Paper 1.

2
Financial
Information for
Management

PART 1

FRIDAY 7 DECEMBER 2001

QUESTION PAPER

Time allowed 3 hours

This paper is divided into two sections

Section A ALL 25 questions are compulsory and MUST be

answered

Section B ALL FIVE questions are compulsory and MUST be

answered

Formulae Sheet, Present Value and Annuity Tables are on

pages 12, 13 and 14.
Section A – ALL 25 questions are compulsory and MUST be attempted.
Please use the answer sheet provided to indicate your choice in each question.
Each question within this section is worth 2 marks.

1 Which of the following statements are correct with regard to marginal costing?

(i) Period costs are costs treated as expenses in the period incurred.
(ii) Product costs can be identified with goods produced.
(iii) Unavoidable costs are relevant for decision making.

A (i), (ii) and (iii)

B (i) and (ii) only
C (i) and (iii) only
D (ii) and (iii) only.

2 Canberra has established the following information regarding fixed overheads for the coming month:

Budgeted information:
Fixed overheads £180,000
Labour hours 3,000 hours
Machine hours 10,000 hours
Units of production 5,000 units

Actual fixed costs for the last month were £160,000.

Canberra produces many different products using highly automated manufacturing processes and absorbs overheads on
the most appropriate basis.

What will be the pre-determined overhead absorption rate?

A £16
B £18
C £36
D £60.

3 Which of the following are correct with regard to service organisations?

(i) Activity based costing would not be considered appropriate.

(ii) The cost of materials will be relatively small.
(iii) A significant proportion of the costs incurred will be fixed and indirect.

A (i), (ii) and (iii)

B (i) and (ii) only
C (i) and (iii) only
D (ii) and (iii) only.

4 Which of the following statements is correct with regard to time series analysis?

A The trend is the general upward movement of the variable over time.
B The multiplicative model assumes that the different variations are independent of one another.
C Time series can be completely predicted by regression analysis.
D The cyclical variation is the regular periodic variation that exists over a long duration.

2
5 Which of the following is NOT CORRECT?
A Cost accounting can be used for stock valuation to meet the requirements of internal reporting only.
B Management accounting provides appropriate information for decision-making, planning, control and
performance evaluation.
C Routine information can be used for both short-term and long run decisions.
D Financial accounting information can be used for internal reporting purposes.

6 Melbourne wishes to make a comparison between the sales revenue figures for two different time periods. The following
figures were recorded:
Inflation
Sales Index
£’000
Year 7 325 124
Year 10 435 130

What is the real increase in the sales revenue over this period in % terms?

A 7·9%
B 27·7%
C 33·8%
D 40·3%.

7 Darwin uses decision tree analysis in order to evaluate potential projects. The company has been looking at the launch
of a new product which it believes has a 70% probability of success. The company is, however, considering undertaking
an advertising campaign costing £50,000, which would increase the probability of success to 95%.
If successful the product would generate income of £200,000 otherwise £70,000 would be received.

What is the maximum that the company would be prepared to pay for the advertising?

A £32,500
B £29,000
C £17,500
D £50,000.

8 Which of the following relates to the cost of replacing (rather than retaining) labour due to high employee turnover?
A Improving working conditions
B Suffering the learning curve effect
C Provision of a pension
D Provision of welfare services.

9 Which of the following is NOT CORRECT?

A Contract costing is appropriate if each unit of production is unique and takes a considerable length of time to
complete.
B Batch costing refers to a system where either job or process costing techniques are used to manufacture a
product.
C Rectification costs should be charged to production overheads if the costs can not be specifically traced to a
job.
D Job costing is required when each unit of production is unique and production is of long duration.

3 [P.T.O.
10 Taree Limited uses linear programming to establish the optimal production plan for the production of its two products, A
and U, given that it has the objective of minimising costs. The following graph has been established bearing in mind the
various constraints of the business. The clear area indicates the feasible region.

A
units

E
B

D C

U units
Which points are most likely to give the optimal solution?

A A and B only
B A, B and C only
C D and E only
D B, D and E only.

11 Dalby is currently considering an investment that gives a positive net present value of £3,664 at 15%. At a discount rate
of 20% it has a negative net present value of £21,451.

What is the internal rate of return of this investment?

A 15·7%
B 16·0%
C 19·3%
D 19·9%.

12 The management accountant of Gympie Limited has already allocated and apportioned the fixed overheads for the
period although she has yet to reapportion the service centre costs. Information for the period is as follows:

Production departments Service departments Total

1 2 Stores Maintenance
Allocated and apportioned £17,500 £32,750 £6,300 £8,450 £65,000
Work done by:
Stores 60% 30% — 10%
Maintenance 75% 20% 5% —

What are the total overheads included in production department 1 if the reciprocal method is used to reapportion
service centre costs?

