ACCA f2 topic wise question

Costs have been allocated and apportioned to these centres as follows: Information regarding how the service centres work for each other and for the production centres is given as: Work

ACCA | Paper F2 Topic-Wise Past Papers

2001-2007

x -clusive!

http://kakakakistani.blogspot.com

A business currently orders 1,000 units of product X at a time It has decided that it may be better to use

the Economic Order Quantity method to establish an optimal reorder quantity

Information regarding stocks is given below:

Current annual total stock costs are £183,000, being the total of the purchasing, ordering and holding

costs of product X

Required:

(b) Using your answer to (a) above calculate the revised annual total stock costs for product X and so

establish the difference compared to the current ordering policy (4 marks)

(c) List ways in which discounts might affect this Economic Order Quantity calculation and subsequent

[Sec: B, Q: 4 F2 December 2003]

2

The following data for the current year relate to a sterile pack purchased by the Goodheart Hospital:

From the start of next year the cost of placing an order will rise by £11 but all the other data will remain

the same

The hospital bases its purchasing decisions on the Economic Order Quantity (EOQ) model

Required:

(a) Calculate the EOQ for:

(i) The current year

(b) Calculate the total extra annual cost to the hospital for next year of ordering and holding stock of the

(c) Identify TWO major costs associated with each of the following:

(i) Holding stock;

[Sec: B, Q: 4 F2 December 2004]

3

Jane plc purchases its requirements for component RB at a price of £80 per unit Its annual usage of

component RB is 8,760 units The annual holding cost of one unit of component RB is 5% of its purchase

price and the cost of placing an order is £12·50

Required:

(a) Calculate the economic order quantity (to the nearest unit) for component RB (2 marks)

(b) Assuming that usage of component RB is constant throughout the year (365 days) and that the lead

time from placing an order to its receipt is 21 days, calculate the stock level (in units) at which an order

(c) (i) Explain the terms ‘stockout’ and ‘buffer stock’

(ii) Briefly describe the circumstances in which Jane plc should consider having a buffer stock of

[Sec: B, Q: 3 F2 June 2005]

Point Ltd uses the economic order quantity (EOQ) model to establish the reorder quantity for raw material

Y The company holds no buffer stock Information relating to raw material Y is as follows:

Annual usage 48,000 units

Purchase price £80 per unit

Ordering costs £120 per order

Annual holding costs 10% of the purchase price

Required:

(a) Calculate:

(i) the EOQ for raw material Y, and

(ii) the total annual cost of purchasing, ordering and holding stocks of raw material Y (4 marks)

The supplier has offered Point Ltd a discount of 1% on the purchase price if each order placed is for

2,000 units

(b) Calculate the total annual saving to Point Ltd of accepting this offer (3 marks)

(c) List FOUR examples of holding costs (2 marks)

A business operates with two production centres and three service centres Costs have been allocated

and apportioned to these centres as follows:

Information regarding how the service centres work for each other and for the production centres is given

as:

Work done for:

Required:

(a) Using the reciprocal method calculate the total overheads in production centres 1 and 2 after

(b) Using the most appropriate basis establish the overhead absorption rate for production centre 1 Briefly

explain the reason for your chosen absorption basis (3 marks)

[Sec: B, Q: 1 F2 December 2003]

2

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 Budgeted Basis of overhead Budgeted activity overheads absorption T £780,000 Machine

hours 16,250 machine hours

W £173,400 Direct labour 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:

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 do for each other? (3 marks)

[Sec: B, Q: 5 F2 December 2005]

There are also two service cost centres (S1 and S2) in the factory The following information has been

extracted from the budget for the coming year:

Allocated and apportioned

Service cost centre S1 costs are reapportioned to all other cost centres based on the number of

employees Service cost centre S2 only does work for P1 and P2 and its costs are reapportioned to these

centres in the ratio 5:3 respectively

Required:

(a) Calculate:

(i) The machine hour absorption rate for cost centre P1, and

(ii) The direct labour hour absorption rate for cost centre P2 (6 marks)

