Answers Part Examination – Paper 1.2 Financial Information for Management December 2005 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 D C C C B D C C A B A B C D A C D A A C D D D D B D C 1,700 units – Breakeven level units (1,200) = 500 units C Contribution per unit = 22 ữ 0ã55 ì 0·45 = £18 Breakeven point = 198,000 ÷ 18 = 11,000 C Variable cost per unit = [(170,000 – 5,000) – 140,000)] ÷ (22,000 –17,000) = £5 Total fixed cost above 18,000 units = 170,000 – (22,000 × 5) = £60,000 Total cost of 20,000 units = (20,000 × 5) + 60,000 = £160,000 B D C Weighted average after 13th = [(200 ì 9,300 ữ 300) + (600 ì 33)] ữ (200 + 600) = £32·50 Closing stock valuation = 300 × 32·50 = £9,750 C EOQ = [(2 ì 160 ì 9,000) ữ (0·08 × 40)]0·5 = 949 A 10 B 17 11 A Absorption rate = 247,500 ÷ 30,000 = £8·25 Absorbed cost = 28,000 × 8·25 = £231,000 Actual cost = £238,000 Under absorption = £7,000 12 B Marginal costing profit = 36,000 (2,000 ì 63,000 ữ 14,000) = £27,000 13 C Process F: expected output = 0·92 × 65,000 = actual output = ∴ abnormal loss Process G: expected output = 0·95 × 37,500 = actual output = ∴ abnormal gain 14 D Actual hours at standard rate (27,000 × 8·50) Standard hours of production at standard rate ∴Labour efficiency variance is 15 A Sales price variance: Actual sales at standard price (4,650 × 6) Actual sales at actual price Favourable price variance Adverse sales volume contribution variance: 350 units × (6 × 0·60) 59,800 58,900 35,625 35,700 £ 229,500 253,980 –––––––– 24,480 Favourable –––––––– £ 27,900 30,225 ––––––– 2,325 ––––––– 1,260 16 C 17 D 18 A 19 A Coefficient of determination = r2 = 0·6 × 0·6 = 0·36 = 36% 20 C 21 D 4,000 × [(20,000 ÷ 2,500) × 1·025] = £32,800 22 D Production (units): J: (6,000 – 100 + 300) = K: (4,000 – 400 + 200) = 6,200 3,800 –––––– 10,000 Joint costs apportioned to J: (6,200 ữ 10,000) ì 110,000 = £68,200 23 D Material required to meet maximum demand: 6,000 ì (13 ữ 4) + 8,000 ì (19 ÷ 4) = 57,500 litres Material available: 50,000 litres ∴ Material is a limiting factor Labour required to meet maximum demand: 6,000 ì (35 ữ 7) + 8,000 ì (28 ÷ 7) = 62,000 hours Labour available: 60,000 hours ∴ Labour is a limiting factor 18 24 D Profits maximised when: marginal revenue (MR) = marginal cost (MC) MR = 50 – 0·05Q MC = 15 MR = MC ∴ 50 – 0·05Q = 15 and Q = 700 P = 50 – (0·025 × 700) = £32·50 25 B When P = 20 then and 20 = 50 – 0·025Q Q = 1,200 £ Total revenue (P × Q) = 1,200 × 20 = 24,000 Less total costs 2,000 + (15 × 1,200) = 20,000 –––––– ∴Profit 4,000 –––––– Section B (a) Using the high-low method: Units 120,000 (W1) 102,000 –––––––– 18,000 –––––––– Total cost (£) 700,000 619,000 –––––––– 81,000 –––––––– Working (W1) Full capacity = 102,000 ÷ 0·85 = 120,000 (i) Variable cost per unit = 81,000 ÷ 18,000 = £4·50 (ii) Total fixed costs = 700,000 – (120,000 × 4·50) = £160,000 (iii) Selling price per unit = variable cost per unit ÷ (1·00 – 0·40) = 4·50 ÷ 0·6 = £7·50 (iv) Contribution per unit = (7·50 – 4·50) = £3·00 (b) New business: Selling price (0·80 × 7·50) Less variable cost £ per unit 6·00 (4·50) ––––– 1·50 ––––– Contribution Contribution from 15,000 units (15,000 ì 1ã50) Less opportunity cost (15,000 ữ 6) ì £3·00 Net increase in contribution (and profit) (c) £ 22,500 (7,500) ––––––– 15,000 ––––––– An opportunity cost is the cost of the best alternative forgone in a situation of choice Opportunity costs are relevant costs In the situation of Pointdextre Ltd, if it goes ahead with the new business (that is the decision) then it will lose (forgo) the contribution from some existing sales This lost contribution is