Answers Part Examination – Paper 1.2 Financial Information for Management December 2006 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 D D A D B C C A B C B A C D C D D A D A D D A D A D D A Variable cost per unit = [(274,000 – 250,000) ÷ (15,000 – 12,000)] = £8 Total fixed cost above 11,000 units = [274,000 – (15,000 x 8)] = £154,000 Total fixed cost below 11,000 units = (10 ÷ 11) x 154,000 = £140,000 Total cost for 10,000 units = [(10,000 x 8) + 140,000] = £220,000 D Contribution per unit = (24 ÷ 0·60 x 0·40) = £16 Breakeven point = (720,000 ÷ 16) = 45,000 units B C C A b = [(5 x 23,091) – (129 x 890)] ÷ [(5 x 3,433) – (1292)] = 1·231 a = (890 ÷ 5) – [(1·231 x 129) ÷ 5] = 146 (nearest whole number) 15 B 10 C Closing stock (units) = 300 + 400 + 500 – 600 – 300 = 300 Valuation = (100 x11) + (200 x 13) = £3,700 11 B (3 x £8) + [(4 – 3) x 0·75 x £8] = £30 12 A 13 C 14 D 15 C (60 + 40 + 20) + [(40 ÷ 8) x 16] + (0·60 x 120) = £272 16 D £ Sales value after further processing = (9,000 x 0·9) x £12 = 97,200 Sales value without further processing = (9,000 x £10) 90,000 ––––––– Increase in sales revenue 7,200 Less: Further processing cost = (9,000 x £1) (9,000) ––––––– Decrease in profit by further processing £1,800 ––––––– 17 D [(45,600 x 4) – 173,280] = £9,120 Favourable 18 A £ 182,400 (15,200) –––––––– 167,200 –––––––– 3,344 Actual usage at standard cost (45,600 x 4) Less: Adverse usage variance Standard cost for actual production Actual production (units) = (167,200 ÷ 50) = 19 D Opportunity cost now + disposal cost at end of contract (2,000 + 800) = £2,800 20 A (800 – 450) x [8 + (14 ÷ 7)] = £3,500 21 D Marginal cost (MC) = 15 Profit maximised when MC = MR 15 = 50 – 0·05Q Q = 700 P = 50 – (0·025 x 700) = £32·50 16 22 D When P = 20: 20 = 50 – 0·025Q And Q = 1,200 Total contribution = 1,200 x (20 – 15) = £6,000 23 A Total fixed costs for shop S Less: Apportioned general costs (200 x 0.60) ÷ (500 ÷ 1,500) Specific avoidable fixed costs for shop S If shop S closed down net contribution lost (60,000 – 30,000) Revised budgeted profit for company (80,000 – 30,000) £ 70,000 (40,000) ––––––– 30,000 ––––––– 30,000 £50,000 24 D 25 A Section B (a) Sales price variance: Actual sales at standard selling price (34,000 x £22) Actual sales at actual selling price £ 748,000 731,000 –––––––– 17,000 A –––––––– Sales price variance Sales volume contribution variance: Budgeted sales (units) Actual sales (units) 32,000 34,000 –––––––– 2,000 F x £13 £26,000 F –––––––– Volume variance (units) At standard contribution per unit £(22 – 9) Sales volume contribution variance (b) The actual selling price (£21·50) was lower than the standard selling price (£22·00) – 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) Less: Budgeted profit (marginal costing) Budgeted fixed costs Less: Budgeted non-production fixed costs (1,152,000 ÷ 12) Budgeted fixed production costs £ 416,000 (200,000) ––––––––– 216,000 (96,000) ––––––––– 120,000 ––––––––– Standard fixed production cost per unit (£120,000 ÷ 30,000) Calculation of absorption costing profit: Marginal costing profit Less: Decrease in stocks at standard fixed production cost per unit [(32,000 – 30,000) x £4] £4 £ 200,000 (8,000) ––––––––– 192,000 ––––––––– Absorption costing profit Alternatively: Budgeted absorption costing manufacturing profit 32,000 x (13 – 4) Less: budgeted non-production fixed costs £ 288,000 (96,000) ––––––––– 192,000 ––––––––– Absorption costing profit 17 (a) (i) Using the formula given: EOQ = [(2 x 120 x 48,000) ÷ (0·10 x 80)]0·5 = 1,200 units (ii) £ 3,840,000 4,800 4,800 –––––––––– 3,849,600 –––––––––– Purchasing cost (48,000 x £80) Ordering cost (48,000 ÷ 1,200) x £120 Holding costs [(1,200 ÷ 2) x £80 x 0·10] Total cost (b) Purchasing cost (48,000 x £80 x 0·99) Ordering cost (48,000 ÷ 2,000) x £120 Holding costs [(2,000 ÷ 2) x £80 x 0·99 x 0·10] 3,801,600 2,880 7,920 –––––––––– 3,812,400 –––––––––– Total cost Annual total saving (3,849,600 – 3,812,400) (c) Insurance costs of stock and warehouse Rent of warehouse Rates of warehouse Interest on capital tied up in stock (a) Hours required [(5 + + + 8) x 2,000] Hours available Shortfall in hours (b) £37,200 52,000 35,000 17,000 E £/unit 32 48 ––– 16 ––– F £/unit 27 51 ––– 24 ––– G £/unit 34 55 ––– 21 ––– H £/unit 35 63 ––– 28 ––– Extra cost per machine hour saved 3·2 4·0 3·0 3·5 Ranking for buying in 2nd 4th 1st 3rd Variable production cost Buy-in price Extra cost of buying in Machine hours per unit Optimal plan for buying in components: Ranking Component Units Machine hours saved 1st G 2,000 14,000 2nd E 600 3,000 (balancing figure) ––––––– Total shortfall of hours [as per (a)] 17,000 ––––––– (c) (1) The quality of the components supplied by