(b) Explain the difference between production overheads that have been ‘allocated’ and those which have

been ‘apportioned’ to cost centres Explain why some manufacturing companies are able to allocate electric

power costs to production cost centres, whereas others can only apportion them (3 marks)

[Sec: B, Q: 5 F2 December 2006]

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 Budgeted Basis of overhead Budgeted activity overheads absorption T £780,000 Machine

hours 16,250 machine hours

W £173,400 Direct labour 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:

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 do for each other? (3 marks)

Adam, the management accountant of Mark Limited, has on file the costs per equivalent unit for the

company’s process for the last month but the input costs and quantities appear to have been mislaid

Information that is available to Adam for last month is as follows:

The losses were as expected and Adam has a record of there being 150 units scrapped during the

month All materials are input at the start of the process The cost per equivalent unit for materials was

£2·60 and for conversion costs was £1·50

Mark Limited uses the FIFO method of stock valuation in its process account

Required:

(b) Calculate the equivalent units for materials and conversion costs (4 marks)

(c) Using your answer from (b) calculate the input costs (4 marks)

[Sec: B, Q: 5 F2 June 2002]

2

A business uses process costing to establish stock valuations and profitability of its products Output from

the process consists of three separate products: two joint products and a by-product Details of the

process are as follows:

Input costs:

The process is expected to lose 20% of the input This is sold for scrap for £4 per unit

The following details relate to the output from the process:

(a) Establish the total cost of the output from the process (4 marks)

(b) Calculate the profit per unit for each of the joint products, A and B (6 marks)

[Sec: B, Q: 2 F2 June 2003]

3

Duddon Ltd makes a product that has to pass through two manufacturing processes, I and II All the

material is input at the start of process I No losses occur in process I but there is a normal loss in process

II equal to 7% of the input into that process Losses have no realisable value

Process I is operated only in the first part of every month followed by process II in the second part of the

month All completed production from process I is transferred into process II in the same month There is

no work in progress in process II

Information for last month for each process is as follows:

Process II

1,650 completed units were transferred to the finished goods warehouse

Required:

(a) Calculate for process I:

(i) The value of the closing work in progress; and

(ii) The total value of the units transferred to process II (4 marks)

(c) Identify TWO main differences between process costing and job costing (2 marks)

[Sec: B, Q: 1 F2 June 2004]

4

Maybud Ltd operates Process X which creates two joint products, A and B, in the ratio of 3:2 by volume

There is no work in progress The following information relates to Process X for last month:

(i) 80,000 litres of raw materials with a total cost of £158,800 were input into the process and conversion

costs were £133,000

(ii) A normal process loss of 5% of the input was expected An actual loss of 5,500 litres was identified at

the end of the process Losses have a realisable value of 75p per litre

It is company policy to apportion joint costs to products using the net realisable value method After

Process X, both product A and product B are further processed at a cost of £2 per litre and £3 per litre

respectively

The final selling prices of the products are as follows:

(b) Explain clearly how an abnormal gain arises in a process Indicate where it would appear in a process

[Sec: B, Q: 1 F2 December 2004]

5

Saphir Ltd operates a process which creates two joint products, X and Y, in the ratio of 7 : 5 by weight

No stocks of work in progress are held in the process and there is a normal process loss equal to 5% of

input Losses have a realisable value of £2 per kg

The following information relates to the process for last month:

10,000 kg of raw materials with a total cost of £18,750 were input into the process and the direct labour

costs were £50,000 Overheads were absorbed at a rate of 140% of direct labour The actual loss was

400 kg

Joint production costs are apportioned to products using the sales value method Selling prices of the

joint products are:

(a) Prepare the process account for last month in which both the output weight and value for each of the joint

(b) Explain briefly the characteristics of a by-product (2 marks)

[Sec: B, Q: 1 F2 June 2005]

6

Partlet Ltd makes a product that passes through two manufacturing processes A normal loss equal to 8%

of the rawmaterial 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

(b) Calculate in respect of Process II for last month:

(i) The value of the completed output; and

(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

[Sec: B, Q: 2 F2 December 2005]

7

Corcoran Ltd operates several manufacturing processes In process G, joint products (P1 and P2) are

created in the ratio 5:3 by volume from the raw materials input In this process a normal loss of 5% of the

raw material input is expected Losses have a realisable value of £5 per litre The company holds no work

in progress The joint costs are apportioned to the joint products using the physical measure basis

