T3
D
T2 and T4
TI
A
Which two cost types would be classified as being semi-variable?
A company manufactures and sells a single product. The following data relate to a weekly output of 2,880 units:
£ per unit
PO
PA
Selling price
Less costs:
Variable production
Other variable
Fixed
£ per unit
80
30
10
25
—–
Profit
(65)
—–
15
—–
5
B
1,440
C
1,800
D
4,800
H
1,900
TA
A
A
What is the weekly break-even point (in units)?
An organisation manufactures a single product which is sold for £60 per unit. The organisation’s total monthly fixed
costs are £54,000 and it has a contribution to sales ratio of 40%. This month it plans to manufacture and sell
4,000 units.
What is the organisation’s margin of safety this month (in units)?
A
1,500
B
1,750
C
2,250
D
2,500
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6
An organisation is using linear regression analysis to establish an equation that shows a relationship between
advertising expenditure and sales. It will then use the equation to predict sales for given levels of advertising
expenditure. Data for the last five periods are as follows:
Period
number
Advertising
expenditure
£000
17
19
24
22
18
1
2
3
4
5
Sales
£000
108
116
141
123
112
9
Σy
£100,000
n
5
B
£100,000
£600,000
5
C
£600,000
£100,000
10
D
£100,000
£600,000
10
A
+ 1·0
B
+ 0·4
C
– 0·6
D
– 1·0
PO
PA
Which of the following correlation coefficients indicates the weakest relationship between two variables?
A
Which of the following statements is NOT correct?
A
Bar codes are only used by retailing organisations.
B
Optical mark recognition is used by some educational organisations to mark multiple choice examination
questions.
C
Magnetic ink character recognition is used in the banking industry.
D
The keyboard is an input device used by many different types of organisation.
H
8
Σx
£600,000
TA
7
A
TI
A
What are the values of ‘Σx’, ‘Σy’ and ‘n’ that need to be inserted into the appropriate formula?
Which of the following statements are correct?
(i)
Strategic information is mainly used by senior management in an organisation.
(ii) Productivity measurements are examples of tactical information.
(iii) Operational information is required frequently by its main users.
A
(i) and (ii) only
B
(i) and (iii) only
C
(ii) and (iii) only
D
(i), (ii) and (iii)
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10 A company manufactures two products P1 and P2 in a factory divided into two cost centres, X and Y. The following
budgeted data are available:
Cost centre
Allocated and apportioned fixed
overhead costs
Direct labour hours per unit:
Product P1
Product P2
X
Y
£88,000
£96,000
3·0
2·5
1·0
2·0
Budgeted output is 8,000 units of each product. Fixed overhead costs are absorbed on a direct labour hour basis.
What is the budgeted fixed overhead cost per unit for Product P2?
£10
B
£11
C
£12
D
£13
TI
A
A
PO
PA
11 A manufacturing company uses a machine hour rate to absorb production overheads, which were budgeted to be
£130,500 for 9,000 machine hours. Actual overheads incurred were £128,480 and 8,800 machine hours were
recorded.
What was the total under absorption of production overheads?
£880
B
£900
C
£2,020
D
£2,900
A
A
H
12 Which of the following would NOT be classified as a service cost centre in a manufacturing company?
Product inspection department
B
Materials handling department
C
Maintenance department
D
Stores
TA
A
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13 The following data relate to material QQ2 for last month:
Opening stock
Purchases:
3rd
17th
Issues:
12th
19th
300kg
valued at
£
2,700
500kg
400kg
for
for
5,500
4,200
600kg
300kg
Using the LIFO valuation method, what was the value of the closing stock for QQ2 last month?
A
£2,700
B
£2,850
C
£3,150
D
£3,300
TI
A
14 A company operates a job costing system. Job number 605 requires £300 of direct materials and £400 of direct
labour. Direct labour is paid at the rate of £8 per hour. Production overheads are absorbed at a rate of £26 per direct
labour hour and non-production overheads are absorbed at a rate of 120% of prime cost.
A
£2,000
B
£2,400
C
£2,840
D
£4,400
PO
PA
What is the total cost of job number 605?
A
The following information relates to questions 15 and 16:
H
A company operates a process costing system using the first in first out (FIFO) method of valuation. No losses occur in the
process.
TA
The following data relate to last month:
Opening work in progress
Completed during the month
Closing work in progress
Units
100
900
150
Degree of completion
60%
Value
£680
48%
The cost per equivalent unit of production for last month was £12.
15 What was the value of the closing work in progress?
A
£816
B
£864
C
£936
D
£1,800
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16 What was the total value of the units completed last month?
A
£10,080
B
£10,320
C
£10,760
D
£11,000
17 A company’s budgeted sales for last month were 10,000 units with a standard selling price of £20 per unit and a
contribution to sales ratio of 40%. Last month actual sales of 10,500 units with total revenue of £204,750 were
achieved.
What were the sales price and sales volume contribution variances?
Sales volume contribution variance (£)
4,000 favourable
B
5,250 adverse
4,000 adverse
C
5,000 adverse
4,000 favourable
D
5,000 adverse
4,000 adverse
TI
A
A
Sales price variance (£)
5,250 adverse
The following data relate to last month:
Actual hours worked
Budgeted hours
Standard hours for actual production
PO
PA
18 A company operates a standard absorption costing system. The standard fixed production overhead rate is £15 per
hour.
5,500
5,000
4,800
B
£7,500 favourable
C
£10,500 adverse
D
£10,500 favourable
H
£7,500 adverse
TA
A
A
What was the fixed production overhead capacity variance?
19 A contract is under consideration which requires 600 labour hours to complete. There are 350 hours of spare labour
capacity. The remaining hours for the contract can be found either by weekend overtime working paid at double the
normal rate of pay or by diverting labour from the manufacture of product QZ. If the contract is undertaken and labour
is diverted, then sales of product QZ will be lost. Product QZ takes three labour hours per unit to manufacture and
makes a contribution of £12 per unit. The normal rate of pay for labour is £9 per hour.
What is the total relevant cost of labour for the contract?
A
£1,000
B
£2,250
C
£3,250
D
£4,500
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20 A company purchased a machine several years ago for £50,000. Its written down value is now £10,000. The
machine is no longer used on normal production work and it could be sold now for £8,000.
A one-off contract is being considered which would make use of this machine for six months.
machine would be sold for £5,000.
After this time the
What is the relevant cost of the machine to the contract?
A
£2,000
B
£3,000
C
£5,000
D
£10,000
21 A company, which manufactures four components (A, B, C and D) using the same machinery, aims to maximise
profit. The following information is available:
Component
B
C
D
60
64
70
68
100
4
120
7
130
5
110
6
TI
A
Variable production cost per unit (£)
Purchase cost per unit from
an outside supplier (£)
Machine hours per unit to manufacture
A
PO
PA
As it has insufficient machine hours available to manufacture all the components required, the company will need to
buy some units of one component from the outside supplier.
B
Component B
C
Component C
D
Component D
H
Component A
TA
A
A
Which component should be purchased from the outside supplier?
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22 A company has three branches (X, Y and Z) to which the following budgeted information relates:
Branch
X
£000
200
——
60
(35)
——
25
——
Sales
Contribution
Less: Fixed costs
Profit/(loss)
Branch
Y
£000
200
——
50
(35)
——
15
——
Branch
Z
£000
200
——
20
(30)
——
(10)
——
Total
£000
600
——
130
(100)
——
30
——
60% of the total fixed costs are general overheads. General overheads are apportioned to the branches on the basis
of sales value. The other fixed overheads are specific to each branch and are avoidable if a branch closes down.
£10,000
B
£20,000
C
£40,000
D
£50,000
PO
PA
A
TI
A
If branch Z is closed down and the sales of the other two branches remained the same, what would be the revised
budgeted profit for the company?
23 Reginald is the manager of production department M in a factory which has ten other production departments. He
receives monthly information that compares planned and actual expenditure for department M. After department M,
all production goes into other factory departments to be completed prior to being despatched to customers. Decisions
involving capital expenditure in department M are not taken by Reginald.
Which of the following describes Reginald’s role in department M?
A cost centre manager
B
An investment centre manager
C
A profit centre manager
D
A revenue centre manager
TA
H
A
A
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The following information relates to questions 24 and 25
A company manufactures and sells two products (X and Y) which have contributions per unit of £8 and £20 respectively.
The company aims to maximise profit. Two materials (G and H) are used in the manufacture of each product. Each
material is in short supply – 1,000 kg of G and 1,800 kg of H are available next period. The company holds no stocks
and it can sell all the units produced.
The management accountant has drawn the following graph accurately showing the constraints for materials G and H.
Product Y
(units)
Material G
TI
A
100
90
PO
PA
Material H
0
125
Product X
(units)
150
Material G
10
Material H
20
B
10
10
C
20
20
D
20
10
TA
H
A
A
24 What is the amount (in kg) of material G and material H used in each unit of product Y?
25 What is the optimal mix of production (in units) for the next period?
A
Product X
0
Product Y
90
B
50
60
C
60
50
D
125
0
(50 marks)
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Section B – ALL FIVE questions are compulsory and MUST be attempted
1
Saphir Ltd operates a process which creates two joint products, X and Y, in the ratio of 7 : 5 by weight. No stocks
of work in progress are held in the process and there is a normal process loss equal to 5% of input. Losses have a
realisable value of £2 per kg.
The following information relates to the process for last month:
10,000 kg of raw materials with a total cost of £18,750 were input into the process and the direct labour costs were
£50,000. Overheads were absorbed at a rate of 140% of direct labour. The actual loss was 400 kg.
Joint production costs are apportioned to products using the sales value method. Selling prices of the joint products
are:
Product
X
Y
Selling price per unit
£25·00
£37·50
Required:
(2 marks)
(10 marks)
Murgatroyd Ltd, which manufactures a single product, uses standard absorption costing. A summary of the standard
product cost is as follows:
£ per unit
15
20
12
A
Direct materials
Direct labour
Fixed overheads
H
Budgeted and actual production for last month were 10,000 units and 9,000 units respectively. The actual costs
incurred were:
TA
2
PO
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(b) Explain briefly the characteristics of a by-product.
TI
A
(a) Prepare the process account for last month in which both the output weight and value for each of the joint
products are shown.
(8 marks)
Direct materials
Direct labour
Fixed overheads
£
138,000
178,000
103,000
Required:
(a) Prepare a statement that reconciles the standard cost of actual production with its actual cost for last month
and 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 for
2·5 litres of the material, at £6 per litre, to be used in each unit of product.
(b) Provide an appropriate breakdown of the total direct materials cost variance included in your statement
in (a).
(3 marks)
(c) Explain who in the company should be involved in setting:
(i)
the standard price; and
(ii) the standard quantity for direct materials.
(3 marks)
(10 marks)
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3
Jane plc purchases its requirements for component RB at a price of £80 per unit. Its annual usage of component
RB is 8,760 units. The annual holding cost of one unit of component RB is 5% of its purchase price and the cost of
placing an order is £12·50.
Required:
(a) Calculate the economic order quantity (to the nearest unit) for component RB.
(2 marks)
(b) Assuming that usage of component RB is constant throughout the year (365 days) and that the lead time
from placing an order to its receipt is 21 days, calculate the stock level (in units) at which an order should
be placed.
(2 marks)
(c) (i)
Explain the terms ‘stockout’ and ‘buffer stock’.
(ii) Briefly describe the circumstances in which Jane plc should consider having a buffer stock of component
RB.
(4 marks)
Archibald Ltd manufactures and sells one product. Its budgeted profit statement for the first month of trading is as
follows:
£
A
Gross profit
Less Fixed selling and distribution costs
PO
PA
Sales (1,200 units at £180 per unit)
Less: Cost of sales:
Less: Production (1,800 units at £100 per unit)
Less: Less Closing stock (600 units at £100 per unit)
H
Net profit
£
216,000
180,000
(60,000)
————
(120,000 )
————
96,000
(41,000 )
————
55,000
————
The budget was prepared using absorption costing principles. If budgeted production in the first month had been
2,000 units then the total production cost would have been £188,000.
Required:
TA
4
TI
A
(8 marks)
(a) Using the high-low method, calculate:
(i)
the variable production cost per unit; and
(ii) the total monthly fixed production cost.
(4 marks)
(b) If the budget for the first month of trading had been prepared using marginal costing principles, calculate:
(i)
the total contribution; and
(ii) the net profit.
(4 marks)
(c) Explain clearly the circumstances in which the monthly profit or loss would be the same using absorption or
marginal costing principles.
(2 marks)
(10 marks)
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Ella Ltd recently started to manufacture and sell product DG. The variable cost of product DG is £4 per unit and the
total weekly fixed costs are £18,000.
The company has set the initial selling price of product DG by adding a mark up of 40% to its total unit cost. It has
assumed that production and sales will be 3,000 units per week.
The company holds no stocks of product DG.
Required:
(a) Calculate for product DG:
(i) the initial selling price per unit; and
(ii) the resultant weekly profit.
(3 marks)
The management accountant has established that a linear relationship beween the unit selling price (P in £) and the
weekly demand (Q in units) for product DG is given by:
P = 20 – 0·002Q
TI
A
The marginal revenue (MR in £ per unit) is related to weekly demand (Q in units) by the equation:
MR = 20 – 0·004Q
PO
PA
(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)
H
A
(12 marks)
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Formulae Sheet
End of Question Paper
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Answers
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Part 1 Examination – Paper 1.2
Financial Information for Management
June 2005 Answers
2
C
3
A
PO
PA
C
T1
T2
T3
T4
Cost
Total cost per unit (£)
Total cost per unit (£)
(125 units)
(180 units)
8·00
7·00
14·00
14·00
19·80
15·70
25·80
25·80
types T2 and T4 are variable and T1 and T3 are semi-variable.
A
1
H
C
C
A
C
B
B
B
A
D
D
A
A
B
C
B
C
A
B
C
B
D
B
A
A
A
TA
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
TI
A
Section A
4
C
Contribution per unit (CPU) = (80 – 30 – 10) = £40
Total fixed cost = 2,880 × 25 = £72,000
Break-even point = 72,000 ÷ 40 = 1,800 units
5
B
CPU = 0·40 × 60 = £24
Break-even point = 54,000 ÷ 24 = 2,250 units
Margin of safety = 4,000 – 2,250 = 1,750 units
6
B
Σx = Σ Advertising expenditure = 100,000
Σy = Σ Sales = 600,000
n = number of pairs of data = 5
7
B
8
A
9
D
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10 D
Total hours in cost centre X = 8,000 × (3 + 2·5) = 44,000
Total hours in cost centre Y = 8,000 × (1 + 2) = 24,000
Overhead rate (X) = £88,000 ÷ 44,000 = £2 per hour
Overhead rate (Y) = £96,000 ÷ 24,000 = £4 per hour
Overhead cost per unit (P2) = (2·5 × 2) + (2·0 × 4) = £13
11 A
Actual overheads
Absorbed overhead (8,800 × 14·50)
Under absorption
£
128,480
127,600
880
12 A
Date
1st
3rd
12th
17th
19th
Units
300
500
(600)
——–
200
400
(300)
——–
300
——–
£ per unit
9
11
£
2,700
5,500
(6,400)
———
1,800
4,200
(3,150)
———
2,850
———
9
10·5
10·5
14 C
£
700
1,300
———
2,000
840
———
2,840
———
Total cost
15 B
PO
PA
Prime cost (300 + 400)
Production overheads (50 × £26)
Total production cost
Non-production overheads (1·20 × 700)
[5,500 + 900]
(150 × 0·48) equivalent units × £12 = £864
16 C
TA
H
A
Units started and finished last month (900 – 100) = 800 × £12
Opening work in progress (WIP) value
Work done to complete opening WIP (100 × 0·40) × £12
17 A
TI
A
13 B
Price variance:
Actual sales revenue
Actual sales units at standard selling price (10,500 × £20)
Sales price variance
Volume variance (500 units × £20 × 0·40)
£
9,600
680
480
———
10,760
———
£
204,750
210,000
————
5,250
———
4,000
18 B
Capacity variance (5,000 – 5,500) hours at £15 per hour
7,500
19 C
250 hours at [£9 per hour + the opportunity cost £(12 ÷ 3) per hour] = £3,250
The incremental labour cost of weekend working is £4,500 (250 × £18) and
being higher than £3,250 is therefore not relevant.
