Answers Part Examination – Paper 1.2 Financial Information for Management C B D C B A D June 2003 Answers Marginal costing profit Less: fixed costs in opening stock (300 x £5) Add: fixed costs in closing stock (750 x £5) £72,300 (£1,500) £3,750 –––––––– £74,550 –––––––– £315 ––––– x 117 = £235 157 Price variance Did cost Should cost (53,000 kg x £2·50) £136,000 £132,500 ––––––––––––– £3,500 adverse ––––––––––––– Usage variance Did use Should use (27,000 units x kg) 53,000 kg 54,000 kg ––––––––– 1,000 kg x £2·50 £2,500 favourable –––––––––––––––– Sales Less: opening stock Add: closing stock (5% x 10,000) 10,000 units (600 units) 500 units –––––––––– 9,900 units Good production required Good production = 90% of total production, therefore 9,900 Total production = –––––– = 11,000 units 90% B C Total Contribution = (£10 – £6) x 250,000 = £1,000,000 Fixed Overheads = 200,000 x £2 = £400,000 Profit = Total contribution less fixed costs = £1,000,000 – £400,000 = £600,000 19 10 A Process Units 400 3,000 Opening stock Input Losses Output Closing stock –––––– 3,400 –––––– –––––– 11 C  1⋅ 00560 – 1 5×  = £348 ⋅ 85 ≈ £349  ⋅ 005  12 D 13 D 14 A 150,000 + 75,000 –––––––––––––––––– 0·75 300,000 ––––––– £10 = £300,000 Breakeven revenue = 30,000 units ∑y ∑x −b n n 200 ⋅ 75 a= – (17 ⋅ 14 × ) = 25 ⋅ 36 4 a= 15 B Lower of replacement cost £105,000 higher of NRV 75,000 Economic value 90,000 16 A 17 C 18 A Residual income for the division = £120,000 – (£650,000 x 18%) Residual income = £3,000 19 A 20 B Total material required = 36 24 15 (2,000 x ––) + (1,500 x ––) + (4,000 x ––) = 28,000 kg 6 21 C Total cost of having stock = D Q (p x D) + (–– x Co) + (Ch x ––) Q 20,000 500 = (40 x 20,00) + (–––––– x 25) + (4 x ––– ) 500 = 800,000 + 1,000 + 1,000 = 802,000 22 D 20 Units 400 2,800 200 –––––– 3,400 –––––– –––––– 23 A As advertising will hopefully generate sales, advertising is the independent variable and sales the dependent; i.e advertising is x and sales is y 225,000 = a + (6,500 x b) 125,000 = a + (2,500 x b) –––––––– –––––––––––––– 100,000 = + (4,000 x b) 100,000 therefore b = ––––––– 4,000 = £25 so, 225,000 = a + (6,500 x 25) 225,000 = a + 162,500 a = 225,000 – 162,500 a = 62,500 24 B Expected value of new building = (0·8 x £2 million )+(0·2 x £1 million) – £1 million = £0·8 million Expected value of the upgrade = (0·7 x £2 million) + (0·3 x £1 million) – cost of upgrade So, New build = £0·8 million Upgrade = £1·7 million – costs Equating the two expressions: £0·8 million = £1·7 million – costs, giving Costs = £1·7 million – £0·8 million = £0·9 million = £900,000 25 D 21 (a) Fixed Production Overhead Expenditure variance £ 2,890,350 2,500,000 –––––––––– 390,350 adverse Actual costs incurred Budgeted costs Variance This variance indicates that the company have spent more than originally budgeted Fixed Production Overhead Volume variance Labour hours 560,000 500,000 –––––––– 60,000 favourable Actual flexed Budget Variance x £5 (W1) = £300,000 favourable W1 £2,500,000 FOAR = ––––––––––––– = £5 500,000 hours This variance indicates that the company has used more labour hours than originally budgeted Or based on units Units 70,000 62,500 ––––––– 7,500 favourable Actual Budget Variance x £40 (W2) = £300,000 favourable W2 £2,500,000 FOAR = ––––––––––––– = £40 62,500 units This variance indicates that the company has produced more units than originally budgeted (b) Fixed Production Overhead Efficiency Variance Hours 525,000 560,000 –––––––– 35,000 