Paper 1.

2
Financial
Information for
Management
PART 1

FRIDAY 11 JUNE 2004

QUESTION PAPER

Time allowed 3 hours

This paper is divided into two sections

Section A ALL 25 questions are compulsory and MUST be

answered

Section B ALL FIVE questions are compulsory and MUST be

answered

Formulae Sheet is on page 14

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination

hall

The Association of Chartered Certified Accountants

Section A – ALL 25 questions are compulsory and MUST be attempted
Please use the candidate registration sheet provided to indicate your chosen answer to each multiple choice question.
Each question within this section is worth 2 marks.

1 The following diagram represents the behaviour of one element of cost:

£
Total
cost

0 Volume of activity

Which ONE of the following statements is consistent with the above diagram?
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.
B Weekly total labour cost when there is a fixed wage for a standard 40 hour week but overtime is paid at a
premium rate.
C Total direct material cost for a period if the supplier charges a lower unit cost on all units once a certain quantity
has been purchased in that period.
D Total direct material cost for a period where the supplier charges a constant amount per unit for all units supplied
up to a maximum charge for the period.

2 The following represents a profit/volume graph for an organisation:

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

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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

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
margin of safety of £64,000 expressed in terms of sales value.
What is the planned activity level (in units) for next month?
A 3,100
B 4,100
C 5,350
D 7,750

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:
Product X Y
Selling price per unit £20 £40
Variable cost per unit £12 £30
Skilled labour hours per unit 2 4
Maximum demand (units) per period 800 400
In order to maximise profit in the coming period, how many units of each product should the company
manufacture and sell?
A 200 units of X and 400 units of Y
B 400 units of X and 300 units of Y
C 600 units of X and 200 units of Y
D 800 units of X and 100 units of Y

3 [P.T.O.
6 An organisation manufactures a single product. The total cost of making 4,000 units is £20,000 and the total cost
of making 20,000 units is £40,000. Within this range of activity the total fixed costs remain unchanged.
What is the variable cost per unit of the product?
A £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 Issues
units units
14th 150
13th 600
15th 200
22nd 250
The stock at the beginning of last month consisted of 200 units valued at £5,200.
The receipts last month cost £32·50 per unit.
Using the FIFO method of valuation, what was the total cost of last month’s issues?
A £18,200
B £18,300
C £18,525
D £19,500

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:
– product X 36 25
– product Y 48 35
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.
What is the budgeted fixed overhead cost per unit for product Y?
A £11
B £12
C £14
D £15

12 A company uses an overhead absorption rate of £3·50 per machine hour, based on 32,000 budgeted machine hours
for the period. During the same period the actual total overhead expenditure amounted to £108,875 and 30,000
machine hours were recorded on actual production.
By how much was the total overhead under or over absorbed for the period?
A Under absorbed by £3,875
B Under absorbed by £7,000
C Over absorbed by £3,875
D Over absorbed by £7,000

13 A company manufactures and sells a single product. For this month the budgeted fixed production overheads are
£48,000, budgeted production is 12,000 units and budgeted sales are 11,720 units.
The company currently uses absorption costing.
If the company used marginal costing principles instead of absorption costing for this month, what would be the
effect on the budgeted profit?
A £1,120 higher
B £1,120 lower
C £3,920 higher
D £3,920 lower
5 [P.T.O.
14 For which of the following is a profit centre manager normally responsible?
A Costs only
B Revenues only
C Costs and revenues
D Costs, revenues and investment.

The following information relates to questions 15 and 16:

The standard direct material cost per unit for a product is calculated as follows:
10·5 litres at £2·50 per litre
Last month the actual price paid for 12,000 litres of material used was 4% above standard and the direct material usage
variance was £1,815 favourable. No stocks of material are held.

