Answers
Part 1 Examination – Paper 1.2
Financial Information for Management
June 2004 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
D
C
C
D
C
B
A
D
D
D
A
B
C
B
C
C
C
B
C
C
A
A
B
D
1
A
2
D
3
C
Contribution per unit (CPU) £(60 – 15 – 5)
Total fixed cost £(30 x 2,400)
Breakeven point (72,000 ÷ 40)
4
C
CPU (40 x 0·40)
Breakeven point (60,000 ÷ 16)
Margin of safety (64,000 ÷ 40)
£40
£72,000
1,800 units
£16
3,750 units
1,600 units
––––––––––
5,350 units
––––––––––
Planned activity level
5
D
X
£8
£4
1st
CPU
Contribution per hour
Ranking
Y
£10
£2·50
2nd
800 units of product X uses 1,600 hours and in the remaining 400 hours, 100 units of product Y can be manufactured.
6
C
7
B
8
A
9
D
£(40,000 – 20,000) ÷ (20,000 – 4,000) units = £1·25 per unit
Closing stock (units) = 200 + 600 – 150 – 200 – 250 = 200
Issues = £5,200 + (600 – 200) x £32·50 = £18,200
EOQ =
(2 x 20 x (4 x 12,500)
0 ⋅ 10 x 15
= 1,155
10 D
11 D
Total direct labour hours:
Primary (6,000 x 36 ÷ 60) + (7,500 x 48 ÷ 60)
9,600
Finishing (6,000 x 25 ÷ 60) + (7,500 x 35 ÷ 60)
6,875
Absorption rates:
Primary
(96,000 ÷ 9,600) £10 per hour
Finishing (82,500 ÷ 6,875) £12 per hour
Fixed cost per unit (Y): (48 ÷ 60) x 10 + (35 ÷ 60) x 12 = £15
17
12 A
£
108,875
105,000
–––––––113,875
––––––––
Actual overhead
Absorbed overhead (30,000 ÷ 3·50)
Under absorption
13 B
Sales < production by 280 units
Marginal costing profit would be lower by 280 x (48,000 ÷ 12,000) = £1,120
14 C
15 B
Adverse price variance (0·04 x 2·50 x 12,000) = £1,200
16 C
£
30,000
11,815
–––––––31,815
–––––––1,212 units
–––––––-
12,000 litres at £2·50 per litre
Add Favourable usage variance
Standard cost of actual production
Actual production £31,815 ÷ (10·5 x 2·50)
17 C
Let x = budgeted expenditure
1·1x – x = 136,000
1.1x – x = 360,000
1·1 x = 396,000 = actual expenditure (£)
18 C
£
112,500
Actual sales at standard selling price
(9,000 x £12·50)
Actual sales at actual selling price
117,000
–––––––4,500 favourable
–––––––-
Sales price variance
19 B
20 C
b =
11 x 13,467 – (440 x 330)
––––––––––––––––––––––––
(11 x 17,986) – (440)2
=
0·6917
a =
(330 ÷ 11) – 0·6917 (440 ÷ 11)
=
2·33
21 C
Salary costs (54 x 40) + (110 x 25)
Overhead cost (164 x 20)
Total cost
Mark-up (40% on total cost)
Final fee
£
4,910
3,280
–––––––8,190
3,276
–––––––11,466
–––––––-
22 A
Joint costs apportioned to product H:
(228 ÷ 640) x 384,000
Further processing costs
£
136,800
159,600
–––––––Total cost of H production (228,000 units)
296,400
–––––––Closing stock: 28,000 x (296,400 ÷ 228,000) = £36,400
23 A
CPU from existing business (3·70 – 2·50)
New business CPU
(2·95 – 2.50)
Total contribution from new business (6,000 x 0·45)
Less Lost contribution from existing business
2 x (6,000 ÷ 15) x 1·20
Overall increase in contribution and profit
24 B
Additional cost of buying in one unit (£)
Machine hours per unit
Additional cost of buying in per machine hour (£)
Ranking for buying in
Buy in component M.
