PART FRIDAY DECEMBER 2005 QUESTION PAPER Time allowed 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 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 marks Up to a given level of activity in each period the purchase price per unit of a raw material is constant After that point a lower price per unit applies both to further units purchased and also retrospectively to all units already purchased Which of the following graphs depicts the total cost of the raw materials for a period? A £ Units C £ Units D £ Units B £ Units The following breakeven chart has been drawn showing lines for total cost (TC), total variable cost (TVC), total fixed cost (TFC) and total sales revenue (TSR): TSR £ TC TVC TFC Units 675 1,200 1,500 What is the margin of safety at the 1,700 units level of activity? A 200 units B 300 units C 500 units D 1,025 units 1,700 A company manufactures a single product with a variable cost per unit of £22 The contribution to sales ratio is 45% Monthly fixed costs are £198,000 What is the breakeven point (in units)? A 4,950 B 9,000 C 11,000 D 20,000 An organisation has the following total costs at two activity levels: Activity level (units) Total costs (£) 17,000 140,000 22,000 170,000 Variable cost per unit is constant in this range of activity and there is a step up of £5,000 in the total fixed costs when activity exceeds 18,000 units What is the total cost at an activity level of 20,000 units? A £155,000 B £158,000 C £160,000 D £163,000 The following statements relate to financial accounting or to cost and management accounting: (i) The main users of financial accounting information are external to an organisation (ii) Cost accounting is part of financial accounting and establishes costs incurred by an organisation (iii) Management accounting is used to aid planning, control and decision making 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) The following terms relate to computers: (i) Application package (ii) Operating system (iii) Spreadsheet Which of the above 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) [P.T.O 7 An organisation’s stock records for last month show the following transactions in respect of one item: Date 1st 5th 13th 20th 28th Receipts (units) Issues (units) Stock (units) 300 200 800 500 300 100 600 300 200 The opening stock was valued at a total cost of £9,300 and all receipts on the 13th were purchased at a cost of £33 per unit The organisation uses the weighted average method of valuation and calculates a new weighted average after each stores receipt What was the total value of the closing stock? A £9,500 B £9,700 C £9,750 D £9,900 A company uses 9,000 units of a component per annum The component has a purchase price of £40 per unit and the cost of placing an order is £160 The annual holding cost of one component is equal to 8% of its purchase price What is the Economic Order Quantity (to the nearest unit) of the component? A 530 B 671 C 949 D 1,342 A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model What would be the effects on the EOQ and the total annual ordering cost of an increase in the annual cost of holding one unit of the component in stock? A EOQ Lower Total annual ordering cost Higher B Higher Lower C Lower No effect D Higher No effect 10 Consider the following statements: (i) Job costing is only applicable to service organisations (ii) Batch costing can be used when a number of identical products are manufactured together to go into finished stock Is each statement TRUE or FALSE? A Statement (i) False Statement (ii) False B False True C True True D True False 11 An organisation absorbs overheads on a machine hour basis The planned level of activity for last month was 30,000 machine hours with a total overhead cost of £247,500 Actual results showed that 28,000 machine hours were recorded with a total overhead cost of £238,000 What was the total under absorption of overheads last month? A £7,000 B £7,500 C £9,500 D £16,500 12 The following information relates to a manufacturing company for next period: Production Sales Units 14,000 12,000 £ 63,000 12,000 Fixed production costs Fixed selling costs Using absorption costing the profit for next period has been calculated as £36,000 What would the profit for next period be using marginal costing? A £25,000 B £27,000 C £45,000 D £47,000 [P.T.O 13 Information relating to two processes (F and G) was as follows: Process F G Normal loss as % of input Input litres 65,000 37,500 Output litres 58,900 35,700 For each process, was there an abnormal loss or an abnormal gain? A Process F Abnormal gain Process G Abnormal gain B Abnormal gain Abnormal loss C Abnormal loss Abnormal gain D Abnormal loss Abnormal loss 14 Last month 27,000 direct labour hours were worked at an actual cost of £236,385 and the standard direct labour hours of production were 29,880 The standard direct labour cost per hour was £8·50 What was the labour efficiency variance? A £17,595 Adverse B £17,595 Favourable C £24,480 Adverse D £24,480 Favourable 15 Last month a company’s budgeted sales were 5,000 units The standard selling price was £6 per unit with a