Answers

Part 1 Examination – Paper 1.2

Financial Information for Management December 2006 Answers

Section A

1 D
2 D
3 A
4 D
5 B
6 C
7 C
8 A
9 B
10 C
11 B
12 A
13 C
14 D
15 C
16 D
17 D
18 A
19 D
20 A
21 D
22 D
23 A
24 D
25 A

1 D

2 D

3 A
Variable cost per unit = [(274,000 – 250,000) ÷ (15,000 – 12,000)] = £8
Total fixed cost above 11,000 units = [274,000 – (15,000 x 8)] = £154,000
Total fixed cost below 11,000 units = (10 ÷ 11) x 154,000 = £140,000
Total cost for 10,000 units = [(10,000 x 8) + 140,000] = £220,000

4 D
Contribution per unit = (24 ÷ 0·60 x 0·40) = £16
Breakeven point = (720,000 ÷ 16) = 45,000 units

5 B

6 C

7 C

8 A
b = [(5 x 23,091) – (129 x 890)] ÷ [(5 x 3,433) – (1292)] = 1·231
a = (890 ÷ 5) – [(1·231 x 129) ÷ 5] = 146 (nearest whole number)

15
9 B

10 C
Closing stock (units) = 300 + 400 + 500 – 600 – 300 = 300
Valuation = (100 x11) + (200 x 13) = £3,700

11 B
(3 x £8) + [(4 – 3) x 0·75 x £8] = £30

12 A

13 C

14 D

15 C
(60 + 40 + 20) + [(40 ÷ 8) x 16] + (0·60 x 120) = £272

16 D
£
Sales value after further processing = (9,000 x 0·9) x £12 = 97,200
Sales value without further processing = (9,000 x £10) 90,000
–––––––
Increase in sales revenue 7,200
Less: Further processing cost = (9,000 x £1) (9,000)
–––––––
Decrease in profit by further processing £1,800
–––––––

17 D
[(45,600 x 4) – 173,280] = £9,120 Favourable

18 A
£
Actual usage at standard cost (45,600 x 4) 182,400
Less: Adverse usage variance (15,200)
––––––––
Standard cost for actual production 167,200
––––––––
Actual production (units) = (167,200 ÷ 50) = 3,344

19 D
Opportunity cost now + disposal cost at end of contract (2,000 + 800) = £2,800

20 A
(800 – 450) x [8 + (14 ÷ 7)] = £3,500

21 D
Marginal cost (MC) = 15
Profit maximised when MC = MR
15 = 50 – 0·05Q
Q = 700
P = 50 – (0·025 x 700) = £32·50

16
 22 D
When P = 20:
20 = 50 – 0·025Q
And Q = 1,200
Total contribution = 1,200 x (20 – 15) = £6,000

23 A
£
Total fixed costs for shop S 70,000
Less: Apportioned general costs (200 x 0.60) ÷ (500 ÷ 1,500) (40,000)
–––––––
Specific avoidable fixed costs for shop S 30,000
–––––––
If shop S closed down net contribution lost (60,000 – 30,000) 30,000
Revised budgeted profit for company (80,000 – 30,000) £50,000

24 D

25 A

Section B

1 (a) Sales price variance: £

Actual sales at standard selling price (34,000 x £22) 748,000
Actual sales at actual selling price 731,000
––––––––
Sales price variance 17,000 A
––––––––
Sales volume contribution variance:
Budgeted sales (units) 32,000
Actual sales (units) 34,000
––––––––
Volume variance (units) 2,000 F
At standard contribution per unit £(22 – 9) x £13
Sales volume contribution variance £26,000 F
––––––––

(b) The actual selling price (£21·50) was lower than the standard selling price (£22·00) – hence the adverse sales price
variance. This reduction in price may have directly encouraged customers to buy more units. The company sold 2,000 more
units than planned giving the favourable sales volume contribution variance of £26,000. Thus the two variances may be
interrelated and if so the variances should be considered together – one partially offsetting the other.

(c) £
Budgeted contribution (32,000 x £13) 416,000
Less: Budgeted profit (marginal costing) (200,000)
–––––––––
Budgeted fixed costs 216,000
Less: Budgeted non-production fixed costs (1,152,000 ÷ 12) (96,000)
–––––––––
Budgeted fixed production costs 120,000
–––––––––
Standard fixed production cost per unit (£120,000 ÷ 30,000) £4
Calculation of absorption costing profit: £
Marginal costing profit 200,000
Less: Decrease in stocks at standard fixed production
cost per unit [(32,000 – 30,000) x £4] (8,000)
–––––––––
Absorption costing profit 192,000
–––––––––
Alternatively: £
Budgeted absorption costing manufacturing profit
32,000 x (13 – 4) 288,000
Less: budgeted non-production fixed costs (96,000)
–––––––––
Absorption costing profit 192,000
–––––––––

17
2 (a) (i) Using the formula given:
EOQ = [(2 x 120 x 48,000) ÷ (0·10 x 80)]0·5 = 1,200 units
£
(ii) Purchasing cost (48,000 x £80) 3,840,000
Ordering cost (48,000 ÷ 1,200) x £120 4,800
Holding costs [(1,200 ÷ 2) x £80 x 0·10] 4,800
––––––––––
Total cost 3,849,600
––––––––––

(b) Purchasing cost (48,000 x £80 x 0·99) 3,801,600

Ordering cost (48,000 ÷ 2,000) x £120 2,880
Holding costs [(2,000 ÷ 2) x £80 x 0·99 x 0·10] 7,920
––––––––––
Total cost 3,812,400
––––––––––
Annual total saving (3,849,600 – 3,812,400) £37,200

