Financial information for managemetn paper 1 2 2003 p2

PART FRIDAY JUNE 2003 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, Present Value and Annuity Tables are on pages 13, 14 and 15 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 A company has established a marginal costing profit of £72,300 Opening stock was 300 units and closing stock is 750 units The fixed production overhead absorption rate has been calculated as £5/unit What was the profit under absorption costing? A B C D £67,050 £70,050 £74,550 £77,550 The following data relates to a wage index for a company: Year 1997 2002 Wages per week £275 £315 Index 117 157 What were the 2002 weekly wages at 1997 prices (to the nearest £)? A B C D Which of the following is correct? A B C D £201 £235 £275 £369 Qualitative data is numerical information only Information can only be extracted from external sources Operational information gives details of long-term plans only Data can be either discrete or continuous Which of the following are purposes of a budget? (i) (ii) (iii) (iv) establishing strategic options motivating management establishing long term objectives planning operations A B C D (i) and (iii) only (i) and (iv) only (ii) and (iv) only (ii), (iii) and (iv) only The following information relates to questions and 6: A company has a budgeted material cost of £125,000 for the production of 25,000 units per month Each unit is budgeted to use kg of material The standard cost of material is £2·50 per kg Actual materials in the month cost £136,000 for 27,000 units and 53,000 kg were purchased and used What was the adverse material price variance? A B C D What was the favourable material usage variance? A B C D £1,000 £3,500 £7,500 £11,000 £2,500 £4,000 £7,500 £10,000 A company is preparing a production budget for the next year The following information is relevant: Budgeted Sales Opening stock Closing stock 10,000 units 600 units 5% of budgeted sales The production process is such that 10% of the units produced are rejected What is the number of units required to be produced to meet demand? A B C D 8,900 units 9,900 units 10,900 units 11,000 units A company produces and sells a single product whose variable cost is £6 per unit Fixed costs have been absorbed over the normal level of activity of 200,000 units and have been calculated as £2 per unit The current selling price is £10 per unit How much profit is made under marginal costing if the company sells 250,000 units? A B C D £500,000 £600,000 £900,000 £1,000,000 Which of the following would be considered to be a pricing strategy? (i) target costing (ii) price skimming (iii) discrimination pricing A B C D (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii) [P.T.O 10 A company uses process costing to value its output and all materials are input at the start of the process The following information relates to the process for one month: Input Opening stock Losses Closing stock 3,000 units 400 units 10% of input is expected to be lost 200 units How many good units were output from the process if actual losses were 400 units? A B C D 2,800 2,900 3,000 3,200 units units units units 11 James wants to invest his pocket money He receives £5 a month which he puts into a savings account earning compound interest at 0·5% per month If James saves his money, how much will be in the account in five years’ time (to the nearest £)? A B C D £303 £338 £349 £354 12 Which of the following is correct with regard to stocks? (i) Stock-outs arise when too little stock is held (ii) Safety stocks are the level of units maintained in case there is unexpected demand (iii) A reorder level can be established by looking at the maximum usage and the maximum lead-time A B C D (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii) 13 A company wishes to make a profit of £150,000 It has fixed costs of £75,000 with a C/S ratio of 0·75 and a selling price of £10 per unit How many units would the company need to sell in order to achieve the required level of profit? A B C D 10,000 15,000 22,500 30,000 units units units units 14 A company uses regression analysis to establish a total cost equation for budgeting purposes Data for the past four months is as follows: Month Total cost £’000 57·5 37·5 45·0 60·0 –––––– 200·00 –––––– Quantity Produced ’000 1·25 1·00 1·50 2·00 ––––– 5·75 ––––– The gradient of the regression line is 17·14 What is the value of a? A B C D 25·36 48·56 74·64 101·45 15 A company is considering its options with regard to a machine which cost £60,000 four years ago If sold the machine