Financial information for managemetn paper 1 2 2003 p2 answer

1 a Fixed Production Overhead Expenditure variance£ –––––––––– This variance indicates that the company have spent more than originally budgeted.. Fixed Production Overhead Capacity Vari

Answers

Part 1 Examination – Paper 1.2

Less: fixed costs in opening stock

Add: fixed costs in closing stock

––––––––

£74,550 ––––––––

2 B £315 ––––– x 117 = £235

157

5 B Price variance

Should cost

–––––––––––––

£3,500 adverse –––––––––––––

6 A Usage variance

Should use

–––––––––

1,000 kg

x £2·50

£2,500 favourable ––––––––––––––––

Add: closing stock

––––––––––

Good production = 90% of total production, therefore

Total production = –––––– 9,900 = 11,000 units

90%

8 B Total Contribution = (£10 – £6) x 250,000 = £1,000,000

Fixed Overheads = 200,000 x £2 = £400,000

Profit = Total contribution less fixed costs

= £1,000,000 – £400,000 = £600,000

10 A

Process

11 C

12 D

13 D 150,000 + 75,000

–––––––––––––––––– = £300,000 Breakeven revenue

0·75 300,000 ––––––– = 30,000 units

£10

14 A

replacement cost higher of

£105,000

16 A

17 C

18 A Residual income for the division = £120,000 – (£650,000 x 18%)

Residual income = £3,000

19 A

20 B Total material required =

(2,000 x36––) + (1,500 x24––) + (4,000 x15––) = 28,000 kg

21 C Total cost of having stock =

(p x D) + (––D x C o ) + (C hx––Q)

= (40 x 20,00) + (20,000 –––––– –––x 25) + (4 x500)

500 2

= 800,000 + 1,000 + 1,000 = 802,000

22 D

60

⋅







–

x

a

= ∑ − ∑

n

200

5 75

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

= (0·8 x £2 million )+(0·2 x £1 million) – £1 million = £0·8 million

Expected value of the upgrade

= (0·7 x £2 million) + (0·3 x £1 million) – cost of upgrade

So,

New build = £0·8 million

Upgrade = £1·7 million – costs

Equating the two expressions:

£0·8 million = £1·7 million – costs, giving

Costs = £1·7 million – £0·8 million = £0·9 million = £900,000

25 D

1 (a) Fixed Production Overhead Expenditure variance

£

––––––––––

This variance indicates that the company have spent more than originally budgeted

Fixed Production Overhead Volume variance

Labour hours

––––––––

x £5 (W1)

= £300,000 favourable

W1 FOAR =–––––––––––––£2,500,000 = £5

500,000 hours

This variance indicates that the company has used more labour hours than originally budgeted

Or based on units

Units

–––––––

x £40 (W2)

= £300,000 favourable

W2 FOAR =–––––––––––––£2,500,000 = £40

62,500 units

This variance indicates that the company has produced more units than originally budgeted

(b) Fixed Production Overhead Efficiency Variance

Hours

––––––––

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

––––––––

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

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

(b) Joint costs to be allocated = (£9·20 x 10,000) – 1,000 x £2

= £92,000 – £2,000

= £90,000

unit

150,000

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

≤

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

a units

’000 1

0

1

2

3

4

5

6

7

8

9

10

11

12

13

b units

’000

5a + 3b = 36,000

a = 1,000

3a + 4b = 30,000 lso-contribution

line

5 Investment 1

–––––– 7·355 –––––– Investment 2

–––––– 10 –––––– Investment 3

–––––– 7·63 –––––– Since investment 2 has the highest net present value it would be the preferred investment

Part 1 Examination – Paper 1.2

Marks

–––

50

–––

1 (a) Fixed production overhead expenditure variance £ 1/2

Fixed production overhead expenditure variance adverse 1/2

Fixed production overhead volume variance £ 1/2

Fixed production overhead volume variance favourable 1/2

–––

5

–––

5 –––

10

–––

2 (a) Calculating the total cost of output to include:

–––

4

(b) Calculating joint costs less by-product proceeds 1 Calculating number of units for A,B and C from output 1

Total NRV calculation 1/2 mark each A and B 1 Joint cost allocation 1/2 mark each A and B 1

–––

6 –––

10

–––

Explanation of the differing treatments of overheads:

–––

6

(b) Explanation of difference including the use of the term cost driver 2

–––

4 –––

10

–––

–––

4

–––

6 –––

10

–––

5 Investment 1

Calculation of present value 1/2 per line in table 11/2 Investment 2

Calculation of present value of the perpetuity 11/2 Investment 3

Calculation of present value 1/2 per line in table 3

–––

10

–––