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f2 Past Papers by Acute
f2 Past Papers by Acute
f2 Past Papers by Acute
Acccunting
Time allowed: 2 hours
ALL FIFTY questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor.
This question paper must not be removed from the examination hall.
Fundamentals Pilct Paper Kncwledge mcdule
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2
The Association of Chartered Certified Accountants
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2
ALL 50 questions are compulsory and MUST be attempted.
1 The following break-even chart has been drawn showing lines for total cost (TC), total variable cost (TVC), total fixed
cost (TFC) and total sales revenue (TSR):
0 675 1,200 1,500 1,700 Units
TSR
TC
TVC
TFC
What is the margin of safety at the 1,700 units level of activity?
A 200 units
B 300 units
C 500 units
D 1,025 units
(2 marks)
2 The following assertions relate to financial accounting and to cost accounting:
(i) The main users of financial accounting information are external to an organisation.
(ii) Cost accounting is that part of financial accounting which records the cash received and payments made by an
organisation.
Whichofthefollowingstatementsaretrue?
A Assertions (i) and (ii) are both correct.
B Only assertion (i) is correct.
C Only assertion (ii) is correct.
(1 mark)
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:
x = 440, y = 330, x
2
= 17,986, y
2
= 10,366, xy = 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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3
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
B Under absorbed by $7,000
C Over absorbed by $3,875
D Over absorbed by $7,000
(2 marks)
6 For which of the following is a profit centre manager responsible?
A Costs only
B Revenues only
C Costs and revenues.
(1 mark)
7 An organisation has the following total costs at two activity levels:
Activity level (units) 16,000 22,000
Total costs ($) 135,000 170,000
Variable cost per unit is constant within this range of activity but there is a step up of $5,000 in the total fixed costs
when the activity exceeds 17,500 units.
What is the total cost at an activity of 20,000 units?
A $155,000
B $158,000
C $160,000
D $163,000
(2 marks)
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8 A company manufactures and sells a single product. In two consecutive months the following levels of production and
sales (in units) occurred:
Month1 Month2
Sales 3,800 4,400
Production 3,900 4,200
The opening inventory for Month 1 was 400 units. Profits or losses have been calculated for each month using both
absorption and marginal costing principles.
Which of the following combination of profits and losses for the two months is consistent with the above data?
Absorptioncostingprofit/(loss) Marginalcostingprofit/(loss)
Month1 Month2 Month1 Month2
$ $ $ $
A 200 4,400 (400) 3,200
B (400) 4,400 200 3,200
C 200 3,200 (400) 4,400
D (400) 3,200 200 4,400
(2 marks)
9 Which of the following best describes a flexible budget?
A A budget which shows variable production costs only.
B A monthly budget which is changed to reflect the number of days in the month.
C A budget which shows sales revenue and costs at different levels of activity.
D A budget that is updated halfway through the year to incorporate the actual results for the first half of the year.
(2 marks)
10 Information relating to two processes (F and G) was as follows:
Process Normallossas Input Output
%ofinput litres litres
F 8 65,000 58,900
G 5 37,500 35,700
For each process, was there an abnormal loss or an abnormal gain?
ProcessF ProcessG
A Abnormal gain Abnormal gain
B Abnormal gain Abnormal loss
C Abnormal loss Abnormal gain
D Abnormal loss Abnormal loss
(2 marks)
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5
11 An organisation manufactures a single product which is sold for $80 per unit. The organisations total monthly fixed
costs are $99,000 and it has a contribution to sales ratio of 45%. This month it plans to manufacture and sell 4,000
units.
What is the organisations margin of safety this month (in units)?
A 1,250
B 1,750
C 2,250
D 2,750
(2 marks)
12 Which one of the following should be classified as indirect labour?
A Assembly workers on a car production line
B Bricklayers in a house building company
C Machinists in a factory producing clothes
D Forklift truck drivers in the stores of an engineering company.
(2 marks)
13 A company is evaluating a project that requires 400kg of raw material X. The company has 150kg of X in stock that
were purchased six months ago for $55 per kg. The company no longer has any use for X. The inventory of X could be
sold for $40 per kg. The current purchase price for X is $53 per kg.
What is the total relevant cost of raw material X for the project?
A $17,950
B $19,250
C $21,200
D $21,500
(2 marks)
14 Which of the following is NOT a feasible value for the correlation coefficient?
A +1.4
B +0.7
C 0
D 0.7
(2 marks)
15 The following statements relate to aspects of budget administration:
Statement (1): An important task of a budget committee is to ensure that budgets are properly coordinated.
Statement (2): A budget manual is the document produced at the end of the budget setting process.
Which of the following is true?
A Only statement (1) is correct.
B Only statement (2) is correct.
C Both statements are correct.
(1 mark)
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6
16 Up to a given level of activity in each period the purchase price per unit of a raw material is constant. After that point
a lower price per unit applies both to further units purchased and also retrospectively to all units already purchased.
Which of the following graphs depicts the total cost of the raw materials for a period?
A
0
B
0
C
0
D
0
(2 marks)
17 A manufacturing organisation incurs costs relating to the following:
(1) Commission payable to salespersons.
(2) Inspecting all products.
(3) Packing the products at the end of the manufacturing process prior to moving them to the warehouse.
Which of these costs are classified as production costs?
A (1) and (2) only
B (1) and (3) only
C (2) and (3) only
D (1), (2) and (3)
(2 marks)
18 Which of the following is correct with regard to expected values?
A Expected values provide a weighted average of anticipated outcomes.
B The expected value will always equal one of the possible outcomes.
C Expected values will show the decision makers attitude to risk.
D The expected value will never equal one of the possible outcomes.
(2 marks)
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7
19 There is a 60% chance that a company will make a profit of $300,000 next year and a 40% chance of making a loss
of $400,000.
What is the expected profit or loss for next year?
A $120,000 Loss
B $20,000 Loss
C $20,000 Profit
D $120,000 Profit
(2 marks)
20 A companys 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 $19.50 per
unit were achieved.
What were the sales price and sales volume contribution variances for last month?
Salespricevariance($) Salesvolumecontributionvariance($)
A 5,250 Adverse 4,000 Favourable
B 5,250 Adverse 4,000 Adverse
C 5,000 Adverse 4,000 Favourable
D 5,000 Adverse 4,000 Adverse
(2 marks)
21 A company manufactures and sells one product which requires 8 kg of raw material in its manufacture. The budgeted
data relating to the next period are as follows:
Units
Sales 19,000
Opening inventory of finished goods 4,000
Closing inventory of finished goods 3,000
Kg
Opening inventory of raw materials 50,000
Closing inventory of raw materials 53,000
What is the budgeted raw material purchases for next period (in kg)?
A 141,000
B 147,000
C 157,000
D 163,000
(2 marks)
22 The following statements refer to spreadsheets:
(i) A spreadsheet is the most suitable software for the storage of large volumes of data.
(ii) A spreadsheet could be used to produce a flexible budget.
(iii) Most spreadsheets contain a facility to display the data in them within them in a graphical form.
Which of these statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
(2 marks)
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8
23 A company always determines its order quantity for a raw material by using the Economic Order Quantity (EOQ)
model.
What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of ordering a
batch of raw material?
EOQ Annualholdingcost
A Higher Lower
B Higher Higher
C Lower Higher
D Lower Lower
(2 marks)
24 Which one of the following is most likely to operate a system of service costing?
A A printing company
B A hospital
C A firm of solicitors.
(1 mark)
25 The following budgeted information relates to a manufacturing company for next period:
Units $
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.
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
B $27,000
C $45,000
D $47,000
(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 companys weekly break- even point is sales revenue of $18,000.
What would be the profit in a week when 1,200 units are sold?
A $1,200
B $2,400
C $3,600
D $6,000
(2 marks)
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9
27 The following graph relates to a linear programming problem:
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
(2 marks)
28 In an organisation manufacturing a number of different products in one large factory, the rent of that factory is an
example of a direct expense when costing a product.
Is this statement true or false?
A True
B False
(1 mark)
Y
0 X
(1)
(2)
(3)
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10
29 A company operates a process in which no losses are incurred. The process account for last month, when there was
no opening work-in-progress, was as follows:
ProcessAccount
$ $
Costs arising 624,000 Finished output
(10,000 units) 480,000
Closing work-in progress (4,000 units) 144,000
624,000 624,000
The closing work-in-progress was complete to the same degree for all elements of cost.
What was the percentage degree of completion of the closing work-in-progress?
A 12%
B 30%
C 40%
D 75%
(2 marks)
30 A company manufactures and sells two products (X and Y) both of which utilise the same skilled labour. For the
coming period, the supply of skilled labour is limited to 2,000 hours. Data relating to each product are as follows:
ProductXY
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
(2 marks)
31 The following statements refer to organisations using job costing:
(i) Work is done to customer specification.
(ii) Work is usually completed within a relatively short period of time.
(iii) Products manufactured tend to be all identical.
Which two of these statements are CORRECT?
A (i) and (ii)
B (i) and (iii)
C (ii) and (iii)
(1 mark)
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Thefollowinginformationrelatestoquestions32and33:
A company uses standard costing and the standard variable overhead cost for a product is:
6 direct labour hours @ $10 per hour
Last month when 3,900 units of the product were manufactured, the actual expenditure on variable overheads was
$235,000 and 24,000 hours were actually worked.
32 What was the variable overhead expenditure variance for last month?
A $5,000 Adverse
B $5,000 Favourable
C $6,000 Adverse
D $6,000 Favourable
(2 marks)
33 What was the variable overhead efficiency variance for last month?
A $5,000 Adverse
B $5,000 Favourable
C $6,000 Adverse
D $6,000 Favourable
(2 marks)
34 When a manufacturing company operates a standard marginal costing system there are no fixed production overhead
variances.
Is this statement true or false?
A True
B False
(1 mark)
35 A company operates a standard costing system. The variance analysis for last month shows a favourable materials price
variance and an adverse labour efficiency variance.
The following four statements, which make comparisons with the standards, have been made:
(1) Inferior quality materials were purchased and used.
(2) Superior quality materials were purchased and used.
(3) Lower graded workers were used on production.
(4) Higher graded workers were used on production.
Which statements are consistent with the variance analysis?
A (1) and (3)
B (1) and (4)
C (2) and (3)
D (2) and (4)
(2 marks)
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12
36 Which of the following best describes a principal budget factor?
A A factor that affects all budget centres.
B A factor that is controllable by a budget centre manager.
C A factor which limits the activities of an organisation.
D A factor that the management accountant builds into all budgets.
(2 marks)
37 Four vertical lines have been labelled G, H, J and K at different levels of activity on the following profit-volume chart:
0
G
H J
K
Output
Which line represents the total contribution at that level of activity?
A Line G
B Line H
C Line J
D Line K
(2 marks)
38 Data is information that has been processed in such a way as to be meaningful to its recipients.
Is this statement true or false?
A True
B False
(1 mark)
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13
39 Two products G and H are created from a joint process. G can be sold immediately after split-off. H requires further
processing into product HH before it is in a saleable condition. There are no opening inventories and no work in
progress of products G, H or HH. The following data are available for last period:
$
Total joint production costs 350,000
Further processing costs of product H 66,000
Product Production Closinginventory
units units
G 420,000 20,000
HH 330,000 30,000
Using the physical unit method for apportioning joint production costs, what was the cost value of the closing
inventory of product HH for last period?
A $16,640
B $18,625
C $20,000
D $21,600
(2 marks)
40 A company purchased a machine several years ago for $50,000. Its written down value is now $10,000. The machine
is no longer used on normal production work and it could be sold now for $8,000.
A project is being considered which would make use of this machine for six months. After this time the machine would
be sold for $5,000.
What is the relevant cost of the machine to the project?
A $2,000
B $3,000
C $5,000
D $10,000
(2 marks)
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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14
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 $1,250
B $3,500
C $4,500
D $4,900
(2 marks)
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.
If an employee produces 200 units in eight hours on a particular day, what is the employees gross pay for that
day?
A $128
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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15
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)
Thefollowinginformationrelatestoquestions47and48:
A company manufactures and sells two products (X and Y) which have contributions per unit of $8 and $20 respectively.
The company aims to maximise profit. Two materials (G and H) are used in the manufacture of each product. Each material
is in short supply 1,000 kg of G and 1,800 kg of H are available next period. The company holds no inventories and it
can sell all the units produced.
The management accountant has drawn the following graph accurately showing the constraints for materials G and H.
Product Y
(units)
100
090
000 125 150
Material G
Material H
Product X
(units)
47 What is the amount (in kg) of material G and material H used in each unit of product Y?
MaterialG MaterialH
A 10 20
B 10 10
C 20 20
D 20 10
(2 marks)
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16
48 What is the optimal mix of production (in units) for the next period?
ProductX ProductY
A 0 90
B 50 60
C 60 50
D 125 0
(2 marks)
49 The following statement refers to a quality of good information:
The cost of producing information should be greater than the value of the benefits of that information to management.
Is this statement true or false?
A True
B False
(1 mark)
50 A company which operates a process costing system had work-in-progress at the start of last month of 300 units
(valued at 1,710) which were 60% complete in respect of all costs. Last month a total of 2,000 units were completed
and transferred to the finished goods warehouse. The cost per equivalent unit for costs arising last month was $10.
The company uses the FIFO method of cost allocation.
What was the total value of the 2,000 units transferred to the finished goods warehouse last month?
A $19,910
B $20,000
C $20,510
D $21,710
(2 marks)
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17
FORMULAE SHEET
Regression analysis
Economic order quantity
Economic batch quantity
a=
y
n
-
bx
n
b=
nxy-xy
nx -(x)
r=
nxy-xy
(
2 2
nnx -(x) )(ny -(y) )
=
2C D
C
=
2C D
C (1-
D
R
2 2 2 2
0
h
0
h
))
a=
y
n
-
bx
n
b=
nxy-xy
nx -(x)
r=
nxy-xy
(
2 2
nnx -(x) )(ny -(y) )
=
2C D
C
=
2C D
C (1-
D
R
2 2 2 2
0
h
0
h
))
a=
y
n
-
bx
n
b=
nxy-xy
nx -(x)
r=
nxy-xy
(
2 2
nnx -(x) )(ny -(y) )
=
2C D
C
=
2C D
C (1-
D
R
2 2 2 2
0
h
0
h
))
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18
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19
Answers
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20
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
19 C 44 D
20 A 45 B
21 B 46 D
22 C 47 A
23 D 48 A
24 B 49 B
25 B 50 A
In detail
1 C
2 B
3 C a = (y n) [(bx) n] = (330 11) [(0.69171 440) 11]
= (30 27.6684)
= 2.3316 (2.33 to 2 decimal places)
4 C {[ 2 20 (4 20,000) ] [0.06 25]}
0.5
= 1,461 units
5 A Actual cost $108,875
Absorbed cost (30,000 3.50) $105,000
Under absorption $ 3,875
6 C
7 C Variable cost per unit: [(170,000 5,000) 135,000] (22,000 16,000) = $5
Total fixed cost (below 17,500 units): [135,000 (16,000 5)] = $55,000
Total cost for 20,000 units: 55,000 + 5,000 + (20,000 5) = $160,000
8 C Month 1: Production > Sales Absorption costing profit > Marginal costing profit
Month 2: Sales > Production Marginal costing profit > absorption costing profit
A and C satisfy Month 1, C and D satisfy Month 2. Therefore C satisfies both.
9 C
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21
10 C Normalloss Actualloss Abnormalloss Abnormalgain
litres litres litres litres
Process F 5,200 6,100 900
Process G 1,875 1,800 75
11 A Contribution per unit (CPU): (80 0.45) = $36
Break even point (units): (99,000 36) = 2,750
Margin of safety: (4,000 2,750) = 1,250 units
12 D
13 B (150 40) + (250 53) = $19,250
14 A
15 A
16 D
17 C
18 A
19 C (300,000 0.60) (400,000 0.40) = +$20,000 (profit)
20 A Price variance: (0.50 10,500) = $5,250 Adverse
Volume variance: (500 8) = $4,000 Favourable
21 B Budgeted production: (19,000 + 3,000 4,000) = 18,000 units
Raw materials required for budgeted production: (18,000 8) = 144,000 kg
Budgeted raw material purchases: (144,000 + 53,000 50,000) = 147,000 kg
22 C
23 D
24 B
25 B Production > Sales Absorption costing profit > Marginal costing profit
Marginal costing profit: {36,000 [2,000 (63,000 14,000)]} = $27,000
26 B CPU: (20 0.4) = $8
Break even point: (18,000 20) = 900 units
Profit when 1,200 units produced and sold: (300 8) = $2,400
27 D
28 B
29 D Cost per equivalent unit: (480,000 10,000) = $48
Closing work in progress valuation: (4,000 Degree of completion 48) = 144,000
Degree of completion = (144,000 4,000 48) = 0.75 = 75%
30 D
X Y
CPU $8 $10
Contribution per hour $4 $2.50
Ranking 1st 2nd
Therefore produce and sell the maximum 800 units of X using 1,600 hours and with the remaining 400 hours produce and sell
100 units of Y.
