Financial information for managemetn paper 1 2 2003 p2

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PART 1
FRIDAY 6 JUNE 2003

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, Present Value and Annuity Tables are on
pages 13, 14 and 15

Paper 1.2

Financial
Information for
Management

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 company has established a marginal costing profit of £72,300. Opening stock was 300 units and closing stock is
750 units. The fixed production overhead absorption rate has been calculated as £5/unit.
What was the profit under absorption costing?
A
B
C
D

2

£67,050
£70,050
£74,550
£77,550

The following data relates to a wage index for a company:
Year
1997
2002

Wages per week
£275
£315

Index
117
157

What were the 2002 weekly wages at 1997 prices (to the nearest £)?

A
B
C
D

3

Which of the following is correct?
A
B
C
D

4

£201
£235
£275
£369

Qualitative data is numerical information only.
Information can only be extracted from external sources.
Operational information gives details of long-term plans only.
Data can be either discrete or continuous.

Which of the following are purposes of a budget?
(i)
(ii)
(iii)
(iv)

establishing strategic options
motivating management
establishing long term objectives
planning operations

A
B
C
D

(i) and (iii) only
(i) and (iv) only
(ii) and (iv) only
(ii), (iii) and (iv) only

2

The following information relates to questions 5 and 6:
A company has a budgeted material cost of £125,000 for the production of 25,000 units per month. Each unit is
budgeted to use 2 kg of material. The standard cost of material is £2·50 per kg.
Actual materials in the month cost £136,000 for 27,000 units and 53,000 kg were purchased and used.
5

What was the adverse material price variance?
A
B
C
D

6

What was the favourable material usage variance?
A
B
C
D

7

£1,000
£3,500
£7,500
£11,000

£2,500
£4,000
£7,500
£10,000

A company is preparing a production budget for the next year. The following information is relevant:
Budgeted Sales
Opening stock
Closing stock

10,000 units
600 units
5% of budgeted sales

The production process is such that 10% of the units produced are rejected.
What is the number of units required to be produced to meet demand?
A
B
C
D

8

8,900 units
9,900 units
10,900 units
11,000 units

A company produces and sells a single product whose variable cost is £6 per unit.
Fixed costs have been absorbed over the normal level of activity of 200,000 units and have been calculated as £2
per unit.
The current selling price is £10 per unit.
How much profit is made under marginal costing if the company sells 250,000 units?
A
B
C
D

9

£500,000
£600,000
£900,000
£1,000,000

Which of the following would be considered to be a pricing strategy?
(i) target costing
(ii) price skimming
(iii) discrimination pricing
A
B
C
D

(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
3

[P.T.O.

10 A company uses process costing to value its output and all materials are input at the start of the process.
The following information relates to the process for one month:
Input
Opening stock
Losses
Closing stock

3,000 units
400 units
10% of input is expected to be lost
200 units

How many good units were output from the process if actual losses were 400 units?
A
B
C
D

2,800
2,900
3,000
3,200

units
units
units
units

11 James wants to invest his pocket money. He receives £5 a month which he puts into a savings account earning
compound interest at 0·5% per month.
If James saves his money, how much will be in the account in five years’ time (to the nearest £)?
A
B
C
D

£303
£338
£349
£354

12 Which of the following is correct with regard to stocks?
(i) Stock-outs arise when too little stock is held.
(ii) Safety stocks are the level of units maintained in case there is unexpected demand.
(iii) A reorder level can be established by looking at the maximum usage and the maximum lead-time.
A
B
C
D

(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)

13 A company wishes to make a profit of £150,000. It has fixed costs of £75,000 with a C/S ratio of 0·75 and a selling
price of £10 per unit.
How many units would the company need to sell in order to achieve the required level of profit?
A
B
C
D

10,000
15,000
22,500
30,000

units
units
units

units

4

14 A company uses regression analysis to establish a total cost equation for budgeting purposes.
Data for the past four months is as follows:
Month
1
2
3
4

Total cost
£’000
57·5
37·5
45·0
60·0
––––––
200·00
––––––

Quantity Produced
’000
1·25
1·00
1·50
2·00
–––––

5·75
–––––

The gradient of the regression line is 17·14.
What is the value of a?
A
B
C
D

25·36
48·56
74·64
101·45

15 A company is considering its options with regard to a machine which cost £60,000 four years ago.
If sold the machine would generate scrap proceeds of £75,000. If kept, this machine would generate net income of
£90,000.
The current replacement cost for this machine is £105,000.
What is the deprival value of the machine?
A
B
C
D

£105,000
£90,000
£75,000
£60,000

5

[P.T.O.