20 B
Opportunity cost now
Realisable value in six months
Relevant cost
21 D
Additional cost of buying in (compared with manufacture) per hour:
A
B
C
D
£10
£8
£12
£7
Buy in component with the lowest additional cost per hour (limiting factor).
A
F
F
£8,000
£5,000
£3,000
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22 B
Branch Z makes a net contribution (after specific branch fixed costs of £10,000) of £10,000.
Closing branch Z will leave a revised profit of £20,000 for the company.
23 A
24 A
1,000 kg of material G produces 100 units of product Y = 10 kg per unit
1,800 kg of material H produces 90 units of product Y = 20 kg per unit
25 A
Total contribution from:
£
A 90 units of Y (90 × £20)
1,800
B 50 units of X + 60 units of Y (50 × 8) + (60 × 20) 1,600
C 60 units of X + 50 units of Y (60 × 8) + (50 × 20) 1,480
D 125 units of X (125 × 8)
1,000
Optimal mix is the one giving the highest total contribution (£1,800)
Section B
(a)
Process Account
Abnormal gain (W3)
100
–––––––
10,100
–––––––
Joint products (W1):
Product X
Product Y
1,450
––––––––
140,200
––––––––
Normal loss (W2)
PO
PA
Raw materials input
Direct labour
Overheads (140% of
direct labour)
£
18,750
50,000
70,000
Cost per kg
Costs arising (18,750 + 50,000 + 70,000)
Less: Normal loss (realisable value)
Kg
£
5,600
4,000
———
9,600
67,200
72,000
————
139,200
500
–––––––
10,100
–––––––
1,000
––––––––
140,200
––––––––
TI
A
Kg
10,000
£
138,750
(1,000)
————
137,750
————
X
Y
H
Workings:
W1
Product
A
Cost per kg:
£137,750 ÷ (Normal yield from 10,000 kg)
= £137,750 ÷ (0·95 × 10,000) = £14·50
Selling price
£/kg
25·00
37·50
TA
1
Production
(ratio 7:5)
kg
5,600
4,000
Sales value of
production
£
140,000
150,000
Total joint production cost (X + Y) = 9,600 kg at £14·50 = £139,200
Apportioned A : B in the ratio 140,000:150,000 (= 14:15)
Product X = £67,200 and Product Y = £72,000
(b)
W2
5% of 10,000 = 500 kg at £2 per kg = £1,000
W3
(500 – 400) = 100 kg at £14·50 per kg = £1,450
A by-product is an output from a process that occurs incidentally to the main production and is insignificant in value terms.
The inputs to a process are intended to create the main product or products but sometimes quite incidentally a by-product is
also created, which has a relatively low value compared to the main products.
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2
(a)
£
Standard cost of actual production
9,000 units × £(15 + 20 + 12)
Total variances:
Direct materials (W1)
Direct labour (W2)
Fixed overheads (W3)
£
423,000
3,000 A
2,000 F
5,000 F
————
Actual cost
Workings:
W1
Actual
£
138,000
Standard cost of actual production (9,000 × £15)
135,000
W2
Actual
178,000
Standard cost of actual production (9,000 × £20)
180,000
W3
Actual
103,000
Standard cost of actual production (9,000 × £20)
108,000
Actual quantity × actual cost
138,000
4,000 F
————
419,000
————
Variance (£)
3,000 A
TI
A
2,000 F
(b)
Actual quantity × standard cost
(24,000 × £6)
Usage
9,000 A
135,000
The standard price per litre is set by the person in the organisation with the specialist knowledge about the prices
charged by suppliers for the raw materials used by Murgatroyd Ltd. This would be the manager responsible for
purchasing (sometimes referred to as the Buying Manager or the Procurement Manager).
(ii)
The standard quantity per unit is set by the person in the organisation with the specialist knowledge about the product
specification and the amount of each raw material that should be used in the manufacture of one unit of the product.
This would be a manager in the production (manufacturing) function or technical department in Murgatroyd Ltd.
H
A
(i)
TA
3
Price
6,000 F
144,000
Standard quantity for actual production
X standard cost [(as in (a)]
(c)
PO
PA
5,000 F
(a)
EOQ = [(2 × 12·50 × 8,760) ÷ (0·05 × 80)]0·5 = 234 units
(b)
Usage per day = 8,760 ÷ 365 = 24
Re-order level = 24 × 21 = 504 units
(c)
(i)
A stockout occurs when a company runs out of stock. There are costs associated with this – lost contribution from lost
sales, for example. In order to avoid a stockout the company could set a buffer stock – in effect a safety level of stock
to cover emergency situations such as demand and/or lead times exceeding their average levels. The holding of a buffer
stock involves an additional cost.
(ii)
Jane plc should consider having a buffer stock if either the usage of component RB starts to fluctuate from period to
period (at present it is constant) and/or the lead time starts to fluctuate from its present constant level of 21 days.
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4
(a)
(i)
Units
Higher level
Lower level
Difference
2,000
1,800
———
200
———
Total cost
£
188,000
180,000
————
8,000
————
Variable production cost per unit = 8,000 ÷ 200 = £40
(ii)
Total production cost for 2,000 units
Less total variable production cost (2,000 × 40)
Total monthly fixed production cost
(b)
(i)
Contribution per unit (180 – 40) = £140
Total contribution from sales = 1,200 × 140 = £168,000
(ii)
£
168,000
(149,000)
————
19,000
————
TI
A
Total contribution [as in (b)(i)]
Less Total fixed costs (108,000 + 41,000)
Net profit
When the number of units produced and the number of units sold in a month are identical, the net profit or loss determined
by using absorption and marginal costing principles will also be the same. In other words the net profit or loss will be the
same when the opening and closing stocks for a month are unchanged.
(a)
(i)
Initial selling price = (variable + fixed cost per unit) + mark up of 40%
Initial selling price = [£4 + £(18,000 ÷ 3,000)] × 1·40 = £14
(ii)
Profit = 3,000 units × £4 profit per unit = £12,000
Profits are maximised when:
Marginal cost (MC) = Marginal revenue (MR)
MC = variable cost = 4
MR = 20 – 0·004Q
4 = 20 – 0·004Q
Q = 4,000 units
H
A
(b)
PO
PA
(c)
TA
5
£
188,000
(80,000)
————
108,000
————
P = 20 – 0·002 (4,000) = £12 = profit maximising price.
(c)
A penetration price is an initially low selling price of a product, whereas a skimming price policy is one where the initial selling
price is set high.
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Part 1 Examination – Paper 1.2
Financial Information for Management
June 2005 Marking Scheme
Marks
Section A
Each of the 25 questions in this section is worth 2 marks
50
–––
Section B
1
(a) Inputs into process
Normal loss
Abnormal gain
Joint products
11/2
11/2
2
3
–––
8
(b)
Incidental to main products
Insignificant in value terms
1
1
–––
2
–––
10
–––
(c)
TI
A
Purchasing management
Production management
3
1
–––
4
11/2
11/2
–––
3
11/2
11/2
–––
3
–––
10
–––
(a)
EOQ calculation
(b)
Stock level for re-ordering
(c)
(i)
Stockout
Buffer stock
(ii)
Variable demand and fluctuating lead time
2
H
3
Price variance
Usage variance
PO
PA
(b)
Each total variance 1 mark
Reconciliation statement
A
(a)
2
TA
2
1
1
2
–––
4
–––
8
–––
4
(a)
(i)
Variable production cost per unit
(ii)
Total monthly fixed production cost
2
2
–––
4
(b)
(i)
Total contribution
(ii)
Net profit
2
2
–––
4
(c)
Production = sales and/or opening stock = closing stock
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–––
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Marks
(a)
(i)
Initial selling price
(ii)
Resultant weekly profit
2
1
–––
3
(b)
Marginal cost (MC) = Marginal revenue (MR)
MC
Optimal quantity (via MC = MR)
Optimal price
1
1
3
2
–––
7
Penetration price
Skimming price
1
1
–––
A
PO
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TI
A
2
–––
12
–––
H
(c)
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Paper 1.2
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Financial
Information for
Management
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PART 1
FRIDAY 9 DECEMBER 2005
TA
Time allowed 3 hours
H
A
QUESTION PAPER
This paper is divided into two sections
Section A
ALL 25 questions are compulsory and MUST be
answered
Section B
ALL FIVE questions are compulsory and MUST be
answered
Formulae Sheet is on page 13
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
The Association of Chartered Certified Accountants
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Section A – ALL 25 questions are compulsory and MUST be attempted.
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.
Each question within this section is worth 2 marks.
1
Up to a given level of activity in each period the purchase price per unit of a raw material is constant. After that point
a lower price per unit applies both to further units purchased and also retrospectively to all units already purchased.
Which of the following graphs depicts the total cost of the raw materials for a period?
Units
C
£
0
Units
A
The following breakeven chart has been drawn showing lines for total cost (TC), total variable cost (TVC), total fixed
cost (TFC) and total sales revenue (TSR):
TSR
H
£
TC
TA
2
D
£
Units
0
Units
0
PO
PA
0
B
£
TI
A
A
£
TVC
TFC
Units
0
675
1,200
1,500
1,700
What is the margin of safety at the 1,700 units level of activity?
A
200 units
B
300 units
C
500 units
D
1,025 units
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3
A company manufactures a single product with a variable cost per unit of £22. The contribution to sales ratio is 45%.
Monthly fixed costs are £198,000.
What is the breakeven point (in units)?
4
A
4,950
B
9,000
C
11,000
D
20,000
An organisation has the following total costs at two activity levels:
Activity level (units)
Total costs (£)
17,000
140,000
22,000
170,000
5
A
£155,000
B
£158,000
C
£160,000
D
£163,000
PO
PA
What is the total cost at an activity level of 20,000 units?
TI
A
Variable cost per unit is constant in this range of activity and there is a step up of £5,000 in the total fixed costs when
activity exceeds 18,000 units.
The following statements relate to financial accounting or to cost and management accounting:
A
(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.
6
(i) and (ii) only
B
(i) and (iii) only
C
(ii) and (iii) only
D
(i), (ii) and (iii)
TA
A
H
Which of the statements are correct?
The following terms relate to computers:
(i) Application package
(ii) Operating system
(iii) Spreadsheet
Which of the above terms are examples of computer software?
A
(i) and (ii) only
B
(i) and (iii) only
C
(ii) and (iii) only
D
(i), (ii) and (iii)
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7
An organisation’s stock records for last month show the following transactions in respect of one item:
Date
1st
5th
13th
20th
28th
Receipts
(units)
Issues
(units)
Stock
(units)
300
200
800
500
300
100
600
300
200
The opening stock was valued at a total cost of £9,300 and all receipts on the 13th were purchased at a cost of £33
per unit.
The organisation uses the weighted average method of valuation and calculates a new weighted average after each
stores receipt.
£9,500
B
£9,700
C
£9,750
D
£9,900
A company uses 9,000 units of a component per annum. The component has a purchase price of £40 per unit and
the cost of placing an order is £160. The annual holding cost of one component is equal to 8% of its purchase price.
PO
PA
8
A
TI
A
What was the total value of the closing stock?
B
671
C
949
D
1,342
H
530
A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model.
TA
9
A
A
What is the Economic Order Quantity (to the nearest unit) of the component?
What would be the effects on the EOQ and the total annual ordering cost of an increase in the annual cost of
holding one unit of the component in stock?
A
EOQ
Lower
Total annual ordering cost
Higher
B
Higher
Lower
C
Lower
No effect
D
Higher
No effect
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10 Consider the following statements:
(i) Job costing is only applicable to service organisations.
(ii) Batch costing can be used when a number of identical products are manufactured together to go into finished
stock.
Is each statement TRUE or FALSE?
A
Statement (i)
False
Statement (ii)
False
B
False
True
C
True
True
D
True
False
A
£7,000
B
£7,500
C
£9,500
D
£16,500
PO
PA
What was the total under absorption of overheads last month?
TI
A
11 An organisation absorbs overheads on a machine hour basis. The planned level of activity for last month was 30,000
machine hours with a total overhead cost of £247,500. Actual results showed that 28,000 machine hours were
recorded with a total overhead cost of £238,000.
12 The following information relates to a manufacturing company for next period:
Units
14,000
12,000
Fixed production costs
Fixed selling costs
A
Production
Sales
£
63,000
12,000
H
Using absorption costing the profit for next period has been calculated as £36,000.
A
£25,000
B
£27,000
C
£45,000
D
£47,000
TA
What would the profit for next period be using marginal costing?
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13 Information relating to two processes (F and G) was as follows:
Process
F
G
Normal loss as
% of input
8
5
Input
litres
65,000
37,500
Output
litres
58,900
35,700
For each process, was there an abnormal loss or an abnormal gain?
A
Process F
Abnormal gain
Process G
Abnormal gain
B
Abnormal gain
Abnormal loss
C
Abnormal loss
Abnormal gain
D
Abnormal loss
Abnormal loss
TI
A
14 Last month 27,000 direct labour hours were worked at an actual cost of £236,385 and the standard direct labour
hours of production were 29,880. The standard direct labour cost per hour was £8·50.
A
£17,595 Adverse
B
£17,595 Favourable
C
£24,480 Adverse
D
£24,480 Favourable
PO
PA
What was the labour efficiency variance?
15 Last month a company’s budgeted sales were 5,000 units. The standard selling price was £6 per unit with a standard
contribution to sales ratio of 60%. Actual sales were 4,650 units with a total revenue of £30,225
2,500
C
2,325
D
2,500
H
B
Sales volume contribution
£
1,260
TA
A
Sales price
£
2,325
A
What were the favourable sales price and adverse sales volume contribution variances?
1,260
2,100
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
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17 Which one of the following would be classified as indirect labour?
A
Assembly workers on a car production line
B
Bricklayers in a house building company
C
Machinists in a factory producing clothes
D
Forklift truck drivers in the stores of an engineering company
18 The following statements relate to the calculation of the regression line y = a + bx using the information on the
formulae sheet at the end of this examination paper:
(i) n represents the number of pairs of data items used
(ii) (∑ x)2 is calculated by multiplying ∑ x by ∑ x
(iii) ∑ xy is calculated by multiplying ∑ x by ∑y
(i) and (ii) only
B
(i) and (iii) only
C
(ii) and (iii) only
D
(i), (ii) and (iii)
PO
PA
A
TI
A
Which statements are correct?
19 The correlation coefficient (r) for measuring the connection between two variables (x and y) has been calculated as
0·6.
B
40%
C
60%
D
64%
H
36%
TA
A
A
How much of the variation in the dependent variable (y) is explained by the variation in the independent variable
(x)?
20 The following statements relate to relevant cost concepts in decision making:
(i) Materials can never have an opportunity cost whereas labour can.
(ii) The annual depreciation charge is not a relevant cost.
(iii) Fixed costs would have a relevant cost element if a decision causes a change in their total expenditure
Which statements are correct?
A
(i) and (ii) only
B
(i) and (iii) only
C
(ii) and (iii) only
D
(i), (ii) and (iii)
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21 A company is evaluating a project that requires 4,000 kg of a material that is used regularly in normal production.
2,500 kg of the material, purchased last month at a total cost of £20,000, are in stock. Since last month the price
of the material has increased by 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 (in
units) relating to last month is as follows:
Sales
J
K
6,000
4,000
Opening stock of
finished goods
100
400
Closing stock of
finished goods
300
200
TI
A
Product
Joint production costs last month were £110,000 and these were apportioned to joint products based on the number
of units produced.
£63,800
B
£64,000
C
£66,000
D
£68,200
A
A
PO
PA
What were the joint production costs apportioned to product J for last month?
TA
H
23 A company manufactures two products (L and M) using the same material and labour. It holds no stocks. Information
about the variable costs and maximum demands are as follows:
Material (£4 per litre)
Labour (£7 per hour)
Maximum monthly demand
Product L
£/unit
13
35
Units
6,000
Product M
£/unit
19
28
Units
8,000
Each month 50,000 litres of material and 60,000 labour hours are available.
Which one of the following statements is correct?
A
Material is a limiting factor but labour is not a limiting factor.
B
Material is not a limiting factor but labour is a limiting factor.
C
Neither material nor labour is a limiting factor.
D
Both material and labour are limiting factors.
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The following information relates to questions 24 and 25:
A company has established the following selling price, costs and revenue equations for one of its products:
Selling price (£ per unit) = 50 – 0·025Q
Marginal revenue (£ per unit) = 50 – 0·05Q
Total costs per month (£) = 2,000 + 15Q
Q represents the number of units produced and sold per month.
