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Management
Accounting
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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
TFC
A
0 675 1,200 1,500 1,700 Units
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What is the margin of safety at the 1,700 units level of activity?
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A 200 units
B 300 units
C 500 units
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D 1,025 units
(2 marks)
A
(ii) Cost accounting is that part of financial accounting which records the cash received and payments made by an
organisation.
TA
3 Regression analysis is being used to find the line of best fit (y = a + bx) from eleven pairs of data. The calculations
have produced the following information:
Σx = 440, Σy = 330, Σx2 = 17,986, Σy2 = 10,366, Σxy = 13,467 and b = 0.69171
What is the value of ‘a’ in the equation for the line of best fit (to 2 decimal places)?
A 0.63
B 0.69
C 2.33
D 5.33
(2 marks)
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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
(2 marks)
5 A company uses an overhead absorption rate of $3.50 per machine hour, based on 32,000 budgeted machine hours
for the period. During the same period the actual total overhead expenditure amounted to $108,875 and 30,000
machine hours were recorded on actual production.
By how much was the total overhead under or over absorbed for the period?
A Under absorbed by $3,875
A
B Under absorbed by $7,000
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C Over absorbed by $3,875
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D Over absorbed by $7,000
(2 marks)
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A
9 Which of the following best describes a flexible budget?
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A A budget which shows variable production costs only.
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B A monthly budget which is changed to reflect the number of days in the month.
C A budget which shows sales revenue and costs at different levels of activity.
D A budget that is updated halfway through the year to incorporate the actual results for the first half of the year.
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(2 marks)
F 8 65,000 58,900
G 5 37,500 35,700
TA
A
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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
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sold for $40 per kg. The current purchase price for X is $53 per kg.
What is the total relevant cost of raw material X for the project?
A $17,950
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B $19,250
C $21,200
D $21,500
A
(2 marks)
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14 Which of the following is NOT a feasible value for the correlation coefficient?
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A +1.4
B +0.7
C 0
D −0.7
(2 marks)
£ A £ B
0 0
£ C £ D
A
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0 0
(2 marks)
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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 $19.50 per
unit were achieved.
What were the sales price and sales volume contribution variances for last month?
Sales price variance ($) Sales volume contribution variance ($)
A 5,250 Adverse 4,000 Favourable
B 5,250 Adverse 4,000 Adverse
A
C 5,000 Adverse 4,000 Favourable
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D 5,000 Adverse 4,000 Adverse
(2 marks)
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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:
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Units
Sales 19,000
Opening inventory of finished goods 4,000
Closing inventory of finished goods 3,000
Kg
A
What is the budgeted raw material purchases for next period (in kg)?
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A 141,000
B 147,000
C 157,000
D 163,000
(2 marks)
24 Which one of the following is most likely to operate a system of service costing?
A A printing company
B A hospital
C A firm of solicitors.
(1 mark)
A
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25 The following budgeted information relates to a manufacturing company for next period:
Units $
PA
Production 14,000 Fixed production costs 63,000
Sales 12,000 Fixed selling costs 12,000
The normal level of activity is 14,000 units per period.
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Using absorption costing the profit for next period has been calculated as $36,000.
What would the profit for next period be using marginal costing?
A $25,000
A
B $27,000
C $45,000
H
D $47,000
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(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)
(1)
(2)
(3)
0 X
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
A
labelled (1), (2) and (3).
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At which of the following intersections is contribution maximised?
A Constraints (1) and (2)
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B Constraints (2) and (3)
C Constraints (1) and (3)
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28 In an organisation manufacturing a number of different products in one large factory, the rent of that factory is an
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B False
(1 mark)
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30 A company manufactures and sells two products (X and Y) both of which utilise the same skilled labour. For the
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coming period, the supply of skilled labour is limited to 2,000 hours. Data relating to each product are as follows:
Product X Y
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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
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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
A
(2 marks)
32 What was the variable overhead expenditure variance for last month?
A $5,000 Adverse
B $5,000 Favourable
C $6,000 Adverse
D $6,000 Favourable
(2 marks)
33 What was the variable overhead efficiency variance for last month?
A $5,000 Adverse
B $5,000 Favourable
A
C $6,000 Adverse
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D $6,000 Favourable
(2 marks)
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34 When a manufacturing company operates a standard marginal costing system there are no fixed production overhead
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variances.
Is this statement true or false?
A True
B False
A
(1 mark)
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35 A company operates a standard costing system. The variance analysis for last month shows a favourable materials price
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37 Four vertical lines have been labelled G, H, J and K at different levels of activity on the following profit-volume chart:
0
Output
G
H J
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PA
Which line represents the total contribution at that level of activity?
A Line G
B Line H
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C Line J
D Line K
(2 marks)
A
38 Data is information that has been processed in such a way as to be meaningful to its recipients.
H
A True
B False
(1 mark)
A
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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.
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A project is being considered which would make use of this machine for six months. After this time the machine would
be sold for $5,000.
What is the relevant cost of the machine to the project?
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A $2,000
B $3,000
C $5,000
A
D $10,000
(2 marks)
H
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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)
43 A contract is under consideration which requires 600 labour hours to complete. There are 350 hours of spare labour
capacity for which the workers are still being paid the normal rate of pay. The remaining hours for the contract can
be found either by weekend overtime working paid at double the normal rate of pay or by diverting labour from other
production. This other production makes a contribution, net of labour cost, of $5 per hour. The normal rate of pay is
$9 per hour.
What is the total relevant cost of labour for the contract?
A
A $1,250
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B $3,500
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C $4,500
D $4,900
(2 marks)
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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
If an employee produces 200 units in eight hours on a particular day, what is the employee’s gross pay for that
day?
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A $128
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B $144
C $160
D $180
(2 marks)
45 A semi-variable cost is one that, in the short term, remains the same over a given range of activity but beyond that
increases and then remains constant at the higher level of activity.
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 Q X Y
$95,000 $82,000 $46,000 $30,000
It has been estimated that each service cost centre does work for other cost centres in the following proportions:
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?
A $124,500
B $126,100
C $127,000
D $128,500
(2 marks)
A
The following information relates to questions 47 and 48:
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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
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is in short supply – 1,000 kg of G and 1,800 kg of H are available next period. The company holds no inventories and it
can sell all the units produced.
The management accountant has drawn the following graph accurately showing the constraints for materials G and H.
PO
Product Y
(units)
100
A
Material G
090
H
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Material H
Product X
000
125 150 (units)
47 What is the amount (in kg) of material G and material H used in each unit of product Y?
Material G Material H
A 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?
Product X Product Y
A 0 90
B 50 60
C 60 50
D 125 0
(2 marks)
50 A company which operates a process costing system had work-in-progress at the start of last month of 300 units
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(valued at £1,710) which were 60% complete in respect of all costs. Last month a total of 2,000 units were completed
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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.
PA
What was the total value of the 2,000 units transferred to the finished goods warehouse last month?
A $19,910
B $20,000
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C $20,510
D $21,710
(2 marks)
A
H
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Formulae Sheet
Regression analysis
∑y b∑x
a= -
n n
∑y b∑x
a= -
n∑xy-∑x∑y
b= n n
n∑x2 -(∑x) 2
∑y b∑x
a= -
nn∑xy-∑x∑y
n
b=
n∑xy-∑x∑y
r= n∑x -(∑x)2
2
2 n∑xy-∑x∑y
(n∑xb= -(∑x)2 )(n∑y 2 -(∑y)2 )
n∑x2 -(∑x)2
n∑xy-∑x∑y
r=
2C0D (n∑x 2
-(∑x)2
)(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
Economic R batch
2C0Dquantity
h
A
=
D
Ch (1-
2C DR)
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= 0
D
Ch (1- )
R
PA
PO
A
H
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A
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A
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A
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Pilot Paper F2 Answers
Management Accounting
Summarised
1 C 26 B
2 B 27 D
3 C 28 B
4 C 29 D
5 A 30 D
6 C 31 A
7 C 32 B
8 C 33 C
9 C 34 B
10 C 35 A
11 A 36 C
12 D 37 C
13 B 38 B
14 A 39 C
15 A 40 B
16 D 41 B
17 C 42 C
18 A 43 B
A
19 C 44 D
20 A 45 B
21 B 46 D
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22 C 47 A
23 D 48 A
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24 B 49 B
25 B 50 A
In detail
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1 C
2 B
A
6 C
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
12 D
14 A
15 A
16 D
17 C
18 A
A
20 A Price variance: (0.50 × 10,500) = $5,250 Adverse
Volume variance: (500 × 8) = $4,000 Favourable
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21 B Budgeted production: (19,000 + 3,000 − 4,000) = 18,000 units
PA
Raw materials required for budgeted production: (18,000 × 8) = 144,000 kg
Budgeted raw material purchases: (144,000 + 53,000 − 50,000) = 147,000 kg
22 C
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23 D
24 B
25 B Production > Sales Absorption costing profit > Marginal costing profit
A
27 D
28 B
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
35 A
36 C
37 C
A
38 B
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39 C Joint costs apportioned to H: [330,000 ÷ (420,000 + 330,000)] × 350,000 = $154,000
Closing inventory valuation (HH): (30,000 ÷ 330,000) × (154,000 + 66,000) = $20,000
PA
40 B Relevant cost: (8,000 − 5,000) = $3,000
46 D
Total overhead to cost centre P: $
Direct 95,000
Proportion of cost centre X [46,000 + (0.10 × 30,000)] × 0.50 24,500
Proportion of cost centre Y [30,000 × 0.3] 9,000
128,500
47 A
100 units of Y with all of material G (1,000 kg) = 10 kg per unit
90 units of Y with all of material H (1,800 kg) = 20 kg per unit
48 A
Total contributions:
A [(0 × 8) + (90 × 20)] = $1,800
B [(50 × 8) + (60 × 20)] = $1,600
C [(60 × 8) + (50 × 20)] = $1,480
D [(125 × 8) + (0 × 20)] = $1,000
50 A
$
Value of 2,000 units transferred:
1,700 units × 10 17,000
300 units × 0.40 × 10 1,200
Opening work in progress value 1,710
19,910
A
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PA
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A
H
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Paper 1.2
Financial
Information for
Management
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PART 1
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FRIDAY 7 DECEMBER 2001
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QUESTION PAPER
A
H
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.
2 Canberra has established the following information regarding fixed overheads for the coming month:
Budgeted information:
Fixed overheads £180,000
Labour hours 3,000 hours
A
Machine hours 10,000 hours
Units of production 5,000 units
TI
Actual fixed costs for the last month were £160,000.
PA
Canberra produces many different products using highly automated manufacturing processes and absorbs overheads on
the most appropriate basis.
A £16
B £18
C £36
D £60.
A
H
4 Which of the following statements is correct with regard to time series analysis?
A The trend is the general upward movement of the variable over time.
B The multiplicative model assumes that the different variations are independent of one another.
C Time series can be completely predicted by regression analysis.
D The cyclical variation is the regular periodic variation that exists over a long duration.
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5 Which of the following is NOT CORRECT?
A Cost accounting can be used for stock valuation to meet the requirements of internal reporting only.
B Management accounting provides appropriate information for decision-making, planning, control and
performance evaluation.
C Routine information can be used for both short-term and long run decisions.
D Financial accounting information can be used for internal reporting purposes.
6 Melbourne wishes to make a comparison between the sales revenue figures for two different time periods. The following
figures were recorded:
Inflation
Sales Index
£000
Year 7 325 124
Year 10 435 130
What is the real increase in the sales revenue over this period in % terms?
A 7·9%
A
B 27·7%
C 33·8%
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D 40·3%.
PA
7 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%.
PO
If successful the product would generate income of £200,000 otherwise £70,000 would be received.
What is the maximum that the company would be prepared to pay for the advertising?
A £32,500
A
B £29,000
C £17,500
H
D £50,000.
TA
8 Which of the following relates to the cost of replacing (rather than retaining) labour due to high employee turnover?
A Improving working conditions
B Suffering the learning curve effect
C Provision of a pension
D Provision of welfare services.
A Contract costing is appropriate if each unit of production is unique and takes a considerable length of time to
complete.
B Batch costing refers to a system where either job or process costing techniques are used to manufacture a
product.
C Rectification costs should be charged to production overheads if the costs can not be specifically traced to a
job.
D Job costing is required when each unit of production is unique and production is of long duration.
3 [P.T.O.
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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
E
B
D C
A
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U units
Which points are most likely to give the optimal solution?
PA
A A and B only
B A, B and C only
C D and E only
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D B, D and E only.
11 Dalby is currently considering an investment that gives a positive net present value of £3,664 at 15%. At a discount rate
of 20% it has a negative net present value of £21,451.
A
A 15·7%
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B 16·0%
C 19·3%
D 19·9%.
12 The management accountant of Gympie Limited has already allocated and apportioned the fixed overheads for the
period although she has yet to reapportion the service centre costs. Information for the period is as follows:
What are the total overheads included in production department 1 if the reciprocal method is used to reapportion
service centre costs?
A £27,618
B £28,171
C £28,398
D £28,453.
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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:
A 153 units
B 170 units
C 485 units
D 509 units.
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.
A
The following information was available for one of the divisions:
Net profit Profit before Divisional net Cash/
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after tax interest and tax assets (overdraft)
£000 £000 £000 £000
PA
Division 1 47 69 104 (21)
What is the residual income for this division based on controllable profit and controllable net assets?
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A £36,600
B £56,500
C £58,600
D £60,700.
A
15 Ayr is planning on paying £300 into a fund on a monthly basis starting three months from now, for twelve months.
H
A £2,816
B £2,733
C £2,541
D £2,986.
5 [P.T.O.
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17 Charleville operates a continuous process producing three products and one by-product. Output from the process for a
month was as follows:
What was the unit valuation for product 3 using the sales revenue basis for allocating joint cost?
A £4·70
B £4·80
C £5·00
D £5·10.
18 Bowen has established the following with regard to fixed overheads for the past month:
A
Actual costs incurred £132,400
Actual units produced 5,000 units
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Actual labour hours worked 9,750 hours
Budgeted costs £135,000
PA
Budgeted units of production 4,500 units
Budgeted labour hours 9,000 hours
A £750 favourable
B £11,250 favourable
C £22,500 favourable
A
D £11,250 adverse.
H
A A stores ledger account will be updated from a goods received note only.
B A stores requisition will only detail the type of product required by a customer.
C The term lead time is best used to describe the time between receiving an order and paying for it.
D To make an issue from stores authorisation should be required.
20 Perth operates a process costing system. The process is expected to lose 25% of input and this can be sold for £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.
A £44,100
B £49,700
C £58,800
D £56,525.
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21 Camden has three divisions. Information for the year ended 30 September is as follows:
Division A Division B Division C Total
£000 £000 £000 £000
Sales 350 420 150 920
Variable costs 280 210 120 610
Contribution 70 210 30 310
Fixed costs 262·5
Net profit 47·5
General fixed overheads are allocated to each division on the basis of sales revenue; 60% of the total fixed costs 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 A, B and C
B A and B only
C B only
D B and C only.
A
22 Brisbane Limited has recorded the following sales information for the past six months:
TI
Month Advertising expenditure Sales revenue
£000 £000
PA
1 1·5 30
2 2 27
3 1·75 25
4 3 40
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5 2·5 32
6 2·75 38
The following has also been calculated:
A
A 0·070
B 0·086
C 8·714
D 14·286.
7 [P.T.O.
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24 The following process account has been drawn up for the last month:
Process account
Units £ Units £
Opening WIP 250 3,000 Normal loss 225 450
Input: Output 4,100
Materials 4,500 22,500 Abnormal Loss 275
Labour 37,500 Closing WIP 150
4,750 4,750
Material Labour
Opening WIP 100% 40%
Closing WIP 100% 30%
The company uses the FIFO method for valuing the output from the process and all losses occurred at the end of the
process.
A
A 4,380 units
B 4,270 units
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C 4,320 units
D 4,420 units.
PA
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
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12·68%. She plans to start making payments into the account the month after her sons fifth birthday.
How much will be in the account immediately after the final payment has been made?
A £18,847
A
B £18,377
C £17,606
H
D £18,610.
TA
(50 marks)
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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 10 (4 kg at £2·50/kg)
Material 2 7 (1 kg at £7/kg)
Direct labour 13 (2 hours at £6·50/hour)
Fixed overheads 7 (2 hours at £3·50/hour)
37
Required:
(a) Using the standard costs calculate two different cost plus prices using two different bases and explain an
advantage and disadvantage of each method. (6 marks)
A
(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)
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(10 marks)
PA
2 Newcastle Limited uses variance analysis as a method of cost control. The following information is available for the year
ended 30 September 2001:
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62
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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 [P.T.O.
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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:
(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 Toowombas production plans.
(2 marks)
(10 marks)
A
4 Wollongong wishes to calculate an operating budget for the forthcoming period. Information regarding products, costs
TI
and sales levels is as follows:
Product A B
PA
Materials required
X (kg) 2 3
Y (litres) 1 4
PO
Closing stock of materials and finished goods will be sufficient to meet 10% of demand. Opening stocks of material X
H
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.
TA
Required:
Produce the following budgets:
(10 marks)
10
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5 Surat is a small business which has the following budgeted marginal costing profit and loss account for the month ended
31 December 2001:
£000 £000
Sales 48
Cost of sales:
Opening stock 3
Production costs 36
Closing stock (7)
(32)
16
Other variable costs:
Selling (3·2)
Contribution 12·8
Fixed costs:
Production overheads (4)
Administration (3·6)
Selling (1·2)
A
Net profit 4·0
TI
The standard cost per unit is:
£
PA
Direct materials (1 kg) 8
Direct labour (3 hours) 9
Variable overheads (3 hours) 3
PO
20
The normal level of activity is 2,000 units per month. Fixed production costs are budgeted at £4,000 per month and
A
Required:
TA
(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 [P.T.O.
