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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:

Product London Bus Policeman Telephone Box Mail Box

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:

London Bus Policeman Telephone Box Mail Box

240 500 360 600

The total demand above includes a contract with a major retailer, which must be
fulfilled, to supply the following units each week:

London Bus Policeman Telephone Box Mail Box

120 200 150 270

The selling price charged by Handsome Ltd for each product is:

London Bus Policeman Telephone Box Mail Box

£10.00 £6.00 £7.00 £4.00

The fixed costs for Week 6 are £1 880

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)

(Total for Question 1 = 55 marks)

3
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Question Answer Mark


Number
1 (a)(i) AO1 (3)
AO1: Three marks for calculating labour hours required to fulfil
contract.

London Policeman Telephone Mail Total


Bus Box Box
Contract 120 200 150 270
Hours 60 50 50 45 205
required
(1)AO1 (1)AO1 (1of)AO1
(3)
both both

Question Answer Mark


Number
1 (a)(ii) AO1 (2)
AO1: Two marks for calculating labour hours available for other
output for Week 6.

Hours available for other output

= (10 x 40) – 205 (1of)AO1


= 195 (1of)AO1

(2)

Question Answer Mar


Number k
1 (a)(iii) AO1 (5)
AO1: Five marks for calculating labour hours required to fulfil total
demand for Week 6.

London Policeman Telephone Mail Box Total


Bus Box
Total 240 500 360 600
demand
Time taken 30 15 minutes 20 minutes 10
to paint minutes minutes
Hours 120 125 120 100 465
required
(1)AO1 (1)AO1 (1)AO1 (1)AO1 (1of)A
(5)
O1

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Question Answer Mark


Number
1 (b)(i) AO1 (2)
AO1: Two marks for explaining the term limiting factor.

A limiting factor is a factor of production (1)AO1 which


restricts the level of activity / quantity of output. (1)AO1 (2)

Question Answer Mark


Number
1 (b)(ii) AO1 (2)
AO1: Two marks for giving examples of a limiting factor
and not a limiting factor

For Handsome Limited


A limiting factor is the quantity of direct labour hand
painters available.(1)AO1
(2)
Materials are not a limiting factor.(1)AO1

Question Answer Mark


Number
1 (c) AO2 (8)
AO2: Eight marks for calculating contribution per unit for each
product.

Product London Policeman Telephone Mail Box


Bus Box
Selling price 10.00 6.00 (1)AO2 7.00 4.00 (1)AO2
Less Direct
costs
Plastic 0.10 0.08 0.09 0.06
mould
Labour cost 5.40 2.70 (1)AO2 3.60 1.80 (1)AO2
to paint (1)AO2 (1)AO2
Total costs 5.50 2.78 3.69 1.86
Contribution 4.50 3.22 3.31 2.14
(1of)AO2 (1of)AO2
both both (8)

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Question Answer Mark


Number
1 (d) AO3 (6)
AO3: Six marks for calculating order of priority for production.

Product London Policeman Telephone Mail Box


Bus Box
Contribution 4.50 3.22 3.31 2.14
Time taken to 30 15 20 10
paint minutes minutes minutes minutes
Contribution per 9.00 12.88 9.93 12.84
labour hour (1of)AO3 (1of)AO3 (1of)AO3 (1of)AO3
4 1 3 2
(1of)AO3 (1of)AO3
both both

(6)

Question Answer Mark


Number
1 (e) AO2 (8)
AO2: Eight marks for calculating production schedule.

Order of Product Output Hours Cumulative


Production Contract + Non-C Contract + Non-C hours
1 Policeman 200 + 300 = 500 50 + 75 = 125 125
(1of)AO2 (1of)AO2
2 Mail Box 270 + 330 = 600 45 + 55 = 100 225
(1of)AO2 (1of)AO2
3 Telephone 150 + 195= 345 50 + 65 = 115 340
Box (1of)AO2 (1of)AO2
4 London Bus 120 60 400
(1of)AO2 (1of)AO2
(8)

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Question Answer Mark


Number
1 (f) AO1 (2), AO2 (5)
AO1: Two marks for calculating total contribution and profit.
AO2: Five marks for calculating total contribution for each product
and deducting fixed costs.

