Answers

Part 1 Examination – Paper 1.2

Financial Information for Management December 2005 Answers

Section A

1 D
2 C
3 C
4 C
5 B
6 D
7 C
8 C
9 A
10 B
11 A
12 B
13 C
14 D
15 A
16 C
17 D
18 A
19 A
20 C
21 D
22 D
23 D
24 D
25 B

1 D

2 C 1,700 units – Breakeven level units (1,200) = 500 units

3 C Contribution per unit = 22 ÷ 0·55 × 0·45 = £18

Breakeven point = 198,000 ÷ 18 = 11,000

4 C Variable cost per unit = [(170,000 – 5,000) – 140,000)] ÷ (22,000 –17,000) = £5

Total fixed cost above 18,000 units = 170,000 – (22,000 × 5) = £60,000
Total cost of 20,000 units = (20,000 × 5) + 60,000 = £160,000

5 B

6 D

7 C Weighted average after 13th = [(200 × 9,300 ÷ 300) + (600 × 33)] ÷ (200 + 600) = £32·50
Closing stock valuation = 300 × 32·50 = £9,750

8 C EOQ = [(2 × 160 × 9,000) ÷ (0·08 × 40)]0·5 = 949

9 A

10 B

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11 A Absorption rate = 247,500 ÷ 30,000 = £8·25
Absorbed cost = 28,000 × 8·25 = £231,000
Actual cost = £238,000
Under absorption = £7,000

12 B Marginal costing profit = 36,000 – (2,000 × 63,000 ÷ 14,000) = £27,000

13 C Process F: expected output = 0·92 × 65,000 = 59,800

actual output = 58,900
∴ abnormal loss
Process G: expected output = 0·95 × 37,500 = 35,625
actual output = 35,700
∴ abnormal gain

14 D £
Actual hours at standard rate (27,000 × 8·50) 229,500
Standard hours of production at standard rate 253,980
––––––––
∴Labour efficiency variance is 24,480 Favourable
––––––––

15 A Sales price variance: £

Actual sales at standard price (4,650 × 6) 27,900
Actual sales at actual price 30,225
–––––––
Favourable price variance 2,325
–––––––
Adverse sales volume contribution variance:
350 units × (6 × 0·60) 1,260

16 C

17 D

18 A

19 A Coefficient of determination = r2 = 0·6 × 0·6 = 0·36 = 36%

20 C

21 D 4,000 × [(20,000 ÷ 2,500) × 1·025] = £32,800

22 D Production (units):
J: (6,000 – 100 + 300) = 6,200
K: (4,000 – 400 + 200) = 3,800
––––––
10,000
––––––
Joint costs apportioned to J: (6,200 ÷ 10,000) × 110,000 = £68,200

23 D Material required to meet maximum demand:

6,000 × (13 ÷ 4) + 8,000 × (19 ÷ 4) = 57,500 litres
Material available: 50,000 litres
∴ Material is a limiting factor
Labour required to meet maximum demand:
6,000 × (35 ÷ 7) + 8,000 × (28 ÷ 7) = 62,000 hours
Labour available: 60,000 hours
∴ Labour is a limiting factor

18
24 D Profits maximised when: marginal revenue (MR) = marginal cost (MC)
MR = 50 – 0·05Q
MC = 15
MR = MC ∴ 50 – 0·05Q = 15
and Q = 700
P = 50 – (0·025 × 700) = £32·50

25 B When P = 20 then 20 = 50 – 0·025Q

and Q = 1,200
£
Total revenue (P × Q) = 1,200 × 20 = 24,000
Less total costs 2,000 + (15 × 1,200) = 20,000
––––––
∴Profit 4,000
––––––

Section B

1 (a) Using the high-low method:

Units Total cost (£)
120,000 (W1) 700,000
102,000 619,000
–––––––– ––––––––
18,000 81,000
–––––––– ––––––––
Working (W1)
Full capacity = 102,000 ÷ 0·85 = 120,000
(i) Variable cost per unit = 81,000 ÷ 18,000 = £4·50
(ii) Total fixed costs = 700,000 – (120,000 × 4·50) = £160,000
(iii) Selling price per unit = variable cost per unit ÷ (1·00 – 0·40)
= 4·50 ÷ 0·6 = £7·50
(iv) Contribution per unit = (7·50 – 4·50) = £3·00

