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Answers

Part 1 Examination – Paper 1.2


Financial Information for Management June 2003 Answers

1 C Marginal costing profit £72,300


Less: fixed costs in opening stock
(300 x £5) (£1,500)
Add: fixed costs in closing stock
(750 x £5) £3,750
––––––––
£74,550
––––––––

£315
2 B ––––– x 117 = £235
157

3 D

4 C

5 B Price variance
Did cost £136,000
Should cost
(53,000 kg x £2·50) £132,500
–––––––––––––
£3,500 adverse
–––––––––––––

6 A Usage variance
Did use 53,000 kg
Should use
(27,000 units x 2 kg) 54,000 kg
–––––––––
1,000 kg
x £2·50
£2,500 favourable
––––––––––––––––

7 D Sales 10,000 units


Less: opening stock (600 units)
Add: closing stock
(5% x 10,000) 500 units
––––––––––
Good production required 9,900 units
Good production = 90% of total production, therefore
9,900
Total production = –––––– = 11,000 units
90%

8 B 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

9 C

19
10 A
Process

Units Units
Opening stock 400 Losses 400
Input 3,000 Output 2,800
Closing stock 200
–––––– ––––––
3,400 3,400
––––––
–––––– ––––––
––––––

 1⋅ 00560 – 1
11 C 5×  = £348 ⋅ 85 ≈ £349
 0 ⋅ 005 

12 D

13 D 150,000 + 75,000
–––––––––––––––––– = £300,000 Breakeven revenue
0·75
300,000
––––––– = 30,000 units
£10

∑y ∑x
14 A a= −b
n n
200 5 ⋅ 75
a= – (17 ⋅ 14 × ) = 25 ⋅ 36
4 4

15 B Lower of

replacement cost higher of


£105,000

NRV Economic value


75,000 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 6 6

21 C Total cost of having stock =


D Q
(p x D) + (–– x Co) + (Ch x ––)
Q 2
20,000 500
= (40 x 20,00) + (–––––– x 25) + (4 x ––– )
500 2
= 800,000 + 1,000 + 1,000 = 802,000

22 D

20
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 = 0 + (4,000 x b)
100,000
therefore b = ––––––– = £25
4,000
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
1 (a) Fixed Production Overhead Expenditure variance
£
Actual costs incurred 2,890,350
Budgeted costs 2,500,000
––––––––––
Variance 390,350 adverse
This variance indicates that the company have spent more than originally budgeted.
Fixed Production Overhead Volume variance
Labour hours
Actual flexed 560,000
Budget 500,000
––––––––
Variance 60,000 favourable
x £5 (W1)
= £300,000 favourable
£2,500,000
W1 FOAR = ––––––––––––– = £5
500,000 hours
This variance indicates that the company has used more labour hours than originally budgeted.
Or based on units
Units
Actual 70,000
Budget 62,500
–––––––
Variance 7,500 favourable
x £40 (W2)
= £300,000 favourable
£2,500,000
W2 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
Did work 525,000
Should have worked 560,000
––––––––
35,000 favourable
x £5 (W3)
= £175,000 favourable
£2,500,000
W3 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
Actual hours worked 525,000
Budgeted hours of work 500,000
––––––––
25,000 favourable
x £5 (W3)
= £125,000 favourable
This variance shows that labour worked for more hours than was originally budgeted thus exceeding the budgeted capacity.

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2 (a) Total cost of output = 45,625 + 29,500 + 26,875 – (12,500 x 20% x 4)
2 (a) Total cost of output = 102,000 – 10,000= 92,000
or
Process

Units £ Units £
Materials 12,500 45,625 Normal loss 2,500 10,000
Labour 29,500 Output 10,000 β 92,000 β
Overheads 26,875
––––––– –––––––– ––––––– ––––––––
12,500 102,000 12,500 102,000
–––––––
––––––– ––––––––
–––––––– –––––––
––––––– ––––––––
––––––––

(b) Joint costs to be allocated = (£9·20 x 10,000) – 1,000 x £2


= £92,000 – £2,000
= £90,000
Product Units % NRV at Total Joint cost Total Profit
split-off NRV allocation profit per
unit
50,000
A 5,000 50 20–10 50,000 30,000 = –––––––– 20,000 4
=10 150,000
100,000
B 4,000 40 25 100,000 60,000 = –––––––– 40,000 10
150,000
C 1,000 10 2
–––––– ––– –––––––– –––––––
Total 10,000 100 150,000 90,000
–––––– ––– –––––––– –––––––
The profit per unit for product A is £4 and for B is £10.