34 of 298 TAHA POPATIA
Formulae Sheet
A
TI
PA
PO
A
H
TA
12
35 of 298 TAHA POPATIA
Present Value Table
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 0·980 0·961 0·943 0·925 0·907 0·890 0·873 0·857 0·842 0·826 2
3 0·971 0·942 0·915 0·889 0·864 0·840 0·816 0·794 0·772 0·751 3
4 0·961 0·924 0·888 0·855 0·823 0·792 0·763 0·735 0·708 0·683 4
5 0·951 0·906 0·863 0·822 0·784 0·747 0·713 0·681 0·650 0·621 5
6 0·942 0·888 0·837 0·790 0·746 0·705 0·666 0·630 0·596 0·564 6
7 0·933 0·871 0·813 0·760 0·711 0·665 0·623 0·583 0·547 0·513 7
8 0·923 0·853 0·789 0·731 0·677 0·627 0·582 0·540 0·502 0·467 8
A
9 0·941 0·837 0·766 0·703 0·645 0·592 0·544 0·500 0·460 0·424 9
TI
10 0·905 0·820 0·744 0·676 0·614 0·558 0·508 0·463 0·422 0·386 10
11 0·896 0·804 0·722 0·650 0·585 0·527 0·475 0·429 0·388 0·305 11
PA
12 0·887 0·788 0·701 0·625 0·557 0·497 0·444 0·397 0·356 0·319 12
13 0·879 0·773 0·681 0·601 0·530 0·469 0·415 0·368 0·326 0·290 13
14 0·870 0·758 0·661 0·577 0·505 0·442 0·388 0·340 0·299 0·263 14
15 0·861 0·743 0·642 0·555
PO
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
A
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 0·812 0·797 0·783 0·769 0·756 0·743 0·731 0·718 0·706 0·694 2
H
3 0·731 0·712 0·693 0·675 0·658 0·641 0·624 0·609 0·593 0·579 3
4 0·659 0·636 0·613 0·592 0·572 0·552 0·534 0·516 0·499 0·482 4
TA
5 0·593 0·567 0·543 0·519 0·497 0·476 0·456 0·437 0·419 0·402 5
6 0·535 0·507 0·480 0·456 0·432 0·410 0·390 0·370 0·352 0·335 6
7 0·482 0·452 0·425 0·400 0·376 0·354 0·333 0·314 0·296 0·279 7
8 0·434 0·404 0·376 0·351 0·327 0·305 0·285 0·266 0·249 0·233 8
9 0·391 0·361 0·333 0·308 0·284 0·263 0·243 0·225 0·209 0·194 9
10 0·352 0·322 0·295 0·270 0·247 0·227 0·208 0·191 0·176 0·162 10
11 0·317 0·287 0·261 0·237 0·215 0·195 0·178 0·162 0·148 0·135 11
12 0·286 0·257 0·231 0·208 0·187 0·168 0·152 0·137 0·124 0·112 12
13 0·258 0·229 0·204 0·182 0·163 0·145 0·130 0·116 0·104 0·093 13
14 0·232 0·205 0·181 0·160 0·141 0·125 0·111 0·099 0·088 0·078 14
15 0·209 0·183 0·160 0·140 0·123 0·108 0·095 0·084 0·074 0·065 15
13 [P.T.O.
36 of 298 TAHA POPATIA
Annuity Table
1 (1 + r)n
Present value of an annuity of 1 i.e. r
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2·487 3
4 3·902 3·808 3·717 3·630 3·546 3·465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3·890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4·486 4·355 6
A
7 6·728 6·472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
TI
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7·435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6·418 6·145 10
PA
11 10·37 9·787 9·253 8·760 8·306 7·887 7·499 7·139 6·805 6·495 11
12 11·26 10·58 9·954 9·385 8·863 8·384 7·943 7·536 7·161 6·814 12
PO
13 12·13 11·35 10·63 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·00 12·11 11·30 10·56 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·87 12·85 11·94 11·12 10·38 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
A
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
H
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2·444 2·402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
TA
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2·690 2·639 2·589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3·498 3·410 3·326 6
7 4·712 4·564 4·423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4·799 4·639 4·487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4·451 4·303 4·163 4·031 9
10 5·889 5·650 5·426 5·216 5·019 4·833 4·659 4·494 4·339 4·192 10
11 6·207 5·938 5·687 5·453 5·234 5·029 4·836 4·656 4·486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4·439 12
13 6·750 6·424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5·468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6·462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
14
37 of 298 TAHA POPATIA
A
Answers TI
PA
PO
A
H
TA
Section A
£180,000
2 B OAR/machine hour = = £18/machine hour
10,000
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.
130
6 B 325,000 x = 340,726 adjusted year 7 sales figure
A
124
TI
435,000
% = 127·7% 100% = 27·7%
340,726
PA
7 A
PO
( )
A
H
TA
8 B Working conditions, pension provisions and welfare are all costs relating to retaining, not replacing, labour.
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.
é 3,664 ù
11 A IRR = 15% + êêê úúú x (20% 15%)
ë 3,664 + 21,451 û
= 15·7%
17
39 of 298 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 Ö
2ChD 2 x (50 + 5) x 4,000
13 D EOQ = = = 509 units
Co (15 x 0·1) + 0·2
A
16 D The expected value represents the weighted average outcome.
TI
17 C Total sales revenue = 18 x 10,000 + 25 x 20,000 + 20 x 20,000
= 1,080,000
PA
Joint costs to be allocated = 277,000 2 x 3,500
= 270,000
20 x 20,000 100,000
Costs to product 3 = 270,000 x = = £5/unit
PO
135,000
18 B OAR/labour hour = = £15/labour hour
9,000
A
Capacity variance:
Actual 9,750 hours
Budget 9,000 hours
H
750 hours
TA
20 C Process account
Units £ Units £
Materials 3,500 52,000 Normal loss 875 7,000
Labour 9,625
Abnormal gain 175 Output 2,800
3,675 3,675
18
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21 B Specific fixed overheads per division = 262,500 x 60%
157,500
= = 52,500
3
23 A Higher level management could be involved with all level of decision making within a business.
A
Opening WIP 250 150 = 60% x 250
Units started and finished 3,850 3,850
TI
4,100
Normal loss 225
PA
Abnormal loss 275 275
Closing WIP 150 45 = 30% x 45
4,750 4,320
PO
12
25 D Ö1·1268 = 1·01
50 x 1·0113x12 1 = £18,610
1·01 1
A
H
TA
19
41 of 298 TAHA POPATIA
Section B
A
to ensure that the plus is large enough to cover fixed costs,
market price leads to an acceptable price but one which may vary,
TI
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.
PA
2 (a) £
Budgeted prime cost (30 + 24) x 12,000 (648,000)
Cost volume variance (500 x 54) 27,000
PO
(621,000)
Materials
Price: Did cost £345,000
Should cost (37,250 x £10) £372,500
A
27,500F
Usage: Did use 37,250 kg
H
x £10 (27,500)A
Labour
Rate: Did cost £300,000
Should cost (45,350 x £6) £272,100
(27,900)A
Efficiency: Did take 45,350 hours
Should take (11,500 x 4 hours) 46,000 hours
650 hours
x £6 3,900F
Actual prime cost (£300,000 + £345,000) (645,000)
(b) Labour rate variance this shows that labour were paid at a higher 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
42 of 298 TAHA POPATIA
3 (a) (i) Total cost for 30,000 units or less = 50,000 + 5 x Q
(ii) Total cost for more than 30,000 units = 100,000 + 5 x Q
(b)
A
(c) 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.
TI
PA
Product A B
Sales 2,000 1,500
Opening stock (100) (200)
Closing stock
PO
Kg Litres
Usage
H
21
43 of 298 TAHA POPATIA
5 (a)
£000 £000
Sales 48·6
Cost of sales:
Opening stock (150 x 22) 3·3
Production costs
Variable costs 36·0
Fixed costs (1,800 x 2) 3·6
42·9
Closing stock (350 x 22) (7·7)
Under absorption (W2) 0·4
(35·6)
Gross profit 12·4
Administration (3·6)
Selling (1·2 + 3·2) (4·4)
Net profit 4·4
Workings
1. Standard cost per unit
£
Direct variable costs 20
A
£4,000
Fixed overheads = 2
TI
2,000 units
22
PA
2. Budgeted costs £4,000
Absorbed fixed overheads £3,600
Budgeted under absorbed £400
PO
(b) £
Profit under absorption costing 4,400
Add fixed costs in opening stock (150 x 2) 300
Less fixed costs in closing stock (350 x 2) (700)
Profit under marginal costing 4,000
A
A business may prefer marginal costing as it only includes costs that are relevant for decision making i.e. variable ones. Also the
H
business may not have significant fixed overheads and so marginal costing could be more appropriate.
TA
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 1
Advantage of marginal cost plus 1
Disadvantage of marginal cost plus 1
Calculation of fixed cost plus 1
Advantage of fixed cost plus 1
Disadvantage of fixed cost plus 1
6
A
10
TI
2 (a) Calculation of budgeted prime cost 1
Calculation of cost volume variance 1
PA
Calculation of the materials price variance 1
Calculation of the materials usage variance 1
Calculation of the labour rate variance 1
Calculation of the labour efficiency variance 1
PO
3
TA
10
23
45 of 298 TAHA POPATIA
Marks
4 (a) Production budget
Sales units for both products ½
Opening stock figures for both products ½
Closing stock figure for product A ½
Closing stock figure for product B ½
2
(b) Materials usage budget
Figure for material X 1
Figure for material Y 1
2
(c) Material purchases budget
Opening stock figures for both materials ½
Closing stock figure for material X 1
Closing stock figure for material Y 1
Showing material costs per kg or litre ½
3
(d) Labour budget
Total hours for skilled labour 1
Total hours for semi skilled labour 1
Showing labour cost per hour ½
A
2½
Presentation ½
TI
10
PA
5 (a) Calculation of FOAR ½
Calculation of standard cost under AC ½
Opening stock units figure ½
PO
Selling costs ½
Presentation ½
H
6
(b) Reconciliation statement
TA
24
46 of 298 TAHA POPATIA
Paper 1.2
Financial
Information for
Management
A
TI
PART 1
PA
FRIDAY 14 JUNE 2002
PO
QUESTION PAPER
A
H
1 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 Jim’s wage increase Retail Price Average Earnings
on prior year Index Index
%
1998 – 157·5 108·0
1999 5·0 162·9 113·5
2000 3·0 165·4 119·0
2001 4·0 170·3 124·4
Jim earned £150 per week in 1998 and is carrying out the review in the year 2001 after receiving the 4% increase.
Required:
(a) Calculate Jim’s actual weekly earnings in each year from 1998 to 2001 using the percentage wage increase
(to one decimal place). (2 marks)
(b) Using your answer from part (a) calculate Jim’s weekly earnings in each year in year 2001 terms using:
A
(i) the Retail Price Index (RPI); and
TI
(ii) the Average Earnings Index (AEI).
PA
Your calculations should be to one decimal place. (4 marks)
(c) Comment on the results obtained from parts (a) and (b). (2 marks)
PO
(d) The Average Earnings Index for 1995 is 100. What does this mean? (2 marks)
(10 marks)
A
H
TA
A
current supplies are being purchased at £6·50.
TI
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.
PA
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
PO
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.
Required:
A
Calculate the minimum contract price that Mike Limited could accept to breakeven using relevant costing
H
techniques.
(10 marks)
TA
3 (a) Define the terms ‘operational planning’ and ‘strategic planning’ and explain how one impacts upon the other.
(3 marks)
(b) List the stages in a planning and control process and briefly explain what is involved at each stage.
(7 marks)
(10 marks)
(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)
(10 marks)
A
5 Adam, the management accountant of Mark Limited, has on file the costs per equivalent unit for the company’s
TI
process for the last month but the input costs and quantities appear to have been mislaid.
Information that is available to Adam for last month is as follows:
PA
Opening work in progress 100 units, 30% complete
Closing work in progress 200 units, 40% complete
Normal loss 10% of input valued at £2 per unit
PO
Mark Limited uses the FIFO method of stock valuation in its process account.
H
Required:
TA
A
TI
PA
PO
A
H
TA
'LVFRXQW UDWH U
3HULRGV
Q
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
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A
ă ă ă ă ă ă ă ă ă ă
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TI
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PO
ă ă ă ă ă ă ă ă ă ă
Q
A
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
H
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
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ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
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² U²Q
3UHVHQW YDOXH RI DQ DQQXLW\ RI LH ³³³³²²
U
'LVFRXQW UDWH U
3HULRGV
Q
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
A
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TI
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PO
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
Q
A
ă ă ă ă ă ă ă ă ă ă
H
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
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)
Year (i) RPI (ii) AEI
150 150
1998 162·2 = × 170·3 172·8 = × 124·4
157·5 108
157·5 157·5
1999 164·7 = × 170·3 172·6 = × 124·4
162·9 113·5
162·2 162·2
2000 167·0 = × 170·3 169·6 = × 124·4
165·4 119
168·7 168·7
2001 168·7 = × 170·3 168·7 = × 124·4
A
170·3 124·4
TI
(c) Using the RPI it shows that Jim has had a real increase in his wages over the four year period.
Using the AEI shows that Jim has actually seen a reduction in his earnings compared to the average wages earned.
PA
(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.
PO
Department 1 4 –
Department 2 5 26,000
H
Overheads 6 –
Minimum contract price 35,450
TA
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.
A
Compound forward for 5 years at 15%
TI
= £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)
PA
(b) (i) Loan 1 –1
APR = 9·38%, then the monthly rate is 1·0938 12 – 1 = 0·0075%
£2,000 = A1 × 1 – 1
PO
£2,000 = A1 × 31·447
£2,000
∴ A1 = = £63·60
A
31·447
Loan 2
H
–1
APR = 12·68%, then the monthly rate is 1·1268 12 – 1 = 0·01%
TA
1
£2,000 = A2 ×
1
–
0 ⋅ 001 0 ⋅ 001 × 1 ⋅ 0124
£2,000 = A2 × 21·243
£2,000
∴ A2 = = £94·15
21·243
150 units
Or from the normal loss figure = = 1,500 units
0·1
(b)
Statement of equivalent Total Material Conversion
units costs
Opening WIP (to complete) 100 – 70
= 100 × 70% = 100 × 70%
Units started and finished β 1,150 1,150 1,150
Output 1,250
Normal loss 150 – –
Closing WIP 200 200 80
= 200 × 10% = 200 × 10%
A
1,350 1,300
(c)
TI
PA
Costs incurred in period Materials Conversion
costs
£ £
3,510 1,950
PO
Marks
1 (a) Noting Jim’s wages for 1998 1/
2
Calculating the figure for 1999 1/
2
Calculating the figure for 2000 1/
2
Calculating the figure for 2001 1/
2
— 2
(b) Calculating the wage figures adjusted for the RPI for:
1998 1/
2
1999 1/
2
2000 1/
2
2001 1/
2
A
RPI 1
AEI 1
TI
— 2
A
Stating minimum price being the total of the relevant costs 1/
2
— 10
TI
PA –—
–—
10
–—
H
TA
A
(ii) Calculation of total repaid amount for loan 1 1/
2
Calculation of total repaid amount for loan 2 1/
2
TI
Explanation regarding which one Doug should
choose based on these figures 1
––– 2
–––
PA
10
–––
––– 4
TA
A
TI
PART 1
PA
FRIDAY 6 DECEMBER 2002
PO
QUESTION PAPER
A
H
1 Consider the following graph for total costs and total revenue:
Total costs
£
Costs/revenue
Total revenue
A B D Units
A
C
TI
At which point on the above graph is it most likely that profits will be maximised?
A
PA
B
C
D
PO
2 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.
What is the breakeven sales revenue?
A
A £75,625
H
B £90,750
C £250,000
TA
D £300,000
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 £140,000
B £150,000
C £165,000
D £175,000
4 A company uses process costing to value output. During the last month the following information was recorded:
Output: 2,800 kg valued at £7·50/kg
Normal loss: 300 kg which has a scrap value of £3/kg
Actual loss: 200 kg
What was the value of the input?
A £22,650
B £21,900
A
C £21,600
D £21,150
TI
PA
PO
A
H
TA
3 [P.T.O.
66 of 298 TAHA POPATIA
5 A company produces three products which have the following details:
Product
I II III
Per unit Per unit Per unit
Direct materials (at £5/kg) 8 kg 5 kg 6 kg
Contribution per unit £35 £25 £48
Contribution per kg of material £4·375 £5 £8
Demand (excluding special contract) (units) 3,000 5,000 2,000
The company must produce 1,000 units of Product I for a special contract before meeting normal demand.
Unfortunately there are only 35,000 kg of material available.
What is the optimal production plan?
Product
I II III
A 1,000 4,600 2,000
B 1,000 3,000 2,000
C 2,875 – 2,000
D 3,000 2,200 –
A
The following information relates to questions 6 and 7:
TI
A company has established the following budgeted fixed overheads for the forthcoming period:
PA
£’000 Bases of
apportionment
Heating and Lighting 12 Cubic capacity
Welfare costs 7 Number of employees
PO
Employees (number) 20 30 6 56
Power
TA
4
67 of 298 TAHA POPATIA
6 What would be the total cost allocated and apportioned to Department 2 excluding the reapportionment of the
maintenance costs?
A £21,250
B £26,875
C £27,625
D £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
A
(iii) If the contract is half complete it is expected that half the expected profit will always be taken.
TI
Which of the above are correct?
A (i) and (ii) only
PA
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
PO
What would be the correct order of the above when in the process of purchasing and using materials?
TA
A 4, 2, 1, 3
B 2, 1, 3, 4
C 4, 1, 3, 2
D 1, 4, 3, 2
5 [P.T.O.
68 of 298 TAHA POPATIA
10 A company has a budget for two products A and B as follows:
Product A Product B
Sales (units) 2,000 4,500
Production (units) 1,750 5,000
Labour:
Skilled at £10/hour 2 hours/unit 2 hours/unit
Unskilled at £7/hour 3 hours/unit 4 hours/unit
What is the budgeted cost for unskilled labour for the period?
A £105,000
B £135,000
C £176,750
D £252,500
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.
A
What would be the monthly repayment on the loan (to the nearest £)?
A £56
TI
B £64
C £66
PA
D £67
12 Which of the following best describes the term ‘equivalent units’ when using the FIFO method?
PO
A The number of units worked on during a period including the opening and closing stock units.
B The number of whole units worked on during a period ignoring the levels on completion of opening and closing
stock units.
C The number of effective whole units worked on during a period allowing for the levels of completion of opening
A
13 A company has established the following information for the costs and revenues at an activity level of 500 units:
£
Direct materials 2,500
Direct labour 5,000
Production overheads 1,000
Selling costs 1,250
––––––
Total cost 9,750
Sales revenue 17,500
––––––
Profit 7,750
––––––
20% of the selling costs and 50% of the production overheads are fixed over all levels of activity.
What would be the profit at an activity level of 1,000 units?
A £15,500
B £16,250
C £16,500
D £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 Total cost
(units) £
1 225 2,300
2 150 1,500
3 350 2,800
The company is aware that fixed costs increase by £500 when sales exceed 200 units.
What would be the total cost at a sales level of 180 units?
A £2,120
B £1,800
C £1,695
D £1,620
A
(iii) It is possible for a division of an organisation to have its own specific objectives.
TI
Which of the above are correct?
A (i) and (ii) only
PA
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
PO
16 The following information relates to prices and units over two different periods:
Prices Units sold
A
£/unit
Time 0 Product 1 75 300
H
Product 2 50 100
Time 1 Product 1 80 250
TA
Product 2 45 150
What would be the Laspeyre price index?
A 93·8
B 95·5
C 101·9
D 103·6
7 [P.T.O.
70 of 298 TAHA POPATIA
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 (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
A
Quarter 1 +25
Quarter 2 –10
TI
Quarter 3 –30
Quarter 4 ?