an opportunity cost relevant to the decision (a) Process I Input Conversion Abnormal gain (W2) Litres 50,000 1,000 ––––––– 51,000 ––––––– £ 365,000 256,000 13,500 –––––––– 634,500 –––––––– Output (W1) Normal loss (0·08 × 50,000) Workings: W1 Cost per litre (365,000 + 256,000) ữ (50,000 ì 0ã92) = Ê13ã50 Output value = 47,000 × 13·50 = £634,500 W2 Abnormal gain = 47,000 – (50,000 × 0·92) = 1,000 Valuation (1,000 × 13·50) = £13,500 19 Litres 47,000 4,000 £ 634,500 – ––––––– 51,000 ––––––– –––––––– 634,500 –––––––– (b) Workings: Cost per equivalent litre (EL): Completion of opening WIP Started and finished within the month (50,000 – 5,000) Work done so far on closing WIP Conversion EL 3,000 45,000 1,000 ––––––– 49,000 ––––––– ∴Cost per EL = 392,000 ÷ 49,000 = £8 (c) (i) Output = 80,000 + (45,000 × 13·50) + (48,000 × 8·00) = £1,071,500 (ii) Closing WIP = (2,000 × 13·50) + (1,000 × 8·00) = £35,000 The disposal costs would be debited to the process account Alternatively, they could be shown as a negative value on the credit side of the account Let X = the number of units of product X and Y = the number of units of product Y Contribution per unit: Product X £ per unit 60 (45) –––– 15 –––– Selling price Less variable cost Contribution Product Y £ per unit 25 (13) –––– 12 –––– Objective function: Total contribution = 15X + 12Y Constraints: 3X + Y ≤ 4,200 Material (£5 per kg) Labour (£6 per hour) 4X + 0·5Y ≤ 3,000 X, Y ≥ Non negative Using a graphical approach, the constraints (solid lines) and the objective function (dotted line) can be shown as follows: Y units 6,000 Labour 4,200 A B Material 750 C 600 750 X units 1,400 Note: the objective function line has been shown on the above graph for a total contribution of £9,000 (assumed) Thus 15X + 12Y = 9,000 Therefore when X = 0, Y = (9,000 ÷ 12) = 750 and when Y = 0, X = (9,000 ÷ 15) = 600 The ‘feasible region’ is the area OABC shown on the graph If the objective function line is moved away from the origin (at the same gradient) the last point it reaches in the feasible region is point A which must therefore be the optimal point Therefore the optimal production is to produce and sell 4,200 units of product Y and no units of product X 20 An alternative approach would be to calculate the total contributions at points A, B and C shown on the graph and select the point giving the highest total contribution, as follows: Point A Total contribution from 4,200 units of Y is (4,200 × £12) = £50,400 Point B To find the units at this point, solve the following equations simultaneously: 3X + Y = 4,200 … (1) 4X + 0·5Y = 3,000 … (2) From (1) Y = 4,200 – 3X Substituting into (2) 4X + 0·5(4,200 – 3X) = 3,000 ∴ 4X + 2,100 – 1·5X = 3,000 ∴ 2·5X = 900 ∴ X = 360 Substituting into (1) (3 × 360) + Y = 4,200 ∴ Y = 3,120 Total contribution from 360 units of X and 3,120 units of Y is (360 × £15) + (3,120 × £12) = £42,840 Point C Total contribution from 750 units of X is (750 × £15) = £11,250 Point A gives the highest contribution (£50,400 from producing 4,200 units of Y and no units of X) and is therefore the optimal solution (as before) (a) Standard cost of actual production [12,500 × (11 + 24 + 18)] Total variances: Adverse Favourable £ £ Materials (W1) 5,200 Labour (W2) 8,700 Fixed overhead (W3) 5,800 ––––––– –––––– 11,000 8,700 ––––––– –––––– Actual cost (142,700 + 291,300 + 230,800) Workings: W1 Actual cost £ 142,700 Standard cost of actual production 137,500 Actual cost 291,300 Standard cost of actual production 300,000 Actual cost 230,800 Standard cost of actual production 225,000 £ 662,500 2,300 A –––––––– 664,800 –––––––– Variance £ 5,200 A W2 8,700 F W3 5,800 A (b) £ Expenditure variance: Actual cost 230,800 Budgeted cost (12,000 × 18) 216,000 Volume variance: Budgeted cost 216,000 Standard cost of actual production 225,000 £ 14,800 A 9,000 F (c) The total direct materials and labour variances would be the same under absorption and marginal costing The total fixed overhead variance under marginal costing would be different and would be the same as the expenditure variance under absorption costing (£14,800 A) There is no volume variance under marginal costing as fixed production costs are treated as period costs and not treated as product costs 21 (a) Absorption rates: Cost centre T: (780,000 ÷ 16,250) = £48 per machine hour Cost centre W: (173,400 ÷ 14,450) = £12 per direct labour hour (b) Prime costs: Direct materials Direct labour: Cost centre T Cost centre W Production overheads: Cost centre T: (35 ữ 60) ì 48 Cost centre W: (21 ÷ 6) × 12 (c) £ 10 14 21 –––– 45 28 42 –––– 115 –––– Products not pass through service cost centres so the costs of such centres cannot be absorbed directly into products Products only pass through production cost centres Therefore in order to calculate a total production cost per unit, service cost centre costs have to be reapportioned to production cost centres for absorption The method of reapportionment that fully recognises any work that service cost centres for each is called the reciprocal method There are two techniques for applying the reciprocal method – a repeated distribution approach or the use of simultaneous equations 22 Part Examination – Paper 1.2 Financial Information for Management December 2005 Marking Scheme Marks Section A Each of the 25 questions in this section is worth marks 50 ––– Section B (a) (i) (ii) (iii) (iv) Variable cost per unit Total monthly fixed costs Selling price per unit Contribution per unit 2 1 ––– (b) Contribution from new business Opportunity cost Net increase in profit 11/2 1/ ––– (c) Explanation of opportunity cost Reference to Pointdextre Ltd 1 ––– ––– 12 ––– (a) Input and conversion Normal loss Abnormal gain Output 11/2 11/2 ––– (b) 11/2 1/ 2 ––– Equivalent units for conversion Cost per equivalent unit for conversion Valuation of output Valuation of closing work in progress (c) Debit entry (a) Contributions per unit Objective function Constraints ––– 12 ––– 1 ––– (b) Graph (or total contributions at feasible points) Optimal plan ––– ––– ––– 23 Marks (a) Total materials variance Total labour variance Total fixed overhead variance Reconciliation statement 1 1 ––– (b) Expenditure variance Volume variance 1 ––– (c) Direct materials and labour variances the same Total variance = expenditure variance No volume variance with reason 1 ––– ––– ––– (a) Cost centre T absorption rate Cost centre W absorption rate 1 ––– (b) 1/ Prime cost Production overheads (T) Production overheads (W) Total unit cost 1 1/ ––– (c) Reapportionment explanation Reapportionment method ––– ––– ––– 24 ... Examination – Paper 1. 2 Financial Information for Management December 20 05 Answers Section A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 D C C C B D C C A B A B C D A C D A A C D D D D B D C 1, 700... 35, 625 35,700 £ 22 9,500 25 3,980 –––––––– 24 ,480 Favourable –––––––– £ 27 ,900 30 ,22 5 ––––––– 2, 325 ––––––– 1, 26 0 16 C 17 D 18 A 19 A Coefficient of determination = r2 = 0·6 × 0·6 = 0·36 = 36% 20 ... = 15 and Q = 700 P = 50 – (0· 025 × 700) = £ 32 50 25 B When P = 20 then and 20 = 50 – 0· 025 Q Q = 1, 20 0 £ Total revenue (P × Q) = 1, 20 0 × 20 = 24 ,000 Less total costs 2, 000 + (15 × 1, 20 0) = 20 ,000