A £27,618
B £28,171
C £28,398
D £28,453.

4
13 Moura uses the economic order quantity formula (EOQ) to establish its optimal reorder quantity for its single raw
material. The following data relates to the stock costs:

Purchase price: £15 per item

Carriage costs: £50 per order
Ordering costs: £5 per order
Storage costs: 10% of purchase price plus £0·20 per unit per annum
Annual demand is 4,000 units.

What is the EOQ to the nearest whole unit?

A 153 units
B 170 units
C 485 units
D 509 units.

14 Bollon uses residual income to appraise its divisions using a cost of capital of 10%. It gives the managers of these
divisions considerable autonomy although it retains the cash control function at head office.

The following information was available for one of the divisions:

Net profit Profit before Divisional net Cash/
after tax interest and tax assets (overdraft)
£’000 £’000 £’000 £’000
Division 1 47 69 104 (21)

What is the residual income for this division based on controllable profit and controllable net assets?

A £36,600
B £56,500
C £58,600
D £60,700.

15 Ayr is planning on paying £300 into a fund on a monthly basis starting three months from now, for twelve months.
The interest earned will be at a rate of 3% per month.

What is the present value of these payments?

A £2,816
B £2,733
C £2,541
D £2,986.

16 Which of the following are true with regard to expected values?

Expected values
(i) represents the single most likely estimate of an outcome.
(ii) take no account of decision-maker’s risk.
(iii) are reliant on the accuracy of the probability distribution.

A (i), (ii) and (iii)

B (i) and (ii) only
C (i) and (iii) only
D (ii) and (iii) only.

5 [P.T.O.
17 Charleville operates a continuous process producing three products and one by-product. Output from the process for a
month was as follows:

Product Selling price per Units of output

unit from process
1 £18 10,000
2 £25 20,000
3 £20 20,000
4 (by-product) £2 3,500

Total output costs were £277,000.

What was the unit valuation for product 3 using the sales revenue basis for allocating joint cost?
A £4·70
B £4·80
C £5·00
D £5·10.

18 Bowen has established the following with regard to fixed overheads for the past month:
Actual costs incurred £132,400
Actual units produced 5,000 units
Actual labour hours worked 9,750 hours
Budgeted costs £135,000
Budgeted units of production 4,500 units
Budgeted labour hours 9,000 hours

Overheads are absorbed on a labour hour basis.

What was the fixed overhead capacity variance?

A £750 favourable
B £11,250 favourable
C £22,500 favourable
D £11,250 adverse.

19 Which of the following statements is correct?

A A stores ledger account will be updated from a goods received note only.
B A stores requisition will only detail the type of product required by a customer.
C The term ‘lead time’ is best used to describe the time between receiving an order and paying for it.
D To make an issue from stores authorisation should be required.

20 Perth operates a process costing system. The process is expected to lose 25% of input and this can be sold for £8
per kg.
Inputs for the month were:
Direct materials 3,500 kg at a total cost of £52,500
Direct labour £9,625 for the period

There is no opening or closing work in progress in the period. Actual output was 2,800 kg.

What is the valuation of the output?

A £44,100
B £49,700
C £58,800
D £56,525.

6
21 Camden has three divisions. Information for the year ended 30 September is as follows:
Division A Division B Division C Total
£’000 £’000 £’000 £’000
Sales 350 420 150 920
Variable costs 280 210 120 610
Contribution 70 210 30 310
Fixed costs 262·5
Net profit 47·5

General fixed overheads are allocated to each division on the basis of sales revenue; 60% of the total fixed costs incurred
by the company are specific to each division being split equally between them.

Using relevant costing techniques, which divisions should remain open if Camden wishes to maximise profits?

A A, B and C
B A and B only
C B only
D B and C only.

22 Brisbane Limited has recorded the following sales information for the past six months:
Month Advertising expenditure Sales revenue
£’000 £’000
1 1·5 30
2 2 27
3 1·75 25
4 3 40
5 2·5 32
6 2·75 38
The following has also been calculated:

S(Advertising expenditure) = £13,500

S(Sales revenue) = £192,000
S(Advertising expenditure x Sales revenue) = £447,250,000
S(Sales revenue2) = £6,322,000,000
S(Advertising expenditure2) = £32,125,000

What is the value of b, i.e. the gradient of the regression line?

A 0·070
B 0·086
C 8·714
D 14·286.

23 Which of the following could be carried out by higher level management?

(i) making short term decisions
(ii) defining the objectives of the business
(iii) making long run decisions

A (i), (ii) and (iii)

B (i) and (ii) only
C (i) and (iii) only
D (ii) and (iii) only.

