Answers Part Examination – Paper 1.2 Financial Information for Management June 2004 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A D C C D C B A D D D A B C B C C C B C C A A B D A D C Contribution per unit (CPU) £(60 – 15 – 5) Total fixed cost £(30 x 2,400) Breakeven point (72,000 ÷ 40) C CPU (40 x 0·40) Breakeven point (60,000 ÷ 16) Margin of safety (64,000 ÷ 40) £40 £72,000 1,800 units £16 3,750 units 1,600 units –––––––––– 5,350 units –––––––––– Planned activity level D X £8 £4 1st CPU Contribution per hour Ranking Y £10 £2·50 2nd 800 units of product X uses 1,600 hours and in the remaining 400 hours, 100 units of product Y can be manufactured C B A D £(40,000 – 20,000) ÷ (20,000 – 4,000) units = £1·25 per unit Closing stock (units) = 200 + 600 – 150 – 200 – 250 = 200 Issues = £5,200 + (600 – 200) x £32·50 = £18,200 EOQ = (2 x 20 x (4 x 12,500) ⋅ 10 x 15 = 1,155 10 D 11 D Total direct labour hours: Primary (6,000 x 36 ÷ 60) + (7,500 x 48 ÷ 60) 9,600 Finishing (6,000 x 25 ÷ 60) + (7,500 x 35 ÷ 60) 6,875 Absorption rates: Primary (96,000 ÷ 9,600) £10 per hour Finishing (82,500 ÷ 6,875) £12 per hour Fixed cost per unit (Y): (48 ÷ 60) x 10 + (35 ÷ 60) x 12 = £15 17 12 A £ 108,875 105,000 –––––––113,875 –––––––– Actual overhead Absorbed overhead (30,000 ÷ 3·50) Under absorption 13 B Sales < production by 280 units Marginal costing profit would be lower by 280 x (48,000 ÷ 12,000) = £1,120 14 C 15 B Adverse price variance (0·04 x 2·50 x 12,000) = £1,200 16 C £ 30,000 11,815 –––––––31,815 –––––––1,212 units –––––––- 12,000 litres at £2·50 per litre Add Favourable usage variance Standard cost of actual production Actual production £31,815 ÷ (10·5 x 2·50) 17 C Let x = budgeted expenditure 1·1x – x = 136,000 1.1x – x = 360,000 1·1 x = 396,000 = actual expenditure (£) 18 C £ 112,500 Actual sales at standard selling price (9,000 x £12·50) Actual sales at actual selling price 117,000 –––––––4,500 favourable –––––––- Sales price variance 19 B 20 C b = 11 x 13,467 – (440 x 330) –––––––––––––––––––––––– (11 x 17,986) – (440)2 = 0·6917 a = (330 ÷ 11) – 0·6917 (440 ÷ 11) = 2·33 21 C Salary costs (54 x 40) + (110 x 25) Overhead cost (164 x 20) Total cost Mark-up (40% on total cost) Final fee £ 4,910 3,280 –––––––8,190 3,276 –––––––11,466 –––––––- 22 A Joint costs apportioned to product H: (228 ÷ 640) x 384,000 Further processing costs £ 136,800 159,600 –––––––Total cost of H production (228,000 units) 296,400 –––––––Closing stock: 28,000 x (296,400 ÷ 228,000) = £36,400 23 A CPU from existing business (3·70 – 2·50) New business CPU (2·95 – 2.50) Total contribution from new business (6,000 x 0·45) Less Lost contribution from existing business x (6,000 ÷ 15) x 1·20 Overall increase in contribution and profit 24 B Additional cost of buying in one unit (£) Machine hours per unit Additional cost of buying in per machine hour (£) Ranking for buying in Buy in component M £1·20 £0·45 £ 2,700 (960) ––––––1,740 ––––––L 12 13 14 2nd 25 D 18 M 15 15 13 1st N 24 14 16 4th P 30 16 15 3rd Section B (a) Cost per equivalent unit (EU) calculations for Process I: Materials EU – 1,600 300 –––––– 1,900 –––––– £133,000 ––––––––– 1,900 = £70 Completion of opening work in progress Started and finished units last month Closing work in progress Work done last month Cost per EU (i) Value of closing work in progress = (300 x 70) + (150 x 50) = £28,500 (ii) Value of transfer of 1,800 units to Process II = 1,600 x (70 + 50) + (120 x 50) + 16,500 = £214,500 (b) Conversion EU 120 1,600 150 –––––– 1,870 –––––– £93,500 –––––––– 1,870 = £50 Process II Account Transfer from