£1·20
£0·45
£
2,700
(960)
––––––1,740
––––––L
12
13
14
2nd
25 D
18
M
15
15
13
1st
N
24
14
16
4th
P
30
16
15
3rd
Section B
1
(a)
Cost per equivalent unit (EU) calculations for Process I:
Materials
EU
–
1,600
300
––––––
1,900
––––––
£133,000
–––––––––
1,900
= £70
Completion of opening work in progress
Started and finished units last month
Closing work in progress
Work done last month
Cost per EU
(i)
Value of closing work in progress =
(300 x 70) + (150 x 50) = £28,500
(ii)
Value of transfer of 1,800 units to Process II =
1,600 x (70 + 50) + (120 x 50) + 16,500 = £214,500
(b)
Conversion
EU
120
1,600
150
––––––
1,870
––––––
£93,500
––––––––
1,870
= £50
Process II Account
Transfer from Process I
Conversion costs
Units
1,800
£
214,500
78,450
––––––
1,800
––––––
––––––––
292,950
––––––––
Normal loss
Abnormal loss
Finished production
Units
126
24
1,650
––––––
1,800
––––––
£
–
4,200
288,750
––––––––
292,950
––––––––
Workings
214,500 + 78,450
Cost per unit = –––––––––––––––––––– = £175
(0·93 x 1,800)
Valuations:
Abnormal loss
= 24 x 175
= £4,200
Finished production = 1,650 x 175 = £288,750
(c)
2
–
In job costing each job is costed separately whereas in process costing it is the process itself which is costed. The total
cost of the process is then averaged over all the units of production.
–
In job costing production is to customer specification and therefore each job is likely to be different. In process costing
all units are identical in any one process.
(a)
Direct material
Actual quantity at actual price
£
417,900
Standard quantity for actual production at standard price
420,000
Direct labour
Actual hours at actual rate
949,620
Standard hours for actual production at standard rate
945,000
Variable production overheads
Actual expenditure
565,740
Standard cost of actual production
567,000
Total
variance
£
2,100 F
4,620 A
1,260 F
19
(b)
Actual hours at actual rate
£
949,620
Actual hours at standard rate
937,125
Standard hours for actual production at standard rate
945,000
Variance (£)
Rate 12,495 A
Efficiency 7,875 F
(c)
Rate:
–
Higher graded workers paid at a higher rate.
–
Higher than expected wage settlement for the company.
Efficiency:
–
The higher graded workers being more skilled took less than the standard time.
–
Highly motivated workers.
3
(a)
(i)
Selling price per unit = £8 ÷ 0·40 = £20
(ii) Weekly contribution = 10,000 + 22,000 = £32,000
Weekly sales = 32,000 ÷ 8 = 4,000 units
(b)
Strategy
Units per week
Selling price
Less Variable cost
Contribution
Total contribution
A
4,400
––––––
£/unit
19·60
(12·00)
––––––
7·60
––––––
£
33,440
–––––––
B
4,720
––––––
£/unit
19·00
(12·00)
––––––
7·00
––––––
£
33,040
–––––––
C
5,000
––––––
£/unit
18·60
(12·00)
––––––
6·60
––––––
£
33,000
–––––––
Contribution and therefore profit is maximised when Strategy A is adopted.
(c)
Some costs do not fall clearly into being either variable or fixed. They are the costs that are a mix of variable and fixed –
sometimes called semi-variable or mixed costs.
The following techniques could be used to separate the fixed and variable components of semi-variable or mixed costs:
–
the high-low method
–
linear regression.
Many costs are a mix of variable and fixed elements, for example power costs (gas or electricity). The tariffs for power costs
often consist of a fixed charge irrespective of the amount of power consumed and a variable charge per unit of consumption.