31 A
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22
32 B
$
Actual expenditure 235,000
Actual hours standard rate
(24,000 10) 240,000
Expenditure variance 5,000 Favourable
33 C
$
Actual hours standard rate 240,000
Standard cost of actual production
(3,900 6 10) 234,000
Efficiency variance 6,000 Adverse
34 B
35 A
36 C
37 C
38 B
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
40 B Relevant cost: (8,000 5,000) = $3,000
41 B Budgeted hours 5,000
Actual hours worked 5,500
Capacity variance 500 hours 15 = $7,500 Favourable
42 C
43 B Overtime cost for 250 hours: (250 9 2) = $4,500
Cost of diverting labour: 250 (9 + 5) = $3,500
Relevant cost (lowest alternative) = $3,500
44 D 200 units (3 60) 18 = $180
45 B, this is a stepped fixed cost
46 D
TotaloverheadtocostcentreP: $
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
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23
49 B
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
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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, Present Value and Annuity Tables are on
pages 12, 13 and 14.
PART 1
FRIDAY 7 DECEMBER 2001
Financial
Information for
Management
P
a
p
e
r
1
.
2
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2
Section A ALL 25 questions are compulsory and MUST be attempted.
Please use the answer sheet provided to indicate your choice in each question.
Each question within this section is worth 2 marks.
1 Which of the following statements are correct with regard to marginal costing?
(i) Period costs are costs treated as expenses in the period incurred.
(ii) Product costs can be identified with goods produced.
(iii) Unavoidable costs are relevant for decision making.
A (i), (ii) and (iii)
B (i) and (ii) only
C (i) and (iii) only
D (ii) and (iii) only.
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
Machine hours 10,000 hours
Units of production 5,000 units
Actual fixed costs for the last month were 160,000.
Canberra produces many different products using highly automated manufacturing processes and absorbs overheads on
the most appropriate basis.
What will be the pre-determined overhead absorption rate?
A 16
B 18
C 36
D 60.
3 Which of the following are correct with regard to service organisations?
(i) Activity based costing would not be considered appropriate.
(ii) The cost of materials will be relatively small.
(iii) A significant proportion of the costs incurred will be fixed and indirect.
A (i), (ii) and (iii)
B (i) and (ii) only
C (i) and (iii) only
D (ii) and (iii) only.
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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3 [P.T.O.
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 79%
B 277%
C 338%
D 403%.
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%.
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
B 29,000
C 17,500
D 50,000.
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.
9 Which of the following is NOT CORRECT?
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.
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4
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.
Which points are most likely to give the optimal solution?
A A and B only
B A, B and C only
C D and E only
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.
What is the internal rate of return of this investment?
A 157%
B 160%
C 193%
D 199%.
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:
Production departments Service departments Total
1 2 Stores Maintenance
Allocated and apportioned 17,500 32,750 6,300 8,450 65,000
Work done by:
Stores 60% 30% 10%
Maintenance 75% 20% 5%
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.
A
B
C D
E
A
units
U units
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5 [P.T.O.
13 Moura uses the economic order quantity formula (EOQ) to establish its optimal reorder quantity for its single raw
material. The following data relates to the stock costs:
Purchase price: 15 per item
Carriage costs: 50 per order
Ordering costs: 5 per order
Storage costs: 10% of purchase price plus 020 per unit per annum
Annual demand is 4,000 units.
What is the EOQ to the nearest whole unit?
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.
The following information was available for one of the divisions:
Net profit Profit before Divisional net Cash/
after tax interest and tax assets (overdraft)
000 000 000 000
Division 1 47 69 104 (21)
What is the residual income for this division based on controllable profit and controllable net assets?
A 36,600
B 56,500
C 58,600
D 60,700.
15 Ayr is planning on paying 300 into a fund on a monthly basis starting three months from now, for twelve months.
The interest earned will be at a rate of 3% per month.
What is the present value of these payments?
A 2,816
B 2,733
C 2,541
D 2,986.
16 Which of the following are true with regard to expected values?
Expected values
(i) represents the single most likely estimate of an outcome.
(ii) take no account of decision-makers risk.
(iii) are reliant on the accuracy of the probability distribution.
A (i), (ii) and (iii)
B (i) and (ii) only
C (i) and (iii) only
D (ii) and (iii) only.
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6
17 Charleville operates a continuous process producing three products and one by-product. Output from the process for a
month was as follows:
Product Selling price per Units of output
unit from process
1 18 10,000
2 25 20,000
3 20 20,000
4 (by-product) 2 3,500
Total output costs were 277,000.
What was the unit valuation for product 3 using the sales revenue basis for allocating joint cost?
A 470
B 480
C 500
D 510.
18 Bowen has established the following with regard to fixed overheads for the past month:
Actual costs incurred 132,400
Actual units produced 5,000 units
Actual labour hours worked 9,750 hours
Budgeted costs 135,000
Budgeted units of production 4,500 units
Budgeted labour hours 9,000 hours
Overheads are absorbed on a labour hour basis.
What was the fixed overhead capacity variance?
A 750 favourable
B 11,250 favourable
C 22,500 favourable
D 11,250 adverse.
19 Which of the following statements is correct?
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.
What is the valuation of the output?
A 44,100
B 49,700
C 58,800
D 56,525.
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7 [P.T.O.
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 2625
Net profit 475
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.
22 Brisbane Limited has recorded the following sales information for the past six months:
Month Advertising expenditure Sales revenue
000 000
1 15 30
2 2 27
3 175 25
4 3 40
5 25 32
6 275 38
The following has also been calculated:
S(Advertising expenditure) = 13,500
S(Sales revenue) = 192,000
S(Advertising expenditure x Sales revenue) = 447,250,000
S(Sales revenue
2
) = 6,322,000,000
S(Advertising expenditure
2
) = 32,125,000
What is the value of b, i.e. the gradient of the regression line?
A 0070
B 0086
C 8714
D 14286.
23 Which of the following could be carried out by higher level management?
(i) making short term decisions
(ii) defining the objectives of the business
(iii) making long run decisions
A (i), (ii) and (iii)
B (i) and (ii) only
C (i) and (iii) only
D (ii) and (iii) only.
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8
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
Work in progress has the following level of completion:
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.
What were the equivalent units for labour?
A 4,380 units
B 4,270 units
C 4,320 units
D 4,420 units.
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
1268%. 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
B 18,377
C 17,606
D 18,610.
(50 marks)
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9 [P.T.O.
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 250/kg)
Material 2 7 (1 kg at 7/kg)
Direct labour 13 (2 hours at 650/hour)
Fixed overheads 7 (2 hours at 350/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)
(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)
(10 marks)
2 Newcastle Limited uses variance analysis as a method of cost control. The following information is available for the year
ended 30 September 2001:
Budget Production for the year 12,000 units
Standard cost per unit:
Direct materials (3 kg at 10/kg) 30
Direct labour (4 hours at 6/hour) 24
Overheads (4 hours at 2/hour) 8
62
Actual Actual production units for year 11,500 units
Labour hours for the year 45,350 hours
cost for the year 300,000
Materials kg used in the year 37,250 kg
cost for the year 345,000
Required:
(a) Prepare a reconciliation statement between the original budgeted and actual prime costs. (7 marks)
(b) Explain what the labour variances calculated in (a) show and indicate the possible interdependence between
these variances. (3 marks)
(10 marks)
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10
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 750 per unit.
Required:
(a) Formulate the equations for the total cost at:
(i) less than or equal to 30,000 units;
(ii) more than 30,000 units. (2 marks)
(b) Prepare a breakeven chart and clearly identify the breakeven point or points. (6 marks)
(c) Discuss the implications of the results from your graph in (b) with regard to Toowombas production plans.
(2 marks)
(10 marks)
4 Wollongong wishes to calculate an operating budget for the forthcoming period. Information regarding products, costs
and sales levels is as follows:
Product A B
Materials required
X (kg) 2 3
Y (litres) 1 4
Labour hours required
Skilled (hours) 4 2
Semi skilled (hours) 2 5
Sales level (units) 2,000 1,500
Opening stocks (units) 100 200
Closing stock of materials and finished goods will be sufficient to meet 10% of demand. Opening stocks of material X
was 300 kg and for material Y was 1,000 litres. Material prices are 10 per kg for material X and 7 per litre for
material Y. Labour costs are 12 per hour for the skilled workers and 8 per hour for the semi skilled workers.
Required:
Produce the following budgets:
(a) production (units);
(b) materials usage (kg and litres);
(c) materials purchases (kg, litres and ); and
(d) labour (hours and ).
(10 marks)
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11 [P.T.O.
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 (32)
Contribution 128
Fixed costs:
Production overheads (4)
Administration (36)
Selling (12)
Net profit 40
The standard cost per unit is:
U
End of Question Paper
Annuity Table
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Answers
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Part 1 Examination Paper 1.2
FInancial Information for Management Answers
Section B
1 (a) Earnings
1998 = 150 (given in the question)
1999 = 150 105 = 1575
2000 = 1575 103 = 1622
2001 = 1622 104 = 1687
(b)
Year (i) RPI (ii) AEI
1998 1622 =
150
1703 1728 =
150
1244
1575 108
1999 1647 =
1575
1703 1726 =
1575
1244
1629 1135
2000 1670 =
1622
1703 1696 =
1622
1244
1654 119
2001 1687 =
1687
1703 1687 =
1687
1244
1703 1244
(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.
(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.
2 Relevant cost statement
Note
Material V 1 900
Material I 2 6,500
Material C 3 2,050
Department 1 4
Department 2 5 26,000
Overheads 6
Minimum contract price 35,450
Notes:
1 The historic cost of 10 is not relevant as it is sunk. The relevant cost is the opportunity cost relating to lost scrap proceeds
= 300 3 = 900.
2 Again the historic cost is irrelevant as it is a sunk cost. Since the material is in continuous use in the business the relevant
cost will be the current replacement cost of the material = 1,000 650 = 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.
Therefore the relevant cost for the stock of 300 kg is = 300
7
= 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 15 = 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.
11
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12
3 (a) Operational planning This is often referred to as short term budgeting and looks at the resources,
production etc for a financial period, usually a year. It provides a detailed plan of
what the organisation hopes will be achieved within the next financial year.
Strategic planning This is often referred to as the long term plan and looks at where the organisation
is heading over a number of years, for example a five year plan would be a long
term plan. It presents the organisation with an idea of the broad direction that it
hopes to be heading in.
The strategic plan will incorporate the operational plans of the organisation. The operational plan translating the strategic plan
into achievable short term goals.
(b) 1. identify objectives defines what the organisation hopes to achieve
2. look at alternative courses of action looks at different ways that the goals might be achieved
3. evaluate the alternatives using relevant data look at the information that has been obtained
4. select the most appropriate course of action from information make the best choice to achieve corporate goals
5. implement the long term plan in the form of a budget prepare detailed budget
6. monitor actual results collect data regarding what is actually happening with the organisation
7. compare actual to planned results look at actual versus budget and see whether control action needs to be taken
4 (a) Future value
= 50 = 50 230039 = 11,50195
Compound forward for 5 years at 15%
= 11,50195 (115)
5
= 11,50195 2011 = 23,130421 23,130
(if the student keeps the numbers in their calculator the solution is 23,135)
(b) (i) Loan 1
APR = 938%, then the monthly rate is 10938 1 = 00075%
2,000 = A
1
2,000 = A
1
31447
A
1
=
2,000
= 6360
31447
Loan 2
APR = 1268%, then the monthly rate is 11268 1 = 001%
2,000 = A
2
2,000 = A
2
21243
A
2
=
2,000
= 9415
21243
(ii) Loan 1 total amount repaid = 6360 36 = 2,2896 2,290
Loan 2 total amount repaid = 9415 24 = 2,2596 2,260
Although loan 2 is more expensive on a monthly basis, slightly less money is paid over the two year period than with loan 1
over the three year period.
1 01 1
1 01 1
10 12
1
0 0075
1
0 0075 1 0075
36
1
0 001
1
0 001 1 01
24
12
1
12
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13
5 (a)
Process account
Units Units
Opening WIP 100 Normal loss 15
Input 1,500 Output 1,250
Closing WIP 200
1,600 1,600
Or from the normal loss figure =
150 units
= 1,500 units
01
(b)
Statement of equivalent Total Material Conversion
units costs
Opening WIP (to complete) 100 70
= 100 70% = 100 70%
Units started and finished 1,150 1,150 1,150
Output 1,250
Normal loss 150
Closing WIP 200 200 80
= 200 10% = 200 10%
1,350 1,300
(c)
Costs incurred in period Materials Conversion
costs
3,510 1,950
= 1,350 260 = 1,300 150
Add scrap proceeds from 300
normal loss = 150 2
3,810 1,950
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15
Part 1 examination Part 1.2
Financial Information for Management Marking Scheme
Marks
1 (a) Noting Jims 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
Calculating the wage figure adjusted for the AEI for:
1998
1
/
2
1999
1
/
2
2000
1
/
2
2001
1
/
2
4
(c) Comment on Jims wages compared to the:
RPI 1
AEI 1
2
(d) Mentioning the words base period 1
Explaining what this means 1
2
10
10
10
10
17
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Financial
Information for
Management
PART 1
FRIDAY 6 DECEMBER 2002
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
P
a
p
e
r
1
.
2
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Section A ALL 25 questions are compulsory and MUST be attempted
Please use the candidate registration sheet provided to indicate your chosen answer to each multiple choice question.
Each question within this section is worth 2 marks.
1 Consider the following graph for total costs and total revenue:
At which point on the above graph is it most likely that profits will be maximised?
A
B
C
D
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 75,625
B 90,750
C 250,000
D 300,000
2
Costs/revenue
Units A B C
D
Total revenue
Total costs
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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 750/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
C 21,600
D 21,150
3 [P.T.O.
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4
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 4375 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
The following information relates to questions 6 and 7:
A company has established the following budgeted fixed overheads for the forthcoming period:
000 Bases of
apportionment
Heating and Lighting 12 Cubic capacity
Welfare costs 7 Number of employees
Power 42 Kwh usage
Total 61
Other information:
Department 1 Department 2 Maintenance Total
Cubic capacity (m
3
) 6,000 7,500 2,500 16,000
Employees (number) 20 30 6 56
Power
(kwh usage) 35,000 25,000 60,000
Labour hours 28,000 48,500 76,500
Machine hours 40,000 39,000 79,000
The maintenance department splits its time between Department 1 and Department 2 on a ratio of 2:3.
The management accountant has partially completed an allocation and apportionment statement:
Department 1 Department 2 Maintenance
Heat and Light 4,500 5,625 1,875
Welfare 2,500
Power 24,500
Total 31,500
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
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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
15 The following statements relate to business objectives:
(i) The short-term objectives of an organisation are described in very general terms.
(ii) Corporate objectives relate to the organisation as a whole.
(iii) It is possible for a division of an organisation to have its own specific objectives.
Which of the above are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
16 The following information relates to prices and units over two different periods:
Prices Units sold
/unit
Time 0 Product 1 75 300
Product 2 50 100
Time 1 Product 1 80 250
Product 2 45 150
What would be the Laspeyre price index?
A 938
B 955
C 1019
D 1036
7 [P.T.O.
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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)
The following information relates to questions 18 and 19:
The following variations and trend have been calculated for sales over a period of time using the additive model:
Seasonal
variation
Quarter 1 +25
Quarter 2 10
Quarter 3 30
Quarter 4 ?
Trend +50 per quarter
The last known trend reading was taken in year 3, quarter 3 and was 1,750.
18 What would be the seasonal variation for quarter 4?
A +15
B 15
C +35
D 35
19 What would be the time series value for year 4 quarter 3?
A 1,950
B 1,920
C 1,900
D 1,870
8
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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?
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 (1D/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.
units
A B
C D
units
units
units
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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
Fixed selling costs 1
Variable selling cost 1
Total costs 37
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.
Required:
(a) Prepare the budgeted profit and loss account for a month for Oathall Limited using absorption costing. Clearly
show the valuation of any stock figures.
(6 marks)
(b) Prepare the budgeted profit and loss account for a month for Oathall Limited using marginal costing. Clearly
show the valuation of any stock figures.
(4 marks)
(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 bookkeeper comes in once a week to make all the relevant entries to the various manual ledgers. Complete stock-
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
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
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13 [P.T.O.
