SUGGESTIVE SOLUTIONS
SECTION A
1(a) Costs of labour turnover:
Replacement costs are the costs incurred in recruiting new employees. These include such
things as advertising, interviewing,
training and inefficiency of employees while learning a new job.
Preventative costs are the costs incurred in order to try to retain employees. These include such
things as employee facilities,
working environment, pay and pension schemes.
The labour turnover rate for a period can be calculated as:
Number of employees replaced (or number leaving)
––––––––––––––––––––––––––––––––––––––––––––
Average number of employees
x 100%
(b) Production ratios:
Working:
Expected hours of actual output = 16,390 units ÷ 25 units/hr = 655·6 direct labour hours
Efficiency ratio:
Expected hours of actual output
–––––––––––––––––––––––––––
Actual hours worked
x 100% = 655·6 x 100% = 102·4%
–––––
––––––
640
Capacity ratio:
Actual hours worked
––––––––––––––––––
Budgeted hours
x 100% = 640 x 100% = 97·0%
–––––
––––––
660
Production volume ratio:
Expected hours of actual output
–––––––––––––––––––––––––––
Budgeted hours
x 100% = 655·6 x 100% = 99·3%
–––––
––––––
660
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2. (a)
Sales
Costs
Profit
Profit/(loss) in the period:
Product A
619·2
468·0
––––––
151·2
––––––
(K000)
Product B
374·4
312·0
––––––
62·4
––––––
Total
993·6
780·0
––––––
213·6
––––––
Workings:
Sales: Product A 72,000 kg atK8·60/kg = K619,200
Product B 48,000 kg at K7·80/kg = K374,400
Costs: Product A K780,000 x (72,000 ÷ 120,000 kg) = K468,000
Product B K780,000 x (48,000 ÷ 120,000 kg) = K312,000
(b) Further processing
Incremental sales
Incremental costs
(Product B to Product BB):
= K1·20 per kg (K9·00 – K7·80)
= K1·40 per kg
–––––––––––––
Incremental loss
= (K0·20) per kg
–––––––––––––
Further processing is not worthwhile.
(C) (a) Service costing:
Service costing is applied to the provision of services by (or within) an organisation. The main
differences, in comparison with
costing methods applied to manufactured products, are:
(i) The cost of direct materials will generally be relatively small compared with the costs of direct
labour, direct expenses
and overheads.
(ii) Indirect costs (overheads) will generally represent a higher proportion of total cost.
(iii) The output of most service organisations (cost centres) is intangible making it more difficult
to establish an appropriate
cost unit.
(iv) Services cannot be stored and therefore the requirement to value work-in-progress/finished
goods stock does not arise.
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3. (a) Absorption costing profit statement
K
K
Sales
162,400
Production cost of sales:
Cost of production
98,040
less Closing inventory
1,720
96,320
Gross profit
66,080
Selling & administration costs 43,680
Net profit
K22,400
(11,200 units at K14·50)
(11,400 units at K8·60)
(200 units at K8·60)
–––––––
(11,200 units at K8·60)
––––––––
(11,200 units at K5·90)
(11,200 units at K3·90)
––––––––
(11,200 units at K2·00)
––––––––
(b) Marginal costing
(i) Total contribution
Contribution per unit = selling price – variable costs = K$14·50 – K5·80 = K8·70
Total contribution = contribution/unit x sales units = K8·70/unit x 11,200 units = K97,440
or Contribution/sales (C/S) ratio = [(K8·70 ÷ K14·50) x 100] = 60%
Total contribution = sales revenue x C/S ratio = K162,400 x 0·6 = K97,440
(ii) Total net profit
Total fixed costs = (K3·80/unit x 11,400 units) + (K2·90/unit x 11,200 units)
= K43,320 + K32,480 = K75,800
Total net profit = contribution – fixed costs = K97,440 – K75,800 = K21,640
(iii) Break-even sales revenue
Break-even sales revenue = total fixed costs x (selling price ÷ contribution/unit)
= K75,800 x (K14·50 ÷ K8·70) = K126,333
or Break-even sales revenue = total fixed costs ÷ C/S ratio = K75,800 ÷ 0·6 = K126,333
(c) Difference in net profit
Profit differs because of the inclusion of fixed production overheads in inventory valuation using
absorption costing.
200 units inventory increase x K3·80 per unit fixed production overhead
= K760 profit difference (K22,400 – K21,640)
4.(a) The main purposes of the ‘Framework for the Preparation and Presentation of Financial
Statements’ are:
(i) To provide a framework for the future development of international accounting standards and
the review of existing ones.
(ii) To inform interested parties (e.g. national standard setting bodies) of the approach taken by
the IASB in formulating
standards.
(iii) To provide guidance to practitioners when applying international accounting standards.
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(iv) To provide a basis for reducing the number of alternative accounting treatments permitted
by international accounting
standards and thereby promoting harmonisation of regulations, accounting standards and
procedures.
(v) To assist auditors in forming an opinion as to whether financial statements conform with
international accounting
standards.
(vi) To assist the users of financial statements when interpreting the information.
(b) User Group
Current (and future) investors
performance of the organisation to understand
Information needs
They need to assess the financial
the level of risk and the returns provided
by their investment.
Key information requirements: ability to
generate cash, level of profitability, and
dividends.
Lenders
organisation to repay loans and any
They need information on the ability of the
interest.
Key information: profitability, ability to
manage working capital (liquidity), current
level of borrowing, value of assets.
