Answers Part Examination – Paper 1.2 Financial Information for Management December 2004 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A A C A B A C A D B A B A C C B A B D D C A D C D A A C A Date 1st 4th 12th 19th 27th Units 200 (150) ––––– 50 500 ––––– 550 (200) (300) Average price (£) 20·00 20·00 26·60 26·00 26·00 26·00 £ 4,000 (3,000) ––––––– 1,000 13,300 ––––––– 14,300 (5,200) (7,800) Total value of issues = 3,000 + 5,200 + 7,800 = £16,000 B (9,250 – 6,750) ÷ (5,000 – 3,000) = £1·25 A C £ 144,500 127,500 –––––––– 17,000 Adverse –––––––– Actual cost Standard cost of actual production (8,500 x 15) Total overhead variance A 17 D Actual cost £ 110,750 Actual hours at standard rate (9,200 x 12·50) 115,000 Variance (£) 4,250 F Rate 5,250 A Efficiency Standard hours for actual production at standard rate (2,195 x x 12·50) 109,750 10 B £ 56,389 53,754 ––––––– 2,635 ––––––– Actual expenditure Absorbed cost (12,400 x 1·02 x 4·25) Total under absorption 11 A £ 1,710 1,200 Opening WIP Completion of opening WIP (300 x 0·40 x 10) Units started and completed in the month (2,000 – 300) x 10 17,000 ––––––– 19,910 ––––––– Total value (2,000 units) 12 B ∑y = 17,500 + 19,500 + 20,500 + 18,500 + 17,000 = 93,000 ∑x = 300 + 360 + 400 + 320 + 280 = 1,660 a = (93,000 ÷ 5) – 29·53(1,660 ÷ 5) = 8,796·04 13 A £ 45 30 –––– 75 50 –––– 125 45 –––– 170 –––– Direct materials Direct labour (4 hours) Prime cost Production overheads (4 x 12·50) Total production cost Non-production overheads (75 x 0·6) Total cost 14 C Maximum usage x Longest lead time = 520 x 15 = 7,800 15 C 16 B Absorption costing profit Less Increase in stock at fixed overhead cost per unit (18,000 – 16,500) x 10 £ 40,000 (15,000) ––––––– 25,000 ––––––– Marginal costing profit 17 A 18 B Material T (500 x 45) V (200 x 40) + (200 x 52) £ 22,500 18,400 ––––––– 40,900 ––––––– Total relevant cost 18 19 D £ 1,200 800 –––––– 2,000 –––––– Opportunity cost now Cost of disposal in one year’s time 20 D 21 C Profits maximised when Marginal revenue (MR) = Marginal cost (MC) MR = 40 – 0·06Q MC = 10 MR = MC Therefore 10 = 40 – 0·06Q Q = 30 ÷ 0·6 = 500 Price (P) = 40 – 0·03(500) = 25 22 A Profit = Total revenue (TR) – Total cost (TC) When P = 31 then 31 = 40 – 0·03Q and Q = 300 £ 9,300 (6,500) ––––––– 2,800 ––––––– TR = P x Q = 31 x 300 = TC = 3,500 + (10 x 300) = Profit 23 D CPU = £27 Contribution to sales ratio = 45% Selling price = 27 ÷ 0·45 = £60 Margin of safety in units = 13,500 ÷ 60 = 225 Break-even point (BEP) = 1,000 – 225 = 775 units At BEP: total contribution = total fixed costs Total fixed costs = 775 x 27 = £20,925 24 C 25 D P = 95,000 + 0·4X + 0·3Y X = 46,000 + 0·1Y Y = 30,000 + 0·2X X = 46,000 + 0·1(30,000 + 0·2X) = 46,000 + 3,000 + 0·02X 0·98X = 49,000 and X = 50,000 Y = 30,000 + 0·2(50,000) = 40,000 P = 95,000 + 0·4(50,000) + 0·3(40,000) = 127,000 19 Section B (a) Litres 80,000 Raw materials input Conversion costs – ––––––– 80,000 ––––––– Process X Account £ 158,800 Joint products (W1) Product A Product B 133,000 Normal loss (W2) Abnormal loss (W3) –––––––– 291,800 –––––––– Litres £ 44,700 29,800 4,000 1,500 ––––––– 80,000 ––––––– 141,550 141,550 3,000 5,700 –––––––– 291,800 –––––––– Cost per equivalent litre (EL): Materials and conversion EL 74,500 1,500 ––––––– 76,000 ––––––– £ 291,800 (3,000) –––––––– 288,800 –––––––– Output (joint products combined) Abnormal loss Total work done Costs arising Less: Normal loss (scrap value) Cost per equivalent litre: Materials and