Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding the style and type of question, and their suggested solutions, in our examinations. They are not intended to provide an exhaustive list of all possible questions that may be asked and both students and teachers alike are reminded to consult our published syllabus (see www.AccountingTechniciansIreland.ie
) for a comprehensive list of examinable topics. There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the only correct approach, particularly with discursive answers. Alternative answers will be marked on their own merits. This publication is copyright 2013 and may not be reproduced without permission of Accounting Technicians Ireland. © Accounting Technicians Ireland, 2013. 2

INSTRUCTIONS TO CANDIDATES
In this examination paper the € / £ symbol may be understood and used by candidates in Northern Ireland to indicate the UK pound sterling by candidates in the Republic of Ireland to indicate the Euro. Answer FIVE questions. Answer all three questions in Section A. Answer ANY Two of THREE questions in Section B. If more than the required number of questions is answered in Section B, then only the requisite number, in the order filed, will be corrected. Candidates should allocate their time carefully. All figures should be labelled, as appropriate, e.g. € , € / £ , units etc. Answers should be illustrated with examples, where appropriate. Question 1 begins on Page 4 overleaf. 3

SECTION A Answer All Questions Question 1
Phelim Ltd. is concerned that two of its products Amber and Venus may not be appropriately costed and priced. This is as a result of declining sales volumes. You have therefore been asked to make relevant calculations, using both ‘traditional’ and ‘modern’ overhead costing methods, to assist with pricing decisions. The company calculates it’s selling prices based on cost plus a mark-up. The company uses a pre-determined overhead absorption rate based on the predominant factor, machine hours. The overhead absorption rate is calculated at the start of each year based on budgeted information: The following relevant information is available: Production overhead Direct labour hours € / £ 1,200,000 50,000 Machine hours Set-up hours Unit costs Direct materials cost 100,000 1,000
Amber
€ / £ 250
Venus
€ / £ 350 Direct labour hours Direct labour cost per hour Machine hours Set-up hours Mark-up 10 € / £ 15 80 1 50% 20 € / £ 15 25 40% 2
Production overheads
Indirect materials cost Supervision cost Support costs Depreciation cost Total overheads
Set-up € / £
50,000 - 50,000 - 100,000
Maintenance € / £
50,000 - 50,000 25,000 125,000
Cutting € / £
100,000 160,000 120,000 145,000 525,000
Assembly € / £
100,000 180,000 120,000 50,000 450,000
TOTAL € / £
300,000 340,000 340,000 220,000 1,200,000 4

Required:
(a) Calculate a suitable pre-determined overhead absorption rate.
2 Marks
(b) Calculate the standard cost and the standard selling price of both Amber and Venus, using the pre determined overhead absorption rate that you have calculated in part (a). 6 Marks (c) In relation to the information given in this question identify suitable cost pools and cost drivers if Gamble Ltd were to use Activity based costing. (d) Calculate a suitable activity-based overhead rate. (e)
4 Marks
Calculate the standard cost and the standard selling price of both Amber and Venus, using the activity-based overhead rate that you have calculated in part (d). 2 Marks
6 Marks Total: 20 Marks
5

Question 2
Robens Ltd. a company which manufactures and sells an electrical component, is approaching the end of its first year in business. Although business has been good, the company has struggled to manage cash flows because of initial set-up costs. The business’ bank balance at the end of the year is projected to be an overdraft of € / £ 85,000. In preparation for a meeting with the company’s bank manager, you have gathered the following budgetary information: 1.
Sales volumes are projected as follows:
Year 1
Quarter 4 50,000 units
Year 2
Quarter 1 Quarter 2 Quarter 3 Quarter 4 50,000 units 40,000 units 30,000 units 70,000 units 2.
3.
4.
The selling price of the component is currently € / £ 5.50 per unit and this is expected to increase to € / £ 6.00 per unit from the start of Quarter 2, Year 2. All sales are on credit and customers settle their debts in the Quarter following sale. Irrecoverable debts of 5% of total sales revenue are anticipated. The company normally holds inventory of 20,000 units at the end of each Quarter and wants this to continue. The electrical components are produced in batches of 2,000 units per batch. Each batch requires 5.
6.
7.
200 direct labour hours and 800 kg of raw materials. Direct labour is projected at a rate of € / £ 16.00 per hour for Quarters 1 and 2 and at € / £ 16.50 thereafter. Raw materials currently cost € / £ 5 per kg and are expected to increase by 5% with effect from the start of Quarter 3, Year 2. The company has agreed an average of 90 days credit with its 8.
suppliers. General overheads are projected to be € / £ 25,000 per month.
Required:
(a) Prepare a Quarterly cash budget for the company for Year 2. 14 Marks (b) Prepare a report to the company’s management team setting out: - the benefits of good budgetary control; - the problems frequently encountered in exercising budgetary control.
6 Marks Total: 20 Marks
6