(c) Insurance costs of stock and warehouse

Rent of warehouse
Rates of warehouse
Interest on capital tied up in stock

3 (a) Hours required [(5 + 6 + 7 + 8) x 2,000] 52,000

Hours available 35,000
Shortfall in hours 17,000

(b) E F G H
£/unit £/unit £/unit £/unit
Variable production cost 32 27 34 35
Buy-in price 48 51 55 63
––– ––– ––– –––
Extra cost of buying in 16 24 21 28
––– ––– ––– –––
Machine hours per unit 5 6 7 8
Extra cost per machine hour saved 3·2 4·0 3·0 3·5
Ranking for buying in 2nd 4th 1st 3rd
Optimal plan for buying in components:
Ranking Component Units Machine hours
saved
1st G 2,000 14,000
2nd E 600 3,000 (balancing figure)
–––––––
Total shortfall of hours [as per (a)] 17,000
–––––––

(c) (1) The quality of the components supplied by Sergeant Ltd.

(2) The loss of control over all aspects of production and delivery of the components.
(3) The possibility of increasing the number of machine hours available next month by working overtime.

4 (a) Process G Account

Litres £ Litres £
Opening WIP 2,000 24,600 Output (W4):
Ex opening WIP 2,000
Costs arising: Started and finished
Direct materials 12,500 99,600 in month 8,000
–––––––
Conversion 155,250 10,000 221,520
Normal loss
(0·08 x 12,500) 1,000 3,000
Abnormal loss (W2) 500 11,100
Closing WIP (W3) 3,000 43,830
––––––– –––––––– ––––––– ––––––––
14,500 279,450 14,500 279,450
––––––– –––––––– ––––––– ––––––––

18
 Workings:
W1 Cost per equivalent litre (EL):
Direct materials Conversion
EL EL
Completion of opening WIP – 1,400
Units started and finished in month 8,000 8,000
Abnormal loss 500 500
Closing WIP 3,000 1,350
––––––– –––––––
Work done last month 11,500 11,250
––––––– –––––––
£ £
Costs arising last month 99,600 155,250
Less: Scrap value of normal loss (3,000) –
––––––– –––––––
96,600 155,250
––––––– –––––––
Cost per EL £8·40 £13·80
W2 Valuation of abnormal loss:
500 x (8·40 + 13·80) = £11,100
W3 Valuation of closing WIP:
(3,000 x £8·40) + (1,350 x £13·80) = £43,830
W4 Valuation of output:
£
Opening WIP value 24,600
Completion of opening WIP
(1,400 x £13·80) 19,320
Units started and finished in month
[8,000 x £(8·40 + 13·80)] 177,600
––––––––
221,520
––––––––

(b) Type of organisation Unit cost measure

Hospital Inpatient day
Haulage transport Tonne mile
Hotel Occupied room night
Rail transport Passenger mile
Note: only two examples were required and other answers were acceptable.

5 (a) Cost centre P1 P2 S1 S2

£ £ £ £
Allocated and apportioned overheads 477,550 404,250 132,000 96,000
Reapportionment of S1 (30:65:15) 36,000 78,000 (132,000) 18,000
Reapportionment of S2 (5:3) 71,250 42,750 – (114,000)
–––––––– –––––––– –––––––– ––––––––
584,800 525,000 – –
–––––––– –––––––– –––––––– ––––––––
Machine hours (P1) 68,000
Direct labour hours (P2) 14,000
Absorption rate:
Per machine hour £8·60
Per direct labour hour £37·50

(b) Allocated overheads are specifically traceable to cost centres. Apportioned overheads are those for which only a total factory-
wide figure is available. Therefore in order to get such overheads related to individual cost centres, the total has to be
apportioned on a logical but arbitrary basis to the cost centres. For example the total factory rates could be apportioned on
the basis of the floor area occupied by each cost centre. Electric power can be allocated if each cost centre is separately
metered. Thus allowing an accurate measure of the amount of power used in each cost centre. Otherwise if there is only one
meter for the whole factory, then the total cost of electric power would need to be apportioned to the factory cost centres. For
example by using the kilowatt hour rating of the machines and equipment in the various cost centres.

19
Part 1 Examination – Paper 1.2
Financial Information for Management December 2006 Marking Scheme

Marks
Section A
Each of the 25 questions in this section is worth 2 marks 50
–––

Section B

1 (a) Price variance 2

Volume variance 2
–––
4

(b) An adverse and a favourable variance 1

Possible interrelationship explained 2
–––
3

(c) Budgeted fixed production costs 1

Fixed production cost per unit 1
Change in stock level effect 1
Absorption costing profit 1
–––
4
–––
11
–––

2 (a) (i) Economic order quantity 11/2

(ii) Purchasing cost 1/
2
Ordering cost 1
Holding cost 1
–––
4

(b) Purchasing cost 1/

2
Ordering cost 1
Holding cost 1
Annual saving 1/
2
–––
3

(c) 1/ mark for each different example 2

2
–––
9
–––

3 (a) Hours required 1/

2
Hours available 1/
2
Shortfall 1
–––
2

(b) Extra cost per unit of buying in 2

Extra cost per machine hour 1
Optimal buying in plan 1
–––
4

(c) 1 mark per factor 3

–––
9
–––

21
 Marks
4 (a) Opening WIP 1
Costs arising 1
Output 3
Normal loss 1
Abnormal loss 2
Closing WIP 2
–––
10

(b) 1/ mark for each type of organisation 1

2
1/ mark for each unit cost measure 1
2
–––
2
–––
12
–––

5 (a) Reapportionment of S1 costs 2

Reapportionment of S2 costs 2
Machine hour rate 1
Direct labour hour rate 1
–––
6

(b) Allocation explained 1

Apportionment explained 1
Use, or not, of meters 1
–––
3
–––
9
–––

22