favourable Did work Should have worked x £5 (W3) = £175,000 favourable W3 £2,500,000 FOAR/hour = ––––––––––––– = £5 500,000 hours This variance shows that labour were more efficient than originally budgeted as they took less time than expected to achieve the production of 70,000 units Fixed Production Overhead Capacity Variance Hours 525,000 500,000 –––––––– 25,000 favourable Actual hours worked Budgeted hours of work x £5 (W3) = £125,000 favourable This variance shows that labour worked for more hours than was originally budgeted thus exceeding the budgeted capacity 22 (a) Total cost of output = 45,625 + 29,500 + 26,875 – (12,500 x 20% x 4) (a) Total cost of output = 102,000 – 10,000= 92,000 or Process Units 12,500 Materials Labour Overheads (b) ––––––– 12,500 ––––––– ––––––– £ 45,625 29,500 26,875 –––––––– 102,000 –––––––– –––––––– Normal loss Output Units 2,500 10,000 β ––––––– 12,500 ––––––– ––––––– £ 10,000 92,000 β –––––––– 102,000 –––––––– –––––––– Joint costs to be allocated = (£9·20 x 10,000) – 1,000 x £2 = £92,000 – £2,000 = £90,000 Product Units % NRV at split-off Total NRV A 5,000 50 20–10 =10 50,000 B 4,000 40 25 100,000 C 1,000 –––––– 10,000 –––––– 10 ––– 100 ––– Total –––––––– 150,000 –––––––– Joint cost allocation 50,000 30,000 = –––––––– 150,000 100,000 60,000 = –––––––– 150,000 Total profit Profit per unit 20,000 40,000 10 ––––––– 90,000 ––––––– The profit per unit for product A is £4 and for B is £10 (a) A service centre is a department that does not directly produce units but is required to support the other departments Examples include maintenance departments, stores or a canteen A production centre is a centre where units are actually made, examples being a machining department or a welding department Although a service will have overheads allocated and apportioned to it, these will be reapportioned to the production centres so that, at the end of a period, all overheads are included in the production centres only Once all the overheads are included in the production centres they can be absorbed into production (b) Activity based costing uses a number of different cost drivers to absorb different overheads, whereas traditional absorption costing only uses one, for example labour hours, machine hours or per unit In activity based costing fixed overhead costs may include machine set-up costs These costs will not be incurred on a per unit basis but will be incurred each time the machine has to be set-up It would not, therefore, be sensible to allocate costs per unit since that is not how the cost is incurred It is, however, better to use the number of set-ups for this particular cost to allocate costs to units (a) Objective is to maximise profit: Let a = the number of units of A to be produced Let b = the number of units of B to be produced Objective function: 9a + 23b Constraints: Non-negativity Restriction on A Materials Labour b≥0 a ≥ 1,000 3a + 4b ≤ 30,000 5a + 3b ≤ 36,000 23 (b) b units ’000 a = 1,000 13 12 11 10 5a + 3b = 36,000 3a + 4b = 30,000 lso-contribution line 1 10 11 12 a units ’000 Optimal point is the intersect of the a = 1,000 line and the materials constraint line 3a + 4b = 30,000 (3 x 1,000) + 4b = 30,000 3,000 + 4b = 30,000 therefore 4b = 30,000 – 3,000 giving 4b = 27,000 so b = 27,000/4,000 therefore b= 6,750 units The optimal production plan is to make 1,000 units of A and 6,750 units of B 24 Investment Time 1-4 Investment Time 1– ∞ Investment Time Cash Flows £’000 (75) 25 Discount factor