PA
Trend +50 per quarter
The last known trend reading was taken in year 3, quarter 3 and was £1,750.
PO
C +35
D –35
H
TA
8
71 of 298 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 (i) only
B (ii) only
C (iii) only
D (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.
Which of the following graphs of total purchase cost against units best illustrates the above situation?
A
A B
TI
£ £
PA
units units
PO
C D
£ £
A
H
TA
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 £370
B £500
C £400
D £620
23 When considering the economic batch quantity model what does (1–D/R) represent?
A The rate at which production decreases.
B The rate at which production increases.
C The rate at which stock decreases.
D The rate at which stock increases.
9 [P.T.O.
72 of 298 TAHA POPATIA
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 £100,000
B £125,000
C £150,000
D £160,000
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
A
Fixed selling costs 1
Variable selling cost 1
TI
––
Total costs 37
––
PA
Budgeted sales units 3,000
Actual sales units 3,500
What was the favourable sales volume variance using marginal costing?
PO
A £9,500
B £7,500
C £7,000
D £6,500
A
(50 marks)
H
TA
10
73 of 298 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:
Month Advertising Sales
Expenditure Revenue
£000 £000
1 2·65 30·0
2 4·25 45·0
3 1·00 17·5
4 5·25 46·0
5 4·75 44·5
6 1·95 25·0
7 3·50 43·0
8 3·00 38·5
––––– –––––
Total 26·35 289·5
––––– –––––
A
Further information is available as follows:
∑ (Advertising Expenditure × Sales Revenue) = £1,055·875
TI
∑ (Advertising Expenditure)2 = £101·2625
∑ (Sales Revenue)2 = £11,283·75
PA
All of the above are given in £ million.
Required:
PO
(a) On a suitable graph plot advertising expenditure against sales revenue or vice versa as appropriate. Explain
your choice of axes. (5 marks)
(b) Using regression analysis calculate a line of best fit. Plot this on your graph from (a). (5 marks)
A
(10 marks)
H
2 Firlands Limited, a retail outlet, is faced with a decision regarding whether or not to expand and build small or large
TA
premises at a prime location. Small premises would cost £300,000 to build and large premises would cost
£550,000.
Regardless of the type of premises built, if high demand exists then the net income is expected to be £1,500,000.
Alternatively, if low demand exists, then net income is expected to be £600,000.
If large premises are built then the probability of high demand is 0·75. If the smaller premises are built then 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 [P.T.O.
74 of 298 TAHA POPATIA
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
Direct materials 4
Direct labour 15
––
19
––
Selling price 50
––
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.
There are no opening stocks.
A
Required:
(a) Prepare the budgeted profit and loss account for a month for Oathall Limited using absorption costing. Clearly
TI
show the valuation of any stock figures.
(6 marks)
PA
(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)
PO
(10 marks)
4 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.
A
A bookkeeper comes in once a week to make all the relevant entries to the various manual ledgers. Complete stock-
H
takes 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
TA
profit and loss account and balance sheet for the owners of the business.
The business has just been taken over by Ms Swainsthorpe who wishes to change the manual accounting system 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
5 South Plc has two divisions, A and B, whose respective performances are under review.
Division A is currently earning a profit of £35,000 and has net assets of £150,000.
Division B currently earns a profit of £70,000 with net assets of £325,000.
South Plc has a current cost of capital of 15%.
Required:
(a) Using the information above, calculate the return on investment and residual income figures for the 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)
(10 marks)
A
TI
PA
PO
A
H
TA
13 [P.T.O.
76 of 298 TAHA POPATIA
Formulae Sheet
A
TI
PA
PO
A
H
TA
14
77 of 298 TAHA POPATIA
Present Value Table
'LVFRXQW UDWH U
3HULRGV
Q
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
A
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TI
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PO
ă ă ă ă ă ă ă ă ă ă
Q
A
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
H
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
15 [P.T.O.
78 of 298 TAHA POPATIA
Annuity Table
² U²Q
3UHVHQW YDOXH RI DQ DQQXLW\ RI LH ³³³³²²
U
'LVFRXQW UDWH U
3HULRGV
Q
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
A
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TI
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PO
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
Q
A
ă ă ă ă ă ă ă ă ă ă
H
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
16
79 of 298 TAHA POPATIA
A
Answers TI
PA
PO
A
H
TA
Section A
11 C
12 D
13 C
14 D
15 B
16 B
17 B
18 A
19 C
10 C
11 B
12 C
13 B
A
14 D
TI
15 C
16 D
PA
17 B
18 A
19 B
PO
20 A
21 C
22 A
23 D
A
24 A
25 A
H
TA
19
82 of 298 TAHA POPATIA
Section B
1 (a)
60
Sales
Revenue
£’000
£000
50
x
x x
x
40
30 x
A
x
TI
20
x
PA
10
PO
1 2 3 4 5 6 Advertising
£’000
A
expenditure
£000
H
b = –––––––––––––––
n ∑ x2 – (∑ x)2
∑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
(8 × 101·2625) – 26·35 2
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
2 Hi
0·95 1,500,000
Large
Premises F
E
600,000
Good (550,000) Lo
0·8 0·05
B
Abandon project
Bad
0·2
Survey
(50,000)
Hi
(550,000) 0·75
A C 1,500,000
Large
Premises Lo
0·25
(300,000)
600,000
Small Hi
Premises 0·6
A
D 1,500,000
TI
Lo 600,000
0·4
PA
EV(F) = 0·95 × 1,500 + 0·05 × 600 = 1,455
Cost at E = EV(F) – 550 = 1,455 – 550 = 905
PO
= 1,275
EV(D) = 0·6 × 1,500 + 0·4 × 600
H
=1,140
Decision at A:
TA
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
3 (a)
Absorption costing £000 £000
Sales (£50 × 100,000) 5,000
Cost of sales:
Opening stock –
Production costs
Variable (£19 × 120,000) 2,280
Fixed (£3(w) × 120,000) 360
––––––
2,640
Closing stock (£22 × 20,000) (440)
Under/over absorption (60)
(2,140)
––––––
Gross profit 2,860
Selling costs
Fixed (150)
Variable (£2 × 100,000) (200)
––––––
Net profit 2,510
––––––
––––––
Working
Overhead absorption rate = £300,000/100,000 = £3 per unit
A
(b)
Marginal costing £000 £000
Sales (£50 × 100,000) 5,000
TI
Cost of sales:
Opening stock –
PA
Production costs
Variable (£19 × 120,000) 2,280
––––––
2,280
Closing stock (£19 × 20,000) (380)
PO
Selling (150)
––––––
Net profit 2,450
H
––––––
––––––
TA
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.
The MIS will help you run the business as it will provide you with relevant information. This information will help with decision-
making, planning and control and coordination of the organisation. The type of information extracted will depend on the needs of
you, the user.
A
Stock
TI
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.
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
PA
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.
PO
Profit 70,000
Net assets 325,000
TA
23
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Part 1 Examination – Part 1.2
Financial Information for Management December 2002 Marking Scheme
Section A
Section B
(b) calculation of b 2
calculation of a 11/2
stating the regression line 1/
2
putting the regression line on the graph from (a) 1
— 5
—
10
—
A
TI
2 correct formulation of the small premises branch 2
correct formulation of the large premises branch 2
PA
correct formulation of the survey branch 2
calculation of expected value at F 1/
2
calculation of cost at E 1/
2
calculation of expected value at B 1/
2
calculation of expected value at C 1/
PO
2
calculation of expected value at D 1/
2
correct decision at A 1
stating a conclusion 1/ 10
2
—
A
2
variable production cost figure 1/
2
fixed overhead absorption rate 1/
2
TA
24
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Marks
4 report format 1/
2
introduction to report 1/
2
three advantages of computer system (1/2 each point) 11/2
three disadvantages of computer system (1/2 each point) 11/2
definition of an MIS 2
how it could be useful 1
critical comment on current stock control methods 11/2
suggestion for improvement 11/2 10
—
A
1 mark each measure 3
—
10
TI
—
PA
PO
A
H
TA
25
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Paper 1.2
Financial
Information for
Management
A
TI
PART 1
PA
FRIDAY 6 JUNE 2003
PO
QUESTION PAPER
A
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 £67,050
B £70,050
C £74,550
D £77,550
A
2002 £315 157
What were the 2002 weekly wages at 1997 prices (to the nearest £)?
TI
A £201
B £235
PA
C £275
D £369
PO
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.
A
7 A company is preparing a production budget for the next year. The following information is relevant:
TI
Budgeted Sales 10,000 units
PA
Opening stock 600 units
Closing stock 5% of budgeted sales
The production process is such that 10% of the units produced are rejected.
PO
D 11,000 units
H
8 A company produces and sells a single product whose variable cost is £6 per unit.
TA
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 £500,000
B £600,000
C £900,000
D £1,000,000
3 [P.T.O.
91 of 298 TAHA POPATIA
10 A company uses process costing to value its output and all materials are input at the start of the process.
The following information relates to the process for one month:
Input 3,000 units
Opening stock 400 units
Losses 10% of input is expected to be lost
Closing stock 200 units
How many good units were output from the process if actual losses were 400 units?
A 2,800 units
B 2,900 units
C 3,000 units
D 3,200 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 £)?
A £303
A
B £338
C £349
TI
D £354
PA
12 Which of the following is correct with regard to stocks?
(i) Stock-outs arise when too little stock is held.
PO
(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
B (i) and (iii) only
A
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 10,000 units
B 15,000 units
C 22,500 units
D 30,000 units
4
92 of 298 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 Quantity Produced
£’000 ’000
1 57·5 1·25
2 37·5 1·00
3 45·0 1·50
4 60·0 2·00
–––––– –––––
200·00 5·75
–––––– –––––
The gradient of the regression line is 17·14.
What is the value of a?
A 25·36
B 48·56
C 74·64
D 101·45
A
15 A company is considering its options with regard to a machine which cost £60,000 four years ago.
TI
If sold the machine would generate scrap proceeds of £75,000. If kept, this machine would generate net income of
£90,000.
PA
The current replacement cost for this machine is £105,000.
What is the deprival value of the machine?
PO
A £105,000
B £90,000
C £75,000
D £60,000
A
H
TA
5 [P.T.O.
93 of 298 TAHA POPATIA
16
Net
Present
Value
0
5%
Interest rate
10% 15%
A
TI
PA
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.
PO
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 £’000
Sales 500
–––––
Gross profit 200
Other costs (80)
–––––
Net profit 120
–––––
–––––
Balance Sheet £’000
Fixed assets 750
Current assets 350
Current liabilities (450)
–––––
Net assets 650
–––––
–––––
What is the residual income for the division if the company has a cost of capital of 18%?
A £3,000
B £21,600
C £83,000
A
D £117,000
TI
19 Which of the following is correct when considering the allocation, apportionment and reapportionment of
PA
overheads in an absorption costing situation?
A Only production related costs should be considered.
B Allocation is the situation where part of an overhead is assigned to a cost centre.
C Costs may only be reapportioned from production centres to service centres.
PO
20 A company uses limiting factor analysis to calculate an optimal production plan given a scarce resource.
A
Product I II III
£ £ £
TA
7 [P.T.O.
95 of 298 TAHA POPATIA
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 £22,000
B £33,500
C £802,000
D £803,000
A
(iii) a firm of accountants
TI
A (i) and (ii) only
B (i) and (iii) only
PA
C (ii) and (iii) only
D (i), (ii) and (iii)
PO
23 The following information for advertising and sales has been established over the past six months:
Month Sales Revenue Advertising expenditure
£’000 £’000
1 155 3
A
2 125 2·5
3 200 6
H
4 175 5·5
5 150 4·5
TA
6 225 6·5
Using the high-low method which of the following is the correct equation for linking advertising and sales from
the above data?
A sales revenue = 62,500 + (25 x advertising expenditure)
B advertising expenditure = –2,500 + (0·04 x sales revenue)
C sales revenue = 95,000 + (20 x advertising expenditure)
D advertising expenditure = –4,750 + (0·05 x sales revenue)
8
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:
What would be the cost of the upgrade that would make the company financially indifferent between building
new premises and upgrading the old one?
A
A £100,000
B £900,000
TI
C £1,000,000
D £1,700,000
PA
25 Which of the following could be true with regard to a management information system (MIS)?
An MIS is
PO
(50 marks)
9 [P.T.O.
97 of 298 TAHA POPATIA
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 £2,500,000
Budgeted (Normal) activity levels:
Units 62,500 units
Labour hours 500,000 hours
Actual fixed production overheads £2,890,350
Actual levels of activity:
Units produced 70,000 units
Labour hours 525,000 hours
Required:
(a) Calculate the fixed production overhead expenditure and volume variances and briefly explain what each
variance shows. (5 marks)
A
(b) Calculate the fixed production overhead efficiency and capacity variances and briefly explain what each
variance shows. (5 marks)
TI (10 marks)
PA
2 A business uses process costing to establish stock valuations and profitability of its products. Output from the process
PO
consists of three separate products: two joint products and a by-product. Details of the process is as follows:
Input costs:
Materials £45,625 for 12,500 kg
Labour £29,500
A
Overheads £26,875
H
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:
TA
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)
4 A company uses linear programming to establish an optimal production plan in order to maximise profit.
The company finds that for the next year materials and labour are likely to be in short supply.
Details of the company’s products are as follows:
A B
£ £
A
Materials (at £2 per kg) 6 8
Labour (at £6 per hour) 30 18
TI
Variable overheads (at £1 per hour) 5 3
––– –––
Variable cost 41 29
PA
Selling price 50 52
––– –––
Contribution 9 23
––– –––
PO
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.
Required:
A
(a) Formulate the objective function and constraint equations for this problem. (4 marks)
H
(b) Plot the constraints on a suitable graph and determine the optimal production plan. (6 marks)
TA
(10 marks)
11 [P.T.O.
99 of 298 TAHA POPATIA
5 A company has to choose between three investments with details as follows:
Investment 1 Investment 2 Investment 3
Timing of Cash Flows Timing of Cash Flows Timing of Cash Flows
flows per annum flows per annum flows per annum
Year Year Year
£ £ £
0 (75,000) 0 (100,000) 0 (125,000)
1–4 25,000 A perpetuity 11,000 1 30,000
5 5,000 starting at time 1 2 40,000
3 50,000
4 60,000
5 (10,000)
The company has a cost of capital of 10%.
Required:
Calculate the net present value of each of the three investments at the company’s cost of capital and state which
investment would be preferred.
A
(10 marks)
TI
PA
PO
A
H
TA
12
100 of 298 TAHA POPATIA
Formulae Sheet
A
TI
PA
PO
A
H
TA
13 [P.T.O.
101 of 298 TAHA POPATIA
Present Value Table
'LVFRXQW UDWH U
3HULRGV
Q
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
A
ă ă ă ă ă ă ă ă ă ă
TI
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PO
ă ă ă ă ă ă ă ă ă ă
Q
A
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
H
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
14
102 of 298 TAHA POPATIA
Annuity Table
² U²Q
3UHVHQW YDOXH RI DQ DQQXLW\ RI LH ³³³³²²
U
'LVFRXQW UDWH U
3HULRGV
Q
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
A
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TI
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PO
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
Q
A
ă ă ă ă ă ă ă ă ă ă
H
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
15
103 of 298 TAHA POPATIA
A
Answers TI
PA
PO
A
H
TA
£315
2 B ––––– x 117 = £235
157
3 D
4 C
5 B Price variance
Did cost £136,000
Should cost
(53,000 kg x £2·50) £132,500
A
–––––––––––––
£3,500 adverse
–––––––––––––
TI
6 A Usage variance
Did use 53,000 kg
PA
Should use
(27,000 units x 2 kg) 54,000 kg
–––––––––
1,000 kg
x £2·50
PO
£2,500 favourable
––––––––––––––––
9,900
Total production = –––––– = 11,000 units
90%
9 C
19
106 of 298 TAHA POPATIA
10 A
Process
Units Units
Opening stock 400 Losses 400
Input 3,000 Output 2,800
Closing stock 200
–––––– ––––––
3,400 3,400
––––––
–––––– ––––––
––––––
1⋅ 00560 – 1
11 C 5× = £348 ⋅ 85 ≈ £349
0 ⋅ 005
12 D
13 D 150,000 + 75,000
–––––––––––––––––– = £300,000 Breakeven revenue
0·75
300,000
––––––– = 30,000 units
£10
A
∑y ∑x
14 A a= −b
n n
TI
200 5 ⋅ 75
a= – (17 ⋅ 14 × ) = 25 ⋅ 36
4 4
PA
15 B Lower of
£105,000
16 A
A
17 C
H
19 A
22 D
20
107 of 298 TAHA POPATIA
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 = ––––––– = £25
4,000
so, 225,000 = a + (6,500 x 25)
225,000 = a + 162,500
a = 225,000 – 162,500
a = 62,500
A
Costs = £1·7 million – £0·8 million = £0·9 million = £900,000
TI
25 D
PA
PO
A
H
TA
21
108 of 298 TAHA POPATIA
1 (a) Fixed Production Overhead Expenditure variance
£
Actual costs incurred 2,890,350
Budgeted costs 2,500,000
––––––––––
Variance 390,350 adverse
This variance indicates that the company have spent more than originally budgeted.
Fixed Production Overhead Volume variance
Labour hours
Actual flexed 560,000
Budget 500,000
––––––––
Variance 60,000 favourable
x £5 (W1)
= £300,000 favourable
£2,500,000
W1 FOAR = ––––––––––––– = £5
500,000 hours
This variance indicates that the company has used more labour hours than originally budgeted.
Or based on units
Units
A
Actual 70,000
Budget 62,500
TI
–––––––
Variance 7,500 favourable
x £40 (W2)
PA
= £300,000 favourable
£2,500,000
W2 FOAR = ––––––––––––– = £40
62,500 units
PO
This variance indicates that the company has produced more units than originally budgeted.
35,000 favourable
x £5 (W3)
TA
= £175,000 favourable
£2,500,000
W3 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
Actual hours worked 525,000
Budgeted hours of work 500,000
––––––––
25,000 favourable
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
109 of 298 TAHA POPATIA
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 £ Units £
Materials 12,500 45,625 Normal loss 2,500 10,000
Labour 29,500 Output 10,000 β 92,000 β
Overheads 26,875
––––––– –––––––– ––––––– ––––––––
12,500 102,000 12,500 102,000
–––––––
––––––– ––––––––
–––––––– –––––––
––––––– ––––––––
––––––––
A
150,000
C 1,000 10 2
–––––– ––– –––––––– –––––––
TI
Total 10,000 100 150,000 90,000
–––––– ––– –––––––– –––––––
The profit per unit for product A is £4 and for B is £10.
PA
3 (a) A service centre is a department that does not directly produce units but is required to support the other departments.
PO
(b) 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
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.