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)
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14
Formulae Sheet
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15
Present value cf 1 i.e. (1 + U)
Q
Where r ~ cisccunt rate
n ~ number cf periccs until payment
'LVFRXQW UDWH U
3HULRGV
(n) 1 2 3 4 5 6 7 8 9 10
1 0990 0980 0971 0962 0952 0943 0935 0926 0917 0909 1
2 0980 0961 0943 0925 0907 0890 0873 0857 0842 0826 2
3 0971 0942 0915 0889 0864 0840 0816 0794 0772 0751 3
4 0961 0924 0888 0855 0823 0792 0763 0735 0708 0683 4
5 0951 0906 0863 0822 0784 0747 0713 0681 0650 0621 5
6 0942 0888 0837 0790 0746 0705 0666 0630 0596 0564 6
7 0933 0871 0813 0760 0711 0665 0623 0583 0547 0513 7
8 0923 0853 0789 0731 0677 0627 0582 0540 0502 0467 8
9 0914 0837 0766 0703 0645 0592 0544 0500 0460 0424 9
10 0905 0820 0744 0676 0614 0558 0508 0463 0422 0386 10
11 0896 0804 0722 0650 0585 0527 0475 0429 0388 0350 11
12 0887 0788 0701 0625 0557 0497 0444 0397 0356 0319 12
13 0879 0773 0681 0601 0530 0469 0415 0368 0326 0290 13
14 0870 0758 0661 0577 0505 0442 0388 0340 0299 0263 14
15 0861 0743 0642 0555 0481 0417 0362 0315 0275 0239 15
(n) 11 12 13 14 15 16 17 18 19 20
1 0901 0893 0885 0877 0870 0862 0855 0847 0840 0833 1
2 0812 0797 0783 0769 0756 0743 0731 0718 0706 0694 2
3 0731 0712 0693 0675 0658 0641 0624 0609 0593 0579 3
4 0659 0636 0613 0592 0572 0552 0534 0516 0499 0482 4
5 0593 0567 0543 0519 0497 0476 0456 0437 0419 0402 5
6 0535 0507 0480 0456 0432 0410 0390 0370 0352 0335 6
7 0482 0452 0425 0400 0376 0354 0333 0314 0296 0279 7
8 0434 0404 0376 0351 0327 0305 0285 0266 0249 0233 8
9 0391 0361 0333 0308 0284 0263 0243 0225 0209 0194 9
10 0352 0322 0295 0270 0247 0227 0208 0191 0176 0162 10
11 0317 0287 0261 0237 0215 0195 0178 0162 0148 0135 11
12 0286 0257 0231 0208 0187 0168 0152 0137 0124 0112 12
13 0258 0229 0204 0182 0163 0145 0130 0116 0104 0093 13
14 0232 0205 0181 0160 0141 0125 0111 0099 0088 0078 14
15 0209 0183 0160 0140 0123 0108 0095 0084 0074 0065 15
Present Value Table
[P.T.O.
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Present value cf an annuity cf 1 i.e.
Where r ~ cisccunt rate
n ~ number cf periccs
'LVFRXQW UDWH U
3HULRGV
(n) 1 2 3 4 5 6 7 8 9 10
1 0990 0980 0971 0962 0952 0943 0935 0926 0917 0909 1
2 1970 1942 1913 1886 1859 1833 1808 1783 1759 1736 2
3 2941 2884 2829 2775 2723 2673 2624 2577 2531 2487 3
4 3902 3808 3717 3630 3546 3465 3387 3312 3240 3170 4
5 4853 4713 4580 4452 4329 4212 4100 3993 3890 3791 5
6 5795 5601 5417 5242 5076 4917 4767 4623 4486 4355 6
7 6728 6472 6230 6002 5786 5582 5389 5206 5033 4868 7
8 7652 7325 7020 6733 6463 6210 5971 5747 5535 5335 8
9 8566 8162 7786 7435 7108 6802 6515 6247 5995 5759 9
10 9471 8983 8530 8111 7722 7360 7024 6710 6418 6145 10
11 1037 9787 9253 8760 8306 7887 7499 7139 6805 6495 11
12 1126 1058 9954 9385 8863 8384 7943 7536 7161 6814 12
13 1213 1135 1063 9986 9394 8853 8358 7904 7487 7103 13
14 1300 1211 1130 1056 9899 9295 8745 8244 7786 7367 14
15 1387 1285 1194 1112 1038 9712 9108 8559 8061 7606 15
(n) 11 12 13 14 15 16 17 18 19 20
1 0901 0893 0885 0877 0870 0862 0855 0847 0840 0833 1
2 1713 1690 1668 1647 1626 1605 1585 1566 1547 1528 2
3 2444 2402 2361 2322 2283 2246 2210 2174 2140 2106 3
4 3102 3037 2974 2914 2855 2798 2743 2690 2639 2589 4
5 3696 3605 3517 3433 3352 3274 3199 3127 3058 2991 5
6 4231 4111 3998 3889 3784 3685 3589 3498 3410 3326 6
7 4712 4564 4423 4288 4160 4039 3922 3812 3706 3605 7
8 5146 4968 4799 4639 4487 4344 4207 4078 3954 3837 8
9 5537 5328 5132 4946 4772 4607 4451 4303 4163 4031 9
10 5889 5650 5426 5216 5019 4833 4659 4494 4339 4192 10
11 6207 5938 5687 5453 5234 5029 4836 4656 4486 4327 11
12 6492 6194 5918 5660 5421 5197 4988 4793 4611 4439 12
13 6750 6424 6122 5842 5583 5342 5118 4910 4715 4533 13
14 6982 6628 6302 6002 5724 5468 5229 5008 4802 4611 14
15 7191 6811 6462 6142 5847 5575 5324 5092 4876 4675 15
1 (1 U)
Q
U
Annuity Table
End of Question Paper
16
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Answers
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19
Part 1 Examination Paper 1.2
FInancial Information for Management December 2002 Answers
Section A
11 C
12 D
13 C
14 D
15 B
16 B
17 B
18 A
19 C
10 C
11 B
12 C
13 B
14 D
15 C
16 D
17 B
18 A
19 B
20 A
21 C
22 A
23 D
24 A
25 A
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20
Section B
1 (a)
(b) Regression line: y = a + bx
b =
n xy x y
n x
2
( x)
2
a =
y b x
n n
In this example the advertising expenditure is the independent variable (x) and the sales revenue the dependent variable (y).
b =
(8 1,055875) (2635 2895) 818675
= = 707
(8 1012625) 2635
2
1157775
a =
2895 2635
707
= 129
8 8
regression line: y = 129 + 707x where x and y are in 000
Line drawn on above graph.
60
50
40
30
20
10
000
000
1 2 3 4 5 6
x
x
x
x
x
x
x
x
Sales
Revenue
000
Advertising
expenditure
000
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21
2
EV(F) = 095 1,500 + 005 600 = 1,455
Cost at E = EV(F) 550 = 1,455 550 = 905
EV(B) = 08 cost at (E) + 02 0
= 08 905 + 02 0
= 724
EV(C) = 075 1,500 + 025 600
= 1,275
EV(D) = 06 1,500 + 04 600
=1,140
Decision at A:
Survey = EV(B) survey costs
= 724 50
= 674
Build large premises with no survey = EV(C) large premises costs
= 1,275 550
= 725
Build small premises with no survey = EV(D) small premises
= 1,140 300
= 840
Better to build small premises without a survey.
Conclusion: It would be better to build the small premises without any survey as this gives the largest expected value.
Good
08
Survey
(50,000)
Large
Premises
Large
Premises
Small
Premises
(550,000)
(550,000)
A
D
C
B
E
F
Lo
005
Bad
02
Hi
075
Hi
06
Lo
04
Hi
095
1,500,000
600,000
1,500,000
600,000
1,500,000
600,000
Abandon project
(300,000)
Lo
025
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22
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)
Working
Overhead absorption rate = 300,000/100,000 = 3 per unit
(b)
Marginal costing 000 000
Sales (50 100,000) 5,000
Cost of sales:
Opening stock
Production costs
Variable (19 120,000) 2,280
2,280
Closing stock (19 20,000) (380)
Variable selling costs 200
(2,100)
Contribution 2,900
Fixed costs
Production (300)
Selling (150)
10
10
10
25
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Financial
Information for
Management
PART 1
FRIDAY 6 JUNE 2003
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, Present Value and Annuity Tables are on
pages 13, 14 and 15
P
a
p
e
r
1
.
2
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2
Section A ALL 25 questions are compulsory and MUST be attempted
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice
question.
Each question within this section is worth 2 marks.
1 A company has established a marginal costing profit of 72,300. Opening stock was 300 units and closing stock is
750 units. The fixed production overhead absorption rate has been calculated as 5/unit.
What was the profit under absorption costing?
A 67,050
B 70,050
C 74,550
D 77,550
2 The following data relates to a wage index for a company:
Year Wages per week Index
1997 275 117
2002 315 157
What were the 2002 weekly wages at 1997 prices (to the nearest )?
A 201
B 235
C 275
D 369
3 Which of the following is correct?
A Qualitative data is numerical information only.
B Information can only be extracted from external sources.
C Operational information gives details of long-term plans only.
D Data can be either discrete or continuous.
4 Which of the following are purposes of a budget?
(i) establishing strategic options
(ii) motivating management
(iii) establishing long term objectives
(iv) planning operations
A (i) and (iii) only
B (i) and (iv) only
C (ii) and (iv) only
D (ii), (iii) and (iv) only
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3 [P.T.O.
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 250 per kg.
Actual materials in the month cost 136,000 for 27,000 units and 53,000 kg were purchased and used.
5 What was the adverse material price variance?
A 1,000
B 3,500
C 7,500
D 11,000
6 What was the favourable material usage variance?
A 2,500
B 4,000
C 7,500
D 10,000
7 A company is preparing a production budget for the next year. The following information is relevant:
Budgeted Sales 10,000 units
Opening stock 600 units
Closing stock 5% of budgeted sales
The production process is such that 10% of the units produced are rejected.
What is the number of units required to be produced to meet demand?
A 8,900 units
B 9,900 units
C 10,900 units
D 11,000 units
8 A company produces and sells a single product whose variable cost is 6 per unit.
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
9 Which of the following would be considered to be a pricing strategy?
(i) target costing
(ii) price skimming
(iii) discrimination pricing
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
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4
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 05% per month.
If James saves his money, how much will be in the account in five years time (to the nearest )?
A 303
B 338
C 349
D 354
12 Which of the following is correct with regard to stocks?
(i) Stock-outs arise when too little stock is held.
(ii) Safety stocks are the level of units maintained in case there is unexpected demand.
(iii) A reorder level can be established by looking at the maximum usage and the maximum lead-time.
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
13 A company wishes to make a profit of 150,000. It has fixed costs of 75,000 with a C/S ratio of 075 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
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5 [P.T.O.
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
1 575 125
2 375 100
3 450 150
4 600 200
20000 575
The gradient of the regression line is 1714.
What is the value of a?
A 2536
B 4856
C 7464
D 10145
15 A company is considering its options with regard to a machine which cost 60,000 four years ago.
If sold the machine would generate scrap proceeds of 75,000. If kept, this machine would generate net income of
90,000.
The current replacement cost for this machine is 105,000.
What is the deprival value of the machine?
A 105,000
B 90,000
C 75,000
D 60,000
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6
16
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 projects total inflows exceed the total outflows.
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
17 What is the economic batch quantity used to establish?
Optimal
A reorder quantity
B reorder level
C cumulative production quantity
D stock level for production
Net
Present
Value
0
Interest rate
5% 10% 15%
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7 [P.T.O.
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
D 117,000
19 Which of the following is correct when considering the allocation, apportionment and reapportionment of
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.
D Any overheads assigned to a single department should be ignored.
20 A company uses limiting factor analysis to calculate an optimal production plan given a scarce resource.
The following applies to the three products of the company:
Product I II III
Direct materials (at 6/kg) 36 24 15
Direct labour (at 10/hour) 40 25 10
Variable overheads (2/hour) 8 5 2
84 54 27
Maximum demand (units) 2,000 4,000 4,000
Optimal production plan 2,000 1,500 4,000
How many kg of material were available for use in production?
A 15,750 kg
B 28,000 kg
C 30,000 kg
D 38,000 kg
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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
22 Which of the following would be considered a service industry?
(i) an airline company
(ii) a railway company
(iii) a firm of accountants
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
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
2 125 25
3 200 6
4 175 55
5 150 45
6 225 65
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 + (004 x sales revenue)
C sales revenue = 95,000 + (20 x advertising expenditure)
D advertising expenditure = 4,750 + (005 x sales revenue)
8
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9 [P.T.O.
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 100,000
B 900,000
C 1,000,000
D 1,700,000
25 Which of the following could be true with regard to a management information system (MIS)?
An MIS is
(i) a database system.
(ii) used for planning, directing and controlling activities.
(iii) a hierarchy of information within an organisation.
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
(50 marks)
Cash flows from sales revenue
Build new premises
Cost 1,000,000
Upgrade old
premises
Cost = ?
High sales = 2,000,000
Low sales = 1,000,000
High sales = 2,000,000
Low sales = 1,000,000
08
02
07
03
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10
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)
(b) Calculate the fixed production overhead efficiency and capacity variances and briefly explain what each
variance shows. (5 marks)
(10 marks)
2 A business uses process costing to establish stock valuations and profitability of its products. Output from the process
consists of three separate products: two joint products and a by-product. Details of the process is as follows:
Input costs:
Materials 45,625 for 12,500 kg
Labour 29,500
Overheads 26,875
The process is expected to lose 20% of the input. This is sold for scrap for 4 per unit.
The following details relate to the output from the process:
Product Type % of output Final sales Further costs
value per unit to complete
A Joint 50% 20 10
B Joint 40% 25
C By-product 10% 2
Joint costs are allocated on the basis of net realisable value at split-off.
Required:
(a) Establish the total cost of the output from the process. (4 marks)
(b) Calculate the profit per unit for each of the joint products, A and B. (6 marks)
(10 marks)
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11 [P.T.O.
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 companys products are as follows:
A B
Materials (at 2 per kg) 6 8
Labour (at 6 per hour) 30 18
Variable overheads (at 1 per hour) 5 3
Variable cost 41 29
Selling price 50 52
Contribution 9 23
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) Formulate the objective function and constraint equations for this problem. (4 marks)
(b) Plot the constraints on a suitable graph and determine the optimal production plan. (6 marks)
(10 marks)
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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)
14 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 companys cost of capital and state which
investment would be preferred.
(10 marks)
12
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13 [P.T.O.
Formulae Sheet
Laspeyres price index
Paasche price index
Laspeyres quantity index
Paasche quantity index
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14
Present value cf 1 i.e. (1 + U)
Q
Where r ~ cisccunt rate
n ~ number cf periccs until payment
'LVFRXQW UDWH U
3HULRGV
(n) 1 2 3 4 5 6 7 8 9 10
1 0990 0980 0971 0962 0952 0943 0935 0926 0917 0909 1
2 0980 0961 0943 0925 0907 0890 0873 0857 0842 0826 2
3 0971 0942 0915 0889 0864 0840 0816 0794 0772 0751 3
4 0961 0924 0888 0855 0823 0792 0763 0735 0708 0683 4
5 0951 0906 0863 0822 0784 0747 0713 0681 0650 0621 5
6 0942 0888 0837 0790 0746 0705 0666 0630 0596 0564 6
7 0933 0871 0813 0760 0711 0665 0623 0583 0547 0513 7
8 0923 0853 0789 0731 0677 0627 0582 0540 0502 0467 8
9 0914 0837 0766 0703 0645 0592 0544 0500 0460 0424 9
10 0905 0820 0744 0676 0614 0558 0508 0463 0422 0386 10
11 0896 0804 0722 0650 0585 0527 0475 0429 0388 0350 11
12 0887 0788 0701 0625 0557 0497 0444 0397 0356 0319 12
13 0879 0773 0681 0601 0530 0469 0415 0368 0326 0290 13
14 0870 0758 0661 0577 0505 0442 0388 0340 0299 0263 14
15 0861 0743 0642 0555 0481 0417 0362 0315 0275 0239 15
(n) 11 12 13 14 15 16 17 18 19 20
1 0901 0893 0885 0877 0870 0862 0855 0847 0840 0833 1
2 0812 0797 0783 0769 0756 0743 0731 0718 0706 0694 2
3 0731 0712 0693 0675 0658 0641 0624 0609 0593 0579 3
4 0659 0636 0613 0592 0572 0552 0534 0516 0499 0482 4
5 0593 0567 0543 0519 0497 0476 0456 0437 0419 0402 5
6 0535 0507 0480 0456 0432 0410 0390 0370 0352 0335 6
7 0482 0452 0425 0400 0376 0354 0333 0314 0296 0279 7
8 0434 0404 0376 0351 0327 0305 0285 0266 0249 0233 8
9 0391 0361 0333 0308 0284 0263 0243 0225 0209 0194 9
10 0352 0322 0295 0270 0247 0227 0208 0191 0176 0162 10
11 0317 0287 0261 0237 0215 0195 0178 0162 0148 0135 11
12 0286 0257 0231 0208 0187 0168 0152 0137 0124 0112 12
13 0258 0229 0204 0182 0163 0145 0130 0116 0104 0093 13
14 0232 0205 0181 0160 0141 0125 0111 0099 0088 0078 14
15 0209 0183 0160 0140 0123 0108 0095 0084 0074 0065 15
Present Value Table
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15
Present value cf an annuity cf 1 i.e.