A
£15·00
B
£17·50
C
£25·00
D
£32·50
TI
A
24 At what selling price will monthly profits be maximised?
£4,000
C
£6,000
D
£12,000
(50 marks)
A
B
H
£1,000
TA
A
PO
PA
25 What would be the monthly profit if the selling price per unit was set at £20?
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Section B – ALL FIVE questions are compulsory and MUST be attempted.
1
Pointdextre Ltd, which manufactures and sells a single product, is currently producing and selling 102,000 units per
month, which represents 85% of its full capacity. Total monthly costs are £619,000 but at full capacity these would
be £700,000. Total fixed costs would remain unchanged at all activity levels up to full capacity. The normal selling
price of the product results in a contribution to sales ratio of 40%.
A new customer has offered to take a monthly delivery of 15,000 units at a price per unit 20% below the normal
selling price. If this new business is accepted, existing sales are expected to fall by one unit for every six units sold
to this new customer.
Required:
(a) For the current production and sales level, calculate:
(i)
(ii)
(iii)
(iv)
the
the
the
the
variable cost per unit;
total monthly fixed costs;
selling price per unit;
contribution per unit.
(6 marks)
TI
A
(b) Calculate the net increase or decrease in monthly profit which would result from acceptance of the new
business.
(4 marks)
(12 marks)
Partlet Ltd makes a product that passes through two manufacturing processes. A normal loss equal to 8% of the raw
material input occurs in Process I but no loss occurs in Process II. Losses have no realisable value.
A
All the raw material required to make the product is input at the start of Process I. The output from Process I each
month is input into Process II in the same month. Work in progress occurs in Process II only.
Process I
Raw material input
Conversion costs
Output to Process II
Process II
Opening work in progress
Conversion costs
Closing work in progress
H
Information for last month for each process is as follows:
TA
2
PO
PA
(c) In the context of decision making, explain the term ‘opportunity cost’ and illustrate your answer by reference
to Pointdextre Ltd.
(2 marks)
50,000 litres at a cost of £365,000
£256,000
47,000 litres
5,000 litres (40% complete for conversion costs) valued at £80,000
£392,000
2,000 litres (50% complete for conversion costs)
Required:
(a) Prepare the Process I account for last month.
(5 marks)
(b) Calculate in respect of Process II for last month:
(i) the value of the completed output; and
(ii) the value of closing work in progress.
(5 marks)
(c) If the losses in Process I were toxic and the company incurred costs in safely disposing of them, state how
the disposal costs associated with the normal loss would have been recorded in the Process I account. No
calculations are required.
(2 marks)
(12 marks)
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3
JWW Ltd manufactures two products, X and Y, and any quantities produced can be sold for £60 per unit and £25
per unit respectively. Variable costs of the two products are:
X
£ per unit
15
24
6
–––
45
–––
Materials (at £5 per kg)
Labour (at £6 per hour)
Other variable costs
Total
Y
£ per unit
5
3
5
–––
13
–––
Next month only 4,200 kg of material and 3,000 labour hours will be available.
The company holds no stocks and aims to maximise its profits each month.
Required:
(a) State the objective function and constraints in a form suitable for solving by linear programming.
(5 marks)
(9 marks)
£
11
24
18
Direct materials
Direct labour
Fixed production overhead
PO
PA
Ploverleigh Ltd, which manufactures a single product, uses standard absorption costing. The standard product cost
per unit is as follows:
Required:
£
142,700
291,300
230,800
H
Direct materials
Direct labour
Fixed production overhead
A
Budgeted and actual production for last month were 12,000 units and 12,500 units respectively. The actual costs
incurred last month were:
TA
4
(4 marks)
TI
A
(b) Determine the optimal production plan for next month (in units).
(a) Prepare a statement that reconciles the standard cost of actual production with its actual cost for last month
and 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 calculating
two sub variances.
(2 marks)
(c) If Ploverleigh Ltd uses standard marginal costing instead of standard absorption costing, explain how AND
why any of the three total variances calculated in (a) would be different and state clearly which, if any, of
the variances would remain unchanged. No calculations are required.
(3 marks)
(9 marks)
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Sangazure Ltd manufactures many different products in a factory that has two production cost centres (T and W) and
several service cost centres.
The total budgeted overhead costs (after the allocation, apportionment and reapportionment of service cost centre
costs), and other information for production cost centres T and W are as follows:
Cost centre
T
W
Budgeted
overheads
£780,000
£173,400
Basis of overhead
absorption
Machine hours
Direct labour hours
Budgeted activity
16,250 machine hours
14,450 direct labour hours
Required:
(a) Calculate the overhead absorption rates for cost centres T and W.
(2 marks)
The prime cost of product PP, one of the products made by Sangazure Ltd, is as follows:
£ per unit
10
14
21
TI
A
Direct material
Direct labour:
Cost centre T
Cost centre W
PO
PA
One unit of product PP takes 35 minutes of machine time in cost centre T. The direct labour in cost centre T is paid
£7 per hour and £6 per hour in cost centre W.
(b) Calculate the total production cost for one unit of PP.
(3 marks)
(c) Briefly explain why service cost centre costs need to be reapportioned to production cost centres. Which
method of reapportionment fully recognises the work that service cost centres do for each other?
(3 marks)
H
A
(8 marks)
TA
5
12
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TA
H
A
PO
PA
TI
A
Formulae Sheet
End of Question Paper
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TI
A
TA
H
A
PO
PA
Answers
226 of 298
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TI
A
PO
PA
A
H
TA
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Part 1 Examination – Paper 1.2
Financial Information for Management
December 2005 Answers
Section A
D
C
C
C
B
D
C
C
A
B
A
B
C
D
A
C
D
A
A
C
D
D
D
D
B
1
D
2
C
1,700 units – Breakeven level units (1,200) = 500 units
3
C
Contribution per unit = 22 ÷ 0·55 × 0·45 = £18
Breakeven point = 198,000 ÷ 18 = 11,000
4
C
Variable cost per unit = [(170,000 – 5,000) – 140,000)] ÷ (22,000 –17,000) = £5
Total fixed cost above 18,000 units = 170,000 – (22,000 × 5) = £60,000
Total cost of 20,000 units = (20,000 × 5) + 60,000 = £160,000
5
B
6
D
7
C
Weighted average after 13th = [(200 × 9,300 ÷ 300) + (600 × 33)] ÷ (200 + 600) = £32·50
Closing stock valuation = 300 × 32·50 = £9,750
8
C
EOQ = [(2 × 160 × 9,000) ÷ (0·08 × 40)]0·5 = 949
9
A
TA
H
A
PO
PA
TI
A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
10 B
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11 A
Absorption rate = 247,500 ÷ 30,000 = £8·25
Absorbed cost = 28,000 × 8·25 = £231,000
Actual cost =
£238,000
Under absorption =
£7,000
12 B
Marginal costing profit = 36,000 – (2,000 × 63,000 ÷ 14,000) = £27,000
13 C
Process F: expected output = 0·92 × 65,000 =
actual output =
∴ abnormal loss
Process G: expected output = 0·95 × 37,500 =
actual output =
∴ abnormal gain
Actual hours at standard rate (27,000 × 8·50)
Standard hours of production at standard rate
∴Labour efficiency variance is
Sales price variance:
Actual sales at standard price (4,650 × 6)
Actual sales at actual price
Favourable price variance
Adverse sales volume contribution variance:
350 units × (6 × 0·60)
16 C
1,260
H
Coefficient of determination = r2 = 0·6 × 0·6 = 0·36 = 36%
20 C
TA
18 A
£
27,900
30,225
–––––––
2,325
–––––––
A
17 D
21 D
4,000 × [(20,000 ÷ 2,500) × 1·025] = £32,800
22 D
Production (units):
J: (6,000 – 100 + 300) =
K: (4,000 – 400 + 200) =
19 A
£
229,500
253,980
––––––––
24,480 Favourable
––––––––
PO
PA
15 A
35,625
35,700
TI
A
14 D
59,800
58,900
6,200
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 factor
Labour required to meet maximum demand:
6,000 × (35 ÷ 7) + 8,000 × (28 ÷ 7) = 62,000 hours
Labour available:
60,000 hours
∴ Labour is a limiting factor
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24 D
Profits maximised when: marginal revenue (MR) = marginal cost (MC)
MR = 50 – 0·05Q
MC = 15
MR = MC
∴ 50 – 0·05Q = 15
and
Q = 700
P = 50 – (0·025 × 700) = £32·50
25 B
When P = 20
then
and
20 = 50 – 0·025Q
Q = 1,200
£
Total revenue (P × Q) = 1,200 × 20 = 24,000
Less total costs 2,000 + (15 × 1,200) = 20,000
––––––
∴Profit
4,000
––––––
Section B
(a)
Using the high-low method:
Units
120,000 (W1)
102,000
––––––––
18,000
––––––––
Total cost (£)
700,000
619,000
––––––––
81,000
––––––––
TI
A
1
Working (W1)
PO
PA
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
A
New business:
Selling price (0·80 × 7·50)
Less variable cost
H
(b)
TA
Contribution
Contribution from 15,000 units (15,000 × 1·50)
Less opportunity cost (15,000 ÷ 6) × £3·00
Net increase in contribution (and profit)
(c)
2
£ per unit
6·00
(4·50)
–––––
1·50
–––––
£
22,500
(7,500)
–––––––
15,000
–––––––
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) the
contribution from some existing sales. This lost contribution is an opportunity cost relevant to the decision.
(a)
Process I
Input
Conversion
Abnormal gain (W2)
Litres
50,000
1,000
–––––––
51,000
–––––––
£
365,000
256,000
13,500
––––––––
634,500
––––––––
Output (W1)
Normal loss (0·08 × 50,000)
Litres
47,000
4,000
£
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) = 1,000
Valuation (1,000 × 13·50) = £13,500
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(b)
Workings:
Cost per equivalent litre (EL):
Completion of opening WIP
Started and finished within the month (50,000 – 5,000)
Work done so far on closing WIP
Conversion
EL
3,000
45,000
1,000
–––––––
49,000
–––––––
∴Cost per EL = 392,000 ÷ 49,000 = £8
(c)
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
The disposal costs would be debited to the process account. Alternatively, they could be shown as a negative value on the
credit side of the account.
Let X = the number of units of product X
and Y = the number of units of product Y
Selling price
Less variable cost
Contribution
Product Y
£ per unit
25
(13)
––––
12
––––
Objective function:
Total contribution = 15X + 12Y
Constraints:
3X + Y ≤ 4,200
Material (£5 per kg)
Labour (£6 per hour)
4X + 0·5Y ≤ 3,000
X, Y ≥ 0
Non negative
PO
PA
Product X
£ per unit
60
(45)
––––
15
––––
TI
A
Contribution per unit:
A
Using a graphical approach, the constraints (solid lines) and the objective function (dotted line) can be shown as follows:
H
Y
units
6,000
TA
3
(i)
Labour
4,200 A
B
Material
750
0
C
600 750
X units
1,400
Note: the objective function line has been shown on the above graph for a total contribution of £9,000 (assumed). Thus 15X +
12Y = 9,000.
Therefore when X = 0, Y = (9,000 ÷ 12) = 750
and when Y = 0, X = (9,000 ÷ 15) = 600
The ‘feasible region’ is the area OABC shown on the graph. If the objective function line is moved away from the origin (at the
same gradient) the last point it reaches in the feasible region is point A which must therefore be the optimal point.
Therefore the optimal production is to produce and sell 4,200 units of product Y and no units of product X.
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An alternative approach would be to calculate the total contributions at points A, B and C shown on the graph and select the point
giving the highest total contribution, as follows:
Point A
Total contribution from 4,200 units of Y is (4,200 × £12) = £50,400
Point B
To find the units at this point, solve the following equations simultaneously:
3X +
Y = 4,200
… (1)
4X + 0·5Y = 3,000
… (2)
From (1)
Y = 4,200 – 3X
Substituting into (2)
4X + 0·5(4,200 – 3X) = 3,000
∴
4X + 2,100 – 1·5X = 3,000
∴
2·5X
= 900
∴
X = 360
Substituting into (1)
(3 × 360) + Y
= 4,200
∴
Y = 3,120
Total contribution from 360 units of X and 3,120 units of Y is (360 × £15) + (3,120 × £12) = £42,840
Point C
Total contribution from 750 units of X is (750 × £15) = £11,250
(a)
A
Workings:
W1
H
Actual cost
Standard cost of actual production
W2
Actual cost
£
662,500
PO
PA
Standard cost of actual production [12,500 × (11 + 24 + 18)]
Total variances:
Adverse
Favourable
£
£
Materials (W1)
5,200
Labour (W2)
8,700
Fixed overhead (W3)
5,800
–––––––
––––––
11,000
8,700
–––––––
––––––
Actual cost (142,700 + 291,300 + 230,800)
TA
4
TI
A
Point A gives the highest contribution (£50,400 from producing 4,200 units of Y and no units of X) and is therefore the optimal
solution (as before).
£
142,700
2,300 A
––––––––
664,800
––––––––
Variance
£
5,200 A
137,500
291,300
8,700 F
Standard cost of actual production
300,000
Actual cost
230,800
Standard cost of actual production
225,000
W3
5,800 A
(b)
£
Expenditure variance:
Actual cost
230,800
Budgeted cost (12,000 × 18)
216,000
Volume variance:
Budgeted cost
216,000
Standard cost of actual production
225,000
£
14,800 A
9,000 F
(c)
The total direct materials and labour variances would be the same under absorption and marginal costing. The total fixed
overhead variance under marginal costing would be different and would be the same as the expenditure variance under
absorption costing (£14,800 A). There is no volume variance under marginal costing as fixed production costs are treated
as period costs and not treated as product costs.
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(a)
Absorption rates:
Cost centre T: (780,000 ÷ 16,250) = £48 per machine hour
Cost centre W: (173,400 ÷ 14,450) = £12 per direct labour hour
(b)
Prime costs:
Direct materials
Direct labour:
Cost centre T
Cost centre W
£
10
14
21
––––
45
Production overheads:
Cost centre T: (35 ÷ 60) × 48
Cost centre W: (21 ÷ 6) × 12
Products do not pass through service cost centres so the costs of such centres cannot be absorbed directly into products.
Products only pass through production cost centres. Therefore in order to calculate a total production cost per unit, service
cost centre costs have to be reapportioned to production cost centres for absorption.
A
PO
PA
TI
A
The method of reapportionment that fully recognises any work that service cost centres do for each is called the reciprocal
method. There are two techniques for applying the reciprocal method – a repeated distribution approach or the use of
simultaneous equations.
H
(c)
28
42
––––
115
––––
TA
5
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Part 1 Examination – Paper 1.2
Financial Information for Management
December 2005 Marking Scheme
Marks
Section A
Each of the 25 questions in this section is worth 2 marks
50
–––
Section B
1
(a)
(i)
(ii)
(iii)
(iv)
Variable cost per unit
Total monthly fixed costs
Selling price per unit
Contribution per unit
2
2
1
1
–––
6
(b)
Contribution from new business
Opportunity cost
Net increase in profit
2
11/2
1/
2
–––
4
2
(a)
TI
A
Input and conversion
Normal loss
Abnormal gain
Output
Equivalent units for conversion
Cost per equivalent unit for conversion
Valuation of output
Valuation of closing work in progress
3
H
A
(b)
Explanation of opportunity cost
Reference to Pointdextre Ltd
PO
PA
(c)
Debit entry
(a)
Contributions per unit
Objective function
Constraints
2
–––
12
–––
1
11/2
11/2
1
–––
5
11/2
1/
2
2
1
–––
5
2
–––
12
–––
TA
(c)
1
1
–––
1
1
3
–––
5
(b)
Graph (or total contributions at feasible points)
Optimal plan
3
1
–––
4
–––
9
–––
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Marks
4
(a)
Total materials variance
Total labour variance
Total fixed overhead variance
Reconciliation statement
1
1
1
1
–––
4
(b)
Expenditure variance
Volume variance
1
1
–––
2
(c)
Direct materials and labour variances the same
Total variance = expenditure variance
No volume variance with reason
1
1
1
–––
3
–––
9
–––
TI
A
PO
PA
(c)
Prime cost
Production overheads (T)
Production overheads (W)
Total unit cost
Reapportionment explanation
Reapportionment method
1
1
–––
2
1/
2
1
1
1/
2
–––
3
2
1
–––
3
–––
8
–––
A
(b)
Cost centre T absorption rate
Cost centre W absorption rate
H
(a)
TA
5
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Paper 1.2
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Financial
Information for
Management
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PART 1
QUESTION PAPER
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Time allowed 3 hours
H
A
FRIDAY 9 JUNE 2006
This paper is divided into two sections
Section A
ALL 25 questions are compulsory and MUST be
answered
Section B
ALL FIVE questions are compulsory and MUST be
answered
Formulae Sheet is on page 13
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
The Association of Chartered Certified Accountants
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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 the
customer are free, after that all calls are charged at a constant rate per minute up to a maximum, thereafter all calls
in the period are again free.