23
110 of 298 TAHA POPATIA
(b)
b units a = 1,000
’000
13
12
11
10
9
5a + 3b = 36,000
8
A
7
TI
6
PA
5
4
PO
3a + 4b = 30,000
3 lso-contribution
line
2
A
1
H
TA
0
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
111 of 298 TAHA POPATIA
5 Investment 1
Time Cash Flows Discount factor Present Value
£’000 at 10% £’000
0 (75) 1 (75)
1-4 25 3·17 79·25
5 5 0·621 3·105
––––––
7·355
––––––
––––––
Investment 2
Time Cash Flows Discount factor Present Value
£’000 at 10% £’000
0 (100) 1 (100)
1– ∞ 11 1/0·1=10 110
––––––
10
––––––
––––––
Investment 3
Time Cash Flows Discount factor Present Value
£’000 at 10% £’000
0 (125) 1 (125)
1 30 0·909 27·27
2 40 0·826 33·04
3 50 0·751 37·55
A
4 60 0·683 40·98
5 (10) 0·621 (6·21)
TI
––––––
7·63
––––––
––––––
PA
Since investment 2 has the highest net present value it would be the preferred investment.
PO
A
H
TA
25
112 of 298 TAHA POPATIA
A
TI
PA
PO
A
H
TA
Marks
1 (i) C 2
(ii) B 2
(iii) D 2
(iv) C 2
(v) B 2
(vi) A 2
(vii) D 2
(viii) B 2
(ix) C 2
(x) A 2
(xi) C 2
(xii) D 2
(xiii) D 2
(xiv) A 2
(xv) B 2
(xvi) A 2
(xvii) C 2
(xviii) A 2
(xix) A 2
A
(xx) B 2
(xxi) C 2
TI
(xxii) D 2
(xxiii) A 2
(xxiv) B 2
PA
(xxv) D 2
–––
50
–––
PO
Explanation of variance 1
–––
5
TA
27
114 of 298 TAHA POPATIA
Marks
2 (a) Calculating the total cost of output to include:
material cost 1/
2
labour costs 1/
2
overhead cost 1/
2
deduct normal loss scrap proceeds 1
Calculation of 92,000 11/2
–––
4
A
3 (a) Definition of service centre 1
Example of a service centre 1
TI
Definition of production centre 1
Example of a production centre 1
Explanation of the differing treatments of overheads:
PA
Service centre cost reapportioned 1
Production centre costs absorbed 1
–––
6
PO
(b) Explanation of difference including the use of the term cost driver 2
Example 2
–––
4
–––
10
–––
A
H
2
Non-negativity constraint for b 1/
2
Variable a greater than 1,000 1
Material constraint 1
Labour constraint 1/
2
–––
4
28
115 of 298 TAHA POPATIA
Marks
5 Investment 1
Correct discount factors 1
For using a cumulative discount factor 1/
2
Calculation of present value 1/2 per line in table 11/2
Investment 2
Correct value at To 1/
2
Calculation of present value of the perpetuity 11/2
Investment 3
Correct discount factors 1
Calculation of present value 1/2 per line in table 3
Preferred investment stated 1
–––
10
–––
A
TI
PA
PO
A
H
TA
29
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Paper 1.2
Financial
Information for
Management
A
TI
PART 1
PA
FRIDAY 5 DECEMBER 2003
PO
QUESTION PAPER
A
H
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 A fixed cost
B A variable cost
C A semi-variable cost
D A stepped fixed cost
2 The following quarterly adjustments have been calculated using the multiplicative model for time series analysis:
Quarter 1 Quarter 2 Quarter 3
0·95 1·25 0·70
A
What would be the adjustment for quarter 4 to two decimal places?
TI
A 0·83
B 0·91
PA
C 1·10
D 1·20
PO
3 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.
What is the profit under absorption costing?
A
A £35,700
H
B £36,500
C £38,500
TA
D £39,300
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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:
What is the value of the closing stock using this weighted average method?
A £1,012·50
B £976·50
C £962·50
D £925·00
A
6 Sydney wishes to make an investment on a monthly basis starting next month for five years. The payments into the
TI
fund would be made on the first day of each month.
PA
The interest rate will be 0·5% per month. Sydney needs a terminal value of £7,000.
What should be the monthly payments into the fund to the nearest £?
A £75
PO
B £86
C £100
D £117
A
Finished Product
Sales 7,000 units
TA
3 [P.T.O.
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8 The following could relate to optical mark readers:
(i) Specialist pens are always required for use.
(ii) Data entry is quick.
(iii) Computers carry out most of the work.
Which of the above would be considered to be advantages of using optical mark readers?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
9 Which of the following would be best described as a short term tactical plan?
A Reviewing cost variances and investigate as appropriate
B Comparing actual market share to budget
C Lowering the selling price by 15%
D Monitoring actual sales to budget
A
10 A company incurs the following costs at various activity levels:
TI
Total cost Activity level
£ Units
250,000 5,000
PA
312,500 7,500
400,000 10,000
Using the high-low method what is the variable cost per unit?
PO
A £25
B £30
C £35
D £40
A
H
£000
383 10%
(246) 15%
What is the estimated internal rate of return to the nearest whole percentage?
A 12%
B 13%
C 14%
D 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 10,000
Output units 9,850
Opening stock 300 units, 100% complete for materials and 70%
complete for conversion costs
Closing stock 450 units, 100% complete for materials and 30%
complete for conversion costs
The company uses the weighted average method of valuing stock.
What were the equivalent units for conversion costs?
A 9,505 units
B 9,715 units
C 9,775 units
D 9,985 units
A
A Expected values provide a weighted average of anticipated outcomes
B The expected value will always equal one of the possible outcomes
TI
C Expected values will show whether the decision maker is risk averse, risk seeking or risk neutral
D The expected value will never equal one of the possible outcomes
PA
PO
A
H
TA
5 [P.T.O.
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14 The following graph has been established for a given set of constraints:
300
200
B C
100
A D
OF
A
0 100 200 300 x
TI
PA
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?
PO
A
B
C
D
A
H
15 The following information has been obtained for sales of two products for a three year period:
TA
Price Quantity
Product A Product B Product A Product B
2000 (base year) 100 150 3 4
2001 125 140 2 3
2002 130 135 2 4
What is the Paasche quantity index for 2002?
A 0·86
B 0·89
C 1·19
D 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 £200
B £1,200
C £1,400
D £1,800
A
B (i) and (iii) only
C (ii) and (iii) only
TI
D (i), (ii) and (iii)
PA
18 A company uses variance analysis to control costs and revenues.
Information concerning sales is as follows:
PO
A £500 favourable
TA
B £1,000 favourable
C £1,000 adverse
D £3,000 adverse
19 A company has the following budgeted information for the coming month:
Budgeted sales revenue £500,000
Budgeted contribution £200,000
Budgeted profit £ 50,000
What is the budgeted break-even sales revenue?
A £125,000
B £350,000
C £375,000
D £450,000
7 [P.T.O.
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20 An investment has the following cash inflows and cash outflows:
What is the net present value of the investment at a discount rate of 8%?
A (£2,416)
B £7,046
C £6,981
D £2,351
A
A When considering limiting factors the products should always be ranked according to contribution per unit sold
B If there is only one scarce resource linear programming should be used
TI
C In linear programming the point furthest from the origin will always be the point of profit maximisation
D The slope of the objective function depends on the contributions of the products
PA
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
PO
4,500 units.
What was the actual fixed production overheads incurred for the period?
A £30,000
B £36,000
A
C £40,000
D £42,000
H
TA
23 A company uses process costing to value its output. The following was recorded for the period:
Input materials 2,000 units at £4·50 per unit
Conversion costs £13,340
Normal loss 5% of input valued at £3 per unit
Actual loss 150 units
There were no opening or closing stocks.
What was the valuation of one unit of output to one decimal place?
A £11·8
B £11·6
C £11·2
D £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)
25 The following information relates to labour costs for the past month:
Budget Labour rate £10 per hour
Production time 15,000 hours
Time per unit 3 hours
Production units 5,000 units
A
Actual Wages paid £176,000
Production 5,500 units
TI
Total hours worked 14,000 hours
There was no idle time.
PA
What were the labour rate and efficiency variances?
Rate variance Efficiency variance
A £26,000 adverse £25,000 favourable
PO
9 [P.T.O.
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Section B – ALL FIVE questions are compulsory and MUST be attempted
1 A business operates with two production centres and three service centres. Costs have been allocated and apportioned
to these centres as follows:
Information regarding how the service centres work for each other and for the production centres is given as:
A
By B 50% 20% 20% – 10%
TI
By C 60% 40% –
PA – –
(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
(10 marks)
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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)? (6 marks)
(b) (i) Sketch a profit-volume chart and indicate where the break-even point would be for a single product firm.
Clearly label the axes and indicate the profit line and fixed costs.
(ii) How would contribution be established from your chart in (b)(i)? (4 marks)
[Note: no specific numbers are required.]
(10 marks)
A
TI
3 A company has obtained the following information regarding costs and revenue for the past financial year:
PA
Original budget:
Sales 10,000 units
Production 12,000 units
PO
–––
22
H
–––
Selling price 30
TA
Actual results:
Sales 9,750 units
Revenue £325,000
Production 11,000 units
Material cost £65,000
Labour cost £100,000
Fixed production overheads £95,000
There were no opening stocks.
Required:
(a) Produce a flexed budget statement showing the flexed budget and actual results. Calculate the 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 [P.T.O.
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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)
(10 marks)
A
TI
5 A company manufactures a single product, product Y. It has documented levels of demand at certain selling prices
for this product as follows:
PA
Demand Selling price per Cost per unit
unit
PO
Units £ £
1,100 48 24
1,200 46 21
1,300 45 20
A
1,400 42 19
H
Required:
TA
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
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Formulae Sheet
A
TI
PA
PO
A
H
TA
13 [P.T.O.
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Present Value Table
'LVFRXQW UDWH U
3HULRGV
Q
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
A
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TI
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PO
ă ă ă ă ă ă ă ă ă ă
Q
A
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
H
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
14
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Annuity Table
² U²Q
3UHVHQW YDOXH RI DQ DQQXLW\ RI LH ³³³³²²
U
'LVFRXQW UDWH U
3HULRGV
Q
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
A
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TI
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
PO
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
Q
A
ă ă ă ă ă ă ă ă ă ă
H
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
TA
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
ă ă ă ă ă ă ă ă ă ă
15
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A
Answers TI
PA
PO
A
H
TA
Section A
11 D
12 C
13 C
14 D
15 B
16 C
17 D
18 C
19 C
10 B
11 B
12 D
13 A
14 D
15 A
16 C
17 A
18 C
A
19 C
20 D
21 D
TI
22 A
23 B
PA
24 A
25 D
1 D
PO
3 C £
Marginal costing profit 37,500
Add: fixed costs in closing stock
(350 × 4)
A
11,400
Less: fixed costs in opening stock
(100 × 4)
H
1,1(400)
–––––––
Absorption costing profit 38,500
TA
–––––––
4 D
5 B
Receipts and issues
Units Price per unit Cost
100 5·00 500
150 5.50 825
–––– –––– ––––––
250 5·30 1,325
(100) 5·30 (530)
100 6·00 600
–––– –––– ––––––
250 5·58 1,395
(75) 5·58 (418·5)
–––– –––– ––––––
175 5·58 976·50
–––– –––– ––––––
19
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6 C
1·00512×5 – 1
A ––––––––––– = 7,000
0·005
A A × 69·77 = 7,000
7,000
A A = –––––– = 100·33 ≈ 100
69·77
7 D Materials
Usage 7,200 × 3 kg = 21,600 kg
kg
Usage 21,600
Opening stock (400)
Closing stock 500
–––––––
Purchases 21,700
–––––––
8 C
A
9 C
TI
10 B hi 400,000 = fixed cost + variable cost per unit × 10,000
low 250,000 = fixed cost + variable cost per unit × 5,000
difference 150,000 = variable cost per unit × 5,000
PA
150,000
variable cost per unit = ––––––– = £30
5,000
PO
11 B
383
IRR = 10% + ––––––––––– (15% – 10%)
383 – (– 246)
A
383
IRR = 10% + –––––––––– × 5%
383 + 246
H
TA
383
IRR = 10% + –––– × 5%
629
12 D conversion costs
Output 9,850
Closing stock 135 = 450 × 30%
–––––
9,985
–––––
13 A
20
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14 D 300
y OF
200
C
B
100
A D
OF
A
TI
PA
∑ p3q3 (130 × 2) + (135 × 4) 800
15 A –––––– = ––––––––——––––––– = –––– = 0·86
∑ p3q1 (130 × 3) + (135 × 4) 930
=
PO
100
production of X
( )
(100 × 12) + —— × 4 = 1,400
2
H
17 A
18 C Volume variance
Budgeted volume 10,000 units
Actual volume 9,800 units
–––––––––––
Difference 200 units
At standard profit per unit × £5
Variance £1,000 adverse
fixed costs
19 C 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
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20 D
Time Flow Discount Present
factor value
£000 8% £000
0 (20,000) 1 (20,000)
1–4 13,000 3·312 19,936
5·747 – 3·312=
5–8 17,000 2·435 17,045
10 (10,000) 0·463 (4,630)
Net Present Value 12,351
21 D
22 A £
Over absorbed fixed production overheads (6,000)
Absorbed overheads
(4,500 × £8) 36,000
–––––––
Actual overheads incurred 30,000
A
23 B (2,000 × £4·50) + 13,340 – (2,000 × 5% × £3)
cost/unit = ––––––––––––––––––––––––––––––––––––––––––
TI
2,000 – (2,000 × 5%)
£22,040
cost/unit = –––––––– = £11·6
PA
1,900
24 A
PO
25 D Rate variance £
Did cost 176,000
Should cost
(14,000 × £10) 140,000
––––––––
36,000 adverse
A
Should take
(5,500 × 3) 16,500
–––––––
TA
2,500 favourable
At standard cost × £10
£25,000 favourable
–––––––––––––––––
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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
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
2,904 4,092 0 0 4
4 × 60% = 2 4 × 40% = 2 (4)
A
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
2,906 4,094 0 0 0
TI
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
The total amount for overheads in production centre 1 is £2,906 and in production centre 2 is £4,094.
PA
(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
PO
3,000 hours
2 (a) (i)
£
A
Total revenue
Costs and
revenue
H
Total costs
TA
Fixed costs
0
Breakeven units
volume
(ii) Contribution would be established by taking the difference between the sales revenue line and the variable costs line.
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(b) (i)
Profit
Profit
£
Breakeven point
0
Units
Loss
£
Fixed costs
(ii) Contribution would be established by taking the difference between profit and fixed costs.
A
TI
3 (a) Flexed budget Actual results Variances
Sales – units 9,750 9,750
PA
Production – units 11,000 11,000
£000 £000 £000
Sales price 292·5 = 30 × 9,750 325 32·5 favourable
Cost of sales
PO
Opening stock 0 0
Production costs:
Materials 55 = 5 × 11,000 65 10 adverse
Labour 99 = 9 × 11,000 100 1 adverse
Fixed production
overheads 96 (note) = 8 × 12,000 95 1 favourable
A
(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.
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2CoD
4 (a) EOQ =
Ch
(c) Discounts are likely to increase the EOQ as the holding cost will be reduced.
A
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.
TI
The holding cost will change as it uses both the increased EOQ and a reduced purchase price.
PA
5 Demand Selling Price Total Marginal Cost Total Marginal
per unit Revenue Revenue per unit Cost Cost
Units £ £ £ £ £ £
PO
=units × =units ×
unit cost per
selling unit
price
1,100 48 52,800 52,800 22 24,200 24,200
A
MR ≥ MC at 1,300 units, therefore profits will be maximised at this point which is a selling price of £45.
25
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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) reapportionment
1 mark for each correct line using correct %’s max 6
Note: any method with sound bases for allocation
should be accepted and given full credit.
Conclusion 1
––– 7
A
–––
10
TI
PA –––
––– 6
2
profit line 1/
2
fixed costs 1/
2
TA
break-even point 1/
2
–––
2
(ii) profit – fixed costs 2
––– 4
–––
10
–––
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Marks
3 (a) Flexed budget
Sales units 1/
2
Production units 1/
2
Sales revenue 1/
2
Material cost 1/
2
Labour cost 1/
2
Fixed cost 1/
2
Closing stock 1
Actual figures – all of them 1
Variances
Sales revenue 1/
2
Material cost 1/
2
Labour cost 1/
2
Fixed cost 1/
2
––– 7
A
10
–––
TI
1/
2
PA
correctly putting in the annual demand 1/
2
correctly putting in the holding cost 1/
2
calculation 1/
2
––-– 2
PO
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Paper 1.2
Financial
Information for
Management
A
TI
PART 1
PA
QUESTION PAPER
A
£
Total
cost
0 Volume of activity
Which ONE of the following statements is consistent with the above diagram?
A
A
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.
TI
B Weekly total labour cost when there is a fixed wage for a standard 40 hour week but overtime is paid at a
PA
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.
PO
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.
A
£
TA
V
0 Units
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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3 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
4 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
TI
margin of safety of £64,000 expressed in terms of sales value.
What is the planned activity level (in units) for next month?
PA
A 3,100
B 4,100
PO
C 5,350
D 7,750
A
5 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:
H
Product X Y
Selling price per unit £20 £40
TA
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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 £0·80
B £1·20
C £1·25
D £2·00
7 In a short-term decision-making context, which ONE of the following would be a relevant cost?
A Specific development costs already incurred.
B The cost of special material which will be purchased.
C Depreciation on existing fixed assets.
D The original cost of raw materials currently in stock which will be used on the project.
8 The stock records for one specific stores item for last month show the following information:
Date Receipts
A Issues
TI
units units
14th 150
13th 600
PA
15th 200
22nd 250
The stock at the beginning of last month consisted of 200 units valued at £5,200.
PO
B £18,300
H
C £18,525
D £19,500
TA
9 The demand for a product is 12,500 units for a three month period. Each unit of product has a purchase price of
£15 and ordering costs are £20 per order placed.
The annual holding cost of one unit of product is 10% of its purchase price.
What is the Economic Order Quantity (to the nearest unit)?
A 1,577
B 1,816
C 1,866
D 1,155
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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:
Cost centre Primary Finishing
Allocated and apportioned fixed
overhead costs £96,000 £82,500
Direct labour minutes per unit:
A
– product X 36 25
– product Y 48 35
TI
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.
PA
What is the budgeted fixed overhead cost per unit for product Y?
A £11
PO
B £12
C £14
D £15
A
12 A company uses an overhead absorption rate of £3·50 per machine hour, based on 32,000 budgeted machine hours
H
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.
TA
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.