would generate scrap proceeds of £75,000 If kept, this machine would generate net income of £90,000 The current replacement cost for this machine is £105,000 What is the deprival value of the machine? A B C D £105,000 £90,000 £75,000 £60,000 [P.T.O 16 Net Present Value 5% 10% 15% Interest rate Which of the following is correct with regard to the above graph? (i) The IRR is 10% (ii) The NPV at 15% is positive (iii) The project’s total inflows exceed the total outflows A B C D (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii) 17 What is the economic batch quantity used to establish? Optimal A reorder quantity B reorder level C cumulative production quantity D stock level for production 18 A company wishes to evaluate a division which has the following profit and loss account and balance sheet: Profit and Loss account Sales £’000 500 ––––– 200 (80) ––––– 120 ––––– ––––– Gross profit Other costs Net profit Balance Sheet Fixed assets Current assets Current liabilities £’000 750 350 (450) ––––– 650 ––––– ––––– Net assets What is the residual income for the division if the company has a cost of capital of 18%? A B C D £3,000 £21,600 £83,000 £117,000 19 Which of the following is correct when considering the allocation, apportionment and reapportionment of overheads in an absorption costing situation? A B C D Only production related costs should be considered Allocation is the situation where part of an overhead is assigned to a cost centre Costs may only be reapportioned from production centres to service centres Any overheads assigned to a single department should be ignored 20 A company uses limiting factor analysis to calculate an optimal production plan given a scarce resource The following applies to the three products of the company: Product Direct materials (at £6/kg) Direct labour (at £10/hour) Variable overheads (£2/hour) Maximum demand (units) Optimal production plan I £ 36 40 –––––– 84 –––––– –––––– 2,000 2,000 II £ 24 25 –––––– 54 –––––– –––––– 4,000 1,500 III £ 15 10 –––––– 27 –––––– –––––– 4,000 4,000 How many kg of material were available for use in production? A B C D 15,750 28,000 30,000 38,000 kg kg kg kg [P.T.O 21 A company uses the Economic Order Quantity (EOQ) model to establish reorder quantities The following information relates to the forthcoming period: Order costs = £25 per order Holding costs = 10% of purchase price = £4/unit Annual demand = 20,000 units Purchase price = £40 per unit EOQ = 500 units No safety stocks are held What are the total annual costs of stock (i.e the total purchase cost plus total order cost plus total holding cost)? A B C D £22,000 £33,500 £802,000 £803,000 22 Which of the following would be considered a service industry? (i) an airline company (ii) a railway company (iii) a firm of accountants A B C D (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii) 23 The following information for advertising and sales has been established over the past six months: Month Sales Revenue £’000 155 125 200 175 150 225 Advertising expenditure £’000 2·5 5·5 4·5 6·5 Using the high-low method which of the following is the correct equation for linking advertising and sales from the above data? A B C D sales revenue = 62,500 + (25 x advertising expenditure) advertising expenditure = –2,500 + (0·04 x sales revenue) sales revenue = 95,000 + (20 x advertising expenditure) advertising expenditure = –4,750 + (0·05 x sales revenue) 24 A company uses decision tree analysis to evaluate potential options The management accountant for the company has established the following: Cash flows from sales revenue High sales = £2,000,000 0·8 Build new premises Cost £1,000,000 0·2 Low sales = £1,000,000 High sales = £2,000,000 0·7 Upgrade old premises Cost = ? 0·3 Low sales = £1,000,000 What would be the cost of the upgrade that would make the company financially indifferent between building new premises and upgrading the old one? A B C D £100,000 £900,000 £1,000,000 £1,700,000 25 Which of the following could be true with regard to a management information system (MIS)? An MIS is (i) a database system (ii) used for planning, directing and controlling activities (iii) a hierarchy of information within an organisation A B C D (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii) (50 marks) [P.T.O Section B – ALL FIVE questions are compulsory and MUST be attempted A company uses absorption costing for both internal and external reporting purposes as it has a considerable level of fixed production costs The following information has been recorded for the past year: Budgeted