Process I Conversion costs Units 1,800 £ 214,500 78,450 –––––– 1,800 –––––– –––––––– 292,950 –––––––– Normal loss Abnormal loss Finished production Units 126 24 1,650 –––––– 1,800 –––––– £ – 4,200 288,750 –––––––– 292,950 –––––––– Workings 214,500 + 78,450 Cost per unit = –––––––––––––––––––– = £175 (0·93 x 1,800) Valuations: Abnormal loss = 24 x 175 = £4,200 Finished production = 1,650 x 175 = £288,750 (c) – In job costing each job is costed separately whereas in process costing it is the process itself which is costed The total cost of the process is then averaged over all the units of production – In job costing production is to customer specification and therefore each job is likely to be different In process costing all units are identical in any one process (a) Direct material Actual quantity at actual price £ 417,900 Standard quantity for actual production at standard price 420,000 Direct labour Actual hours at actual rate 949,620 Standard hours for actual production at standard rate 945,000 Variable production overheads Actual expenditure 565,740 Standard cost of actual production 567,000 Total variance £ 2,100 F 4,620 A 1,260 F 19 (b) Actual hours at actual rate £ 949,620 Actual hours at standard rate 937,125 Standard hours for actual production at standard rate 945,000 Variance (£) Rate 12,495 A Efficiency 7,875 F (c) Rate: – Higher graded workers paid at a higher rate – Higher than expected wage settlement for the company Efficiency: – The higher graded workers being more skilled took less than the standard time – Highly motivated workers (a) (i) Selling price per unit = £8 ÷ 0·40 = £20 (ii) Weekly contribution = 10,000 + 22,000 = £32,000 Weekly sales = 32,000 ÷ = 4,000 units (b) Strategy Units per week Selling price Less Variable cost Contribution Total contribution A 4,400 –––––– £/unit 19·60 (12·00) –––––– 7·60 –––––– £ 33,440 ––––––– B 4,720 –––––– £/unit 19·00 (12·00) –––––– 7·00 –––––– £ 33,040 ––––––– C 5,000 –––––– £/unit 18·60 (12·00) –––––– 6·60 –––––– £ 33,000 ––––––– Contribution and therefore profit is maximised when Strategy A is adopted (c) Some costs not fall clearly into being either variable or fixed They are the costs that are a mix of variable and fixed – sometimes called semi-variable or mixed costs The following techniques could be used to separate the fixed and variable components of semi-variable or mixed costs: – the high-low method – linear regression Many costs are a mix of variable and fixed elements, for example power costs (gas or electricity) The tariffs for power costs often consist of a fixed charge irrespective of the amount of power consumed and a variable charge per unit of consumption (a) (i) Materials K L (ii) Skilled labour Labour cost Opportunity cost of labour (b) £ 30,870 2,200 –––––––– £33,070 –––––––– 3,000 kg at (£19,600 ÷ 2,000) x 1·05 200 kg at £11 800 hours at £9·50 800 hours at (£40 ÷ 4) £ 7,600 8,000 –––––––– £15,600 –––––––– Any variable overhead costs associated with the contract would be relevant because they would represent additional or incremental costs caused directly by the contract Fixed overhead costs would only be relevant if the total fixed overhead costs of the company increased as a direct consequence of the contract being undertaken In that case the relevant amount would be the specific increase in the total fixed overhead costs caused by the acceptance of the contract Arbitrary apportionments of existing fixed overhead costs would not be relevant Similarly sunk and committed costs would not be relevant 20 (a) £ 241,320 Fixed production overhead costs (finishing