The following information relates to process G for last month:

Other costs incurred:

Required:

(a) Prepare the process G account for last month in which both the output volumes and values for each of

The company can sell product P1 for £20 per litre at the end of process G It is considering a proposal to further

process product P1 in process H in order to create product PP1 Process H has sufficient spare capacity to do this

work The further processing in process H would cost £4 per litre input from process G In process H there would be a

normal loss in volume of 10% of the input to that process This loss has no realisable value Product PP1 could then

be sold for £26 per litre

(b) Determine, based on financial considerations only, whether product P1 should be further processed to

(c) In the context of process G in Corcoran Ltd, explain the difference between ‘direct expenses’ and

[Sec: B, Q: 1 F2 June 2006]

8

Yeomen Ltd uses process costing and the FIFO method of valuation The following information for last

month relates to Process G, where all the material is added at the beginning of the process:

at £24,600 (£16,500 for direct materials; £8,100 for conversion)

Costs incurred:

throughout the process, can be sold for £3 per litre

warehouse

Required:

(a) Prepare the Process G Account for last month in £ and litres (10 marks)

(b) Identify TWO types of organisation where it would be appropriate to use service (operation) costing For

[Sec: B, Q: 4 F2 December 2006]

9

Luiz Ltd operates several manufacturing processes in which stocks of work-in-progress are never held In

process K, joint products (P1 and P2) are created in the ratio 2:1 by volume from the raw materials input

In this process a normal loss of 4% of the raw materials input is expected Losses have a realisable value

of £5 per litre The joint costs of the process are apportioned to the joint products using the sales value

basis At the end of process K, P1 and P2 can be sold for £25 and £40 per litre respectively

The following information relates to process K for last month:

Required:

(a) Prepare the process K account for last month in which both the output volumes and values for each joint

The company could further process product P1 in process L to create product XP1 at an incremental cost

of £3 per litre input Process L is an existing process with spare capacity In process L a normal loss of

8% of input is incurred which has no value Product XP1 could be sold for £30 per litre

Required:

(b) Based on financial considerations only, determine, with supporting calculations, whether product P1

should be further processed in process L to create product XP1 (3 marks)

[Sec: B, Q: 3 F2 June 2007]

Costing

Surat is a small business which has the following budgeted marginal costing profit and loss account for

the month ended 31 December 2001:

20

The normal level of activity is 2,000 units per month Fixed production costs are budgeted at £4,000 per

month and absorbed on the normal level of activity of units produced

Required:

(a) Prepare a budgeted profit and loss account under absorption costing for the month ended 31 December

(b) Reconcile the profits under these two methods and explain why a business may prefer to use marginal

[Sec: B, Q: 5 F2 December 2001]

2

Oathall Limited, which manufactures a single product, is considering whether to use marginal or

absorption costing to report its budgeted profit in its management accounts

The following information is available:

––

Fixed production overheads are budgeted to be £300,000 per month and are absorbed on an activity

level of 100,000 units per month

For the month in question, sales are expected to be 100,000 units although production units will be

120,000 units

Fixed selling costs of £150,000 per month will need to be included in the budget as will the variable

selling costs of £2 per unit

(a) Prepare the budgeted profit and loss account for a month for Oathall Limited using absorption costing

(b) Prepare the budgeted profit and loss account for a month for Oathall Limited using marginal costing

[Sec: B, Q: 3 F2 December 2002]

3

Langdale Ltd is a small company manufacturing and selling two different products – the Lang and the

Dale Each product passes through two separate production cost centres – a machining department,

where all the work is carried out on the same general purpose machinery, and a finishing section There

is a general service cost centre providing facilities for all employees in the factory

The company operates an absorption costing system using budgeted overhead absorption rates The

management accountant has calculated the machine hour absorption rate for the machining department

as £3·10 but a direct labour hour absorption rate for the finishing section has yet to be calculated

The following data have been extracted from the budget for the coming year:

Direct labour cost per unit:

Service cost centre costs are reapportioned to production cost centres

Required:

