F2 Revision

PAper F2 Revision Notes June 2009 Examinations 1
FORMULAE SHEET
∑y b∑x Regression analysis

a= -
n
∑y b∑x
a= -
n∑xy-∑x∑y n n
b=
n∑x2 -(∑x)2 ∑y b∑x
a= -
n∑xy-∑x∑y
b= n n
x ∑xy-∑x∑y n∑x2 -(∑x) 2
∑y b∑x
r= a= -
( nn∑xy-∑x∑y
n
b=
n∑xy-∑x∑y
r= n∑x -(∑x)2
2
2 n∑xy-∑x∑y
(n∑xb=-(∑x)2 )(n∑y 2 -(∑y)2 )
n∑x2 -(∑x)2
x∑xy-∑x∑y
r=
2C0D (n∑x -(∑x)2 )(n∑y 2 -(∑y)2 )
2
=Economic order x∑xy-∑x∑y
quantity
Ch r=
(n∑x -(∑x)2 )(n∑y 2 -(∑y)2 )
2
2C0D
=
2C0D Ch
= 2C0D
D
Ch (1-= ) C
Economic R batch
2C0Dquantity
h
=
D
Ch (1-
2C DR)
= 0
D
Ch (1- )
R
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OVERHEAD ALLOCATION AND ABSORPTION
Jones Ltd has allocated overheads between departments as follows:

Dept $
A 336,000
B 210,000
Repairs 42,000
Maintenance 28,000
In addition there are general overheads of $308,000 which should be apportioned:
A: 40%; B: 30%; Repairs: 20%; Maintenance: 10%.
A & B are production departments. The repairs and maintenance service production department as follows:
A B Repairs Maintenance
Repairs 60% 40% – –
Maintenance 40% 40% 20% –
Budgeted labour hours:

A: 40,000 hrs; B: 8,000 hrs
Budgeted machine hours:

A: 5,000hrs; B: 60,000 hrs
(a) Calculate an overhead absorption rate for each production dept.

(b) Smith Ltd has budgeted overheads of $200,000 and budgeted labour hours of 50,000. Actual hours worked
were 48,000 and actual overheads were $205,000.
Calculate the amount of over or under absorption of overheads
OVERHEAD ABSORPTION - SERVICE DEPARTMENTS
After allocating and apportioning overheads, the total overheads for each department are:
X Y Stores Canteen
280,000 196,000 84,000 56,000
Stores and Canteen are service departments, and are used by other departments as follows:
X Y Stores Canteen
Stores 80% 10% – 10%
Canteen 60% 36% 4% –
Reallocate the service department costs
BREAKEVEN ANALYSIS
Skully Ltd has produced the following (summarised) P&L A/C for 2002:
$ $
Sales (20 000 units) 560,000
Production costs:
Variable 252,000
Fixed 84,000
336,000
Gross Profit 224,000
Non-production costs:
Variable 84,000
Fixed 84,000
168,000
Net Profit $56,000
(a) What was breakeven sales volume for 2002?
(b) What was the margin of safety in 2002?
(c) What is C/S ratio in 2003
(d) Draw
(i) profit volume chart
(ii) breakeven chart for 2002
PROCESS COSTING
A In process X, 8,000 units were started during the month. There is a normal loss of 10% of input. All losses are
sold for $1 p.u. Actual units completed during the month were 7300u.
Costs incurred during the month:
Materials: $20,000
Labour and overheads: $3,840
(There was no W.I.P at start or end of month)
Write up the Process account and Loss account for the month
B In process Y, 6,000u were started during the month.

W.I.P. at the start of month:
400u [Materials 100% complete: $1,600
Labour 30% complete: $240]
W.I.P. at the end of month:

600u [ Materials 100% complete
Labour 60% complete]
Expenditure during the month:

Materials: $30,000
Labour: $18,120
(There were no losses during the month)
Write up the process account, using FIFO
JOINT COSTS AND BY-PRODUCTS
Jackson Ltd produces 2 products (& a by-product) in a joint process.
During 2001, production was as follows:

S.P. (per kg)
A 10,000 kg $10
B 40,000 kg $14
By-product 10,000 kg $1.40
The costs incurred in the process are $560,000
Product A needs a further $3 per kg to be spent before it is ready for sale.
For products A & B, calculate the stock value per kg splitting the joint costs
(i) on the basis of weight
(ii) on the basis of sales value
LINEAR PROGRAMMING
Mulder Ltd manufactures 2 products - X & Y with the following unit costings:
X Y
Selling price 20 15
Variable costs 14 5
Contribution $6 $10
Labour usage 2 hrs 4 hrs