standard contribution to sales ratio of 60% Actual sales were 4,650 units with a total revenue of £30,225 What were the favourable sales price and adverse sales volume contribution variances? A Sales price £ 2,325 Sales volume contribution £ 1,260 B 2,500 1,260 C 2,325 2,100 D 2,500 2,100 16 Which of the following is an initial requirement of a management control system? A Establishing the standard to be achieved B Measuring the actual performance C Setting organisational objectives D Taking appropriate corrective action 17 Which one of the following would be classified as indirect labour? A Assembly workers on a car production line B Bricklayers in a house building company C Machinists in a factory producing clothes D Forklift truck drivers in the stores of an engineering company 18 The following statements relate to the calculation of the regression line y = a + bx using the information on the formulae sheet at the end of this examination paper: (i) n represents the number of pairs of data items used (ii) (∑ x)2 is calculated by multiplying ∑ x by ∑ x (iii) ∑ xy is calculated by multiplying ∑ x by ∑y Which statements are correct? A (i) and (ii) only B (i) and (iii) only C (ii) and (iii) only D (i), (ii) and (iii) 19 The correlation coefficient (r) for measuring the connection between two variables (x and y) has been calculated as 0·6 How much of the variation in the dependent variable (y) is explained by the variation in the independent variable (x)? A 36% B 40% C 60% D 64% 20 The following statements relate to relevant cost concepts in decision making: (i) Materials can never have an opportunity cost whereas labour can (ii) The annual depreciation charge is not a relevant cost (iii) Fixed costs would have a relevant cost element if a decision causes a change in their total expenditure Which statements are correct? A (i) and (ii) only B (i) and (iii) only C (ii) and (iii) only D (i), (ii) and (iii) [P.T.O 21 A company is evaluating a project that requires 4,000 kg of a material that is used regularly in normal production 2,500 kg of the material, purchased last month at a total cost of £20,000, are in stock Since last month the price of the material has increased by 21/2% What is the total relevant cost of the material for the project? A £12,300 B £20,500 C £32,300 D £32,800 22 In a process where there are no work-in-progress stocks, two joint products (J and K) are created Information (in units) relating to last month is as follows: Product Sales J K 6,000 4,000 Opening stock of finished goods 100 400 Closing stock of finished goods 300 200 Joint production costs last month were £110,000 and these were apportioned to joint products based on the number of units produced What were the joint production costs apportioned to product J for last month? A £63,800 B £64,000 C £66,000 D £68,200 23 A company manufactures two products (L and M) using the same material and labour It holds no stocks Information about the variable costs and maximum demands are as follows: Material (£4 per litre) Labour (£7 per hour) Maximum monthly demand Product L £/unit 13 35 Units 6,000 Product M £/unit 19 28 Units 8,000 Each month 50,000 litres of material and 60,000 labour hours are available Which one of the following statements is correct? A Material is a limiting factor but labour is not a limiting factor B Material is not a limiting factor but labour is a limiting factor C Neither material nor labour is a limiting factor D Both material and labour are limiting factors The following information relates to questions 24 and 25: A company has established the following selling price, costs and revenue equations for one of its products: Selling price (£ per unit) = 50 – 0·025Q Marginal revenue (£ per unit) = 50 – 0·05Q Total costs per month (£) = 2,000 + 15Q Q represents the number of units produced and sold per month 24 At what selling price will monthly profits be maximised? A £15·00 B £17·50 C £25·00 D £32·50 25 What would be the monthly profit if the selling price per unit was set at £20? A £1,000 B £4,000 C £6,000 D £12,000 (50 marks) [P.T.O Section B – ALL FIVE questions are compulsory and MUST be attempted Pointdextre Ltd, which manufactures and sells a single product, is currently producing and selling 102,000 units per month, which represents 85% of its full capacity Total monthly costs are £619,000 but at full capacity these would be £700,000 Total fixed costs would remain unchanged at all activity levels up to full capacity The normal selling price of the product results in a contribution to sales ratio of 40% A new customer has offered to take a monthly delivery of 15,000 units at a price per unit 20% below the normal selling price If this new business is accepted, existing sales are expected to fall by one unit for every six units sold to this new customer Required: (a) For the current production and sales level, calculate: (i) (ii) (iii) (iv) the the the the variable cost per unit; total monthly fixed costs; selling price per unit; contribution per unit (6 marks) (b) Calculate the net increase or decrease in monthly profit which would result from acceptance