conversion (288,800 ÷ 76,000) Workings: W1 Product Selling price £/litre A B 12 £3·80 Further processing cost £/litre Net realisable value £/litre Production (ratio 3:2) litres 44,700 29,800 Net realisable value of production £ 268,200 268,200 Total joint production cost (A + B) = 74,500 litres at £3·80 = £283,100 Apportioned A:B in the ratio 268,200:268,200 (= 1:1) Product A = £141,550 and Product B = £141,550 W2 5% of 80,000 = 4,000 litres at 75p per litre = £3,000 W3 5,500 – 4,000 = 1,500 litres at £3·80 per litre = £5,700 (b) An abnormal gain occurs when the actual loss is less than the normal loss expected In other words the actual output of good production is higher than would normally be expected from the given level of input The abnormal gain is shown as a debit entry in the process account The abnormal gain is valued at its full process cost (a) Calculations for the current year: (i) Contribution per unit £50 x (75 ÷ 25) = £150 (ii) Total contribution (5,000 x £150) Less Total fixed costs (5,000 x £70) Total profit (b) £’000 750 (350) –––– 400 –––– Calculations for next year: Selling price Less Variable cost 50 x (100 ÷ 25) x 1·08 (50 x 1·12) Contribution Total fixed costs (5,000 x £70) x 1·12 Target/required profit [as per (a)(ii)] Required contribution for next year £/unit 216 (56) –––– 160 –––– £’000 392 400 –––– 792 –––– Number of units required = (792,000 ÷ 160) = 4,950 units 20 (c) A mixed or semi-variable cost is one that is partly fixed and partly variable in behaviour An example would be power costs (gas or electricity, for instance) which consist of a fixed charge irrespective of the number of units of power consumed and a variable charge based on the number of units of power consumed For cost-volume-profit analysis the fixed and variable elements need to be separately identified by using, for example, the high low method or linear regression Each would then be considered along with the other variable and other fixed costs in the analysis (a) Sales variances: Actual sales units at actual selling price Actual sales units at standard selling price (46,000 x £15) Sales price variance Sales volume profit variance: (46,000 – 45,000) x £(15 – 9) £ 678,500 690,000 –––––––– 11,500 A –––––––– 6,000 F –––––––– (b) The person (or persons) who should receive the information generated by any system in an organisation should be the person with responsibility for that aspect or part of the business to which the information relates In the case of sales variance information, it would be the person responsible for sales in the organisation This could be the sales manager or marketing manager In a large divisionalised company it may be the divisional manager A summary of the sales and cost variances would be issued to senior management in the organisation (c) (i) Absorption costing profit: Gross profit 45,000 x £(15 – 9) Less Non-production costs £ 270,000 (44,000) –––––––– 226,000 –––––––– Absorption costing net profit (ii) Marginal costing profit: Total contribution 45,000 x £(15 – 4) Less Fixed production costs (48,000 x £5) Fixed non-production costs £ 495,000 (240,000) (44,000) –––––––– 211,000 –––––––– Marginal costing net profit Alternative answer: Absorption costing net profit [as above in (i)] Deduct Increase in stocks at standard fixed production cost per unit (3,000 units at £5 per unit) £ 226,000 (15,000) –––––––– 211,000 –––––––– Marginal costing net profit (a) (i) EOQ for the current year = [(2 x 25 x 