Material usage 5 kg 3 kg
Maximum demand: 3,000 u 12,000 u
If labour hours are restricted to a maximum of 8,000 hours, and material is restricted to a maximum of
13,000kg, what is the optimum production schedule?
LINEAR PROGRAMMING
CONSTRAINTS:
Labour: 2x + 4y ≤ 8.000
Material: 5x + 3y ≤ 13.000
Demand: x ≤ 3000; y ≤ 12.000
Non-negativity: x ≥0; y ≥ 0
OBJECTIVE:
Maximise contribution:
C = 6x+10y
4333 Demand
A
For x
The demand
for y constraint
is obviously
redundant Material
2000 C
Labour
1500
E
Objective
B D
2500 2600 4000 x
[Contribution line: if C = $15.000, then: x=0; y=1500

y=0; x=2500
BUT use any value for C - slope will be the same]
LINEAR PROGRAMMING
Optimum production schedule occurs at point E on the graph
At point E:
2x + 4y = 8,000 (1)
and 5x + 3y = 13,000 (2)
(1) x 2.5 gives: 5x + 10y = 20,000 (3)
(3) – (2) gives 7y = 7000
y = 1000
Substitute for y in (1): 2x + 4000 = 8000

2x = 4000
x = 2000
Optimum production schedule:

Produce 2000 units of product X
and 1000 units of product Y
STOCK CONTROL
X plc needs to purchase 1,800 units a year. The purchase price of each unit is $25.
Delivery costs per order: $32

Stock holding costs p.a.
(as %age of purchase cost): 18 % p.a.

(a) Calculate the optimum order quantity, and the total costs p.a. at that order quantity.
(b) Y Plc has minimum demand of 20 units per day, average demand of 30 units per day, and maximum
demand of 40 units per day. The lead time varies between 10 and 15 days.
(i) What should the reorder level be?
(ii) If the reorder quantity is 1,200 units, what will be the maximum stock level?
– buffer (or safety) stock
VARIANCE ANALYSIS
COST CARD
$ p.u.
Selling price 40
Materials (5kg at $4 per kg 20
Labour (3 hrs at $3 per hr) 9
Fixed overheads (3hrs at $2 per hr) 6
35
Standard profit $5p.u.
Budgeted production: 5,600 units

Budgeted sales: 5,000 units
No opening stock.
Actual results:
Sales: 5,200 units for $218,400
Production costs (for production of 5,500 units):
$
Materials (27,200 kg) 112,000
Labour (18,000 hours paid and worked) 55,800
Fixed overheads 30,000
REGRESSION
Units Costs
($’000’s)
x y xy x2 y2
100 40
200 45
300 50
400 65
500 70
600 70
700 80
(a) Calculate the regression line
(b) Calculate the coefficient of correlation
(c) Calculate the coefficient of determination
RELEVANT COSTING
Example 1
500 kg of material are needed for a special contract.
There are 200 kg in stock, which was purchased for $2 per kg.. The current purchase price is $2.20 per kg..
The material is in regular use.
What is the relevant cost?
Example 2
600 kg of material are needed for a special contract.
There are 400 kg in stock, which was purchased for $5 per kg.
The current purchase price is $7 per kg, and the current realisable value is $6 per kg.
The company has no other use for this material.
Example 3
A contract needs 200 hours of labour. Labour is paid $8 per hour, and the company has spare capacity.
Example 4
A contact needs 300 hours of labour. Labour is paid $6 per hour.
There is no spare capacity, and the labour would have to be transferred from other work producing units that
earn a contribution of $14 per unit and take 2 hours per unit to produce.
SUNK COSTS
OPPORTUNITY COSTS
Labour costs
Ratios:
Expected hours to make output

Production Volume Ratio =
Hours budgeted
Actual hours worked

Capacity Ratio =
Hours budgeted
Expected hours to make output

Efficiency Ratio =
Actual hours worked
Piecework: Pay workers per unit produced
Employees Replaced
Labour Turnover Rate =
Average Number of Employees
Example
Firm had 200 employees at start of the year, and 160 at the end of the year.
During the year 50 employees had left.
Answer
Number of employees fell by 40, so if 50 left 10 must have been replaced.
Average number of employees
200 +160
Average number of employees = = 180
2
10
Labour turnover rate = × 100% = 5.56%
180
Marginal and Absorption costing
Z Ltd produces desks for which the standard cost card is as follows:
$ pu
Materials 10
Labour 6
Variable overheads 4
Fixed overheads 3
$23
During January, Z Ltd produced 50,000 desks and sold 45,000.