Question 3
The following information relates to Product Z, produced by Olymice Ltd. during December:
Variances
Materials Price
€ / £
19,000 Adverse Materials Usage Labour Rate Labour Efficiency 5,250 Favourable 12,480 Favourable 19,200 Adverse
Actual data
Materials costs Labour costs 517,750 for 95,000 Kg 486,720 for 62,400 hours Production Volume 12,000 units Actual and standard production volume is the same
Required:
(a) Prepare a standard cost sheet for Product Z. (b) Outline possible explanations for the materials and the labour variances.
14 Marks 6 Marks Total: 20 Marks
7

Question 4
You have been asked by your manager to assist with the induction of a new member of the finance team. After a number of days, the new person approached you with a number of queries about the following terms which they have heard being used, but which they don’t understand: 1.
2.
3.
4.
5.
6.
Integrated cost accounting system Limiting factors Flexible budgets Cost codes Sensitivity analysis Sunk costs Conscious of the importance placed upon clear guidance by your manager, and in order to provide documentation for future reference, you decide that the best approach is for you to provide a written explanation of each term.
Required:
Prepare brief notes which explain each of the above terms. The notes should include practical examples to fully explain each term.
Total: 20 Marks
8

Question 5
‘Over time or over a specific range of activity, some costs tend to be unaffected by the level of output, whereas others will change as output changes’.
Required:
(a) Briefly explain, with the aid of an example, each of the following three cost classifications: (b) i.
ii.
iii.
Variable cost; Fixed cost; Mixed cost (Semi variable / semi fixed cost).
6 Marks
The following information has been supplied for Foxes Ltd. a manufacturing company based in Mullingar;
Activity
Production (units) Sales (units) 60,000 50,000 90,000 85,000
Costs
Direct Material
€/£
120,000
€/£
180,000 Administration Factory Overhead Production Labour Selling and Distribution 75,000 460,000 300,000 170,000 75,000 640,000 450,000 230,000 (c) Prepare a table summarising the variable cost per unit and total fixed cost for each of the five cost headings above.
10 Marks
Using your answer to part (b) calculate the total estimated cost for an activity level of production of 80,000 units and sales of 75,000 units
4 Marks Total: 20 Marks
9

Question 6 Rubex Ltd. manufactures plastic storage boxes. The following is a budgeted Income Statement for the business for June 2013: €/£ €/£ Sales Revenue 15,000 Direct Material 5,200 Direct Labour Production Overhead Selling Overhead 2,390 3,200 890 Profit The following information is also supplied: 1.
2.
11,680 3,320 The monthly budgeted production and sales is 5,000 units. The following breakdown between fixed and variable costs applies: Direct Materials Labour Production Overhead Selling Overhead
Variable
100% €/£1,340 €/£2,680 100%
Fixed
n/a €/£1,050 €/£520 n/a
Required:
(a) Calculate the following: i.
ii.
iii.
iv.
v.
vi.
Contribution for the year; Contribution per unit; Contribution / sales ratio; Breakeven sales volume; Margin of safety %; Sales volume required to achieve a profit of €/£2,220. Note: Each section carries equal marks. (b)
12 Marks
Prepare a clearly labelled breakeven chart, showing the breakeven point, margin of safety and expected profit.
6 Marks
(c) In deciding whether to make or buy the labels which are glued to the storage boxes, list any two qualitative factors that would need to be considered in making this decision.
2 Marks Total: 20 Marks END OF PAPER
10

