Professional Documents
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Accounting
Level 3
Model Answers
Series 2 2008 (Code 3024)
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Management Accounting Level 3
Series 2 2008
Model Answers have been developed by Education Development International plc (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:
(2) Model Answers – summary of the main points that the Chief Examiner expected to
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plus a fully worked example or sample answer (where applicable)
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Management Accounting Level 3
Series 2 2008
QUESTION 1
Project PR1 requires investment of £260,000 in Year 0 which is expected to be followed by constant
annual net cash inflows in each of Years 1 to 6. No residual value is expected at the end of the project
life. The net present value of Project PR1 has been calculated as £23,660 (positive) with the cash
flows discounted at the company's cost of capital of 12% per annum.
Project PR2 requires investment of £410,000 in Year 0, with estimated net cash inflows over 5 years
as follows:
Year £000
1 80
2 105
3 130
4 130
5 75
Discount factors
Year Annual discount rate %
9 12 15
1 0.917 0.893 0.870
2 0.842 0.797 0.756
3 0.772 0.712 0.658
4 0.708 0.636 0.572
5 0.650 0.567 0.497
6 0.596 0.506 0.432
REQUIRED
(a) Calculate the annual net cash inflow expected on Project PR1. (3 marks)
(c) Explain and illustrate how a weighted average cost of capital can be calculated. (6 marks)
(Total 20 marks)
3024/2/08/MA Page 1 of 10
MODEL ANSWER TO QUESTION 1
= 3.7 years
(ii) Project PR2 – net present value (NPV) + workings for IRR calculation:
= 9.9%
(c) The long term capital employed by a business is likely to be a mix of equity capital and debt
capital. Each has its own risks and associated rewards. The overall cost of capital to a business
will depend upon the cost of each element of long term capital and their relative proportions in the
capital mix.
Illustration:
A company has equity capital which represents 70% of total long term capital, requiring a return
of 15% per annum, and 30% debt capital at a cost of 10% per annum. The overall cost of capital
will be:
3024/2/08/MA Page 2 of 10
QUESTION 2
A wholesale business has the following budgeted balance sheets for the year ahead:
Stock 36 42
Debtors 67 74
Bank --- 9
103 125
Trade creditors 17 21
Expense creditors 6 8
Bank overdraft 11 ---
34 29
The profit to sales ratios for the year are budgeted to be:
No fixed assets are budgeted to be disposed of during the year. The cost of capital is 10% per
annum.
REQUIRED
(a) Prepare a summary cash budget for the year (workings for each item must be clearly shown)
(15 marks)
(b) Calculate each of the following budgeted ratios for the year:
(Total 20 marks)
3024/2/08/MA Page 3 of 10
MODEL ANSWER TO QUESTION 2
£000
Receipts
from sales 593 [(42 ÷ 0.07) – (74 – 67)]
Payments
to trade creditors 422 [(sales × 0.7) – (21 – 17) + (42 – 36)]
for expenses 86 [(sales × 0.23) – (8 – 6) – 50 depreciation]
for fixed assets 65 (465 – 400)
573
Bank overdraft at
beginning of year 11
Bank balance at
end of year 9
3024/2/08/MA Page 4 of 10
QUESTION 3
REQUIRED
A company manufactures and sells three products with the following selling prices and costs:
Availability of direct labour will be limited to 5,000 hours in the next period. Other resources will be
available as required. Output per direct labour hour is as follows:
Product X 10 units
Product Y 12 units
Product Z 15 units
Demand for the three products in the next period is expected to be:
REQUIRED
(i) demonstrate that direct labour will be the limiting factor (3 marks)
(ii) prepare a statement showing the sales units, and the resulting profit contribution,
of each product that would maximise profit. (10 marks)
(Total 20 marks)
3024/2/08/MA Page 5 of 10
MODEL ANSWER TO QUESTION 3
A cost that can be avoided if one or other of the decision-making alternatives is not
pursued.
Demand exceeds supply by 500 hours so direct labour is the limiting factor.
Workings:
3024/2/08/MA Page 6 of 10
QUESTION 4
REQUIRED
(a) Briefly, describe and appraise how ideal and attainable standards may be used as the basis for a
standard costing system.
(6 marks)
A company has a single product with standard selling price and standard production costs of £75 and
£50 per unit respectively. In the period just ended, 2,400 units of the product were sold, 100 units less
than budgeted, for a total revenue of £182,400.
REQUIRED
(b) Calculate the following variances for the period just ended:
In the same period, the cost variances reported by the company included:
£
Direct material price 415 Favourable
Direct material usage 1,320 Adverse
Direct labour rate 296 Favourable
Direct labour efficiency 480 Adverse
Fixed production overhead volume 1,820 Adverse
A single raw material is used in the manufacture of the product. The standard purchase price of the
material is £12.00 per kg. 2,400 units of the product were manufactured in the period during which
3,950 kgs of the raw material were purchased and used. The standard direct labour rate is £6.00 per
hour with standard efficiency of 1.2 hours per unit of product. The fixed production overhead
absorption rate is £14 per unit of output.
REQUIRED
(i) actual total cost of the material purchased and used (3 marks)
(Total 20 marks)
3024/2/08/MA Page 7 of 10
MODEL ANSWER TO QUESTION 4
(a) Ideal standards are performance standards that can only be achieved under perfect operating
conditions, i.e. maximum efficiency making no allowance for losses, waste, etc. Such standards
are very unlikely to be achieved and may as a consequence be de-motivational.
Attainable standards are performance standards that assume efficient levels of operation but
make some allowance for losses, waste, etc where appropriate. Such standards are commonly
adopted as they can be seen to be achievable with effort and thus may provide motivation to
improve performance.
Standard labour cost of production £17,280 (2,400 units × 1.2 hrs/unit × £6.00/hr)
+ Adverse labour efficiency variance £480
- Favourable labour rate variance £296
Actual labour cost of production £17,464
3024/2/08/MA Page 8 of 10
QUESTION 5
A company manufactures two products (P1 and P2). Three raw materials (M1, M2 and M3) are used
in the manufacture of the two products, as follows:
Raw material
M1 M2 M3
kg/unit of product litres/unit of product kg/unit of product
Product P1 1.4 0.2 ---
Product P2 --- 0.4 0.6
Finished stock of each of the products at the beginning of each month is 25% of that month's expected
sales.
The stock of Material M1 is not expected to change but the stocks of Material M2 and Material M3 are
considered to be too high and a reduction of 10% is to be budgeted for each material in each month.
REQUIRED
(b) List the stock valuations on the budgeted balance sheet at the end of Month 2. (4 marks)
(Total 20 marks)
3024/2/08/MA Page 9 of 10
MODEL ANSWER TO QUESTION 5
Working:
e.g. Product P1 closing stock, Month 2 = Month 3 sales 3,300 × 0.25 = 825 units
Working:
e.g. Material M2 usage, Month 2 = Product P1 production, Month 2 2,850 units × 0.2
+ Product P2 production, Month 2 2,025 units × 0.4 = 1,380 litres
Working:
e.g. Material M3 closing stock, Month 1 = opening stock, Month 1 300 kgs × 0.9 = 270 kgs
Finished goods:
Product P1 825 units x £19.40/unit £16,005
Product P2 450 units x £22.90/unit £10,305 £26,310
Raw materials:
Material M1 460 kgs x £3.60/kg £1,656
Material M2 405 litres x £9.40/litre £3,807
Material M3 243 kgs x £8.00/kg £1,944 £7,407
£33,717