Coimisiún na Scrúduithe Stáit

State Examinations Commission

Leaving Certificate 2016

Marking Scheme

Accounting

Higher Level
Note to teachers and students on the use of published marking schemes
Marking schemes published by the State Examinations Commission are not intended to be
standalone documents. They are an essential resource for examiners who receive training in
the correct interpretation and application of the scheme. This training involves, among other
things, marking samples of student work and discussing the marks awarded, so as to clarify
the correct application of the scheme. The work of examiners is subsequently monitored by
Advising Examiners to ensure consistent and accurate application of the marking scheme.
This process is overseen by the Chief Examiner, usually assisted by a Chief Advising
Examiner. The Chief Examiner is the final authority regarding whether or not the marking
scheme has been correctly applied to any piece of candidate work.

Marking schemes are working documents. While a draft marking scheme is prepared in
advance of the examination, the scheme is not finalised until examiners have applied it to
candidates’ work and the feedback from all examiners has been collated and considered in
light of the full range of responses of candidates, the overall level of difficulty of the
examination and the need to maintain consistency in standards from year to year. This
published document contains the finalised scheme, as it was applied to all candidates’ work.

In the case of marking schemes that include model solutions or answers, it should be noted
that these are not intended to be exhaustive. Variations and alternatives may also be
acceptable. Examiners must consider all answers on their merits, and will have consulted
with their Advising Examiners when in doubt.

Future Marking Schemes

Assumptions about future marking schemes on the basis of past schemes should be avoided.
While the underlying assessment principles remain the same, the details of the marking of a
particular type of question may change in the context of the contribution of that question to
the overall examination in a given year. The Chief Examiner in any given year has the
responsibility to determine how best to ensure the fair and accurate assessment of candidates’
work and to ensure consistency in the standard of the assessment from year to year.
Accordingly, aspects of the structure, detail and application of the marking scheme for a
particular examination are subject to change from one year to the next without notice.
 Accounting – Higher Level 2016
Question 1

(a) 75
Manufacturing Account of Ryan Ltd for the year ended 31/12/2015 [1]
€ €
Opening stock of raw materials 46,500 [1]
Purchases of raw materials W1 496,200 [4]
542,700
Less Closing stock of raw materials (36,100) [1]
Cost of Raw Materials Consumed 506,600
Direct Costs:
Factory wages W2 213,200 [5]
Hire of special equipment 35,700 [2]
Royalty payments 30,500 [2] 279,400
Prime Cost 786,000
Factory Overheads:
General factory overheads W3 95,200 [6]
Depreciation - plant and machinery W4 31,100 [3]
Loss on sale of machine W5 4,950 [4] 131,250
Factory Cost 917,250
Add Work in progress 01/01/2015 33,200 [3]
Less Work in progress 31/12/2015 (34,200) [3]
916,250
Less Sale of scrap materials W6 (2,500) [4]
Cost of manufacture 913,750

Trading and Profit and Loss Account for the year ended 31/12/2015
€ €
Sales W7 1,337,000 [5]
Less Cost of Sales
Opening stock of finished goods 48,100 [3]
Cost of manufacture 913,750 [2]
961,850
Less Stock of finished goods 31/12/2015 W8 (90,100) [4] (871,750)
Gross Profit 465,250
Less Expenses
Administration
Administration expenses 49,200 [2]
Selling and Distribution
Provision for bad debts W9 1,512 [3]
Selling expenses 36,300 [2] 37,812 (87,012)
378,238
Add Operating Income
Discount W 10 4,800 [3]
Rent W 11 10,200 [3] 15,000
Operating profit 393,238
Investment income W 12 8,400 [3]
401,638
Less Debenture interest W 13 (28,400) [2]
Net Profit 373,238
Less Dividends paid (22,500) [1]
Retained profit 350,738
Add Profit and loss balance 01/01/2015 68,900 [2]
Profit and loss balance 31/12/2015 419,638 [1]
 

1
(b) 45
Balance Sheet as at 31/12/2015
Cost Acc. Dep. Net

Tangible Fixed Assets € € €

Factory buildings W 14 970,300 [2] 20,000 [1] 950,300
Plant and machinery W 15 302,000 [2] 96,650 [3] 205,350
1,272,300 116,650 1,155,650