16
Net
Present
Value

0
5%

10%

15%

Interest rate

Which of the following is correct with regard to the above graph?
(i) The IRR is 10%.
(ii) The NPV at 15% is positive.
(iii) The project’s total inflows exceed the total outflows.
A
B
C
D

(i) and (ii) only
(i) and (iii) only

(ii) and (iii) only
(i), (ii) and (iii)

17 What is the economic batch quantity used to establish?
Optimal
A reorder quantity
B reorder level
C cumulative production quantity
D stock level for production

6

18 A company wishes to evaluate a division which has the following profit and loss account and balance sheet:
Profit and Loss account
Sales

£’000
500
–––––
200
(80)
–––––
120
–––––
–––––

Gross profit
Other costs
Net profit

Balance Sheet
Fixed assets
Current assets
Current liabilities

£’000
750
350
(450)
–––––
650
–––––
–––––

Net assets

What is the residual income for the division if the company has a cost of capital of 18%?
A
B
C
D

£3,000
£21,600
£83,000
£117,000

19 Which of the following is correct when considering the allocation, apportionment and reapportionment of
overheads in an absorption costing situation?
A

B
C
D

Only production related costs should be considered.
Allocation is the situation where part of an overhead is assigned to a cost centre.
Costs may only be reapportioned from production centres to service centres.
Any overheads assigned to a single department should be ignored.

20 A company uses limiting factor analysis to calculate an optimal production plan given a scarce resource.
The following applies to the three products of the company:
Product
Direct materials (at £6/kg)
Direct labour (at £10/hour)
Variable overheads (£2/hour)

Maximum demand (units)
Optimal production plan

I
£
36
40
8
––––––
84
––––––
––––––
2,000
2,000

II
£
24
25
5
––––––
54
––––––
––––––
4,000
1,500

III
£
15
10
2
––––––
27
––––––
––––––
4,000
4,000

How many kg of material were available for use in production?
A
B
C
D

15,750
28,000
30,000
38,000

kg
kg
kg
kg

7

[P.T.O.

21 A company uses the Economic Order Quantity (EOQ) model to establish reorder quantities. The following information
relates to the forthcoming period:
Order costs = £25 per order
Holding costs = 10% of purchase price = £4/unit
Annual demand = 20,000 units
Purchase price = £40 per unit
EOQ = 500 units
No safety stocks are held.
What are the total annual costs of stock (i.e. the total purchase cost plus total order cost plus total holding cost)?
A
B
C
D

£22,000
£33,500
£802,000
£803,000

22 Which of the following would be considered a service industry?
(i) an airline company
(ii) a railway company
(iii) a firm of accountants
A
B
C
D

(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)

23 The following information for advertising and sales has been established over the past six months:
Month
1
2
3
4
5
6

Sales Revenue
£’000

155
125
200
175
150
225

Advertising expenditure
£’000
3
2·5
6
5·5
4·5
6·5

Using the high-low method which of the following is the correct equation for linking advertising and sales from
the above data?
A
B
C
D

sales revenue = 62,500 + (25 x advertising expenditure)
advertising expenditure = –2,500 + (0·04 x sales revenue)
sales revenue = 95,000 + (20 x advertising expenditure)
advertising expenditure = –4,750 + (0·05 x sales revenue)

8

24 A company uses decision tree analysis to evaluate potential options. The management accountant for the company
has established the following:
Cash flows from sales revenue
High sales = £2,000,000
0·8
Build new premises
Cost £1,000,000

0·2

Low sales = £1,000,000

High sales = £2,000,000
0·7
Upgrade old
premises
Cost = ?