Solution 1 (a) Pre-determined Overhead Absorption Rate
Production Overhead Machine hours € / £ 1,200,000 100,000 = € / £ 12 per machine hour
(b) Standard Cost & Standard Selling Price using Pre-determined Overhead Absorption Rate
Direct Materials cost (given) Direct Labour cost (labour hours x pay rate) Production Overhead (Machine hours x OAR) € / £ Amber 250.00 150.00 960.00 € / £ Venus 350.00 300.00 300.00
Standard Cost
Mark Up
Standard Selling Price
(50%)
(c) Activity-based Cost pools and cost drivers Cost Pools
Set-Up Costs Maintenance Cutting Assembly
1360.00
680.00
2,040.00 Cost Drivers
Set-Up Hours (40%) Machine Hours Machine Hours Direct Labour Hours
950.00
380.00
1,330.00
11

(d) Activity-based Overhead Rate
Production Overheads Cost driver
Activity-based Overhead Rate Set-Up € / £
100,000 1,000 SUH
€ / £ 100 per SUH Maintenance € / £
125,000 100,000 MH
€ / £ 1.25 per MH Cutting € / £
525,000 100,000 MH
€ / £ 5.25 per MH Assembly (e) Standard Cost & Standard Selling Price using an activity-based overhead rate € / £
Direct Materials cost (given) Direct Labour cost (labour hours x pay rate)
Amber
250.00 150.00
Production Overheads
Set-Up Cost (1/2 x € / £ 100 per Set-up Hour) Maintenance costs (80/25 x € / £ 1.25 per machine hour) Cutting Costs (80/25 x € / £ 5.25 per machine hour) Assembly Costs (DL x € / £ 9 per direct labour hour) 100.00 100.00 420.00 90.00
Standard cost
Mark Up
Standard Selling Price
(50%)
1,110.00
555.00
1,665.00
(40%)
€ / £ Venus
350.00 300.00 200.00 31.25 131.25 180.00
1,192.50
477.00
1,669.50 € / £
450,000 50,000 DLH
€ / £ 9 per DLH
12

Solution 2 (a) CASH BUDGET - YEAR 2
Workings Cash Inflow from Sales
Year 1 Quarter 4
50,000 units Sales Volume € / £ 5.50 per unit Selling Price € / £ 275,000 Gross Sales Revenue € / £ (13,750) LESS Irrecoverable Debt € / £ 261,250 Cash Inflow Net
Quarter 1
50,000 units € / £ 5.50 per unit € / £ 275,000 € / £ (13,750) € / £ 261,250 € / £ 261,250
Year 2 Quarter 2
40,000 units € / £ 6.00 per unit
Quarter 3
30,000 units € / £ 6.00 per unit € / £ 240,000 € / £ (12,000) € / £ 228,000 € / £ 261,250 € / £ 180,000 € / £ (9,000) € / £ 171,000 € / £ 228,000
Quarter 4
70,000 units € / £ 6.00 per unit € / £ 420,000 € / £ (21,000) € / £ 399,000 € / £ 171,000

Payments to Suppliers
Year 1 Quarter 4
50,000 units Sales Volume 20,000 units PLUS Closing inventory 20,000 units LESS Opening Inventory 50,000 units Production Volume 25 Number of batches 800 kg Raw materials per batch 20,000 kg Total Raw materials volume € / £ 5 per kg Raw materials price € / £ 100,000 Raw materials cost Supplier payable Direct Labour Cost Number of batches (from table above) Direct labour hours per batch Total Direct labour hours Direct labour rate Total Direct labour cost
Quarter 1
50,000 units 20,000 units 20,000 units 50,000 units 800 kg 20,000 kg € / £ 5 per kg € / £ 100,000 € / £ 100,000
Quarter 1
25 200 5,000 hours € / £ 16.00 per hour € / £ 80,000 25
Quarter 2
40,000 units
Year 2
20,000 units 20,000 units 40,000 units 20 800 kg 16,000 kg € / £ 5 per kg € / £ 80,000 € / £ 100,000
Quarter 2
20 200 4,000 hours € / £ 16.00 per hour € / £ 64,000
Quarter 3
30,000 units 20,000 units 20,000 units 30,000 units € / £ 5.25 per kg
Year 2
15 800 kg 12,000 kg € / £ 63,000 € / £ 80,000
Quarter 4
70,000 units 20,000 units 20,000 units 70,000 units 35 800 kg 28,000 kg € / £ 5.25 per kg € / £ 147,000 € / £ 63,000
Quarter 3
15 200 3,000 hours € / £ 16.50 per hour € / £ 49,500
Quarter 4
35 200 7,000 hours € / £ 16.50 per hour € / £ 115,500 14
/Cont’d