Financial Assets
Investments 315,000 [2]
1,470,650
Current Assets
Stock Raw materials 36,100 [3]
Work in progress 34,200 [2]
Finished goods 90,100 [2] 160,400

Debtors W 16 37,800 [5]

Less Provision (1,512) [1] 36,288
Investment income due 8,400 [2]
205,088

Less Creditors: amounts falling due within one year

Creditors W 17 59,400 [4]
Bank W 18 38,300 [4]
Rent prepaid 3,400 [1]
Wages due 5,500 [1]
PAYE, PRSI & USC 46,100 [2]
Debenture interest due 28,400 [2] (181,100) 23,988
1,494,638

Financed by
Creditors: amounts falling due after more than one year
8% Debentures 375,000 [2]

Capital and Reserves Authorised Issued

Ordinary shares @ €1 each 600,000 [1] 500,000 [1]
5% Preference shares @ €1 each 250,000 [1] 200,000 [1]
850,000 700,000
Profit and loss balance 419,638 1,119,638
Capital Employed 1,494,638

2
Workings

1. Purchases – raw materials 524,200 – 28,000 496,200

2. Factory wages 220,000 + 5,500 - 12,300 213,200

3. General factory overheads 86,400 + 10,000 - 1,200 95,200

4. Depreciation - plant and machinery 16,000 + 15,100 31,100

30,200 + 900

5. Loss on sale of machine 18,000 - 9,450 - 3,600 4,950

6. Sale of scrap materials 6,100 - 3,600 2,500

7. Sales - finished goods 1,352,000 – 15,000 1,337,000

8. Closing Stock - finished goods 77,600 + 12,500 90,100

9. Provision for bad debts [37,800 × 4%] 1,512

10. Discount 6,000 - 1,200 4,800

11. Rent 8,500 + 5,100 – 3,400 prepaid 10,200

12. Investment income 4% [315,000] × 8/12 8,400

13. Debenture interest 25,200 + 3,200 28,400

20,000 + 8,400

14. Factory buildings 930,000 + [28,000 + 12,300] 970,300

15. Accumulated depreciation - 75,000 - 9,450 + 31,100 96,650

plant and machinery
16. Debtors 52,000 + 800 – 15,000 37,800

17. Creditors 49,400 + 10,000 59,400

18. Bank 42,600 + 800 – 5,100 38,300

36,300 + 2,000 38,300

Penalties: 1 mark for the omission of expense heading ‘selling and distribution’ in profit and loss a/c
1 mark for the omission of ‘total cost’ figure for fixed assets.

3
Question 2

(a)

22
Adjusted Debtors Control Account
€ €
Balance b/d 27,000 [1] Balance b/d 650 [1]
Interest (ii) 6 [5] Discount allowed (i) 330 [5]
Sales returns (vi) 15 [5] Contra (iv) 280 [4]
Balance c/d 650 [1] Balance c/d 26,411
27,671 27,671
Balance b/d 26,411 Balance b/d 650

(b)

30
Schedule of Debtors Accounts Balances € €
Balance as per list of debtors 25,396 [3]
Add
Sales – cash and credit (iii) 2,200 [4]
27,596
Deduct
Discount allowed (i) 120 [5]
Interest (ii) 30 [5]
Contra (iv) 550 [4]
Bills receivable (v) 1,120 [4]
Sales returns (vi) 15 [4] (1,835)
Net balance as per adjusted control account 25,761 [1]

(c)

8
(i) Why debtors control accounts should be prepared.

1. They act as a check on the accuracy of the ledgers by comparing the balance of the control account
with the total as per the schedule.
2. They locate errors quickly and narrow searching for errors to confined areas.
3. They are useful when a firm needs to find credit sales from incomplete records.
4. They allow amounts owed by debtors to be ascertained quickly by simply balancing the control
accounts.

(ii) Limitations of control accounts

1. Control accounts do not identify which ledger account may contain an error.
2. Some types of errors are not revealed by the control account such as errors of commission, errors of
omission, compensating errors, and errors of original entry.