Product Contribution Output Total


per unit contribution
Policeman 3.22 500 1 610.00 (1of)AO2
Mail Box 2.14 600 1 284.00 (1of)AO2
Telephone 3.31 345 1 141.95 (1of)AO2
Box
London 4.50 120 540.00 (1of)AO2
Bus
Total 4 575.95 (1of)AO1
Less Fixed Costs 1 880.00 (1)AO2
Profit 2 695.95 (1of)AO1

(7)

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Question Indicative Content Mark


Number
1 (g) AO1 (1), AO2 (1), AO3 (4), AO4 (6)

Answers may include:

Case for new contract


The present contract is profitable, covering fixed costs and
bringing in a weekly contribution on all four products.
Weekly contributions of the present contract are:
London Bus 120 x £4.50 = £540
Policeman 200 x £3.22 = £644
Telephone Box 150 x £3.31 = £496.50
Mail Box 270 x £2.14 = £577.80
Total contribution = £2 258.30 out of a total weekly
contribution of £4 575.95.
This is about 50% of the contribution.
If 50% of the fixed costs were absorbed by this order, there
would be a profit of about £1 294
If the model Tower of London is costed and priced correctly,
this should bring in a further contribution.
The contract could prove to be the basis for a bank loan
which results in expansion of the business.

Case against the new contract


Handsome Ltd cannot meet the full weekly demand at
present. Signing a contract with an additional model could
mean even more potential customers are disappointed.
There is the possibility that Handsome Ltd may become too
dependent on one customer. This may lead to possible
difficulties in the future if this customer has trading
problems.

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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Level Mark Descriptor


0 A completely incorrect response.
Level 1 1-3 Isolated elements of knowledge and understanding recall
based.
Weak or no relevant application to the scenario set.
Generic assertions may be present.
Level 2 4-6 Elements of knowledge and understanding, which are
applied to the scenario.
Chains of reasoning are present, but may be incomplete or
invalid.
A generic or superficial assessment is present.
Level 3 7-9 Accurate and thorough understanding, supported
throughout by relevant application to the scenario.
Some analytical perspectives are present, with developed
chains of reasoning, showing causes and/or effects.
An attempt at an assessment is presented, using financial
and non-financial information, in an appropriate format
and communicates reasoned explanations.
Level 4 10 - 12 Accurate and thorough knowledge and understanding,
supported throughout by relevant and effective application
to the scenario.
A coherent and logical chain of reasoning, showing causes
and effects.
Assessment is balanced, wide ranging and well
contextualised using financial and non-financial
information and makes informed recommendations and
decisions.

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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.

Direct labour 2 693 600

Direct materials 1 202 500

Semi-variable costs 1 106 300

Fixed overheads 1 827 800

Revenue 8 826 300

The semi-variable costs include a fixed element of £288 600


Production 962 000 units
Sales 934 000 units

Closing inventory £137 200


Required
(a) Calculate the value of the closing inventory at 31 December 2016 using
absorption costing.
(8)
(b) Calculate the increase or decrease in profit for the year ended 31 December 2016
using absorption costing instead of marginal costing for inventory valuation.
(4)

6
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Icarus Limited recorded actual monthly production and sales on a quarterly (three
monthly) basis for 2017.

Production per month Sales per month


2017
(units) (units)
Quarter 1 : Jan, Feb,
90 000 85 000
March
Quarter 2 : April, May,
95 000 92 000
June
Quarter 3 : July, Aug,
88 000 91 000
Sept
Quarter 4 : Oct, Nov,
86 000 90 000
Dec

(c) Calculate the units in inventory at 31 December 2017.


(4)
For the year ended 31 December 2017, all costs and revenues per unit remain the
same as those in the year ended 31 December 2016.
(d) Calculate, using absorption costing, the profit or loss for the year ended
31 December 2017.
(8)
A director commented, “I think absorption costing is better than marginal costing, as
it will always give a higher profit”.
(e) Evaluate the statement made by the director.
(6)

(Total for Question 3 = 30 marks)

7
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Question Answer Mark


Number
3 (a) AO2 (8)
AO2: Eight marks for correct calculation of
value of closing inventory.