7 [P.T.O.
24 The following process account has been drawn up for the last month:
Process account
Units £ Units £
Opening WIP 250 3,000 Normal loss 225 450
Input: Output 4,100
Materials 4,500 22,500 Abnormal Loss 275
Labour 37,500 Closing WIP 150
4,750 4,750

Work in progress has the following level of completion:

Material Labour
Opening WIP 100% 40%
Closing WIP 100% 30%

The company uses the FIFO method for valuing the output from the process and all losses occurred at the end of the
process.

What were the equivalent units for labour?

A 4,380 units
B 4,270 units
C 4,320 units
D 4,420 units.

25 Sydney is considering making a monthly investment for her son who will be five years old on his next birthday. She
wishes to make payments until his 18th birthday and intends to pay £50 per month into an account yielding an APR of
12·68%. She plans to start making payments into the account the month after her son’s fifth birthday.

How much will be in the account immediately after the final payment has been made?

A £18,847
B £18,377
C £17,606
D £18,610.

(50 marks)

8
Section B – ALL FIVE questions are compulsory and MUST be attempted

1 Albany has recently spent some time on researching and developing a new product for which they are trying to establish
a suitable price. Previously they have used cost plus 20% to set the selling price.
The standard cost per unit has been estimated as follows:

£
Direct materials
Material 1 10 (4 kg at £2·50/kg)
Material 2 7 (1 kg at £7/kg)
Direct labour 13 (2 hours at £6·50/hour)
Fixed overheads 7 (2 hours at £3·50/hour)
37

Required:

(a) Using the standard costs calculate two different cost plus prices using two different bases and explain an
advantage and disadvantage of each method. (6 marks)

(b) Give two other possible pricing strategies that could be adopted and describe the impact of each one on the
price of the product. (4 marks)

(10 marks)

2 Newcastle Limited uses variance analysis as a method of cost control. The following information is available for the year
ended 30 September 2001:

Budget Production for the year 12,000 units

Standard cost per unit: £
Direct materials (3 kg at £10/kg) 30
Direct labour (4 hours at £6/hour) 24
Overheads (4 hours at £2/hour) 8
62

Actual Actual production units for year 11,500 units

Labour – hours for the year 45,350 hours
– cost for the year £300,000
Materials – kg used in the year 37,250 kg
– cost for the year £345,000

Required:

(a) Prepare a reconciliation statement between the original budgeted and actual prime costs. (7 marks)

(b) Explain what the labour variances calculated in (a) show and indicate the possible interdependence between
these variances. (3 marks)

(10 marks)

9 [P.T.O.
3 Toowomba manufactures various products and uses CVP analysis to establish the minimum level of production to
ensure profitability.

Fixed costs of £50,000 have been allocated to a specific product but are expected to increase to £100,000 once
production exceeds 30,000 units, as a new factory will need to be rented in order to produce the extra units. Variable
costs per unit are stable at £5 per unit over all levels of activity. Revenue from this product will be £7·50 per unit.

Required:

(a) Formulate the equations for the total cost at:

(i) less than or equal to 30,000 units;
(ii) more than 30,000 units. (2 marks)

(b) Prepare a breakeven chart and clearly identify the breakeven point or points. (6 marks)

(c) Discuss the implications of the results from your graph in (b) with regard to Toowomba’s production plans.
(2 marks)

(10 marks)

4 Wollongong wishes to calculate an operating budget for the forthcoming period. Information regarding products, costs
and sales levels is as follows:

Product A B
Materials required
X (kg) 2 3
Y (litres) 1 4
Labour hours required
Skilled (hours) 4 2
Semi skilled (hours) 2 5
Sales level (units) 2,000 1,500
Opening stocks (units) 100 200
Closing stock of materials and finished goods will be sufficient to meet 10% of demand. Opening stocks of material X
was 300 kg and for material Y was 1,000 litres. Material prices are £10 per kg for material X and £7 per litre for
material Y. Labour costs are £12 per hour for the skilled workers and £8 per hour for the semi skilled workers.

Required:
Produce the following budgets:

(a) production (units);

(b) materials usage (kg and litres);
(c) materials purchases (kg, litres and £); and
(d) labour (hours and £).

(10 marks)

10
5 Surat is a small business which has the following budgeted marginal costing profit and loss account for the month ended
31 December 2001:

£’000 £’000
Sales 48
Cost of sales:
Opening stock 3
Production costs 36
Closing stock (7)
(32)
16
Other variable costs:
Selling (3·2)
Contribution 12·8
Fixed costs:
Production overheads (4)
Administration (3·6)
Selling (1·2)
Net profit 4·0

The standard cost per unit is:

£
Direct materials (1 kg) 8
Direct labour (3 hours) 9
Variable overheads (3 hours) 3
20

Budgeted selling price per unit 30

The normal level of activity is 2,000 units per month. Fixed production costs are budgeted at £4,000 per month and
absorbed on the normal level of activity of units produced.