90,000) ÷ 8]0·5 = 750 units (ii) EOQ for next year = [(2 x 36 x 90,000) ÷ 8]0·5 = 900 units (b) Annual holding cost £ Current year (750 ÷ 2) x (90,000 ÷ 750) x 25 3,000 Next year (900 ÷ 2) x (90,000 ÷ 900) x 36 3,600 Annual ordering cost £ 3,000 3,600 Total extra cost of holding and ordering stock for next year (compared with current year) 21 Annual total cost £ 3,000 3,000 –––––– 6,000 –––––– 3,600 3,600 –––––– 7,200 –––––– £1,200 (c) Any two for each of the following: (i) Interest on net working capital, costs of storage space, insurance costs, obsolescence, pilferage and deterioration (ii) Costs of contacting supplier to place an order, costs associated with checking goods received and transport costs (a) Product X 90 18 1st Contribution per unit (£) Litres of Material L per unit Contribution per litre of Material L Ranking Product Y 96 16 2nd Optimal production plan for first three months of next year is to produce and sell 4,800 units of Product X (24,000 litres ÷ litres/unit) giving a total contribution of £432,000 (4,800 units at £90 per unit) (b) Let x = the number of units of product X and y = the number of units of product Y Formulation of constraints: Material L 5x + 6y ≤ 24,000 Material M 6x + 4y ≤ 24,000 Optimal point is the intersection of and 5x + 6y = 24,000 ……….(1) 6x + 4y = 24,000 ……….(2) Solving these simultaneously gives: (1) X (2) X (1) – (2) 30x + 36y = 144,000 30x + 20y = 120,000 –––––––––––––––––––– 16y = 24,000 y = 1,500 and x = 3,000 The optimal production plan for the second three months of next year is to produce 3,000 units of product X and 1,500 units of product Y This will give a resultant total contribution of [(3,000 x 90) + (1,500 x 96)] = £414,000 22 Part Examination – Paper 1.2 Financial Information for Management December 2004 Marking Scheme Marks Section A Each of the 25 questions in this section is worth marks 50 ––– Section B (a) Inputs into process Normal loss Abnormal loss Joint products ––– (b) Actual loss less than normal loss Debit entry in process account Valuation at full process cost 1 ––– ––– 10 ––– (a) Contribution per unit Total profit ––– (b) Contribution per unit Total fixed costs Required contribution Number of units 1/ 1/ –––2 (c) Partly fixed/partly variable Example Separation of fixed/variable elements 1 ––– ––– 10 ––– (a) Sales price variance Sales volume profit variance 2 ––– (b) General principle/suggested person(s) (c) Absorption costing profit Marginal costing profit ––– ––– 10 ––– 23 Marks (a) (i) (ii) EOQ this year EOQ next year 2 ––– (b) Annual holding costs Annual ordering costs 2 ––– (c) 1/ (a) Contribution per unit Contribution per litre (L) Optimal units for product X Resultant contribution mark for each of four costs identified ––– 10 ––– 1 1 ––– (b) Equations/formulations Optimal units for products X and Y Resultant contribution ––– ––– 10 ––– 24 ... Paper 1. 2 Financial Information for Management December 20 04 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A A C A B A C A D B A B A C C B A B D D C A D C D A A C A Date 1st... 1st 4th 12 th 19 th 27 th Units 20 0 (15 0) ––––– 50 500 ––––– 550 (20 0) (300) Average price (£) 20 ·00 20 ·00 26 ·60 26 ·00 26 ·00 26 ·00 £ 4,000 (3,000) ––––––– 1, 000 13 ,300 ––––––– 14 ,300 (5 ,20 0) (7,800)... £ 26 8 ,20 0 26 8 ,20 0 Total joint production cost (A + B) = 74,500 litres at £3·80 = 28 3 ,10 0 Apportioned A:B in the ratio 26 8 ,20 0 :26 8 ,20 0 (= 1: 1) Product A = 14 1,550 and Product B = 14 1,550 W2