3 (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.

4 (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 b≥0
Restriction on A a ≥ 1,000
Materials 3a + 4b ≤ 30,000
Labour 5a + 3b ≤ 36,000

23
(b)

b units a = 1,000
’000

13

12

11

10

9
5a + 3b = 36,000
8

3a + 4b = 30,000
3 lso-contribution
line

0
1 2 3 4 5 6 7 8 9 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.

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5 Investment 1
Time Cash Flows Discount factor Present Value
£’000 at 10% £’000
0 (75) 1 (75)
1-4 25 3·17 79·25
5 5 0·621 3·105
––––––
7·355
––––––
––––––
Investment 2
Time Cash Flows Discount factor Present Value
£’000 at 10% £’000
0 (100) 1 (100)
1– ∞ 11 1/0·1=10 110
––––––
10
––––––
––––––
Investment 3
Time Cash Flows Discount factor Present Value
£’000 at 10% £’000
0 (125) 1 (125)
1 30 0·909 27·27
2 40 0·826 33·04
3 50 0·751 37·55
4 60 0·683 40·98
5 (10) 0·621 (6·21)
––––––
7·63
––––––
––––––
Since investment 2 has the highest net present value it would be the preferred investment.

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Part 1 Examination – Paper 1.2
Financial information for Management June 2003 Marking Scheme

Marks
1 (i) C 2
(ii) B 2
(iii) D 2
(iv) C 2
(v) B 2
(vi) A 2
(vii) D 2
(viii) B 2
(ix) C 2
(x) A 2
(xi) C 2
(xii) D 2
(xiii) D 2
(xiv) A 2
(xv) B 2
(xvi) A 2
(xvii) C 2
(xviii) A 2
(xix) A 2
(xx) B 2
(xxi) C 2
(xxii) D 2
(xxiii) A 2
(xxiv) B 2
(xxv) D 2
–––
50
–––

1 (a) Fixed production overhead expenditure variance £ 1/


2
Fixed production overhead expenditure variance adverse 1/
2
Explanation of variance 1
Fixed production overhead volume variance £ 1/
2
Fixed production overhead volume variance favourable 1/
2
Calculation of the FOAR/unit 1
Explanation of variance 1
–––
5

(b) Efficiency variance £ 1/


2
Efficiency variance favourable 1/
2
Calculating FOAR/labour hour 1
Explanation of variance 1
Capacity variance £ 1/
2
Capacity variance favourable 1/
2
Explanation of variance 1
–––
5
–––
10
–––

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Marks
2 (a) Calculating the total cost of output to include:
material cost 1/
2
labour costs 1/
2
overhead cost 1/
2
deduct normal loss scrap proceeds 1
Calculation of 92,000 11/2
–––
4

(b) Calculating joint costs less by-product proceeds 1


Calculating number of units for A,B and C from output 1
NRV at split-off for A 1/
2
NRV at split-off for B and C 1/
2
Total NRV calculation 1/2 mark each A and B 1
Joint cost allocation 1/2 mark each A and B 1
Profit per unitv 1/2 mark each A and B 1
–––
6
–––
10
–––

3 (a) Definition of service centre 1


Example of a service centre 1
Definition of production centre 1
Example of a production centre 1
Explanation of the differing treatments of overheads:
Service centre cost reapportioned 1
Production centre costs absorbed 1
–––
6

(b) Explanation of difference including the use of the term cost driver 2
Example 2
–––
4
–––
10
–––

4 (a) Defining variables 1/


2
Objective function 1/
2
Non-negativity constraint for b 1/
2
Variable a greater than 1,000 1
Material constraint 1
Labour constraint 1/
2
–––
4

(b) labelled axes on graph 1/


2
good presentation 1/
2
correctly drawn material line 1
correctly drawn labour line 1
restriction on a 1/
2
plotting the objective function 1
establishing the optimal point 11/2
–––
6
–––
10
–––

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Marks
5 Investment 1
Correct discount factors 1
For using a cumulative discount factor 1/
2
Calculation of present value 1/2 per line in table 11/2
Investment 2
Correct value at To 1/
2
Calculation of present value of the perpetuity 11/2
Investment 3
Correct discount factors 1
Calculation of present value 1/2 per line in table 3
Preferred investment stated 1
–––
10
–––

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