LCCI International Qualifications

Management Accounting
Level 3

Model Answers
Series 2 2009 (3024)

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Management Accounting Level 3
Series 2 2009

How to use this booklet

Model Answers have been developed by EDI to offer additional information and guidance to Centres,
teachers and candidates as they prepare for LCCI International Qualifications. The contents of this
booklet are divided into 3 elements:

(1) Questions – reproduced from the printed examination paper

(2) Model Answers – summary of the main points that the Chief Examiner expected to
see in the answers to each question in the examination paper,
plus a fully worked example or sample answer (where applicable)

(3) Helpful Hints – where appropriate, additional guidance relating to individual

questions or to examination technique

Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success.

EDI provides Model Answers to help candidates gain a general understanding of the standard
required. The general standard of model answers is one that would achieve a Distinction grade. EDI
accepts that candidates may offer other answers that could be equally valid.

© Education Development International plc 2009

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or
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without prior written permission of the Publisher. The book may not be lent, resold, hired out or
otherwise disposed of by way of trade in any form of binding or cover, other than that in which it is
published, without the prior consent of the Publisher.

Page 1 of 14
QUESTION 1

A company manufactures and sells a single product at a selling price of £120 per unit. The variable
production costs and variable selling costs of the product are £82.50 and £7.50 per unit respectively.
In the next period, fixed costs are budgeted at £225,000 and the budgeted production and sales are
12,000 units.

REQUIRED

(a) Calculate, for the next period, the:

(i) budgeted break-even point (in sales revenue) (3 marks)

(ii) budgeted margin of safety (expressed as a percentage) (2 marks)

(iii) selling price required to maintain the current contribution/sales ratio if the variable production
costs and the variable selling costs increase by 8% and 12% per unit respectively.
(5 marks)

The company, which has sufficient unused production capacity, is considering reducing the selling
price by 4% in the next period in order to generate a forecast of 15% increase in sales units. This
would be expected to result in the following cost increases:

Variable production costs 6% per unit

Variable selling costs £0.09 per unit
Fixed costs £14,400

REQUIRED

(b) Assuming that the selling price is reduced by 4% for the next period, calculate the revised
budgeted:

(i) break-even point (in sales revenue) (6 marks)

(ii) net profit. (4 marks)

(Total 20 marks)

3024/2/09/MA Page 2 of 14
MODEL ANSWER TO QUESTION 1

(a) (i)
£ per unit
Selling price 120.00
Less: Variable costs
Production 82.50
Selling 7.50 (90.00)
Contribution 30.00

 30 
Contribution/sales ratio (C/S) =   = 0.25
 120 

Break-even point (in sales revenue) = FC = £225,000 = £900,000

C/S 0.25

(ii) Budgeted sales value = 12,000 x £120 = £1,440,000

 1,440,000 − 900,000 
Margin of safety =   x 100% = 37.5%
 1,440,000 
(iii) New selling price with current contribution/sales ratio

Existing Revised
unit cost unit cost
£ £
Variable production 82.50 x (1.08) 89.10
Variable selling 7.50 x (1.12) 8.40
Total variable cost 90.00 97.50

Variable cost ratio = 1 - C/S = 1 - 0.25 = 0.75

In order to maintain the current C/S ratio of 0.25, the revised variable cost per unit must
equal 0.75 of selling price per unit.

New selling price = £97.50 = £130 per unit

0.75

(b) (i)
£ per unit £ per unit
Selling price (£120 x 0.96) 115.20
Less: Variable costs
Production (£82.50 x 1.06) 87.45
Selling (£7.50 + £0.09) 7.59 95.04
Contribution 20.16

 20.16 
C/S =   = 0.175
 115.20 

Break-even point (in sales revenue) = FC = (£225,000 + £14,400) = £1,368,000

C/S 0.175

3024/2/09/MA Page 3 of 14
MODEL ANSWER TO QUESTION 1 CONTINUED

(ii)
£
Sales – 13,800 (12,000 x 1.15) units @ £115.20 1,589,760
Less: Variable costs of sales
Production (13,800 @ £87.45 per unit) (1,206,810)
Selling (13,800 @ £7.59 per unit) (104,742)
Contribution 278,208
Less: Fixed cost (£225,000 + 14,400) (239,400)
Net profit* 38,808

*Alternative calculation:
£
Contribution (13,800 units x £20.16) 278,208
Less: Fixed cost (£225,000 + £14,400) (239,400)
Net profit 38,808

3024/2/09/MA Page 4 of 14
QUESTION 2

A company manufactures and sells two products – Product A and Product B. The company is
preparing its budgets for the coming period and has provided the following information:

(1) Production and sales of each of the two products are in batches of 100 units.