of the new business (4 marks) (c) In the context of decision making, explain the term ‘opportunity cost’ and illustrate your answer by reference to Pointdextre Ltd (2 marks) (12 marks) Partlet Ltd makes a product that passes through two manufacturing processes A normal loss equal to 8% of the raw material input occurs in Process I but no loss occurs in Process II Losses have no realisable value All the raw material required to make the product is input at the start of Process I The output from Process I each month is input into Process II in the same month Work in progress occurs in Process II only Information for last month for each process is as follows: Process I Raw material input Conversion costs Output to Process II Process II Opening work in progress Conversion costs Closing work in progress 50,000 litres at a cost of £365,000 £256,000 47,000 litres 5,000 litres (40% complete for conversion costs) valued at £80,000 £392,000 2,000 litres (50% complete for conversion costs) Required: (a) Prepare the Process I account for last month (5 marks) (b) Calculate in respect of Process II for last month: (i) the value of the completed output; and (ii) the value of closing work in progress (5 marks) (c) If the losses in Process I were toxic and the company incurred costs in safely disposing of them, state how the disposal costs associated with the normal loss would have been recorded in the Process I account No calculations are required (2 marks) (12 marks) 10 JWW Ltd manufactures two products, X and Y, and any quantities produced can be sold for £60 per unit and £25 per unit respectively Variable costs of the two products are: Materials (at £5 per kg) Labour (at £6 per hour) Other variable costs Total X £ per unit 15 24 ––– 45 ––– Y £ per unit 5 ––– 13 ––– Next month only 4,200 kg of material and 3,000 labour hours will be available The company holds no stocks and aims to maximise its profits each month Required: (a) State the objective function and constraints in a form suitable for solving by linear programming (5 marks) (b) Determine the optimal production plan for next month (in units) (4 marks) (9 marks) Ploverleigh Ltd, which manufactures a single product, uses standard absorption costing The standard product cost per unit is as follows: Direct materials Direct labour Fixed production overhead £ 11 24 18 Budgeted and actual production for last month were 12,000 units and 12,500 units respectively The actual costs incurred last month were: Direct materials Direct labour Fixed production overhead £ 142,700 291,300 230,800 Required: (a) Prepare a statement that reconciles the standard cost of actual production with its actual cost for last month and highlights the total variance for each of the three cost elements (4 marks) (b) Provide a breakdown of the total fixed production overhead variance in your statement in (a) by calculating two sub variances (2 marks) (c) If Ploverleigh Ltd uses standard marginal costing instead of standard absorption costing, explain how AND why any of the three total variances calculated in (a) would be different and state clearly which, if any, of the variances would remain unchanged No calculations are required (3 marks) (9 marks) 11 [P.T.O 5 Sangazure Ltd manufactures many different products in a factory that has two production cost centres (T and W) and several service cost centres The total budgeted overhead costs (after the allocation, apportionment and reapportionment of service cost centre costs), and other information for production cost centres T and W are as follows: Cost centre T W Budgeted overheads £780,000 £173,400 Basis of overhead absorption Machine hours Direct labour hours Budgeted activity 16,250 machine hours 14,450 direct labour hours Required: (a) Calculate the overhead absorption rates for cost centres T and W (2 marks) The prime cost of product PP, one of the products made by Sangazure Ltd, is as follows: Direct material Direct labour: Cost centre T Cost centre W £ per unit 10 14 21 One unit of product PP takes 35 minutes of machine time in cost centre T The direct labour in cost centre T is paid £7 per hour and £6 per hour in cost centre W (b) Calculate the total production cost for one unit of PP (3 marks) (c) Briefly explain why service cost centre costs need to be reapportioned to production cost centres Which method of reapportionment fully recognises the work that service cost centres for each other? (3 marks) (8 marks) 12 Formulae Sheet End of Question Paper 13 ... £30 ,22 5 What were the favourable sales price and adverse sales volume contribution variances? A Sales price £ 2, 325 Sales volume contribution £ 1, 26 0 B 2, 500 1, 26 0 C 2, 325 2 ,10 0 D 2, 500 2 ,10 0 16 ... price of the material has increased by 21 / 2% What is the total relevant cost of the material for the project? A 12 ,300 B 20 ,500 C £ 32, 300 D £ 32, 800 22 In a process where there are no work-in-progress... Direct materials Direct labour Fixed production overhead £ 11 24 18 Budgeted and actual production for last month were 12 ,000 units and 12 ,500 units respectively The actual costs incurred last month