(8)

Units in closing inventory (962 000 - 934 000) = (1) AO2 28 000 units (1)
AO2

Direct Labour 2 693 600


Direct Materials 1 202 500
Semi- variable costs 1 106 300
Fixed overheads 1 827 800
Total costs 6 830 200 (1of) 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

Question Answer Mark


Number
3 (b) AO3 (4)
AO3: Four marks for correct calculation of
increase in profit.

(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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Question Answer Mark


Number
3 (c) AO1 (4)
AO1: Four marks for correct calculation of
units in inventory.

(4)

2017 Quarterly Quarterly sales


production
Quarter 1 : Jan – March 270 000 255 000
Quarter 2 : April – June 285 000 276 000
Quarter 3 : July – Sept 264 000 273 000
Quarter 4 : Oct - Dec 258 000 270 000
Total 1 077 000 (1) 1 074 000 (1)
AO1 AO1

Inventory increases by 3 000 units (1of) AO1

Inventory at 31 December 2017= 28 000 + 3 000 = 31 000 units (1of)


of of AO1

Question Answer Mark


Number
3 (d) AO1 (1), A02 (4), A03 (3)
AO1: One mark for correct inclusion of
opening inventory.
AO2: Four marks for correct calculation of
production cost and closing inventory.
AO3: Three marks for correct calculation of
revenue and profit.
(8)

Revenue per unit = 8 826 300 = £9.45 per unit (1) AO3
934 000

Revenue (£9.45 of x 1 074 000 of) 10 149 300 (1of) AO3

Opening Inventory 198 800 (1of) AO1

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

= Cost of Sales 7 625 400

Profit 2 523 900 (1of) AO3

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Question Indicative Content Mark


Number
3 (e) A04 (6)
For the statement

In the first year of trading, profit will always be


higher using absorption costing, as long as there
is a closing inventory. This is because some of the
overheads for year 1 will be carried forward into
year 2.

Against the statement

If there is no inventory at the end of year 1, then


marginal costing and absorption costing will give
the same value for profit.
For all other years, the profit may be larger or
smaller using absorption costing. This will depend
upon the relative size and value of the opening
and closing inventories.

Decision

The statement is incorrect. Absorption cost may


sometimes give a greater profit, but there are
times when it does not. (6)
Level Mark Descriptor
0 A completely incorrect response.
Level 1 1-2 Isolated elements of knowledge and understanding
which 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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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:

Farm Berryfields Highlands Oaks Woodgate

Number of cows 155 120 148 132

£ £ £ £

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:

Farm Berryfields Highlands Oaks Woodgate

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:

Farm Berryfields Highlands Oaks Woodgate

Ratio 4 3 4 3

(3) Depreciation – at a rate of 2% on cost of farm buildings:

Farm Berryfields Highlands Oaks Woodgate

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)

(Total for Question 1 = 52 marks)

Answer space for Question 1 is on pages 2 to 8 of the question paper.

3
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Section A

1(a) Milk Production Berryfield Highlands Oaks Woodgate


Cows 155 120 148 132
Production (litres) 1357800 √ 1051200 √ 1296480 √ 1156320 √
(4)
1(b) Fixed costs
Farm Manager 12000 10000 11000 10000 √all
Head Office 8000 6000 √both 8000 6000 √both
Depreciation 18000 √ 2000 √ 5000 √ 6000 √
Total Fixed costs 38000 18000 √both 24000 22000 √both
(9)

1(c) Income statement


Sales Revenue 380184 √ 294336 √ 363014 √ 323770 √

Direct Materials 176514 168192 194472 173448 √all


Direct Labour 108624 105120 116683 115632 √all
Fixed Costs 38000 18000 24000 22000 √of all
Total Costs 323138 √of 291312 √of 335155 √of 311080 √of

Profit (Loss) 57046 √of 3024 √of 27859 √of 12690 √of
(15 )

1(d) Pence per litre Berryfield Highlands Oaks Woodgate


Sales Revenue 25 25 25 25 √ all

Direct Materials 13 √ 16 √ 15 √ 15 √
Direct Labour 8 √ 10 √ 9 √ 10 √
Total Direct Costs 21 26 24 25 √

Contribution 4 -1 √of 1 0 √of


both both
(12 )

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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. √