Where r ~ cisccunt rate
n ~ number cf periccs
'LVFRXQW UDWH U
3HULRGV
(n) 1 2 3 4 5 6 7 8 9 10
1 0990 0980 0971 0962 0952 0943 0935 0926 0917 0909 1
2 1970 1942 1913 1886 1859 1833 1808 1783 1759 1736 2
3 2941 2884 2829 2775 2723 2673 2624 2577 2531 2487 3
4 3902 3808 3717 3630 3546 3465 3387 3312 3240 3170 4
5 4853 4713 4580 4452 4329 4212 4100 3993 3890 3791 5
6 5795 5601 5417 5242 5076 4917 4767 4623 4486 4355 6
7 6728 6472 6230 6002 5786 5582 5389 5206 5033 4868 7
8 7652 7325 7020 6733 6463 6210 5971 5747 5535 5335 8
9 8566 8162 7786 7435 7108 6802 6515 6247 5995 5759 9
10 9471 8983 8530 8111 7722 7360 7024 6710 6418 6145 10
11 1037 9787 9253 8760 8306 7887 7499 7139 6805 6495 11
12 1126 1058 9954 9385 8863 8384 7943 7536 7161 6814 12
13 1213 1135 1063 9986 9394 8853 8358 7904 7487 7103 13
14 1300 1211 1130 1056 9899 9295 8745 8244 7786 7367 14
15 1387 1285 1194 1112 1038 9712 9108 8559 8061 7606 15
(n) 11 12 13 14 15 16 17 18 19 20
1 0901 0893 0885 0877 0870 0862 0855 0847 0840 0833 1
2 1713 1690 1668 1647 1626 1605 1585 1566 1547 1528 2
3 2444 2402 2361 2322 2283 2246 2210 2174 2140 2106 3
4 3102 3037 2974 2914 2855 2798 2743 2690 2639 2589 4
5 3696 3605 3517 3433 3352 3274 3199 3127 3058 2991 5
6 4231 4111 3998 3889 3784 3685 3589 3498 3410 3326 6
7 4712 4564 4423 4288 4160 4039 3922 3812 3706 3605 7
8 5146 4968 4799 4639 4487 4344 4207 4078 3954 3837 8
9 5537 5328 5132 4946 4772 4607 4451 4303 4163 4031 9
10 5889 5650 5426 5216 5019 4833 4659 4494 4339 4192 10
11 6207 5938 5687 5453 5234 5029 4836 4656 4486 4327 11
12 6492 6194 5918 5660 5421 5197 4988 4793 4611 4439 12
13 6750 6424 6122 5842 5583 5342 5118 4910 4715 4533 13
14 6982 6628 6302 6002 5724 5468 5229 5008 4802 4611 14
15 7191 6811 6462 6142 5847 5575 5324 5092 4876 4675 15
1 (1 U)
Q
U
Annuity Table
End of Question Paper
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Answers
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19
Part 1 Examination Paper 1.2
Financial Information for Management June 2003 Answers
1 C Marginal costing profit 72,300
Less: fixed costs in opening stock
(300 x 5) (1,500)
Add: fixed costs in closing stock
(750 x 5) 3,750
74,550
2 B
315
x 117 = 235
157
3 D
4 C
5 B Price variance
Did cost 136,000
Should cost
(53,000 kg x 250) 132,500
3,500 adverse
6 A Usage variance
Did use 53,000 kg
Should use
(27,000 units x 2 kg) 54,000 kg
1,000 kg
x 250
2,500 favourable
a
y
n
b
x
a
=
=
=
n
200
4
17 14
5 75
4
25 36 ( )
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21
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)
therefore b =
100,000
= 25
4,000
so, 225,000 = a + (6,500 x 25)
225,000 = a + 162,500
a = 225,000 162,500
a = 62,500
24 B Expected value of new building
= (08 x 2 million )+(02 x 1 million) 1 million = 08 million
Expected value of the upgrade
= (07 x 2 million) + (03 x 1 million) cost of upgrade
So,
New build = 08 million
Upgrade = 17 million costs
Equating the two expressions:
08 million = 17 million costs, giving
Costs = 17 million 08 million = 09 million = 900,000
25 D
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22
1 (a) Fixed Production Overhead Expenditure variance
35,000 favourable
x 5 (W3)
= 175,000 favourable
W3 FOAR/hour =
2,500,000
= 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.
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23
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 92,000
Overheads 26,875
12,500 102,000 12,500 102,000
(b) Joint costs to be allocated = (920 x 10,000) 1,000 x 2
= 92,000 2,000
= 90,000
Product Units % NRV at Total Joint cost Total Profit
split-off NRV allocation profit per
unit
A 5,000 50 2010 50,000 30,000 =
50,000
20,000 4
=10 150,000
B 4,000 40 25 100,000 60,000 =
100,000
40,000 10
150,000
C 1,000 10 2
Total 10,000 100 150,000 90,000
The profit per unit for product A is 4 and for B is 10.
3 (a) A service centre is a department that does not directly produce units but is required to support the other departments.
Examples include maintenance departments, stores or a canteen.
A production centre is a centre where units are actually made, examples being a machining department or a welding
department.
Although a service will have overheads allocated and apportioned to it, these will be reapportioned to the production centres
so that, at the end of a period, all overheads are included in the production centres only. Once all the overheads are included
in the production centres they can be absorbed into production.
(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.
In activity based costing fixed overhead costs may include machine set-up costs. These costs will not be incurred on a per
unit basis but will be incurred each time the machine has to be set-up. It would not, therefore, be sensible to allocate costs
per unit since that is not how the cost is incurred. It is, however, better to use the number of set-ups for this particular cost
to allocate costs to units.
4 (a) Objective is to maximise profit:
Let a = the number of units of A to be produced
Let b = the number of units of B to be produced
Objective function: 9a + 23b
Constraints:
Non-negativity b 0
Restriction on A a 1,000
Materials 3a + 4b 30,000
Labour 5a + 3b 36,000
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(b)
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
a units
000
1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
2 3 4 5 6 7 8 9 10 11 12
b units
000
5a + 3b = 36,000
a = 1,000
3a + 4b = 30,000
lso-contribution
line
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5 Investment 1
Time Cash Flows Discount factor Present Value
000 at 10% 000
0 (75) 1 (75)
1-4 25 317 7925
5 5 0621 3105
7355
Investment 2
Time Cash Flows Discount factor Present Value
000 at 10% 000
0 (100) 1 (100)
1 11 1/01=10 110
10
Investment 3
Time Cash Flows Discount factor Present Value
000 at 10% 000
0 (125) 1 (125)
1 30 0909 2727
2 40 0826 3304
3 50 0751 3755
4 60 0683 4098
5 (10) 0621 (621)
763
Since investment 2 has the highest net present value it would be the preferred investment.
25
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Part 1 Examination Paper 1.2
Financial information for Management June 2003 Marking Scheme
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
(xx) B 2
(xxi) C 2
(xxii) D 2
(xxiii) A 2
(xxiv) B 2
(xxv) D 2
50
5
(b) Efficiency variance
1
/
2
Efficiency variance favourable
1
/
2
Calculating FOAR/labour hour 1
Explanation of variance 1
Capacity variance
1
/
2
Capacity variance favourable
1
/
2
Explanation of variance 1
10
27
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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 1
1
/
2
4
(b) Calculating joint costs less by-product proceeds 1
Calculating number of units for A,B and C from output 1
NRV at split-off for A
1
/
2
NRV at split-off for B and C
1
/
2
Total NRV calculation
1
/
2
mark each A and B 1
Joint cost allocation
1
/
2
mark each A and B 1
Profit per unitv
1
/
2
mark each A and B 1
10
6
(b) Explanation of difference including the use of the term cost driver 2
Example 2
10
4
(b) labelled axes on graph
1
/
2
good presentation
1
/
2
correctly drawn material line 1
correctly drawn labour line 1
restriction on a
1
/
2
plotting the objective function 1
establishing the optimal point 1
1
/
2
10
28
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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 1
1
/
2
Investment 2
Correct value at To
1
/
2
Calculation of present value of the perpetuity 1
1
/
2
Investment 3
Correct discount factors 1
Calculation of present value 1/2 per line in table 3
Preferred investment stated 1
10
29
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Financial
Information for
Management
PART 1
FRIDAY 5 DECEMBER 2003
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, Present Value and Annuity Tables are on
pages 13, 14 and 15
P
a
p
e
r
1
.
2
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Section A ALL 25 questions are compulsory and MUST be attempted
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice
question.
Each question within this section is worth 2 marks.
1 A cost is described as staying the same over a certain activity range and then increasing but remaining stable over a
revised activity range in the short term.
What type of cost is this?
A 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
095 125 070
What would be the adjustment for quarter 4 to two decimal places?
A 083
B 091
C 110
D 120
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 35,700
B 36,500
C 38,500
D 39,300
4 The following could relate to contract costing:
(i) Work is for a period of long duration.
(ii) Progress payments are amounts paid for the contract throughout the course of the contract.
(iii) Architects certificates are provided to establish the amount of work certified.
Which of the above are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
2
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5 A company values stocks using the weighted average value after each purchase. The following receipts and issues
have been made with regards to materials for the last month:
Date Receipts Issues
Units /unit Valuation Units
Brought forward 100 5 500
4th 150 550 825
16th 100
20th 100 6 600
21st 75
What is the value of the closing stock using this weighted average method?
A 1,01250
B 97650
C 96250
D 92500
6 Sydney wishes to make an investment on a monthly basis starting next month for five years. The payments into the
fund would be made on the first day of each month.
The interest rate will be 05% per month. Sydney needs a terminal value of 7,000.
What should be the monthly payments into the fund to the nearest ?
A 75
B 86
C 100
D 117
7 A company has the following budget for the next month:
Finished Product
Sales 7,000 units
Production units 7,200 units
Materials
Usage per unit 3 kg
Opening stock 400 kg
Closing stock 500 kg
What is the material purchases budget for the month?
A 20,900 kg
B 21,100 kg
C 21,500 kg
D 21,700 kg
3 [P.T.O.
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4
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
10 A company incurs the following costs at various activity levels:
Total cost Activity level
Units
250,000 5,000
312,500 7,500
400,000 10,000
Using the high-low method what is the variable cost per unit?
A 25
B 30
C 35
D 40
11 An investment gives the following results:
Net present value Discount rate
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%
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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
13 Which of the following is correct with regard to expected values?
A Expected values provide a weighted average of anticipated outcomes
B The expected value will always equal one of the possible outcomes
C Expected values will show whether the decision maker is risk averse, risk seeking or risk neutral
D The expected value will never equal one of the possible outcomes
5 [P.T.O.
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14 The following graph has been established for a given set of constraints:
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?
A
B
C
D
15 The following information has been obtained for sales of two products for a three year period:
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 086
B 089
C 119
D 120
6
300
200
100
100 200 300 0
y
x
OF
A
B
C
D
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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
17 The following statements relate to performance evaluation methods:
(i) Residual income is not a relative measure.
(ii) The return on investment figure is a relative measure.
(iii) Residual income cannot be calculated for an individual project.
Which of the above are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
18 A company uses variance analysis to control costs and revenues.
Information concerning sales is as follows:
Budgeted selling price 15 per unit
Budgeted sales units 10,000 units
Budgeted profit per unit 5 per unit
Actual sales revenue 151,500
Actual units sold 9,800 units
What is the sales volume profit variance?
A 500 favourable
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:
Time Cash flow per annum
000
0 (20,000)
1-4 13,000
5-8 17,000
10 (10,000)
What is the net present value of the investment at a discount rate of 8%?
A (2,416)
B 7,046
C 6,981
D 2,351
21 Which of the following is correct?
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
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
22 A company has over absorbed fixed production overheads for the period by 6,000. The fixed production overhead
absorption rate was 8 per unit and is based on the normal level of activity of 5,000 units. Actual production was
4,500 units.
What was the actual fixed production overheads incurred for the period?
A 30,000
B 36,000
C 40,000
D 42,000
23 A company uses process costing to value its output. The following was recorded for the period:
Input materials 2,000 units at 450 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 118
B 116
C 112
D 110
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) x
2
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
Actual Wages paid 176,000
Production 5,500 units
Total hours worked 14,000 hours
There was no idle time.
What were the labour rate and efficiency variances?
Rate variance Efficiency variance
A 26,000 adverse 25,000 favourable
B 26,000 adverse 10,000 favourable
C 36,000 adverse 12,500 favourable
D 36,000 adverse 25,000 favourable
(50 marks)
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:
Information concerning production requirements in the two production centres is as follows:
Centre 1 Centre 2
Units produced 1,500 units 2,000 units
Machine hours 3,000 hours 4,500 hours
Labour hours 2,000 hours 6,000 hours
Required:
(a) Using the reciprocal method calculate the total overheads in production centres 1 and 2 after
reapportionment of the service centre costs. (7 marks)
(b) Using the most appropriate basis establish the overhead absorption rate for production centre 1. Briefly
explain the reason for your chosen absorption basis. (3 marks)
(10 marks)
10
Production Centres Service Centres
1 2 A B C
2,000
3,500 300 500 700
Work done for:
Production Centres Service Centres
1 2 A B C
By A 45% 45% 10%
By B 50% 20% 20% 10%
By C 60% 40%
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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)
3 A company has obtained the following information regarding costs and revenue for the past financial year:
Original budget:
Sales 10,000 units
Production 12,000 units
Standard cost per unit:
Direct materials 5
Direct labour 9
Fixed production overheads 8
22
Selling price 30
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)
5 A company manufactures a single product, product Y. It has documented levels of demand at certain selling prices
for this product as follows:
Required:
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
Demand Selling price per Cost per unit
unit
Units
1,100 48 24
1,200 46 21
1,300 45 20
1,400 42 19
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13 [P.T.O.
Formulae Sheet
Laspeyres price index =
Paasche price index =
Laspeyres quantity index =
Paasche quantity index =
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14
Present value cf 1 i.e. (1 + U)
Q
Where r ~ cisccunt rate
n ~ number cf periccs until payment
'LVFRXQW UDWH U
3HULRGV
(n) 1 2 3 4 5 6 7 8 9 10
1 0990 0980 0971 0962 0952 0943 0935 0926 0917 0909 1
2 0980 0961 0943 0925 0907 0890 0873 0857 0842 0826 2
3 0971 0942 0915 0889 0864 0840 0816 0794 0772 0751 3
4 0961 0924 0888 0855 0823 0792 0763 0735 0708 0683 4
5 0951 0906 0863 0822 0784 0747 0713 0681 0650 0621 5
6 0942 0888 0837 0790 0746 0705 0666 0630 0596 0564 6
7 0933 0871 0813 0760 0711 0665 0623 0583 0547 0513 7
8 0923 0853 0789 0731 0677 0627 0582 0540 0502 0467 8
9 0914 0837 0766 0703 0645 0592 0544 0500 0460 0424 9
10 0905 0820 0744 0676 0614 0558 0508 0463 0422 0386 10
11 0896 0804 0722 0650 0585 0527 0475 0429 0388 0350 11
12 0887 0788 0701 0625 0557 0497 0444 0397 0356 0319 12
13 0879 0773 0681 0601 0530 0469 0415 0368 0326 0290 13
14 0870 0758 0661 0577 0505 0442 0388 0340 0299 0263 14
15 0861 0743 0642 0555 0481 0417 0362 0315 0275 0239 15
(n) 11 12 13 14 15 16 17 18 19 20
1 0901 0893 0885 0877 0870 0862 0855 0847 0840 0833 1
2 0812 0797 0783 0769 0756 0743 0731 0718 0706 0694 2
3 0731 0712 0693 0675 0658 0641 0624 0609 0593 0579 3
4 0659 0636 0613 0592 0572 0552 0534 0516 0499 0482 4
5 0593 0567 0543 0519 0497 0476 0456 0437 0419 0402 5
6 0535 0507 0480 0456 0432 0410 0390 0370 0352 0335 6
7 0482 0452 0425 0400 0376 0354 0333 0314 0296 0279 7
8 0434 0404 0376 0351 0327 0305 0285 0266 0249 0233 8
9 0391 0361 0333 0308 0284 0263 0243 0225 0209 0194 9
10 0352 0322 0295 0270 0247 0227 0208 0191 0176 0162 10
11 0317 0287 0261 0237 0215 0195 0178 0162 0148 0135 11
12 0286 0257 0231 0208 0187 0168 0152 0137 0124 0112 12
13 0258 0229 0204 0182 0163 0145 0130 0116 0104 0093 13
14 0232 0205 0181 0160 0141 0125 0111 0099 0088 0078 14
15 0209 0183 0160 0140 0123 0108 0095 0084 0074 0065 15
Present Value Table
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15
Present value cf an annuity cf 1 i.e.
