Examination question paper: May 2017

Module code: AC4002

Component number: 003

Module title: Introduction to Accounting

Module leader: Samuel O Idowu

Date: 18 May 2017

Start time: 14:00

Duration: 1 Hour 30 Minutes

Exam type: Unseen, Closed

Materials supplied: None

Materials permitted: Calculator

Warning: Candidates are warned that possession of

unauthorised materials in an examination is a
serious assessment offence.

Instructions to Candidates should answer all Questions in Section A and

candidates: Any Two Questions in Section B

There are different marks available for each Question.

Do not turn page over until instructed

© London Metropolitan University
SECTION A – COMPULSORY. Write your Answers to the following Multiple Choice
Questions in the Answer Booklet provided.

Questions 1 – 15 4 Marks each

Question 1
Jolly Joker Partnership, a phone making business, incurred the following costs last year:

Direct Labour: £150,000

Direct Expenses: £250,000
Indirect Labour: £50,000
Indirect Materials: £50,000

What was the total prime cost incurred by the partnership last year?

(a) £100,000
(b) £150,000
(c) £250,000
(d) £400,000

Question 2

A direct costs is a cost which

(a) Is incurred as a direct consequence of a decision

(b) Can be economically identified with the item being costed
(c) Cannot be economically identified with the item being costed
(d) Is immediately controllable.

Question 3

The following is the production and cost extract from Jolly Joker Partnership:

Production (units) 4000 6000

Production costs (£) 11,100 12,900

Using the high-low method, the total cost for 8,000 units is:

(a) £7,200
(b) 14,700
(c) 17,200
(d) £22,200

2
Question 4

A firm of lawyers charges £50 per hour for overheads; during the year ended, the firm
under-absorbed by £50,000 on an actual work volume of 11,000 hours. Budgeted overhead
was £500,000 for the year.

What was the actual overhead for the year?

(a) £450,000
(b) £500,000
(c) £550,000
(d) £600,000

Question 5

LMU Plc’s finance department is reviewing the following information relating to fixed
production overheads:

Standard absorption rate £7.5 per unit

Budgeted production and sales 12,000 units
Actual production 11,800 units
Actual production overhead costs £115,000

Calculate the under or over absorption of fixed production overheads

(a) £26,500 under absorption

(b) £26,500 over absorption
(c) £1,571
(d) £157

3
Question 6

LMU Plc Edinburgh branch produces a single product and its standard cost card based on
normal monthly output of 2000 units shows the following unit costs:

£
Variable production cost 8.00
Fixed production cost 6.00
Variable Selling cost 2.00
Fixed selling cost 5.00
Profit 3.00
Selling Price 24.00

The break-even point in units is?

a) 1,571 units
b) 17,510 units
c) 26,500 units
d) 25,600 units

Question 7

The term contribution used in Marginal or Variable costing means:

a) Variable costs less fixed overheads

b) Maintenance cost less Fixed overheads
c) Sales less Variable costs
d) Fixed overheads less Sales Revenue

Question 8

Opportunity cost is:

(a) The cost of additional material and labour due to a change of contract
(b) Direct material + Direct labour + Direct expenses
(c) The cost of pursuing one course of action over another course of action- the lost
benefit
(d) The same as relevant costs

4
Question 9

Which of the following technique is not a of Project Appraisal method:

(a) Internal Rate of Return method

(b) Payback method
(c) Net Present Value method
(d) High and Low method

Question 10

Fixed costs are defined as:

(a) Costs that vary in direct proportion as output

(b) Costs that remain the same regardless of the level of output
(c) Costs that remain fixed when the weather is cold
(d) Costs which are unaffected by inflation

Question 11

1. What would be the fixed cost element of the following factory maintenance costs
given the following information:

Units Produced Total Maintenance Cost

17,000 £246,500
18,500 £251,750

(a) £246,500
(b) £187,000
(c) £251,750
(d) £59,500

Question 12

Which ONE of the following costs could NOT be classified as a production overhead cost in
a car manufacturing company?

(a) The cost of the machine operators

(b) The cost of renting the factory building
(c) The salary of the factory manager
(d) The depreciation of equipment located in the staff canteen

5
Question 13
Murphy Ltd’s stock purchases during a recent week were as follows:
Day Price per unit £ Units Purchased
1 2.55 110
2 2.65 160
3 2.70 240
4 2.80 150
5 2.95 260

There was no stock at the beginning of the week. 550 units were issued to
production during the week. The company updates its stock records after every
transaction.