Which of the following graphs depicts the total cost to the customer of the telephone services in a period?
AA
BB
£
0
Hours
0
Hours
CC
DD
£
H
A
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£
Hours
0
Hours
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0
2
TI
A
£
Four vertical lines have been labelled P, Q, R and S at different levels of activity on the following profit-volume chart:
£
S
Output
0
P
Q
R
Which line represents the total contribution at that level of activity?
A
B
C
D
Line
Line
Line
Line
P
Q
R
S
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3
A company manufactures a single product which it sells for £15 per unit. The product has a contribution to sales ratio
of 40%. The company’s weekly break-even point is sales of £18,000.
What would be the profit in a week when 1,500 units are sold?
A
B
C
D
4
£900
£1,800
£2,700
£4,500
The following production and total cost information relates to a single product organisation for the last three months:
Month
1
2
3
Production
units
1,200
1,900
1,400
Total cost
£
66,600
58,200
68,200
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The variable cost per unit is constant up to a production level of 2,000 units per month but a step up of £6,000 in
the monthly total fixed cost occurs when production reaches 1,100 units per month.
What is the total cost for a month when 1,000 units are produced?
Which of the following is NOT a feasible value for the correlation coefficient?
A
B
C
D
The following statements relate to responsibility centres:
TA
6
+ 1·2
+ 0·6
+0
– 0·6
H
A
5
£54,200
£55,000
£59,000
£60,200
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A
B
C
D
(i) Return on capital employed is a suitable measure of performance in both profit and investment centres.
(ii) Cost centres are found in manufacturing organisations but not in service organisations.
(iii) The manager of a revenue centre is responsible for both sales and costs in a part of an organisation.
Which of the statements, if any, is true?
A
B
C
D
7
(i) only
(ii) only
(iii) only
None of them
The purchase price of a stock item is £25 per unit. In each three month period the usage of the item is 20,000 units.
The annual holding costs associated with one unit equate to 6% of its purchase price. The cost of placing an order
for the item is £20.
What is the Economic Order Quantity (EOQ) for the stock item to the nearest whole unit?
A
B
C
D
1,730
1,894
1,461
1,633
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8
A company determines its order quantity for a raw material using the EOQ model.
What would be the effects on the EOQ and on the total annual stockholding cost of a decrease in the cost of
placing an order for the raw material?
EOQ
A
B
C
D
A company uses standard absorption costing. The following data relate to last month:
Budget
Actual
Sales and production (units)
1,000
900
Standard
Actual
£
£
Selling price per unit
50
52
Total production cost per unit
39
40
What was the adverse sales volume profit variance last month?
£1,000
£1,100
£1,200
£1,300
PO
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A
B
C
D
TI
A
9
Increase
Decrease
Increase
Decrease
Total annual
stockholding cost
No effect
No effect
Increase
Decrease
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?
H
A
£61,250
£62,475
£62,500
£63,750
TA
A
B
C
D
11 An organisation’s stock records show the following transactions for a specific item during last month:
Date
4th
13th
20th
27th
Receipts
units
Issues
units
50
200
50
50
The stock at the beginning of last month consisted of 100 units valued at £6,700.
The receipts last month cost £62 per unit.
The value of the closing stock for last month has been calculated twice – once using a FIFO valuation and once using
a LIFO valuation.
Which of the following statements about the valuation of closing stock for last month is correct?
A
B
C
D
The
The
The
The
FIFO
LIFO
FIFO
LIFO
valuation
valuation
valuation
valuation
is
is
is
is
higher
higher
higher
higher
than
than
than
than
the
the
the
the
LIFO
FIFO
LIFO
FIFO
valuation
valuation
valuation
valuation
by
by
by
by
£250.
£250.
£500.
£500.
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12 A company uses absorption costing with a predetermined hourly overhead absorption rate. The following situations
arose last month:
(i) Actual hours worked exceeded planned hours.
(ii) Actual overhead expenditure exceeded planned expenditure.
Which of the following statements is correct?
A
B
C
D
Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be under
absorbed.
Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be over
absorbed.
Both situations would cause overheads to be over absorbed.
Both situations would cause overheads to be under absorbed.
TI
A
13 A factory consists of two production cost centres (G and H) and two service cost centres (J and K). The total overheads
allocated and apportioned to each centre are as follows:
G
H
J
K
£40,000
£50,000
£30,000
£18,000
The work done by the service cost centres can be represented as follows:
G
H
J
K
Percentage of service cost centre J to
30%
70%
–
–
Percentage of service cost centre K to
50%
40%
10%
–
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The company apportions service cost centre costs to production cost centres using a method that fully recognises any
work done by one service cost centre for another.
What are the total overheads for production cost centre G after the reapportionment of all service cost centre
costs?
H
A
14 The
(i)
(ii)
(iii)
£58,000
£58,540
£59,000
£59,540
following statements refer to strategic planning:
It is concerned with quantifiable and qualitative matters.
It is mainly undertaken by middle management in an organisation.
It is concerned predominantly with the long term.
TA
A
B
C
D
Which of the statements are correct?
A
B
C
D
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
15 The following statements refer to situations occurring in Process Q of an organisation which operates a series of
consecutive processes:
(i) Direct labour is working at below the agreed productivity level.
(ii) A machine breakdown has occurred.
(iii) Direct labour is waiting for work to be completed in a previous process.
Which of these situations could give rise to idle time?
A
B
C
D
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
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16 The
(i)
(ii)
(iii)
following terms relate to computers:
Spreadsheets
Floppy disks
Operating systems
Which of these terms are examples of computer software?
A
B
C
D
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
17 A company operates a job costing system. Job number 506 requires £64 of direct materials and 7 hours of direct
labour. Direct labour is paid £8 per hour. Production overheads are absorbed at the rate of £20 per direct labour hour
and non-production overheads at a rate of 60% of prime cost.
What is the total cost of job number 506?
£332
£352
£416
£448
TI
A
A
B
C
D
£ per unit
Contribution
20
15
–––
£ per unit
60
H
A
Selling price
Less Variable costs:
Less Skilled labour
Less Others
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18 All of a company’s skilled labour, which is paid £8 per hour, is fully employed manufacturing a product to which the
following data refer:
(35)
–––
25
–––
TA
The company is evaluating a contract which requires 90 skilled labour hours to complete. No other supplies of skilled
labour are available.
What is the total relevant skilled labour cost of the contract?
A
B
C
D
£720
£900
£1,620
£2,160
19 A company requires 600 kg of raw material Z for a contract it is evaluating. It has 400 kg of material Z in stock which
were purchased last month. Since then the purchase price of material Z has risen by 8% to £27 per kg. Raw material
Z is used regularly by the company in normal production.
What is the total relevant cost of raw material Z to the contract?
A
B
C
D
£15,336
£15,400
£16,200
£17,496
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The following information relates to questions 20 and 21:
A company operates a process costing system using the first-in-first-out (FIFO) method of valuation. No losses occur in the
process. All materials are input at the commencement of the process. Conversion costs are incurred evenly through the
process.
The following data relate to last period:
Units
Degree of completion
Opening work in progress
12,000
60%
Total number of units completed
14,000
Closing work in progress
13,000
30%
£
Costs arising:
Materials
151,000
Conversion
193,170
20 What was the total number of units input during last period?
12,000
13,000
15,000
17,000
TI
A
A
B
C
D
A
B
C
D
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21 What was the value of the closing work in progress for last period?
£21,330
£21,690
£22,530
£22,890
H
A
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?
Premium pricing
Price skimming
Price discrimination
Penetration pricing
TA
A
B
C
D
23 A company has established the following equations for one of its products:
Selling price (£ per unit)
=
Marginal revenue (£ per unit)
=
Total cost per week (£)
=
Q in each case represents the number
40 – 0·008Q
40 – 0·016Q
2,500 + 8Q
of units produced and sold per week.
At what selling price per unit will weekly profits be maximised?
A
B
C
D
£8
£16
£24
£32
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The following information relates to questions 24 and 25:
A company which manufactures and sells two products (X and Y) aims to maximise its profits. It holds no stocks. Product
X makes a contribution per unit of £4 and product Y makes a contribution per unit of £1.
Next period the company faces three ‘less than’ production constraints and these are shown as the lines labelled (1), (2)
and (3) on the following graph:
Product Y
units
11
’000
10
(2)
9
(3)
8
7
H
6
J
TI
A
5
4
3
K
1
L
1
2
3
4
5
6
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2
(1)
7
8
9
10
11
12
13
Product X
14 units
’000
Point
Point
Point
Point
H
J
K
L
TA
A
B
C
D
H
A
24 Which of the following points shown on the graph is optimal for next period?
25 Which of the following constraint formulations is represented by the line labelled (2) on the graph?
A
B
C
D
10X
17X
17X
13X
+
+
+
+
17Y
10Y
13Y
1 7Y
≤
≤
≤
≤
70,000
70,000
91,000
91,000
(50 marks)
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Section B – ALL FIVE questions are compulsory and MUST be attempted
Corcoran Ltd operates several manufacturing processes. In process G, joint products (P1 and P2) are created in the
ratio 5:3 by volume from the raw materials input. In this process a normal loss of 5% of the raw material input is
expected. Losses have a realisable value of £5 per litre. The company holds no work in progress. The joint costs are
apportioned to the joint products using the physical measure basis.
The following information relates to process G for last month:
Raw materials input
60,000 litres (at a cost of £381,000)
Abnormal gain
11,000 litres
Other costs incurred:
Direct labour
£180,000
Direct expenses
1£54,000
Production overheads
110% of direct labour cost.
Required:
(a) Prepare the process G account for last month in which both the output volumes and values for each of the
joint products are shown separately.
(7 marks)
PO
PA
TI
A
The company can sell product P1 for £20 per litre at the end of process G. It is considering a proposal to further
process product P1 in process H in order to create product PP1. Process H has sufficient spare capacity to do this
work. The further processing in process H would cost £4 per litre input from process G. In process H there would
be a normal loss in volume of 10% of the input to that process. This loss has no realisable value. Product PP1 could
then be sold for £26 per litre.
(b) Determine, based on financial considerations only, whether product P1 should be further processed to create
product PP1.
(3 marks)
(c) In the context of process G in Corcoran Ltd, explain the difference between ‘direct expenses’ and ‘production
overheads’.
(2 marks)
H
A
(12 marks)
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2
Buttercup Ltd manufactures and sells three products (R, S and T). These products are made using the same
machinery. The total machining time available each month is 10,500 hours but this is insufficient to produce all the
units of R, S and T required to meet maximum demands. No stocks of these products are held.
The following information is available:
Selling price per unit
Contribution to sales ratio
Machining minutes per unit
Maximum monthly demand (units)
Product R
£60
20%
40
9,000
Product S
£75
24%
54
6,000
Product T
£84
25%
75
3,000
Required:
(a) Calculate the monthly shortfall in machining hours.
(2 marks)
(b) Determine the monthly production plan in units that will maximise the company’s total contribution from
products R, S and T and calculate this total contribution.
(6 marks)
(8 marks)
PO
PA
The following information relates to last month:
Material H:
Purchased
40,000 kg for £294,000
Issued into production
36,500 kg
Finished output of MS
17,200 units
TI
A
Deadeye Ltd operates a standard costing system in which all stocks are valued at standard cost. The standard direct
material cost of one unit of product MS is £36, made up of 4·8 kg of material H at £7·50 per kg. Material H is used
only in the manufacture of product MS.
Required:
(a) Calculate the direct material price and usage variances for last month.
(3 marks)
(c) (i)
H
A
(b) Prepare a statement that reconciles the actual cost of material H purchased with the standard material cost
of actual production of MS for last month. The statement should incorporate the variances calculated in (a).
(3 marks)
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?
TA
3
(4 marks)
(10 marks)
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The management accountant at Josephine Ltd is trying to predict the quarterly total maintenance cost for a group of
similar machines. She has extracted the following information for the last eight quarters:
Quarter number
1
2
3
4
5
6
7
8
Total maintenance
cost (£’000)
265
302
222
240
362
295
404
400
Production units
(‘000)
20
24
16
18
26
22
32
30
The effects of inflation have been eliminated from the above costs.
The management accountant is using linear regression to establish an equation of the form y = a + bx and has
produced the following preliminary calculations:
Σ (total maintenance cost x production units)
= £61,250 million
Σ (total maintenance cost)2
= £809,598 million
Σ (production units)2
= 4,640 million
Required:
TI
A
(a) Establish the equation which will allow the management accountant to predict quarterly total maintenance
costs for a given level of production. Interpret your answer in terms of fixed and variable maintenance costs.
(7 marks)
(10 marks)
H
A
PO
PA
(b) Using the equation established in (a), predict the total maintenance cost for the next quarter when planned
production is 44,000 units. Suggest a major reservation, other than the effect of inflation, you would have
about this prediction.
(3 marks)
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4
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Pinafore Ltd manufactures and sells a single product. The budgeted profit statement for this month, which has been
prepared using marginal costing principles, is as follows:
£’000
£’000
Sales (24,000 units)
864
Less Variable production cost of sales:
Less Opening stock (3,000 units)
169
Less Production (22,000 units)
506
Less Closing stock (1,000 units)
1(23)
––––
(552)
––––
312
Less Variable selling cost
1(60)
––––
Contribution
252
Less Fixed overhead costs:
Less Production
125
Less Selling and administration
140
––––
(165)
––––
Net profit
187
––––
The normal monthly level of production is 25,000 units and stocks are valued at standard cost.
Required:
PO
PA
(a) Prepare in full a budgeted profit statement for this month using absorption costing principles. Assume that
fixed 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)
H
A
(10 marks)
TA
5
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A
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Formulae Sheet
End of Question Paper
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Answers
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Part 1 Examination – Paper 1.2
Financial Information for Management
June 2006 Answers
Section A
A
C
B
C
A
D
C
D
B
A
B
A
B
B
C
B
A
C
C
C
D
D
C
C
A
1
A
2
C
3
B
Contribution per unit = 15 x 0·4 = £6
Break even point = 18,000 ÷ 15 = 1,200 units
Profit when 1,500 units sold = (1,500 – 1,200) x 6 = £1,800
4
C
Units
1,400
1,200
–––––
1,200
–––––
TA
H
Total cost (£)
68,200
66,600
––––––––
1,600
––––––––
A
PO
PA
TI
A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Variable cost per unit = (1,600 ÷ 200) = £8
Total fixed cost (above 1,000 units) = [68,200 – (1,400 x 8)] = £57,000
Total cost for 1,000 units = [(57,000 – 6,000) + (1,000 x 8)] = £59,000
5
A
6
D
7
C
8
D
9
B
10 A
EOQ = {[ 2 x 20 x (4 x 20,000) ] ÷ [0·06 x 25]}0·5 = 1,461 units
(Budgeted quantity – Actual quantity) x standard profit per unit
(1,000 – 900) x (50 – 39) = £1,100
Budgeted overhead – actual overhead = 1,250
Actual overhead = 0·98 x Budgeted overhead
Budgeted overhead – (0·98 x Budgeted overhead) = 1,250
Budgeted overhead = 1,250 ÷ 0·02 = 62,500
Actual overhead = 62,500 – 1,250 = £61,250
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11 B
Closing stock = 100 – 50 + 200 – 50 – 50 = 150 units
FIFO = 150 x 62 = £9,300
LIFO = (100 x 62) + (50 x 67) = £9,550
LIFO valuation greater than FIFO valuation by £250
12 A
13 B
13 B
Cost centre G = 40,000 + (0·50 x 18,000) + 0·30 [30,000 + (0·10 x 18,000)]
Cost centre G = £58,540
14 B
15 C
17 A
£
120
140
––––
260
72
––––
332
––––
Prime cost [64 + (7 x 8)]
Production overhead (7 x 20)
Non-production overhead (0·60 x 120)
Total cost
C
Opportunity cost per skilled labour hour = [25 ÷ (20 ÷ 8)] = £10
Relevant cost:
£
Skilled labour cost (90 x 8)
1,720
Opportunity cost (90 x 10)
1,900
–––––
1,620
–––––
PO
PA
18
TI
A
16 B
Relevant cost of a regularly used material in stock is its replacement cost (600 x 27) = £16,200
20 C
Input = (14,000 + 3,000 – 2,000) = 15,000 units
21 D
Material cost per unit = [51,000 ÷ (12,000 + 3,000)] = £3·40
Conversion:
Cost per equivalent unit = [193,170 ÷ (12,000 + 0·40 x 2,000 + 0·30 x 3,000)]
Cost per equivalent unit = 193,170 ÷ 13,700 = £14·10
Closing stock valuation = (3,000 x 3·40) + (900 x 14·1) = £22,890
22 D
TA
H
A
19 C
23 C
Profits maximised when: Marginal revenue (MR) = Marginal cost (MC)
MC = 8
MR = (40 – 0·016Q)
MR = MC
40 – 0·016Q = 8,000
MR = MC 40 – 0·016
Q = 2,000
When Q = 2,000 Price = 40 – (0·008 x 2,000) = £24
24 C
Objective function (maximisation of contribution) = 4X + Y
Let 4X + Y = 40,000 (assumed)
When X = 0, Y = 40,000
When Y = 0, X = 10,000
These two points are plotted on the graph and joined by a (dotted) line. This line is then moved away from the origin keeping
it parallel to the originally drawn dotted line until it reaches the furthest most point in the feasible area ((OHJKL).