Cash Budget for Year 2
Cash Inflows
Receipts from Customers Total Cash Inflow
Cash Outflows
Direct labour cost Payments to Suppliers General Overheads (€ / £ 25,000 per month) Total Cash Outflow Net Cash Inflow / Outflow Opening Bank Balance Closing Bank Balance
Quarter 1 € / £
261,250 261,250 80,000 100,000 75,000 255,000
6,250
(85,000)
(78,750) Quarter 2 € / £
261,250 261,250 64,000 100,000 75,000
Quarter 3 € / £
228,000 228,000 49,500 80,000 75,000 239,000
22,250
(78,750)
(56,500)
204,500
23,500
(56,500)
(33,000) Quarter 4 € / £
171,000 171,000 115,500 63,000 75,000 253,500
(82,500)
(33,000)
(115,500) TOTAL € / £
921,500 921,500 309,000 343,000 300,000 952,000
(30,500)
(85,000)
(115,500)
15

(b) Report on Budgetary Control & Typical Problems
Benefits of good budgetary control Benefits of good budgetary control include:
Improved planning and co-ordination
The preparation of formal budgets requires detailed planning, which, in turn, requires the co-ordination of activities within a section or department or on an organization-wide basis.
Clarification of authority and responsibility
Budget preparation requires clarification of manager responsibilities. A budget can provide clear guidelines for managers and translate organizational objectives into specific tasks related to individual managers.
Communication
As the budgetary process will involve all levels of management, it provides a vehicle for communication – and ultimately the budget should be communicated to all staff.
Motivation
The process of setting targets and comparing actual results with budget can be a motivating factor for staff, if correctly handled by management. This may include participation to achieve goal congruence.
Control
Reporting and systematic monitoring of deviations from budget (variances) can assist with control in an organization and allow corrective action to be taken.
Efficiency
Management-by-exception techniques facilitated by budgeting can result in more-efficient use of management time.
Integration
The integration of budgets can assist with cash flow management and working capital management. Problems frequently encountered in exercising budgetary control Problems frequently encountered in exercising budgetary control include:
Measuring change
Variance information may arise because of changing circumstances and / or poor forecasting.
Market conditions
Budgets are often developed internally and may not respond to changing external market circumstances. 16

Inflexibility
Well-documented plans can be a contributory factor to inertia and a lack of flexibility with an organization.
Human aspects
Budgetary systems which are not well-communicated can cause employee relations difficulties and impact on employee morale. 17

Solution 3
Workings: Materials € / £ 517,750 for 95,000 Kg = € / £ 5.45 per kg Labour € / £ 486,720 for 62,400 hours = € / £ 7.80 per hour Materials Price Variance
(Actual Price – Standard Price) x Actual Quantity
(5.45 per kg – x ) = 0.20 x 95,000 kg = € / £ 19,000 Adverse x = € / £ 5.25 per kg Materials Usage Variance
(Actual Quantity – Standard Quantity ) x Standard Price
(x – 95,000 kg) x € / £ 5.25 = € / £ 5,250 Favourable x = 96,000 kg 96,000 kg / 12,000 units = 8 kg per unit Labour Rate Variance
(Actual Pay Rate – Standard Pay Rate ) x Actual Labour Hours
(€ / £ 7.80 per hour – x) = 0.2 x 62,400 hours = € / £ 12,480 Favourable x = € / £ 8 per hour Labour Efficiency Variance (Actual Labour Hours – Standard Labour Hours) x Standard Pay Rate (62,400 hours – x) x € / £ 8.00 per hour = € / £ 19,200 Adverse x = 60,000 hours 60,000 hours / 12,000 units = 5 hours per unit 18