Where r ~ cisccunt rate
n ~ number cf periccs
'LVFRXQW UDWH U
3HULRGV
(n) 1 2 3 4 5 6 7 8 9 10
1 0990 0980 0971 0962 0952 0943 0935 0926 0917 0909 1
2 1970 1942 1913 1886 1859 1833 1808 1783 1759 1736 2
3 2941 2884 2829 2775 2723 2673 2624 2577 2531 2487 3
4 3902 3808 3717 3630 3546 3465 3387 3312 3240 3170 4
5 4853 4713 4580 4452 4329 4212 4100 3993 3890 3791 5
6 5795 5601 5417 5242 5076 4917 4767 4623 4486 4355 6
7 6728 6472 6230 6002 5786 5582 5389 5206 5033 4868 7
8 7652 7325 7020 6733 6463 6210 5971 5747 5535 5335 8
9 8566 8162 7786 7435 7108 6802 6515 6247 5995 5759 9
10 9471 8983 8530 8111 7722 7360 7024 6710 6418 6145 10
11 1037 9787 9253 8760 8306 7887 7499 7139 6805 6495 11
12 1126 1058 9954 9385 8863 8384 7943 7536 7161 6814 12
13 1213 1135 1063 9986 9394 8853 8358 7904 7487 7103 13
14 1300 1211 1130 1056 9899 9295 8745 8244 7786 7367 14
15 1387 1285 1194 1112 1038 9712 9108 8559 8061 7606 15
(n) 11 12 13 14 15 16 17 18 19 20
1 0901 0893 0885 0877 0870 0862 0855 0847 0840 0833 1
2 1713 1690 1668 1647 1626 1605 1585 1566 1547 1528 2
3 2444 2402 2361 2322 2283 2246 2210 2174 2140 2106 3
4 3102 3037 2974 2914 2855 2798 2743 2690 2639 2589 4
5 3696 3605 3517 3433 3352 3274 3199 3127 3058 2991 5
6 4231 4111 3998 3889 3784 3685 3589 3498 3410 3326 6
7 4712 4564 4423 4288 4160 4039 3922 3812 3706 3605 7
8 5146 4968 4799 4639 4487 4344 4207 4078 3954 3837 8
9 5537 5328 5132 4946 4772 4607 4451 4303 4163 4031 9
10 5889 5650 5426 5216 5019 4833 4659 4494 4339 4192 10
11 6207 5938 5687 5453 5234 5029 4836 4656 4486 4327 11
12 6492 6194 5918 5660 5421 5197 4988 4793 4611 4439 12
13 6750 6424 6122 5842 5583 5342 5118 4910 4715 4533 13
14 6982 6628 6302 6002 5724 5468 5229 5008 4802 4611 14
15 7191 6811 6462 6142 5847 5575 5324 5092 4876 4675 15
1 (1 U)
Q
U
Annuity Table
End of Question Paper
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Answers
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19
Part 1 Examination Paper 1.2
Financial Information for Management December 2003 Answers
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
19 C
20 D
21 D
22 A
23 B
24 A
25 D
1 D
2 C 4(095 + 125 + 07) = 11
3 C
Marginal costing profit 37,500
Add: fixed costs in closing stock
(350 4) 11,400
Less: fixed costs in opening stock
(100 4) 1,1(400)
4 D
5 B
Receipts and issues
Units Price per unit Cost
100 500 500
150 5.50 825
250 530 1,325
(100) 530 (530)
100 600 600
250 558 1,395
(75) 558 (4185)
175 558 97650
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20
6 C
1005
125
1
= 7,000 A
0005
A A 6977 = 7,000
7,000
A
A =
6977
= 10033 100
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
9 C
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
variable cost per unit =
150,000
= 30
5,000
11 B
IRR = 10% +
383
(15% 10%)
383 ( 246)
IRR = 10% +
383
5%
383 + 246
IRR = 10% +
383
5%
629
IRR = 10% + 3% = 13%
12 D conversion costs
Output 9,850
Closing stock 135 = 450 30%
9,985
13 A
C/S ratio
Fixed costs = 200,000 50,000 = 150,000
C/S ratio =
200,000
= 04
500,000
Breakeven sales revenue =
150,000
= 375,000
04
300
200
100
0
OF
C
B
A
D
200 300
OF
100
y
x
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22
20 D
Time Flow Discount Present
factor value
000 8% 000
0 (20,000) 1 (20,000)
14 13,000 3312 19,936
5747 3312=
58 17,000 2435 17,045
10 (10,000) 0463 (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
36,000 adverse
Efficiency variance hours
Did take 14,000
Should take
(5,500 3) 16,500
2,500 favourable
At standard cost 10
25,000 favourable
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)
2,906 4,094 0 0 0
The total amount for overheads in production centre 1 is 2,906 and in production centre 2 is 4,094.
(b) Centre 1
The most appropriate basis is to use machine hours as it is machine intensive.
2,906
0
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(b) (i)
(ii) Contribution would be established by taking the difference between profit and fixed costs.
3 (a) Flexed budget Actual results Variances
Sales units 9,750 9,750
Production units 11,000 11,000
000 000 000
Sales price 2925 = 30 9,750 325 325 favourable
Cost of sales
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
250 260 10 adverse
Closing stock 275 = 22 (11,000 9,750) 275
2225 2325
Profit 70 925 225 favourable
Note: This figure can also be established by taking the absorbed fixed production overheads of 8 11,000 = 88,000 and
adding the under absorbed amount of 8,000.
(b) The sales price variance will have arisen due to a higher selling price than budgeted being obtained.
The material variance may have arisen either because the number of kg used were more than expected, and/or the amount
paid per kg was higher than expected.
24
Fixed costs
Units
0
Breakeven point
Profit
Profit
Loss
Saving 600
(c) Discounts are likely to increase the EOQ as the holding cost will be reduced.
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.
The holding cost will change as it uses both the increased EOQ and a reduced purchase price.
5 Demand Selling Price Total Marginal Cost Total Marginal
per unit Revenue Revenue per unit Cost Cost
Units
=units =units
unit cost per
selling unit
price
1,100 48 52,800 52,800 22 24,200 24,200
1,200 46 55,200 12,400 21 25,200 11,000
1,300 45 58,500 13,300 20 26,000 11,800
1,400 42 58,800 1,1300 19 26,600 11,600
MR MC at 1,300 units, therefore profits will be maximised at this point which is a selling price of 45.
25
2C D
C
o
h
2 200 12 000
1 2
10
4
(ii) total revenue variable costs 2
6
(b) (i) correctly labelled axes
1
/
2
profit line
1
/
2
fixed costs
1
/
2
break-even point
1
/
2
2
(ii) profit fixed costs 2
4
10
27
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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
(b) Sales price 1
Mentioning materials price 1
Mentioning materials usage 1
3
10
10
28
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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
P
a
p
e
r
1
.
2
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Section A ALL 25 questions are compulsory and MUST be attempted
Please use the candidate registration sheet provided to indicate your chosen answer to each multiple choice question.
Each question within this section is worth 2 marks.
1 The following diagram represents the behaviour of one element of cost:
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:
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
Total
cost
0
Volume of activity
V
T
0 Units
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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
x = 440,
y = 330,
x
2
= 17,986,
y
2
= 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 063
B 069
C 233
D 533
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 consultants 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.
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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:
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:
(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)
12
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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 310 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.
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14
Formulae Sheet
End of Question Paper
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Answers
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17
Part 1 Examination Paper 1.2
Financial Information for Management June 2004 Answers
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
19 B
20 C
21 C
22 A
23 A
24 B
25 D
1 A
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
4 C CPU (40 x 040) 16
Breakeven point (60,000 16) 3,750 units
Margin of safety (64,000 40) 1,600 units
5 D X Y
CPU 8 10
Contribution per hour 4 250
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 = 125 per unit
7 B
8 A Closing stock (units) = 200 + 600 150 200 250 = 200
Issues = 5,200 + (600 200) x 3250 = 18,200
9 D
EOQ = = 1,155
10 D
11 D Total direct labour hours:
Primary (6,000 x 36 60) + (7,500 x 48 60) 9,600
Finishing (6,000 x 25 60) + (7,500 x 35 60) 6,875
Absorption rates:
Primary (96,000 9,600) 10 per hour
Finishing (82,500 6,875) 12 per hour
Fixed cost per unit (Y): (48 60) x 10 + (35 60) x 12 = 15
(2 x 20 x (4 x 12,500)
0 10 x 15
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12 A
Actual overhead 108,875
Absorbed overhead (30,000 350) 105,000
-
Under absorption 113,875
33,070
15,600
(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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21
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
112,800
(c) For both products Lang and Dale production is greater than sales for the coming year. In other words, stocks of finished
products will be increasing. In this situation, profits calculated using marginal costing principles will be lower than the profits
calculated using absorption costing principles.
Fixed production costs are written off as they arise under marginal costing whereas under absorption costing they form part
of the product cost and the inventory valuation. Therefore in the coming year with stocks increasing and using absorption
costing, a higher amount of fixed production cost will be carried forward at the year end than was brought forward in any
opening stocks. The effect is that some of the costs that would have been written off and would have reduced the profit under
marginal costing are being carried forward under absorption costing to be written off against profits in later years.
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23
Part 1 Examination Paper 1.2
Financial Information for Management June 2004 Marking Scheme
Marks
Section A
Each of the 25 questions in this section is worth 2 marks 50
Section B
1 (a) Equivalent units of work done 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
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
30,000
UNITS
0
30,000
UNITS
0
30,000
UNITS
0
30,000
UNITS
0
B
D C
A
UNITS
0
SALES REVENUE
TOTAL COSTS
4,000
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3 Which of the following is a feasible value for the correlation coefficient?
A 20
B 12
C 0
D + 12
4 An organisations 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 2660 per unit.
The organisation uses the weighted average method of valuation and calculates a new weighted average price after
each stores receipt.
What was the total value of the issues during last month?
A 16,000
B 16,900
C 17,000
D 17,290
5 The total cost of production for two levels of activity is as follows:
Level 1 Level 2
Production (units) 3,000 5,000
Total cost () 6,750 9,250
The variable production cost per unit and the total fixed production cost both remain constant in the range of activity
shown.
What is the variable production cost per unit?
A 080
B 125
C 185
D 225
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
3 [P.T.O.
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7 A company uses a standard absorption costing system. Last month budgeted production was 8,000 units and the
standard fixed production overhead cost was 15 per unit. Actual production last month was 8,500 units and the
actual fixed production overhead cost was 17 per unit.
What was the total adverse fixed production overhead variance for last month?
A 7,500
B 16,000
C 17,000
D 24,500
The following information relates to questions 8 and 9:
A company operating a standard costing system has the following direct labour standards per unit for one of its
products:
4 hours at 1250 per hour
Last month when 2,195 units of the product were manufactured, the actual direct labour cost for the 9,200 hours
worked was 110,750.
8 What was the direct labour rate variance for last month?
A 4,250 favourable
B 4,250 adverse
C 5,250 favourable
D 5,250 adverse
9 What was the direct labour efficiency variance for last month?
A 4,250 favourable
B 4,250 adverse
C 5,250 favourable
D 5,250 adverse
10 A cost centre has an overhead absorption rate of 425 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
4
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11 A company which operates a process costing system had work in progress at the start of last month of 300 units
(valued at 1,710) which were 60% complete in respect of all costs.
Last month a total of 2,000 units were completed and transferred to the finished goods warehouse. The cost per
equivalent unit for costs arising last month was 10. The company uses the FIFO method of cost allocation.
What was the total value of the 2,000 units transferred to the finished goods warehouse last month?
A 19,910
B 20,000
C 20,510
D 21,710
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
10 320 18,500
11 280 17,000
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 2953.
What is the value of a (to the nearest ) in the total cost equation?
A 7,338
B 8,796
C 10,430
D 10,995
13 A company operates a job costing system. Job number 1012 requires 45 of direct materials and 30 of direct
labour. Direct labour is paid at the rate of 750 per hour. Production overheads are absorbed at a rate of 1250
per direct labour hour and non-production overheads are absorbed at a rate of 60% of prime cost.
What is the total cost of job number 1012?
A 170
B 195
C 200
D 240
5 [P.T.O.
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14 Data relating to a particular stores item are as follows:
Average daily usage 400 units
Maximum daily usage 520 units
Minimum daily usage 180 units
Lead time for replenishment of stock 10 to 15 days
Reorder quantity 8,000 units
What is the reorder level (in units) which avoids stockouts?
A 5,000
B 6,000
C 7,800
D 8,000
15 Which one of the following statements correctly describes the shadow price of a resource in linear programming?
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.
C The increase in total contribution if one extra unit of a binding constraint is made available.
D The increase in total contribution if one extra unit of a non-binding constraint is made available.
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.
What would the profit for last month have been using marginal costing?
A 15,000
B 25,000
C 55,000
D 65,000
17 The following terms relate to computers:
(i) application packages
(ii) operating systems
(iii) point-of-sale devices
Which of these terms are categorised as software?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
6
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18 A company is evaluating a project that requires two types of material (T and V).
Data relating to the material requirements are as follows:
Material Quantity needed Quantity Original cost of Current Current
type for project currently quantity in stock purchase resale
in stock price price
kg kg /kg /kg /kg
T 500 100 40 45 44
V 400 200 55 52 40
Material T is regularly used by the company in normal production. Material V is no longer in use by the company
and has no alternative use within the business.
What is the total relevant cost of materials for the project?
A 40,400
B 40,900
C 43,400
D 43,900
19 A machine owned by a company has been idle for some months but could now be used on a one year contract which
is under consideration. The net book value of the machine is 1,000. If not used on this contract, the machine
could be sold now for a net amount of 1,200. After use on the contract, the machine would have no saleable value
and the cost of disposing of it in one years time would be 800.
What is the total relevant cost of the machine to the contract?
A 400
B 800
C 1,200
D 2,000
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?
A Premium pricing
B Price differentiation
C Penetration pricing
D Price skimming
7 [P.T.O.
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The following information relates to questions 21 and 22:
In the following price, cost and revenue functions, which have been established by a company for one of its products,
Q represents the number of units produced and sold per week:
Price ( per unit) = 40 003Q
Marginal revenue ( per unit) = 40 006Q
Total cost per week () = 3,500 + 10Q
21 What price should be set in order to maximise weekly profits?
A 10
B 15
C 25
D 30
22 What would be the profit per week if the selling price of the product was set at 31 per unit?
A 2,800
B 3,150
C 5,490
D 5,800
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 companys total fixed costs per period?
A 6,075
B 7,425
C 13,500
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
8
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25 A factory consists of two production cost centres (P and Q) and two service cost centres (X and Y). The total allocated
and apportioned overhead for each is as follows:
P Q X Y
95,000 82,000 46,000 30,000
It has been estimated that each service cost centre does work for the other cost centres in the following proportions:
P Q X Y
Percentage of service cost centre X to 40 40 20
Percentage of service cost centre Y to 30 60 10
After the reapportionment of service cost centre costs has been carried out using a method that fully recognises
the reciprocal service arrangements in the factory, what is the total overhead for production cost centre P?
A 122,400
B 124,716
C 126,000
D 127,000
(50 marks)
9 [P.T.O.
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Section B ALL FIVE questions are compulsory and MUST be attempted
1 Maybud Ltd operates Process X which creates two joint products, A and B, in the ratio of 3:2 by volume. There is
no work in progress. The following information relates to Process X for last month:
(i) 80,000 litres of raw materials with a total cost of 158,800 were input into the process and conversion costs
were 133,000.
(ii) A normal process loss of 5% of the input was expected. An actual loss of 5,500 litres was identified at the end
of the process. Losses have a realisable value of 75p per litre.
It is company policy to apportion joint costs to products using the net realisable value method. After Process X, both
product A and product B are further processed at a cost of 2 per litre and 3 per litre respectively. The final selling
prices of the products are as follows:
Product per litre
A 8
B 12
Required:
(a) Prepare the process account for last month including the output volume and cost of products A and B
separately. (7 marks)
(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)
(10 marks)
2 Despard Ltd manufactures and sells a single product. The following data have been extracted from the current years
budget:
Sales and production (units) 5,000
Variable cost per unit 50
Fixed cost per unit 70
Contribution to sales ratio 75%
The selling price per unit for next year is to be 8% above the current years 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.
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)
The company is also considering a change from absorption costing to marginal costing.
(c) Calculate the BUDGETED profit for the month just ended under:
(i) absorption costing;
(ii) marginal costing. (3 marks)
(10 marks)
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
Cost of placing an order 25
From the start of next year the cost of placing an order will rise by 11 but all the other data will remain the same.
The hospital bases its purchasing decisions on the Economic Order Quantity (EOQ) model.
Required:
(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 [P.T.O.
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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 (750 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)
The companys management accountant has already carried out some preliminary calculations relating to the second
three month period. Using linear programming, she has determined that the optimal production plan for that quarter
involves a combination of product X and product Y.
