Paper 1.

2
Financial
Information for
Management
PART 1

FRIDAY 8 JUNE 2007

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 is on page 13

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination

hall

The Association of Chartered Certified Accountants

Section A – ALL 25 questions are compulsory and MUST be attempted.

Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.
Each question within this section is worth 2 marks.

1 Four lines representing expected costs and revenue have been drawn on the following break-even chart:
E
£
F

Output
0
Which statement is correct?
A Line F represents total variable cost.
B The break-even point occurs at the intersection of lines E and F.
C Line G represents total revenue.
D The break-even point occurs at the intersection of lines G and H.

2 The following diagram depicts a line which relates the quantity demanded (Q) to the selling price (P):

Price
(P)

25

Quantity (Q)
0 40,000
What is the equation of the line?
A P = 25 – 0.000625Q
B P = 25 – 1,600Q
C P = 25 – 1·6Q
D P = 25 – 0·625Q

2
3 An organisation manufactures a single product which has a variable cost of £36 per unit. The organisation’s total
weekly fixed costs are £81,000 and it has a contribution to sales ratio of 40%. This week it plans to manufacture
and sell 5,000 units.
What is the organisation’s margin of safety this week (in units)?
A 1,625
B 2,750
C 3,375
D 3,500

4 An organisation has the following total costs at two activity levels:

Activity level (units) 15,000 24,000
Total costs £380,000 £470,000
Variable cost per unit is constant in this activity range but there is a step up of
£18,000 in the total fixed costs when the activity exceeds 20,000 units.
What are the total costs at an activity level of 18,000 units?
A £404,000
B £410,000
C £422,000
D £428,000

5 The following statements refer to different types of planning within a manufacturing organisation:
(i) Operational planning includes the scheduling of work to be done in the short term.
(ii) Tactical planning includes consideration of ways in which the productivity of the factory workforce could be
improved.
(iii) Strategic planning includes the setting of the organisation’s long term objectives.
Which of the statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)

6 The following statements relate to spreadsheets:

(i) A spreadsheet is the most suitable software for the storage of large amounts of data.
(ii) A spreadsheet consists of rows, columns and cells.
(iii) A forecast profit and loss account could be prepared using a spreadsheet.
Which of the statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)

3 [P.T.O.
7 An organisation’s records for last month show the following in respect of one stores item:
Date Receipts Issues Stock
units units units
1st 200
5th 100 100
7th 400 500
19th 190 310
27th 170 140
Last month’s opening stock was valued at a total of £2,900 and the receipts during
the month were purchased at a cost of £17·50 per unit.
The organisation uses the weighted average method of valuation and calculates a
new weighted average after each stores receipt.
What was the total value of the issues last month?
A £7,360
B £7,534
C £7,590
D £7,774

8 Data relating to one particular stores item are as follows:

Average daily issues 70 units
Maximum daily issues 90 units
Minimum daily issues 50 units
Lead time for the replenishment of stock 11 to 17 days
Reorder quantity 2,000 units
Reorder level 1,800 units
What is the maximum stock level (in units) for this stores item?
A 2,950
B 3,100
C 3,250
D 3,800

9 A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model.
What would be the effects on the EOQ and the total annual ordering cost of a decrease in the annual cost of
holding one unit of the component in stock?
EOQ Total annual ordering cost
A Lower No effect
B Higher No effect
C Lower Higher
D Higher Lower

10 A company operates a job costing system. Job number 607 requires £300 of direct materials, £400 of direct labour
and £100 of direct expenses. Direct labour is paid at a rate of £8 per hour. Production overheads are absorbed at a
rate of £40 per direct labour hour and non-production overheads are absorbed at a rate of 150% of prime cost.
What is the total cost of job number 607?
A £3,750
B £3,850
C £4,000
D £4,200

4
11 A company uses absorption costing with a predetermined hourly fixed overhead absorption rate. The following
situations arose last month:
(i) Actual overhead expenditure was less than the planned expenditure.
(ii) Actual hours worked exceeded planned hours.
Which statement is correct?
A Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be over
absorbed.
B Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be under
absorbed.
C Both situations would cause overheads to be over absorbed.
D Both situations would cause overheads to be under absorbed.