0·3

Low sales = £1,000,000

What would be the cost of the upgrade that would make the company financially indifferent between building
new premises and upgrading the old one?
A
B
C
D

£100,000
£900,000
£1,000,000
£1,700,000

25 Which of the following could be true with regard to a management information system (MIS)?
An MIS is
(i) a database system.
(ii) used for planning, directing and controlling activities.
(iii) a hierarchy of information within an organisation.
A
B
C
D

(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
(50 marks)

9

[P.T.O.

Section B – ALL FIVE questions are compulsory and MUST be attempted
1

A company uses absorption costing for both internal and external reporting purposes as it has a considerable level of

fixed production costs.
The following information has been recorded for the past year:
Budgeted fixed production overheads
Budgeted (Normal) activity levels:
Units
Labour hours

£2,500,000
62,500 units
500,000 hours

Actual fixed production overheads
Actual levels of activity:
Units produced
Labour hours

£2,890,350
70,000 units
525,000 hours

Required:
(a) Calculate the fixed production overhead expenditure and volume variances and briefly explain what each
variance shows.
(5 marks)
(b) Calculate the fixed production overhead efficiency and capacity variances and briefly explain what each
variance shows.
(5 marks)
(10 marks)

2

A business uses process costing to establish stock valuations and profitability of its products. Output from the process
consists of three separate products: two joint products and a by-product. Details of the process is as follows:
Input costs:
Materials
Labour
Overheads

£45,625 for 12,500 kg
£29,500
£26,875

The process is expected to lose 20% of the input. This is sold for scrap for £4 per unit.
The following details relate to the output from the process:
Product
A
B
C

Type
Joint
Joint
By-product

% of output
50%
40%
10%

Final sales

value per unit
£20
£25
£2

Further costs
to complete
£10

Joint costs are allocated on the basis of net realisable value at split-off.
Required:
(a) Establish the total cost of the output from the process.

(4 marks)

(b) Calculate the profit per unit for each of the joint products, A and B.

(6 marks)
(10 marks)

10

3

(a) Explain the following terms giving an example of each:
(i) service centre; and
(ii) production centre.
Explain how the treatment of overheads differs between the two different types of centre.

(6 marks)

(b) Explain how Activity Based Costing differs from traditional absorption costing, giving an example.
(4 marks)
(10 marks)

4

A company uses linear programming to establish an optimal production plan in order to maximise profit.
The company finds that for the next year materials and labour are likely to be in short supply.
Details of the company’s products are as follows:
A
£
6
30
5
–––
41
50
–––
9
–––
–––

Materials (at £2 per kg)
Labour (at £6 per hour)
Variable overheads (at £1 per hour)
Variable cost
Selling price
Contribution

B
£
8
18
3
–––
29
52
–––
23
–––
–––

There are only 30,000 kg of material and 36,000 labour hours available. The company also has an agreement to
supply 1,000 units of product A which must be met.
Required:
(a) Formulate the objective function and constraint equations for this problem.

(4 marks)

(b) Plot the constraints on a suitable graph and determine the optimal production plan.

(6 marks)
(10 marks)

11

[P.T.O.

5

A company has to choose between three investments with details as follows:
Investment 1
Timing of
Cash Flows
flows
per annum
Year
£
0
(75,000)
1–4
25,000
5
5,000

Investment 2
Timing of
Cash Flows
flows
per annum
Year
£
0
(100,000)
A perpetuity
11,000
starting at time 1

Investment 3
Timing of
Cash Flows
flows
per annum
Year
£
0
(125,000)
1
30,000
2
40,000
3
50,000
4
60,000
5
(10,000)

The company has a cost of capital of 10%.
Required:
Calculate the net present value of each of the three investments at the company’s cost of capital and state which
investment would be preferred.
(10 marks)

12

Formulae Sheet

Laspeyre’s price index
Paasche price index
Laspeyre’s quantity index

Paasche quantity index

13

[P.T.O.

Present Value Table
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