Using the FIFO method of costing stock issues, the value of closing stock would be:

(a) £1075.00
(b) £1091.50
(c) £943.50
(d) £710.50

Questions 14 and 15 relate to the following information.

Sunbeam Ltd produces a single product which it plans to sell it for £120 and has variable
production costs of £76 and sales commission is £6. It has established a fixed cost budget of
£152,000 for 2018 and it has budgeted for sales revenue of £960,000.

Question 14
How many units must it sell to generate its target profit of £76,000 for the year?

(a) 6,000 units

(b) 7,200 units
(c) 5,500 units
(d) 4,000 units

Question 15
The margin of safety in units will be:

(a) 3,600
(b) 4,000
(c) 4,400
(d) 4,800

Total Marks: 60

6
SECTION B – Answer Any Two Questions from this Section

Question 16

The CEO of CCC Plc has provided you with the budgeted data for January to June 2018 in the
table below:

January February March April May June

£ £ £ £ £ £
Sales 80,000 100,000 110,000 130,000 140,000 150,000
Purchases 40,000 60,000 80,000 90,000 110,000 130,000
Wages 10,000 12,000 16,000 20,000 24,000 28,000
Overheads 10,000 10,000 15,000 15,000 15,000 20,000
Dividends 20,000
Capital 30,000 40,000
Expenditure

You are also told the following:

(i) Sales are 40% cash 60% credit. Credit sales are paid two months after the month
of sale.
(ii) Purchases are paid the month following purchase.
(iii) 75% of wages are paid in the current month and 25% the following month.
(iv) Overheads are paid in the month after they are incurred.
(v) Dividends are paid three months after they are declared.
(vi) Capital expenditure is paid two months after it is incurred.
(vii) The opening cash balance is £15,000.

The CEO is pleased with the above figures as they show sales will have increased by 100% in
the period under review. In order to achieve this she has arranged a bank overdraft with a
ceiling of £50,000 to accommodate the increased stock levels and wage bill for overtime
worked.

Required:

(a) Prepare a Cash Budget for the four months period January to April 2018. 17 Marks
(b) Comment upon your results in the light of the CEO’s comments and offer advice.
3 Marks

Total Marks: 20

7
SECTION B - Continued

Question 17

Ted Malloch Limited manufactures two components, but wishes to investigate the prices
which an overseas producer of the two components has recently quoted to its purchasing
manager. The accounting records of the company have produced the following costs and
prices of the two components:

Component A B
Production units 40,000 80,000

£ £
Selling price per unit 8.00 10.00

Cost per unit:

Direct material 1.60 2.00
Direct labour 3.20 3.60
Direct expense 0.80 1.20
Fixed cost 1.60 2.00
Total unit cost 7.20 8.80

Imported unit price 5.50 8.40

REQUIRED:

(a) Calculate whether any of the components should be imported, basing your
recommendation only on cost. 8 Marks
(b) Calculate the profit or loss the company will make if it produced the two
components itself. 6 Marks
(c) Calculate the increase or decrease in profit if your recommendation in part (a) were
followed. 3 Marks
(d) Explain two other non-financial factors the company should bear in mind when
deciding whether or not to go ahead and import any of the components.
3 Marks

TOTAL Marks: 20

8
SECTION B - Continued

Question 18

The Chief Finance Officer (CFO) of Easy Smart Plc has been provided with the following
information about two possible capital projects of which you have been told that finance is
only available for only one of them. Both projects have the same initial capital cost of
£400,000 and Easy Smart Plc can only undertake just one of them.

Project Super Deluxe

Net Cash in flow

Year 1 160,000 110,000
2 160,000 130,000
3 120,000 170,000
4 100,000 220,000
Scrap value in Year 4 40,000 40,000

Cost of Capital 16% 16%

Present Value Factors:

Year 1 0.8621
Year 2 0.7432
Year 3 0.6407
Year 4 0.5523

Required:

Calculate the following for both projects:

(a) Payback periods 2 Marks

(b) Accounting Rates of Return 5 Marks
(c) Net Present Values 10 Marks
(d) Advise the CFO of Easy Smart Plc which of the two projects should be undertaken
giving your reasons for your recommendation 2 Marks
(e) Explain the term “Cost of Capital” and why it is important in investment decisions
1 Marks

Total Marks: 20

END OF PAPER