Exercises
Exercises
Exercises
This Revision Handout includes the Questions and Answers of a total of 5 exercises!
Chapters:
Marginal and Absorption Costing - Unit 2 (Pearson Edexcel)
Page 1 (WAC02 or WAC12) 2019 Winter
Page 3 (WAC02 or WAC12) 2019 Winter - Answer
Page 9 (WAC02 or WAC12) 2018 Winter
Page 11 (WAC02 or WAC12) 2018 Winter - Answer
Page 14 (WAC02 or WAC12) 2017 Winter
Page 16 (WAC02 or WAC12) 2017 Winter - Answer
Page 18 (WAC02 or WAC12) 2017 Summer
Page 19 (WAC02 or WAC12) 2017 Summer - Answer
Page 22 (WAC02 or WAC12) 2016 Autumn
Page 23 (WAC02 or WAC12) 2016 Autumn - Answer
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SECTION A
Answer BOTH questions in this section.
1 Handsome Ltd supplies hand-painted model souvenirs to retailers in London.
The models are produced using a plastic mould, and are then hand-painted.
The following information is available.
The direct costs per unit of the four products produced are:
Plastic mould 10 pence (£0.10) 8 pence (£0.08) 9 pence (£0.09) 6 pence (£0.06)
Labour time
30 minutes 15 minutes 20 minutes 10 minutes
taken to paint
The plastic material is bought from a local supplier who holds a very large inventory
of plastic.
Hand-painting labour is a direct cost and each worker is paid at a rate of £10.80 per hour.
The painting area has room for 10 hand-painters who each work for 40 hours per week.
It is not company policy to work overtime.
Total demand for each product, in units, for Week 6 is:
The total demand above includes a contract with a major retailer, which must be
fulfilled, to supply the following units each week:
The selling price charged by Handsome Ltd for each product is:
2
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Required
(a) Calculate the number of direct labour hours:
(i) required to fulfil the contract with the major retailer
(3)
(ii) available for other output for Week 6
(2)
(iii) required to fulfil the total demand for Week 6.
(5)
(b) (i) Define the term limiting factor.
(2)
(ii) State one example, for Handsome Ltd, of
• a limiting factor
• a factor that is not limiting.
(2)
(c) Calculate the contribution per unit for each of the four products.
(8)
(d) Calculate the order of production of the four products required to maximise
profit for Week 6.
(6)
(e) Calculate the possible quantities of production of the four products that would
fulfil the contract and maximise profit for Week 6. You must show the hours that
would be spent on painting each product.
(8)
(f ) Calculate the profit for Week 6 from the quantities of production in (e), that would
fulfil the contract and maximise profit.
(7)
The contract with the major retailer will be ending soon. The retailer wishes to agree
a new contract that will have the same quantities of the four products as the present
contract supplied each week. In addition, the retailer wishes 100 units of another
product, a model Tower of London, to be supplied.
(g) Evaluate whether Handsome Ltd should agree a new contract with the major
retailer. Your evaluation should include all relevant factors that should be
considered by Handsome Ltd.
(12)
3
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(2)
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(6)
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(7)
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Other considerations
Handsome Ltd will need to reconsider the company policy
not to employ overtime. Workers may have to work
overtime to meet weekly demand. Even if overtime
premiums are paid, the contract should still be profitable.
Alternatively, they could employ more hand painters, but
there may be an issue with space available. Perhaps the
company may have to move to new premises, but this could
be expensive.
Decision
Handsome Ltd should probably take on the contract
including the extra model, and introduce overtime to meet
all the demand. (12)
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SECTION B
Answer THREE questions from this section.
3 You have recently been appointed as the accountant for Icarus Limited. The company
started trading on 1 January 2016, producing batteries for mobile phones. You
notice that the financial statements for the year ended 31 December 2016 have
been prepared using marginal costing for inventory valuation. After discussion with
the Board, it is agreed that the financial statements for 31 December 2017 are to be
drawn up using absorption costing.
The following information is available for the year ended 31 December 2016.
6
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Icarus Limited recorded actual monthly production and sales on a quarterly (three
monthly) basis for 2017.