(b) Determine the optimal production plan in units for the second three month period of next year and the
resultant total contribution. (6 marks)
(10 marks)
12
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13
Formulae Sheet
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Answers
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Part 1 Examination Paper 1.2
Financial Information for Management December 2004 Answers
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
19 D
20 D
21 C
22 A
23 D
24 C
25 D
1 A
2 A
3 C
4 A
Date Units Average price ()
1st 200 2000 4,000
4th (150) 2000 (3,000)
50 1,000
12th 500 2660 13,300
550 2600 14,300
19th (200) 2600 (5,200)
27th (300) 2600 (7,800)
Total value of issues = 3,000 + 5,200 + 7,800 = 16,000
5 B
(9,250 6,750) (5,000 3,000) = 125
6 A
7 C
8 A
17
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9 D
Variance ()
Actual cost 110,750
4,250 F Rate
Actual hours at standard rate (9,200 x 1250) 115,000
5,250 A Efficiency
Standard hours for actual production at
standard rate (2,195 x 4 x 1250) 109,750
10 B
11 A
12 B
y = 17,500 + 19,500 + 20,500 + 18,500 + 17,000 = 93,000
x = 300 + 360 + 400 + 320 + 280 = 1,660
a = (93,000 5) 2953(1,660 5) = 8,79604
13 A
Direct materials 45
Direct labour (4 hours) 30
Prime cost 75
Production overheads (4 x 1250) 50
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)
17 A
18 B
Material
T (500 x 45) 22,500
V (200 x 40) + (200 x 52) 18,400
18
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19 D
2,000
20 D
21 C
Profits maximised when Marginal revenue (MR) = Marginal cost (MC)
MR = 40 006Q
MC = 10
MR = MC Therefore 10 = 40 006Q
Q = 30 06 = 500
Price (P) = 40 003(500) = 25
22 A
Profit = Total revenue (TR) Total cost (TC)
When P = 31 then 31 = 40 003Q and Q = 300
TR = P x Q = 31 x 300 = 9,300
TC = 3,500 + (10 x 300) = (6,500)
Profit 2,800
23 D
CPU = 27
Contribution to sales ratio = 45%
Selling price = 27 045 = 60
Margin of safety in units = 13,500 60 = 225
Break-even point (BEP) = 1,000 225 = 775 units
At BEP: total contribution = total fixed costs
Total fixed costs = 775 x 27 = 20,925
24 C
25 D
P = 95,000 + 04X + 03Y
X = 46,000 + 01Y
Y = 30,000 + 02X
X = 46,000 + 01(30,000 + 02X) = 46,000 + 3,000 + 002X
098X = 49,000 and X = 50,000
Y = 30,000 + 02(50,000) = 40,000
P = 95,000 + 04(50,000) + 03(40,000) = 127,000
19
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Section B
1 (a) Process X Account
Litres Litres
Raw materials input 80,000 158,800 Joint products (W1)
Product A 44,700 141,550
Product B 29,800 141,550
Conversion costs 133,000 Normal loss (W2) 4,000 3,000
Abnormal loss (W3) 1,500 5,700
80,000 291,800 80,000 291,800
Cost per equivalent litre (EL):
Materials and conversion
EL
Output (joint products combined) 74,500
Abnormal loss 1,500
288,800
Contribution 160
000
Total fixed costs (5,000 x 70) x 112 392
Target/required profit [as per (a)(ii)] 400
(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.
(c) (i) Absorption costing profit:
Gross profit 45,000 x (15 9) 270,000
Less Non-production costs (44,000)
Alternative answer:
Absorption costing net profit [as above in (i)] 226,000
Deduct Increase in stocks at standard fixed
production cost per unit
(3,000 units at 5 per unit) (15,000)
6,000
Next year
(900 2) x 8 3,600 3,600
(90,000 900) x 36 3,600 3,600
7,200
Total extra cost of holding and ordering stock for next year 1,200
(compared with current year)
21
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(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.
5 (a) Product X Product Y
Contribution per unit () 90 96
Litres of Material L per unit 5 6
Contribution per litre of Material L 18 16
Ranking 1st 2nd
Optimal production plan for first three months of next year is to produce and sell 4,800 units of Product X (24,000 litres
5 litres/unit) giving a total contribution of 432,000 (4,800 units at 90 per unit).
(b) Let x = the number of units of product X
and y = the number of units of product Y
Formulation of constraints:
Material L 5x + 6y 24,000
Material M 6x + 4y 24,000
Optimal point is the intersection of 5x + 6y = 24,000 .(1)
and 6x + 4y = 24,000 .(2)
Solving these simultaneously gives:
(1) X 6 30x + 36y =144,000
(2) X 5 30x + 20y =120,000
Section B
1 (a) Inputs into process 1
Normal loss 2
Abnormal loss 1
Joint products 3
7
(b) Actual loss less than normal loss 1
Debit entry in process account 1
Valuation at full process cost 1
10
3
(b) Contribution per unit 2
Total fixed costs 1
Required contribution
1
/
2
Number of units
1
/
2
4
(c) Partly fixed/partly variable 1
Example 1
Separation of fixed/variable elements 1
10
4
(b) General principle/suggested person(s) 3
(c) Absorption costing profit 1
Marginal costing profit 2
10
23
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Marks
4 (a) (i) EOQ this year 2
(ii) EOQ next year 2
4
(b) Annual holding costs 2
Annual ordering costs 2
4
(c)
1
/
2
mark for each of four costs identified 2
10
4
(b) Equations/formulations 3
Optimal units for products X and Y 2
Resultant contribution 1
10
24
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Financial
Information for
Management
PART 1
FRIDAY 10 JUNE 2005
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
P
a
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Section A ALL 25 questions are compulsory and MUST be attempted
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.
Each question within this section is worth 2 marks.
1 Four lines representing expected costs and revenue have been drawn on a break-even chart:
Which line represents total variable cost?
A Line A
B Line B
C Line C
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:
Which line represents the total contribution at the corresponding level of output?
A Line J
B Line K
C Line L
D Line M
2
0
A
B
C
D
Output
0
J
K
L
M
Output
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3 A manufacturing company has four types of cost (identified as T1, T2 , T3 and T4).
The total cost for each type at two different production levels is:
Total cost for Total cost for
Cost type 125 units 180 units
T1 1,000 1,260
T2 1,750 2,520
T3 2,475 2,826
T4 3,225 4,644
Which two cost types would be classified as being semi-variable?
A T1 and T3
B T1 and T4
C T2 and T3
D T2 and T4
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
Selling price 80
Less costs:
Variable production 30
Other variable 10
Fixed 25
(65)
Profit 15
(120,000)
The budget was prepared using absorption costing principles. If budgeted production in the first month had been
2,000 units then the total production cost would have been 188,000.
Required:
(a) Using the high-low method, calculate:
(i) the variable production cost per unit; and
(ii) the total monthly fixed production cost. (4 marks)
(b) If the budget for the first month of trading had been prepared using marginal costing principles, calculate:
(i) the total contribution; and
(ii) the net profit. (4 marks)
(c) Explain clearly the circumstances in which the monthly profit or loss would be the same using absorption or
marginal costing principles. (2 marks)
(10 marks)
12
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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:
(a) Calculate for product DG:
(i) the initial selling price per unit; and
(ii) the resultant weekly profit. (3 marks)
The management accountant has established that a linear relationship beween the unit selling price (P in ) and the
weekly demand (Q in units) for product DG is given by:
P = 20 0002Q
The marginal revenue (MR in per unit) is related to weekly demand (Q in units) by the equation:
MR = 20 0004Q
(b) Calculate the selling price per unit for product DG that should be set in order to maximise weekly profit.
(7 marks)
(c) Distinguish briefly between penetration and skimming pricing policies when launching a new product.
(2 marks)
(12 marks)
13
[P.T.O.
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14
Formulae Sheet
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Part 1 Examination Paper 1.2
Financial Information for Management June 2005 Answers
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
19 C
20 B
21 D
22 B
23 A
24 A
25 A
1 C
2 C
3 A Total cost per unit () Total cost per unit ()
(125 units) (180 units)
T1 800 700
T2 1400 1400
T3 1980 1570
T4 2580 2580
Cost types T2 and T4 are variable and T1 and T3 are semi-variable.
4 C Contribution per unit (CPU) = (80 30 10) = 40
Total fixed cost = 2,880 25 = 72,000
Break-even point = 72,000 40 = 1,800 units
5 B CPU = 040 60 = 24
Break-even point = 54,000 24 = 2,250 units
Margin of safety = 4,000 2,250 = 1,750 units
6 B x = Advertising expenditure = 100,000
y = Sales = 600,000
n = number of pairs of data = 5
7 B
8 A
9 D
17
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10 D Total hours in cost centre X = 8,000 (3 + 25) = 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) = (25 2) + (20 4) = 13
11 A
Actual overheads 128,480
Absorbed overhead (8,800 1450) 127,600
Under absorption 880
12 A
13 B Date Units per unit
1st 300 9 2,700
3rd 500 11 5,500
12th (600) (6,400) [5,500 + 900]
200 9 1,800
17th 400 105 4,200
19th (300) 105 (3,150)
300 2,850
14 C
Prime cost (300 + 400) 700
Production overheads (50 26) 1,300
10,760
17 A Price variance:
Actual sales revenue 204,750
Actual sales units at standard selling price (10,500 20) 210,000
137,750
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
5,000 F
Standard cost of actual production (9,000 20) 108,000
(b) Actual quantity actual cost 138,000
Price
6,000 F
Actual quantity standard cost 144,000
(24,000 6) Usage
9,000 A
Standard quantity for actual production
X standard cost [(as in (a)] 135,000
(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
purchasing (sometimes referred to as the Buying Manager or the Procurement Manager).
(ii) The standard quantity per unit is set by the person in the organisation with the specialist knowledge about the product
specification and the amount of each raw material that should be used in the manufacture of one unit of the product.
This would be a manager in the production (manufacturing) function or technical department in Murgatroyd Ltd.
3 (a) EOQ = [(2 1250 8,760) (005 80)]
05
= 234 units
(b) Usage per day = 8,760 365 = 24
Re-order level = 24 21 = 504 units
(c) (i) A stockout occurs when a company runs out of stock. There are costs associated with this lost contribution from lost
sales, for example. In order to avoid a stockout the company could set a buffer stock in effect a safety level of stock
to cover emergency situations such as demand and/or lead times exceeding their average levels. The holding of a buffer
stock involves an additional cost.
(ii) Jane plc should consider having a buffer stock if either the usage of component RB starts to fluctuate from period to
period (at present it is constant) and/or the lead time starts to fluctuate from its present constant level of 21 days.
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4 (a) (i) Units Total cost
(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.
5 (a) (i) Initial selling price = (variable + fixed cost per unit) + mark up of 40%
Initial selling price = [4 + (18,000 3,000)] 140 = 14
(ii) Profit = 3,000 units 4 profit per unit = 12,000
(b) Profits are maximised when:
Marginal cost (MC) = Marginal revenue (MR)
MC = variable cost = 4
MR = 20 0004Q
4 = 20 0004Q
Q = 4,000 units
P = 20 0002 (4,000) = 12 = profit maximising price.
(c) A penetration price is an initially low selling price of a product, whereas a skimming price policy is one where the initial selling
price is set high.
21
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Part 1 Examination Paper 1.2
Financial Information for Management June 2005 Marking Scheme
Marks
Section A
Each of the 25 questions in this section is worth 2 marks 50
Section B
1 (a) Inputs into process 1
1
/
2
Normal loss 1
1
/
2
Abnormal gain 2
Joint products 3
8
(b) Incidental to main products 1
Insignificant in value terms 1
10
4
(b) Price variance 1
1
/
2
Usage variance 1
1
/
2
3
(c) Purchasing management 1
1
/
2
Production management 1
1
/
2
10
4
(b) (i) Total contribution 2
(ii) Net profit 2
4
(c) Production = sales and/or opening stock = closing stock 2
10
23
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Marks
5 (a) (i) Initial selling price 2
(ii) Resultant weekly profit 1
3
(b) Marginal cost (MC) = Marginal revenue (MR) 1
MC 1
Optimal quantity (via MC = MR) 3
Optimal price 2
7
(c) Penetration price 1
Skimming price 1
12
24
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Financial
Information for
Management
PART 1
FRIDAY 9 DECEMBER 2005
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 13
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
The Association of Chartered Certified Accountants
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a
p
e
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Section A ALL 25 questions are compulsory and MUST be attempted.
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.
Each question within this section is worth 2 marks.
1 Up to a given level of activity in each period the purchase price per unit of a raw material is constant. After that point
a lower price per unit applies both to further units purchased and also retrospectively to all units already purchased.
Which of the following graphs depicts the total cost of the raw materials for a period?
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):
What is the margin of safety at the 1,700 units level of activity?
A 200 units
B 300 units
C 500 units
D 1,025 units
2
0 Units
0 Units
0 Units
0 Units
A B
C D
TSR
TC
TVC
TFC
Units
1,700 1,500 1,200 675
0
Direct materials 11
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:
10,000
Profit 4,000
Section B
1 (a) Using the high-low method:
Units Total cost ()
120,000 (W1) 700,000
102,000 619,000
18,000 81,000
Working (W1)
Full capacity = 102,000 085 = 120,000
(i) Variable cost per unit = 81,000 18,000 = 450
(ii) Total fixed costs = 700,000 (120,000 450) = 160,000
(iii) Selling price per unit = variable cost per unit (100 040)
= 450 06 = 750
(iv) Contribution per unit = (750 450) = 300
(b) New business: per unit
Selling price (080 750) 600
Less variable cost (450)
Contribution 150
(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 (008 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) (50,000 092) = 1350
Output value = 47,000 1350 = 634,500
W2 Abnormal gain = 47,000 (50,000 092) = 1,000
Valuation (1,000 1350) = 13,500
19
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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
Workings:
W1 Variance
Actual cost 142,700
5,200 A
Standard cost of actual production 137,500
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.
21
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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
(b) Prime costs:
Direct materials 10
Direct labour:
Cost centre T 14
Cost centre W 21
45
Production overheads:
Cost centre T: (35 60) 48 28
Cost centre W: (21 6) 12 42
115
(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
simultaneous equations.
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
1 (a) (i) Variable cost per unit 2
(ii) Total monthly fixed costs 2
(iii) Selling price per unit 1
(iv) Contribution per unit 1
6
(b) Contribution from new business 2
Opportunity cost 1
1
/2
Net increase in profit
1
/2
4
(c) Explanation of opportunity cost 1
Reference to Pointdextre Ltd 1
12
5
(b) Equivalent units for conversion 1
1
/2
Cost per equivalent unit for conversion
1
/2
Valuation of output 2
Valuation of closing work in progress 1
5
(c) Debit entry 2
12
5
(b) Graph (or total contributions at feasible points) 3
Optimal plan 1
23
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Marks
4 (a) Total materials variance 1
Total labour variance 1
Total fixed overhead variance 1
Reconciliation statement 1
4
(b) Expenditure variance 1
Volume variance 1
2
(c) Direct materials and labour variances the same 1
Total variance = expenditure variance 1
No volume variance with reason 1
2
(b) Prime cost
1
/2
Production overheads (T) 1
Production overheads (W) 1
Total unit cost
1
/2
3
(c) Reapportionment explanation 2
Reapportionment method 1
24
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Financial
Information for
Management
PART 1
FRIDAY 9 JUNE 2006
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 13
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
The Association of Chartered Certified Accountants
P
a
p
e
r
1
.
2
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Section A ALL 25 questions are compulsory and MUST be attempted.
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.
Each question within this section is worth 2 marks.
1 A supplier of telephone services charges a fixed line rental per period. The first 10 hours of telephone calls by the
customer are free, after that all calls are charged at a constant rate per minute up to a maximum, thereafter all calls
in the period are again free.
Which of the following graphs depicts the total cost to the customer of the telephone services in a period?
2 Four vertical lines have been labelled P, Q, R and S at different levels of activity on the following profit-volume chart:
Which line represents the total contribution at that level of activity?
A Line P
B Line Q
C Line R
D Line S
2
A B
C D
0 Hours 0 Hours
0 Hours 0 Hours
P
Q R
S
Output 0
A
C
D
B
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3 A company manufactures a single product which it sells for 15 per unit. The product has a contribution to sales ratio
of 40%. The companys weekly break-even point is sales of 18,000.
What would be the profit in a week when 1,500 units are sold?
A 900
B 1,800
C 2,700
D 4,500
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.
What is the total cost for a month when 1,000 units are produced?
A 54,200
B 55,000
C 59,000
D 60,200
5 Which of the following is NOT a feasible value for the correlation coefficient?
A + 12
B + 06
C + 0
D 06
6 The following statements relate to responsibility centres:
(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
3 [P.T.O.
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8 A company determines its order quantity for a raw material using the EOQ model.
What would be the effects on the EOQ and on the total annual stockholding cost of a decrease in the cost of
placing an order for the raw material?
EOQ Total annual
stockholding cost
A Increase No effect
B Decrease No effect
C Increase Increase
D Decrease Decrease
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
What was the adverse sales volume profit variance last month?
