Financial information for managemetn paper 1 2 2005 answers

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

Answers

Part 1 Examination – Paper 1.2

Section A

10 B

11 A

12 B

13 C

14 D

15 A

16 C

17 D

18 A

19 A

20 C

21 D

22 D

23 D

24 D

25 B

2 C 1,700 units – Breakeven level units (1,200) = 500 units

3 C Contribution per unit = 22 ÷ 0·55 ×0·45 = £18

Breakeven point = 198,000 ÷ 18 = 11,000

4 C Variable cost per unit = [(170,000 – 5,000) – 140,000)] ÷ (22,000 –17,000) = £5

Total fixed cost above 18,000 units = 170,000 – (22,000 ×5) = £60,000

Total cost of 20,000 units = (20,000 ×5) + 60,000 = £160,000

7 C Weighted average after 13th = [(200 ×9,300 ÷ 300) + (600 ×33)] ÷ (200 + 600) = £32·50

Closing stock valuation = 300 ×32·50 = £9,750

8 C EOQ = [(2 ×160 ×9,000) ÷ (0·08 ×40)]0·5= 949

10 B

17

11 A Absorption rate = 247,500 ÷ 30,000 = £8·25

Absorbed cost = 28,000 ×8·25 = £231,000

12 B Marginal costing profit = 36,000 – (2,000 ×63,000 ÷ 14,000) = £27,000

13 C Process F: expected output = 0·92 ×65,000 = 59,800

∴abnormal loss Process G: expected output = 0·95 ×37,500 = 35,625

∴abnormal gain

Actual hours at standard rate (27,000 ×8·50) 229,500

Standard hours of production at standard rate 253,980

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∴Labour efficiency variance is 24,480 Favourable

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Actual sales at standard price (4,650 ×6) 27,900

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Adverse sales volume contribution variance:

16 C

17 D

18 A

19 A Coefficient of determination = r2= 0·6 ×0·6 = 0·36 = 36%

20 C

21 D 4,000 ×[(20,000 ÷ 2,500) ×1·025] = £32,800

22 D Production (units):

J: (6,000 – 100 + 300) = 6,200

K: (4,000 – 400 + 200) = 3,800

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10,000 ––––––

Joint costs apportioned to J: (6,200 ÷ 10,000) ×110,000 = £68,200

23 D Material required to meet maximum demand:

6,000 ×(13 ÷ 4) + 8,000 ×(19 ÷ 4) = 57,500 litres

∴Material is a limiting factor

Labour required to meet maximum demand:

6,000 ×(35 ÷ 7) + 8,000 ×(28 ÷ 7) = 62,000 hours

∴

24 D Profits maximised when: marginal revenue (MR) = marginal cost (MC)

MR = 50 – 0·05Q

MC = 15

P = 50 – (0·025 ×700) = £32·50

25 B When P = 20 then 20 = 50 – 0·025Q

£ Total revenue (P ×Q) = 1,200 ×20 = 24,000

Less total costs 2,000 + (15 ×1,200) = 20,000

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Section B

1 (a) Using the high-low method:

Working (W1)

Full capacity = 102,000 ÷ 0·85 = 120,000

(i) Variable cost per unit = 81,000 ÷ 18,000 = £4·50

(ii) Total fixed costs = 700,000 – (120,000 ×4·50) = £160,000

(iii) Selling price per unit = variable cost per unit ÷ (1·00 – 0·40)

= 4·50 ÷ 0·6 = £7·50

(iv) Contribution per unit = (7·50 – 4·50) = £3·00

Less variable cost (4·50)

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£ Contribution from 15,000 units (15,000 ×1·50) 22,500

Less opportunity cost (15,000 ÷ 6) ×£3·00 (7,500)

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Net increase in contribution (and profit) 15,000

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(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

Workings:

W1 Cost per litre (365,000 + 256,000) ÷ (50,000 ×0·92) = £13·50

Output value = 47,000 ×13·50 = £634,500

W2 Abnormal gain = 47,000 – (50,000 ×0·92) = 1,000

Valuation (1,000 ×13·50) = £13,500

19

(b) Workings:

EL

Started and finished within the month (50,000 – 5,000) 45,000

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49,000 –––––––

∴Cost per EL = 392,000 ÷ 49,000 = £8

(i) Output = 80,000 + (45,000 ×13·50) + (48,000 ×8·00) = £1,071,500

(ii) Closing WIP = (2,000 ×13·50) + (1,000 ×8·00) = £35,000

(c) The disposal costs would be debited to the process account Alternatively, they could be shown as a negative value on the credit side of the account

3 Let X = the number of units of product X

and Y = the number of units of product Y

Contribution per unit:

£ per unit £ per unit

Less variable cost (45) (13)

Objective function:

Total contribution = 15X + 12Y

Constraints:

Material (£5 per kg) 3X + Y ≤ 4,200

Labour (£6 per hour) 4X + 0·5Y ≤ 3,000

Using a graphical approach, the constraints (solid lines) and the objective function (dotted line) can be shown as follows:

Note: the objective function line has been shown on the above graph for a total contribution of £9,000 (assumed) Thus 15X + 12Y = 9,000

Therefore when X = 0, Y = (9,000 ÷ 12) = 750

and when Y = 0, X = (9,000 ÷ 15) = 600

The ‘feasible region’ is the area OABC shown on the graph If the objective function line is moved away from the origin (at the same gradient) the last point it reaches in the feasible region is point A which must therefore be the optimal point

B A

C 0

750

600

4,200

6,000

Y

units

X units Material

Labour

An alternative approach would be to calculate the total contributions at points A, B and C shown on the graph and select the point giving the highest total contribution, as follows:

Point A

Total contribution from 4,200 units of Y is (4,200 ×£12) = £50,400

Point B

To find the units at this point, solve the following equations simultaneously:

4X + 0·5Y = 3,000 … (2)

Substituting into (2) 4X + 0·5(4,200 – 3X) = 3,000

Substituting into (1) (3 ×360) + Y = 4,200

Total contribution from 360 units of X and 3,120 units of Y is (360 ×£15) + (3,120 ×£12) = £42,840

Point C

Total contribution from 750 units of X is (750 ×£15) = £11,250

Point A gives the highest contribution (£50,400 from producing 4,200 units of Y and no units of X) and is therefore the optimal solution (as before)

Standard cost of actual production [12,500 ×(11 + 24 + 18)] 662,500

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Workings:

5,200 A Standard cost of actual production 137,500

W2

8,700 F Standard cost of actual production 300,000

W3

5,800 A Standard cost of actual production 225,000

Expenditure variance:

14,800 A

Volume variance:

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

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

Direct labour:

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45 Production overheads:

Cost centre T: (35 ÷ 60) ×48 28

Cost centre W: (21 ÷ 6) ×12 42

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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

Part 1 Examination – Paper 1.2

Marks

Section A

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Section B

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23

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