In this case that will be the point K which is optimal.
25 A
10X + 7Y = 70,000
When X = 0, Y = 10,000
When Y = 0, X = 7,000
Constraint line (2) joins these two points on the axes.
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Section B
1
(a)
Process
£
381,000
180,000
54,000
Litres
60,000
Raw material
Direct labour
Direct expenses
Production
overheads (W1)
Abnormal gain
(W4)
G
Output (W3):
P1 (W4)
P2 (W4)
Normal loss (W2)
Litres
£
36,250
21,750
3,000
507,500
304,500
15,000
–––––––
61,000
–––––––
––––––––
827,000
––––––––
198,000
1,000
–––––––
61,000
–––––––
14,000
––––––––
827,000
––––––––
Assuming 100 litres of product P1
Revenue if sold at point of split-off without
further processing (100 x 20)
Revenue (from PP1) if sold after
further processing (100 x 90%) x 26
£
2,000
A
(b)
PO
PA
TI
A
Workings:
W1 Production overheads = 110% x 180,000 = £198,000
W2 Normal loss = 5% x 60,000 = 3,000 litres at 5 = £15,000
W3 Total output = 61,000 – 3,000 = 58,000
W3 Split P1 : P2 in ratio 5 : 3
W3 P1 = (5 ÷ 8) x 58,000 = 36,250 litres
W3 P2 = (3 ÷ 8) x 58,000 = 21,750 litres
W4 Cost per litre:
W3 Net total cost = 381,000 + 180,000 + 54,000 + 198,000 – 15,000
W3 Net total cost = £798,000
W3 Expected output = 60,000 x 95% = 57,000 litres
W3 Cost per litre = 798,000 ÷ 57,000 = £14
W3 Valuations:
W3 Abnormal gain = 1,000 x 14 = £14,000
W3 Joint products:
W3 Joint prodP1 36,250 x 14 = £507,500
W3 Joint prodP2 21,750 x 14 = £304,500
H
Additional revenue
TA
Additional cost (in process H)
2,340
–––––
1,340
–––––
1,400
–––––
The additional cost exceeds the additional revenue by £60 for every 100 litres of product P1 further processed. For example,
if the output of 36,250 litres of product P1 last month were further processed to make product PP1 then the additional costs
would exceed the additional revenue by (36,250 ÷ 100 x 60) = £21,750.
Therefore product P1 should not be further processed into product PP1.
(c)
2
(a)
(i)
Direct expenses are costs, other than material and labour, which are specifically traceable to the process (G). An example
of such a cost would be the cost of hiring special equipment required for that process only.
(ii)
Production overheads are general factory wide costs which need to be apportioned to the various processes that benefit
from them. An example of production overhead would be factory rates.
Monthly machining hours required to meet maximum demand:
Product
Units
Hours/unit
R
9,000
(40 ÷ 60) = 0·667
S
6,000
(54 ÷ 60) = 0·900
T
3,000
(75 ÷ 60) = 1·250
Available hours
Shortfall in machining hours
19
252 of
298
Total hours
16,000
15,400
13,750
––––––
15,150
10,500
––––––
14,650
––––––
TAHA POPATIA
(b)
Calculation of the contribution per machining hour for each product:
R
S
Selling price per unit
£60
£75
Contribution to sales ratio
20%
24%
Contribution per unit
£12
£18
Machining hours per unit
0·667
0·900
Contribution per machine hour
£18
£20
Ranking
2nd
1st
T
£84
25%
£21
1·250
£16·80
3rd
Optimal production plan and resultant contribution:
Product
Units
Machine hours used
Contribution (£)
S
6,000
15,400
108,000
R
7,650
15,100 (balance)
191,800
–––––––
––––––––
Total
10,500
199,800
–––––––
––––––––
(a)
Direct material variances:
Actual quantity purchased at actual price
£
294,000 


300,000 
Actual quantity purchased at standard price
(40,000 kg at 7·50 )
Actual quantity used at standard price
(36,500 kg at 7·50 )
Standard quantity for actual production at
standard price [(7,200 units x 4·8) at 7·50]
Reconciliation:
Actual cost of purchases
Less: Adverse/Plus: Favourable variances:
Less: Price variance [as in (a)]
Less: Usage variance [as in (a)]
Less: Increase in stock at standard cost
Less: [(40,000 – 36,500) x 7·50]
£
PO
PA
(b)
273,750 


259,200 
(a)
14,550 A Usage
£
294,000
(8,550) A
(26,250)
––––––––
259,200
––––––––
H
A
4
6,000 F Price
6,000 F
14,550 A
–––––––
Standard material cost of actual production [per (a)]
(i)
Price variance (£6,000 F)
Cheaper materials, but with a lower quality than standard, may have been purchased because the normal supplier was
unable to deliver.
Usage variance (£14,550 A)
The lower quality materials purchased may have required higher than standard usage per unit in production.
(ii)
The purchase price variance should be reported to the purchasing (procurement) manager as this is the person within
the organisation who is responsible for buying the materials. This manager would be able to take any appropriate action.
TA
(c)
Variance (£)
TI
A
3
In the linear regression equation y = a + bx:
y = maintenance cost in £’000 (dependent variable), and
x = production units in ’000 (independent variable)
Σ y = (265 + 302 + 222 + 240 + 362 + 295 + 404 + 400) = 2,490
Σ x = (20 + 24 + 16 + 18 + 26 + 22 + 32 + 30) = 188
n=8
Using formulae provided in the examination:
b = [(8 x 61,250) – (188 x 2,490)] ÷ [ (8 x 4,640) – (188 x 188)]
b = 12·32
a = (2,490 ÷ 8) – (12·32 x 188 ÷ 8) = 21·73
Linear equation is:
y = 21·73 + 12·32x where x and y are in ’000
The interpretation is that the fixed maintenance cost per quarter is £21,730 and the variable cost per unit of production is
£12·32.
20
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(b)
Predicted maintenance cost for next quarter (44,000 units) is:
21·730 + (12·320 x 44) = 563·81 or £563,810
The major reservation about this prediction is that 44,000 units of production is well outside the range of data used to
establish the linear regression equation. The data related to a range 16,000 to 32,000 units per quarter. The behaviour of
costs outside this range may be quite different. For example there may be a step in the fixed costs.
(a)
Budgeted profit statement (absorption costing):
£’000
Sales (24,000 units)
Less: Production cost of sales:
Less: Opening stock (3,000 x 28) [W1]
Less: Production (22,000 x 28)
Less: Closing stock (1,000 x 28)
£’000
864
84
616
(28)
––––
(672)
––––
192
Less: Under absorption of fixed
Less: production overhead cost [W2]
Less: (3,000 x 5)
TI
A
Gross profit
Less: Non-production costs:
Less: Variable selling cost
Less: Fixed selling and admin costs
PO
PA
60
40
–––
Net profit
A
Workings:
W1 Variable production cost per unit
W1 [For example, from opening stock under
W1 marginal costing: (69,000 ÷ 3,000)]
W1 Fixed production cost per unit
W1 [125,000 ÷ 25,000]
W1
(15)
––––
177
(100)
––––
77
––––
£
23
5
–––
28
–––
(b)
Reconciliation:
H
W2 Under absorption (25,000 – 22,000) = 3,000 units
TA
5
Net profit per absorption costing (a)
Add: Decrease in stocks x fixed production overhead
Add: cost per unit [2,000 x 5]
Net profit per marginal costing (per question)
(c)
£’000
77
10
–––
87
–––
Marginal costing is more relevant for short-term decision-making as it separates fixed and variable costs. In the short-term
fixed costs are more likely to remain unchanged and therefore would not be relevant.
21
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Part 1 Examination – Paper 1.2
Financial Information for Management
June 2006 Marking Scheme
Marks
Section A
Each of the 25 questions in this section is worth 2 marks
50
–––
Section B
1
(a)
Inputs
Abnormal gain
Normal loss
Joint products
2
11/2
11/2
2
–––
(b)
Additional revenue
Additional cost
Conclusion
11/2
1
1/
2
–––
(c)
Direct expenses
Production overheads
1
1
–––
7
(a)
Required hours
Shortfall
(b)
Contribution per unit
Contribution per machining hour
Ranking
Optimal plan
Resultant contribution
2
–––
12
–––
11/2
1/
2
–––
2
11/2
11/2
1/
2
11/2
1
–––
6
–––
8
–––
3
TA
H
A
2
PO
PA
TI
A
3
11/2
11/2
–––
(a)
Price variance
Usage variance
(b)
Variances
Change in stock
Layout/presentation of statement
1
1
1
–––
(c)
(i)
(ii)
2
1
1
–––
3
3
Causes (1 mark for each)
Purchasing manager
Responsibility for buying
4
–––
10
–––
23
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Marks
4
(a)
Σy
Σx
Calculation of ‘b’
Calculation of ‘a’
Fixed/variable costs
1
1
21/2
11/2
1
–––
(b)
Total cost for 44,000 units
Reservation
11/2
11/2
–––
7
3
–––
10
–––
1/
Sales
Cost of sales
Under absorption of overhead
Variable selling cost
Fixed selling and admin costs
TI
A
(a)
Layout/presentation of statement
Change in stock and its evaluation
(c)
Marginal costing
Separation of fixed and variable costs
Fixed costs not relevant to short term decisions
6
1
1
–––
2
1
1/
2
1/
2
–––
2
–––
10
–––
H
A
PO
PA
(b)
2
3
11/2
1/
2
1/
2
–––
TA
5
24
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Paper 1.2
TI
A
Financial
Information for
Management
PO
PA
PART 1
QUESTION PAPER
TA
Time allowed 3 hours
H
A
FRIDAY 8 DECEMBER 2006
This paper is divided into two sections
Section A
ALL 25 questions are compulsory and MUST be
answered
Section B
ALL FIVE questions are compulsory and MUST be
answered
Formulae Sheet is on page 12
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
The Association of Chartered Certified Accountants
257 of 298
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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
The following diagram represents a profit/volume chart for an organisation:
£
H
Output
0
TI
A
G
A
B
C
D
Line ‘H’
Profit
Contribution
Profit
Contribution
The following diagram represents the behaviour of one element of cost:
Total
cost
H
A
£
TA
2
Line ‘G’
Loss
Loss
Contribution
Contribution
PO
PA
At the specific levels indicated what do the lines ‘G’ and ‘H’ represent?
0
Volume of
activity
Which one of the following descriptions is consistent with the above diagram?
A
B
C
D
Annual total cost of factory power where the supplier sets a tariff based on a fixed charge plus a constant unit
cost for consumption which is subject to a maximum annual charge.
Total annual direct material cost where the supplier charges a constant amount per unit which then reduces to
a lower amount per unit after a certain level of purchases.
Total annual direct material cost where the supplier charges a constant amount per unit but when purchases
exceed a certain level a lower amount per unit applies to all purchases in the year.
Annual total cost of telephone services where the supplier makes a fixed charge and then a constant unit rate for
calls up to a certain level. This rate then reduces for all calls above this level.
258 of2 298
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3
An organisation has the following total costs at three activity levels:
Activity level (units)
Total cost
8,000
£204,000
12,000
£250,000
15,000
£274,000
Variable cost per unit is constant within this activity range and there is a step up of 10% in the total fixed costs when
the activity level exceeds 11,000 units.
What is the total cost at an activity level of 10,000 units?
A
B
C
D
4
£220,000
£224,000
£227,000
£234,000
An organisation manufactures and sells a single product which has a variable cost of £24 per unit and a contribution
to sales ratio of 40%. Total monthly fixed costs are £720,000.
What is the monthly breakeven point (in units)?
5
TI
A
18,000
20,000
30,000
45,000
PO
PA
A
B
C
D
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.
6
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
TA
A
B
C
D
H
A
Which of the above statements are correct?
A company is considering the launch of a new product at a high initial selling price.
Which of the following statements is correct?
A
B
C
D
This
This
This
This
is
is
is
is
an
an
an
an
example
example
example
example
of
of
of
of
strategic planning involving the application of penetration pricing.
operational planning involving the application of penetration pricing.
strategic planning involving the application of price skimming.
operational planning involving the application of price skimming.
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7
The following statements relate to an organisation’s management information system:
(i) It is used only by top and middle management to aid in strategic and tactical decision-making.
(ii) It generates both financial and non-financial information.
(iii) It often uses a database system.
Which of the above statements are correct?
A
B
C
D
8
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
Regression analysis is being used to find the line of best fit (y = a + bx) from five pairs of data. The calculations have
produced the following information:
Σx = 129
Σy = 890
Σxy = 23,091
Σx2 = 3,433
Σy2 = 29,929
What is the value of ‘a’ in the equation for the line of best fit (to the nearest whole number)?
TI
A
Which of the following is a feasible value for a correlation coefficient?
A
B
C
D
+1·2
0
–1·2
–2·0
H
A
9
146
152
210
245
PO
PA
A
B
C
D
10 The following data relate to material J for last month:
300 kg valued at
£
3,300
400 kg for
500 kg for
4,800
6,500
TA
Opening stock
Purchases:
4th
18th
Issues:
13th
25th
600 kg
300 kg
Using the LIFO valuation method, what was the value of the closing stock for last month?
A
B
C
D
£3,300
£3,500
£3,700
£3,900
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11 A jobbing company operates a premium bonus scheme for its employees of 75% of the time saved compared with
the standard time allowance for a job, at the normal hourly rate. The data relating to Job 1206 completed by an
employee is as follows:
Allowed time for Job 1206
Time taken to complete Job 1206
Normal hourly rate of pay
4 hours
3 hours
£8
What is the total pay of the employee for Job 1206?
A
B
C
D
£24
£30
£32
£38
The following statements relate to the paint manufacturer:
TI
A
12 A paint manufacturer has a number of departments. Each department is located in a separate building on the same
factory site. In the mixing department the basic raw materials are mixed together in very large vessels. These are then
moved on to the colour adding department where paints of different colours are created in these vessels. In the next
department – the pouring department – the paint is poured from these vessels into litre sized tins. The tins then go
on to the labelling department prior to going on to the finished goods department.
PO
PA
(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?
(i) only
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
H
A
A
B
C
D
13 The following statements relate to spreadsheets:
A spreadsheet consists of records and files.
Most spreadsheets have a facility to allow data within them to be displayed graphically.
A spreadsheet could be used to prepare a budgeted profit and loss account.
A spreadsheet is the most suitable software for storing large volumes of data.
TA
(i)
(ii)
(iii)
(iv)
Which of the above statements are correct?