Is it possible to negotiate with the supermarket √ to achieve a higher price


for the milk. √ Perhaps Westdownes Farm Limited can argue that some
farms will have to close at these prices, √ so the supermarket will not
achieve the required level of supply. √ Is it possible to publicly highlight the
plight of farmers, √ to persuade the supermarkets to offer a higher price. √

Some of the Head Office costs will probably have to be reapportioned at a


higher level √ to the farms that are remaining open. √ This could result in
these farms having to close. √

Is it possible for the farms to reduce their costs, √ in order to remain in


business. √

(12)

Total for Question 1 = 52 Marks

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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)

(Total for Question 6 = 30 marks)

TOTAL FOR SECTION B = 90 MARKS


TOTAL FOR PAPER = 200 MARKS

13
P48251A
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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

Calculation of closing inventory


Marginal (19.75+6.30+1.40) (1) AO2 27.45 1 100 30 195 (1) AO2
(1) AO3 (1) AO3 o/f (1) AO3
Absorption 1 155 000 35 38 500
o/f 1 100 o/f
33 000 (1) AO3
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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.

• If used financial statements would give a


true and fair view and be signed off by
auditors. Recommended by IAS 2.

• This follows the matching concept. Here


the revenues of a product are matched
against the costs of the product.

(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.

• Does not follow the prudence concept. The


closing inventory and the profit figures are
higher than in marginal costing.

• Absorption costing is not suitable for


decision making in the short term. .In the
long term fixed costs need to be covered
so absorption costing is suitable for long
term decision making only.

(2)
(6)

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Question Indicative content Mark


Number
6 (c) AO4 (6)
For accepting order
• The order could be accepted on the grounds
that £30 is greater than the marginal cost
of £27.45 (o/f). A positive contribution of
£2.55 per item would be made.
• New customer may result in more orders in
the future, perhaps at a higher price.

For rejecting order


• However in the long term, selling at £30
would result in a Net Loss/ not all costs are
covered.
• Existing customers would be unhappy to
hear of this low price on offer.

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.

Pearson Education Limited. Registered company number 872828


with its registered office at 80 Strand, London WC2R 0RL, United Kingdom

MSB - Page 21
Autumn 2016 www.mystudybro.com Accounting Unit 2
Past Paper This resource was created and owned by Pearson Edexcel WAC02 or WAC12

SOURCE MATERIAL FOR USE WITH QUESTION 7


7 Acorn Supplies Limited has a small factory, where it produces four steel products
for the construction industry: beams, fence posts, brackets, and lintels. Production is
planned according to demand, and the company has seen demand increase. When
production is planned for Week 43, Acorn Supplies Limited is not sure it is able to
meet all the orders. This is because it does not have the capacity to heat and melt
enough steel.
There is one furnace which can be used to heat and melt the steel, to produce any
of the four products. The furnace can operate for 12 hours a day. The furnace holds
50 kilograms of metal, which takes 45 minutes to melt, to use for production. The
company is only able to operate the furnace for 12 hours a day, for 6 days a week.
Required:
(a) Calculate the amount of steel that can be used for production in one week.
(4)
The following information is available for Week 43:

Product Beams Fence posts Brackets Lintels

Materials (steel) per unit (kgs) 12 10 6 8

Variable costs per unit £18 £10 £9 £7

Selling price per unit £45 £28 £21 £15

Sales units 265 135 120 95

(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)

(Total for Question 7 = 32 marks)

Answer space for Question 7 is on pages 35 to 37 of the question paper.

20
P50700A
MSB - Page 22
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. √

Case Against not producing all of the product range


Customers may be annoyed that there is a waiting time for the order. √ This is especially applicable for small building/repair
jobs √ which have not planned a schedule in advance. √ Work may have to stop on the job, whilst supplies are awaited. √
The customer may decide to look elsewhere for supplies. √ They may not return to Acorn. √
The customer may be looking to buy similar products/ products in the same product range. √

Maximum of 4 marks for arguing one side.

Conclusion – 2 marks
Not producing all of the product range may/may not be a good idea.
(8)

Total for Question 7 = 32 marks

Pearson Education Limited. Registered company number 872828


with its registered office at 80 Strand, London WC2R 0RL

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