Financial information for managemetn paper 1 2 2004 a1

Answers Part Examination – Paper 1.2 Financial Information for Management June 2006 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A C B C A D C D B A B A B B C B A C C C D D C C A A C B Contribution per unit = 15 x 0·4 = £6 Break even point = 18,000 ÷ 15 = 1,200 units Profit when 1,500 units sold = (1,500 – 1,200) x = £1,800 C Units 1,400 1,200 ––––– 1,200 ––––– Total cost (£) 68,200 66,600 –––––––– 1,600 –––––––– Variable cost per unit = (1,600 ÷ 200) = £8 Total fixed cost (above 1,000 units) = [68,200 – (1,400 x 8)] = £57,000 Total cost for 1,000 units = [(57,000 – 6,000) + (1,000 x 8)] = £59,000 A D C D B 10 A EOQ = {[ x 20 x (4 x 20,000) ] ÷ [0·06 x 25]}0·5 = 1,461 units (Budgeted quantity – Actual quantity) x standard profit per unit (1,000 – 900) x (50 – 39) = £1,100 Budgeted overhead – actual overhead = 1,250 Actual overhead = 0·98 x Budgeted overhead Budgeted overhead – (0·98 x Budgeted overhead) = 1,250 Budgeted overhead = 1,250 ÷ 0·02 = 62,500 Actual overhead = 62,500 – 1,250 = £61,250 17 11 B Closing stock = 100 – 50 + 200 – 50 – 50 = 150 units FIFO = 150 x 62 = £9,300 LIFO = (100 x 62) + (50 x 67) = £9,550 LIFO valuation greater than FIFO valuation by £250 12 A 13 B 13 B Cost centre G = 40,000 + (0·50 x 18,000) + 0·30 [30,000 + (0·10 x 18,000)] Cost centre G = £58,540 14 B 15 C 16 B 17 A Prime cost [64 + (7 x 8)] Production overhead (7 x 20) Non-production overhead (0·60 x 120) Total cost 18 C £ 120 140 –––– 260 72 –––– 332 –––– Opportunity cost per skilled labour hour = [25 ÷ (20 ÷ 8)] = £10 Relevant cost: £ Skilled labour cost (90 x 8) 1,720 Opportunity cost (90 x 10) 1,900 ––––– 1,620 ––––– 19 C Relevant cost of a regularly used material in stock is its replacement cost (600 x 27) = £16,200 20 C Input = (14,000 + 3,000 – 2,000) = 15,000 units 21 D Material cost per unit = [51,000 ÷ (12,000 + 3,000)] = £3·40 Conversion: Cost per equivalent unit = [193,170 ÷ (12,000 + 0·40 x 2,000 + 0·30 x 3,000)] Cost per equivalent unit = 193,170 ÷ 13,700 = £14·10 Closing stock valuation = (3,000 x 3·40) + (900 x 14·1) = £22,890 22 D 23 C Profits maximised when: Marginal revenue (MR) = Marginal cost (MC) MC = MR = (40 – 0·016Q) MR = MC 40 – 0·016Q = 8,000 MR = MC 40 – 0·016 Q = 2,000 When Q = 2,000 Price = 40 – (0·008 x 2,000) = £24 24 C Objective function (maximisation of contribution) = 4X + Y Let 4X + Y = 40,000 (assumed) When X = 0, Y = 40,000 When Y = 0, X = 10,000 These two points are plotted on the graph and joined by a (dotted) line This line is then moved away from the origin keeping it parallel to the originally drawn dotted line until it reaches the furthest most point in the feasible area ((OHJKL) In this case that will be the point K which is optimal 25 A 10X + 7Y = 70,000 When X = 0, Y = 10,000 When Y = 0, X = 7,000 Constraint line (2) joins these two points on the axes 18 Section B (a) Raw material Direct labour Direct expenses Production overheads (W1) Abnormal gain (W4) Litres 60,000 Process £ 381,000 180,000 54,000 G Output (W3): P1 (W4) P2 (W4) Normal loss (W2) Litres £ 36,250 21,750 3,000 507,500 304,500 15,000 ––––––– 61,000 ––––––– –––––––– 827,000 –––––––– 198,000 1,000 ––––––– 61,000 ––––––– 14,000 –––––––– 827,000 –––––––– Workings: W1 Production overheads = 110% x 180,000 = £198,000 W2 Normal loss = 5% x 60,000 = 3,000 litres at = £15,000 W3 Total output = 61,000 – 3,000 = 58,000 W3 Split P1 : P2 in ratio : W3 P1 = (5 ÷ 8) x 58,000 = 36,250 litres W3 P2 = (3 ÷ 8) x 58,000 = 21,750 litres W4 Cost per litre: W3 Net total cost = 381,000 + 180,000 + 54,000 + 198,000 – 15,000 W3 Net total cost = £798,000 W3 Expected output = 60,000 x 95% = 57,000 litres W3 Cost per litre = 798,000 ÷ 57,000 = £14 W3 Valuations: W3 Abnormal gain = 1,000 x 14 = £14,000 W3 Joint products: W3 Joint prodP1 36,250 x 14 = £507,500 W3 Joint prodP2 21,750 x 14 = £304,500 (b) Assuming 100 litres of product P1 Revenue if sold at point of split-off without further processing (100 x 20) Revenue (from PP1) if sold after further processing (100 x 90%) x 26 Additional revenue Additional cost (in process H) £ 2,000 2,340 ––––– 1,340 ––––– 1,400 ––––– The additional cost exceeds the additional revenue by £60 for every 100 litres of product P1 further processed For example, if the output of 36,250 litres of product P1 last month were further processed to make product PP1 then the additional costs would exceed the additional revenue by (36,250 ÷ 100 x 60) = £21,750 Therefore product P1 should not be further processed into product PP1 (c) (a) (i) Direct expenses are costs, other than material and labour, which are specifically traceable to the process (G) An example of such a cost would be the cost of hiring special equipment required for that process only (ii) Production overheads are general factory wide costs which need to be apportioned to the various processes that benefit from them An example of production overhead would be factory rates Monthly machining hours required to meet maximum demand: Product Units Hours/unit R 9,000 (40 ÷ 60) = 0·667 S 6,000 (54 ÷ 60) = 0·900 T 3,000 (75 ÷ 60) = 1·250 Available hours Shortfall in machining hours 19 Total hours 16,000 15,400 13,750 –––––– 15,150 10,500 –––––– 14,650 –––––– (b) Calculation of the contribution per machining hour for each product: R S Selling price per unit £60 £75 Contribution to sales ratio 20% 24% Contribution per unit £12 £18 Machining hours per unit 0·667 0·900 Contribution per machine hour £18 £20 Ranking 2nd 1st T £84 25% £21 1·250 £16·80 3rd Optimal production plan and resultant contribution: Product Units Machine hours used Contribution (£) S 6,000 15,400 108,000 R 7,650 15,100 (balance) 191,800 ––––––– –––––––– Total 10,500 199,800 ––––––– –––––––– (a) Direct material variances: Actual quantity purchased at actual price £ 294,000    300,000  Actual quantity purchased at standard price (40,000 kg at 7·50 ) Actual quantity used at standard price (36,500 kg at 7·50 ) Standard quantity for actual production at standard price [(7,200 units x 4·8) at 7·50] (b) 273,750    259,200  Reconciliation: Actual cost of purchases Less: Adverse/Plus: Favourable variances: Less: Price variance [as in (a)] Less: Usage variance [as in (a)] £ Variance (£) 6,000 F Price 14,550 A Usage £ 294,000 6,000 F 14,550 A ––––––– (8,550) A Less: Increase in stock at standard cost Less: [(40,000 – 36,500) x 7·50] (26,250) –––––––– 259,200 –––––––– Standard material cost of actual production [per (a)] (c) (a) (i) Price variance (£6,000 F) Cheaper materials, but with a lower quality than standard, may have been purchased because the normal supplier was unable to deliver Usage variance (£14,550 A) The lower quality materials purchased may have required higher than standard usage per unit in production (ii) The purchase price variance should be reported to the purchasing (procurement) manager as this is the person within the organisation who is responsible for buying the materials This manager would be able to take any appropriate action In the linear regression equation y = a + bx: y = maintenance cost in £’000 (dependent variable), and x = production units in ’000 (independent variable) Σ y = (265 + 302 + 222 + 240 + 362 + 295 + 404 + 400) = 2,490 Σ x = (20 + 24 + 16 + 18 + 26 + 22 + 32 + 30) = 188 n=8 Using formulae provided in the examination: b = [(8 x 61,250) – (188 x 2,490)] ÷ [ (8 x 4,640) – (188 x 188)] b = 12·32 