Customers
organisation for significant levels of
Customers that are dependent on the
business or are considering placing long
term contracts will need to know
whether it will stay in business or not.
Key information requirements: ability to
generate cash, and profitability.
Suppliers (and trade creditors)
organisation will stay in business and
They will want to know whether the
whether they will be paid.
Key information requirements: ability to
generate cash, and profitability.
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SECTION B
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(i)
Realisation a/c
Capital a/cs
Cash
Current a/cs
Realisation a/c
(ii) Realisation Account
Furniture & fittings (NBV)
Loan a/c
Motor vehicles (NBV)
Payables
Inventory
Receivables
Partners’ Accounts
John
Peter
Janes
K
K
K
9,000
45,000
30,000
15,000
56,255
38,453
12,802
9,750
7,450
6,300
1,505
1,003
502
––––––– –––––––
56,255
38,453
21,802
––––––––– –––––––––––––– ––
K
50,000
K
18,000
35000
26,500
25,000
42,000
Cash and bank:
Loan
Furniture and fittings
48,800
Payables
Motor vehicles
29,500
Dissolution expenses
1,000
Inventory
27,750
Profit on realisation:John 3/6 1,505
Receivables
39,900
Peter 2/6 1,003
Janes (motor vehicle)
9,000
Janes1/6 502
––––––––
199,450
––––––––––––––––
(iii)
Balance
Realisation a/c
Furniture and fittings
Motor vehicles
Inventory
Receivables
K
6,000
48,800
29,500
27,750
39,900
––––––––
151,950
18,000
25,440
––––––––
199,450
––––––––––––––––
Cash and bank
K
Realisation A/c:
Loan
Payables
Dissolution expenses
Partners a/c:
John
Peter
Janes
18,000
25,440
1,000
56,255
38,453
12,802
151,950
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6. Transport company
(a) Total cost per coach on each route
Drivers’ wages
Fuel and maintenance
Fixed costs:
Vehicle tax & insurance
Apportioned costs
Route A
K
34,320 (W1)
46,818 (W2)
3,870
10,880 (W4)
––––––––
K95,888
––––––––
Route B
K
34,320
52,949 (W3)
3,870
10,880
–––––––––
K102,019
–––––––––
(b) Cost per kilometre on each route
Total cost
÷ total kilometres
Cost per kilometre
(c) Profit per kilometre on each route
Revenue
Costs
Profit/(loss)
Route A
K95,888
52,416(W5)
K1·8294
––––––––
Route A
K per km
2·0986(W7)
1·8294
––––––––
K0·2692 per km
––––––––
Route B
K102,019
59,280 (W6)
K1·7210
–––––––––
Route B
K per km
1·6211 (W8)
1·7210
–––––––––
K(0·0999) per km
–––––––––
Workings:
W1 K110/coach x 6 days/week x 52 weeks/year
W2 K0·8932/km x 12 journeys/day x 14 km/journey x 6 days/week x 52 weeks/year
W3 K0·8932/km x 10 journeys/day x 19 km/journey x 6 days/week x 52 weeks/year
W4 K21,760/route ÷ 2 coaches/route
W5 12 journeys/day x 14 km/journey x 6 days/week x 52 weeks/year
W6 10 journeys/day x 19 km/journey x 6 days/week x 52 weeks/year
W7 13 passengers/journey x K2·26/passenger ÷ 14 km/journey
W8 11 passengers/journey x K2·80/passenger ÷ 19 km/journey
7. (a) Overhead over/under absorption
Overhead absorbed
Overhead incurred
Overhead absorbed
Overhead incurred
Cost centre X
K29,146 (1,235 machine hours at K23·60)
K29,609
––––––––
Overhead under absorbed K463
––––––––
Cost centre Y
K53,718 (6,395 labour hours at K8·40)
K52,567
––––––––
Overhead over absorbed K1,151
––––––––
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(b) Predetermined, as opposed to actual, overhead absorption rates
Advantages:
– enable overheads to be absorbed immediately after production
– easier to estimate product/job costs
– even out fluctuations that would otherwise occur in unit costs if production is uneven
8. (a) NPV – Project 1:
Present value of a perpetuity = annual cash flow ÷ cost of capital expressed as a decimal
Thus, present value of a net cash inflow perpetuity of K13,500 per annum at a cost of capital of
10% per annum
= K13,500 ÷ 0·1 = K135,000
NPV = K135,000 – K119,000
= K16,000
(b) IRR – Project 2:
Net present value at 14%:
Year
0
1
2
3
4
5
Cash flow
(K000)
(241)
60
65
70
100
85
Discount
factor
1·000
0·877
0·769
0·675
0·592
0·519
Net present
value (K000)
(241·0)
52·6
50·0
47·3
59·2
44·1
––––
12·2
––––
Internal rate of return (IRR
=14% + [(20%- 14%)X (12.2/12.2 = 23.0)]
=16%
(Alternatively the NPV at 10% could have been calculated and used.)
4J–IENGBC
Pa
(c) Annual net cash flow – Project 3:
Investment sum ÷ cumulative discount factor over five years at 14%
= K186,000 ÷ 3·432 = K54,195 net cash inflow per annum.
(d) If the cost of capital increased to 15% Project 2 would still be justified as the IRR is 16% (i.e.
IRR > cost of capital).
Project 3, with an IRR of 14%, would not be justified (i.e. IRR < cost of capital).
4J–IENG
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