A
B
C
D
(i) and (ii) only
(i), (iii) and (iv) only
(ii) and (iii) only
(iii) and (iv) only
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14 A company uses absorption costing with a predetermined hourly overhead absorption rate. The following situations
have both occurred:
(i) Actual overhead expenditure exceeded planned expenditure; and
(ii) Actual hours worked were less than the planned hours.
Which of the following statements is correct?
A
B
C
D
Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be under
absorbed.
Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be over
absorbed.
Both situations would cause overheads to be over absorbed.
Both situations would cause overheads to be under absorbed.
15 A company operates a job costing system. Job 812 requires £60 of direct materials, £40 of direct labour and £20 of
direct expenses. Direct labour is paid £8 per hour. Production overheads are absorbed at a rate of £16 per direct
labour hour and non-production overheads are absorbed at a rate of 60% of prime cost.
£240
£260
£272
£320
PO
PA
A
B
C
D
TI
A
What is the total cost of Job 812?
16 At the end of manufacturing in Process I, product K can be sold for £10 per litre. Alternatively product K could be
further processed into product KK in Process II at an additional cost of £1 per litre input into this process. Process II
is an existing process with spare capacity in which a loss of 10% of the input volume occurs. At the end of the further
processing, product KK could be sold for £12 per litre.
Further
Further
Further
Further
processing
processing
processing
processing
into
into
into
into
product
product
product
product
TA
A
B
C
D
H
A
Which of the following statements is correct in respect of 9,000 litres of product K?
KK
KK
KK
KK
would
would
would
would
increase profits by £9,000.
increase profits by £8,100.
decrease profits by £900.
decrease profits by £1,800.
The following information relates to questions 17 and 18:
The standard direct material cost for a product is £50 per unit (12·5 kg at £4 per kg). Last month the actual amount paid
for 45,600 kg of material purchased and used was £173,280 and the direct material usage variance was £15,200
adverse.
17 What was the direct material price variance last month?
A
B
C
D
£8,800
£8,800
£9,120
£9,120
Adverse
Favourable
Adverse
Favourable
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18 What was the actual production last month?
A
B
C
D
3,344
3,520
3,952
4,160
units
units
units
units
19 Equipment owned by a company has a net book value of £1,800 and has been idle for some months. It could now
be used on a six months contract which is being considered. If not used on this contract, the equipment would be
sold now for a net amount of £2,000. After use on the contract, the equipment would have no saleable value and
would be dismantled. The cost of dismantling and disposing of it would be £800.
What is the total relevant cost of the equipment to the contract?
£1,200
£1,800
£2,000
£2,800
TI
A
A
B
C
D
PO
PA
20 A contract is under consideration which requires 800 labour hours to complete. There are 450 hours of spare labour
capacity for which the workers are still being paid the normal rate of pay. The remaining hours required for the contract
can be found either by overtime working paid at 50% above the normal rate of pay or by diverting labour from the
manufacture of product OT. If the contract is undertaken and labour is diverted, then sales of product OT will be lost.
Product OT takes seven labour hours per unit to manufacture and makes a contribution of £14 per unit. The normal
rate of pay for labour is £8 per hour.
A
B
C
D
£3,500
£4,200
£4,500
£4,900
H
A
What is the total relevant labour cost to the contract?
TA
The following information relates to questions 21 and 22:
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 – 0·025Q
Marginal revenue (£ per unit) = 50 – 0·05Q
Total weekly cost = 1,000 + 15Q
21 What price per unit should be set in order to maximise weekly profit?
A
B
C
D
£15·00
£17·50
£25·00
£32·50
22 What would the weekly total contribution be if the price of the product was set at £20 per unit?
A
B
C
D
£2,000
£3,000
£5,000
£6,000
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23 A company has three shops (R, S and T) to which the following budgeted information relates:
Shop R
£000
400
––––
100
(60)
––––
40
––––
Sales
Contribution
Less: Fixed costs
Profit/(Loss)
Shop S
£000
500
––––
60
(70)
––––
(10)
––––
Shop T
£000
600
––––
120
(70)
––––
50
––––
Total
£000
1,500
––––––
280
(200)
––––––
80
––––––
60% of the total fixed costs are general company overheads. These are apportioned to the shops on the basis of sales
value. The other fixed costs are specific to each shop and are avoidable if the shop closes down.
If shop S is closed down and the sales of the other two shops remained unchanged, what would be the revised
budgeted profit for the company?
£50,000
£60,000
£70,000
£90,000
TI
A
A
B
C
D
24 Which of the following statements correctly describes the shadow price of a resource in linear programming?
The
The
The
The
minimum sum payable for one more unit of the scarce resource.
maximum sum payable for one more unit of the scarce resource.
increase in total contribution if one more unit of a non-binding constraint is made available.
increase in total contribution if one more unit of a binding constraint is made available.
PO
PA
A
B
C
D
25 The following graph relates to a linear programming problem:
y
H
A
(3)
TA
(2)
(1)
x
0
The objective is to maximise total contribution and the dotted line on the graph depicts this function. There are three
constraints which are all of the ‘less than or equal’ type which are depicted on the graph as the three solid lines
labelled (1), (2) and (3).
At which of the following intersections is total contribution maximised?
A
B
C
D
Constraint
Constraint
Constraint
Constraint
(3)
(2)
(1)
(1)
and
and
and
and
the x-axis
constraint (3)
constraint (2)
constraint (3)
(50 marks)
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Section B – ALL FIVE questions are compulsory and MUST be attempted.
1
Fairfax Ltd manufactures a single product which has a standard selling price of £22 per unit. It operates a standard
marginal costing system. The standard variable production cost is £9 per unit. Budgeted annual production is
360,000 units and budgeted non-production costs of £1,152,000 per annum are all fixed.
The following data relate to last month:
Budget
units
30,000
32,000
Production
Sales
Actual
units
33,000
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 whether
each variance is favourable or adverse.
(4 marks)
(3 marks)
TI
A
(b) Explain how the two variances calculated in (a) could be interrelated.
(11 marks)
Point Ltd uses the economic order quantity (EOQ) model to establish the reorder quantity for raw material Y. The
company holds no buffer stock. Information relating to raw material Y is as follows:
Required:
(a) Calculate:
48,000 units
£80 per unit
£120 per order
10% of the purchase price
H
A
Annual usage
Purchase price
Ordering costs
Annual holding costs
TA
2
PO
PA
(c) Calculate the BUDGETED profit for last month assuming that the company was using absorption costing.
(4 marks)
(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)
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3
Merryl Ltd manufactures four components (E, F, G and H) which are incorporated into different products made by the
company. All the components are manufactured using the same general purpose machinery. The following production
cost and machine hour data are available:
E
32
6
5
Variable production cost (£ per unit)
Fixed production cost (£ per unit)
General purpose machine hours per unit
F
27
14
6
G
34
8
7
H
35
16
8
The fixed production costs represent a share of factory-wide costs that have been related to the individual components
by using a direct labour hour rate. There are no fixed costs which can be specifically related to individual components.
From next month the company’s monthly manufacturing requirements are for 2,000 units of each component. The
maximum number of machine hours available for component manufacture is 35,000 per month.
The company can purchase any quantity of each component from Sergeant Ltd at the following unit prices next
month:
E
£48
F
£51
G
£55
H
£63
TI
A
Merryl Ltd aims to minimise its monthly costs.
Required:
PO
PA
(a) Calculate the shortfall in general purpose machine hours next month.
(2 marks)
(b) Determine how many units of which components should be purchased from Sergeant Ltd next month.
(4 marks)
(c) Briefly explain THREE other factors that the management of Merryl Ltd should consider before making a final
decision to buy in components from Sergeant Ltd for next month.
(3 marks)
H
A
Yeomen Ltd uses process costing and the FIFO method of valuation. The following information for last month relates
to Process G, where all the material is added at the beginning of the process:
Opening work-in-progress:
Costs incurred:
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).
TA
4
(9 marks)
Normal loss:
Actual output:
Closing work-in-progress:
Direct materials
£99,600 for 12,500 litres of input
Conversion
£155,250
8% of input in the period. All losses, which are incurred evenly throughout the
process, can be sold for £3 per litre.
10,000 litres were transferred from Process G to the finished goods warehouse.
3,000 litres (45% complete in respect of conversion costs).
Required:
(a) Prepare the Process G Account for last month in £ and litres.
(10 marks)
(b) Identify TWO types of organisation where it would be appropriate to use service (operation) costing. For each
one suggest a suitable unit cost measure.
(2 marks)
(12 marks)
10
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Phoebe Ltd manufactures many different products which pass through two production cost centres (P1 and P2).
There are also two service cost centres (S1 and S2) in the factory. The following information has been extracted from
the budget for the coming year:
Allocated and apportioned
production overheads
Number of employees
Total machine hours
Total direct labour hours
P1
P2
S1
S2
£477,550
30
£404,250
65
£132,000
10
£96,000
15
68,000
4,000
11,400
14,000
Service cost centre S1 costs are reapportioned to all other cost centres based on the number of employees. Service
cost centre S2 only does work for P1 and P2 and its costs are reapportioned to these centres in the ratio 5:3
respectively.
Required:
(a) Calculate:
TI
A
(i) the machine hour absorption rate for cost centre P1, and
(ii) the direct labour hour absorption rate for cost centre P2.
(6 marks)
(9 marks)
H
A
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(b) Explain the difference between production overheads that have been ‘allocated’ and those which have been
‘apportioned’ to cost centres. Explain why some manufacturing companies are able to allocate electric power
costs to production cost centres, whereas others can only apportion them.
(3 marks)
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5
11
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Formulae Sheet
End of Question Paper
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Answers
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Part 1 Examination – Paper 1.2
Financial Information for Management
December 2006 Answers
1
D
2
D
3
A
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D
D
A
D
B
C
C
A
B
C
B
A
C
D
C
D
D
A
D
A
D
D
A
D
A
A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
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Section A
H
Variable cost per unit = [(274,000 – 250,000) ÷ (15,000 – 12,000)] = £8
TA
Total fixed cost above 11,000 units = [274,000 – (15,000 x 8)] = £154,000
Total fixed cost below 11,000 units = (10 ÷ 11) x 154,000 = £140,000
Total cost for 10,000 units = [(10,000 x 8) + 140,000] = £220,000
4
D
Contribution per unit = (24 ÷ 0·60 x 0·40) = £16
Breakeven point = (720,000 ÷ 16) = 45,000 units
5
B
6
C
7
C
8
A
b = [(5 x 23,091) – (129 x 890)] ÷ [(5 x 3,433) – (1292)] = 1·231
a = (890 ÷ 5) – [(1·231 x 129) ÷ 5] = 146 (nearest whole number)
15
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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
15 C
(60 + 40 + 20) + [(40 ÷ 8) x 16] + (0·60 x 120) = £272
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16 D
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14 D
£
Sales value after further processing = (9,000 x 0·9) x £12 = 97,200
Sales value without further processing = (9,000 x £10)
90,000
–––––––
Increase in sales revenue
7,200
Less: Further processing cost = (9,000 x £1)
(9,000)
–––––––
Decrease in profit by further processing
£1,800
–––––––
A
17 D
TA
18 A
H
[(45,600 x 4) – 173,280] = £9,120 Favourable
£
182,400
(15,200)
––––––––
167,200
––––––––
3,344
Actual usage at standard cost (45,600 x 4)
Less: Adverse usage variance
Standard cost for actual production
Actual production (units) = (167,200 ÷ 50) =
19 D
Opportunity cost now + disposal cost at end of contract (2,000 + 800) = £2,800
20 A
(800 – 450) x [8 + (14 ÷ 7)] = £3,500
21 D
Marginal cost (MC) = 15
Profit maximised when MC = MR
15 = 50 – 0·05Q
Q = 700
P = 50 – (0·025 x 700) = £32·50
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22 D
When P = 20:
20 = 50 – 0·025Q
And Q = 1,200
Total contribution = 1,200 x (20 – 15) = £6,000
23 A
Total fixed costs for shop S
Less: Apportioned general costs (200 x 0.60) ÷ (500 ÷ 1,500)
Specific avoidable fixed costs for shop S
If shop S closed down net contribution lost (60,000 – 30,000)
Revised budgeted profit for company (80,000 – 30,000)
£
70,000
(40,000)
–––––––
30,000
–––––––
30,000
£50,000
24 D
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25 A
Section B
Sales price variance:
Actual sales at standard selling price (34,000 x £22)
Actual sales at actual selling price
Sales price variance
Sales volume contribution variance:
Budgeted sales (units)
Actual sales (units)
The actual selling price (£21·50) was lower than the standard selling price (£22·00) – hence the adverse sales price
variance. This reduction in price may have directly encouraged customers to buy more units. The company sold 2,000 more
units than planned giving the favourable sales volume contribution variance of £26,000. Thus the two variances may be
interrelated and if so the variances should be considered together – one partially offsetting the other.
H
(b)
32,000
34,000
––––––––
2,000 F
x £13
£26,000 F
––––––––
A
Volume variance (units)
At standard contribution per unit £(22 – 9)
Sales volume contribution variance
£
748,000
731,000
––––––––
17,000 A
––––––––
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(a)
(c)
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1
Budgeted contribution (32,000 x £13)
Less: Budgeted profit (marginal costing)
Budgeted fixed costs
Less: Budgeted non-production fixed costs (1,152,000 ÷ 12)
Budgeted fixed production costs
£
416,000
(200,000)
–––––––––
216,000
(96,000)
–––––––––
120,000
–––––––––
Standard fixed production cost per unit (£120,000 ÷ 30,000)
Calculation of absorption costing profit:
Marginal costing profit
Less: Decrease in stocks at standard fixed production
cost per unit [(32,000 – 30,000) x £4]
£4
£
200,000
(8,000)
–––––––––
192,000
–––––––––
Absorption costing profit
Alternatively:
Budgeted absorption costing manufacturing profit
32,000 x (13 – 4)
Less: budgeted non-production fixed costs
£
288,000
(96,000)
–––––––––
192,000
–––––––––
Absorption costing profit
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2
(a)
(i)
Using the formula given:
EOQ = [(2 x 120 x 48,000) ÷ (0·10 x 80)]0·5 = 1,200 units
£
3,840,000
4,800
4,800
––––––––––
3,849,600
––––––––––
Purchasing cost (48,000 x £80)
Ordering cost (48,000 ÷ 1,200) x £120
Holding costs [(1,200 ÷ 2) x £80 x 0·10]
Total cost
(b)
Purchasing cost (48,000 x £80 x 0·99)
Ordering cost (48,000 ÷ 2,000) x £120
Holding costs [(2,000 ÷ 2) x £80 x 0·99 x 0·10]
3,801,600
2,880
7,920
––––––––––
3,812,400
––––––––––
Total cost
Annual total saving (3,849,600 – 3,812,400)
3
(c)
Insurance costs of stock and warehouse
Rent of warehouse
Rates of warehouse
Interest on capital tied up in stock
(a)
Hours required [(5 + 6 + 7 + 8) x 2,000]
Hours available
Shortfall in hours
52,000
35,000
17,000
E
£/unit
32
48
–––
16
–––
F
£/unit
27
51
–––
24
–––
G
£/unit
34
55
–––
21
–––
H
£/unit
35
63
–––
28
–––
5
6
7
8
3·2
4·0
3·0
3·5
2nd
4th
1st
3rd
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(b)
£37,200
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(ii)
Variable production cost
Buy-in price
Extra cost of buying in
Machine hours per unit
Extra cost per machine hour saved
A
Ranking for buying in
4
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H
Optimal plan for buying in components:
Ranking Component
Units
Machine hours
saved
1st
G
2,000
14,000
2nd
E
600
3,000 (balancing figure)
–––––––
Total shortfall of hours [as per (a)]
17,000
–––––––
(c)
(1) The quality of the components supplied by Sergeant Ltd.
(2) The loss of control over all aspects of production and delivery of the components.
(3) The possibility of increasing the number of machine hours available next month by working overtime.