A 1,000
B 1,100
C 1,200
D 1,300
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
B 62,475
C 62,500
D 63,750
11 An organisations 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.
4
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12 A company uses absorption costing with a predetermined hourly overhead absorption rate. The following situations
arose last month:
(i) Actual hours worked exceeded planned hours.
(ii) Actual overhead expenditure exceeded planned expenditure.
Which of the following statements is correct?
A Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be under
absorbed.
B Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be over
absorbed.
C Both situations would cause overheads to be over absorbed.
D Both situations would cause overheads to be under absorbed.
13 A factory consists of two production cost centres (G and H) and two service cost centres (J and K). The total overheads
allocated and apportioned to each centre are as follows:
G H J K
40,000 50,000 30,000 18,000
The work done by the service cost centres can be represented as follows:
G H J K
Percentage of service cost centre J to 30% 70%
Percentage of service cost centre K to 50% 40% 10%
The company apportions service cost centre costs to production cost centres using a method that fully recognises any
work done by one service cost centre for another.
What are the total overheads for production cost centre G after the reapportionment of all service cost centre
costs?
A 58,000
B 58,540
C 59,000
D 59,540
14 The following statements refer to strategic planning:
(i) It is concerned with quantifiable and qualitative matters.
(ii) It is mainly undertaken by middle management in an organisation.
(iii) It is concerned predominantly with the long term.
Which of the statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
15 The following statements refer to situations occurring in Process Q of an organisation which operates a series of
consecutive processes:
(i) Direct labour is working at below the agreed productivity level.
(ii) A machine breakdown has occurred.
(iii) Direct labour is waiting for work to be completed in a previous process.
Which of these situations could give rise to idle time?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
5 [P.T.O.
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16 The following terms relate to computers:
(i) Spreadsheets
(ii) Floppy disks
(iii) Operating systems
Which of these terms are examples of computer software?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
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
D 448
18 All of a companys skilled labour, which is paid 8 per hour, is fully employed manufacturing a product to which the
following data refer:
per unit per unit
Selling price 60
Less Variable costs:
Less Skilled labour 20
Less Others 15
(35)
Contribution 25
The company is evaluating a contract which requires 90 skilled labour hours to complete. No other supplies of skilled
labour are available.
What is the total relevant skilled labour cost of the contract?
A 720
B 900
C 1,620
D 2,160
19 A company requires 600 kg of raw material Z for a contract it is evaluating. It has 400 kg of material Z in stock which
were purchased last month. Since then the purchase price of material Z has risen by 8% to 27 per kg. Raw material
Z is used regularly by the company in normal production.
What is the total relevant cost of raw material Z to the contract?
A 15,336
B 15,400
C 16,200
D 17,496
6
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The following information relates to questions 20 and 21:
A company operates a process costing system using the first-in-first-out (FIFO) method of valuation. No losses occur in the
process. All materials are input at the commencement of the process. Conversion costs are incurred evenly through the
process.
The following data relate to last period:
Units Degree of completion
Opening work in progress 12,000 60%
Total number of units completed 14,000
Closing work in progress 13,000 30%
Costs arising:
Materials 151,000
Conversion 193,170
20 What was the total number of units input during last period?
A 12,000
B 13,000
C 15,000
D 17,000
21 What was the value of the closing work in progress for last period?
A 21,330
B 21,690
C 22,530
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.
What pricing policy is the company following?
A Premium pricing
B Price skimming
C Price discrimination
D Penetration pricing
23 A company has established the following equations for one of its products:
Selling price ( per unit) = 40 0008Q
Marginal revenue ( per unit) = 40 0016Q
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
7 [P.T.O.
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The following information relates to questions 24 and 25:
A company which manufactures and sells two products (X and Y) aims to maximise its profits. It holds no stocks. Product
X makes a contribution per unit of 4 and product Y makes a contribution per unit of 1.
Next period the company faces three less than production constraints and these are shown as the lines labelled (1), (2)
and (3) on the following graph:
24 Which of the following points shown on the graph is optimal for next period?
A Point H
B Point J
C Point K
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)
8
H
(2)
(3)
(1)
J
K
L
Product Y
units
000
1
2
3
4
5
6
7
8
9
10
11
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Product X
units
000
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Section B ALL FIVE questions are compulsory and MUST be attempted
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 154,000
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
work. The further processing in process H would cost 4 per litre input from process G. In process H there would
be a normal loss in volume of 10% of the input to that process. This loss has no realisable value. Product PP1 could
then be sold for 26 per litre.
(b) Determine, based on financial considerations only, whether product P1 should be further processed to create
product PP1. (3 marks)
(c) In the context of process G in Corcoran Ltd, explain the difference between direct expenses and production
overheads. (2 marks)
(12 marks)
9 [P.T.O.
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2 Buttercup Ltd manufactures and sells three products (R, S and T). These products are made using the same
machinery. The total machining time available each month is 10,500 hours but this is insufficient to produce all the
units of R, S and T required to meet maximum demands. No stocks of these products are held.
The following information is available:
Product R Product S Product T
Selling price per unit 60 75 84
Contribution to sales ratio 20% 24% 25%
Machining minutes per unit 40 54 75
Maximum monthly demand (units) 9,000 6,000 3,000
Required:
(a) Calculate the monthly shortfall in machining hours. (2 marks)
(b) Determine the monthly production plan in units that will maximise the companys total contribution from
products R, S and T and calculate this total contribution. (6 marks)
(8 marks)
3 Deadeye Ltd operates a standard costing system in which all stocks are valued at standard cost. The standard direct
material cost of one unit of product MS is 36, made up of 48 kg of material H at 750 per kg. Material H is used
only in the manufacture of product MS.
The following information relates to last month:
Material H:
Purchased 40,000 kg for 294,000
Issued into production 36,500 kg
Finished output of MS 17,200 units
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).
(3 marks)
(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)
(10 marks)
10
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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:
(total maintenance cost x production units) = 61,250 million
(total maintenance cost)
2
= 809,598 million
(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)
(b) Using the equation established in (a), predict the total maintenance cost for the next quarter when planned
production is 44,000 units. Suggest a major reservation, other than the effect of inflation, you would have
about this prediction. (3 marks)
(10 marks)
11 [P.T.O.
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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)
The normal monthly level of production is 25,000 units and stocks are valued at standard cost.
Required:
(a) Prepare in full a budgeted profit statement for this month using absorption costing principles. Assume that
fixed production overhead costs are absorbed using the normal level of activity. (6 marks)
(b) Prepare a statement that reconciles the net profit calculated in (a) with the net profit using marginal costing.
(2 marks)
(c) Which of the two costing principles (absorption or marginal) is more relevant for short-run decision-making,
and why? (2 marks)
(10 marks)
12
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13
Formulae Sheet
End of Question Paper
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Answers
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Part 1 Examination Paper 1.2
Financial Information for Management June 2006 Answers
Section A
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
19 C
20 C
21 D
22 D
23 C
24 C
25 A
1 A
2 C
3 B Contribution per unit = 15 x 04 = 6
Break even point = 18,000 15 = 1,200 units
Profit when 1,500 units sold = (1,500 1,200) x 6 = 1,800
4 C Units Total cost ()
1,400 68,200
1,200 66,600
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
7 C EOQ = {[ 2 x 20 x (4 x 20,000) ] [006 x 25]}
05
= 1,461 units
8 D
9 B (Budgeted quantity Actual quantity) x standard profit per unit
(1,000 900) x (50 39) = 1,100
10 A Budgeted overhead actual overhead = 1,250
Actual overhead = 098 x Budgeted overhead
Budgeted overhead (098 x Budgeted overhead) = 1,250
Budgeted overhead = 1,250 002 = 62,500
Actual overhead = 62,500 1,250 = 61,250
17
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11 B Closing stock = 100 50 + 200 50 50 = 150 units
FIFO = 150 x 62 = 9,300
LIFO = (100 x 62) + (50 x 67) = 9,550
LIFO valuation greater than FIFO valuation by 250
12 A
13 B Cost centre G = 40,000 + (050 x 18,000) + 030 [30,000 + (010 x 18,000)]
13 B Cost centre G = 58,540
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 (060 x 120) 72
Total cost 332
1,620
19 C Relevant cost of a regularly used material in stock is its replacement cost (600 x 27) = 16,200
20 C Input = (14,000 + 3,000 2,000) = 15,000 units
21 D Material cost per unit = [51,000 (12,000 + 3,000)] = 340
Conversion:
Cost per equivalent unit = [193,170 (12,000 + 040 x 2,000 + 030 x 3,000)]
Cost per equivalent unit = 193,170 13,700 = 1410
Closing stock valuation = (3,000 x 340) + (900 x 141) = 22,890
22 D
23 C Profits maximised when: Marginal revenue (MR) = Marginal cost (MC)
MC = 8
MR = (40 0016Q)
MR = MC 40 0016Q = 8,000
MR = MC 40 0016 Q = 2,000
When Q = 2,000 Price = 40 (0008 x 2,000) = 24
24 C Objective function (maximisation of contribution) = 4X + Y
Let 4X + Y = 40,000 (assumed)
When X = 0, Y = 40,000
When Y = 0, X = 10,000
These two points are plotted on the graph and joined by a (dotted) line. This line is then moved away from the origin keeping
it parallel to the originally drawn dotted line until it reaches the furthest most point in the feasible area ((OHJKL).
In this case that will be the point K which is optimal.
25 A 10X + 7Y = 70,000
When X = 0, Y = 10,000
When Y = 0, X = 7,000
Constraint line (2) joins these two points on the axes.
18
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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:
W3 Net total cost = 381,000 + 180,000 + 54,000 + 198,000 15,000
W3 Net total cost = 798,000
W3 Expected output = 60,000 x 95% = 57,000 litres
W3 Cost per litre = 798,000 57,000 = 14
W3 Valuations:
W3 Abnormal gain = 1,000 x 14 = 14,000
W3 Joint products:
W3 Joint prodP1 36,250 x 14 = 507,500
W3 Joint prodP2 21,750 x 14 = 304,500
(b) Assuming 100 litres of product P1
Revenue if sold at point of split-off without
further processing (100 x 20) 2,000
Revenue (from PP1) if sold after
further processing (100 x 90%) x 26 2,340
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.
2 (a) Monthly machining hours required to meet maximum demand:
Product Units Hours/unit Total hours
R 9,000 (40 60) = 0667 16,000
S 6,000 (54 60) = 0900 15,400
T 3,000 (75 60) = 1250 13,750
15,150
Available hours 10,500
19
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(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 0667 0900 1250
Contribution per machine hour 18 20 1680
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
3 (a) Direct material variances: Variance ()
Actual quantity purchased at actual price 294,000
6,000 F Price
Actual quantity purchased at standard price 300,000
(40,000 kg at 750 )
Actual quantity used at standard price 273,750
(36,500 kg at 750 ) 14,550 A Usage
Standard quantity for actual production at 259,200
standard price [(7,200 units x 48) at 750]
(b) Reconciliation:
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
(8,550) A
Less: Increase in stock at standard cost
Less: [(40,000 36,500) x 750] (26,250)
192
Less: Under absorption of fixed
Less: production overhead cost [W2]
Less: (3,000 x 5) (15)
Net profit 77
Workings:
W1 Variable production cost per unit 23
W1 [For example, from opening stock under
W1 marginal costing: (69,000 3,000)]
W1 Fixed production cost per unit 5
W1 [125,000 25,000]
W1 28
Section B
1 (a) Inputs 2
Abnormal gain 1
1
/2
Normal loss 1
1
/2
Joint products 2
7
(b) Additional revenue 1
1
/2
Additional cost 1
Conclusion
1
/2
3
(c) Direct expenses 1
Production overheads 1
2
12
2 (a) Required hours 1
1
/2
Shortfall
1
/2
2
(b) Contribution per unit 1
1
/2
Contribution per machining hour 1
1
/2
Ranking
1
/2
Optimal plan 1
1
/2
Resultant contribution 1
6
8
3 (a) Price variance 1
1
/2
Usage variance 1
1
/2
3
(b) Variances 1
Change in stock 1
Layout/presentation of statement 1
3
(c) (i) Causes (1 mark for each) 2
(ii) Purchasing manager 1
Responsibility for buying 1
4
10
23
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Marks
4 (a) y 1
x 1
Calculation of b 2
1
/2
Calculation of a 1
1
/2
Fixed/variable costs 1
7
(b) Total cost for 44,000 units 1
1
/2
Reservation 1
1
/2
3
10
5 (a) Sales
1
/2
Cost of sales 3
Under absorption of overhead 1
1
/2
Variable selling cost
1
/2
Fixed selling and admin costs
1
/2
6
(b) Layout/presentation of statement 1
Change in stock and its evaluation 1
2
(c) Marginal costing 1
Separation of fixed and variable costs
1
/2
Fixed costs not relevant to short term decisions
1
/2
2
10
24
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Financial
Information for
Management
PART 1
FRIDAY 8 DECEMBER 2006
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 12
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
The Association of Chartered Certified Accountants
P
a
p
e
r
1
.
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Section A ALL 25 questions are compulsory and MUST be attempted.
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.
Each question within this section is worth 2 marks.
1 The following diagram represents a profit/volume chart for an organisation:
At the specific levels indicated what do the lines G and H represent?
Line G Line H
A Loss Profit
B Loss Contribution
C Contribution Profit
D Contribution Contribution
2 The following diagram represents the behaviour of one element of cost:
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.
2
G
H
0
Output
0
Total
cost
Volume of
activity
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3 An organisation has the following total costs at three activity levels:
Activity level (units) 8,000 12,000 15,000
Total cost 204,000 250,000 274,000
Variable cost per unit is constant within this activity range and there is a step up of 10% in the total fixed costs when
the activity level exceeds 11,000 units.
What is the total cost at an activity level of 10,000 units?
A 220,000
B 224,000
C 227,000
D 234,000
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.
What is the monthly breakeven point (in units)?
A 18,000
B 20,000
C 30,000
D 45,000
5 The following statements refer to qualities of good information:
(i) It should be communicated to the right person.
(ii) It should always be completely accurate before it is used.
(iii) It should be understandable by the recipient.
Which of the above statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
6 A company is considering the launch of a new product at a high initial selling price.
Which of the following statements is correct?
A This is an example of strategic planning involving the application of penetration pricing.
B This is an example of operational planning involving the application of penetration pricing.
C This is an example of strategic planning involving the application of price skimming.
D This is an example of operational planning involving the application of price skimming.
3 [P.T.O.
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7 The following statements relate to an organisations management information system:
(i) It is used only by top and middle management to aid in strategic and tactical decision-making.
(ii) It generates both financial and non-financial information.
(iii) It often uses a database system.
Which of the above statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
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:
x = 129 y = 890 xy = 23,091 x
2
= 3,433 y
2
= 29,929
What is the value of a in the equation for the line of best fit (to the nearest whole number)?
A 146
B 152
C 210
D 245
9 Which of the following is a feasible value for a correlation coefficient?
A +12
B 0
C 12
D 20
10 The following data relate to material J for last month:
17 D
[(45,600 x 4) 173,280] = 9,120 Favourable
18 A
(b) The actual selling price (2150) was lower than the standard selling price (2200) hence the adverse sales price
variance. This reduction in price may have directly encouraged customers to buy more units. The company sold 2,000 more
units than planned giving the favourable sales volume contribution variance of 26,000. Thus the two variances may be
interrelated and if so the variances should be considered together one partially offsetting the other.
(c)
Budgeted contribution (32,000 x 13) 416,000
Less: Budgeted profit (marginal costing) (200,000)
Alternatively:
Budgeted absorption costing manufacturing profit
32,000 x (13 4) 288,000
Less: budgeted non-production fixed costs (96,000)
17
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2 (a) (i) Using the formula given:
EOQ = [(2 x 120 x 48,000) (010 x 80)]
05
= 1,200 units
221,520
Section B
1 (a) Price variance 2
Volume variance 2
4
(b) An adverse and a favourable variance 1
Possible interrelationship explained 2
3
(c) Budgeted fixed production costs 1
Fixed production cost per unit 1
Change in stock level effect 1
Absorption costing profit 1
11
4
(b) Purchasing cost
1
/
2
Ordering cost 1
Holding cost 1
Annual saving
1
/
2
3
(c)
1
/
2
mark for each different example 2
2
(b) Extra cost per unit of buying in 2
Extra cost per machine hour 1
Optimal buying in plan 1
4
(c) 1 mark per factor 3
21
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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
(b)
1
/
2
mark for each type of organisation 1
1
/
2
mark for each unit cost measure 1
12
6
(b) Allocation explained 1
Apportionment explained 1
Use, or not, of meters 1
22
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Financial
Information for
Management
PART 1
FRIDAY 8 JUNE 2007
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 13
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
The Association of Chartered Certified Accountants
P
a
p
e
r
1
.
2
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Section A ALL 25 questions are compulsory and MUST be attempted.
Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.
Each question within this section is worth 2 marks.
1 Four lines representing expected costs and revenue have been drawn on the following break-even chart:
Which statement is correct?
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.