a = (2,490 ÷ 8) – (12·32 x 188 ÷ 8) = 21·73 Linear equation is: y = 21·73 + 12·32x where x and y are in ’000 The interpretation is that the fixed maintenance cost per quarter is £21,730 and the variable cost per unit of production is £12·32 20 (b) Predicted maintenance cost for next quarter (44,000 units) is: 21·730 + (12·320 x 44) = 563·81 or £563,810 The major reservation about this prediction is that 44,000 units of production is well outside the range of data used to establish the linear regression equation The data related to a range 16,000 to 32,000 units per quarter The behaviour of costs outside this range may be quite different For example there may be a step in the fixed costs (a) Budgeted profit statement (absorption costing): £’000 Sales (24,000 units) Less: Production cost of sales: Less: Opening stock (3,000 x 28) [W1] Less: Production (22,000 x 28) Less: Closing stock (1,000 x 28) 84 616 (28) –––– Less: Under absorption of fixed Less: production overhead cost [W2] Less: (3,000 x 5) £’000 864 (672) –––– 192 (15) –––– 177 Gross profit Less: Non-production costs: Less: Variable selling cost Less: Fixed selling and admin costs 60 40 ––– Net profit Workings: W1 Variable production cost per unit W1 [For example, from opening stock under W1 marginal costing: (69,000 ÷ 3,000)] W1 Fixed production cost per unit W1 [125,000 ÷ 25,000] W1 (100) –––– 77 –––– £ 23 ––– 28 ––– W2 Under absorption (25,000 – 22,000) = 3,000 units (b) Reconciliation: £’000 77 Net profit per absorption costing (a) Add: Decrease in stocks x fixed production overhead Add: cost per unit [2,000 x 5] 10 ––– 87 ––– Net profit per marginal costing (per question) (c) Marginal costing is more relevant for short-term decision-making as it separates fixed and variable costs In the short-term fixed costs are more likely to remain unchanged and therefore would not be relevant 21 Part Examination – Paper 1.2 Financial Information for Management June 2006 Marking Scheme Marks Section A Each of the 25 questions in this section is worth marks 50 ––– Section B (a) Inputs Abnormal gain Normal loss Joint products 11/2 11/2 ––– (b) Additional revenue Additional cost Conclusion 11/2 1/ ––– (c) Direct expenses Production overheads 1 ––– ––– 12 ––– (a) Required hours Shortfall 11/2 1/ ––– (b) Contribution per unit Contribution per machining hour Ranking Optimal plan Resultant contribution 11/2 11/2 1/ 11/2 ––– ––– ––– (a) Price variance Usage variance 11/2 11/2 ––– (b) Variances Change in stock Layout/presentation of statement 1 ––– (c) (i) (ii) 1 ––– 3 Causes (1 mark for each) Purchasing manager Responsibility for buying ––– 10 ––– 23 Marks (a) Σy Σx Calculation of ‘b’ Calculation of ‘a’ Fixed/variable costs 1 21/2 11/2 ––– (b) Total cost for 44,000 units Reservation 11/2 11/2 ––– ––– 10 ––– (a) 1/ Sales Cost of sales Under absorption of overhead Variable selling cost Fixed selling and admin costs 11/2 1/ 1/ ––– (b) Layout/presentation of statement Change in stock and its evaluation 1 ––– (c) Marginal costing Separation of fixed and variable costs Fixed costs not relevant to short term decisions 1/ 1/ ––– 2 ––– 10 ––– 24 ...Part Examination – Paper 1. 2 Financial Information for Management June 20 06 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A C B C A D C D B A B A B B C B A... y = (26 5 + 3 02 + 22 2 + 24 0 + 3 62 + 29 5 + 404 + 400) = 2, 490 Σ x = (20 + 24 + 16 + 18 + 26 + 22 + 32 + 30) = 18 8 n=8 Using formulae provided in the examination: b = [(8 x 61, 25 0) – (18 8 x 2, 490)]... contribution 11 /2 11 /2 1/ 11 /2 ––– ––– ––– (a) Price variance Usage variance 11 /2 11 /2 ––– (b) Variances Change in stock Layout/presentation of statement 1 ––– (c) (i) (ii) 1 ––– 3 Causes (1 mark for