15 What was the adverse direct material price variance for last month?
A
A £1,000
B £1,200
TI
C £1,212
PA
D £1,260
A 1,074
B 1,119
C 1,212
A
D 1,258
H
17 A company operates a standard marginal costing system. Last month its actual fixed overhead expenditure was 10%
TA
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
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
A
D 5·33
TI
21 The following information relates to a management consultancy organisation:
PA
The organisation adds 40% to total cost to arrive at the final fee to be charged to a client.
Assignment number 789 took 54 hours of a senior consultant’s time and 110 hours of junior consultants’ time.
What is the final fee to be charged for Assignment 789?
A
A £6,874
B £10,696
H
C £11,466
TA
D £12,642
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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 Selling price Sales Production
per unit units units
G £0·84 400,000 412,000
H £1·82 200,000 228,000
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?
A £36,400
B £37,520
C £40,264
D £45,181
A
23 A company manufactures and sells a single product. The variable cost of the product is £2·50 per unit and all
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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
PA
business is accepted, sales to existing customers are expected to fall by two units for every 15 units sold to the new
customer.
What would be the overall increase in monthly profit which would result from accepting the new business?
PO
A £1,740
B £2,220
C £2,340
A
D £2,700
H
24 A company manufactures four components (L, M, N and P) using the same general purpose machinery. Weekly
TA
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 M N P
Variable production cost (£ per unit) 45 40 30 20
General purpose machinery hours per unit 13 15 14 16
Purchase price from outside supplier (£ per unit) 57 55 54 50
In order to minimise total cost, which component should be purchased from the outside supplier each week?
A Component L
B Component M
C Component N
D Component P
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25 The following graph relates to a linear programming problem:
y
(1)
(3) (2)
0 x
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).
A
At which of the following intersections is contribution maximised?
A Constraints (1) and (2)
TI
B Constraints (2) and (3)
PA
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Section B – ALL FIVE questions are compulsory and MUST be attempted
1 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
Input into the process 1,900 units with a material cost of £133,000
Conversion costs incurred £93,500
Closing work in progress 50% complete for conversion costs
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.
A
TI
Required:
(a) Calculate for process I:
PA
(c) Identify TWO main differences between process costing and job costing. (2 marks)
(10 marks)
A
H
TA
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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
Direct material 20
Direct labour (6 hours at £7·50 per hour) 45
Variable production overheads 27
–––
92
–––
The budgeted and actual activity levels for the last quarter were as follows:
Budget Actual
units units
Sales 20,000 19,000
Production 20,000 21,000
The actual costs incurred last quarter were:
£
Direct material 417,900
Direct labour (124,950 hours) 949,620
Variable production overheads 565,740
Required:
A
TI
(a) Calculate the total variances for direct material, direct labour and variable production overheads. (3 marks)
(b) Provide an appropriate breakdown of the total variance for direct labour calculated in (a). (3 marks)
PA
(c) Suggest TWO possible causes for EACH variance calculated in (b). (4 marks)
(10 marks)
PO
3 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
A
The company’s production capacity is not being fully utilised in the current year and three possible strategies are under
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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:
Strategy Reduction in unit Expected increase in weekly
selling price sales volume over budget
% %
A 2 10
B 5 18
C 7 25
The company does not hold stocks of finished goods.
Required:
(a) Calculate for the current year:
(i) the selling price per unit for the product; and
(ii) the weekly sales (in units). (3 marks)
(b) Determine, with supporting calculations, which one of the three strategies should be adopted by the 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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4 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.
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
–––
A (60)
–––
TI
40
–––
PA
Required:
(a) Prepare calculations showing the total relevant costs for making a decision about the contract in respect of
the following cost elements:
PO
(10 marks)
H
TA
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5 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 Dale
Sales (units) 6,000 19,000
Production (units) 7,200 10,400
Direct material cost per unit £52 £44
Direct labour cost per unit:
– machining department (£8 per hour) £72 £40
– finishing section (£6 per hour) £42 £36
Machining department – machine hours per unit £15 £13
Fixed production overhead costs: £
– machining department 183,120
A
– finishing section 241,320
– general service cost centre 182,800
TI
Number of employees:
– machining department 14
PA
– finishing section 32
– general service cost centre 14
Service cost centre costs are reapportioned to production cost centres.
PO
Required:
(a) Calculate the direct labour hour absorption rate for the finishing section. (5 marks)
(b) Calculate the budgeted total cost for one unit of product Dale only, showing each main cost element
separately. (2 marks)
A
(c) The company is considering a change over to marginal costing. State with reasons, whether the total profit
H
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
(10 marks)
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Formulae Sheet
A
TI
PA
PO
A
H
14
155 of 298 TAHA POPATIA
A
Answers TI
PA
PO
A
H
TA
Section A
1 A
2 D
3 C
4 C
5 D
6 C
7 B
8 A
9 D
10 D
11 D
12 A
13 B
14 C
15 B
16 C
17 C
18 C
A
19 B
20 C
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21 C
22 A
23 A
PA
24 B
25 D
1 A
PO
2 D
3 C Contribution per unit (CPU) £(60 – 15 – 5) £40
Total fixed cost £(30 x 2,400) £72,000
Breakeven point (72,000 ÷ 40) 1,800 units
A
––––––––––
Planned activity level 5,350 units
TA
––––––––––
5 D X Y
CPU £8 £10
Contribution per hour £4 £2·50
Ranking 1st 2nd
800 units of product X uses 1,600 hours and in the remaining 400 hours, 100 units of product Y can be manufactured.
6 C £(40,000 – 20,000) ÷ (20,000 – 4,000) units = £1·25 per unit
7 B
8 A Closing stock (units) = 200 + 600 – 150 – 200 – 250 = 200
Issues = £5,200 + (600 – 200) x £32·50 = £18,200
9 D
(2 x 20 x (4 x 12,500)
EOQ = = 1,155
0 ⋅ 10 x 15
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 £
Actual overhead 108,875
Absorbed overhead (30,000 ÷ 3·50) 105,000
–––––––-
Under absorption 113,875
––––––––
13 B Sales < production by 280 units
Marginal costing profit would be lower by 280 x (48,000 ÷ 12,000) = £1,120
14 C
15 B Adverse price variance (0·04 x 2·50 x 12,000) = £1,200
16 C £
12,000 litres at £2·50 per litre 30,000
Add Favourable usage variance 11,815
–––––––-
Standard cost of actual production 31,815
–––––––-
Actual production £31,815 ÷ (10·5 x 2·50) 1,212 units
–––––––-
17 C Let x = budgeted expenditure
1·1x – x = 136,000
1.1x – x = 360,000
1·1 x = 396,000 = actual expenditure (£)
18 C £
A
Actual sales at standard selling price 112,500
(9,000 x £12·50)
TI
Actual sales at actual selling price 117,000
–––––––-
Sales price variance 4,500 favourable
PA
–––––––-
19 B
20 C
11 x 13,467 – (440 x 330)
PO
b = –––––––––––––––––––––––– = 0·6917
(11 x 17,986) – (440)2
a = (330 ÷ 11) – 0·6917 (440 ÷ 11) = 2·33
21 C £
Salary costs (54 x 40) + (110 x 25) 4,910
A
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Section B
A
Transfer from Process I 1,800 214,500 Normal loss 126 –
Conversion costs 78,450 Abnormal loss 24 4,200
TI
Finished production 1,650 288,750
–––––– –––––––– –––––– ––––––––
1,800 292,950 1,800 292,950
–––––– –––––––– –––––– ––––––––
PA
Workings
214,500 + 78,450
Cost per unit = –––––––––––––––––––– = £175
(0·93 x 1,800)
PO
Valuations:
Abnormal loss = 24 x 175 = £4,200
Finished production = 1,650 x 175 = £288,750
(c) – In job costing each job is costed separately whereas in process costing it is the process itself which is costed. The total
A
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
H
2 (a)
Total
variance
Direct material £ £
Actual quantity at actual price 417,900
2,100 F
Standard quantity for actual production at standard price 420,000
Direct labour
Actual hours at actual rate 949,620
4,620 A
Standard hours for actual production at standard rate 945,000
Variable production overheads
Actual expenditure 565,740
1,260 F
Standard cost of actual production 567,000
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(b) £ Variance (£)
Actual hours at actual rate 949,620
Rate 12,495 A
Actual hours at standard rate 937,125
Efficiency 7,875 F
Standard hours for actual production at standard rate 945,000
(c) Rate:
– Higher graded workers paid at a higher rate.
– Higher than expected wage settlement for the company.
Efficiency:
– The higher graded workers being more skilled took less than the standard time.
– Highly motivated workers.
(b) Strategy A B C
Units per week 4,400 4,720 5,000
–––––– –––––– ––––––
A
£/unit £/unit £/unit
Selling price 19·60 19·00 18·60
Less Variable cost (12·00) (12·00) (12·00)
TI
–––––– –––––– ––––––
Contribution 7·60 7·00 6·60
–––––– –––––– ––––––
PA
£ £ £
Total contribution 33,440 33,040 33,000
––––––– ––––––– –––––––
Contribution and therefore profit is maximised when Strategy A is adopted.
PO
(c) Some costs do not fall clearly into being either variable or fixed. They are the costs that are a mix of variable and fixed –
sometimes called semi-variable or mixed costs.
The following techniques could be used to separate the fixed and variable components of semi-variable or mixed costs:
– the high-low method
A
– linear regression.
Many costs are a mix of variable and fixed elements, for example power costs (gas or electricity). The tariffs for power costs
H
often consist of a fixed charge irrespective of the amount of power consumed and a variable charge per unit of consumption.
TA
(b) 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.
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5 (a) £
Fixed production overhead costs (finishing section) 241,320
+
Reapportionment of general service centre costs
£82,800 x (32 ÷ 46) 57,600
––––––––
298,920
––––––––
Direct labour hours in finishing section: hours
Lang 7,200 units x (42 ÷ 6 ) 50,400
Dale 10,400 units x (36 ÷ 6) 62,400
––––––––
112,800
––––––––
Direct labour hour absorption rate for the finishing section:
£298,920 ÷ 112,800 = £2·65
A
–––––––
Prime cost 120·00
Production overhead costs:
TI
– machining department (3 x £3·10) 9·30
– finishing section (6 x £2·65) 15·90
––––––––
PA
Total cost per unit for Dale £145·20
––––––––
(c) For both products – Lang and Dale – production is greater than sales for the coming year. In other words, stocks of finished
PO
products will be increasing. In this situation, profits calculated using marginal costing principles will be lower than the profits
calculated using absorption costing principles.
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
A
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
TA
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A
TI
PA
PO
A
H
TA
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 1
Cost per equivalent unit 1
Value of work in progress 1
Value of transfer 1
––– 4
(b) Transfer in from Process I 1/
2
Conversion costs 1/
2
Normal loss 1
Abnormal loss 1
Finished production 1
––– 4
(c) Two differences – 1 mark for each 2
–––
10
–––
A
TI
2 (a) Three total variances – 1 mark for each 3
(b) Rate and efficiency variances – 11/2 marks for each 3
(c) Four causes (two for each variance in (b)) – 1 mark for each 4
PA
––– 10
–––
PO
Methods 1
––– 3
–––
10
–––
4 (a) Material K 2
Material L 2
Skilled labour: – cost 1
Skilled labour: – opportunity cost 2
––– 7
(b) Explanation of relevant cost concept 1
Variable overhead costs 1
Fixed overhead costs 1
––– 3
–––
10
–––
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Marks
5 (a) Reapportionment of general service centre costs 11/2
Original cost of finishing section 1/
2
Total direct labour hours in finishing section 2
Direct labour hour rate 1
––– 5
(b) Prime cost 1
Overhead costs (2 x 1/ mark) 1
2
––– 2
(c) Production > sales/increasing stocks 1
Marginal costing profit lower than absorption costing profit 1
Explanation 1
––– 3
–––
10
–––
A
TI
PA
PO
A
H
TA
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Paper 1.2
Financial
Information for
Management
A
TI
PART 1
PA
FRIDAY 10 DECEMBER 2004
PO
QUESTION PAPER
A
H
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?
£ £
A B
UNITS UNITS
0 30,000 0 30,000
£ £
C D
A
TI
PA
UNITS UNITS
0 30,000 0 30,000
PO
£
A
SALES REVENUE
TOTAL COSTS
H
TA
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.
4 An organisation’s records for last month show the following in respect of one particular stores item:
Date Receipts Issues Stock
units units units
1st 200
4th 150 50
12th 500 550
19th 200 350
27th 300 50
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.
A
The organisation uses the weighted average method of valuation and calculates a new weighted average price after
TI
each stores receipt.
What was the total value of the issues during last month?
PA
A £16,000
B £16,900
PO
C £17,000
D £17,290
A
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?
A £0·80
B £1·25
C £1·85
D £2·25
6 Monthly variance reports are an example of which one of the following types of management information?
A Tactical
B Strategic
C Planning
D Operational
A
worked was £110,750.
8 What was the direct labour rate variance for last month?
TI
PA
A £4,250 favourable
B £4,250 adverse
PO
C £5,250 favourable
D £5,250 adverse
A
9 What was the direct labour efficiency variance for last month?
A £4,250 favourable
H
B £4,250 adverse
TA
C £5,250 favourable
D £5,250 adverse
10 A cost centre has an overhead absorption rate of £4·25 per machine hour, based on a budgeted activity level 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
12 A company has recorded its total cost for different levels of activity over the last five months as follows:
Month Activity level (units) Total cost (£)
7 300 17,500
8 360 19,500
9 400 20,500
A
10 320 18,500
11 280 17,000
TI
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.
PA
What is the value of ‘a’ (to the nearest £) in the total cost equation?
A 7,338
PO
B 8,796
C 10,430
D 10,995
A
13 A company operates a job costing system. Job number 1012 requires £45 of direct materials and £30 of direct
H
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.
TA
15 Which one of the following statements correctly describes the shadow price of a resource in linear programming?
A The maximum sum payable for one more unit of the scarce resource.
B The minimum sum payable for one more unit of the scarce resource.
A
C The increase in total contribution if one extra unit of a binding constraint is made available.
TI
D The increase in total contribution if one extra unit of a non-binding constraint is made available.
PA
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.
PO
What would the profit for last month have been using marginal costing?
A £15,000
B £25,000
C £55,000
A
D £65,000
H
TA
A
19 A machine owned by a company has been idle for some months but could now be used on a one year contract which
TI
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
PA
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?
A £400
PO
B £800
C £1,200
D £2,000
A
H
20 An organisation launching a new product has set a relatively high initial selling price.
Which one of the following pricing policies is this an example of?
TA
A Premium pricing
B Price differentiation
C Penetration pricing
D Price skimming
22 What would be the profit per week if the selling price of the product was set at £31 per unit?
A
A £2,800
TI
B £3,150
C £5,490
PA
D £5,800
PO
23 A company sells a single product which has a contribution of £27 per unit and a contribution to sales ratio of 45%.
This period it is forecast to sell 1,000 units giving it a margin of safety of £13,500 in sales revenue terms.
What are the company’s total fixed costs per period?
A £6,075
A
B £7,425
H
C £13,500
TA
D £20,925
24 Which one of the following groups of workers would be classified as indirect labour?
A Machinists in an organisation manufacturing clothes
B Bricklayers in a house building company
C Maintenance workers in a shoe factory
D Assembly workers in a vehicle manufacturing business
(50 marks)
A
TI
PA
PO
A
H
TA
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:
(a) Prepare the process account for last month including the output volume and cost of products A and B
separately. (7 marks)
A
TI
(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)
PA
(10 marks)
PO
2 Despard Ltd manufactures and sells a single product. The following data have been extracted from the current year’s
budget:
Sales and production (units) 5,000
Variable cost per unit £50
Fixed cost per unit £70
A
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
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.
(b) To whom should the variances calculated in (a) be communicated and why? (3 marks)
A
The company is also considering a change from absorption costing to marginal costing.
TI
(c) Calculate the BUDGETED profit for the month just ended under:
(i) absorption costing;
PA
(ii) marginal costing. (3 marks)
(10 marks)
PO
4 The following data for the current year relate to a sterile pack purchased by the Goodheart Hospital:
Annual demand 90,000 units
Annual holding cost per unit £8
A
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.
TA
Required:
(a) Calculate the EOQ for:
(i) the current year
(ii) next year. (4 marks)
(b) Calculate the total extra annual cost to the hospital for next year of ordering and holding stock of the 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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5 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:
(a) Determine the optimal production plan in units for the first three months of next year and the resultant total
contribution. (4 marks)
A
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
TI
involves a combination of product X and product Y.
PA
(b) Determine the optimal production plan in units for the second three month period of next year and the
resultant total contribution. (6 marks)
(10 marks)
PO
A
H
TA
12
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Formulae Sheet
A
TI
PA
PO
A
H
13
178 of 298 TAHA POPATIA
A
Answers TI
PA
PO
A
H
TA
Section A
1 A
2 A
3 C
4 A
5 B
6 A
7 C
8 A
9 D
10 B
11 A
12 B
13 A
14 C
15 C
16 B
17 A
18 B
A
19 D
20 D
TI
21 C
22 A
23 D
PA
24 C
25 D
1 A
PO
2 A
3 C
4 A
A
5 B
(9,250 – 6,750) ÷ (5,000 – 3,000) = £1·25
6 A
7 C
£
Actual cost 144,500
Standard cost of actual production (8,500 x 15) 127,500
––––––––
Total overhead variance 17,000 Adverse
––––––––
8 A
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9 D
£ Variance (£)
Actual cost 110,750
4,250 F Rate
Actual hours at standard rate (9,200 x 12·50) 115,000
5,250 A Efficiency
Standard hours for actual production at
standard rate (2,195 x 4 x 12·50) 109,750
10 B
£
Actual expenditure 56,389
Absorbed cost (12,400 x 1·02 x 4·25) 53,754
–––––––
Total under absorption 2,635
–––––––
11 A
£
Opening WIP 1,710
Completion of opening WIP (300 x 0·40 x 10) 1,200
Units started and completed in the month
(2,000 – 300) x 10 17,000
–––––––
Total value (2,000 units) 19,910
A
–––––––
TI
12 B
∑y = 17,500 + 19,500 + 20,500 + 18,500 + 17,000 = 93,000
∑x = 300 + 360 + 400 + 320 + 280 = 1,660
PA
a = (93,000 ÷ 5) – 29·53(1,660 ÷ 5) = 8,796·04
13 A
PO
£
Direct materials 45
Direct labour (4 hours) 30
––––
Prime cost 75
Production overheads (4 x 12·50) 50
––––
A
14 C
Maximum usage x Longest lead time = 520 x 15 = 7,800
15 C
16 B £
Absorption costing profit 40,000
Less Increase in stock at fixed overhead cost per unit
(18,000 – 16,500) x 10 (15,000)
–––––––
Marginal costing profit 25,000
–––––––
17 A
18 B
Material £
T (500 x 45) 22,500
V (200 x 40) + (200 x 52) 18,400
–––––––
Total relevant cost 40,900
–––––––
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19 D
£
Opportunity cost now 1,200
Cost of disposal in one year’s time 800
––––––
2,000
––––––
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
£
TR = P x Q = 31 x 300 = 9,300
TC = 3,500 + (10 x 300) = (6,500)
A
–––––––
Profit 2,800
–––––––
TI
23 D
CPU = £27
PA
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
PO
24 C
25 D
A
Y = 30,000 + 0·2X
TA
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Section B
A
Cost per equivalent litre:
Materials and conversion (288,800 ÷ 76,000) £3·80
TI
Workings:
W1 Product Selling price Further Net Production Net realisable
PA
£/litre processing realisable (ratio 3:2) value of
cost value litres production
£/litre £/litre £
A 8 2 6 44,700 268,200
B 12 3 9 29,800 268,200
PO
(b) 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.