(2) 1,200,000 units of Product A and 800,000 units of Product B are expected to be sold at selling
prices of £65 and £115 per batch of 100 units respectively.

(3) Both products use the same type of raw material (Material X) and direct labour with the following
requirements per batch of 100 units:
Product A Product B
Material X @ £6.25 per kg 5 kg 8 kg
Direct labour @ £13.75 per hour 1¾ hours 2½ hours

(4) The stocks of Material X and of the two products at the beginning of the budget period are
estimated as follows:

Material X 18,000 kg
Product A 140,000 units
Product B 120,000 units

(5) The company plans to increase the stock levels of Product A and Product B by 10% and 12½%,
respectively, by the end of the period. However, the estimated opening stock level of Material X
is considered to be too high and a reduction of 15% is planned by the end of the period. There is
no stock of work-in-progress.

REQUIRED

(a) Prepare the following budgets for the coming period:

(i) sales (value of each product and total value) (2 marks)

(ii) production (units of each product) (3 marks)

(iii) purchases (quantity in kg and cost for Material X) (4 marks)

(iv) direct labour (quantity in hours and cost). (3 marks)

(b) Explain each of the following approaches to budgeting:

(i) rolling/continuous budgets (4 marks)

(ii) zero-based budgets. (4 marks)

(Total 20 marks)

3024/2/09/MA Page 5 of 14
MODEL ANSWER TO QUESTION 2

(a) (i) Sales budget (value)

Product A Product B Total

‘000’ ‘000’ ‘000’

Budgeted sales units 1,200 800

Selling price per unit* x £0.65 x £1.15
Budgeted sales value £780 £920 £1,700

= £1,700,000
* Selling price per unit = £65 ÷ 100 = £115 ÷ 100
= £0.65 per unit = £1.15 per unit

(ii) Production budget (units)

Product A Product B
‘000’ units ‘000’ units

Budgeted sales units 1,200 800

Add Closing stock (140 x 1.1) 154 (120 x 1.125) 135
1,354 935
Less: Opening stock 140 120
Budgeted production units 1,214 815

(iii) Purchases budget (quantity in kg and cost for Material X)

Product A Product B Total

‘000’ ‘000’ ‘000’

Budgeted production units 1,214 815
Material required per unit** x 0.05 x 0.08
Required for production 60.7 kg 65.2 kg 125.9 kg
Add Closing stock (18 × 0.85) 15.3 kg
141.2 kg
Less Opening stock 18.0 kg
Budgeted purchases (quantity) 123.2 kg
x Cost of material per kg x £6.25
Budgeted purchases (cost) £770

= £ 770,000

** Material required per unit = 5 kg ÷ 100 = 8 kg ÷ 100

= 0.05 per unit = 0.08 per unit

3024/2/09/MA Page 6 of 14
QUESTION 2 CONTINUED

(iv) Direct labour budget (quantity in hours and cost)

Product A Product B Total

‘000’ ‘000’ ‘000’

Budgeted production units 1,214 815

Hours required per unit*** x 0.0175 x 0.025
Budgeted labour hours 21.245 20.375 41.62
× Cost of labour per hour x £13.75
Budgeted labour (cost) £572.275

= £572,275

*** Hours required per unit = 1.75 hours ÷ 100 = 2.5 hours ÷ 100
= 0.0175 per unit = 0.025 per unit

(b) A rolling/continuous budget is a 12-month budget which involves continuous amendment and
updating by adding, for example, a further quarter (or month) and deducting the earliest quarter
(or month) from the current budget.

Rolling budgets allow management to update budgets as more definitive information becomes
available. They are particularly useful where demand for a service or costs cannot be accurately
forecast at the time of preparing the budgets.

A zero-based budget (ZBB) is a method of budgeting, commonly used in non-profit-making

organisations, whereby managers are required to justify all costs as if the spending programs
were being proposed for the first time.

ZBB requires a fundamental review of all items to be included in a budget on the assumption that
all services start at a zero cost level. This is in contrast with the usual incremental approach
which accepts the previous year’s budget figures and concentrates on marginal changes.