12 A company manufactures two products K1 and K2 in a factory consisting of two cost centres, Y and Z. The following
budgeted data are available:
Cost centre
Y Z
Allocated and apportioned fixed
overhead costs £576,000 £288,000
Direct labour hours per unit:
Product K1 5 2
Product K2 3 4
Budgeted output is 12,000 units of each product. Fixed overhead costs are absorbed on a direct labour hour basis.
What is the budgeted fixed overhead cost per unit for product K2?
A £34
B £36
C £38
D £42

13 A factory consists of two production cost centres (P and Q) and two service cost centres (T and V). The total overheads
allocated and apportioned to each cost centre are as follows:
P Q T V
Total overheads £180,000 £120,000 £128,000 £140,000
The work done by the service cost centres can be represented as follows:
P Q T V
Percentage of service cost centre T to: 70% 30% – –
Percentage of service cost centre V to: 40% 30% 30% –
The service cost centre costs are apportioned to production cost centres using a method that fully recognises any work
done by one service cost centre for another.
What are the total overheads for production cost centre P after the reapportionment of all service cost centre
costs?
A £325,600
B £349,600
C £355,000
D £379,000

5 [P.T.O.
The following information relates to questions 14 and 15:
A company operates a process costing system using the first-in-first-out (FIFO) system of valuation. No losses occur in the
process. The following data relate to last month:
Units
Opening work-in-progress 200 with a total value of £1,530
Input to the process 1,000
Completed production 1,040
Last month the cost per equivalent unit of production was £20 and the degree of completion of the work-in-progress was
40% throughout the month.

14 What was the value (at cost) of last month’s closing work-in-progress?
A £1,224
B £1,280
C £1,836
D £1,920

15 What was the cost of the 1,040 units completed last month?
A £19,200
B £19,930
C £20,730
D £20,800

16 The following statements relate to the calculation of the regression line y = a + bx using the information on the
formulae sheet at the end of this examination paper:
(i) ∑xy is calculated by multiplying ∑x by ∑y.
(ii) ∑y2 is not the same as (∑y)2 .
(iii) n represents the number of pairs of data items used.
Which statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)

17 Which of the following correlation coefficients indicates the weakest relationship between two variables?
A +0·9
B – 0·6
C – 0·8
D – 1·0

18 The following statements relate to responsibility centres:

(i) The manager of a revenue centre is responsible for sales and costs in a segment of an organisation.
(ii) Return on capital employed is a suitable measure of performance in a profit centre.
(iii) Cost centres are found in manufacturing and service organisations.
Which of the statements, if any, is correct?
A (i) only
B (ii) only
C (iii) only
D None of them.

6
19 A company operates a standard absorption costing system in which the standard fixed production overhead rate is £9
per hour.
The following data relate to last month:
Budgeted hours 8,000
Standard hours for actual production 8,200
Actual hours worked 8,400
What was the fixed production overhead capacity variance for last month?
A £1,800 Adverse
B £1,800 Favourable
C £3,600 Adverse
D £3,600 Favourable

20 A company operates a standard marginal costing system. Last month the company sold 200 units more than it
planned to sell. The following data relate to last month:
Standard Actual
£ £
Selling price per unit 40 38
Variable cost per unit 30 29
What was the favourable sales volume contribution variance last month?
A £1,600
B £1,800
C £2,000
D £2,200

21 Which of the following should be classified as indirect labour?

A Machine operators in a factory producing furniture
B Lawyers in a legal firm
C Maintenance workers in a power generation organisation
D Lorry drivers in a road haulage company.

22 Which of the following should NOT be classified as a service cost centre in a manufacturing organisation?
A Factory canteen
B Stores
C Materials handling department
D Final product inspection department

23 A long established city centre hotel charges a higher price for its executive bedrooms on weekdays than it does for the
same rooms at weekends and on public holidays.
Which pricing policy is the hotel adopting?
A Penetration pricing
B Price skimming
C Premium pricing
D Price discrimination

7 [P.T.O.
24 A company would sell 40,000 units of a product if the unit selling price was set at £10 and these would generate a
total contribution of £160,000. If the unit selling price was reduced to £9·50 then sales of 44,000 units would result.
Setting unit selling prices of £10·50 and £11 would result in sales of 36,000 and 31,000 units respectively.
Which selling price would generate the highest total contribution?
A £9·50
B £10·00
C £10·50
D £11·00

25 A company which manufactures four components (A, B, C and D), using the same skilled labour, aims to maximise
its profits. The following information is available:
Component
A B C D
Variable production cost per unit (£) 60 70 75 85
Purchase price per unit from
another supplier (£) 108 130 120 124
Skilled labour hours per unit
to manufacture 4 6 5 3
As it has insufficient skilled labour hours available to manufacture all the components required, the company will need
to buy some units of one component from the other supplier.
Which component should be purchased from the other supplier?
A Component A
B Component B
C Component C
D Component D

(50 marks)

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

1 Casilda Ltd manufactures gonds, which have a standard selling price of £120 per gond. The company operates a
standard marginal costing system and values stocks at standard cost.
The standard variable cost of a gond is as follows:
£ per gond
Direct material 20
Direct labour (6 hours at £8 per hour) 48
Production overhead 24
–––
92
–––
The budgeted and actual activity levels for last month were as follows:
Budget Actual
units units
Sales 25,000 25,000
Production 25,000 26,000
The actual sales and variable costs for last month were as follows:
£
Sales 2,995,000
Direct material (purchased and used) 532,800
Direct labour (150,000 hours) 1,221,000
Variable production overhead 614,000