Alternative approach: Cost per kg of material Material price variance
95,000kg should have cost (95,000 x C) 95,000kg did cost
Variance
95,000kg should have cost 95,000kg did cost
Variance
Therefore 95,000 x Cost = €/£498,750 C = €/£ 498,750/95,000 = €/£5.25
Kg material per unit of product Material usage variance
12,000 units should have used (12,000 x Kg) 12,000 units did use x standard cost per kg €/£5.25 Variance 12,000 units should have used (12,000 x Kg) 12,000 units did use x standard cost per kg €/£5.25 (€/£5,250/€/£5.25) Variance Therefore 12,000 x Kg = 96,000 Kg = 96,000/12,000 = 8Kg 19 €/£ 95,000C 517,750
19,000A
€/£ 498,750 (Bal. Fig.) 517,750
19,000A
Kg 12,000Kg 95,000
€/£5,250F
Kg 96,000 (Bal.Fig.) 95,000 1,000F
€/£5,250F

Cost per labour hour Labour rate variance
62,400 hours should have cost (62,400 x C) 62,400 hours did cost
Variance
62,400 hours should have cost (62,400 x C) 62,400 hours did cost
Variance
Therefore 62,400 x Cost = €/£499,200 C = €/£499,200/62,400 = €/£8.00
Labour hours per unit of product Labour efficiency variance
12,000 units should have used (12,000 x Hrs) 12,000 units did use x standard cost per kg €/£8.00 Variance 12,000 units should have used (12,000 x Hrs) 12,000 units did use x standard cost per kg €/£8.00 (€/£19,200/€/£8.00) Variance Therefore 12,000 x Hrs = 60,000 Hrs = 60,000/12,000 = 5Hrs 20
€/£
62,400C 486,720
12,480F €/£
499,200 (Bal. Fig.) 486,720
12,480F
Hrs 12,000Hrs 62,400
€/£19,200A
Hrs 60,000 (Bal.Fig.) 62,400 2,400A
€19,200A

(a) Standard cost card
Materials cost Labour cost 8kg @ € / £ 5.25 per kg 5 hours @ € / £ 8 per hour Per Unit
€ / £
42.00 40.00 82.00 Total (b) Explanation of Variances
Material Variances
The business may have sourced more expensive, better-quality materials for production. Accordingly, these cost more, resulting in the adverse price variance of € / £ 19,000. However, there has been less usage (perhaps less wastage or less faults) with a favourable usage variance of € / £ 5,450.
Labour Variances
The adverse labour efficiency variance of € / £ 18,720 could be attributable to less-skilled or less experienced staff that have proved to be cheaper to employ, hence the favourable labour rate variance, but have taken longer to do the job. 21

Solution 4 Integrated cost accounting system
An integrated cost accounting system is one where the cost accounts and financial accounts are kept in the same set of accounting records. This system avoids the need for separate accounting records for financial accounting and costing purposes but is still able to meet the information requirement for costing plus financial accounts. There are a number of requirements for the successful operation of an Integrated Cost Accounting System, including: • Top-management decision on the extent of integration of the two sets of accounting records re: to integrate until the stage of primary cost or factory cost or full integration. • A suitable coding system must be developed to serve the purposes of both financial accounting and cost accounting • An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses, other adjustments necessary for the preparation of interim accounts • Proper coordination should exist between the staff responsible for the financial and cost aspect of the accounts In an integrated cost accounting system, the financial and cost transactions are recorded in an integrated ledger which is self-balancing. Advantages of this include: • Savings in clerical work and costs because only one set of accounts is kept; • • No need to reconcile financial and cost profits; No confusion arises from different inventory valuations, method of depreciation and profits • • The probability of error is less because recording takes place in one set of accounts and Information produced in an integrated system is quicker, thus helping management in decision making
Limiting factors
A limiting factor prevents a company from expanding to infinity. Limiting factors affect budgeting and they must be considered to ensure that the budgets can be attained. Examples are: raw material shortage, labour shortage, insufficient production capacity, low demand for products, lack of capital, etc. The principal budget factor is the factor that limits the activities of an organization because such a limit / constraint will have a pervasive effect on all plans and budgets. The limiting factor must be identified during the budget preparation process. Examples of principal budget factors include: • Shortage of labour / materials • Shortage of production capacity. • • Shortage of finance Shortage of demand for goods or services. 22