3024/2/09/MA Page 7 of 14
QUESTION 3

Apex Limited manufactures and sells a single product. The company had budgeted to produce and
sell 2,500 units at a selling price of £240 per unit in the period just ended. Details of the standard cost
per unit are as follows:
£
Direct material 7½ kg @ £13.80 per kg 103.50
Direct labour 5 hours @ £10.50 per hour 52.50
Fixed production overhead 5 hours @ £5.60 per hour 28.00

The following is a reconciliation of the budgeted gross profit with the actual gross profit for the period
just ended:
£ £ £
Budgeted gross profit 140,000

Sales variances:
Sales price variance 15,700 ADV
Sales volume gross profit variance 10,080 FAV
5,620 ADV
Direct material cost variances:
Material price variance 9,660 ADV
Material usage variance 12,120 FAV
2,460 FAV
Direct labour cost variances:
Labour rate variance 7,520 FAV
Labour efficiency variance 13,400 ADV
5,880 ADV
Fixed production overhead variances:
Fixed overhead expenditure variance 4,290 FAV
Fixed overhead volume variance 5,040 FAV
9,330 FAV
290 FAV
Actual gross profit 140,290

ADV = Adverse variance FAV = Favourable variance

There were no stocks of raw materials, work-in-progress or finished units.

REQUIRED

(a) Calculate the following actual figures for the period just ended:

(i) production and sales units (2 marks)

(ii) sales revenue (3 marks)

(iii) direct material cost (3 marks)

(iv) direct labour cost (2 marks)

(v) fixed production overhead. (3 marks)

(b) Explain the differences between planning variances and operational variances.
(7 marks)

(Total 20 marks)

3024/2/09/MA Page 8 of 14
MODEL ANSWER TO QUESTION 3

(a) (i) Actual production and sales units

units
Budgeted production and sales units 2,500

Add Sales volume profit variance = £10,080 = 180

Budgeted gross profit per unit £56*

Actual production and sales units 2,680

* Budgeted gross profit per unit = £240 – (£103.50 + £52.50 + £28.00) = £56

(ii) Actual sales revenue

£
Budgeted sales revenue 2,500 units x £240 600,000
Add Increased sales revenue 180 units x £240 43,200
Actual sales @ standard price 643,200
Less: Sales price variance – 15,700
Actual sales revenue 627,500

(iii) Actual direct material cost

£
Standard cost of actual units 2,680 units x £103.50 277,380
Add Material price variance + 9,660
Less: Material usage variance – 12,120
Actual direct material cost 274,920

(iv) Actual direct labour cost

£
Standard cost of actual units 2,680 units x £52.50 140,700
Add Labour efficiency variance + 13,400
Less Labour rate variance – 7,520
Actual direct labour cost 146,580

(v) Actual fixed production overhead

£
Fixed overhead absorbed 2,680 units x £28 75,040
Less Fixed overhead volume variance 5,040
Budgeted fixed overhead 70,000
Less Fixed overhead expenditure variance 4,290
Actual fixed production overhead 65,710

(b) Planning variances seek to explain the extent to which the original standard needs to be
adjusted in order to reflect changes in operating conditions between the current situation and the
one envisaged when the standard was originally calculated. In effect, it means that the original
standard is brought up to date in order for it to be a realistic attainable target in current conditions.

Operational variances indicate the extent to which attainable targets (i.e., the adjusted
standards) have been achieved. Operational variances would be calculated after the planning
variances have been established and are, thus, a realistic way of assessing performance.

3024/2/09/MA Page 9 of 14
QUESTION 4

A company manufactures and sells four products. The following details regarding the products are
available for the coming period:

Product P Product Q Product R Product S

£ per unit £ per unit £ per unit £ per unit

Selling price 480 840 780 525

Deduct:
Direct material costs (Note 1) 120 200 255 100
Direct labour costs (Note 2) 100 200 150 125
Variable overhead costs 80 160 120 100
Fixed overhead costs 120 240 180 150
420 800 705 475

Profit per unit 60 40 75 50

Production and sales (Note 3)1,150 units 1,800 units 2,500 units 3,160 units

Notes

(1) All products are made from the same direct material.

(2) Direct labour is paid £20 per hour and the same grade of direct labour is used in the production of
the four products.

(3) The production and sales figures include the following units which the company is contracted to
supply one of its major customers in the coming period:

Product P 250 units

Product Q 150 units
Product S 400 units.

REQUIRED

Prepare a schedule of the optimum production mix for the coming period in each of the following
situations:

(a) the supply of direct material is limited to £500,000 (11 marks)

(b) the availability of direct labour is limited to 35,000 hours. (9 marks)

(Total 20 marks)

3024/2/09/MA Page 10 of 14
MODEL ANSWER TO QUESTION 4

(a) Production schedule – supply of direct materials limited to £500,000

Product P Product Q Product R Product S

£ per unit £ per unit £ per unit £ per unit

Selling price 480 840 780 525

Deduct Variable costs
Direct material 120 200 255 100
Direct labour 100 200 150 125
Variable overheads 80 160 120 100
300 560 525 325