(a)
Process G Account
Opening WIP
Costs arising:
Direct materials
Litres
2,000
12,500
Conversion
£
24,600
99,600
Litres
Output (W4):
Ex opening WIP
Started and finished
in month
155,250
–––––––
14,500
–––––––
––––––––
279,450
––––––––
Normal loss
(0·08 x 12,500)
Abnormal loss (W2)
Closing WIP (W3)
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£
2,000
8,000
–––––––
10,000
221,520
1,000
500
3,000
–––––––
14,500
–––––––
3,000
11,100
43,830
––––––––
279,450
––––––––
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Workings:
W1 Cost per equivalent litre (EL):
Completion of opening WIP
Units started and finished in month
Abnormal loss
Closing WIP
Work done last month
Costs arising last month
Less: Scrap value of normal loss
Direct materials
EL
–
8,000
500
3,000
–––––––
11,500
–––––––
£
99,600
(3,000)
–––––––
96,600
–––––––
Conversion
EL
1,400
8,000
500
1,350
–––––––
11,250
–––––––
£
155,250
–
–––––––
155,250
–––––––
£8·40
£13·80
Cost per EL
W2 Valuation of abnormal loss:
500 x (8·40 + 13·80) = £11,100
W3 Valuation of closing WIP:
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(3,000 x £8·40) + (1,350 x £13·80) = £43,830
W4 Valuation of output:
Type of organisation
Hospital
Haulage transport
Hotel
Rail transport
19,320
177,600
––––––––
221,520
––––––––
Unit cost measure
Inpatient day
Tonne mile
Occupied room night
Passenger mile
A
(b)
£
24,600
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PA
Opening WIP value
Completion of opening WIP
(1,400 x £13·80)
Units started and finished in month
[8,000 x £(8·40 + 13·80)]
(a)
Cost centre
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5
H
Note: only two examples were required and other answers were acceptable.
Allocated and apportioned overheads
Reapportionment of S1 (30:65:15)
Reapportionment of S2 (5:3)
Machine hours (P1)
Direct labour hours (P2)
Absorption rate:
Per machine hour
Per direct labour hour
(b)
P1
£
477,550
36,000
71,250
––––––––
584,800
––––––––
P2
£
404,250
78,000
42,750
––––––––
525,000
––––––––
S1
£
132,000
(132,000)
–
––––––––
–
––––––––
S2
£
96,000
18,000
(114,000)
––––––––
–
––––––––
68,000
14,000
£8·60
£37·50
Allocated overheads are specifically traceable to cost centres. Apportioned overheads are those for which only a total factorywide figure is available. Therefore in order to get such overheads related to individual cost centres, the total has to be
apportioned on a logical but arbitrary basis to the cost centres. For example the total factory rates could be apportioned on
the basis of the floor area occupied by each cost centre. Electric power can be allocated if each cost centre is separately
metered. Thus allowing an accurate measure of the amount of power used in each cost centre. Otherwise if there is only one
meter for the whole factory, then the total cost of electric power would need to be apportioned to the factory cost centres. For
example by using the kilowatt hour rating of the machines and equipment in the various cost centres.
19
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Part 1 Examination – Paper 1.2
Financial Information for Management
December 2006 Marking Scheme
Marks
Section A
Each of the 25 questions in this section is worth 2 marks
50
–––
Section B
1
(a)
Price variance
Volume variance
2
2
–––
4
(b)
An adverse and a favourable variance
Possible interrelationship explained
1
2
–––
3
Budgeted fixed production costs
Fixed production cost per unit
Change in stock level effect
Absorption costing profit
1
1
1
1
–––
3
Economic order quantity
Purchasing cost
Ordering cost
Holding cost
Purchasing cost
Ordering cost
Holding cost
Annual saving
(c)
1/
(a)
Hours required
Hours available
Shortfall
2
A
(b)
(i)
(ii)
4
–––
11
–––
11/2
1/
2
1
1
–––
4
1/
2
1
1
1/
2
–––
3
H
(a)
mark for each different example
2
–––
9
–––
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2
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(c)
1/
2
1/
2
1
–––
2
(b)
Extra cost per unit of buying in
Extra cost per machine hour
Optimal buying in plan
2
1
1
–––
4
(c)
1 mark per factor
3
–––
9
–––
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Marks
4
(a)
Opening WIP
Costs arising
Output
Normal loss
Abnormal loss
Closing WIP
1
1
3
1
2
2
–––
10
(b)
1/
1/
mark for each type of organisation
2 mark for each unit cost measure
1
1
–––
2
2
–––
12
–––
(a)
Reapportionment of S1 costs
Reapportionment of S2 costs
Machine hour rate
Direct labour hour rate
2
2
1
1
–––
1
1
1
–––
3
–––
9
–––
A
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Allocation explained
Apportionment explained
Use, or not, of meters
H
(b)
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Paper 1.2
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Financial
Information for
Management
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PART 1
QUESTION PAPER
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Time allowed 3 hours
H
A
FRIDAY 8 JUNE 2007
This paper is divided into two sections
Section A
ALL 25 questions are compulsory and MUST be
answered
Section B
ALL FIVE questions are compulsory and MUST be
answered
Formulae Sheet is on page 13
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
The Association of Chartered Certified Accountants
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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
Four lines representing expected costs and revenue have been drawn on the following break-even chart:
E
£
F
G
TI
A
H
Output
0
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PA
Which statement is correct?
A
B
C
D
The following diagram depicts a line which relates the quantity demanded (Q) to the selling price (P):
H
A
Price
(P)
TA
2
Line F represents total variable cost.
The break-even point occurs at the intersection of lines E and F.
Line G represents total revenue.
The break-even point occurs at the intersection of lines G and H.
25
0
40,000
Quantity (Q)
What is the equation of the line?
A
B
C
D
P
P
P
P
=
=
=
=
25
25
25
25
–
–
–
–
0.000625Q
1,600Q
1·6Q
0·625Q
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3
An organisation manufactures a single product which has a variable cost of £36 per unit. The organisation’s total
weekly fixed costs are £81,000 and it has a contribution to sales ratio of 40%. This week it plans to manufacture
and sell 5,000 units.
What is the organisation’s margin of safety this week (in units)?
A
B
C
D
4
1,625
2,750
3,375
3,500
An organisation has the following total costs at two activity levels:
Activity level (units)
Total costs
15,000
£380,000
24,000
£470,000
Variable cost per unit is constant in this activity range but there is a step up of
£18,000 in the total fixed costs when the activity exceeds 20,000 units.
What are the total costs at an activity level of 18,000 units?
5
TI
A
£404,000
£410,000
£422,000
£428,000
PO
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A
B
C
D
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
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
TA
A
B
C
D
H
A
Which of the statements are correct?
The following statements relate to spreadsheets:
(i) A spreadsheet is the most suitable software for the storage of large amounts of data.
(ii) A spreadsheet consists of rows, columns and cells.
(iii) A forecast profit and loss account could be prepared using a spreadsheet.
Which of the statements are correct?
A
B
C
D
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
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7
An organisation’s records for last month show the following in respect of one stores item:
Date
1st
5th
7th
19th
27th
Receipts
units
Issues
units
Stock
units
200
100
500
310
140
100
400
190
170
Last month’s opening stock was valued at a total of £2,900 and the receipts during
the month were purchased at a cost of £17·50 per unit.
The organisation uses the weighted average method of valuation and calculates a
new weighted average after each stores receipt.
What was the total value of the issues last month?
Data relating to one particular stores item are as follows:
Average daily issues
Maximum daily issues
Minimum daily issues
Lead time for the replenishment of stock
Reorder quantity
Reorder level
70 units
90 units
50 units
11 to 17 days
2,000 units
1,800 units
PO
PA
8
£7,360
£7,534
£7,590
£7,774
TI
A
A
B
C
D
9
2,950
3,100
3,250
3,800
TA
A
B
C
D
H
A
What is the maximum stock level (in units) for this stores item?
A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model.
What would be the effects on the EOQ and the total annual ordering cost of a decrease in the annual cost of
holding one unit of the component in stock?
A
B
C
D
EOQ
Lower
Higher
Lower
Higher
Total annual ordering cost
No effect
No effect
Higher
Lower
10 A company operates a job costing system. Job number 607 requires £300 of direct materials, £400 of direct labour
and £100 of direct expenses. Direct labour is paid at a rate of £8 per hour. Production overheads are absorbed at a
rate of £40 per direct labour hour and non-production overheads are absorbed at a rate of 150% of prime cost.
What is the total cost of job number 607?
A
B
C
D
£3,750
£3,850
£4,000
£4,200
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11 A company uses absorption costing with a predetermined hourly fixed overhead absorption rate. The following
situations arose last month:
(i) Actual overhead expenditure was less than the planned expenditure.
(ii) Actual hours worked exceeded planned hours.
Which statement is correct?
A
B
C
D
Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be over
absorbed.
Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be under
absorbed.
Both situations would cause overheads to be over absorbed.
Both situations would cause overheads to be under absorbed.
PO
PA
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A
12 A company manufactures two products K1 and K2 in a factory consisting of two cost centres, Y and Z. The following
budgeted data are available:
Cost centre
Y
Z
Allocated and apportioned fixed
overhead costs
£576,000
£288,000
Direct labour hours per unit:
Product K1
5
2
Product K2
3
4
Budgeted output is 12,000 units of each product. Fixed overhead costs are absorbed on a direct labour hour basis.
What is the budgeted fixed overhead cost per unit for product K2?
£34
£36
£38
£42
H
A
A
B
C
D
Total overheads
TA
13 A factory consists of two production cost centres (P and Q) and two service cost centres (T and V). The total overheads
allocated and apportioned to each cost centre are as follows:
P
£180,000
Q
£120,000
The work done by the service cost centres can be represented as follows:
P
Q
Percentage of service cost centre T to:
70%
30%
Percentage of service cost centre V to:
40%
30%
T
£128,000
V
£140,000
T
–
30%
V
–
–
The service cost centre costs are apportioned to production cost centres using a method that fully recognises any work
done by one service cost centre for another.
What are the total overheads for production cost centre P after the reapportionment of all service cost centre
costs?
A
B
C
D
£325,600
£349,600
£355,000
£379,000
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The following information relates to questions 14 and 15:
A company operates a process costing system using the first-in-first-out (FIFO) system of valuation. No losses occur in the
process. The following data relate to last month:
Units
Opening work-in-progress
200 with a total value of £1,530
Input to the process
1,000
Completed production
1,040
Last month the cost per equivalent unit of production was £20 and the degree of completion of the work-in-progress was
40% throughout the month.
14 What was the value (at cost) of last month’s closing work-in-progress?
A
B
C
D
£1,224
£1,280
£1,836
£1,920
£19,200
£19,930
£20,730
£20,800
PO
PA
A
B
C
D
TI
A
15 What was the cost of the 1,040 units completed last month?
16 The following statements relate to the calculation of the regression line y = a + bx using the information on the
formulae sheet at the end of this examination paper:
(i) ∑xy is calculated by multiplying ∑x by ∑y.
(ii) ∑y2 is not the same as (∑y)2 .
(iii) n represents the number of pairs of data items used.
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
TA
A
B
C
D
H
A
Which statements are correct?
17 Which of the following correlation coefficients indicates the weakest relationship between two variables?
A
B
C
D
+0·9
– 0·6
– 0·8
– 1·0
18 The following statements relate to responsibility centres:
(i) The manager of a revenue centre is responsible for sales and costs in a segment of an organisation.
(ii) Return on capital employed is a suitable measure of performance in a profit centre.
(iii) Cost centres are found in manufacturing and service organisations.
Which of the statements, if any, is correct?
A
B
C
D
(i) only
(ii) only
(iii) only
None of them.
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19 A company operates a standard absorption costing system in which the standard fixed production overhead rate is £9
per hour.
The following data relate to last month:
Budgeted hours
8,000
Standard hours for actual production 8,200
Actual hours worked
8,400
What was the fixed production overhead capacity variance for last month?
A
B
C
D
£1,800
£1,800
£3,600
£3,600
Adverse
Favourable
Adverse
Favourable
20 A company operates a standard marginal costing system. Last month the company sold 200 units more than it
planned to sell. The following data relate to last month:
Actual
£
38
29
TI
A
Selling price per unit
Variable cost per unit
Standard
£
40
30
What was the favourable sales volume contribution variance last month?
£1,600
£1,800
£2,000
£2,200
PO
PA
A
B
C
D
21 Which of the following should be classified as indirect labour?
H
A
Machine operators in a factory producing furniture
Lawyers in a legal firm
Maintenance workers in a power generation organisation
Lorry drivers in a road haulage company.
TA
A
B
C
D
22 Which of the following should NOT be classified as a service cost centre in a manufacturing organisation?
A
B
C
D
Factory canteen
Stores
Materials handling department
Final product inspection department
23 A long established city centre hotel charges a higher price for its executive bedrooms on weekdays than it does for the
same rooms at weekends and on public holidays.
Which pricing policy is the hotel adopting?
A
B
C
D
Penetration pricing
Price skimming
Premium pricing
Price discrimination
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24 A company would sell 40,000 units of a product if the unit selling price was set at £10 and these would generate a
total contribution of £160,000. If the unit selling price was reduced to £9·50 then sales of 44,000 units would result.
Setting unit selling prices of £10·50 and £11 would result in sales of 36,000 and 31,000 units respectively.
Which selling price would generate the highest total contribution?
A
B
C
D
£9·50
£10·00
£10·50
£11·00
TI
A
25 A company which manufactures four components (A, B, C and D), using the same skilled labour, aims to maximise
its profits. The following information is available:
Component
A
B
C
D
Variable production cost per unit (£)
60
70
75
85
Purchase price per unit from
another supplier (£)
108
130
120
124
Skilled labour hours per unit
to manufacture
4
6
5
3
As it has insufficient skilled labour hours available to manufacture all the components required, the company will need
to buy some units of one component from the other supplier.
A
B
C
D
(50 marks)
H
A
Component
Component
Component
Component
TA
A
B
C
D
PO
PA
Which component should be purchased from the other supplier?
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Section B – ALL FIVE questions are compulsory and MUST be attempted.
Casilda Ltd manufactures gonds, which have a standard selling price of £120 per gond. The company operates a
standard marginal costing system and values stocks at standard cost.
The standard variable cost of a gond is as follows:
Direct material
Direct labour (6 hours at £8 per hour)
Production overhead
£ per gond
20
48
24
–––
92
–––
The budgeted and actual activity levels for last month were as follows:
Actual
units
25,000
26,000
The actual sales and variable costs for last month were as follows:
Required:
PO
PA
Sales
Direct material (purchased and used)
Direct labour (150,000 hours)
Variable production overhead
£
2,995,000
532,800
1,221,000
614,000
TI
A
Sales
Production
Budget
units
25,000
25,000
H
A
(a) Calculate the following cost variances for last month:
(i) Total direct materials;
(ii) Total variable production overhead;
(iii) Direct labour rate;
(iv) Direct labour efficiency.
(4 marks)
(b) Prepare a statement that reconciles the budgeted contribution with the actual contribution for last month
and which incorporates the variances calculated in (a).
(6 marks)
TA
1
(c) Suggest ONE possible explanation of how the two direct labour variances calculated in (a) could be
interrelated.
(2 marks)
(12 marks)
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2
Plaza Ltd aims to maximise profit from the two products (X and Y) which it manufactures and sells. The unit selling
price for product X is £200 and the company can sell all the units that it can produce at this price. The unit selling
price of product Y is £250 but, at this price, the annual demand is limited to 40,000 units. The company holds no
stocks.
The following product cost data are available:
Direct material (£5 per kg)
Direct labour (£10 per hour)
Other variable costs
Total variable cost
Product X
£ per unit
60
50
60
–––
170
–––
Product Y
£ per unit
40
80
90
–––
210
–––
Next year the supply of direct material will be limited to 540,000 kg and the direct labour hours will be limited to
400,000.
Required:
TI
A
(a) Determine the optimal production plan in units for next year and calculate the resultant total contribution.
Workings should be clearly shown.
PO
PA
Note: Graph paper is available.
(8 marks)
(b) Explain the term ‘shadow price’ in the context of scarce resources. State clearly which, if any, of the
company’s resources will have a shadow price next year. No calculations are required.
(3 marks)
H
A
Luiz Ltd operates several manufacturing processes in which stocks of work-in-progress are never held. In process K,
joint products (P1 and P2) are created in the ratio 2:1 by volume from the raw materials input. In this process a
normal loss of 4% of the raw materials input is expected. Losses have a realisable value of £5 per litre. The joint costs
of the process are apportioned to the joint products using the sales value basis. At the end of process K, P1 and P2
can be sold for £25 and £40 per litre respectively.
TA
3
(11 marks)
The following information relates to process K for last month:
Raw materials input
90,000 litres at a total cost of £450,000
Actual loss incurred
4,800 litres
Conversion costs incurred £216,000
Required:
(a) Prepare the process K account for last month in which both the output volumes and values for each joint
product are shown separately.
