Financial information for managemetn paper 1 2 2004 a1

Answers


Part 1 Examination – Paper 1.2
Financial Information for Management

June 2006 Answers

Section A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

23
24
25

A
C
B
C
A
D
C
D
B
A
B
A
B
B
C
B
A
C
C
C
D
D
C
C
A

1

A

2

C

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
1,400
1,200
–––––
1,200
–––––

Total cost (£)
68,200
66,600

––––––––
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
5

A

6

D

7

C

8

D

9

B

10 A

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

(Budgeted quantity – Actual quantity) x standard profit per unit
(1,000 – 900) x (50 – 39) = £1,100
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

17


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
13 B

Cost centre G = 40,000 + (0·50 x 18,000) + 0·30 [30,000 + (0·10 x 18,000)]
Cost centre G = £58,540

14 B
15 C
16 B
17 A

Prime cost [64 + (7 x 8)]
Production overhead (7 x 20)
Non-production overhead (0·60 x 120)
Total cost
18

C

£
120
140
––––
260
72
––––
332
––––

Opportunity cost per skilled labour hour = [25 ÷ (20 ÷ 8)] = £10
Relevant cost:
£
Skilled labour cost (90 x 8)
1,720
Opportunity cost (90 x 10)
1,900
–––––
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.

18


Section B
1

(a)
Raw material
Direct labour
Direct expenses
Production
overheads (W1)
Abnormal gain
(W4)

Litres

60,000

Process
£
381,000
180,000
54,000

G
Output (W3):
P1 (W4)
P2 (W4)
Normal loss (W2)

Litres

£

36,250
21,750
3,000

507,500
304,500
15,000

–––––––
61,000
–––––––

––––––––
827,000
––––––––

198,000
1,000
–––––––
61,000
–––––––

14,000
––––––––
827,000
––––––––

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
W3 Split P1 : P2 in ratio 5 : 3
W3 P1 = (5 ÷ 8) x 58,000 = 36,250 litres
W3 P2 = (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
(b)

Assuming 100 litres of product P1
Revenue if sold at point of split-off without
further processing (100 x 20)
Revenue (from PP1) if sold after
further processing (100 x 90%) x 26
Additional revenue
Additional cost (in process H)

£
2,000
2,340
–––––
1,340
–––––
1,400
–––––

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)

2

(a)

(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.

Monthly machining hours required to meet maximum demand:
Product
Units
Hours/unit
R
9,000
(40 ÷ 60) = 0·667
S
6,000
(54 ÷ 60) = 0·900
T
3,000
(75 ÷ 60) = 1·250
Available hours
Shortfall in machining hours

19

Total hours

16,000
15,400
13,750
––––––
15,150
10,500
––––––
14,650
––––––


(b)

Calculation of the contribution per machining hour for each product:
R
S
Selling price per unit
£60
£75
Contribution to sales ratio
20%
24%
Contribution per unit
£12
£18
Machining hours per unit
0·667
0·900
Contribution per machine hour
£18

£20
Ranking
2nd
1st

T
£84
25%
£21
1·250
£16·80
3rd

Optimal production plan and resultant contribution:
Product
Units
Machine hours used
Contribution (£)
S
6,000
15,400
108,000
R
7,650
15,100 (balance)
191,800
–––––––
––––––––
Total
10,500

199,800
–––––––
––––––––
3

(a)

Direct material variances:
Actual quantity purchased at actual price

£
294,000 


300,000 

Actual quantity purchased at standard price
(40,000 kg at 7·50 )
Actual quantity used at standard price
(36,500 kg at 7·50 )
Standard quantity for actual production at
standard price [(7,200 units x 4·8) at 7·50]
(b)

273,750 


259,200 

Reconciliation:

Actual cost of purchases
Less: Adverse/Plus: Favourable variances:
Less: Price variance [as in (a)]
Less: Usage variance [as in (a)]

£

Variance (£)
6,000 F Price

14,550 A Usage

£
294,000

6,000 F
14,550 A
–––––––
(8,550) A

Less: Increase in stock at standard cost
Less: [(40,000 – 36,500) x 7·50]

(26,250)
––––––––
259,200
––––––––

Standard material cost of actual production [per (a)]

(c)

4

(a)

(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.

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
The interpretation is that the fixed maintenance cost per quarter is £21,730 and the variable cost per unit of production is
£12·32.

20


(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):
£’000
Sales (24,000 units)
Less: Production cost of sales:
Less: Opening stock (3,000 x 28) [W1]
Less: Production (22,000 x 28)
Less: Closing stock (1,000 x 28)

84
616
(28)

––––

Less: Under absorption of fixed
Less: production overhead cost [W2]
Less: (3,000 x 5)

£’000
864

(672)
––––
192

(15)
––––
177

Gross profit
Less: Non-production costs:
Less: Variable selling cost
Less: Fixed selling and admin costs

60
40
–––

Net profit
Workings:
W1 Variable production cost per unit
W1 [For example, from opening stock under

W1 marginal costing: (69,000 ÷ 3,000)]
W1 Fixed production cost per unit
W1 [125,000 ÷ 25,000]
W1

(100)
––––
77
––––

£
23

5
–––
28
–––

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

Reconciliation:
£’000
77

Net profit per absorption costing (a)
Add: Decrease in stocks x fixed production overhead
Add: cost per unit [2,000 x 5]

10

–––
87
–––

Net profit per marginal costing (per question)

(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.

21


Part 1 Examination – Paper 1.2
Financial Information for Management

June 2006 Marking Scheme
Marks

Section A
Each of the 25 questions in this section is worth 2 marks

50
–––

Section B
1

(a)

Inputs
Abnormal gain
Normal loss
Joint products

2
11/2
11/2
2
–––

(b)

Additional revenue
Additional cost
Conclusion

11/2
1
1/
2
–––

(c)

Direct expenses
Production overheads

1

1
–––

7

3

2
–––
12
–––

2

(a)

Required hours
Shortfall

11/2
1/
2
–––

(b)

Contribution per unit
Contribution per machining hour
Ranking
Optimal plan

Resultant contribution

11/2
11/2
1/
2
11/2
1
–––

2

6
–––
8
–––

3

(a)

Price variance
Usage variance

11/2
11/2
–––

(b)

Variances
Change in stock
Layout/presentation of statement

1
1
1
–––

(c)

(i)
(ii)

2
1
1
–––

3

3
Causes (1 mark for each)
Purchasing manager
Responsibility for buying

4
–––
10
–––

23


Marks
4

(a)

Σy
Σx
Calculation of ‘b’
Calculation of ‘a’
Fixed/variable costs

1
1
21/2
11/2
1
–––

(b)

Total cost for 44,000 units
Reservation

11/2
11/2
–––

7

3
–––
10
–––

5

(a)

1/
2

Sales
Cost of sales
Under absorption of overhead
Variable selling cost
Fixed selling and admin costs

3
11/2
1/
2
1/
2
–––
6

(b)

Layout/presentation of statement
Change in stock and its evaluation

1
1
–––

(c)

Marginal costing
Separation of fixed and variable costs
Fixed costs not relevant to short term decisions

1
1/
2
1/
2
–––

2

2
–––
10
–––

24