4
Question 3

(a)

25
Accumulated Fund 01/01/2015
Assets € €
Clubhouse and course 650,000 [1]
Bar stock 6,000 [1]
Equipment 24,000 [1]
Bar debtors 355 [1]
Investments W1 62,500 [2]
Levy due 1,000 [2]
Investment interest due W2 300 [2] 744,155

Less Liabilities
Life membership 40,000 [2]
Bar creditors 3,000 [1]
Wages due 1,500 [1]
Levy reserve fund 50,000 [2]
Subscriptions prepaid 1,400 [2]
Loan 30,000 [1]
Loan interest due W3 600 [3]
Bank current account 8,500 [1] (135,000)
Accumulated fund 01/01/2015 609,155 [2]

(b)

27
Income and Expenditure Account for the year ended 31/12/2015
Income € €
Bar profit W4 55,515 [4]
Investment interest W2 2,500 [2]
Subscriptions W5 67,500 [6]
Life membership W6 5,000 [2]
Catering profit W7 2,300 [2]
Competition profit W8 3,500 [1]
Entrance fees 10,000 [1]
Annual sponsorship 11,400 [1]
157,715

Less Expenditure
Sundry expenses W9 122,850 [2]
Loan interest W3 2,400 [1]
Depreciation - clubhouse and course 13,000 [1]
Depreciation - equipment 8,400 [1]
Bad debt 80 [1] (146,730)
Surplus of income over expenditure 10,985 [2]

5
(c) 8
Levy – This is a payment made to a club by its members to fund a special project such as a clubhouse
extension. It must be used for the purpose for which it is collected. It is a capital receipt (on a once off basis
or for a specific number of years) and is credited to a reserve fund. It is due to the members until it is used
so it is treated as a long-term liability in the balance sheet.

Life Membership – This is where a club member pays a fee that entitles her/him to use the facilities of the
club for the rest of her/his life. It is treated as a long-term liability in the balance sheet and can be written off
to income over a stated number of years.

Workings

1. Investments
4% = 2,500
Therefore 100% = 62,500
2. Investment interest
2,400 - 300 + 400 = 2,500
3. Loan interest
8% × 1.25 years = 10%
33,000 = 110%
Loan (100%) = 30,000
Total interest (10%) = 3,000
Interest for 2014 = 600
Interest for 2015 = 2,400
4. Bar Trading Account € €
Sales (76,300 - 355 + 500) 76,445
Stock 01/01/2015 6,000
Add Purchases (33,600 – 3,000 + 1,230) 31,830
37,830
Less Closing stock (16,900) (20,930)
Bar profit 55,515
5. Subscriptions 102,900
Add prepaid 01/01/2015 1,400
Less prepaid 31/12/2015 (800)
Less life membership (10,000)
Less levy 2015 (25,000)
Less levy 2014 (1,000)
67,500
6. Life Membership 50,000 (40,000 + 10,000) ÷ 10 = 5,000
7. Catering Profit 6,500 - 4,200 (4800 - 600) = 2,300
8. Competition Profit 25,600 - 22,100 = 3,500
9. Sundry Expenses 124,350 - 1,500 = 122,850

6
Question 4

(a)

52
Balance Sheet as at 31/12/2015
Intangible Assets € €
Goodwill W1 51,100 [3]
Fixed Assets
Buildings (450,000 + 295,000) 745,000 [4]
Equipment W2 11,200 [3] 756,200
Financial Assets
Investments 15,639 [5]
822,939
Current Assets
Stock at 31/12/2015 17,300 [2]
Trade debtors 37,300 [2]
Bank W3 112,700 [5]
Rates prepaid W4 2,700 [3] 170,000

Less Creditors: amounts falling due within 1 year

Creditors 44,600 [2]
Interest due W5 1,750 [3]
Electricity due 760 [2] (47,110)
Working capital 122,890
945,829
Financed by

Creditors: amounts falling due after more than 1 year

Loan 350,000 [2]

Capital - Balance at 01/01/2015 560,000 [2]

Add Capital introduced 4,200 [3]
Less Drawings W6 (31,643) [7] 532,557
882,557
Add Net profit 63,272 [4]
Capital employed 945,829

(b)

8
O’Neill should keep a detailed cash book and general ledger supported by appropriate
subsidiary day books. This would enable O’Neill to prepare an accurate trading and profit
and loss account and therefore would avoid reliance on estimates or net worth to ascertain
profit.

