Answers

Part 1 Examination – Paper 1.2

Financial Information for Management Answers

Section A

1 B Unavoidable costs are not relevant for decision making.

£180,000
2 B OAR/machine hour = = £18/machine hour
10,000

3 D Service organisations are more likely to use ABC.

4 D The trend is the general upward or downward movement of the variable over time.
The additive model assumes independence, not the multiplicative model.
Regression analysis can be used to predict the trend but adjustments still need to be made regarding variations.

5 A Cost accounting can be used for stock valuation to meet the requirements of both internal and external reporting.

130
6 B 325,000 x = 340,726 adjusted year 7 sales figure
124

435,000
% = 127·7% – 100% = 27·7%
340,726

7 A

( )

Value of imperfect information

= (£200,000 x 0·95 + £70,000 x 0·05) – (£200,000 x 0·7 + £70,000 x 0·3)
= £32,500

8 B Working conditions, pension provisions and welfare are all costs relating to retaining, not replacing, labour.

9 D Job costing applies to units that take a short duration to complete.

10 C Since the company has an objective of minimising costs the potential optimal solutions will be the points closest to the origin i.e.
D and E.

é 3,664 ù
11 A IRR = 15% + êêê úúú x (20% – 15%)
ë 3,664 + 21,451 û
= 15·7%

17
12 C S = 6,300 + 0·05M
M = 8,450 + 0·1S
S = 6,300 + 0·05 x (8,450 + 0·1S)
= 6,300 + 422·5 + 0·005S
0·995S = 6,722·5
\ S = £6,756
\ M = £9,126
For production department 1, the total overheads are
= 17,500 + 6,756 x 60% + 9,126 x 75%
= £28,398

Ö Ö
2ChD 2 x (50 + 5) x 4,000
13 D EOQ = = = 509 units
Co (15 x 0·1) + 0·2

14 B RI = 69 – (104 + 21) x 10% = 56·5

15 A PV = 300 x 11·30 – 300 x 1·913 (from tables) = £2,816 or

PV = (300 x 9·954) x 0·943 = £2,816

16 D The expected value represents the weighted average outcome.

17 C Total sales revenue = 18 x 10,000 + 25 x 20,000 + 20 x 20,000

= 1,080,000
Joint costs to be allocated = 277,000 – 2 x 3,500
= 270,000
20 x 20,000 100,000
Costs to product 3 = 270,000 x = = £5/unit
1,080,000 20,000 units

135,000
18 B OAR/labour hour = = £15/labour hour
9,000
Capacity variance:
Actual 9,750 hours
Budget 9,000 hours
750 hours
x £15 = £11,250 favourable

19 D Authorisation should be obtained if the stores function is to be properly maintained.

20 C Process account
Units £ Units £
Materials 3,500 52,000 Normal loss 875 7,000
Labour 9,625
Abnormal gain 175 Output 2,800
3,675 3,675

52,500 + 9,625 – 7,000 55,125

Cost/unit = = = £21
3,500 – 875 2,625

Valuation of output = £21 x 2,800 = £58,800

18
21 B Specific fixed overheads per division = 262,500 x 60%
157,500
= = 52,500
3

Division A Division B Division C Total

£’000 £’000 £’000
Contribution 70·5) 210·5) 30·5) 310·5)
Fixed costs – specific (52·5) (52·5) (52·5) (157·5)
Profit after specific costs 17·5) 157·5) (22·5) 245·5)

22 C (6 x 447,250,000) – (13,500 x 192,000)

= 8·714
(6 x 32,125,000) – 13,5002
Advertising expenditure is the independent variable.

23 A Higher level management could be involved with all level of decision making within a business.

24 C Statement of Equivalent Units

Total Labour
Opening WIP 250 150 = 60% x 250
Units started and finished 3,850 3,850
4,100
Normal loss 225 –
Abnormal loss 275 275
Closing WIP 150 45 = 30% x 45
4,750 4,320

12
25 D Ö1·1268 = 1·01
50 x 1·0113x12 – 1 = £18,610
1·01 – 1

19
Section B

1 (a) Marginal cost plus = £30 x 120% = £36

Advantage – simple and easy to calculate
– focuses on contribution
– can easily adjust the mark-up
Disadvantage – may not cover fixed costs
– ignores price/demand relationship
Total cost plus = £37 x 120% = £44·40
Advantage – more likely to ensure a profit is made
– product is not sold below full cost
– simple and easy to calculate
– can easily adjust the mark-up
Disadvantage – fixed costs need to be allocated to the cost unit which may be ambiguous
– ignores price/demand relationship

(b) Any two of the following pricing strategies should be included:

– price skimming – tends to lead to a high price initially, useful if the product is completely new,
– penetration pricing – go to market with a low price initially to gain market share,
– price discrimination – use two different prices in two different markets if there are barriers between the markets e.g. age,
time and location,
– premium pricing – charging a higher price than the competitors as the product can be differentiated,
– cost plus pricing – leads to a price that will cover costs although care needs to be taken with regard to marginal cost plus
to ensure that the plus is large enough to cover fixed costs,
– market price – leads to an acceptable price but one which may vary,
– price to maximise profits although a demand function will need to be established – leads to an optimal price but may not
affect the market price.