TA
20
184 of 298 TAHA POPATIA
(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.
(b) 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.
A
(c) (i) Absorption costing profit: £
Gross profit 45,000 x £(15 – 9) 270,000
TI
Less Non-production costs (44,000)
––––––––
Absorption costing net profit 226,000
––––––––
PA
(ii) Marginal costing profit: £
Total contribution 45,000 x £(15 – 4) 495,000
Less Fixed production costs (48,000 x £5) (240,000)
Fixed non-production costs (44,000)
PO
––––––––
Marginal costing net profit 211,000
––––––––
Alternative answer: £
Absorption costing net profit [as above in (i)] 226,000
Deduct Increase in stocks at standard fixed
A
––––––––
Marginal costing net profit 211,000
––––––––
TA
4 (a) (i) EOQ for the current year = [(2 x 25 x 90,000) ÷ 8]0·5 = 750 units
(ii) EOQ for next year = [(2 x 36 x 90,000) ÷ 8]0·5 = 900 units
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185 of 298 TAHA POPATIA
(c) Any two for each of the following:
(i) Interest on net working capital, costs of storage space, insurance costs, obsolescence, pilferage and deterioration.
(ii) Costs of contacting supplier to place an order, costs associated with checking goods received and transport costs.
A
Solving these simultaneously gives:
TI
(1) X 6 30x + 36y = 144,000
(2) X 5 30x + 20y = 120,000
––––––––––––––––––––
(1) – (2) 16y = 24,000
PA
y = 1,500
and x = 3,000
The optimal production plan for the second three months of next year is to produce 3,000 units of product X and 1,500 units
of product Y. This will give a resultant total contribution of [(3,000 x 90) + (1,500 x 96)] = £414,000.
PO
A
H
TA
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 1
Normal loss 2
Abnormal loss 1
Joint products 3
–––
7
A
2 (a) Contribution per unit 1
Total profit 2
TI
–––
3
PA
(b) Contribution per unit 2
Total fixed costs 1
Required contribution 1/
2
Number of units 1/
–––2
PO
3
–––
10
H
–––
TA
23
187 of 298 TAHA POPATIA
Marks
4 (a) (i) EOQ this year 2
(ii) EOQ next year 2
–––
4
(b) Equations/formulations 3
Optimal units for products X and Y 2
A
Resultant contribution 1
–––
TI
6
–––
10
–––
PA
PO
A
H
TA
24
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Paper 1.2
Financial
Information for
Management
A
TI
PART 1
PA
FRIDAY 10 JUNE 2005
PO
QUESTION PAPER
A
H
1 Four lines representing expected costs and revenue have been drawn on a break-even chart:
A
£
Output
A
0
TI
Which line represents total variable cost?
A Line A
PA
B Line B
C Line C
PO
D Line D
2 Four lines have been labelled as J, K, L and M at different levels of output on the following profit-volume chart:
A
£
H
TA
0 Output
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
A
4 A company manufactures and sells a single product. The following data relate to a weekly output of 2,880 units:
£ per unit £ per unit
TI
Selling price 80
Less costs:
PA
Variable production 30
Other variable 10
Fixed 25
—–
PO
(65)
—–
Profit 15
—–
What is the weekly break-even point (in units)?
A
A 1,900
H
B 1,440
TA
C 1,800
D 4,800
5 An organisation manufactures a single product which is sold for £60 per unit. The organisation’s total monthly 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
A
TI
7 Which of the following correlation coefficients indicates the weakest relationship between two variables?
PA
A + 1·0
B + 0·4
C – 0·6
PO
D – 1·0
B Optical mark recognition is used by some educational organisations to mark multiple choice examination
questions.
TA
A
11 A manufacturing company uses a machine hour rate to absorb production overheads, which were budgeted to be
TI
£130,500 for 9,000 machine hours. Actual overheads incurred were £128,480 and 8,800 machine hours were
recorded.
PA
What was the total under absorption of production overheads?
A £880
B £900
PO
C £2,020
D £2,900
A
12 Which of the following would NOT be classified as a service cost centre in a manufacturing company?
H
14 A company operates a job costing system. Job number 605 requires £300 of direct materials and £400 of direct
A
labour. Direct labour is paid at the rate of £8 per hour. Production overheads are absorbed at a rate of £26 per direct
TI
labour hour and non-production overheads are absorbed at a rate of 120% of prime cost.
What is the total cost of job number 605?
PA
A £2,000
B £2,400
C £2,840
PO
D £4,400
A company operates a process costing system using the first in first out (FIFO) method of valuation. No losses occur in the
H
process.
The following data relate to last month:
TA
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 price variance (£) Sales volume contribution variance (£)
A 5,250 adverse 4,000 favourable
B 5,250 adverse 4,000 adverse
C 5,000 adverse 4,000 favourable
A
D 5,000 adverse 4,000 adverse
TI
18 A company operates a standard absorption costing system. The standard fixed production overhead rate is £15 per
hour.
PA
The following data relate to last month:
Actual hours worked 5,500
PO
B £7,500 favourable
H
C £10,500 adverse
TA
D £10,500 favourable
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
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
A B C D
Variable production cost per unit (£) 60 64 70 68
A
Purchase cost per unit from
an outside supplier (£) 100 120 130 110
TI
Machine hours per unit to manufacture 4 7 5 6
As it has insufficient machine hours available to manufacture all the components required, the company will need to
PA
buy some units of one component from the outside supplier.
Which component should be purchased from the outside supplier?
PO
A Component A
B Component B
C Component C
D Component D
A
H
TA
A
D £50,000
TI
PA
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.
PO
Product Y
(units)
100 Material G
90
A
Material H
TI Product X
PA
(units)
0 125 150
PO
24 What is the amount (in kg) of material G and material H used in each unit of product Y?
Material G Material H
A 10 20
B 10 10
A
C 20 20
H
D 20 10
TA
25 What is the optimal mix of production (in units) for the next period?
Product X Product Y
A 0 90
B 50 60
C 60 50
D 125 0
(50 marks)
10
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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 Selling price per unit
X £25·00
Y £37·50
Required:
(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)
A
TI
(b) Explain briefly the characteristics of a by-product. (2 marks)
(10 marks)
PA
2 Murgatroyd Ltd, which manufactures a single product, uses standard absorption costing. A summary of the standard
PO
Budgeted and actual production for last month were 10,000 units and 9,000 units respectively. The actual costs
H
incurred were:
£
TA
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)
(10 marks)
11
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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)
(8 marks)
A
4 Archibald Ltd manufactures and sells one product. Its budgeted profit statement for the first month of trading is as
follows:
TI
£ £
Sales (1,200 units at £180 per unit) 216,000
PA
Less: Cost of sales:
Less: Production (1,800 units at £100 per unit) 180,000
Less: Less Closing stock (600 units at £100 per unit) (60,000)
————
PO
(120,000 )
————
Gross profit 96,000
Less Fixed selling and distribution costs (41,000 )
————
A
The budget was prepared using absorption costing principles. If budgeted production in the first month had been
TA
2,000 units then the total production cost would have been £188,000.
Required:
(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)
12
200 of 298 TAHA POPATIA
5 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:
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
The marginal revenue (MR in £ per unit) is related to weekly demand (Q in units) by the equation:
A
MR = 20 – 0·004Q
TI
(b) Calculate the selling price per unit for product DG that should be set in order to maximise weekly profit.
(7 marks)
PA
(c) Distinguish briefly between penetration and skimming pricing policies when launching a new product.
(2 marks)
PO
(12 marks)
A
H
TA
13 [P.T.O.
201 of 298 TAHA POPATIA
Formulae Sheet
A
TI
PA
PO
A
H
14
202 of 298 TAHA POPATIA
A
Answers TI
PA
PO
A
H
TA
Section A
1 C
2 C
3 A
4 C
5 B
6 B
7 B
8 A
9 D
10 D
11 A
12 A
13 B
14 C
15 B
16 C
17 A
18 B
A
19 C
20 B
TI
21 D
22 B
23 A
PA
24 A
25 A
1 C
PO
2 C
3 A Total cost per unit (£) Total cost per unit (£)
(125 units) (180 units)
T1 8·00 7·00
A
T2 14·00 14·00
T3 19·80 15·70
H
T4 25·80 25·80
Cost types T2 and T4 are variable and T1 and T3 are semi-variable.
TA
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 128,480
Absorbed overhead (8,800 × 14·50) 127,600
Under absorption 880
12 A
A
——– ———
TI
14 C £
Prime cost (300 + 400) 700
Production overheads (50 × £26) 1,300
———
PA
Total production cost 2,000
Non-production overheads (1·20 × 700) 840
———
Total cost 2,840
PO
———
16 C £
Units started and finished last month (900 – 100) = 800 × £12 9,600
A
———
10,760
———
TA
17 A Price variance: £
Actual sales revenue 204,750
Actual sales units at standard selling price (10,500 × £20) 210,000
————
Sales price variance 5,250 A
———
Volume variance (500 units × £20 × 0·40) 4,000 F
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.
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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
Section B
A
direct labour) ——— ————
9,600 139,200
TI
Abnormal gain (W3) 100 1,450 Normal loss (W2) 500 1,000
––––––– –––––––– ––––––– ––––––––
PA
10,100 140,200 10,100 140,200
––––––– –––––––– ––––––– ––––––––
Cost per kg £
Costs arising (18,750 + 50,000 + 70,000) 138,750
Less: Normal loss (realisable value) (1,000)
PO
————
137,750
————
Cost per kg:
£137,750 ÷ (Normal yield from 10,000 kg)
= £137,750 ÷ (0·95 × 10,000) = £14·50
A
Workings:
H
(b) A by-product is an output from a process that occurs incidentally to the main production and is insignificant in value terms.
The inputs to a process are intended to create the main product or products but sometimes quite incidentally a by-product 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) 423,000
Total variances:
Direct materials (W1) 3,000 A
Direct labour (W2) 2,000 F
Fixed overheads (W3) 5,000 F
———— 4,000 F
————
Actual cost 419,000
————
Workings:
W1 £ Variance (£)
Actual 138,000
3,000 A
Standard cost of actual production (9,000 × £15) 135,000
W2
Actual 178,000
2,000 F
Standard cost of actual production (9,000 × £20) 180,000
W3
Actual 103,000
A
5,000 F
Standard cost of actual production (9,000 × £20) 108,000
TI
(b) Actual quantity × actual cost 138,000
Price
PA
6,000 F
Actual quantity × standard cost 144,000
(24,000 × £6) Usage
9,000 A
PO
(c) (i) 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
A
(ii) The standard quantity per unit is set by the person in the organisation with the specialist knowledge about the product
H
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.
TA
(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 Total cost
£
Higher level 2,000 188,000
Lower level 1,800 180,000
——— ————
Difference 200 8,000
——— ————
Variable production cost per unit = 8,000 ÷ 200 = £40
(ii) £
Total production cost for 2,000 units 188,000
Less total variable production cost (2,000 × 40) (80,000)
————
Total monthly fixed production cost 108,000
————
(ii) £
Total contribution [as in (b)(i)] 168,000
Less Total fixed costs (108,000 + 41,000) (149,000)
————
A
Net profit 19,000
————
TI
(c) 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.
PA
5 (a) (i) Initial selling price = (variable + fixed cost per unit) + mark up of 40%
Initial selling price = [£4 + £(18,000 ÷ 3,000)] × 1·40 = £14
PO
MC = variable cost = 4
MR = 20 – 0·004Q
4 = 20 – 0·004Q
H
Q = 4,000 units
TA
(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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A
TI
PA
PO
A
H
TA
Marks
Section A
Each of the 25 questions in this section is worth 2 marks 50
–––
Section B
1 (a) Inputs into process 11/2
Normal loss 11/2
Abnormal gain 2
Joint products 3
–––
8
A
Reconciliation statement 1
–––
TI
4
23
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Marks
5 (a) (i) Initial selling price 2
A
TI
PA
PO
A
H
TA
24
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Paper 1.2
Financial
Information for
Management
A
TI
PART 1
PA
FRIDAY 9 DECEMBER 2005
PO
QUESTION PAPER
A
H
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?
£ A £ B
0 Units 0 Units
A
£ C £ D
TI
PA
0 Units 0 Units
PO
2 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):
A
TSR
H
£
TC
TA
TVC
TFC
0 Units
675 1,200 1,500 1,700
A
A £155,000
TI
B £158,000
C £160,000
PA
D £163,000
PO
5 The following statements relate to financial accounting or to cost and management accounting:
(i) The main users of financial accounting information are external to an organisation.
(ii) Cost accounting is part of financial accounting and establishes costs incurred by an organisation.
(iii) Management accounting is used to aid planning, control and decision making.
A
A
D £9,900
TI
A company uses 9,000 units of a component per annum. The component has a purchase price of £40 per unit and
PA
the cost of placing an order is £160. The annual holding cost of one component is equal to 8% of its purchase price.
What is the Economic Order Quantity (to the nearest unit) of the component?
PO
A 530
B 671
C 949
A
D 1,342
H
9 A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model.
TA
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?
EOQ Total annual ordering cost
A Lower Higher
B Higher Lower
C Lower No effect
D Higher No effect
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.
A
What was the total under absorption of overheads last month?
TI
A £7,000
B £7,500
PA
C £9,500
D £16,500
PO
What would the profit for next period be using marginal costing?
TA
A £25,000
B £27,000
C £45,000
D £47,000
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
What was the labour efficiency variance?
TI
A £17,595 Adverse
B £17,595 Favourable
PA
C £24,480 Adverse
D £24,480 Favourable
PO
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
What were the favourable sales price and adverse sales volume contribution variances?
A
£ £
A 2,325 1,260
TA
B 2,500 1,260
C 2,325 2,100
D 2,500 2,100
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
A
C (ii) and (iii) only
TI
D (i), (ii) and (iii) PA
19 The correlation coefficient (r) for measuring the connection between two variables (x and y) has been calculated as
0·6.
PO
How much of the variation in the dependent variable (y) is explained by the variation in the independent variable
(x)?
A 36%
B 40%
A
C 60%
H
D 64%
TA
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:
Product Sales Opening stock of Closing stock of
finished goods finished goods
J 6,000 100 300
K 4,000 400 200
A
Joint production costs last month were £110,000 and these were apportioned to joint products based on the number
TI
of units produced.
What were the joint production costs apportioned to product J for last month?
PA
A £63,800
B £64,000
PO
C £66,000
D £68,200
A
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:
H
Product L Product M
£/unit £/unit
TA
A
25 What would be the monthly profit if the selling price per unit was set at £20?
A £1,000
TI
B £4,000
PA
C £6,000
D £12,000
PO
(50 marks)
A
H
TA
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) the variable cost per unit;
(ii) the total monthly fixed costs;
(iii) the selling price per unit;
(iv) the contribution per unit. (6 marks)
(b) Calculate the net increase or decrease in monthly profit which would result from acceptance of the new
A
business. (4 marks)
TI
(c) In the context of decision making, explain the term ‘opportunity cost’ and illustrate your answer by reference
to Pointdextre Ltd. (2 marks)
PA
(12 marks)
PO
2 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.
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.
A
Process I
Raw material input 50,000 litres at a cost of £365,000
TA
Required:
(a) Prepare the Process I account for last month. (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 Y
£ per unit £ per unit
Materials (at £5 per kg) 15 5
Labour (at £6 per hour) 24 3
Other variable costs 6 5
––– –––
Total 45 13
––– –––
Next month only 4,200 kg of material and 3,000 labour hours will be available.
The company holds no stocks and aims to maximise its profits each month.
Required:
(a) State the objective function and constraints in a form suitable for solving by linear programming.
(5 marks)
(b) Determine the optimal production plan for next month (in units). (4 marks)
A
(9 marks)
TI
Ploverleigh Ltd, which manufactures a single product, uses standard absorption costing. The standard product cost
PA
per unit is as follows:
£
Direct materials 11
PO
Direct labour 24
Fixed production overhead 18
Budgeted and actual production for last month were 12,000 units and 12,500 units respectively. The actual costs
incurred last month were:
A
£
Direct materials 142,700
H
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 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)
11
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5 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 Budgeted Basis of overhead Budgeted activity
overheads absorption
T £780,000 Machine hours 16,250 machine hours
W £173,400 Direct labour hours 14,450 direct labour hours
Required:
(a) Calculate the overhead absorption rates for cost centres T and W. (2 marks)
The prime cost of product PP, one of the products made by Sangazure Ltd, is as follows:
£ per unit
Direct material 10
Direct labour:
Cost centre T 14
Cost centre W 21
A
One unit of product PP takes 35 minutes of machine time in cost centre T. The direct labour in cost centre T is paid
TI
£7 per hour and £6 per hour in cost centre W.
PA
(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?
PO
(3 marks)
(8 marks)
A
H
TA
12
224 of 298 TAHA POPATIA
Formulae Sheet
A
TI
PA
PO
A
H
13
225 of 298 TAHA POPATIA
A
Answers TI
PA
PO
A
H
TA
Section A
1 D
2 C
3 C
4 C
5 B
6 D
7 C
8 C
9 A
10 B
11 A
12 B
13 C
14 D
15 A
16 C
17 D
18 A
A
19 A
20 C
TI
21 D
22 D
23 D
PA
24 D
25 B
PO
1 D
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
9 A
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
14 D £
Actual hours at standard rate (27,000 × 8·50) 229,500
Standard hours of production at standard rate 253,980
––––––––
∴Labour efficiency variance is 24,480 Favourable
––––––––
A
15 A Sales price variance: £
TI
Actual sales at standard price (4,650 × 6) 27,900
Actual sales at actual price 30,225
–––––––
Favourable price variance 2,325
PA
–––––––
Adverse sales volume contribution variance:
350 units × (6 × 0·60) 1,260
PO
16 C
17 D
A
18 A
H
19 A
20 C
22 D Production (units):
J: (6,000 – 100 + 300) = 6,200
K: (4,000 – 400 + 200) = 3,800
––––––
10,000
––––––
Joint costs apportioned to J: (6,200 ÷ 10,000) × 110,000 = £68,200
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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
Section B
A
102,000 619,000
–––––––– ––––––––
18,000 81,000
–––––––– ––––––––
TI
Working (W1)
Full capacity = 102,000 ÷ 0·85 = 120,000
PA
(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)
PO
Contribution 1·50
–––––
£
TA
(c) An opportunity cost is the cost of the best alternative forgone in a situation of choice. Opportunity costs are relevant costs.