7
Workings

1. Goodwill account – (Purchase price less net worth) €

Purchase price 490,000
Assets
Buildings 450,000
Stock 15,700
Rates prepaid 2,400
Debtors 26,600 494,700
Less Liabilities
Wages due 4,800
Creditors 51,000 (55,800)
Net worth (438,900)
Goodwill 51,100

2. Equipment less drawings 30% [16,000 - 4,800] 11,200

3. Bank Account
€ €
Lodgement 560,000 Business 490,000
Loan 350,000 Drawings 7,800
Capital introduced 4,200 Wages 94,000
Cash lodgements 145,000 Equipment 16,000
Purchases-premises 295,000
Investments 15,600
Light and heat 9,200
Interest 3,500
Rates 10,800
College fees 4,600
________ Balance 112,700
1,059,200 1,059,200

4. Rates - amount paid 10,800

Add rates prepaid 01/01/2015 2,400
Less rates prepaid 31/12/2015 [25% × 10,800] (2,700)

5. Interest - amount paid 3,500

Add interest due 1,750
5,250
Less drawings (1,575)

6. Drawings
Drawings of stock 9,880
Cash/bank 7,800
College fees – family member 4,600
Equipment 4,800
Light and heat 2,988
Interest 1,575
31,643

7. Light and heat - amount paid 9,200

Add electricity due 31/12/2015 760
9,960
Less drawings [30% × 9,960] (2,988)

8
Question 5

(a)

50
(i) Cash Purchases = total purchases less credit purchases

Total purchases = cost of sales + closing stock - opening stock

Total purchases = 752,000 + 65,000 - 55,000

Total purchases = 762,000

Credit purchases = 90,000 × 12 = 540,000

2

Cash purchases = 762,000 - 540,000 = 222,000 [12]

(ii) Dividend Yield

Dividend per share × 100 = 7 × 100 = 5.6% [10]

Market price 125

(iii) Price earnings ratio

Market price = 125 = 5.3 to 1

EPS 23.6 5.3 years [10]

(iv) Return on Capital Employed

Operating profit × 100 = 145,000 × 100 = 12.85% [9]

Capital employed 1,128,000

(v) Dividend Cover

Net profit - preference dividend = 133,000 - 15,000 = 3.37 times [9]

Ordinary dividend 35,000

(b)

35
Profitability [6]
The ROCE has improved from 10.3% in 2014 to 12.85% in 2015. Doherty Ltd is a profitable company. The
return is well above the return from risk free investments of 2%. The return is also above the company’s
cost of borrowing of 6%. The company is making efficient use of its resources.
Shareholders will be pleased with this. If this upward trend continues the debentures can be paid in 2017
without having to sell the secured assets.

9
Dividend Policy [6]
The dividend per share has improved from 6c in 2014 to 7c in 2015. The dividend yield has improved from
5.22% in 2014 to 5.6% in 2015. This is above the return from risk free investments of 2%. The dividend
cover has also improved from 2.2 times in 2014 to 3.37 times in 2015. While shareholders will be happy
with the improving trends, they will feel that the company has the scope to pay a higher proportion of profits
in dividends. Alternatively they could be pleased that profits and cash are retained for the purpose of
repaying debenture holders/expansion.

Liquidity [5]
The quick ratio has improved from 1.2 to 1 in 2014 to 1.63 to 1 in 2015. Doherty Ltd. has good liquidity. It
should have no problem paying short term debts when they fall due. There is 163c available in liquid assets for
every €1 owed in the short term. Shareholders will be pleased with this as there is good ability to pay a
dividend and interest as well as having funds available for investment.