2 (a) £
Budgeted prime cost (30 + 24) x 12,000 (648,000)
Cost volume variance (500 x 54) 27,000
(621,000)
Materials
Price: Did cost £345,000
Should cost (37,250 x £10) £372,500
27,500F
Usage: Did use 37,250 kg
Should use (11,500 x 3) 34,500 kg
2,750 kg
x £10 (27,500)A
Labour
Rate: Did cost £300,000
Should cost (45,350 x £6) £272,100
(27,900)A
Efficiency: Did take 45,350 hours
Should take (11,500 x 4 hours) 46,000 hours
650 hours
x £6 3,900F
Actual prime cost (£300,000 + £345,000) (645,000)

(b) Labour rate variance – this shows that labour were paid at a higher rate
Labour efficiency variance – this shows that labour worked harder than expected as they made more in less time
Interdependence – since labour were paid more they were motivated to work harder

20
3 (a) (i) Total cost for 30,000 units or less = 50,000 + 5 x Q
(ii) Total cost for more than 30,000 units = 100,000 + 5 x Q

(b)

(c) Implications of having two breakeven points: the product is only profitable between 20,000 and 30,000 units and above
40,000 units, so the production plan should be set accordingly.

4 (a) Production budget

Product A B
Sales 2,000 1,500
Opening stock (100) (200)
Closing stock
(10% x sales level) 200 150
2,100 1,450

(b) Materials usage budget

Material type X Y
Kg Litres
Usage
(2,100 x 2 + 1,450 x 3) 8,550
(2,100 x 1 + 1,450 x 4) 7,900

(c) Materials purchases budget

Usage 8,550 7,900
Opening stock (300) (1,000)
Closing stock (W) 850 800
9,100 7,700
x £10 x £7
£91,000 £53,900

(d) Labour budget

Skilled Semi skilled
hours hours
(2,100 x 4 + 1,450 x 2) 11,300
(2,100 x 2 + 1,450 x 5) 11,450
x £12 x £8
£135,600 £91,600

Working for Material Closing Stock:

Material X (2,000 x 2 + 1,500 x 3) x 10% = 850
Material Y (2,000 x 1 + 1,500 x 4) x 10% = 800

21
5 (a)
£’000 £’000
Sales 48·6
Cost of sales:
Opening stock (150 x 22) 3·3
Production costs
Variable costs 36·0
Fixed costs (1,800 x 2) 3·6
42·9
Closing stock (350 x 22) (7·7)
Under absorption (W2) 0·4
(35·6)
Gross profit 12·4
Administration (3·6)
Selling (1·2 + 3·2) (4·4)
Net profit 4·4

Workings
1. Standard cost per unit
£
Direct variable costs 20
£4,000
Fixed overheads = 2
2,000 units
22

2. Budgeted costs £4,000

Absorbed fixed overheads £3,600
Budgeted under absorbed £400

(b) £
Profit under absorption costing 4,400
Add fixed costs in opening stock (150 x 2) 300
Less fixed costs in closing stock (350 x 2) (700)
Profit under marginal costing 4,000

A business may prefer marginal costing as it only includes costs that are relevant for decision making i.e. variable ones. Also the
business may not have significant fixed overheads and so marginal costing could be more appropriate.

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

Marks
Section A
Each question within this section is worth 2 marks 25 x 2
50

Section B
1 (a) Calculation of marginal cost plus 1
Advantage of marginal cost plus 1
Disadvantage of marginal cost plus 1
Calculation of fixed cost plus 1
Advantage of fixed cost plus 1
Disadvantage of fixed cost plus 1
6

(b) Pricing strategy 1

Impact of pricing strategy on price 1
2
Two strategies and impacts required 2x2 4
10

2 (a) Calculation of budgeted prime cost 1

Calculation of cost volume variance 1
Calculation of the materials price variance 1
Calculation of the materials usage variance 1
Calculation of the labour rate variance 1
Calculation of the labour efficiency variance 1
Calculation of actual prime cost ½
Well presented reconciliation statement ½
7

(b) What the rate variance indicates 1

What the efficiency variance indicates 1
Discussion of interdependence 1
3
10

3 (a) (i) Total cost equation at 30,000 units or less 1

(ii) Total cost equation at above 30,000 units 1
2
(b) Labelled axes on graph ½
Plotting the total cost line correctly 2
Plotting the total revenue line correctly 1
Breakeven point at 20,000 indicated 1
Breakeven point at 40,000 indicated 1
Good presentation ½
6
(c) Discussion of implications 2
10

23
 Marks
4 (a) Production budget
Sales units for both products ½
Opening stock figures for both products ½
Closing stock figure for product A ½
Closing stock figure for product B ½
2
(b) Materials usage budget
Figure for material X 1
Figure for material Y 1
2
(c) Material purchases budget
Opening stock figures for both materials ½
Closing stock figure for material X 1
Closing stock figure for material Y 1
Showing material costs per kg or litre ½
3
(d) Labour budget
Total hours for skilled labour 1
Total hours for semi skilled labour 1
Showing labour cost per hour ½
2½
Presentation ½
10

5 (a) Calculation of FOAR ½

Calculation of standard cost under AC ½
Opening stock units figure ½
Opening stock valuation ½
Calculation of production units ½
Fixed production costs absorbed ½
Closing stock units figure ½
Closing stock valuation ½
Under absorption calculation 1
Selling costs ½
Presentation ½
6
(b) Reconciliation statement
Absorption costing profit ½
Fixed costs in opening stock ½
Fixed costs in closing stock ½
Marginal costing profit ½
Discussion of why MC could be preferred 2
4
10

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