Required:
(a) Calculate the following cost variances for last month:
(i) Total direct materials;
(ii) Total variable production overhead;
(iii) Direct labour rate;
(iv) Direct labour efficiency. (4 marks)

(b) Prepare a statement that reconciles the budgeted contribution with the actual contribution for last month
and which incorporates the variances calculated in (a). (6 marks)

(c) Suggest ONE possible explanation of how the two direct labour variances calculated in (a) could be
interrelated. (2 marks)

(12 marks)

9 [P.T.O.
2 Plaza Ltd aims to maximise profit from the two products (X and Y) which it manufactures and sells. The unit selling
price for product X is £200 and the company can sell all the units that it can produce at this price. The unit selling
price of product Y is £250 but, at this price, the annual demand is limited to 40,000 units. The company holds no
stocks.
The following product cost data are available:
Product X Product Y
£ per unit £ per unit
Direct material (£5 per kg) 60 40
Direct labour (£10 per hour) 50 80
Other variable costs 60 90
––– –––
Total variable cost 170 210
––– –––
Next year the supply of direct material will be limited to 540,000 kg and the direct labour hours will be limited to
400,000.

Required:
(a) Determine the optimal production plan in units for next year and calculate the resultant total contribution.
Workings should be clearly shown.
Note: Graph paper is available.
(8 marks)

(b) Explain the term ‘shadow price’ in the context of scarce resources. State clearly which, if any, of the
company’s resources will have a shadow price next year. No calculations are required. (3 marks)

(11 marks)

3 Luiz Ltd operates several manufacturing processes in which stocks of work-in-progress are never held. In process K,
joint products (P1 and P2) are created in the ratio 2:1 by volume from the raw materials input. In this process a
normal loss of 4% of the raw materials input is expected. Losses have a realisable value of £5 per litre. The joint costs
of the process are apportioned to the joint products using the sales value basis. At the end of process K, P1 and P2
can be sold for £25 and £40 per litre respectively.
The following information relates to process K for last month:
Raw materials input 90,000 litres at a total cost of £450,000
Actual loss incurred 4,800 litres
Conversion costs incurred £216,000

Required:
(a) Prepare the process K account for last month in which both the output volumes and values for each joint
product are shown separately. (7 marks)

The company could further process product P1 in process L to create product XP1 at an incremental cost of £3 per
litre input. Process L is an existing process with spare capacity. In process L a normal loss of 8% of input is incurred
which has no value. Product XP1 could be sold for £30 per litre.

Required:
(b) Based on financial considerations only, determine, with supporting calculations, whether product P1 should
be further processed in process L to create product XP1. (3 marks)

(10 marks)

10
4 Marco Ltd manufactures and sells a single product. The budgeted profit and loss statement for next year, which has
been drawn up using absorption costing principles, is as follows:
£000 £000
Sales (40,000 units) 4,400
Less Cost of sales:
Production cost (45,000 units):
Variable 1,800
Fixed 1,476
––––––
3,276
Less Closing stock (5,000 units) (364)
––––––
(2,912)
––––––
Gross profit 1,488
Less Non-production expenses:
Variable selling costs 360
Fixed selling, administration
and distribution costs 598
––––––
(958)
––––––
Net profit 530
––––––
There will be no stock at the beginning of next year.

Required:
(a) Using marginal costing principles, calculate the following for next year:
(i) the total budgeted contribution from sales; and
(ii) the budgeted net profit. (4 marks)

(b) Calculate the break-even point (in units) for next year. (2 marks)

(c) Explain clearly why Marco Ltd’s net profit for next year using marginal costing principles differs from that
under absorption costing. Under what conditions would the two net profits be the same? (3 marks)

(9 marks)

11 [P.T.O.
5 Inez Ltd is evaluating the relevant costs of a one-off contract. The following information relates to the materials and
labour requirements of the contract:
Materials
The contract requires 2,500 kg of material R, which is a material regularly used by the company in other production.
The company has 4,000 kg of R currently in stock. Half of that stock was purchased two months ago for £24 per kg
and the other half was purchased last month for £25 per kg. The supplier has recently notified the company that the
price of R has risen by 8% compared with last month.
Labour
The contract requires 600 hours of skilled labour which is paid £10 per hour. The company’s existing skilled labour
is all fully employed in the manufacture of product T and no further supply is available. The following information
relates to product T:
£ per unit £ per unit
Selling price 100
Less Variable costs:
Direct materials 40
Skilled labour 25
Selling 5
–––
(70)
–––
30
–––
Required:
(a) Calculate the total relevant costs for the contract in respect of:
(i) Material R; and
(ii) Skilled labour. (5 marks)

(b) Explain the basis you would use to determine if any production overhead costs would be relevant to the
evaluation of the contract. Illustrate your answer with examples of such costs but no calculations are
required. (3 marks)

(8 marks)

12
 Formulae Sheet

End of Question Paper

13