(a) Calculate the direct labour hour absorption rate for the finishing section (5 marks)

(b) Calculate the budgeted total cost for one unit of product Dale only, showing each main cost element

(c) The company is considering a change over to marginal costing State with reasons, whether the total

profit for the coming year calculated using marginal costing would be higher or lower than the profit

calculated using absorption costing No calculations are required (3 marks)

[Sec: B, Q: 5 F2 June 2004]

Oakapple Ltd manufactures a single product which has a standard selling price of £15 per unit It

operates a standard absorption costing system The total standard production cost is £9 per unit of which

£4 per unit represents the variable cost element Non-production costs of £44,000 per month are all fixed

The following data relate to the month just ended:

(a) Calculate the sales price and sales volume profit variances for the month just ended (4 marks)

One of the qualities of good information is that it should be communicated to the right person or persons in an

organisation

(b) To whom should the variances calculated in (a) be communicated and why? (3 marks)

The company is also considering a change from absorption costing to marginal costing

(c) Calculate the BUDGETED profit for the month just ended under:

(i) Absorption costing;

Less: Cost of sales:

The budget was prepared using absorption costing principles If budgeted production in the first month

had been 2,000 units then the total production cost would have been £188,000

Required:

(a) Using the high-low method, calculate:

(i) the variable production cost per unit; and

(b) If the budget for the first month of trading had been prepared using marginal costing principles, calculate:

(i) the total contribution; and

(c) Explain clearly the circumstances in which the monthly profit or loss would be the same using absorption

[Sec: B, Q: 4 F2 June 2005]

Pinafore Ltd manufactures and sells a single product The budgeted profit statement for this month, which

has been prepared using marginal costing principles, is as follows:

Less Variable production cost of sales:

Less Closing stock (1,000 units) 1 (23)

(a) Prepare in full a budgeted profit statement for this month using absorption costing principles Assume

that fixed production overhead costs are absorbed using the normal level of activity (6 marks)

(b) Prepare a statement that reconciles the net profit calculated in (a) with the net profit using marginal

(c) Which of the two costing principles (absorption or marginal) is more relevant for short-run

[Sec: B, Q: 5 F2 June 2006]

7

Marco Ltd manufactures and sells a single product The budgeted profit and loss statement for next year,

which has been drawn up using absorption costing principles, is as follows:

Less Cost of sales:

Production cost (45,000 units):

Less Non-production expenses:

––––––

(958) ––––––

(a) Using marginal costing principles, calculate the following for next year:

(i) The total budgeted contribution from sales; and

(b) Calculate the break-even point (in units) for next year (2 marks)

(c) Explain clearly why Marco Ltd’s net profit for next year using marginal costing principles differs from that

under absorption costing Under what conditions would the two net profits be the same? (3 marks)

[Sec: B, Q: 4 F2 June 2007]

Analysis

Toowomba manufactures various products and uses CVP analysis to establish the minimum level of

production to ensure profitability

Fixed costs of £50,000 have been allocated to a specific product but are expected to increase to

£100,000 once production exceeds 30,000 units, as a new factory will need to be rented in order to

produce the extra units Variable costs per unit are stable at £5 per unit over all levels of activity Revenue

from this product will be £7·50 per unit

Required:

(a) Formulate the equations for the total cost at:

(i) Less than or equal to 30,000 units;

(b) Prepare a breakeven chart and clearly identify the breakeven point or points (6 marks)

(c) Discuss the implications of the results from your graph in (b) with regard to Toowomba’s production

(i) Sketch a profit-volume chart and indicate where the break-even point would be for a single

product firm Clearly label the axes and indicate the profit line and fixed costs

(ii) How would contribution be established from your chart in (b)(i)? (4 marks)

[Note: no specific numbers are required.]

[Sec: B, Q: 2 F2 December 2003]

3

A company manufactures a single product, product Y It has documented levels of demand at certain

selling prices for this product as follows:

Using a tabular approach calculate the marginal revenues and marginal costs for product Y at the different

levels of demand, and so determine the selling price at which the company profits are maximised

[Sec: B, Q: 3 F2 December 2003]