Flexible budgets
A flexible budget is a budget which is designed to change in accordance with the level of activity attained. It is also known as Variable budget as the budget recognises the difference in cost behaviour - namely fixed costs and variable costs - in relation to fluctuations in activity. The budget is designed to change in accordance with such fluctuations. For a fixed budget, the budget remains the same irrespective of the level of activity actually achieved. The fixed budget is prepared based on only one level of activity. Therefore, if the level of output actually achieved differs considerably from that budgeted, large variances will arise. Differences between Fixed Budgets and Flexible Budgets include: • For a fixed budget, the figures are for a SINGLE level of activity while a flexible budget is prepared for DIFFERENT levels of activity; • Under fixed budgets, managers are held responsible for variances not under their control ( both fixed and variable cost); • The fixed budget is never able to properly assess the efficiency and actual performance of managers. For example, a fixed budget is set with a planned 8,000 hours but an actual 10,000 hours are recorded, from both the motivational and control point, it is difficult to gauge the efficiency of the managers who are involved in the manufacture of the output at that actual level; The flexible budget allows more meaningful comparison as it ‘flexes’ to the actual activity level. It calculates what costs should have been for the actual level of activity and • The flexible budget has the advantage of assisting the managers deal with uncertainty by allowing them to see the expected outcomes for a range of activity;
Cost codes
Job Cost Management modules enable you to effectively manage jobs from revenue and cost perspectives. To do this effectively, we allow for a work breakdown, which we refer to as a cost code. User-defined cost codes can be established by type of job. Cost Analysis by cost-code links each class of expense with budget. These reports may be selected by job range, open or complete jobs, department, or division. Features: • Cost codes are user defined. They may be customized to your needs and preferences. You may set up a different code structure for each job. • Balancing your jobs to the General Ledger is easy because nothing is recorded as a job cost without also being recorded in the General Ledger. • Reporting of labour burden cost allows you to have a more-accurate job cost by allowing you to see not only what you pay an employee, but also what he / she is costing you in ‘invisible’ cost. 23

Sensitivity analysis
Sensitivity analysis is implemented to analyze the various risks to a project by looking at all aspects of the project and their potential impact on the overall goal. Knowing the level of impact various elements have on a project can assist management with setting priorities to achieve the end result more quickly. Sensitivity analysis facilitates comparisons between various elements to quickly discern which risks are worth taking. Project management can use sensitivity analysis to create priorities in dealing with elemental risks to a project. By knowing which risks affect the objective the most, more efforts can be concentrated to lessen that risk. Lowering risk potential allows for projects to flow in a smoother fashion with fewer unexpected delays.
Sunk Costs
Sunk cost is a past cost not directly relevant in decision making. • If we refer to relevant costs, the main feature is that we are referring to future costs. • As a sunk cost is a cost which has already been incurred, it should be ignored when making decisions. • By analysing these types of sunk costs, management will be wasting their time and effort as these costs do not affect the decision they are going to make. In short-term decision making, fixed costs are generally regarded as sunk costs. EXAMPLE Say Company A has a factory which produces product A. Earlier last year it extended and renovated the factory at an additional cost of € / £ 200,000 to produce product B. Now management is thinking of whether to let outsiders produce product B or not. Should this € / £ 200,000 be considered in that decision? € / £ 200,000 is a sunk cost which was caused by a previous decision. Sunk costs are costs which cannot be recovered once they have been incurred. Sunk costs are sometimes contrasted with variable costs, which are the costs that will change due to a proposed course of action, and prospective costs which are costs that will be incurred if an action is taken. Only variable costs are relevant to a decision. 24