2 The following diagram depicts a line which relates the quantity demanded (Q) to the selling price (P):
What is the equation of the line?
A P = 25 0.000625Q
B P = 25 1,600Q
C P = 25 16Q
D P = 25 0625Q
2
E
F
G
H
Output
0
25
40,000
0
Price
(P)
Quantity (Q)
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3 An organisation manufactures a single product which has a variable cost of 36 per unit. The organisations total
weekly fixed costs are 81,000 and it has a contribution to sales ratio of 40%. This week it plans to manufacture
and sell 5,000 units.
What is the organisations margin of safety this week (in units)?
A 1,625
B 2,750
C 3,375
D 3,500
4 An organisation has the following total costs at two activity levels:
Activity level (units) 15,000 24,000
Total costs 380,000 470,000
Variable cost per unit is constant in this activity range but there is a step up of
18,000 in the total fixed costs when the activity exceeds 20,000 units.
What are the total costs at an activity level of 18,000 units?
A 404,000
B 410,000
C 422,000
D 428,000
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.
(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 organisations long term objectives.
Which of the statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
6 The following statements relate to spreadsheets:
(i) A spreadsheet is the most suitable software for the storage of large amounts of data.
(ii) A spreadsheet consists of rows, columns and cells.
(iii) A forecast profit and loss account could be prepared using a spreadsheet.
Which of the statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
3 [P.T.O.
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7 An organisations records for last month show the following in respect of one stores item:
Date Receipts Issues Stock
units units units
1st 200
5th 100 100
7th 400 500
19th 190 310
27th 170 140
Last months opening stock was valued at a total of 2,900 and the receipts during
the month were purchased at a cost of 1750 per unit.
The organisation uses the weighted average method of valuation and calculates a
new weighted average after each stores receipt.
What was the total value of the issues last month?
A 7,360
B 7,534
C 7,590
D 7,774
8 Data relating to one particular stores item are as follows:
Average daily issues 70 units
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
Reorder level 1,800 units
What is the maximum stock level (in units) for this stores item?
A 2,950
B 3,100
C 3,250
D 3,800
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
4
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11 A company uses absorption costing with a predetermined hourly fixed overhead absorption rate. The following
situations arose last month:
(i) Actual overhead expenditure was less than the planned expenditure.
(ii) Actual hours worked exceeded planned hours.
Which statement is correct?
A Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be over
absorbed.
B Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be under
absorbed.
C Both situations would cause overheads to be over absorbed.
D Both situations would cause overheads to be under absorbed.
12 A company manufactures two products K1 and K2 in a factory consisting of two cost centres, Y and Z. The following
budgeted data are available:
Cost centre
Y Z
Allocated and apportioned fixed
overhead costs 576,000 288,000
Direct labour hours per unit:
Product K1 5 2
Product K2 3 4
Budgeted output is 12,000 units of each product. Fixed overhead costs are absorbed on a direct labour hour basis.
What is the budgeted fixed overhead cost per unit for product K2?
A 34
B 36
C 38
D 42
13 A factory consists of two production cost centres (P and Q) and two service cost centres (T and V). The total overheads
allocated and apportioned to each cost centre are as follows:
P Q T V
Total overheads 180,000 120,000 128,000 140,000
The work done by the service cost centres can be represented as follows:
P Q T V
Percentage of service cost centre T to: 70% 30%
Percentage of service cost centre V to: 40% 30% 30%
The service cost centre costs are apportioned to production cost centres using a method that fully recognises any work
done by one service cost centre for another.
What are the total overheads for production cost centre P after the reapportionment of all service cost centre
costs?
A 325,600
B 349,600
C 355,000
D 379,000
5 [P.T.O.
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The following information relates to questions 14 and 15:
A company operates a process costing system using the first-in-first-out (FIFO) system of valuation. No losses occur in the
process. The following data relate to last month:
Units
Opening work-in-progress 200 with a total value of 1,530
Input to the process 1,000
Completed production 1,040
Last month the cost per equivalent unit of production was 20 and the degree of completion of the work-in-progress was
40% throughout the month.
14 What was the value (at cost) of last months 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 19,200
B 19,930
C 20,730
D 20,800
16 The following statements relate to the calculation of the regression line y = a + bx using the information on the
formulae sheet at the end of this examination paper:
(i) xy is calculated by multiplying x by y.
(ii) y
2
is not the same as (y)
2
.
(iii) n represents the number of pairs of data items used.
Which statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
17 Which of the following correlation coefficients indicates the weakest relationship between two variables?
A +09
B 06
C 08
D 10
18 The following statements relate to responsibility centres:
(i) The manager of a revenue centre is responsible for sales and costs in a segment of an organisation.
(ii) Return on capital employed is a suitable measure of performance in a profit centre.
(iii) Cost centres are found in manufacturing and service organisations.
Which of the statements, if any, is correct?
A (i) only
B (ii) only
C (iii) only
D None of them.
6
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19 A company operates a standard absorption costing system in which the standard fixed production overhead rate is 9
per hour.
The following data relate to last month:
Budgeted hours 8,000
Standard hours for actual production 8,200
Actual hours worked 8,400
What was the fixed production overhead capacity variance for last month?
A 1,800 Adverse
B 1,800 Favourable
C 3,600 Adverse
D 3,600 Favourable
20 A company operates a standard marginal costing system. Last month the company sold 200 units more than it
planned to sell. The following data relate to last month:
Standard Actual
Selling price per unit 40 38
Variable cost per unit 30 29
What was the favourable sales volume contribution variance last month?
A 1,600
B 1,800
C 2,000
D 2,200
21 Which of the following should be classified as indirect labour?
A Machine operators in a factory producing furniture
B Lawyers in a legal firm
C Maintenance workers in a power generation organisation
D Lorry drivers in a road haulage company.
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
7 [P.T.O.
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24 A company would sell 40,000 units of a product if the unit selling price was set at 10 and these would generate a
total contribution of 160,000. If the unit selling price was reduced to 950 then sales of 44,000 units would result.
Setting unit selling prices of 1050 and 11 would result in sales of 36,000 and 31,000 units respectively.
Which selling price would generate the highest total contribution?
A 950
B 1000
C 1050
D 1100
25 A company which manufactures four components (A, B, C and D), using the same skilled labour, aims to maximise
its profits. The following information is available:
Component
A B C D
Variable production cost per unit () 60 70 75 85
Purchase price per unit from
another supplier () 108 130 120 124
Skilled labour hours per unit
to manufacture 4 6 5 3
As it has insufficient skilled labour hours available to manufacture all the components required, the company will need
to buy some units of one component from the other supplier.
Which component should be purchased from the other supplier?
A Component A
B Component B
C Component C
D Component D
(50 marks)
8
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Section B ALL FIVE questions are compulsory and MUST be attempted.
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
The actual sales and variable costs for last month were as follows:
Sales 2,995,000
Direct material (purchased and used) 532,800
Direct labour (150,000 hours) 1,221,000
Variable production overhead 614,000
Required:
(a) Calculate the following cost variances for last month:
(i) Total direct materials;
(ii) Total variable production overhead;
(iii) Direct labour rate;
(iv) Direct labour efficiency. (4 marks)
(b) Prepare a statement that reconciles the budgeted contribution with the actual contribution for last month
and which incorporates the variances calculated in (a). (6 marks)
(c) Suggest ONE possible explanation of how the two direct labour variances calculated in (a) could be
interrelated. (2 marks)
(12 marks)
9 [P.T.O.
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2 Plaza Ltd aims to maximise profit from the two products (X and Y) which it manufactures and sells. The unit selling
price for product X is 200 and the company can sell all the units that it can produce at this price. The unit selling
price of product Y is 250 but, at this price, the annual demand is limited to 40,000 units. The company holds no
stocks.
The following product cost data are available:
Product X Product Y
per unit per unit
Direct material (5 per kg) 60 40
Direct labour (10 per hour) 50 80
Other variable costs 60 90
Total variable cost 170 210
Next year the supply of direct material will be limited to 540,000 kg and the direct labour hours will be limited to
400,000.
Required:
(a) Determine the optimal production plan in units for next year and calculate the resultant total contribution.
Workings should be clearly shown.
Note: Graph paper is available.
(8 marks)
(b) Explain the term shadow price in the context of scarce resources. State clearly which, if any, of the
companys resources will have a shadow price next year. No calculations are required. (3 marks)
(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
normal loss of 4% of the raw materials input is expected. Losses have a realisable value of 5 per litre. The joint costs
of the process are apportioned to the joint products using the sales value basis. At the end of process K, P1 and P2
can be sold for 25 and 40 per litre respectively.
The following information relates to process K for last month:
Raw materials input 90,000 litres at a total cost of 450,000
Actual loss incurred 4,800 litres
Conversion costs incurred 216,000
Required:
(a) Prepare the process K account for last month in which both the output volumes and values for each joint
product are shown separately. (7 marks)
The company could further process product P1 in process L to create product XP1 at an incremental cost of 3 per
litre input. Process L is an existing process with spare capacity. In process L a normal loss of 8% of input is incurred
which has no value. Product XP1 could be sold for 30 per litre.
Required:
(b) Based on financial considerations only, determine, with supporting calculations, whether product P1 should
be further processed in process L to create product XP1. (3 marks)
(10 marks)
10
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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)
(958)
(70)
30
Required:
(a) Calculate the total relevant costs for the contract in respect of:
(i) Material R; and
(ii) Skilled labour. (5 marks)
(b) Explain the basis you would use to determine if any production overhead costs would be relevant to the
evaluation of the contract. Illustrate your answer with examples of such costs but no calculations are
required. (3 marks)
(8 marks)
12
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13
Formulae Sheet
End of Question Paper
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Answers
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17
Part 1 Examination Paper 1.2
Financial Information for Management June 2007 Answers
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
19 D
20 C
21 C
22 D
23 D
24 C
25 C
1 B
2 A
3 A Contribution per unit (CPU) = (36 060) 040 = 24
Break-even point = (81,000 24) = 3,375 units
Margin of safety = (5,000 3,375) = 1,625 units
4 A Using the high low method:
Variable cost per unit = [(470,000 18,000) 380,000] [24,000 15,000] = 8
Total fixed costs (below 20,000 units) = 380,000 (15,000 8) = 260,000
Total costs for 18,000 units = 260,000 + (18,000 8) = 404,000
5 D
6 C
7 B Weighted average after receipts on 7th = [(2,900 2) + (400 1750)] 500 = 1690
Value of issues = 100 (2,900 200) + [(190 + 170) 1690] = 7,534
8 C Reorder level (Minimum usage in shortest lead time) + Reorder quantity =
1,800 (50 11) + 2,000 = 3,250 units = Maximum stock level
9 D
10 C
Prime cost (300 + 400 + 100) = 800
+ Production overheads (400 8) 40 = 2,000
+ Non-production overheads (15 800) = 1,200
11 C
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12 A Absorption rate (Y) = 576,000 [(5 + 3) 12,000] = 6 per hour
Absorption rate (Z) = 288,000 [(2 + 4) 12,000] = 4 per hour
Fixed overhead cost per unit (K2) = [(3 6) + (4 4)] = 34
13 C Total overheads (T) = 128,000 + (030 140,000) = 170,000
Total overheads (P) = 180,000 + (070 170,000) + (040 140,000) = 355,000
14 B Closing work in progress (WIP) = (200 + 1,000 1,040) = 160 units
WIP valuation = (160 040 20) = 1,280
15 C
Opening WIP value 1,530
+ Completion of opening WIP (200 060 20) 2,400
+ Units started and finished in the month [(1,040 200) 20] 16,800
16 C
17 B
18 C
19 D Fixed production overhead capacity variance:
(Budgeted hours Actual hours worked) Standard fixed overhead rate =
(8,000 8,400) 9 = 3,600 Favourable
20 C 200 units standard contribution per unit = [200 (40 30)] = 2,000 (F)
21 C
22 D
23 D
24 C CPU = (160,000 40,000) = 4 and variable cost per unit = (10 4) = 6
Units Selling price per unit CPU Total contribution
000
44,000 950 350 154
40,000 1000 400 160
36,000 1050 450 162
31,000 1100 500 155
25 C Additional cost of Hours per unit to Additional cost
Component buying in per unit manufacture per hour
A 48 4 12
B 60 6 10
C 45 5 9
D 39 3 13
Lowest additional cost per hour saved is 9 and component C should be bought in.
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Section B
Workings:
Actual sales (25,000 units) 2,995,000
Less: Actual production costs (26,000 units):
Material + Labour + Production overhead 2,367,800
Less: Closing stock at standard cost (1,000 92) (92,000)
(2,275,800)
(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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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 540,000
Labour: 5x + 8y 400,000
Demand (Y): y 40,000
Non-negative x, y 0
The constraints and objective function can be represented as follows:
The feasible region is OABCD. By moving the objective function line (dotted) away from the origin it can be determined that
the optimal point is C (the intersection of the material and labour constraint lines). The values of x and y at this point can be
read from the graph or found by solving the equations for the two constraint lines simultaneously, as follows:
(1) 12x + 8y = 540,000 (Materials)
(2) 5x + 8y = 400,000 (Labour)
Subtracting (2) from (1) gives 7x = 140,000
x = 20,000
Substituting for x in (1) gives (12 20,000) + 8y = 540,000
8y = 300,000
y = 37,500
The optimal production plan for next year is to manufacture and sell 20,000 units of product X and 37,500 units of product
Y. The resultant total contribution is [(20,000 30) + (37,500 40)] = 2,100,000.
Alternative approach (which does not involve drawing a graph):
Each production possibility is evaluated in terms of total contribution, as follows:
(1) Materials. Using all the materials available (540,000 kg), 45,000 units of X or 67,500 units of Y could be produced.
For Y, this exceeds the demand constraint. The contribution from 45,000 units of X is (45,000 30) = 1,350,000.
(2) Labour. Using all the labour hours available (400,000), 80,000 units of X or 50,000 units of Y could be produced.
There is insufficient material available for this quantity of X [see (1)]. In the case of Y, production is restricted to 40,000
units which uses only 320,000 hours, leaving 80,000 hours for the production of 16,000 units of X. The total
contribution from this production mix is [(16,000 30) + (40,000 40)] = 2,080,000.
(3) The other production mix possibility is found by solving the following equations simultaneously: 12x + 8y = 540,000
and 5x + 8y = 400,000 This calculation has been done above under the graphical approach and gives a total
contribution of 2,100,000.
The optimal solution is (3) as it gives the highest total contribution. It involves the production of 20,000 units of product X
and 37,500 units of product Y.
Demand (Y)
Labour
X Units
000 800 450 200
0
400
150
500
675
Y
Units
000
A
B
C
Materials
D
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(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.
3 (a) Process K Account
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:
W1 Valuation of abnormal loss and combined total output of 85,200 litres
(P1 + P2) is at a cost per litre of:
(666,000 18,000) (90,000 3,600) = 750
Abnormal loss valuation: (1,200 750) = 9,000
W2 Total output (85,200) split P1 : P2 in ratio 2 : 1, P1 = 56,800 and P2 = 28,400
Combined total output of P1 + P2 valued at: (85,200 750) = 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 = 125 : 1
Product P1 valuation = (125 225) 639,000 = 355,000
Product P2 valuation = (100 225) 639,000 = 284,000
(b) Assuming 100 litres of product P1:
Revenue from sale of 100 litres of P1 (100 25) 2,500
Revenue from sale of (100 092) litres of XP1 (92 30) 2,760
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
(b) Let x = number of units produced and sold at the break-even point.
At the break-even point: Total contribution = Total fixed costs
61x = 2,074,000
x = 34,000 units
(c) When production units and sales units are not the same in a period, that is when opening and closing stocks are different,
the profits calculated under absorption costing (AC) and marginal costing (MC) will not be the same. The stock valuation
under AC includes a share of the fixed production overhead costs whereas under MC stocks are valued only at variable
production cost. Marco Ltd has no opening stock next year but a closing stock of 5,000 units. Under AC this closing stock
will contain an element of fixed production overhead costs which will be carried forward to the following year. Whereas under
MC all the fixed production overhead costs will have been written off next year against profits and not included in the closing
stock valuation. The effect of this is that next years MC profit (366,000) will be lower than the AC profit (530,000).
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 25 108) = 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) = 25 hours of the skilled labour.
So the relevant cost of 600 hours of skilled labour will be:
(600 10) + [600 (30 25)] = 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.
22
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Part 1 Examination Paper 1.2
Financial Information for Management June 2007 Marking Scheme
Marks
Section A
Each of the 25 questions in this section is worth 2 marks 50
Section B
1 (a) (i) to (iv) Variances (1 mark per variance) 4
(b) Budgeted contribution 1
Sales price variance 1
Variances from (a) 1
Actual contribution 2
Layout/presentation of statement 1
6
(c) Explanation 2
12
11
10
23
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Marks
5 (a) Relevant cost material R 2
Relevant cost skilled labour 3
5
(b) Explanation of relevant cost concept 1
Application to variable and fixed production overhead costs 1
Examples 1
3
24
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