Answers Part Examination – Paper 1.2 Financial Information for Management June 2005 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 C C A C B B B A D D A A B C B C A B C B D B A A A C C A T1 T2 T3 T4 Cost Total cost per unit (£) Total cost per unit (£) (125 units) (180 units) 8·00 7·00 14·00 14·00 19·80 15·70 25·80 25·80 types T2 and T4 are variable and T1 and T3 are semi-variable C Contribution per unit (CPU) = (80 – 30 – 10) = £40 Total fixed cost = 2,880 × 25 = £72,000 Break-even point = 72,000 ÷ 40 = 1,800 units B CPU = 0·40 × 60 = £24 Break-even point = 54,000 ÷ 24 = 2,250 units Margin of safety = 4,000 – 2,250 = 1,750 units B Σx = Σ Advertising expenditure = 100,000 Σy = Σ Sales = 600,000 n = number of pairs of data = B A D 17 10 D Total hours in cost centre X = 8,000 × (3 + 2·5) = 44,000 Total hours in cost centre Y = 8,000 × (1 + 2) = 24,000 Overhead rate (X) = £88,000 ÷ 44,000 = £2 per hour Overhead rate (Y) = £96,000 ÷ 24,000 = £4 per hour Overhead cost per unit (P2) = (2·5 × 2) + (2·0 × 4) = £13 11 A Actual overheads Absorbed overhead (8,800 × 14·50) Under absorption £ 128,480 127,600 880 12 A 13 B Date 1st 3rd 12th 17th 19th Units 300 500 (600) ——– 200 400 (300) ——– 300 ——– £ per unit 11 £ 2,700 5,500 (6,400) ——— 1,800 4,200 (3,150) ——— 2,850 ——— 10·5 10·5 14 C £ 700 1,300 ——— 2,000 840 ——— 2,840 ——— Prime cost (300 + 400) Production overheads (50 × £26) Total production cost Non-production overheads (1·20 × 700) Total cost 15 B [5,500 + 900] (150 × 0·48) equivalent units × £12 = £864 16 C Units started and finished last month (900 – 100) = 800 × £12 Opening work in progress (WIP) value Work done to complete opening WIP (100 × 0·40) × £12 17 A Price variance: Actual sales revenue Actual sales units at standard selling price (10,500 × £20) Sales price variance Volume variance (500 units × £20 × 0·40) £ 9,600 680 480 ——— 10,760 ——— £ 204,750 210,000 ———— 5,250 ——— 4,000 18 B Capacity variance (5,000 – 5,500) hours at £15 per hour 19 C 250 hours at [£9 per hour + the opportunity cost £(12 ÷ 3) per hour] = £3,250 The incremental labour cost of weekend working is £4,500 (250 × £18) and being higher than £3,250 is therefore not relevant 20 B Opportunity cost now Realisable value in six months Relevant cost 21 D Additional cost of buying in (compared with manufacture) per hour: A B C D £10 £8 £12 £7 Buy in component with the lowest additional cost per hour (limiting factor) £8,000 £5,000 £3,000 18 7,500 A F F 22 B Branch Z makes a net contribution (after specific branch fixed costs of £10,000) of £10,000 Closing branch Z will leave a revised profit of £20,000 for the company 23 A 24 A 1,000 kg of material G produces 100 units of product Y = 10 kg per unit 1,800 kg of material H produces 90 units of product Y = 20 kg per unit 25 A Total contribution from: £ A 90 units of Y (90 × £20) 1,800 B 50 units of X + 60 units of Y (50 × 8) + (60 × 20) 1,600 C 60 units of X + 50 units of Y (60 × 8) + (50 × 20) 1,480 D 125 units of X (125 × 8) 1,000 Optimal mix is the one giving the highest total contribution (£1,800) Section B (a) Process Account Kg 10,000 Raw materials input Direct labour Overheads (140% of direct labour) Abnormal gain (W3) 100 ––––––– 10,100 ––––––– £ 18,750 50,000 70,000 Joint products (W1): Product X Product Y 1,450 –––––––– 140,200 –––––––– Cost per kg Costs arising (18,750 + 50,000 + 70,000) Less: Normal loss (realisable value) Normal loss (W2) Kg £ 5,600 4,000 ——— 9,600 67,200 72,000 ———— 139,200 500 ––––––– 10,100 ––––––– 1,000 –––––––– 140,200 –––––––– £ 138,750 (1,000) ———— 137,750 ———— Cost per kg: £137,750 ÷ (Normal yield from 10,000 kg) = £137,750 ÷ (0·95 × 10,000) = £14·50 Workings: W1 Product X Y Selling price £/kg 25·00 37·50 Production (ratio 7:5) kg 5,600 4,000 Sales value of production £ 140,000 150,000 Total joint production cost (X + Y) = 9,600 kg at £14·50 = £139,200 Apportioned A : B in the ratio 140,000:150,000 (= 14:15) Product X = £67,200 and Product Y = £72,000 (b) W2 5% of 10,000 = 500 kg at £2 per kg = £1,000 W3 (500 – 400) = 100 kg at £14·50 per kg = £1,450 A by-product is an output from a process that occurs incidentally to the main production and is insignificant in value terms The inputs to a process are intended to create the main product or products but sometimes quite incidentally a by-product is also created, which has a relatively low value compared to the main products 19 (a) £ Standard cost of actual production 9,000 units × £(15 + 20 + 12) Total variances: Direct materials (W1) Direct labour (W2) Fixed overheads (W3) £ 423,000 3,000 A 2,000 F 5,000 F ———— Actual cost Workings: W1 Actual £ 138,000 Standard cost of actual production (9,000 × £15) 135,000 W2 Actual 178,000 Standard cost of actual production (9,000 × £20) 180,000 W3 Actual 103,000 Standard cost of