Market Price of a Share [4]

The market price of a share has improved from €1.15 in 2014 to €1.25 in 2015. This indicates market
confidence in the company which will please shareholders. The price earnings ratio has fallen from
8.7 years to 5.3 years and this means it will take a shorter time-period for an ordinary shareholder to recover
his/her investment in one share.

Gearing [6]
The gearing has improved from 54% in 2014 to 44.33% in 2015. The company has moved into a low geared
position. The company is not dependent on outside borrowing and is not at risk from outside investors.
The interest cover has improved from 6 times in 2014 to 12.08 times in 2015. The company has no problem
paying its interest charges.

Sector [5]
The company is in the tourist sector. This is a growing industry at the moment. As economies around the
world recover, people have more disposable income to spend on holidays. The weakness of the euro against
sterling and the dollar also makes Ireland a cheaper destination for foreign visitors. If there is continued
economic growth and the euro remains weak, then future prospects are good.

Overall shareholders will be happy with this and I would buy the shares in the company. [3]

(c) 15
(i) Gearing - This is a measure of how a business is financed on a long-term basis. It measures the
relationship between fixed interest debt (loans/debentures + preference shares) and total capital
employed/equity. When this is less than 50%/100%, the business is lowly geared. Above 50%/100%
is highly geared. Low gearing is preferable.

(ii) Benefits of low gearing - When fixed interest debt is a small proportion of overall capital it has the
following benefits:
1. Low interest repayments means more profits are available for investment elsewhere in the
business.
2. Shareholders are more likely to get a dividend when gearing is low.
3. The business should find it easier to raise additional loan finance.
4. Less risk of liquidation due to not being able to make interest payments.

(iii) Possible ways to reduce gearing:

1. Sell more ordinary shares.
2. Reduce or repay loans.
3. Increase reserves/retained profits.
4. Convert long-term debt to ordinary shares.

10
Question 6

(a) 54
Dr Cr
€ €
(i) Equipment a/c 1,800 [2]
Creditors a/c 5,600 [2]
Purchases a/c 2,800 [3]
Suspense a/c 1,000 [3]
Correction of an incorrect treatment of a credit purchase [1]

(ii) Debtors a/c 1,530 [3]

Sales a/c 1,530 [3]
Motor vehicles a/c 2,400 [3]
Provision for depreciation on motor vehicles a/c 900 [3]
Cash a/c 1,350 [3]
Loss on sale – profit and loss a/c 150 [3]
Correction of an incorrect treatment of a delivery van sale [1]

(iii) Profit and loss a/c 800 [2]

Insurance company a/c (balance sheet) 340 [3]
Tenant rent a/c (balance sheet) 460 [3]
Being recording of insurance due and rent receivable prepaid
omitted from books [1]

(iv) Sales returns a/c 880 [2]

Debtors a/c 880 [2]
Being correction of incorrect recording of credit note to debtor [1]

(v) Purchases/purchases returns a/c 10,500 [3]

Creditors a/c 16,000 [3]
Suspense a/c 26,500 [3]
Being correction of the incorrect treatment of purchases returns [1]

(b)

6
Suspense Account
Original difference 25,500 [2] Creditors/purchases (v) 26,500 [2]
Equipment/creditors (i) 1,000 [2] ______
26,500 26,500

11
(c)

14
Statement of Corrected Net Profit
€ €
Original net profit as per books 88,000
Add Sales/motor vehicles (ii) 1,530 [2]
89,530
Less Purchases (i) 2,800 [2]
Loss on sale (ii) 150 [2]
Rent/insurance (iii) 800 [1]
Sales returns (iv) 880 [1]
Purchases returns (v) 10,500 [1] (15,130)
Correct net profit 74,400 [5]

