Financial information for managemetn paper 1 2 2004 a1

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.. c i Direct expe

Answers

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

3 B Contribution per unit = 15 x 0·4 = £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

7 C EOQ = {[ 2 x 20 x (4 x 20,000) ] ÷ [0·06 x 25]}0·5= 1,461 units

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 = 0·98 x Budgeted overhead

Budgeted overhead – (0·98 x Budgeted overhead) = 1,250

Budgeted overhead = 1,250 ÷ 0·02 = 62,500

Actual overhead = 62,500 – 1,250 = £61,250

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 + (0·50 x 18,000) + 0·30 [30,000 + (0·10 x 18,000)]

13 B Cost centre G= £58,540

14 B

15 C

16 B

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260 Non-production overhead (0·60 x 120) 72

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18 C Opportunity cost per skilled labour hour = [25 ÷ (20 ÷ 8)] = £10

Skilled labour cost (90 x 8) 1,720

Opportunity cost (90 x 10) 1,900

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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)] = £3·40

Conversion:

Cost per equivalent unit = [193,170 ÷ (12,000 + 0·40 x 2,000 + 0·30 x 3,000)]

Cost per equivalent unit= 193,170 ÷ 13,700 = £14·10

Closing stock valuation = (3,000 x 3·40) + (900 x 14·1) = £22,890

22 D

23 C Profits maximised when: Marginal revenue (MR) = Marginal cost (MC)

MC = 8

MR = (40 – 0·016Q)

MR = MC 40 – 0·016Q = 8,000

MR = MC 40 – 0·016 Q = 2,000

When Q = 2,000 Price = 40 – (0·008 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

Section B

Production Normal loss (W2) 3,000 15,000

Abnormal gain

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

W3Split P1 : P2 in ratio 5 : 3

W3P1 = (5 ÷ 8) x 58,000 = 36,250 litres

W3P2 = (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

Revenue if sold at point of split-off without

Revenue (from PP1) if sold after

further processing (100 x 90%) x 26 2,340

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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:

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15,150

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(b) Calculation of the contribution per machining hour for each product:

Optimal production plan and resultant contribution:

Product Units Machine hours used Contribution (£)

Actual quantity purchased at actual price 294,000

6,000 F Price Actual quantity purchased at standard price 300,000

(40,000 kg at 7·50 )

Actual quantity used at standard price 273,750

(36,500 kg at 7·50 ) 14,550 A Usage

Standard quantity for actual production at 259,200

standard price [(7,200 units x 4·8) at 7·50]

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

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(8,550) A

Less: Increase in stock at standard cost

Less:[(40,000 – 36,500) x 7·50] (26,250)

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(c) (i) Price variance (£6,000 F)

Cheaper materials, but with a lower quality than standard, may have been purchased because the normal supplier was unable to deliver

Usage variance (£14,550 A)

The lower quality materials purchased may have required higher than standard usage per unit in production

(ii) The purchase price variance should be reported to the purchasing (procurement) manager as this is the person within the organisation who is responsible for buying the materials This manager would be able to take any appropriate action

4 (a) In the linear regression equation y = a + bx:

y = maintenance cost in £’000 (dependent variable), and

x = production units in ’000 (independent variable)

Σ y = (265 + 302 + 222 + 240 + 362 + 295 + 404 + 400) = 2,490

Σ x = (20 + 24 + 16 + 18 + 26 + 22 + 32 + 30) = 188

n = 8

Using formulae provided in the examination:

b = [(8 x 61,250) – (188 x 2,490)] ÷ [ (8 x 4,640) – (188 x 188)]

b= 12·32

a = (2,490 ÷ 8) – (12·32 x 188 ÷ 8) = 21·73

Linear equation is:

y = 21·73 + 12·32x where x and y are in ’000

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(b) Predicted maintenance cost for next quarter (44,000 units) is:

21·730 + (12·320 x 44) = 563·81 or £563,810

The major reservation about this prediction is that 44,000 units of production is well outside the range of data used to establish the linear regression equation The data related to a range 16,000 to 32,000 units per quarter The behaviour of costs outside this range may be quite different For example there may be a step in the fixed costs

5 (a) Budgeted profit statement (absorption costing):

Less: Production cost of sales:

Less:Opening stock (3,000 x 28) [W1] 84

Less:Production (22,000 x 28) 616

Less:Closing stock (1,000 x 28) (28)

–––– (672)

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192

Less: Under absorption of fixed

Less:production overhead cost [W2]

Less:(3,000 x 5) (15)

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Gross profit 177

Less: Non-production costs:

Less:Variable selling cost 60

Less:Fixed selling and admin costs 40

––– (100)

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Net profit 77

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Workings: £

W1 Variable production cost per unit 23

W1[For example, from opening stock under

W1marginal costing: (69,000 ÷ 3,000)]

W1Fixed production cost per unit 5

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W2 Under absorption (25,000 – 22,000) = 3,000 units

(b) Reconciliation:

£’000

Add: Decrease in stocks x fixed production overhead

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(c) Marginal costing is more relevant for short-term decision-making as it separates fixed and variable costs In the short-term fixed costs are more likely to remain unchanged and therefore would not be relevant

Part 1 Examination – Paper 1.2

Marks

Section A

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Section B

Abnormal gain 11/2

Normal loss 11/2

Joint products 2

––– 7 (b) Additional revenue 11/2 Additional cost 1

Conclusion 1/2 ––– 3 (c) Direct expenses 1

Production overheads 1

––– 2 ––– 12 ––– 2 (a) Required hours 11/2 Shortfall 1/2 ––– 2 (b) Contribution per unit 11/2 Contribution per machining hour 11/2 Ranking 1/2 Optimal plan 11/2 Resultant contribution 1

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6 ––– 8 ––– 3 (a) Price variance 11/2 Usage variance 11/2 –––

3 (b) Variances 1

Change in stock 1

Layout/presentation of statement 1

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3 (c) (i) Causes (1 mark for each) 2

(ii) Purchasing manager 1

Responsibility for buying 1

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4 –––

10

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4 (a) Σy 1

Σx 1

Calculation of ‘b’ 21/2

Calculation of ‘a’ 11/2

Fixed/variable costs 1

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7

(b) Total cost for 44,000 units 11/2

Reservation 11/2

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3 –––

10

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5 (a) Sales 1/2

Cost of sales 3

Under absorption of overhead 11/2

Variable selling cost 1/2

Fixed selling and admin costs 1/2

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6

(b) Layout/presentation of statement 1

Change in stock and its evaluation 1

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2

(c) Marginal costing 1

Separation of fixed and variable costs 1/2

Fixed costs not relevant to short term decisions 1/2

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2 –––

10

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