Required:

(a) Prepare a budgeted profit and loss account under absorption costing for the month ended 31 December 2001.
(6 marks)

(b) Reconcile the profits under these two methods and explain why a business may prefer to use marginal costing
rather than absorption costing. (4 marks)

(10 marks)

11 [P.T.O.
Formulae Sheet

12
 Present Value Table

Present value of 1 i.e. (1 + r)–n

Where r = discount rate
n = number of periods until payment

Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 0·980 0·961 0·943 0·925 0·907 0·890 0·873 0·857 0·842 0·826 2
3 0·971 0·942 0·915 0·889 0·864 0·840 0·816 0·794 0·772 0·751 3
4 0·961 0·924 0·888 0·855 0·823 0·792 0·763 0·735 0·708 0·683 4
5 0·951 0·906 0·863 0·822 0·784 0·747 0·713 0·681 0·650 0·621 5

6 0·942 0·888 0·837 0·790 0·746 0·705 0·666 0·630 0·596 0·564 6
7 0·933 0·871 0·813 0·760 0·711 0·665 0·623 0·583 0·547 0·513 7
8 0·923 0·853 0·789 0·731 0·677 0·627 0·582 0·540 0·502 0·467 8
9 0·941 0·837 0·766 0·703 0·645 0·592 0·544 0·500 0·460 0·424 9
10 0·905 0·820 0·744 0·676 0·614 0·558 0·508 0·463 0·422 0·386 10

11 0·896 0·804 0·722 0·650 0·585 0·527 0·475 0·429 0·388 0·305 11
12 0·887 0·788 0·701 0·625 0·557 0·497 0·444 0·397 0·356 0·319 12
13 0·879 0·773 0·681 0·601 0·530 0·469 0·415 0·368 0·326 0·290 13
14 0·870 0·758 0·661 0·577 0·505 0·442 0·388 0·340 0·299 0·263 14
15 0·861 0·743 0·642 0·555 0·481 0·417 0·362 0·315 0·275 0·239 15

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 0·812 0·797 0·783 0·769 0·756 0·743 0·731 0·718 0·706 0·694 2
3 0·731 0·712 0·693 0·675 0·658 0·641 0·624 0·609 0·593 0·579 3
4 0·659 0·636 0·613 0·592 0·572 0·552 0·534 0·516 0·499 0·482 4
5 0·593 0·567 0·543 0·519 0·497 0·476 0·456 0·437 0·419 0·402 5

6 0·535 0·507 0·480 0·456 0·432 0·410 0·390 0·370 0·352 0·335 6
7 0·482 0·452 0·425 0·400 0·376 0·354 0·333 0·314 0·296 0·279 7
8 0·434 0·404 0·376 0·351 0·327 0·305 0·285 0·266 0·249 0·233 8
9 0·391 0·361 0·333 0·308 0·284 0·263 0·243 0·225 0·209 0·194 9
10 0·352 0·322 0·295 0·270 0·247 0·227 0·208 0·191 0·176 0·162 10

11 0·317 0·287 0·261 0·237 0·215 0·195 0·178 0·162 0·148 0·135 11
12 0·286 0·257 0·231 0·208 0·187 0·168 0·152 0·137 0·124 0·112 12
13 0·258 0·229 0·204 0·182 0·163 0·145 0·130 0·116 0·104 0·093 13
14 0·232 0·205 0·181 0·160 0·141 0·125 0·111 0·099 0·088 0·078 14
15 0·209 0·183 0·160 0·140 0·123 0·108 0·095 0·084 0·074 0·065 15

13 [P.T.O.
 Annuity Table

1 – (1 + r)–n
Present value of an annuity of 1 i.e. ————––r

Where r = discount rate

n = number of periods

Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2·487 3
4 3·902 3·808 3·717 3·630 3·546 3·465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3·890 3·791 5

6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4·486 4·355 6
7 6·728 6·472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7·435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6·418 6·145 10

11 10·37 9·787 9·253 8·760 8·306 7·887 7·499 7·139 6·805 6·495 11
12 11·26 10·58 9·954 9·385 8·863 8·384 7·943 7·536 7·161 6·814 12
13 12·13 11·35 10·63 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·00 12·11 11·30 10·56 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·87 12·85 11·94 11·12 10·38 9·712 9·108 8·559 8·061 7·606 15

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2·444 2·402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2·690 2·639 2·589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5

6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3·498 3·410 3·326 6
7 4·712 4·564 4·423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4·799 4·639 4·487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4·451 4·303 4·163 4·031 9
10 5·889 5·650 5·426 5·216 5·019 4·833 4·659 4·494 4·339 4·192 10

11 6·207 5·938 5·687 5·453 5·234 5·029 4·836 4·656 4·486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4·439 12
13 6·750 6·424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5·468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6·462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15

End of Question Paper

14