Sergeant Ltd (2) The loss of control over all aspects of production and delivery of the components (3) The possibility of increasing the number of machine hours available next month by working overtime (a) Process G Account Opening WIP Costs arising: Direct materials Litres 2,000 12,500 Conversion £ 24,600 99,600 Litres Output (W4): Ex opening WIP Started and finished in month 155,250 ––––––– 14,500 ––––––– –––––––– 279,450 –––––––– Normal loss (0·08 x 12,500) Abnormal loss (W2) Closing WIP (W3) 18 £ 2,000 8,000 ––––––– 10,000 221,520 1,000 500 3,000 ––––––– 14,500 ––––––– 3,000 11,100 43,830 –––––––– 279,450 –––––––– Workings: W1 Cost per equivalent litre (EL): Completion of opening WIP Units started and finished in month Abnormal loss Closing WIP Work done last month Costs arising last month Less: Scrap value of normal loss Cost per EL Direct materials EL – 8,000 500 3,000 ––––––– 11,500 ––––––– £ 99,600 (3,000) ––––––– 96,600 ––––––– Conversion EL 1,400 8,000 500 1,350 ––––––– 11,250 ––––––– £ 155,250 – ––––––– 155,250 ––––––– £8·40 £13·80 W2 Valuation of abnormal loss: 500 x (8·40 + 13·80) = £11,100 W3 Valuation of closing WIP: (3,000 x £8·40) + (1,350 x £13·80) = £43,830 W4 Valuation of output: Opening WIP value Completion of opening WIP (1,400 x £13·80) Units started and finished in month [8,000 x £(8·40 + 13·80)] (b) Type of organisation Hospital Haulage transport Hotel Rail transport £ 24,600 19,320 177,600 –––––––– 221,520 –––––––– Unit cost measure Inpatient day Tonne mile Occupied room night Passenger mile Note: only two examples were required and other answers were acceptable (a) Cost centre Allocated and apportioned overheads Reapportionment of S1 (30:65:15) Reapportionment of S2 (5:3) Machine hours (P1) Direct labour hours (P2) Absorption rate: Per machine hour Per direct labour hour (b) P1 £ 477,550 36,000 71,250 –––––––– 584,800 –––––––– P2 £ 404,250 78,000 42,750 –––––––– 525,000 –––––––– S1 £ 132,000 (132,000) – –––––––– – –––––––– S2 £ 96,000 18,000 (114,000) –––––––– – –––––––– 68,000 14,000 £8·60 £37·50 Allocated overheads are specifically traceable to cost centres Apportioned overheads are those for which only a total factorywide figure is available Therefore in order to get such overheads related to individual cost centres, the total has to be apportioned on a logical but arbitrary basis to the cost centres For example the total factory rates could be apportioned on the basis of the floor area occupied by each cost centre Electric power can be allocated if each cost centre is separately metered Thus allowing an accurate measure of the amount of power used in each cost centre Otherwise if there is only one meter for the whole factory, then the total cost of electric power would need to be apportioned to the factory cost centres For example by using the kilowatt hour rating of the machines and equipment in the various cost centres 19 Part Examination – Paper 1.2 Financial Information for Management December 2006 Marking Scheme Marks Section A Each of the 25 questions in this section is worth marks 50 ––– Section B (a) Price variance Volume variance 2 ––– (b) An adverse and a favourable variance Possible interrelationship explained ––– (c) Budgeted fixed production costs Fixed production cost per unit Change in stock level effect Absorption costing profit 1 1 ––– ––– 11 ––– (a) (i) (ii) 11/2 1/ 1 ––– Economic order quantity Purchasing cost Ordering cost Holding cost (b) 1/ 1 1/ ––– Purchasing cost Ordering cost Holding cost Annual saving 3 (c) 1/ (a) Hours required Hours available Shortfall mark for each different example ––– ––– 1/ 1/ ––– (b) Extra cost per unit of buying in Extra cost per machine hour Optimal buying in plan 1 ––– (c) mark per factor ––– ––– 21 Marks (a) Opening WIP Costs arising Output Normal loss Abnormal loss Closing WIP 1 2 ––– 10 (b) 1/ 1/ mark for each type of organisation mark for each unit cost measure 1 ––– ––– 12 ––– (a) Reapportionment of S1 costs Reapportionment of S2 costs Machine hour rate Direct labour hour rate 2 1 ––– (b) Allocation explained Apportionment explained Use, or not, of meters 1 ––– ––– ––– 22 ...Part Examination – Paper 1. 2 Financial Information for Management December 20 06 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 D D A D B C C A B C B A C D C D... 3,433) – ( 12 92) ] = 1 2 31 a = (890 ÷ 5) – [ (1 2 31 x 12 9) ÷ 5] = 14 6 (nearest whole number) 15 B 10 C Closing stock (units) = 300 + 400 + 500 – 600 – 300 = 300 Valuation = (10 0 x 11) + (20 0 x 13 ) =... unit = [ (27 4,000 – 25 0,000) ÷ (15 ,000 – 12 ,000)] = £8 Total fixed cost above 11 ,000 units = [27 4,000 – (15 ,000 x 8)] = 15 4,000 Total fixed cost below 11 ,000 units = (10 ÷ 11 ) x 15 4,000 = 14 0,000