15 What was the adverse direct material price variance for last month?
A £1,000
B £1,200
C £1,212
D £1,260

16 What was the actual production last month (in units)?

A 1,074
B 1,119
C 1,212
D 1,258

17 A company operates a standard marginal costing system. Last month its actual fixed overhead expenditure was 10%
above budget resulting in a fixed overhead expenditure variance of £36,000.
What was the actual expenditure on fixed overheads last month?
A £324,000
B £360,000
C £396,000
D £400,000

18 Last month a company budgeted to sell 8,000 units at a price of £12·50 per unit.
Actual sales last month were 9,000 units giving a total sales revenue of £117,000.
What was the sales price variance for last month?
A £4,000 favourable
B £4,000 adverse
C £4,500 favourable
D £4,500 adverse

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19 Which department would normally be responsible for completing a standard purchase requisition for goods in a
service organisation?
A The buying (purchasing) department
B The department that requires the goods
C The goods inwards department
D The accounting department staff.

20 Regression analysis is being used to find the line of best fit (y = a + bx) from eleven pairs of data. The calculations
have produced the following information:
∑ x = 440, ∑ y = 330, ∑ x2 = 17,986, ∑ y2 = 10,366 and ∑ xy = 13,467

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

21 The following information relates to a management consultancy organisation:

Salary cost per hour for senior consultants £40
Salary cost per hour for junior consultants £25
Overhead absorption rate per hour applied to all hours £20
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 £6,874
B £10,696
C £11,466
D £12,642

7 [P.T.O.
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

23 A company manufactures and sells a single product. The variable cost of the product is £2·50 per unit and all
production each month is sold at a price of £3·70 per unit. A potential new customer has offered to buy 6,000 units
per month at a price of £2·95 per unit. The company has sufficient spare capacity to produce this quantity. If the new
business is accepted, sales to existing customers are expected to fall by two units for every 15 units sold to the new
customer.
What would be the overall increase in monthly profit which would result from accepting the new business?
A £1,740
B £2,220
C £2,340
D £2,700

24 A company manufactures four components (L, M, N and P) using the same general purpose machinery. Weekly
demand is 1,500 units of each component but only 24,000 machine hours are available each week. A decision
has to be made on which component to buy in from an outside supplier. The following data are available:
11 L 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).
At which of the following intersections is contribution maximised?
A Constraints (1) and (2)
B Constraints (2) and (3)
C Constraints (1) and (3)
D Constraint (1) and the x-axis
(50 marks)

9 [P.T.O.
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.
Required:
(a) Calculate for process I:
(i) the value of the closing work in progress; and
(ii) the total value of the units transferred to process II. (4 marks)
(b) Prepare the process II account for last month. (4 marks)
(c) Identify TWO main differences between process costing and job costing. (2 marks)
(10 marks)

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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) 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)
(c) Suggest TWO possible causes for EACH variance calculated in (b). (4 marks)
(10 marks)

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
Weekly profit £22,000
Contribution to sales ratio 40%
The company’s production capacity is not being fully utilised in the current year and three possible strategies are under
consideration. Each strategy involves reducing the unit selling price on all units sold with a consequential effect on
the budgeted volume of sales. Details of each strategy are as follows:
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)

11 [P.T.O.
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
–––
(60)
–––
40
–––
Required:
(a) Prepare calculations showing the total relevant costs for making a decision about the contract in respect of
the following cost elements:
(i) materials K and L; and
(ii) skilled labour. (7 marks)
(b) Explain how you would decide which overhead costs would be relevant in the financial appraisal of the
contract. (3 marks)
(10 marks)

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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
– finishing section 241,320
– general service cost centre 182,800
Number of employees:
– machining department 14
– finishing section 32
– general service cost centre 14
Service cost centre costs are reapportioned to production cost centres.
Required:
(a) Calculate the direct labour hour absorption rate for the finishing section. (5 marks)
(b) Calculate the budgeted total cost for one unit of product Dale only, showing each main cost element
separately. (2 marks)
(c) The company is considering a change over to marginal costing. State with reasons, whether the total profit
for the coming year calculated using marginal costing would be higher or lower than the profit calculated
using absorption costing. No calculations are required. (3 marks)
(10 marks)

13 [P.T.O.
 Formulae Sheet

End of Question Paper

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