In the situation of Pointdextre Ltd, if it goes ahead with the new business (that is the decision) then it will lose (forgo) the
contribution from some existing sales. This lost contribution is an opportunity cost relevant to the decision.
2 (a) Process I
Litres £ Litres £
Input 50,000 365,000 Output (W1) 47,000 634,500
Conversion 256,000 Normal loss (0·08 × 50,000) 4,000 –
Abnormal gain (W2) 1,000 13,500
––––––– –––––––– ––––––– ––––––––
51,000 634,500 51,000 634,500
––––––– –––––––– ––––––– ––––––––
Workings:
W1 Cost per litre (365,000 + 256,000) ÷ (50,000 × 0·92) = £13·50
Output value = 47,000 × 13·50 = £634,500
W2 Abnormal gain = 47,000 – (50,000 × 0·92) = 1,000
Valuation (1,000 × 13·50) = £13,500
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(b) Workings:
Cost per equivalent litre (EL): Conversion
EL
Completion of opening WIP 3,000
Started and finished within the month (50,000 – 5,000) 45,000
Work done so far on closing WIP 1,000
–––––––
49,000
–––––––
∴Cost per EL = 392,000 ÷ 49,000 = £8
(i) Output = 80,000 + (45,000 × 13·50) + (48,000 × 8·00) = £1,071,500
(ii) Closing WIP = (2,000 × 13·50) + (1,000 × 8·00) = £35,000
(c) The disposal costs would be debited to the process account. Alternatively, they could be shown as a negative value on the
credit side of the account.
A
Selling price 60 25
Less variable cost (45) (13)
TI
–––– ––––
Contribution 15 12
–––– ––––
PA
Objective function:
Total contribution = 15X + 12Y
Constraints:
Material (£5 per kg) 3X + Y ≤ 4,200
PO
Y
units
H
6,000
TA
Labour
4,200 A
Material
750
C
0 X units
600 750 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.
20
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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
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).
A
TI
4 (a) £
Standard cost of actual production [12,500 × (11 + 24 + 18)] 662,500
Total variances: Adverse Favourable
PA
£ £
Materials (W1) 5,200
Labour (W2) 8,700
Fixed overhead (W3) 5,800
––––––– ––––––
PO
£ £
Actual cost 142,700
H
5,200 A
Standard cost of actual production 137,500
TA
W2
Actual cost 291,300
8,700 F
Standard cost of actual production 300,000
W3
Actual cost 230,800
5,800 A
Standard cost of actual production 225,000
(b) £ £
Expenditure variance:
Actual cost 230,800
14,800 A
Budgeted cost (12,000 × 18) 216,000
Volume variance:
Budgeted cost 216,000
9,000 F
Standard cost of actual production 225,000
(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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5 (a) Absorption rates:
Cost centre T: (780,000 ÷ 16,250) = £48 per machine hour
Cost centre W: (173,400 ÷ 14,450) = £12 per direct labour hour
(c) Products do not pass through service cost centres so the costs of such centres cannot be absorbed directly into products.
Products only pass through production cost centres. Therefore in order to calculate a total production cost per unit, service
cost centre costs have to be reapportioned to production cost centres for absorption.
The method of reapportionment that fully recognises any work that service cost centres do for each is called the reciprocal
method. There are two techniques for applying the reciprocal method – a repeated distribution approach or the use of
A
simultaneous equations.
TI
PA
PO
A
H
TA
22
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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
A
Reference to Pointdextre Ltd 1
–––
2
–––
TI
12
–––
PA
2 (a) Input and conversion 1
Normal loss 11/2
Abnormal gain 11/2
PO
Output 1
–––
5
–––
12
–––
23
234 of 298 TAHA POPATIA
Marks
4 (a) Total materials variance 1
Total labour variance 1
Total fixed overhead variance 1
Reconciliation statement 1
–––
4
A
2
TI
(b) Prime cost 1/
2
Production overheads (T) 1
Production overheads (W) 1
PA
Total unit cost 1/
2
–––
3
Reapportionment method 1
–––
3
–––
8
–––
A
H
TA
24
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Paper 1.2
Financial
Information for
Management
A
TI
PART 1
PA
FRIDAY 9 JUNE 2006
PO
QUESTION PAPER
A
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
£ £
A
0 Hours 0 Hours
TI
CC DD
£ £
PA
PO
A
H
0 Hours 0 Hours
TA
2 Four vertical lines have been labelled P, Q, R and S at different levels of activity on the following profit-volume chart:
£
0 Output
Q R
4 The following production and total cost information relates to a single product organisation for the last three months:
Month Production Total cost
units £
1 1,200 66,600
2 1,900 58,200
3 1,400 68,200
The variable cost per unit is constant up to a production level of 2,000 units per month but a step up of £6,000 in
the monthly total fixed cost occurs when production reaches 1,100 units per month.
A
What is the total cost for a month when 1,000 units are produced?
A £54,200
TI
B £55,000
C £59,000
PA
D £60,200
5 Which of the following is NOT a feasible value for the correlation coefficient?
PO
A + 1·2
B + 0·6
C +0
D – 0·6
A
H
(i) Return on capital employed is a suitable measure of performance in both profit and investment centres.
(ii) Cost centres are found in manufacturing organisations but not in service organisations.
(iii) The manager of a revenue centre is responsible for both sales and costs in a part of an organisation.
Which of the statements, if any, is true?
A (i) only
B (ii) only
C (iii) only
D None of them
7 The purchase price of a stock item is £25 per unit. In each three month period the usage of the item is 20,000 units.
The annual holding costs associated with one unit equate to 6% of its purchase price. The cost of placing an order
for the item is £20.
What is the Economic Order Quantity (EOQ) for the stock item to the nearest whole unit?
A 1,730
B 1,894
C 1,461
D 1,633
9 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
A
What was the adverse sales volume profit variance last month?
TI
A £1,000
B £1,100
C £1,200
PA
D £1,300
PO
10 A company operates a standard marginal costing system. Last month actual fixed overhead expenditure was 2%
below budget and the fixed overhead expenditure variance was £1,250.
What was the actual fixed overhead expenditure for last month?
A £61,250
A
B £62,475
C £62,500
H
D £63,750
TA
11 An organisation’s stock records show the following transactions for a specific item during last month:
Date Receipts Issues
units units
4th 50
13th 200
20th 50
27th 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 The FIFO valuation is higher than the LIFO valuation by £250.
B The LIFO valuation is higher than the FIFO valuation by £250.
C The FIFO valuation is higher than the LIFO valuation by £500.
D The LIFO valuation is higher than the FIFO valuation by £500.
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
A
Percentage of service cost centre J to 30% 70% – –
TI
Percentage of service cost centre K to 50% 40% 10% –
The company apportions service cost centre costs to production cost centres using a method that fully recognises any
PA
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?
PO
A £58,000
B £58,540
C £59,000
D £59,540
A
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 (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (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?
A £332
B £352
C £416
A
D £448
TI
18 All of a company’s skilled labour, which is paid £8 per hour, is fully employed manufacturing a product to which the
PA
following data refer:
£ per unit £ per unit
Selling price 60
PO
–––
Contribution 25
–––
H
The company is evaluating a contract which requires 90 skilled labour hours to complete. No other supplies of skilled
TA
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 £15,336
B £15,400
C £16,200
D £17,496
20 What was the total number of units input during last period?
A 12,000
B 13,000
C 15,000
A
D 17,000
21 What was the value of the closing work in progress for last period?
TI
PA
A £21,330
B £21,690
C £22,530
PO
D £22,890
22 A company is attempting to break into an existing market by launching a new product at an initially low selling price.
A
B Price skimming
C Price discrimination
TA
D Penetration pricing
23 A company has established the following equations for one of its products:
Selling price (£ per unit) = 40 – 0·008Q
Marginal revenue (£ per unit) = 40 – 0·016Q
Total cost per week (£) = 2,500 + 8Q
Q in each case represents the number of units produced and sold per week.
At what selling price per unit will weekly profits be maximised?
A £8
B £16
C £24
D £32
Product Y
units 11
’000
10
9 (2)
(3)
8
H
7
J
5
A
4
TI
3
2
PA
K
(1)
1
L
Product X
1 2 3 4 5 6 7 8 9 10 11 12 13 14 units
PO
’000
24 Which of the following points shown on the graph is optimal for next period?
A
A Point H
H
B Point J
C Point K
TA
D Point L
25 Which of the following constraint formulations is represented by the line labelled (2) on the graph?
A 10X + 17Y ≤ 70,000
B 17X + 10Y ≤ 70,000
C 17X + 13Y ≤ 91,000
D 13X + 1 7Y ≤ 91,000
(50 marks)
1 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)
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
A
work. The further processing in process H would cost £4 per litre input from process G. In process H there would
TI
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.
PA
(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)
PO
(12 marks)
A
H
TA
3 Deadeye Ltd operates a standard costing system in which all stocks are valued at standard cost. The standard direct
A
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.
TI
The following information relates to last month:
Material H:
PA
Purchased 40,000 kg for £294,000
Issued into production 36,500 kg
Finished output of MS 17,200 units
PO
Required:
(a) Calculate the direct material price and usage variances for last month. (3 marks)
(b) Prepare a statement that reconciles the actual cost of material H purchased with the standard material cost
of actual production of MS for last month. The statement should incorporate the variances calculated in (a).
A
(3 marks)
H
(c) (i) Suggest ONE possible cause for EACH of the variances calculated in (a).
(ii) Who should the direct material price variance be reported to, and why? (4 marks)
TA
(10 marks)
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4 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:
(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)
A
(b) Using the equation established in (a), predict the total maintenance cost for the next quarter when planned
TI
production is 44,000 units. Suggest a major reservation, other than the effect of inflation, you would have
about this prediction. (3 marks)
PA
(10 marks)
PO
A
H
TA
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5 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
––––
A
The normal monthly level of production is 25,000 units and stocks are valued at standard cost.
TI
Required:
(a) Prepare in full a budgeted profit statement for this month using absorption costing principles. Assume that
PA
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)
PO
(c) Which of the two costing principles (absorption or marginal) is more relevant for short-run decision-making,
and why? (2 marks)
(10 marks)
A
H
TA
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247 of 298 TAHA POPATIA
Formulae Sheet
A
TI
PA
PO
A
H
13
248 of 298 TAHA POPATIA
A
Answers TI
PA
PO
A
H
TA
Section A
1 A
2 C
3 B
4 C
5 A
6 D
7 C
8 D
9 B
10 A
11 B
12 A
13 B
14 B
15 C
16 B
17 A
18 C
A
19 C
20 C
21 D
TI
22 D
23 C
PA
24 C
25 A
1 A
PO
2 C
1,400 68,200
1,200 66,600
––––– ––––––––
TA
1,200 1,600
––––– ––––––––
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
8 D
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250 of 298 TAHA POPATIA
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
14 B
15 C
16 B
17 A £
Prime cost [64 + (7 x 8)] 120
Production overhead (7 x 20) 140
––––
260
Non-production overhead (0·60 x 120) 72
––––
Total cost 332
A
––––
TI
18 C Opportunity cost per skilled labour hour = [25 ÷ (20 ÷ 8)] = £10
Relevant cost: £
Skilled labour cost (90 x 8) 1,720
PA
Opportunity cost (90 x 10) 1,900
–––––
1,620
–––––
PO
19 C Relevant cost of a regularly used material in stock is its replacement cost (600 x 27) = £16,200
Conversion:
Cost per equivalent unit = [193,170 ÷ (12,000 + 0·40 x 2,000 + 0·30 x 3,000)]
H
22 D
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.
18
251 of 298 TAHA POPATIA
Section B
1 (a) Process G
Litres £ Litres £
Raw material 60,000 381,000 Output (W3):
Direct labour 180,000 P1 (W4) 36,250 507,500
Direct expenses 54,000 P2 (W4) 21,750 304,500
Production Normal loss (W2) 3,000 15,000
overheads (W1) 198,000
Abnormal gain
(W4) 1,000 14,000
––––––– –––––––– ––––––– ––––––––
61,000 827,000 61,000 827,000
––––––– –––––––– ––––––– ––––––––
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:
A
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
TI
W3 Cost per litre = 798,000 ÷ 57,000 = £14
W3 Valuations:
PA
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
PO
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) (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.
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252 of 298 TAHA POPATIA
(b) Calculation of the contribution per machining hour for each product:
R S T
Selling price per unit £60 £75 £84
Contribution to sales ratio 20% 24% 25%
Contribution per unit £12 £18 £21
Machining hours per unit 0·667 0·900 1·250
Contribution per machine hour £18 £20 £16·80
Ranking 2nd 1st 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
(36,500 kg at 7·50 ) 14,550 A Usage
Standard quantity for actual production at 259,200
TI
standard price [(7,200 units x 4·8) at 7·50]
(b) Reconciliation: £ £
PA
Actual cost of purchases 294,000
Less: Adverse/Plus: Favourable variances:
Less: Price variance [as in (a)] 6,000 F
Less: Usage variance [as in (a)] 14,550 A
PO
–––––––
(8,550) A
Less: Increase in stock at standard cost
Less: [(40,000 – 36,500) x 7·50] (26,250)
––––––––
Standard material cost of actual production [per (a)] 259,200
A
––––––––
H
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253 of 298 TAHA POPATIA
(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
Less: Non-production costs:
Less: Variable selling cost 60
TI
Less: Fixed selling and admin costs 40
––– (100)
––––
PA
Net profit 77
––––
Workings: £
W1 Variable production cost per unit 23
PO
–––
W2 Under absorption (25,000 – 22,000) = 3,000 units
H
(b) Reconciliation:
£’000
TA
(c) 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.
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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 2
Abnormal gain 11/2
Normal loss 11/2
Joint products 2
–––
7
(b) Additional revenue 11/2
Additional cost 1
Conclusion 1/
2
–––
3
(c) Direct expenses 1
Production overheads 1
–––
A
2
–––
12
TI
–––
PA
2 (a) Required hours 11/2
Shortfall 1/
2
–––
2
PO
6
–––
H
8
–––
TA
23
255 of 298 TAHA POPATIA
Marks
4 (a) Σy 1
Σx 1
Calculation of ‘b’ 21/2
Calculation of ‘a’ 11/2
Fixed/variable costs 1
–––
7
(b) Total cost for 44,000 units 11/2
Reservation 11/2
–––
3
–––
10
–––
5 (a) Sales 1/
2
Cost of sales 3
Under absorption of overhead 11/2
Variable selling cost 1/
2
Fixed selling and admin costs 1/
2
–––
A
6
(b) Layout/presentation of statement 1
TI
Change in stock and its evaluation 1
–––
2
PA
(c) Marginal costing 1
Separation of fixed and variable costs 1/
2
Fixed costs not relevant to short term decisions 1/
2
–––
PO
2
–––
10
–––
A
H
TA
24
256 of 298 TAHA POPATIA
Paper 1.2
Financial
Information for
Management
A
TI
PART 1
PA
FRIDAY 8 DECEMBER 2006
PO
QUESTION PAPER
A
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.
H
0 Output
A
At the specific levels indicated what do the lines ‘G’ and ‘H’ represent?
Line ‘G’ Line ‘H’
TI
A Loss Profit
B Loss Contribution
PA
C Contribution Profit
D Contribution Contribution
PO
£
Total
A
cost
H
TA
Volume of
0 activity
Which one of the following descriptions is consistent with the above diagram?
A Annual total cost of factory power where the supplier sets a tariff based on a fixed charge plus a constant unit
cost for consumption which is subject to a maximum annual charge.
B Total annual direct material cost where the supplier charges a constant amount per unit which then reduces to
a lower amount per unit after a certain level of purchases.
C Total annual direct material cost where the supplier charges a constant amount per unit but when purchases
exceed a certain level a lower amount per unit applies to all purchases in the year.
D Annual total cost of telephone services where the supplier makes a fixed charge and then a constant unit rate for
calls up to a certain level. This rate then reduces for all calls above this level.
4 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.
A
B 20,000
TI
C 30,000
D 45,000
PA
5 The following statements refer to qualities of good information:
(i) It should be communicated to the right person.
PO
6 A company is considering the launch of a new product at a high initial selling price.
8 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)?
A 146
A
B 152
TI
C 210
D 245
PA
9 Which of the following is a feasible value for a correlation coefficient?
A +1·2
PO
B 0
C –1·2
D –2·0
A
£
Opening stock 300 kg valued at 3,300
TA
Purchases:
4th 400 kg for 4,800
18th 500 kg for 6,500
Issues:
13th 600 kg
25th 300 kg
Using the LIFO valuation method, what was the value of the closing stock for last month?
A £3,300
B £3,500
C £3,700
D £3,900
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.
A
The following statements relate to the paint manufacturer:
TI
(i) The mixing department is a cost centre.
(ii) A suitable cost unit for the colour adding department is a litre tin of paint.
PA
(iii) The pouring department is a profit centre.
A (i) only
B (i) and (ii) only
C (i) and (iii) only
D (ii) and (iii) only
A
(ii) Most spreadsheets have a facility to allow data within them to be displayed graphically.
(iii) A spreadsheet could be used to prepare a budgeted profit and loss account.
(iv) A spreadsheet is the most suitable software for storing large volumes of data.
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.
A
A £240
TI
B £260
C £272
PA
D £320
16 At the end of manufacturing in Process I, product K can be sold for £10 per litre. Alternatively product K could be
PO
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.
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.
A
20 A contract is under consideration which requires 800 labour hours to complete. There are 450 hours of spare labour
TI
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.
PA
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.
PO
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 £15·00
B £17·50
C £25·00
D £32·50
22 What would the weekly total contribution be if the price of the product was set at £20 per unit?
A £2,000
B £3,000
C £5,000
D £6,000
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?
A £50,000
B £60,000
C £70,000
D £90,000
A
TI
24 Which of the following statements correctly describes the shadow price of a resource in linear programming?
A The minimum sum payable for one more unit of the scarce resource.
PA
B The maximum sum payable for one more unit of the scarce resource.
C The increase in total contribution if one more unit of a non-binding constraint is made available.
D The increase in total contribution if one more unit of a binding constraint is made available.
PO
(2)
TA
(1)
0 x
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).
(50 marks)
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 Actual
units units
Production 30,000 33,000
Sales 32,000 34,000
Last month the budgeted profit was £200,000 and the actual total sales revenue was £731,000.