at 10% 3·17 0·621 Present Value £’000 (75) 79·25 3·105 –––––– 7·355 –––––– –––––– Cash Flows £’000 (100) 11 Discount factor at 10% 1/0·1=10 Present Value £’000 (100) 110 –––––– 10 –––––– –––––– Cash Flows £’000 (125) 30 40 50 60 (10) Discount factor at 10% 0·909 0·826 0·751 0·683 0·621 Present Value £’000 (125) 27·27 33·04 37·55 40·98 (6·21) –––––– 7·63 –––––– –––––– Since investment has the highest net present value it would be the preferred investment 25 Part Examination – Paper 1.2 Financial information for Management (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) (xvi) (xvii) (xviii) (xix) (xx) (xxi) (xxii) (xxiii) (xxiv) (xxv) June 2003 Marking Scheme Marks 2 2 2 2 2 2 2 2 2 2 2 2 ––– C B D C B A D B C A C D D A B A C A A B C D A B D 50 ––– (a) Fixed production overhead expenditure variance £ Fixed production overhead expenditure variance adverse Explanation of variance Fixed production overhead volume variance £ Fixed production overhead volume variance favourable Calculation of the FOAR/unit Explanation of variance 1/ 1/ 1/ 1/ 1 ––– (b) 1/ 1/ Efficiency variance £ Efficiency variance favourable Calculating FOAR/labour hour Explanation of variance Capacity variance £ Capacity variance favourable Explanation of variance 1 1/ 1/ ––– ––– 10 ––– 27 Marks (a) Calculating the total cost of output to include: material cost labour costs overhead cost deduct normal loss scrap proceeds Calculation of 92,000 1/ 1/ 1/ 11/2 ––– (b) Calculating joint costs less by-product proceeds Calculating number of units for A,B and C from output NRV at split-off for A NRV at split-off for B and C Total NRV calculation 1/2 mark each A and B Joint cost allocation 1/2 mark each A and B Profit per unitv 1/2 mark each A and B 1 1/ 1/ 1 ––– ––– 10 ––– (a) Definition of service centre Example of a service centre Definition of production centre Example of a production centre Explanation of the differing treatments of overheads: Service centre cost reapportioned Production centre costs absorbed 1 1 1 ––– (b) Explanation of difference including the use of the term cost driver Example 2 ––– ––– 10 ––– (a) 1/ 1/ 1/ Defining variables Objective function Non-negativity constraint for b Variable a greater than 1,000 Material constraint Labour constraint 1 1/ ––– (b) 1/ 1/ labelled axes on graph good presentation correctly drawn material line correctly drawn labour line restriction on a plotting the objective function establishing the optimal point 1 1/ 11/2 ––– ––– 10 ––– 28 Marks Investment Correct discount factors For using a cumulative discount factor Calculation of present value 1/2 per line in table 1/ 11/2 Investment Correct value at To Calculation of present value of the perpetuity 1/ 11/2 Investment Correct discount factors Calculation of present value 1/2 per line in table Preferred investment stated ––– 10 ––– 29 ... (75) 25 Discount factor at 10 % 3? ?17 0·6 21 Present Value £’000 (75) 79? ?25 3? ?10 5 –––––– 7·355 –––––– –––––– Cash Flows £’000 (10 0) 11 Discount factor at 10 % 1/ 0? ?1= 10 Present Value £’000 (10 0) 11 0... y 22 5,000 = a + (6,500 x b) 12 5,000 = a + (2, 500 x b) –––––––– –––––––––––––– 10 0,000 = + (4,000 x b) 10 0,000 therefore b = ––––––– 4,000 = ? ?25 so, 22 5,000 = a + (6,500 x 25 ) 22 5,000 = a + 16 2, 500... (£9? ?20 x 10 ,000) – 1, 000 x ? ?2 = £ 92, 000 – ? ?2, 000 = £90,000 Product Units % NRV at split-off Total NRV A 5,000 50 20 ? ?10 =10 50,000 B 4,000 40 25 10 0,000 C 1, 000 –––––– 10 ,000 –––––– 10 ––– 10 0