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

1 A
2 D
3 C Contribution per unit (CPU) £(60 – 15 – 5) £40
Total fixed cost £(30 x 2,400) £72,000
Breakeven point (72,000 ÷ 40) 1,800 units
4 C CPU (40 x 0·40) £16
Breakeven point (60,000 ÷ 16) 3,750 units
Margin of safety (64,000 ÷ 40) 1,600 units
––––––––––
Planned activity level 5,350 units
––––––––––
5 D X Y
CPU £8 £10
Contribution per hour £4 £2·50
Ranking 1st 2nd
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
7 B
8 A Closing stock (units) = 200 + 600 – 150 – 200 – 250 = 200
Issues = £5,200 + (600 – 200) x £32·50 = £18,200
9 D
(2 x 20 x (4 x 12,500)
EOQ = = 1,155
0 ⋅ 10 x 15

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 £
Actual overhead 108,875
Absorbed overhead (30,000 ÷ 3·50) 105,000
–––––––-
Under absorption 113,875
––––––––
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 £
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 (£)
18 C £
Actual sales at standard selling price 112,500
(9,000 x £12·50)
Actual sales at actual selling price 117,000
–––––––-
Sales price variance 4,500 favourable
–––––––-
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
21 C £
Salary costs (54 x 40) + (110 x 25) 4,910
Overhead cost (164 x 20) 3,280
–––––––-
Total cost 8,190
Mark-up (40% on total cost) 3,276
–––––––-
Final fee 11,466
–––––––-
22 A Joint costs apportioned to product H: £
(228 ÷ 640) x 384,000 136,800
Further processing costs 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) £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
2 x (6,000 ÷ 15) x 1·20 (960)
––––––-
Overall increase in contribution and profit 1,740
––––––-
24 B L M N P
Additional cost of buying in one unit (£) 12 15 24 30
Machine hours per unit 13 15 14 16
Additional cost of buying in per machine hour (£) 14 13 16 15
Ranking for buying in 2nd 1st 4th 3rd
Buy in component M.
25 D

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Section B

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

Materials Conversion
EU EU
Completion of opening work in progress – 120
Started and finished units last month 1,600 1,600
Closing work in progress 300 150
–––––– ––––––
Work done last month 1,900 1,870
–––––– ––––––
£133,000 £93,500
Cost per EU ––––––––– ––––––––
1,900 1,870
= £70 = £50
(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) Process II Account

Units £ Units £
Transfer from Process I 1,800 214,500 Normal loss 126 –
Conversion costs 78,450 Abnormal loss 24 4,200
Finished production 1,650 288,750
–––––– –––––––– –––––– ––––––––
1,800 292,950 1,800 292,950
–––––– –––––––– –––––– ––––––––
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.

2 (a)
Total
variance
Direct material £ £
Actual quantity at actual price 417,900
2,100 F
Standard quantity for actual production at standard price 420,000
Direct labour
Actual hours at actual rate 949,620
4,620 A
Standard hours for actual production at standard rate 945,000
Variable production overheads
Actual expenditure 565,740
1,260 F
Standard cost of actual production 567,000

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 (b) £ Variance (£)
Actual hours at actual rate 949,620
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

(b) Strategy A B C
Units per week 4,400 4,720 5,000
–––––– –––––– ––––––
£/unit £/unit £/unit
Selling price 19·60 19·00 18·60
Less Variable cost (12·00) (12·00) (12·00)
–––––– –––––– ––––––
Contribution 7·60 7·00 6·60
–––––– –––––– ––––––
£ £ £
Total contribution 33,440 33,040 33,000
––––––– ––––––– –––––––
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
L 200 kg at £11 2,200
––––––––
£33,070
––––––––
(ii) Skilled labour
£
Labour cost 800 hours at £9·50 7,600
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.

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5 (a) £
Fixed production overhead costs (finishing section) 241,320
+
Reapportionment of general service centre costs
£82,800 x (32 ÷ 46) 57,600
––––––––
298,920
––––––––
Direct labour hours in finishing section: hours
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
– machining department 40·00
– finishing section 36·00
–––––– 76·00
–––––––
Prime cost 120·00
Production overhead costs:
– machining department (3 x £3·10) 9·30
– finishing section (6 x £2·65) 15·90
––––––––
Total cost per unit for Dale £145·20
––––––––

(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.

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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
–––

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 Marks
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
––– 5
(b) Prime cost 1
Overhead costs (2 x 1/ mark) 1
2
––– 2
(c) Production > sales/increasing stocks 1
Marginal costing profit lower than absorption costing profit 1
Explanation 1
––– 3
–––
10
–––

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