4
(a)
(i)
Materials
K
L
(ii)
Skilled labour
Labour cost
Opportunity cost of labour
(b)
£
30,870
2,200
––––––––
£33,070
––––––––
3,000 kg at (£19,600 ÷ 2,000) x 1·05
200 kg at £11
800 hours at £9·50
800 hours at (£40 ÷ 4)
£
7,600
8,000
––––––––
£15,600
––––––––
Any variable overhead costs associated with the contract would be relevant because they would represent additional or
incremental costs caused directly by the contract.
Fixed overhead costs would only be relevant if the total fixed overhead costs of the company increased as a direct consequence
of the contract being undertaken. In that case the relevant amount would be the specific increase in the total fixed overhead
costs caused by the acceptance of the contract.
Arbitrary apportionments of existing fixed overhead costs would not be relevant. Similarly sunk and committed costs would
not be relevant.
20
5
(a)
£
241,320
Fixed production overhead costs (finishing section)
+
Reapportionment of general service centre costs
£82,800 x (32 ÷ 46)
57,600
––––––––
298,920
––––––––
hours
50,400
62,400
––––––––
112,800
––––––––
Direct labour hours in finishing section:
Lang
7,200 units x (42 ÷ 6 )
Dale
10,400 units x (36 ÷ 6)
Direct labour hour absorption rate for the finishing section:
£298,920 ÷ 112,800 = £2·65
(b)
Cost per unit for a Dale:
£ per unit
Direct material
Direct labour
–
–
machining department
finishing section
Prime cost
Production overhead costs:
–
machining department
–
finishing section
40·00
36·00
––––––
(3 x £3·10)
(6 x £2·65)
Total cost per unit for Dale
(c)
£ per unit
44·00
76·00
–––––––
120·00
9·30
15·90
––––––––
£145·20
––––––––
For both products – Lang and Dale – production is greater than sales for the coming year. In other words, stocks of finished
products will be increasing. In this situation, profits calculated using marginal costing principles will be lower than the profits
calculated using absorption costing principles.
Fixed production costs are written off as they arise under marginal costing whereas under absorption costing they form part
of the product cost and the inventory valuation. Therefore in the coming year with stocks increasing and using absorption
costing, a higher amount of fixed production cost will be carried forward at the year end than was brought forward in any
opening stocks. The effect is that some of the costs that would have been written off and would have reduced the profit under
marginal costing are being carried forward under absorption costing to be written off against profits in later years.
21
Part 1 Examination – Paper 1.2
Financial Information for Management
June 2004 Marking Scheme
Marks
Section A
Each of the 25 questions in this section is worth 2 marks
50
Section B
1
(a) Equivalent units of work done
Cost per equivalent unit
Value of work in progress
Value of transfer
(b)
2
3
4
1
1
1
1
–––
1
1
1
–––
(c)
Two differences – 1 mark for each
(a)
(b)
(c)
Three total variances – 1 mark for each
Rate and efficiency variances – 11/2 marks for each
Four causes (two for each variance in (b)) – 1 mark for each
(a)
Selling price
Weekly sales
(b)
Units for each strategy
Selling price for each strategy
Contribution for each strategy
Recommendation (best strategy)
(c)
Mixed or semi-variable costs
Example
Methods
(a)
Material K
Material L
Skilled labour: – cost
Skilled labour: – opportunity cost
(b)
Explanation of relevant cost concept
Variable overhead costs
Fixed overhead costs
4
1/
2
1/
2
Transfer in from Process I
Conversion costs
Normal loss
Abnormal loss
Finished production
3
3
4
–––
1
2
–––
1
1
1
1
–––
1
1
1
–––
2
2
1
2
–––
1
1
1
–––
23
4
2
–––
10
–––
10
–––
3
4
3
–––
10
–––
7
3
–––
10
–––
5
(a)
(b)
(c)
Marks
11/2
Reapportionment of general service centre costs
Original cost of finishing section
Total direct labour hours in finishing section
Direct labour hour rate
Prime cost
Overhead costs (2 x
1/
2
1/
2
mark)
Production > sales/increasing stocks
Marginal costing profit lower than absorption costing profit
Explanation
24
2
1
–––
1
1
–––
1
1
1
–––
5
2
3
–––
10
–––