Contribution per unit £180 £280 £255 £200

Direct material cost per unit £120 £200 £255 £100

Contr. per £ of material cost 1.5 1.4 1.0 2.0

nd rd th st
Ranking 2 3 4 1

Units Material cost

£
Product S
Production units on contract 400 x £100 40,000
Balance 3,160 – 400 2,760 x £100 276,000
3,160

Product P
Production units on contract 250 x £120 30,000
Balance 1,150 – 250 900 x £120 108,000
1,150

Product Q
Production units on contract 150 x £200 30,000
Balance of material (£16,000 ÷ £200) 80 x £200 16,000
230
£500,000

(b) Production schedule – availability of direct labour limited to 35,000 hours

Product P Product Q Product R Product S

£ per unit £ per unit £ per unit £ per unit

Contribution per unit £180 £280 £255 £200

Direct labour hour per unit* 5 10 7.5 6.25
Contribution per labour hour £36 £28 £34 £32
st th nd rd
Ranking 1 4 2 3

*Direct labour cost per unit £100 = 5 £200 = 10 £150 = 7.5 £125 = 6.25
Direct labour rate per hour £20 £20 £20 £20

3024/2/09/MA Page 11 of 14
MODEL ANSWER TO QUESTION 4 CONTINUED

Units Labour hours

Product P
Production units on contract 250 x 5 hours 1,250
Balance (1,150 – 250) 900 x 5 hours 4,500
1,150

Product R 2,500 x 7.5 hours 18,750

Product S
Production units on contract 400 x 6.25 hours 2,500
Balance of labour hours (6,500 ÷ 6.25) 1,040 x 6.25 hours 6,500
1,440

Product Q
Production units on contract 150 x 10 hours 1,500

35,000

3024/2/09/MA Page 12 of 14
QUESTION 5

A company is considering investing in a new capital project for which the following estimates have
been prepared:

Initial project cost £400,000

Duration of project 5 years

Cost of capital 12% per annum

Annual sales 6,000 units of a product at a selling price of £144 per unit

Variable costs £86 per unit

Incremental fixed costs

(excluding depreciation) £210,000 per annum

It is assumed that net cash flows occur at the end of the years to which they relate.

Discount factors: Year 12% 15% 20% 25%

1 0.893 0.870 0.833 0.800
2 0.797 0.756 0.694 0.640
3 0.712 0.658 0.579 0.512
4 0.636 0.572 0.482 0.410
5 0.567 0.497 0.402 0.328
3.605 3.353 2.990 2.690

REQUIRED

(a) Calculate the following:

(i) net present value of the project (5 marks)

(ii) internal rate of return for the project. (5 marks)

(b) Calculate (in percentages to 2 decimal places) the sensitivity of the NPV figure calculated in part
(a) (i) to the following estimates:

(i) initial project cost (2 marks)

(ii) annual sales units (2 marks)

(iii) selling price per unit (2 marks)

(iv) variable costs per unit (2 marks)

(v) fixed costs per annum. (2 marks)

(Total 20 marks)

3024/2/09/MA Page 13 of 14
MODEL ANSWER TO QUESTION 5

(a) (i) NPV of project

£
Annual contribution: (£144 – £86) = £58 x 6,000 units 348,000
Less Annual fixed costs 210,000
Net annual cash inflows 138,000
x Annuity factor (AF) @ 12% discount rate x 3.605
Present value 497,490
Less Initial project cost – 400,000
Net present value 97,490

(ii) IRR of project

Net annual cash inflows 138,000

x Annuity factor (AF) @ 25% discount rate x 2.690
Present value 371,220
Less Initial project cost – 400,000
NPV – 28,780

IRR = 12% + {13% x [97,490 ÷ (97,490 + 28,780)]} = 22.04%

(b) (i) Sensitivity of NPV to initial project cost NPV x 100%

Initial cost

= £97,490 x 100% = 24.37%

£400,000

(ii) Sensitivity of NPV to annual sales NPV x 100%

Sales units x (SP – VC) x AF

= £97,490 x 100% = 7.77%

6,000 x (£144 – £86) x 3.605

(iii) Sensitivity of NPV to selling price per unit NPV x 100%

Sales units x SP x AF

= £97,490 x 100% = 3.13%

6,000 x £144 x 3.605

(iv) Sensitivity of NPV to variable costs per unit NPV x 100%

Sales units x VC x AF

= £97,490 x 100% = 5.24%

6,000 × £86 x 3.605

(v) Sensitivity of NPV to annual fixed costs NPV x 100%

Fixed costs x AF

= £97,490 x 100% = 12.88%

£210,000 x £3.605

3024/2/09/MA Page 14 of 14 © Education Development International plc

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