7
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(8)
Units in closing inventory (962 000 - 934 000) = (1) AO2 28 000 units (1)
AO2
Absorption cost per unit 6 830 200 (1of) AO2 = £7.10 (1of) AO2
962 000 (1) AO2
Value of closing inventory (28 000 x £7.10) (1of) AO2 =£198 800 (1of) AO2
(4)
Increase in Inventory value (198 800 of - 137 200) (1) AO3= £61 600 (1of)
AO3
So increase (1of) AO3 in profit = £61 600 (1of) AO3
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(4)
Revenue per unit = 8 826 300 = £9.45 per unit (1) AO3
934 000
Plus Production cost (1 077 000 x £7.10) (1of) AO2 7 646 700 (1of) AO2
Less Closing Inventory (31 000 x £7.10) (1of) AO2 220 100 (1of) AO2
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Decision
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SECTION A
SOURCE MATERIAL FOR USE WITH QUESTION 1
1 Westdownes Farms Limited owns four dairy farms, producing milk that is sold to a
major supermarket. The supermarket sets the price it is prepared to pay in an annual
contract. The contract commences on 1 February 2016 and ends on 31 January 2017.
The price payable is 28 pence (£0.28) per litre of milk.
Information for the four farms for the year ended 31 January 2017:
£ £ £ £
Direct materials 176 514 168 192 194 472 173 448
Direct labour 108 624 105 120 116 683 115 632
Additional information
• Each cow produces 8 760 litres of milk per year.
Required:
(a) Calculate the quantity of milk, in litres, produced by each of the four farms.
(4)
Fixed costs consist of the following:
(1) Farm managers’ salaries:
Manager’s salary £12 000 £10 000 £11 000 £10 000
(2) Head office overheads – total £28 000. To be apportioned in the following ratio:
Ratio 4 3 4 3
Cost of farm buildings £900 000 £100 000 £250 000 £300 000
2
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Required:
(b) Calculate the total fixed costs for each of the four farms.
(9)
(c) Calculate the profit or loss for each of the four farms of Westdownes Farms
Limited for the year ended 31 January 2017, rounding your answers to the nearest
pound (£) where necessary.
(15)
The supermarket has now informed Westdownes Farms Limited that it will only pay
25 pence (£0.25) per litre in the next contract, starting on 1 February 2017 and
ending on 31 January 2018.
All costs will remain the same for next year.
Required:
(d) Calculate the forecast contribution made by each of the four farms, per litre of
milk for, the year ended 31 January 2018.
(12)
(e) Evaluate the future of each of the four farms, using the figures calculated in (d)
and any other relevant factors.
(12)
3
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Section A
Profit (Loss) 57046 √of 3024 √of 27859 √of 12690 √of
(15 )
Direct Materials 13 √ 16 √ 15 √ 15 √
Direct Labour 8 √ 10 √ 9 √ 10 √
Total Direct Costs 21 26 24 25 √
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(1e)
All comments own figure
Berryfields
Will be making a positive contribution √ of 4p per litre. Should continue in
the short term and the long term. √
Still make a profit of £16 312 next year. √
Highlands
Will be making a negative contribution √ of 1p per litre. Should stop
production on 1 February 2017. √
Would make a loss of £28 512 next year. √
Oaks
Will be making a positive contribution √ of 1p per litre. Should continue in
the short term but probably not in the long term. √
Makes a loss of £11 035 next year. √
Woodgate
Not making a positive or negative contribution.√ Maybe continue in the
short term but stop in the long term. √
Makes a loss of £22 000 next year. √
Maximum of 3 marks per farm
Other points
Is it possible to find another customer, √ who is willing to pay a higher price
for milk. √ Given the large volumes of production, √ it is likely to have to
be a supermarket, √ who may already have contracts in place, √ or who
are likely to want to drive down prices. √
(12)
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6 Hercules Baggage Limited produces suitcases for travellers. Inventory is valued using
both the marginal costing method and the absorption costing method.
The following information is available for the year ended 30 April 2017:
Opening inventory 850 units
Opening inventory value: Marginal costing £21 250
Absorption costing £27 200
Production 33 000 units per year
Direct materials £19.75 per unit
Direct labour 45 minutes work per unit at a wage rate of £8.40 per hour
Semi-variable costs £8 000 fixed element per month plus £1.40 per unit
of production
Fixed overheads £12 762.50 per month
Sales units 32 750
Selling price £64 per unit
Required
(a) Prepare a Statement of Profit or Loss and Other Comprehensive Income for the
year ended 30 April 2017, in columnar format, showing:
• marginal costing inventory valuation.
• absorption costing inventory valuation.
(18)
(b) Explain to management:
(i) two advantages of valuing inventory using absorption costing.
(4)
(ii) one disadvantage of valuing inventory using absorption costing.
(2)
In April 2017, a potential customer is interested in buying the product, but is only
prepared to offer £30 per unit.
