Financial information for managemetn paper 1 2 2004 ansewrs 2

The total cost of the process is then averaged over all the units of production.. 2 a Total variance 2,100 F Standard quantity for actual production at standard price 420,000 Direct labo

Answers

Part 1 Examination – Paper 1.2

Financial Information for Management June 2004 Answers Section A

1 A

2 D

3 C

4 C

5 D

6 C

7 B

8 A

9 D

10 D

11 D

12 A

13 B

14 C

15 B

16 C

17 C

18 C

19 B

20 C

21 C

22 A

23 A

24 B

25 D

3 C Contribution per unit (CPU) £(60 – 15 – 5) £40

4 C CPU (40 x 0·40) £16

––––––––––

––––––––––

800 units of product X uses 1,600 hours and in the remaining 400 hours, 100 units of product Y can be manufactured

6 C £(40,000 – 20,000) ÷ (20,000 – 4,000) units = £1·25 per unit

8 A Closing stock (units) = 200 + 600 – 150 – 200 – 250 = 200

Issues = £5,200 + (600 – 200) x £32·50 = £18,200

9 D

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

(2 x 20 x (4 x 12,500)

0 10 x 15⋅

12 A £

Absorbed overhead (30,000 ÷ 3·50) 105,000

–––––––-

––––––––

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

12,000 litres at £2·50 per litre 30,000

Add Favourable usage variance 11,815

–––––––- Standard cost of actual production 31,815

–––––––- Actual production £31,815 ÷ (10·5 x 2·50) 1,212 units

–––––––-

17 C Let x = budgeted expenditure

1·1x – x = 136,000

1.1x –x = 360,000

1·1 x = 396,000 = actual expenditure (£)

Actual sales at standard selling price 112,500

(9,000 x £12·50) Actual sales at actual selling price 117,000

–––––––-

–––––––-

19 B

20 C

11 x 13,467 – (440 x 330)

b = –––––––––––––––––––––––– = 0·6917

(11 x 17,986) – (440)2

a = (330 ÷ 11) – 0·6917 (440 ÷ 11) = 2·33

Salary costs (54 x 40) + (110 x 25) 4,910

–––––––-

–––––––-

–––––––-

22 A Joint costs apportioned to product H: £

–––––––- 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) £1·20

New business CPU (2·95 – 2.50) £0·45

£ Total contribution from new business (6,000 x 0·45) 2,700

Less Lost contribution from existing business

––––––- Overall increase in contribution and profit 1,740

––––––-

Buy in component M

25 D

Section B

1 (a) Cost per equivalent unit (EU) calculations for Process I:

(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

Finished production 1,650 288,750

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

2 (a)

Total variance

2,100 F Standard quantity for actual production at standard price 420,000

Direct labour

4,620 A Standard hours for actual production at standard rate 945,000

Variable production overheads

1,260 F

19

(b) £ Variance (£)

Rate 12,495 A Actual hours at standard rate 937,125

Efficiency 7,875 F Standard hours for actual production at standard rate 945,000

(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

3 (a) (i) Selling price per unit = £8 ÷ 0·40 = £20

(ii) Weekly contribution = 10,000 + 22,000 = £32,000

Weekly sales = 32,000 ÷ 8 = 4,000 units

Contribution and therefore profit is maximised when Strategy A is adopted

(c) Some costs do 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

4 (a) (i) Materials

£

K 3,000 kg at (£19,600 ÷ 2,000) x 1·05 30,870

––––––––

£33,070 ––––––––

(ii) Skilled labour

£

Opportunity cost of labour 800 hours at (£40 ÷ 4) 8,000

––––––––

£15,600 ––––––––

(b) 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

Fixed production overhead costs (finishing section) 241,320

+

Reapportionment of general service centre costs

––––––––

298,920 ––––––––

Lang 7,200 units x (42 ÷ 6 ) 50,400 Dale 10,400 units x (36 ÷ 6) 62,400

––––––––

112,800 ––––––––

Direct labour hour absorption rate for the finishing section:

£298,920 ÷ 112,800 = £2·65

(b) Cost per unit for a Dale:

£ per unit £ per unit Direct material 44·00

Direct labour

– finishing section 36·00

–––––––

Production overhead costs:

– machining department (3 x £3·10) 9·30 – finishing section (6 x £2·65) 15·90

––––––––

––––––––

(c) 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

Part 1 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 2 marks 50

Section B 1 (a) Equivalent units of work done 1

Cost per equivalent unit 1

Value of work in progress 1

Value of transfer 1

––– 4 (b) Transfer in from Process I 1/2 Conversion costs 1/2 Normal loss 1

Abnormal loss 1

Finished production 1

––– 4 (c) Two differences – 1 mark for each 2

–––

10 ––– 2 (a) Three total variances – 1 mark for each 3

(b) Rate and efficiency variances – 11/2 marks for each 3

(c) Four causes (two for each variance in (b)) – 1 mark for each 4

––– 10 ––– 3 (a) Selling price 1

Weekly sales 2

––– 3 (b) Units for each strategy 1 Selling price for each strategy 1

Contribution for each strategy 1

Recommendation (best strategy) 1

––– 4 (c) Mixed or semi-variable costs 1

Example 1

Methods 1

––– 3 –––

10 ––– 4 (a) Material K 2

Material L 2

Skilled labour: – cost 1

Skilled labour:– opportunity cost 2

––– 7 (b) Explanation of relevant cost concept 1

Variable overhead costs 1

Fixed overhead costs 1

––– 3 –––

10

–––

5 (a) Reapportionment of general service centre costs 11/2

Original cost of finishing section 1/2

Total direct labour hours in finishing section 2

Direct labour hour rate 1

(b) Prime cost 1

Overhead costs (2 x 1/2mark) 1

(c) Production > sales/increasing stocks 1

Marginal costing profit lower than absorption costing profit 1

Explanation 1

–––

10

–––