Solution 5 (a)
Variable cost is a cost that varies as the level of activity changes. Material cost would be an example of a variable cost – the more of a product that is produced the more material that would be required. Fixed cost is a cost that remains the same irrespective of the level of activity. The cost of renting a building would be classified as a fixed cost. The rent would be paid periodically and would not vary with the level of activity. Mixed cost is a cost that is partly fixed and partly variable. The remuneration package of a sales representative would be an example of a mixed cost. The basic salary of the sales representative is the fixed element and any sales commission paid would depend on the volume of sales achieved, hence, the variable element.
(b)
Direct Material Administration Factory Overhead Production Labour Selling & Distribution
Variable cost per unit € /£
2.00 0 6.00 5.00 2.00 15.00
Fixed cost Working € /£
0 75,000 100,000 0 70,000 245,000 1 2 3 4 5 Workings: Using the High-low method
Direct material (W1)
Production units Production units Increase in units and cost
Administration (W2)
Production units Production units Increase in units and cost
Factory overhead (W3)
Production units Production units Increase in units and cost
Activity Volume
60,000 90,000 30,000 60,000 90,000 30,000 60,000 90,000 30,000
Total cost € /£
120,000 180,000 60,000 75,000 75,000 nil 460,000 640,000 180,000
Variable CPU € /£
2 2 2
Fixed cost
nil 6 75,000 100,000 25

Production labour (W4)
Production units Production units Increase in units and cost
Selling and Distribution (W5)
Sales units Sales units Increase in units and cost 60,000 90,000 30,000 50,000 85,000 35,000
€ /£
300,000 450,000 150,000 170,000 240,000 70,000
€ /£
5 5 5 2 nil 70,000 1.
2.
3.
VC €/£120,000 / 60,000 =€/£2.00 per unit; €/£180,000 / 90,000 =€/£2.00 per unit; All fixed because there is no increase in costs as volume of output increases. 60,000 x €/£6 = €/£360,000 variable. Total is €/£460,000. Fixed is €/£100,000. or 90,000 x €/£6 = €/£540,000 variable. Total is €/£640,000. Fixed is €/£100,000. 4.
5.
VC €/£300,000 / 60,000 =€/£5.00 per unit; €/£450,000 / 90,000 =€/£5.00 per unit; 50,000 x €/£2 = €/£100,000 variable. Total is €/£170,000. Fixed is €/£70,000. or 85,000 x €/£2 = €/£170,000 variable. Total is €/£240,000. Fixed is €/£70,000.
(c)
Direct Material Administration Factory Overhead Production Labour Selling & Distribution 80,000 x €/£2 (80,000 x €/£6) + €/£100,000 80,000 x €/£5 (75,000 x €/£2.00) + €/£70,000
€ /£
160,000 75,000 580,000 400,000 220,000 1,435,000 26

Solution 6: (a)
(i) Sales Revenue Variable Cost Direct materials Direct labour Production overhead Selling overhead
Contribution
(ii)
€ /£
5,200 1,340 2,680 890 or Total contribution Total units
CPU
Sales price per unit Variable cost per unit
CPU
(iii) Contribution to sales ratio C.P.U. / SP x 100 €0.978 / €/£3 x 100 (iv) Breakeven sales volume Fixed Cost €/£1,570 CPU (v) Margin of safety % €/£0.978 Expected sales Breakeven sales Margin of safety Margin of Safety % € /£ 4,890 5,000
0.978
€ /£ 3.000 2.022
0.978
= 32.60% = 1,605 units Units 5,000 1,605 3,395 67.9%
€ /£
15,000 10,110
4,890
27

(b)
€/£ (‘000) (vi) Sales volume required to achieve a profit of €/£2,200 Fixed Costs + Target Profit C.P.U. (€/£1,570 + €/£2,220) €/£0.978 = 3,875 units Breakeven Chart 17 16 15 14 13 12
(c)
Revenue Total Costs Expected Profit 7 6 5 4 11 10 9 8 BEP Margin of Safety 3 2 1
1,000 1,605 2,000 3,000 4,000 5,000
Fixed Costs Units Factors that would need to be considered before deciding to make or buy the packaging 1) The reliability of the supplier in terms of delivery time. 2) Quality issues relating to the quality of the suppliers product. 3) The price quoted by the supplier and the risk of the supplier increasing the price of its 4) product. The benefit that the use of a supplier for packaging might bring in terms of being able to concentrate on core competencies. (other relevant factors would be acceptable) 28