(7 marks)
The company could further process product P1 in process L to create product XP1 at an incremental cost of £3 per
litre input. Process L is an existing process with spare capacity. In process L a normal loss of 8% of input is incurred
which has no value. Product XP1 could be sold for £30 per litre.
Required:
(b) Based on financial considerations only, determine, with supporting calculations, whether product P1 should
be further processed in process L to create product XP1.
(3 marks)
(10 marks)
10
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Marco Ltd manufactures and sells a single product. The budgeted profit and loss statement for next year, which has
been drawn up using absorption costing principles, is as follows:
£000
Less Closing stock (5,000 units)
Gross profit
Less Non-production expenses:
Variable selling costs
Fixed selling, administration
and distribution costs
£000
4,400
1,800
1,476
––––––
3,276
(364)
––––––
(2,912)
––––––
1,488
360
598
––––––
(958)
––––––
530
––––––
PO
PA
Net profit
TI
A
Sales (40,000 units)
Less Cost of sales:
Production cost (45,000 units):
Variable
Fixed
There will be no stock at the beginning of next year.
Required:
H
A
(a) Using marginal costing principles, calculate the following for next year:
(i) the total budgeted contribution from sales; and
(ii) the budgeted net profit.
(b) Calculate the break-even point (in units) for next year.
(4 marks)
(2 marks)
(c) Explain clearly why Marco Ltd’s net profit for next year using marginal costing principles differs from that
under absorption costing. Under what conditions would the two net profits be the same?
(3 marks)
TA
4
(9 marks)
11
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Inez Ltd is evaluating the relevant costs of a one-off contract. The following information relates to the materials and
labour requirements of the contract:
Materials
The contract requires 2,500 kg of material R, which is a material regularly used by the company in other production.
The company has 4,000 kg of R currently in stock. Half of that stock was purchased two months ago for £24 per kg
and the other half was purchased last month for £25 per kg. The supplier has recently notified the company that the
price of R has risen by 8% compared with last month.
Labour
The contract requires 600 hours of skilled labour which is paid £10 per hour. The company’s existing skilled labour
is all fully employed in the manufacture of product T and no further supply is available. The following information
relates to product T:
£ per unit
100
40
25
5
–––
PO
PA
(70)
–––
30
–––
TI
A
£ per unit
Selling price
Less Variable costs:
Direct materials
Skilled labour
Selling
Required:
(a) Calculate the total relevant costs for the contract in respect of:
(i) Material R; and
(ii) Skilled labour.
(5 marks)
H
A
(b) Explain the basis you would use to determine if any production overhead costs would be relevant to the
evaluation of the contract. Illustrate your answer with examples of such costs but no calculations are
required.
(3 marks)
(8 marks)
TA
5
12
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TA
H
A
PO
PA
TI
A
Formulae Sheet
End of Question Paper
13
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TI
A
TA
H
A
PO
PA
Answers
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TAHA POPATIA
Part 1 Examination – Paper 1.2
Financial Information for Management
June 2007 Answers
Section A
B
A
A
A
D
C
B
C
D
C
C
A
C
B
C
C
B
C
D
C
C
D
D
C
C
1
B
2
A
3
A
Contribution per unit (CPU) = (36 ÷ 0·60) × 0·40 = £24
Break-even point = (81,000 ÷ 24) = 3,375 units
Margin of safety = (5,000 – 3,375) = 1,625 units
4
A
Using the high low method:
Variable cost per unit = [(470,000 – 18,000) – 380,000] ÷ [24,000 – 15,000] = £8
Total fixed costs (below 20,000 units) = 380,000 – (15,000 × 8) = £260,000
Total costs for 18,000 units = 260,000 + (18,000 × 8) = £404,000
5
D
6
C
7
B
Weighted average after receipts on 7th = [(2,900 ÷ 2) + (400 × 17·50)] ÷ 500 = 16·90
Value of issues = 100 × (2,900 ÷ 200) + [(190 + 170) × 16·90] = £7,534
8
C
Reorder level – (Minimum usage in shortest lead time) + Reorder quantity =
1,800 – (50 × 11) + 2,000 = 3,250 units = Maximum stock level
9
D
10 C
TA
H
A
PO
PA
TI
A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
£
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
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12 A
Absorption rate (Y) = 576,000 ÷ [(5 + 3) × 12,000] = £6 per hour
Absorption rate (Z) = 288,000 ÷ [(2 + 4) × 12,000] = £4 per hour
Fixed overhead cost per unit (K2) = [(3 × £6) + (4 × £4)] = £34
13 C
Total overheads (T) = 128,000 + (0·30 × 140,000) = £170,000
Total 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
TI
A
18 C
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)
PO
PA
19 D
21 C
22 D
23 D
CPU = (160,000 ÷ 40,000) = £4 and variable cost per unit = (10 – 4) = £6
Units
Selling price per unit
CPU
Total contribution
£
£
£000
44,000
9·50
3·50
154
40,000
10·00
4·00
160
36,000
10·50
4·50
162
31,000
11·00
5·00
155
25 C
Component
A
B
C
D
TA
H
A
24 C
Additional cost of
buying in per unit
£
48
60
45
39
Hours per unit to
manufacture
4
6
5
3
Additional cost
per hour
£
12
10
9
13
Lowest additional cost per hour saved is £9 and component C should be bought in.
18
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Section B
(a)
(i)
£
532,800
Actual cost
Total variance £12,800 A
(ii)
Standard cost of actual production
(26,000 × 20)
520,000
Actual cost
614,000
Standard cost of actual production
(26,000 × 24)
624,000
Total variance £10,000 F
(iii) and (iv)
Actual cost
1,221,000
Wage rate variance £21,000 A (iii)
Actual hours at standard rate
(150,000 × 8)
1,200,000
Standard cost of actual production
(26,000 × 48)
1,248,000
Efficiency variance £48,000 F (iv)
Total direct labour
Actual contribution (See workings)
£
700,000
5,000 A
12,800 A
10,000 F
PO
PA
Budgeted contribution
[25,000 × £(120 – 92)]
Sales variances:
Price [(25,000 × 120) – 2,995,000]
Cost variances:
Total direct materials [(a) (i)]
Total variable production overhead [(a) (ii)]
Direct labour: – rate [(a) (iii)]
– efficiency [(a) (iv)]
TI
A
(b)
21,000 A
48,000 F
————
27,000 F
————
719,200
————
H
A
Workings:
Actual sales (25,000 units)
Less: Actual production costs (26,000 units):
Material + Labour + Production overhead
Less: Closing stock at standard cost (1,000 × 92)
£
(2,275,800)
—————
719,200
—————
Actual contribution
(c)
£
2,995,000
2,367,800
(92,000)
—————
TA
1
The rate variance is adverse (£21,000) and the efficiency variance is favourable (£48,000). A possible explanation of how
these could be interrelated is that higher graded, more skilled workers, were used last month to produce gonds and were paid
at a higher wage rate than standard thus giving the adverse rate variance. These higher graded, more skilled workers were
more efficient and produced the gonds in less than the standard time allowed – 26,000 units should have taken 156,000
hours (that is 6 hours per unit) to manufacture whereas they were produced in only 150,000 hours thus giving a favourable
efficiency variance.
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Let x = the number of units of product X and let y = the number of units of product Y.
Objective function (maximisation of contribution):
(200 – 170) x + (250 – 210) y
= 30x + 40y
Constraint formulations:
Materials:
12x + 8y ⱕ 540,000
Labour:
5x + 8y ⱕ 400,000
Demand (Y):
y ⱕ
40,000
Non-negative
x, y ⱖ
0
The constraints and objective function can be represented as follows:
Y
Units
’000
67·5
Materials
40·0
A
Demand (Y)
B
15·0
PO
PA
C
TI
A
50·0
Labour
D
0
20·0
45·0
80·0
H
A
(a)
X Units
’000
The feasible region is OABCD. By moving the objective function line (dotted) away from the origin it can be determined that
the optimal point is C (the intersection of the material and labour constraint lines). The values of x and y at this point can be
read from the graph or found by solving the equations for the two constraint lines simultaneously, as follows:
(1)
(2)
12x + 8y
5x + 8y
7x
x
(12 × 20,000) + 8y
8y
y
TA
2
Subtracting (2) from (1) gives
Substituting for x in (1) gives
=
=
=
=
=
=
=
540,000
400,000
140,000
20,000
540,000
300,000
37,500
(Materials)
(Labour)
The optimal production plan for next year is to manufacture and sell 20,000 units of product X and 37,500 units of product
Y. The resultant total contribution is [(20,000 × 30) + (37,500 × 40)] = £2,100,000.
Alternative approach (which does not involve drawing a graph):
Each production possibility is evaluated in terms of total contribution, as follows:
(1) Materials. Using all the materials available (540,000 kg), 45,000 units of X or 67,500 units of Y could be produced.
For Y, this exceeds the demand constraint. The contribution from 45,000 units of X is (45,000 × 30) = £1,350,000.
(2) Labour. Using all the labour hours available (400,000), 80,000 units of X or 50,000 units of Y could be produced.
There is insufficient material available for this quantity of X [see (1)]. In the case of Y, production is restricted to 40,000
units which uses only 320,000 hours, leaving 80,000 hours for the production of 16,000 units of X. The total
contribution from this production mix is [(16,000 × 30) + (40,000 × 40)] = £2,080,000.
(3) The other production mix possibility is found by solving the following equations simultaneously: 12x + 8y = 540,000
and 5x + 8y = 400,000 This calculation has been done above under the graphical approach and gives a total
contribution of £2,100,000.
The optimal solution is (3) as it gives the highest total contribution. It involves the production of 20,000 units of product X
and 37,500 units of product Y.
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(b)
(a)
Process K Account
Litres
90,000
Materials input
Conversion costs
£
450,000
Litres
Normal loss
3,600
(4% × 90,000)
Abnormal loss [W1]
1,200
(4,800 – 3,600)
Output:
Product P1 [W2]
56,800
Product P2 [W2]
28,400
––––––––
90,000
––––––––
216,000
––––––––
90,000
––––––––
––––––––
666,000
––––––––
£
18,000
9,000
355,000
284,000
––––––––
666,000
––––––––
TI
A
Workings:
PO
PA
W1 Valuation of abnormal loss and combined total output of 85,200 litres
(P1 + P2) is at a cost per litre of:
(666,000 – 18,000) ÷ (90,000 – 3,600) = £7·50
Abnormal loss valuation: (1,200 × 7·50) = £9,000
W2 Total output (85,200) split P1 : P2 in ratio 2 : 1,
P1 = 56,800 and P2 = 28,400
Combined total output of P1 + P2 valued at: (85,200 × 7·50) = £639,000
Split between P1 and P2 in the ratio of the sales value of production :
P1 : P2 is (56,800 × 25) : (28,400 × 40) = 1,420 : 1,136 = 1·25 : 1
Product P1 valuation = (1·25 ÷ 2·25) × 639,000 = £355,000
Product P2 valuation = (1·00 ÷ 2·25) × 639,000 = £284,000
Assuming 100 litres of product P1:
Revenue from sale of 100 litres of P1 (100 × 25)
Revenue from sale of (100 × 0·92) litres of XP1 (92 × 30)
£
2,500
2,760
––––––
Additional revenue
260
Further processing costs of converting P1 into XP1 (100 × 3)
300
––––––
Additional costs exceed additional revenue by
(40)
––––––
Product P1 should not be further processed to make product XP1 as additional costs exceed additional revenue by £40 for
every 100 litres of product P1.
H
A
(b)
TA
3
Any scarce resource that is fully utilised in the optimal solution will have a shadow price. It would be worth paying more than
the ‘normal’ price to obtain more of the scarce resource because of the contribution foregone by not being able to satisfy the
sales demand. Hence the shadow price of a so-called binding constraint is the amount by which the total contribution would
increase if one more unit of the scarce resource became available. In the case of Plaza Ltd there are two binding constraints
next year – materials and labour (all available materials and labour are used in the optimal solution) – therefore each will
have a shadow price.
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4
(a)
£ per unit
Selling price (4,400,000 ÷ 40,000)
Less Variable costs:
Production (1,800,000 ÷ 45,000)
Selling, admin and
distribution (360,000 ÷ 40,000)
40
9
––
Contribution
(i)
£ per unit
110
Total contribution (61 × 40,000)
(ii) Total contribution [as in (i)]
Less Total fixed costs:
Production
Selling, admin and distribution
(49)
–––
61
–––
£2,440,000
£000
2,440
1,476
598
–––––
Net profit
(2,074)
––––––
366
––––––
£000
530
(164)
––––––
366
––––––
PO
PA
Net profit (absorption costing)
Less Increase in stock (5,000 units) at fixed
production cost per unit (1,476,000 ÷ 45,000)
TI
A
Alternative calculation of marginal costing net profit:
Net profit (marginal costing)
Let x = number of units produced and sold at the break-even point.
At the break-even point: Total contribution = Total fixed costs
61x = 2,074,000
x = 34,000 units
(c)
When production units and sales units are not the same in a period, that is when opening and closing stocks are different,
the profits calculated under absorption costing (AC) and marginal costing (MC) will not be the same. The stock valuation
under AC includes a share of the fixed production overhead costs whereas under MC stocks are valued only at variable
production cost. Marco Ltd has no opening stock next year but a closing stock of 5,000 units. Under AC this closing stock
will contain an element of fixed production overhead costs which will be carried forward to the following year. Whereas under
MC all the fixed production overhead costs will have been written off next year against profits and not included in the closing
stock valuation. The effect of this is that next year’s MC profit (£366,000) will be lower than the AC profit (£530,000).
TA
H
A
(b)
The two profits will be the same in a period when production and sales units are the same, that is when there is no change
in stocks.
5
(a)
(b)
(i)
The relevant cost of material in regular usage will be its replacement cost. So the relevant cost of 2,500 kg of material
R will be:
(2,500 × 25 × 1·08) = £67,500.
(ii)
The relevant cost of skilled labour in short supply will be the labour cost itself plus its opportunity cost (lost contribution
from its alternative use). The alternative use of the skilled labour is the production of product T which makes a
contribution of £30 using (25 ÷ 10) = 2·5 hours of the skilled labour.
So the relevant cost of 600 hours of skilled labour will be:
(600 × 10) + [600 × (30 ÷ 2·5)] = £13,200.
Relevant costs are those future cash costs that change as a direct consequence of undertaking the contract. This general
approach applies to variable and fixed production overhead costs as well as to materials and labour. Generally variable
production overhead costs tend to be relevant because by definition they vary with activity. So if the contract involves more
activity then more variable production overhead costs will be incurred. An example of a variable production overhead cost is
power charged at a rate per unit used (gas or electricity). On the other hand, if the fixed production overhead costs do not
change as a result of undertaking the contract then they are not relevant. Examples of such costs would be rent or rates.
However, if the contract causes a step up in the fixed production overhead costs then the amount by which they change is a
relevant cost to the contract.
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Part 1 Examination – Paper 1.2
Financial Information for Management
June 2007 Marking Scheme
Marks
Section A
Each of the 25 questions in this section is worth 2 marks
50
Section B
Budgeted contribution
Sales price variance
Variances from (a)
Actual contribution
Layout/presentation of statement
(c)
Explanation
(a)
Formulation of objective function
Formulation of constraints
Optimal production plan
Resultant contribution
(b)
3
(a)
(b)
4
(a)
Explanation of shadow price
Shadow prices
Debit entries
Normal loss
Abnormal loss
Outputs
1
1
1
2
1
–––
TI
A
(b)
4
PO
PA
(i) to (iv) Variances (1 mark per variance)
H
A
2
(a)
TA
1
Break-even point
(c)
Explanation for profit difference
Condition for equal profits
1
3
3
1
–––
2
1
–––
1
11/2
2
21/2
–––
21/2
11/2
–––
Total contribution
Net profit
(b)
2
––
12
––
11/2
1
1/
2
–––
Additional revenue
Additional costs
Decision
6
8
3
––
11
––
7
3
––
10
––
4
2
2
1
–––
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3
––
9
––
TAHA POPATIA
Marks
2
3
––
1
1
1
––
3
––
8
––
TI
A
Explanation of relevant cost concept
Application to variable and fixed production overhead costs
Examples
5
PO
PA
(b)
Relevant cost – material R
Relevant cost – skilled labour
H
A
(a)
TA
5
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