section) + Reapportionment of general service centre costs £82,800 x (32 ÷ 46) 57,600 –––––––– 298,920 –––––––– hours 50,400 62,400 –––––––– 112,800 –––––––– Direct labour hours in finishing section: Lang 7,200 units x (42 ÷ ) Dale 10,400 units x (36 ÷ 6) Direct labour hour absorption rate for the finishing section: £298,920 ÷ 112,800 = £2·65 (b) Cost per unit for a Dale: £ per unit Direct material Direct labour – – machining department finishing section Prime cost Production overhead costs: – machining department – finishing section 40·00 36·00 –––––– (3 x £3·10) (6 x £2·65) Total cost per unit for Dale (c) £ per unit 44·00 76·00 ––––––– 120·00 9·30 15·90 –––––––– £145·20 –––––––– For both products – Lang and Dale – production is greater than sales for the coming year In other words, stocks of finished products will be increasing In this situation, profits calculated using marginal costing principles will be lower than the profits calculated using absorption costing principles Fixed production costs are written off as they arise under marginal costing whereas under absorption costing they form part of the product cost and the inventory valuation Therefore in the coming year with stocks increasing and using absorption costing, a higher amount of fixed production cost will be carried forward at the year end than was brought forward in any opening stocks The effect is that some of the costs that would have been written off and would have reduced the profit under marginal costing are being carried forward under absorption costing to be written off against profits in later years 21 Part Examination – Paper 1.2 Financial Information for Management June 2004 Marking Scheme Marks Section A Each of the 25 questions in this section is worth marks 50 Section B (a) Equivalent units of work done Cost per equivalent unit Value of work in progress Value of transfer (b) 1 1 ––– 1 ––– (c) Two differences – mark for each (a) (b) (c) Three total variances – mark for each Rate and efficiency variances – 11/2 marks for each Four causes (two for each variance in (b)) – mark for each (a) Selling price Weekly sales (b) Units for each strategy Selling price for each strategy Contribution for each strategy Recommendation (best strategy) (c) Mixed or semi-variable costs Example Methods (a) Material K Material L Skilled labour: – cost Skilled labour: – opportunity cost (b) Explanation of relevant cost concept Variable overhead costs Fixed overhead costs 1/ 1/ Transfer in from Process I Conversion costs Normal loss Abnormal loss Finished production 3 ––– ––– 1 1 ––– 1 ––– 2 ––– 1 ––– 23 ––– 10 ––– 10 ––– ––– 10 ––– ––– 10 ––– (a) (b) (c) Marks 11/2 Reapportionment of general service centre costs Original cost of finishing section Total direct labour hours in finishing section Direct labour hour rate Prime cost Overhead costs (2 x 1/ 1/ mark) Production > sales/increasing stocks Marginal costing profit lower than absorption costing profit Explanation 24 ––– 1 ––– 1 ––– ––– 10 ––– ... Part Examination – Paper 1. 2 Financial Information for Management June 20 04 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A D C C D C B A D D D A B C B C C... (20 ,000 – 4,000) units = 1 25 per unit Closing stock (units) = 20 0 + 600 – 15 0 – 20 0 – 25 0 = 20 0 Issues = £5 ,20 0 + (600 – 20 0) x £ 32 50 = 18 ,20 0 EOQ = (2 x 20 x (4 x 12 ,500) ⋅ 10 x 15 = 1, 155... variance 19 B 20 C b = 11 x 13 ,467 – (440 x 330) –––––––––––––––––––––––– (11 x 17 ,986) – (440 )2 = 0·6 917 a = (330 ÷ 11 ) – 0·6 917 (440 ÷ 11 ) = 2 33 21 C Salary costs (54 x 40) + (11 0 x 25 ) Overhead