Required:
(a) Calculate the sales price and sales volume contribution variances for last month showing clearly whether
each variance is favourable or adverse. (4 marks)
(b) Explain how the two variances calculated in (a) could be interrelated. (3 marks)
A
(c) Calculate the BUDGETED profit for last month assuming that the company was using absorption costing.
TI
(4 marks)
(11 marks)
PA
2 Point Ltd uses the economic order quantity (EOQ) model to establish the reorder quantity for raw material Y. The
PO
Required:
H
(a) Calculate:
TA
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)
(9 marks)
A
Required:
TI
(a) Calculate the shortfall in general purpose machine hours next month.
PA (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
PO
decision to buy in components from Sergeant Ltd for next month. (3 marks)
(9 marks)
A
4 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:
H
Opening work-in-progress: 2,000 litres (30% complete in respect of conversion costs) valued in total at
TA
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)
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266 of 298 TAHA POPATIA
5 Phoebe Ltd manufactures many different products which pass through two production cost centres (P1 and P2).
There are also two service cost centres (S1 and S2) in the factory. The following information has been extracted from
the budget for the coming year:
P1 P2 S1 S2
Allocated and apportioned
production overheads £477,550 £404,250 £132,000 £96,000
Number of employees 30 65 10 15
Total machine hours 68,000 11,400
Total direct labour hours 4,000 14,000
Service cost centre S1 costs are reapportioned to all other cost centres based on the number of employees. 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:
(i) the machine hour absorption rate for cost centre P1, and
(ii) the direct labour hour absorption rate for cost centre P2. (6 marks)
A
(b) Explain the difference between production overheads that have been ‘allocated’ and those which have been
TI
‘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)
PA
(9 marks)
PO
A
H
TA
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Formulae Sheet
A
TI
PA
PO
A
H
12
268 of 298 TAHA POPATIA
A
Answers TI
PA
PO
A
H
TA
Section A
1 D
2 D
3 A
4 D
5 B
6 C
7 C
8 A
9 B
10 C
11 B
12 A
13 C
14 D
15 C
16 D
17 D
18 A
A
19 D
20 A
TI
21 D
22 D
23 A
PA
24 D
25 A
PO
1 D
2 D
A
3 A
Variable cost per unit = [(274,000 – 250,000) ÷ (15,000 – 12,000)] = £8
H
Total fixed cost above 11,000 units = [274,000 – (15,000 x 8)] = £154,000
TA
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)
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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
14 D
15 C
A
(60 + 40 + 20) + [(40 ÷ 8) x 16] + (0·60 x 120) = £272
TI
16 D
PA
£
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
PO
17 D
A
18 A
TA
£
Actual usage at standard cost (45,600 x 4) 182,400
Less: Adverse usage variance (15,200)
––––––––
Standard cost for actual production 167,200
––––––––
Actual production (units) = (167,200 ÷ 50) = 3,344
19 D
Opportunity cost now + disposal cost at end of contract (2,000 + 800) = £2,800
20 A
(800 – 450) x [8 + (14 ÷ 7)] = £3,500
21 D
Marginal cost (MC) = 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 70,000
Less: Apportioned general costs (200 x 0.60) ÷ (500 ÷ 1,500) (40,000)
–––––––
Specific avoidable fixed costs for shop S 30,000
–––––––
If shop S closed down net contribution lost (60,000 – 30,000) 30,000
Revised budgeted profit for company (80,000 – 30,000) £50,000
24 D
25 A
A
Section B
TI
1 (a) Sales price variance: £
Actual sales at standard selling price (34,000 x £22) 748,000
Actual sales at actual selling price 731,000
PA
––––––––
Sales price variance 17,000 A
––––––––
Sales volume contribution variance:
Budgeted sales (units) 32,000
PO
(b) The actual selling price (£21·50) was lower than the standard selling price (£22·00) – hence the adverse sales price
H
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.
TA
(c) £
Budgeted contribution (32,000 x £13) 416,000
Less: Budgeted profit (marginal costing) (200,000)
–––––––––
Budgeted fixed costs 216,000
Less: Budgeted non-production fixed costs (1,152,000 ÷ 12) (96,000)
–––––––––
Budgeted fixed production costs 120,000
–––––––––
Standard fixed production cost per unit (£120,000 ÷ 30,000) £4
Calculation of absorption costing profit: £
Marginal costing profit 200,000
Less: Decrease in stocks at standard fixed production
cost per unit [(32,000 – 30,000) x £4] (8,000)
–––––––––
Absorption costing profit 192,000
–––––––––
Alternatively: £
Budgeted absorption costing manufacturing profit
32,000 x (13 – 4) 288,000
Less: budgeted non-production fixed costs (96,000)
–––––––––
Absorption costing profit 192,000
–––––––––
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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
£
(ii) Purchasing cost (48,000 x £80) 3,840,000
Ordering cost (48,000 ÷ 1,200) x £120 4,800
Holding costs [(1,200 ÷ 2) x £80 x 0·10] 4,800
––––––––––
Total cost 3,849,600
––––––––––
A
3 (a) Hours required [(5 + 6 + 7 + 8) x 2,000] 52,000
Hours available 35,000
TI
Shortfall in hours 17,000
(b) E F G H
PA
£/unit £/unit £/unit £/unit
Variable production cost 32 27 34 35
Buy-in price 48 51 55 63
––– ––– ––– –––
Extra cost of buying in 16 24 21 28
PO
saved
1st G 2,000 14,000
TA
Litres £ Litres £
Opening WIP 2,000 24,600 Output (W4):
Ex opening WIP 2,000
Costs arising: Started and finished
Direct materials 12,500 99,600 in month 8,000
–––––––
Conversion 155,250 10,000 221,520
Normal loss
(0·08 x 12,500) 1,000 3,000
Abnormal loss (W2) 500 11,100
Closing WIP (W3) 3,000 43,830
––––––– –––––––– ––––––– ––––––––
14,500 279,450 14,500 279,450
––––––– –––––––– ––––––– ––––––––
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Workings:
W1 Cost per equivalent litre (EL):
Direct materials Conversion
EL EL
Completion of opening WIP – 1,400
Units started and finished in month 8,000 8,000
Abnormal loss 500 500
Closing WIP 3,000 1,350
––––––– –––––––
Work done last month 11,500 11,250
––––––– –––––––
£ £
Costs arising last month 99,600 155,250
Less: Scrap value of normal loss (3,000) –
––––––– –––––––
96,600 155,250
––––––– –––––––
Cost per EL £8·40 £13·80
W2 Valuation of abnormal loss:
500 x (8·40 + 13·80) = £11,100
W3 Valuation of closing WIP:
(3,000 x £8·40) + (1,350 x £13·80) = £43,830
A
W4 Valuation of output:
£
TI
Opening WIP value 24,600
Completion of opening WIP
(1,400 x £13·80) 19,320
PA
Units started and finished in month
[8,000 x £(8·40 + 13·80)] 177,600
––––––––
221,520
––––––––
PO
Note: only two examples were required and other answers were acceptable.
H
£ £ £ £
Allocated and apportioned overheads 477,550 404,250 132,000 96,000
Reapportionment of S1 (30:65:15) 36,000 78,000 (132,000) 18,000
Reapportionment of S2 (5:3) 71,250 42,750 – (114,000)
–––––––– –––––––– –––––––– ––––––––
584,800 525,000 – –
–––––––– –––––––– –––––––– ––––––––
Machine hours (P1) 68,000
Direct labour hours (P2) 14,000
Absorption rate:
Per machine hour £8·60
Per direct labour hour £37·50
(b) Allocated overheads are specifically traceable to cost centres. Apportioned overheads are those for which only a total factory-
wide figure is available. Therefore in order to get such overheads related to individual cost centres, the total has to 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.
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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
A
4
–––
11
TI
PA –––
2
–––
3
H
9
–––
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Marks
4 (a) Opening WIP 1
Costs arising 1
Output 3
Normal loss 1
Abnormal loss 2
Closing WIP 2
–––
10
A
(b) Allocation explained 1
Apportionment explained 1
TI
Use, or not, of meters 1
–––
3
–––
PA
9
–––
PO
A
H
TA
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Paper 1.2
Financial
Information for
Management
A
TI
PART 1
PA
FRIDAY 8 JUNE 2007
PO
QUESTION PAPER
A
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
A
Output
0
TI
Which statement is correct?
PA
A Line F represents total variable cost.
B The break-even point occurs at the intersection of lines E and F.
C Line G represents total revenue.
D The break-even point occurs at the intersection of lines G and H.
PO
2 The following diagram depicts a line which relates the quantity demanded (Q) to the selling price (P):
Price
A
(P)
H
TA
25
Quantity (Q)
0 40,000
What is the equation of the line?
A P = 25 – 0.000625Q
B P = 25 – 1,600Q
C P = 25 – 1·6Q
D P = 25 – 0·625Q
A
B £410,000
C £422,000
TI
D £428,000
PA
5 The following statements refer to different types of planning within a manufacturing organisation:
(i) Operational planning includes the scheduling of work to be done in the short term.
PO
(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.
Which of the statements are correct?
A
A
TI
8 Data relating to one particular stores item are as follows:
Average daily issues 70 units
PA
Maximum daily issues 90 units
Minimum daily issues 50 units
Lead time for the replenishment of stock 11 to 17 days
Reorder quantity 2,000 units
PO
C 3,250
D 3,800
H
TA
9 A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model.
What would be the effects on the EOQ and the total annual ordering cost of a decrease in the annual cost of
holding one unit of the component in stock?
EOQ Total annual ordering cost
A Lower No effect
B Higher No effect
C Lower Higher
D 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 £3,750
B £3,850
C £4,000
D £4,200
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
A
overhead costs £576,000 £288,000
Direct labour hours per unit:
TI
Product K1 5 2
Product K2 3 4
PA
Budgeted output is 12,000 units of each product. Fixed overhead costs are absorbed on a direct labour hour basis.
What is the budgeted fixed overhead cost per unit for product K2?
A £34
PO
B £36
C £38
D £42
A
13 A factory consists of two production cost centres (P and Q) and two service cost centres (T and V). The total overheads
H
14 What was the value (at cost) of last month’s closing work-in-progress?
A £1,224
B £1,280
C £1,836
D £1,920
15 What was the cost of the 1,040 units completed last month?
A
A £19,200
B £19,930
TI
C £20,730
D £20,800
PA
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:
PO
17 Which of the following correlation coefficients indicates the weakest relationship between two variables?
A +0·9
B – 0·6
C – 0·8
D – 1·0
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:
Standard Actual
£ £
Selling price per unit 40 38
A
Variable cost per unit 30 29
TI
What was the favourable sales volume contribution variance last month?
A £1,600
PA
B £1,800
C £2,000
D £2,200
PO
22 Which of the following should NOT be classified as a service cost centre in a manufacturing organisation?
A Factory canteen
B Stores
C Materials handling department
D 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 Penetration pricing
B Price skimming
C Premium pricing
D Price discrimination
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
A
As it has insufficient skilled labour hours available to manufacture all the components required, the company will need
TI
to buy some units of one component from the other supplier.
Which component should be purchased from the other supplier?
PA
A Component A
B Component B
C Component C
PO
D Component D
(50 marks)
A
H
TA
1 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:
£ per gond
Direct material 20
Direct labour (6 hours at £8 per hour) 48
Production overhead 24
–––
92
–––
The budgeted and actual activity levels for last month were as follows:
Budget Actual
units units
Sales 25,000 25,000
Production 25,000 26,000
A
The actual sales and variable costs for last month were as follows:
£
TI
Sales 2,995,000
Direct material (purchased and used) 532,800
PA
Direct labour (150,000 hours) 1,221,000
Variable production overhead 614,000
Required:
PO
(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
(c) Suggest ONE possible explanation of how the two direct labour variances calculated in (a) could be
interrelated. (2 marks)
(12 marks)
Required:
(a) Determine the optimal production plan in units for next year and calculate the resultant total contribution.
A
Workings should be clearly shown.
TI
Note: Graph paper is available.
(8 marks)
PA
(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)
PO
(11 marks)
3 Luiz Ltd operates several manufacturing processes in which stocks of work-in-progress are never held. In process K,
joint products (P1 and P2) are created in the ratio 2:1 by volume from the raw materials input. In this process a
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
H
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)
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4 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 £000
Sales (40,000 units) 4,400
Less Cost of sales:
Production cost (45,000 units):
Variable 1,800
Fixed 1,476
––––––
3,276
Less Closing stock (5,000 units) (364)
––––––
(2,912)
––––––
Gross profit 1,488
Less Non-production expenses:
Variable selling costs 360
Fixed selling, administration
and distribution costs 598
A
––––––
(958)
TI
––––––
Net profit 530
PA
––––––
There will be no stock at the beginning of next year.
PO
Required:
(a) Using marginal costing principles, calculate the following for next year:
(i) the total budgeted contribution from sales; and
(ii) the budgeted net profit. (4 marks)
A
(b) Calculate the break-even point (in units) for next year. (2 marks)
H
(c) Explain clearly why Marco Ltd’s net profit for next year using marginal costing principles differs from that
TA
under absorption costing. Under what conditions would the two net profits be the same? (3 marks)
(9 marks)
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5 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 £ per unit
Selling price 100
Less Variable costs:
Direct materials 40
Skilled labour 25
Selling 5
–––
A
(70)
–––
TI
30
–––
PA
Required:
(a) Calculate the total relevant costs for the contract in respect of:
(i) Material R; and
PO
(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)
A
(8 marks)
H
TA
12
288 of 298 TAHA POPATIA
Formulae Sheet
A
TI
PA
PO
A
H
13
289 of 298 TAHA POPATIA
A
Answers TI
PA
PO
A
H
TA
Section A
1 B
2 A
3 A
4 A
5 D
6 C
7 B
8 C
9 D
10 C
11 C
12 A
13 C
14 B
15 C
16 C
17 B
18 C
A
19 D
20 C
21 C
TI
22 D
23 D
PA
24 C
25 C
1 B
PO
2 A
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
9 D
10 C £
Prime cost (300 + 400 + 100) = 800
+ Production overheads (400 ÷ 8) × 40 = 2,000
+ Non-production overheads (1·5 × 800) = 1,200
––––––
Total cost 4,000
––––––
11 C
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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
15 C £
Opening WIP value 1,530
+ Completion of opening WIP (200 × 0·60 × 20) 2,400
+ Units started and finished in the month [(1,040 – 200) × 20] 16,800
–––––––
Total value of 1,040 completed units 20,730
–––––––
16 C
17 B
18 C
A
19 D Fixed production overhead capacity variance:
TI
(Budgeted hours – Actual hours worked) × Standard fixed overhead rate =
(8,000 – 8,400) × 9 = £3,600 Favourable
PA
20 C 200 units × standard contribution per unit = [200 × (40 – 30)] = £2,000 (F)
21 C
PO
22 D
23 D
£ £ £000
44,000 9·50 3·50 154
H
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Section B
£
1 (a) (i) Actual cost 532,800
Total variance £12,800 A
Standard cost of actual production 520,000
(26,000 × 20)
(ii) Actual cost 614,000
Total variance £10,000 F
Standard cost of actual production 624,000
(26,000 × 24)
(iii) and (iv)
Actual cost 1,221,000
Wage rate variance £21,000 A (iii)
Actual hours at standard rate 1,200,000
(150,000 × 8)
Efficiency variance £48,000 F (iv)
Standard cost of actual production 1,248,000
(26,000 × 48)
(b) £
Budgeted contribution 700,000
[25,000 × £(120 – 92)]
A
Sales variances:
Price [(25,000 × 120) – 2,995,000] 5,000 A
TI
Cost variances:
Total direct materials [(a) (i)] 12,800 A
Total variable production overhead [(a) (ii)] 10,000 F
PA
Direct labour: – rate [(a) (iii)] 21,000 A
– efficiency [(a) (iv)] 48,000 F
————
Total direct labour 27,000 F
PO
————
Actual contribution (See workings) 719,200
————
Workings: £ £
Actual sales (25,000 units) 2,995,000
A
(2,275,800)
—————
Actual contribution 719,200
—————
(c) The rate variance is adverse (£21,000) and the efficiency variance is favourable (£48,000). A possible explanation of 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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293 of 298 TAHA POPATIA
2 (a) Let x = the number of units of product X and let y = the number of units of product Y.
Objective function (maximisation of contribution):
(200 – 170) x + (250 – 210) y
= 30x + 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
50·0
A
A
40·0 Demand (Y)
B
TI
C
PA
15·0
Labour
PO
D
X Units
0 80·0 ’000
20·0 45·0
A
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
H
read from the graph or found by solving the equations for the two constraint lines simultaneously, as follows:
(1) 12x + 8y = 540,000 (Materials)
TA
294 of
20 298 TAHA POPATIA
(b) 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.
Litres £ Litres £
Materials input 90,000 450,000 Normal loss 3,600 18,000
(4% × 90,000)
Conversion costs 216,000 Abnormal loss [W1] 1,200 9,000
(4,800 – 3,600)
Output:
Product P1 [W2] 56,800 355,000
Product P2 [W2] 28,400 284,000
–––––––– –––––––– –––––––– ––––––––
90,000 666,000 90,000 666,000
–––––––– –––––––– –––––––– ––––––––
Workings:
A
W1 Valuation of abnormal loss and combined total output of 85,200 litres
(P1 + P2) is at a cost per litre of:
TI
(666,000 – 18,000) ÷ (90,000 – 3,600) = £7·50
Abnormal loss valuation: (1,200 × 7·50) = £9,000
PA
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
PO
––––––
Additional revenue 260
Further processing costs of converting P1 into XP1 (100 × 3)
H
300
––––––
Additional costs exceed additional revenue by (40)
TA
––––––
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.
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4 (a) £ per unit £ per unit
Selling price (4,400,000 ÷ 40,000) 110
Less Variable costs:
Production (1,800,000 ÷ 45,000) 40
Selling, admin and
distribution (360,000 ÷ 40,000) 9
–– (49)
–––
Contribution 61
–––
(i) Total contribution (61 × 40,000) £2,440,000
£000
(ii) Total contribution [as in (i)] 2,440
Less Total fixed costs:
Production 1,476
Selling, admin and distribution 598
––––– (2,074)
––––––
Net profit 366
––––––
A
£000
Net profit (absorption costing) 530
Less Increase in stock (5,000 units) at fixed
TI
production cost per unit (1,476,000 ÷ 45,000) (164)
––––––
PA
Net profit (marginal costing) 366
––––––
(b) Let x = number of units produced and sold at the break-even point.
At the break-even point: Total contribution = Total fixed costs
PO
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
A
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
H
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
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) (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.
(b) 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
Section B
(c) Explanation 2
––
12
––
A
2 (a) Formulation of objective function 1
TI
Formulation of constraints 3
Optimal production plan 3
Resultant contribution 1
PA
––– 8
––– 3
––
11
––
Outputs 21/2
––– 7
TA
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Marks
A
TI
PA
PO
A
H
TA
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