(d) 20
Balance Sheet as at 31/12/2015
Fixed Assets € € €
Premises 630,000 --- 630,000 [1]
Equipment [56,000 + 1,800] 57,800 [1] 12,000 [1] 45,800
Motor vehicles [92,000 – 2,400] [26,000 – 900] 89,600 [1] 25,100 [1] 64,500
777,400 37,100 740,300
Current Assets
Stock (including suspense) [98,000 – 25,500] 72,500 [1]
Debtors [41,600 + 1,530 - 880] 42,250 [3]
Cash [2,400 + 1,350] 3,750 [2]
118,500
Less: Creditors: amounts falling due within 1 year
Creditors [72,000 + 5,600 - 16,000] 61,600 [3]
Insurance company 340 [1]
Creditor - tenant 460 [1]
Bank 22,000 [1] (84,400) 34,100
774,400
Financed by:
Capital 700,000 [2]
Profit and loss account 74,400 [1] 774,400
774,400

(e) 6
Compensating errors: This is where an error on the debit side of one account is compensated by another
error of an equal amount on the credit side of another account. For example, a cash payment of €550 for
repairs entered as €55 on the debit of the repairs account and on the credit side of the cash account.

Errors of original entry: These are errors made in the books of first entry which are then, subsequently,
posted to the appropriate ledger accounts. For example, credit purchases from T. Long €223 entered as
€322 in the purchases book and posted accordingly to both the purchases account and to Long’s account.

12
Question 7

40
Profit and Loss Account of Atkinson plc for the year ended 31/12/2015
€
Turnover 1,799,700 [2]
Cost of sales W1 (1,191,000) [5]
Gross profit 608,700
Distribution costs W2 (179,000) [3]
Administrative expenses W3 (329,250) [7]
100,450
Other operating income W4 67,250 [4]
Operating profit 167,700
Investment income W5 15,000 [3]
Profit on the sale of land 35,000 [2]
217,700
Interest payable (14,000) [3]
Profit on ordinary activities before taxation [1] 203,700
Tax on profit on ordinary activities (56,000) [2]
Profit on ordinary activities after taxation 147,700
Dividend paid (43,000) [2]
Profit retained for the year 104,700
Profit brought forward on 01/01/2015 72,000 [2]
Profit carried forward on 31/12/2015 176,700 [4]

26
Balance Sheet of Atkinson plc as at 31/12/2015

Fixed Assets € € €
Intangible assets 22,000 [1]
Tangible assets 928,000 [2]
Financial assets 250,000 [1]
1,200,000
Current Assets
Stock 76,000 [1]
Debtors W6 123,100 [3]
Bank 90,000 [1] 289,100

Creditors: amounts falling due within 1 year [1]

Trade creditors 94,000 [1]
Taxation W7 77,300 [2]
Other creditors W8 105,800 [4] (277,100)
Net current assets 12,000
Total assets less current liabilities 1,212,000

Creditors: amounts falling due after more than 1 year

7% Debentures [2] 200,000
Capital and Reserves
Issued shares 600,000 [2] [1]
Revaluation reserve W9 235,300 [3]
Profit carried forward 176,700 [1]
1,012,000
1,212,000

13
Notes to the Accounts

22
1. Accounting policy notes on Tangible Fixed Assets and Stock [5]
Buildings were re-valued at the end of 2015 and were included in the accounts at their re-valued
amount. Vehicles are shown at cost. Depreciation is calculated in order to write off the value/cost of
the tangible assets over their estimated useful economic life, as follows:
Buildings - 2% per annum - straight line basis.
Vehicles - 20% of cost.
Stocks - Stocks are valued on a first in first out basis at the lower of cost and net realisable
value.

2. Operating Profit [5]

Operating profit is arrived at after charging:
Depreciation on tangible assets 72,000
Patent amortised 11,000
Directors’ remuneration 26,000
Auditors’ fees 18,000

3. Dividends [2]
Ordinary dividend
Paid 6.96c per share 33,400

Preference dividend
Paid 8c per share 9,600

4. Tangible Fixed Assets [7]

Land/Buildings Vehicles Total
Value 01/01/2015 785,000 290,000 1,075,000
Disposal (85,000) (85,000)
Revaluation surplus 31/12/2015 100,000 _______ 100,000
Value at 31/12/2015 800,000 290,000 1,090,000

Depreciation 01/01/2015 121,300 104,000 225,300

Charge for the year 14,000 58,000 72,000
135,300 162,000 297,300
Transfer on revaluation (135,300) - (135,300)
Depreciation 31/12/2015 ------ 162,000 162,000

Net book value 01/01/2015 663,700 186,000 849,700

Net book value 31/12/2015 800,000 128,000 928,000

5. Contingent Liability [3]

The company has provided €60,000 for a claim made by an employee for unfair dismissal. The
company’s legal advisers have advised that the company will probably be liable for the full €60,000 of
the claim.