actual production (9,000 × £20) 108,000 Actual quantity × actual cost 138,000 4,000 F ———— 419,000 ———— Variance (£) 3,000 A 2,000 F 5,000 F (b) Price 6,000 F Actual quantity × standard cost (24,000 × £6) 144,000 Usage 9,000 A Standard quantity for actual production X standard cost [(as in (a)] (c) 135,000 (i) The standard price per litre is set by the person in the organisation with the specialist knowledge about the prices charged by suppliers for the raw materials used by Murgatroyd Ltd This would be the manager responsible for purchasing (sometimes referred to as the Buying Manager or the Procurement Manager) (ii) The standard quantity per unit is set by the person in the organisation with the specialist knowledge about the product specification and the amount of each raw material that should be used in the manufacture of one unit of the product This would be a manager in the production (manufacturing) function or technical department in Murgatroyd Ltd (a) EOQ = [(2 ì 12ã50 ì 8,760) ữ (0ã05 ì 80)]0ã5 = 234 units (b) Usage per day = 8,760 ÷ 365 = 24 Re-order level = 24 × 21 = 504 units (c) (i) A stockout occurs when a company runs out of stock There are costs associated with this – lost contribution from lost sales, for example In order to avoid a stockout the company could set a buffer stock – in effect a safety level of stock to cover emergency situations such as demand and/or lead times exceeding their average levels The holding of a buffer stock involves an additional cost (ii) Jane plc should consider having a buffer stock if either the usage of component RB starts to fluctuate from period to period (at present it is constant) and/or the lead time starts to fluctuate from its present constant level of 21 days 20 (a) (i) Units Higher level Lower level Difference 2,000 1,800 ——— 200 ——— Total cost £ 188,000 180,000 ———— 8,000 ———— Variable production cost per unit = 8,000 ÷ 200 = £40 (ii) £ 188,000 (80,000) ———— 108,000 ———— Total production cost for 2,000 units Less total variable production cost (2,000 × 40) Total monthly fixed production cost (b) (i) Contribution per unit (180 – 40) = £140 Total contribution from sales = 1,200 × 140 = £168,000 (ii) £ 168,000 (149,000) ———— 19,000 ———— Total contribution [as in (b)(i)] Less Total fixed costs (108,000 + 41,000) Net profit (c) When the number of units produced and the number of units sold in a month are identical, the net profit or loss determined by using absorption and marginal costing principles will also be the same In other words the net profit or loss will be the same when the opening and closing stocks for a month are unchanged (a) (i) Initial selling price = (variable + fixed cost per unit) + mark up of 40% Initial selling price = [£4 + £(18,000 ÷ 3,000)] × 1·40 = £14 (ii) Profit = 3,000 units × £4 profit per unit = £12,000 (b) Profits are maximised when: Marginal cost (MC) = Marginal revenue (MR) MC = variable cost = MR = 20 – 0·004Q = 20 – 0·004Q Q = 4,000 units P = 20 – 0·002 (4,000) = £12 = profit maximising price (c) A penetration price is an initially low selling price of a product, whereas a skimming price policy is one where the initial selling price is set high 21 Part Examination – Paper 1.2 Financial Information for Management June 2005 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 gain Joint products 11/2 11/2 ––– (b) Incidental to main products Insignificant in value terms 1 ––– ––– 10 ––– (a) Each total variance mark Reconciliation statement ––– (b) 11/2 11/2 ––– Price variance Usage variance (c) 11/2 11/2 ––– Purchasing management Production management ––– 10 ––– (a) EOQ calculation (b) Stock level for re-ordering (c) (i) Stockout Buffer stock (ii) Variable demand and fluctuating lead time 1 ––– ––– ––– (a) (i) Variable production cost per unit (ii) Total monthly fixed production cost 2 ––– (b) (i) Total contribution (ii) Net profit 2 ––– (c) Production = sales and/or opening stock = closing stock 23 ––– 10 ––– Marks (a) (i) Initial selling price (ii) Resultant weekly profit ––– (b) Marginal cost (MC) = Marginal revenue (MR) MC Optimal quantity (via MC = MR) Optimal price 1 ––– (c) Penetration price Skimming price 1 ––– ––– 12 ––– 24 ... Examination – Paper 1. 2 Financial Information for Management June 20 05 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 C C A C B B B A D D A A B C B C A B C B D B A A A C C A T1 T2 T3... £ 12 8,480 12 7,600 880 12 A 13 B Date 1st 3rd 12 th 17 th 19 th Units 300 500 (600) ——– 20 0 400 (300) ——– 300 ——– £ per unit 11 £ 2, 700 5,500 (6,400) ——— 1, 800 4 ,20 0 (3 ,15 0) ——— 2, 850 ——— 10 ·5 10 ·5... Joint products 11 /2 11 /2 ––– (b) Incidental to main products Insignificant in value terms 1 ––– ––– 10 ––– (a) Each total variance mark Reconciliation statement ––– (b) 11 /2 11 /2 ––– Price variance