(c) Evaluate the offer of £30 per unit and advise Hercules Baggage Limited whether
this offer should be accepted.
(6)
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Question
Answer Mark
Number
AO1(2), AO2 (12), AO3 (4)
AO1: Two marks for sales and direct materials
AO2: Twelve marks for calculation of closing inventory, direct labour, semi-
6 (a) (18)
variable costs, fixed overheads, opening and marginal closing inventory, and
profit.
AO3: Four marks for calculation of closing inventory using absorption costing
Statement of profit or loss and other comprehensive Income
Closing
Opening inventory Production Sales units
Inventory
Calculation of Closing inventory 850 33 000 (1) AO2 32 750 (1) AO2 1 100 (1) AO2
(i)Marginal (ii)Absorption
Sales 2 096 000 2 096 000 (1) AO1 both
Less
Direct materials 651 750 651 750 (1) AO1 both
Direct labour 207 900 207 900 (1) AO2 both
Semi-variable costs 96 000 96 000 (1) AO2 both
46 200 46 200 (1) AO2 both
Fixed overheads 153 150 153 150 (1) AO2 both
1 155 000 1 155 000
Opening inventory 21 250 27 200 (1) AO2 both
Closing inventory (30 195) (38 500)
(1) AO2
Profit 949 945 952 300 (1) AO2 o/f
o/f
Question
Answer Mark
Number
6 (b) AO1(3) , AO3 (3)
AO1: 1 mark for each point made.
AO3: 1 mark for each development.
(i) Advantages of absorption costing (Maximum
of 2 points)
• All are costs allocated to products. This
could be useful for management when
fixing prices.
(4)
(ii) Disadvantage of absorption costing (Maximum
of 1 point)
• All costs are not allocated to the time
period in which they are incurred. So it
may be argued that profit for that time
period is not accurate as external accounts
are drawn up on the basis of a time period.
(2)
(6)
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Conclusion
Marginal costing states order should be accepted
(6)
Level Mark Descriptor
0 A completely incorrect response.
Level 1 1-2 Isolated elements of knowledge and understanding that
are recall based.
Generic assertions may be present.
Weak or no relevant application to the scenario set.
Level 2 3-4 Elements of knowledge and understanding, which are
applied to the scenario.
Some analysis is present, with developed chains of
reasoning, showing causes and/or effects applied to the
scenario, although these may be incomplete or invalid.
An attempt at an evaluation is presented, using
financial and perhaps non-financial information, with a
decision.
Level 3 5-6 Accurate and thorough knowledge and understanding.
Application to the scenario is relevant and effective.
A coherent and logical chain of reasoning, showing
causes and effects is present.
Evaluation is balanced and wide ranging, using financial
and perhaps non-financial information and an
appropriate decision is made.
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(b) Calculate the optimum production mix that Acorn Supplies Ltd should produce to
give the maximum profit.
(15)
(c) Calculate the forecast profit for Week 43 for the optimum production mix if fixed
costs for Week 43 are £6 845
(5)
Sometimes, when demand for its products is high, Acorn Supplies Ltd may decide
not to produce all of its product range for a few weeks.
(d) Evaluate the decision of Acorn Supplies Limited not to produce all of its product
range for a few weeks.
(8)
20
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7
(a) Times number kilos Total kilos
Steel for production (12 x 60)√ = 16 √ x (6 x 50) √ 4 800 √ (4)
45
(b)
Optimum Production Beams Fence posts Brackets Lintels
Selling price per unit £45 £28 £21 £15
Variable cost per unit £18 £10 £9 £7
Contribution £27√ £18√ £12√ £8√
Materials per unit 12 10 6 8
Contribution/Material unit 2.25√ 1.8√ £2√ £1.00√
Order 1 3√ 2 4√
Production
Steel Output
Beams 3 180 265 √
Brackets 720 120 √
Fence posts 900 90 √√
Lintels 0 0√
Total maximum output 4 800 (15)
(c)Profit
Contbtn Sales Total
Beams 27 265 7 155 √
Brackets 12 120 1 440 √
Fence posts 18 90 1 620 √
10 215
Less Fixed Costs 6 845 √
Profit 3 370 √ (5)
7(d)
Case For not producing all of the product range
Profits can be maximised, √ by ranking in order the products with the highest contribution per unit of limiting factor first. √
Profits built up when demand is high, √ can help cushion the company when demand and profits are low √
It will be possible to build up inventory when demand is low √ as the product is not perishable. √
Conclusion – 2 marks
Not producing all of the product range may/may not be a good idea.
(8)