Financial information for managemetn paper 1 2 2006 q2

4 The following production and total cost information relates to a single product organisation for the last three months: The variable cost per unit is constant up to a production level

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

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

0 Hours 0 Hours

0 Hours 0 Hours

£

P

S

Output 0

A

B

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 company’s weekly break-even point is sales of £18,000

What would be the profit in a week when 1,500 units are sold?

4 The following production and total cost information relates to a single product organisation for the last three months:

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?

5 Which of the following is NOT a feasible value for the correlation coefficient?

B + 0·6

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

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?

stockholding cost

B Decrease No effect

C Increase Increase

D Decrease Decrease

9 A company uses standard absorption costing The following data relate to last month:

Sales and production (units) 1,000 900

Standard Actual

What was the adverse sales volume profit variance last month?

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 organisation’s stock records show the following transactions for a specific item during last month:

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

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

The work done by the service cost centres can be represented as follows:

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)

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?

18 All of a company’s skilled labour, which is paid £8 per hour, is fully employed manufacturing a product to which the

following data refer:

£ per unit £ per unit

Less Variable costs:

–––

(35) –––

–––

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?

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?

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

Total number of units completed 14,000

£ Costs arising:

20 What was the total number of units input during last period?

21 What was the value of the closing work in progress for last period?

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 – 0·008Q

Marginal revenue (£ per unit) = 40 – 0·016Q

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?

C £24

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)

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 Xunits

’000

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)

Other costs incurred:

Direct expenses 1£54,000

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

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

(c) In the context of process G in Corcoran Ltd, explain the difference between ‘direct expenses’ and ‘production

(12 marks)

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:

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 company’s total contribution from

(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 4·8 kg of material H at £7·50 per kg Material H is used only in the manufacture of product MS

The following information relates to last month:

Material H:

Issued into production 36,500 kg

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)

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:

Total maintenance

Production units

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:

Σ (total maintenance cost x production units) = £61,250 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)

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:

Less Variable production cost of sales:

––––

312

––––

Less Fixed overhead costs:

––––

––––

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,

(10 marks)

Formulae Sheet

End of Question Paper