Answers

Part 1 Examination – Paper 1.2

Financial Information for Management December 2004 Answers

Section A

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

1 A

2 A

3 C

4 A
Date Units Average price (£) £
1st 200 20·00 4,000
4th (150) 20·00 (3,000)
––––– –––––––
50 1,000
12th 500 26·60 13,300
––––– –––––––
550 26·00 14,300
19th (200) 26·00 (5,200)
27th (300) 26·00 (7,800)
Total value of issues = 3,000 + 5,200 + 7,800 = £16,000

5 B
(9,250 – 6,750) ÷ (5,000 – 3,000) = £1·25

6 A

7 C
£
Actual cost 144,500
Standard cost of actual production (8,500 x 15) 127,500
––––––––
Total overhead variance 17,000 Adverse
––––––––

8 A

17
9 D
£ Variance (£)
Actual cost 110,750
4,250 F Rate
Actual hours at standard rate (9,200 x 12·50) 115,000
5,250 A Efficiency
Standard hours for actual production at
standard rate (2,195 x 4 x 12·50) 109,750

10 B
£
Actual expenditure 56,389
Absorbed cost (12,400 x 1·02 x 4·25) 53,754
–––––––
Total under absorption 2,635
–––––––

11 A
£
Opening WIP 1,710
Completion of opening WIP (300 x 0·40 x 10) 1,200
Units started and completed in the month
(2,000 – 300) x 10 17,000
–––––––
Total value (2,000 units) 19,910
–––––––

12 B
∑y = 17,500 + 19,500 + 20,500 + 18,500 + 17,000 = 93,000
∑x = 300 + 360 + 400 + 320 + 280 = 1,660
a = (93,000 ÷ 5) – 29·53(1,660 ÷ 5) = 8,796·04

13 A
£
Direct materials 45
Direct labour (4 hours) 30
––––
Prime cost 75
Production overheads (4 x 12·50) 50
––––
Total production cost 125
Non-production overheads (75 x 0·6) 45
––––
Total cost 170
––––

14 C
Maximum usage x Longest lead time = 520 x 15 = 7,800

15 C

16 B £
Absorption costing profit 40,000
Less Increase in stock at fixed overhead cost per unit
(18,000 – 16,500) x 10 (15,000)
–––––––
Marginal costing profit 25,000
–––––––

17 A

18 B
Material £
T (500 x 45) 22,500
V (200 x 40) + (200 x 52) 18,400
–––––––
Total relevant cost 40,900
–––––––

18
19 D
£
Opportunity cost now 1,200
Cost of disposal in one year’s time 800
––––––
2,000
––––––

20 D

21 C
Profits maximised when Marginal revenue (MR) = Marginal cost (MC)
MR = 40 – 0·06Q
MC = 10
MR = MC Therefore 10 = 40 – 0·06Q
Q = 30 ÷ 0·6 = 500
Price (P) = 40 – 0·03(500) = 25

22 A
Profit = Total revenue (TR) – Total cost (TC)
When P = 31 then 31 = 40 – 0·03Q and Q = 300
£
TR = P x Q = 31 x 300 = 9,300
TC = 3,500 + (10 x 300) = (6,500)
–––––––
Profit 2,800
–––––––

23 D
CPU = £27
Contribution to sales ratio = 45%
Selling price = 27 ÷ 0·45 = £60
Margin of safety in units = 13,500 ÷ 60 = 225
Break-even point (BEP) = 1,000 – 225 = 775 units
At BEP: total contribution = total fixed costs
Total fixed costs = 775 x 27 = £20,925

24 C

25 D
P = 95,000 + 0·4X + 0·3Y
X = 46,000 + 0·1Y
Y = 30,000 + 0·2X

X = 46,000 + 0·1(30,000 + 0·2X) = 46,000 + 3,000 + 0·02X

0·98X = 49,000 and X = 50,000
Y = 30,000 + 0·2(50,000) = 40,000
P = 95,000 + 0·4(50,000) + 0·3(40,000) = 127,000