The profit was calculated at $220,000, using absorption costing
What would the profit be using marginal costing?
Key Factor Analysis (1)
XX produces 3 products:
A B C
Selling price 42 56 51
Materials 10 18 14
Labour 12 16 12
Variable overheads 8 10 10
30 44 36
Contribution p.u. $12 $12 $15
Maximum demand 1,000 1,000 1,000
Labour is paid $4 per hour, and there is a maximum 8,000 hours available.
How many units of each should be produced to maximise profit?
Key Factor Analysis (2)
YY makes 2 products:
F G
Materials 8 4
Labour 5 10
Variable overheads 3 4
16 18
Units required 2,000 2,000
Labour is paid $5 per hour, and there are only 5,000 hours available.
The units may be purchased from a supplier at costs of F:$22p.u., and G: $26p.u.
How many units of each should be produced, and how many purchased from the supplier, in order to
minimise costs?
VARIANCES – MATERIALS
Standard cost of materials:
20 kg at $4 per kg = $80 per unit
During the month we produced 5000 units.
We purchased 120,000 kg of material and paid $500,000

We used 105,000 kg in production (the other 15,000 kg are in inventory)
Materials expenditure (price) variance:
Materials usage variance:
VARIANCES – LABOUR
Standard cost of labour:
8 hours at $3 per hr = $24 per unit
During the month we produced 6000 units.
We paid for 52,000 hours of labour at the rate of $3.20 per hour.
We worked 49,500 hours.
Labour rate of pay variance:
Labour idle time variance:
Labour efficiency variance:
VARIANCES – VARIABLE OVERHEADS
Standard cost of variable overheads:
During the month we produced 1,200 units.
We worked for 7100 hours, and paid $13,900 for variable overheads.
Variable overhead expenditure variance:
Variable overhead efficiency variance:
VARIANCES – FIXED OVERHEADS
Our company uses absorption costing, and budgeted to produce and sell 8,000 units.
Standard cost of fixed overheads:
During the month we produced 9,000 units.

We worked for 35,000 hours, and paid $100,000 for fixed overheads.
Total fixed overhead variance:
Fixed overhead expenditure variance:
Fixed overhead volume variance:
Fixed overhead capacity variance:
Fixed overhead efficiency variance:
VARIANCES – SALES
We budgeted to sell 10,000 units.
The standard selling price is $20 per unit.

The standard costs are:
Variable costs $12 per unit
Fixed costs $ 5 per unit
The actual sales were 12,000 units at a selling price of $19 per unit
Absorption costing:
Sales price variance:
Sales volume variance:
Marginal costing:
Sales price variance:
Sales volume variance:

F2 Revision

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PAper F2 Revision Notes June 2009 Examinations 1

∑y b∑x Regression analysis

Jones Ltd has allocated overheads between departments as follows:

In addition there are general overheads of $308,000 which should be apportioned:

A: 40%; B: 30%; Repairs: 20%; Maintenance: 10%.

Budgeted labour hours:

Budgeted machine hours:

(a) Calculate an overhead absorption rate for each production dept.

Reallocate the service department costs

(a) What was breakeven sales volume for 2002?

(b) What was the margin of safety in 2002?

(c) What is C/S ratio in 2003

(i) profit volume chart

(ii) breakeven chart for 2002

B In process Y, 6,000u were started during the month.

W.I.P. at the end of month:

Expenditure during the month:

(There were no losses during the month)

Write up the process account, using FIFO

Jackson Ltd produces 2 products (& a by-product) in a joint process.

During 2001, production was as follows:

The costs incurred in the process are $560,000

Product A needs a further $3 per kg to be spent before it is ready for sale.

(i) on the basis of weight

(ii) on the basis of sales value

Labour usage 2 hrs 4 hrs

[Contribution line: if C = $15.000, then: x=0; y=1500

Optimum production schedule occurs at point E on the graph

Substitute for y in (1): 2x + 4000 = 8000

Optimum production schedule:

Delivery costs per order: $32

(i) What should the reorder level be?

– buffer (or safety) stock

Budgeted production: 5,600 units

(a) Calculate the regression line

(b) Calculate the coefficient of correlation

(c) Calculate the coefficient of determination

What is the relevant cost?

What is the relevant cost?

What is the relevant cost?

What is the relevant cost?

Expected hours to make output

Actual hours worked

Expected hours to make output

Piecework: Pay workers per unit produced

During January, Z Ltd produced 50,000 desks and sold 45,000.

What would the profit be using marginal costing?

How many units of each should be produced to maximise profit?

Standard cost of materials:

20 kg at $4 per kg = $80 per unit

During the month we produced 5000 units.

We purchased 120,000 kg of material and paid $500,000

Materials expenditure (price) variance:

Materials usage variance:

Standard cost of labour:

8 hours at $3 per hr = $24 per unit

During the month we produced 6000 units.

Labour rate of pay variance:

Labour idle time variance:

Labour efficiency variance:

Standard cost of variable overheads:

6 hours at $2 per hr = $12 per unit

During the month we produced 1,200 units.

PAper F2 Revision Notes June 2009 Examinations 1