fixed production overheads Budgeted (Normal) activity levels: Units Labour hours £2,500,000 62,500 units 500,000 hours Actual fixed production overheads Actual levels of activity: Units produced Labour hours £2,890,350 70,000 units 525,000 hours Required: (a) Calculate the fixed production overhead expenditure and volume variances and briefly explain what each variance shows (5 marks) (b) Calculate the fixed production overhead efficiency and capacity variances and briefly explain what each variance shows (5 marks) (10 marks) 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 is as follows: Input costs: Materials Labour Overheads £45,625 for 12,500 kg £29,500 £26,875 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: Product A B C Type Joint Joint By-product % of output 50% 40% 10% Final sales value per unit £20 £25 £2 Further costs to complete £10 Joint costs are allocated on the basis of net realisable value at split-off Required: (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) (10 marks) 10 (a) Explain the following terms giving an example of each: (i) service centre; and (ii) production centre Explain how the treatment of overheads differs between the two different types of centre (6 marks) (b) Explain how Activity Based Costing differs from traditional absorption costing, giving an example (4 marks) (10 marks) A company uses linear programming to establish an optimal production plan in order to maximise profit The company finds that for the next year materials and labour are likely to be in short supply Details of the company’s products are as follows: A £ 30 ––– 41 50 ––– ––– ––– Materials (at £2 per kg) Labour (at £6 per hour) Variable overheads (at £1 per hour) Variable cost Selling price Contribution B £ 18 ––– 29 52 ––– 23 ––– ––– There are only 30,000 kg of material and 36,000 labour hours available The company also has an agreement to supply 1,000 units of product A which must be met Required: (a) Formulate the objective function and constraint equations for this problem (4 marks) (b) Plot the constraints on a suitable graph and determine the optimal production plan (6 marks) (10 marks) 11 [P.T.O 5 A company has to choose between three investments with details as follows: Investment Timing of Cash Flows flows per annum Year £ (75,000) 1–4 25,000 5,000 Investment Timing of Cash Flows flows per annum Year £ (100,000) A perpetuity 11,000 starting at time Investment Timing of Cash Flows flows per annum Year £ (125,000) 30,000 40,000 50,000 60,000 (10,000) The company has a cost of capital of 10% Required: Calculate the net present value of each of the three investments at the company’s cost of capital and state which investment would be preferred (10 marks) 12 Formulae Sheet Laspeyre’s price index Paasche price index Laspeyre’s quantity index Paasche quantity index 13 [P.T.O Present Value Table 3UHVHQW YDOXH RI  LH   U²Q :KHUH U Q GLVFRXQW UDWH QXPEHU RI SHULRGV XQWLO SD\PHQW 'LVFRXQW UDWH U 3HULRGV Q                ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă           ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă           ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă      Q                ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă           ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă           ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă      14 Annuity Table 3UHVHQW YDOXH RI DQ DQQXLW\ RI  LH :KHUH U Q  ²   U²Q ³³³³²² U GLVFRXQW UDWH QXPEHU RI SHULRGV 'LVFRXQW UDWH U 3HULRGV Q                ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă           ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă           ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă      Q                ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă           ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă           ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă ă      End of Question Paper 15 ... for a company: Year 19 97 20 02 Wages per week 27 5 £ 315 Index 11 7 15 7 What were the 20 02 weekly wages at 19 97 prices (to the nearest £)? A B C D Which of the following is correct? A B C D 2 01. .. (iii) 23 The following information for advertising and sales has been established over the past six months: Month Sales Revenue £’000 15 5 12 5 20 0 17 5 15 0 22 5 Advertising expenditure £’000 2 5 5·5... –––––– 20 0·00 –––––– Quantity Produced ’000 1 25 1 00 1 50 2 00 ––––– 5·75 ––––– The gradient of the regression line is 17 14 What is the value of a? A B C D 25 ·36 48·56 74·64 10 1·45 15 A company