19
Section B

1 (a) Process X Account

Litres £ Litres £
Raw materials input 80,000 158,800 Joint products (W1)
Product A 44,700 141,550
Product B 29,800 141,550
Conversion costs – 133,000 Normal loss (W2) 4,000 3,000
Abnormal loss (W3) 1,500 5,700
––––––– –––––––– ––––––– ––––––––
80,000 291,800 80,000 291,800
––––––– –––––––– ––––––– ––––––––
Cost per equivalent litre (EL):
Materials and conversion
EL
Output (joint products combined) 74,500
Abnormal loss 1,500
–––––––
Total work done 76,000
–––––––
£
Costs arising 291,800
Less: Normal loss (scrap value) (3,000)
––––––––
288,800
––––––––
Cost per equivalent litre:
Materials and conversion (288,800 ÷ 76,000) £3·80
Workings:
W1 Product Selling price Further Net Production Net realisable
£/litre processing realisable (ratio 3:2) value of
cost value litres production
£/litre £/litre £
A 8 2 6 44,700 268,200
B 12 3 9 29,800 268,200
Total joint production cost (A + B) = 74,500 litres at £3·80 = £283,100
Apportioned A:B in the ratio 268,200:268,200 (= 1:1)
Product A = £141,550 and Product B = £141,550
W2 5% of 80,000 = 4,000 litres at 75p per litre = £3,000
W3 5,500 – 4,000 = 1,500 litres at £3·80 per litre = £5,700

(b) An abnormal gain occurs when the actual loss is less than the normal loss expected. In other words the actual output of
good production is higher than would normally be expected from the given level of input.
The abnormal gain is shown as a debit entry in the process account.
The abnormal gain is valued at its full process cost.

2 (a) Calculations for the current year:

(i) Contribution per unit £50 x (75 ÷ 25) = £150
£’000
(ii) Total contribution (5,000 x £150) 750
Less Total fixed costs (5,000 x £70) (350)
––––
Total profit 400
––––

(b) Calculations for next year:

£/unit
Selling price 50 x (100 ÷ 25) x 1·08 216
Less Variable cost (50 x 1·12) (56)
––––
Contribution 160
––––
£’000
Total fixed costs (5,000 x £70) x 1·12 392
Target/required profit [as per (a)(ii)] 400
––––
Required contribution for next year 792
––––
Number of units required = (792,000 ÷ 160) = 4,950 units.

20
 (c) A mixed or semi-variable cost is one that is partly fixed and partly variable in behaviour. An example would be power costs
(gas or electricity, for instance) which consist of a fixed charge irrespective of the number of units of power consumed and a
variable charge based on the number of units of power consumed.
For cost-volume-profit analysis the fixed and variable elements need to be separately identified by using, for example, the high
low method or linear regression. Each would then be considered along with the other variable and other fixed costs in the
analysis.

3 (a) Sales variances:

£
Actual sales units at actual selling price 678,500
Actual sales units at standard selling price (46,000 x £15) 690,000
––––––––
Sales price variance 11,500 A
––––––––
Sales volume profit variance: (46,000 – 45,000) x £(15 – 9) 6,000 F
––––––––

(b) The person (or persons) who should receive the information generated by any system in an organisation should be the person
with responsibility for that aspect or part of the business to which the information relates. In the case of sales variance
information, it would be the person responsible for sales in the organisation. This could be the sales manager or marketing
manager. In a large divisionalised company it may be the divisional manager. A summary of the sales and cost variances
would be issued to senior management in the organisation.