14
Workings

1. Cost of sales 91,000 + 1,165,000 + 11,000 - 76,000 = 1,191,000

2. Distribution costs 121,000 + 58,000 = 179,000

3. Administrative expenses 203,000 + 18,000 + 26,000 + 8,250 + 14,000 + 60,000 = 329,250

4. Other operating income 46,000 + 8,250 + 13,000 = 67,250

5. Investment income 5,400 + 9,600 = 15,000

6. Debtors 129,000 - 15,500 + 9,600 = 123,100

7. Taxation 21,300 + 56,000 = 77,300

8. Other creditors 18,000 + 26,000 + 1,800 + 60,000 = 105,800

9. Revaluation reserve 100,000 + 121,300 + 14,000 = 235,300

(b) 12
(i) Regulation is important for the following reasons:

1. To ensure that financial statements are consistent from year to year.

2. To ensure that financial statements can be easily compared with other businesses.
3. To ensure that financial statements comply with national and international law.
4. To ensure that the required accounting information is available to external users (e.g. banks).
5. Good regulation makes fraud less likely and builds trust among the investing public.

(ii) The European Union influences regulation by issuing directives. Directives are instructions that are
binding on member states. Member states are given a fixed period of time to implement the directive
into national law. The purpose of directives is to harmonise accounting practice in member states. An
example would be the fourth directive.

15
Question 8

80
(a)

Overhead Basis Total Prod 1 Prod 2 Service Service

A B
Indirect
Given 380,000 245,000 135,000
materials
Indirect
Given 400,000 280,000 120,000
labour
Machine Machine
[1] 12,000 7,200 [1] 4,800 [1]
maintenance hours
Dep. –
[1] Book value 30,000 15,000 [1] 7,500 [1] 5,000 [1] 2,500 [1]
buildings
Factory
[1] Volume 18,000 9,000 [1] 4,500 [1] 3,000 [1] 1,500 [1]
L&H
Factory
[1] Floor area 8,000 3,200 [1] 2,400 [1] 1,600 [1] 800 [1]
cleaning
No. of
Canteen [1] 5,600 3,200 [1] 1,600 [1] 800 [1] -----
employees
853,600 562,600 [1] 275,800 [1] 10,400 [1] 4,800 [1]

(b)

Production 1 Production 2 Service A Service B

Overhead costs 562,600 275,800 10,400 4,800
Apportion Service A
7,280 [2] 3,120 [2] (10,400)
[70%/30%]
Apportion Service B
2,880 [2] 1,920 [2] (4,800)
[60%/40%]
572,760 280,840

(c)
Overhead Rate Production 1 - (Machine Hours)
572,760 = €19.09 per machine hour [6]
30,000 hours
Overhead Rate Production 2 - (Labour Hours)
280,840 = €6.24 per labour hour [6]
45,000 hours
(d)

Selling price of Job 650 €

Direct materials (7,500 + 2,800) 10,300.00 [4]
Direct labour (4,000 + 3,900) 7,900.00 [4]
Prime cost 18,200.00
Overheads
Production 1 (120 machine hours × €19.09) 2,290.80 [4]
Production 2 (100 labour hours × €6.24) 624.00 [4]
Cost of Job 650 21,114.80
Margin of 20% 5,278.70 [2]
Selling price of Job 650 26,393.50 [6]

16
(e) [10]

(i) Re apportionment of costs

This is the term used where service department costs are reapportioned/divided between production
departments because overheads can only be recovered by being included in the cost of production.

(ii)
Absorption rates
Per labour hour
Per machine hour
Per unit
Percentage of prime cost

Overhead absorption rates are based on budgeted rather than actual costs because actual costs may not
be known until the end of the year and the business cannot wait until then to decide the cost of the
product as they need to decide on the selling price to charge for tendering purposes.