(c) (i) Absorption costing profit: £

Gross profit 45,000 x £(15 – 9) 270,000
Less Non-production costs (44,000)
––––––––
Absorption costing net profit 226,000
––––––––
(ii) Marginal costing profit: £
Total contribution 45,000 x £(15 – 4) 495,000
Less Fixed production costs (48,000 x £5) (240,000)
Fixed non-production costs (44,000)
––––––––
Marginal costing net profit 211,000
––––––––

Alternative answer: £
Absorption costing net profit [as above in (i)] 226,000
Deduct Increase in stocks at standard fixed
production cost per unit
(3,000 units at £5 per unit) (15,000)
––––––––
Marginal costing net profit 211,000
––––––––

4 (a) (i) EOQ for the current year = [(2 x 25 x 90,000) ÷ 8]0·5 = 750 units
(ii) EOQ for next year = [(2 x 36 x 90,000) ÷ 8]0·5 = 900 units

(b) Annual Annual Annual

holding cost ordering cost total cost
£ £ £
Current year
(750 ÷ 2) x 8 3,000 3,000
(90,000 ÷ 750) x 25 3,000 3,000
––––––
6,000
––––––
Next year
(900 ÷ 2) x 8 3,600 3,600
(90,000 ÷ 900) x 36 3,600 3,600
––––––
7,200
––––––
Total extra cost of holding and ordering stock for next year £1,200
(compared with current year)

21
 (c) Any two for each of the following:
(i) Interest on net working capital, costs of storage space, insurance costs, obsolescence, pilferage and deterioration.
(ii) Costs of contacting supplier to place an order, costs associated with checking goods received and transport costs.

5 (a) Product X Product Y

Contribution per unit (£) 90 96
Litres of Material L per unit 5 6
Contribution per litre of Material L 18 16
Ranking 1st 2nd
Optimal production plan for first three months of next year is to produce and sell 4,800 units of Product X (24,000 litres ÷
5 litres/unit) giving a total contribution of £432,000 (4,800 units at £90 per unit).

(b) Let x = the number of units of product X

and y = the number of units of product Y
Formulation of constraints:
Material L 5x + 6y ≤ 24,000
Material M 6x + 4y ≤ 24,000
Optimal point is the intersection of 5x + 6y = 24,000 ……….(1)
and 6x + 4y = 24,000 ……….(2)
Solving these simultaneously gives:
(1) X 6 30x + 36y = 144,000
(2) X 5 30x + 20y = 120,000
––––––––––––––––––––
(1) – (2) 16y = 24,000
y = 1,500
and x = 3,000
The optimal production plan for the second three months of next year is to produce 3,000 units of product X and 1,500 units
of product Y. This will give a resultant total contribution of [(3,000 x 90) + (1,500 x 96)] = £414,000.

22
Part 1 Examination – Paper 1.2
Financial Information for Management December 2004 Marking Scheme

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

Section B
1 (a) Inputs into process 1
Normal loss 2
Abnormal loss 1
Joint products 3
–––
7

(b) Actual loss less than normal loss 1

Debit entry in process account 1
Valuation at full process cost 1
–––
3
–––
10
–––

2 (a) Contribution per unit 1

Total profit 2
–––
3

(b) Contribution per unit 2

Total fixed costs 1
Required contribution 1/
2
Number of units 1/
–––2
4

(c) Partly fixed/partly variable 1

Example 1
Separation of fixed/variable elements 1
–––
3
–––
10
–––

3 (a) Sales price variance 2

Sales volume profit variance 2
–––
4

(b) General principle/suggested person(s) 3

(c) Absorption costing profit 1

Marginal costing profit 2
–––
3
–––
10
–––

23
 Marks
4 (a) (i) EOQ this year 2
(ii) EOQ next year 2
–––
4

(b) Annual holding costs 2

Annual ordering costs 2
–––
4

(c) 1/ mark for each of four costs identified 2

2
–––
10
–––

5 (a) Contribution per unit 1

Contribution per litre (L) 1
Optimal units for product X 1
Resultant contribution 1
–––
4

(b) Equations/formulations 3
Optimal units for products X and Y 2
Resultant contribution 1
–––
6
–––
10
–––

24