17
Question 9

80
(a)
Production Budget
July Aug Sept Oct Nov
Sales 9,000 [1] 9,750 [1] 11,000 [1] 12,000 [1] 12,500
Add Closing stock 5,850 [1] 6,600 [1] 7,200 [1] 7,500 [1] 7,680
14,850 16,350 18,200 19,500 20,180
Less Opening stock ------- (5,850) [1] (6,600) [1] (7,200) [1] (7,500)
Required for production 14,850 10,500 11,600 12,300 12,680

(b)
Raw Materials Purchases Budget
July Aug Sept Oct Nov
Units of production 14,850 [½] 10,500 [½] 11,600 [½] 12,300 [½] 12,680
Materials per unit ×3 [½] ×3 ×3 ×3 ×3
Required for
44,550 [½] 31,500 [½] 34,800 [½] 36,900 [½] 38,040
production
Add Closing stock 6,300 [½] 6,960 [½] 7,380 [½] 7,608 [1]
Less Opening stock ------- (6,300) [½] (6,960) [½] (7,380) [½]
Required for
50,850 [½] 32,160 [½] 35,220 [½] 37,128 [½]
purchases
Price per kg ×4 [½] ×4 ×4 ×4
Cost of raw
€203,400 [½] €128,640 [½] €140,880 [½] €148,512 [½]
materials

Total purchases €621,432

(c)
Cash Budget
Receipts July August September October
Cash sales 81,000 [1] 87,750 [1] 99,000 [1] 108,000 [1]
Credit sales 1 month 94,500 [1] 102,375 [1] 115,500 [1]
Credit sales 2 month _____ ______ 94,500 [1] 102,375 [1]
81,000 182,250 295,875 325,875
Payments
Purchases 203,400 [1] 128,640 [1] 140,880 [1]
Wages 23,500 [1] 24,625 [1] 26,500 [1] 28,000 [1]
Variable overheads 59,400 [1] 42,000 [1] 46,400 [1] 49,200 [1]
Fixed overheads 27,000 [1] 27,000 27,000 27,000
Equipment 60,000 [1]
Loan repayments 1,000 [1] 1,000 1,000
Interest ______ 400 [1] 400 400
169,900 298,425 229,940 246,480
Net monthly cash flow (88,900) [1] (116,175) [1] 65,935 [1] 79,395 [1]
Loan 48,000 [1]
Opening cash balance (40,900) [1] (157,075) [1] (91,140) [1]
Closing cash balance (40,900) (157,075) (91,140) (11,745) [2]

18
(d) Budgeted Trading and Profit and Loss Account for the 4 months ended 31/10/2016

€ € €
Sales 1,252,500 [1]
Less cost of sales
Opening stock -----
Purchases 621,432 [1]
621,432
Closing stock - finished goods (7,500 × €20) 150,000 [1]
- raw materials (7,608 × €4) 30,432 [1] (180,432) (441,000)
Gross Profit 811,500
Less Expenses
Wages 102,625 [1]
Variable overheads 197,000 [1]
Fixed overheads 108,000 [1]
Depreciation 4,000 [1] (411,625)
Operating profit 399,875
Less interest (1,200) [1]
Net profit 398,675 [4]

(e) [9]

(i) Recommendations

1. Reduce requirement for closing stock of finished goods, particularly in earlier months to reduce
the costs of production.
2. Negotiate a lower price than the €4 per kg, from suppliers when buying raw materials and this
will reduce cash expenditure.
3. Encourage debtors to pay earlier by offering discounts for early payment/reduce the period of
credit allowed from 2 months to one month, which will increase receipts.
4. Postpone the purchase of equipment in July and instead lease the equipment. This will reduce
the deficit in July by €12,000 (€60,000 – €48,000) and by the interest and loan repayments
€1,400 thereafter.

(ii)
1. Market research and trends/opinion of sales representatives may be a reliable indicator of
potential sales.
2. What is the price to be charged for the product or service?
3. Is the level of competition in the market place intense or not?
4. Is the economy expected to grow over the coming months?

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