(b) New business: £ per unit

Selling price (0·80 × 7·50) 6·00
Less variable cost (4·50)
–––––
Contribution 1·50
–––––
£
Contribution from 15,000 units (15,000 × 1·50) 22,500
Less opportunity cost (15,000 ÷ 6) × £3·00 (7,500)
–––––––
Net increase in contribution (and profit) 15,000
–––––––

(c) An opportunity cost is the cost of the best alternative forgone in a situation of choice. Opportunity costs are relevant costs.
In the situation of Pointdextre Ltd, if it goes ahead with the new business (that is the decision) then it will lose (forgo) the
contribution from some existing sales. This lost contribution is an opportunity cost relevant to the decision.

2 (a) Process I
Litres £ Litres £
Input 50,000 365,000 Output (W1) 47,000 634,500
Conversion 256,000 Normal loss (0·08 × 50,000) 4,000 –
Abnormal gain (W2) 1,000 13,500
––––––– –––––––– ––––––– ––––––––
51,000 634,500 51,000 634,500
––––––– –––––––– ––––––– ––––––––
Workings:
W1 Cost per litre (365,000 + 256,000) ÷ (50,000 × 0·92) = £13·50
Output value = 47,000 × 13·50 = £634,500
W2 Abnormal gain = 47,000 – (50,000 × 0·92) = 1,000
Valuation (1,000 × 13·50) = £13,500

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 (b) Workings:
Cost per equivalent litre (EL): Conversion
EL
Completion of opening WIP 3,000
Started and finished within the month (50,000 – 5,000) 45,000
Work done so far on closing WIP 1,000
–––––––
49,000
–––––––
∴Cost per EL = 392,000 ÷ 49,000 = £8
(i) Output = 80,000 + (45,000 × 13·50) + (48,000 × 8·00) = £1,071,500
(ii) Closing WIP = (2,000 × 13·50) + (1,000 × 8·00) = £35,000

(c) The disposal costs would be debited to the process account. Alternatively, they could be shown as a negative value on the
credit side of the account.

3 Let X = the number of units of product X

and Y = the number of units of product Y
Contribution per unit:
Product X Product Y
£ per unit £ per unit
Selling price 60 25
Less variable cost (45) (13)
–––– ––––
Contribution 15 12
–––– ––––
Objective function:
Total contribution = 15X + 12Y
Constraints:
Material (£5 per kg) 3X + Y ≤ 4,200
Labour (£6 per hour) 4X + 0·5Y ≤ 3,000
Non negative X, Y ≥ 0
Using a graphical approach, the constraints (solid lines) and the objective function (dotted line) can be shown as follows:

Y
units
6,000

Labour

4,200 A

Material

750
C
0 X units
600 750 1,400

Note: the objective function line has been shown on the above graph for a total contribution of £9,000 (assumed). Thus 15X +
12Y = 9,000.
Therefore when X = 0, Y = (9,000 ÷ 12) = 750
and when Y = 0, X = (9,000 ÷ 15) = 600
The ‘feasible region’ is the area OABC shown on the graph. If the objective function line is moved away from the origin (at the
same gradient) the last point it reaches in the feasible region is point A which must therefore be the optimal point.
Therefore the optimal production is to produce and sell 4,200 units of product Y and no units of product X.

20
 An alternative approach would be to calculate the total contributions at points A, B and C shown on the graph and select the point
giving the highest total contribution, as follows:
Point A
Total contribution from 4,200 units of Y is (4,200 × £12) = £50,400
Point B
To find the units at this point, solve the following equations simultaneously:
3X + Y = 4,200 … (1)
4X + 0·5Y = 3,000 … (2)
From (1) Y = 4,200 – 3X
Substituting into (2) 4X + 0·5(4,200 – 3X) = 3,000
∴ 4X + 2,100 – 1·5X = 3,000
∴ 2·5X = 900
∴ X = 360
Substituting into (1) (3 × 360) + Y = 4,200
∴ Y = 3,120
Total contribution from 360 units of X and 3,120 units of Y is (360 × £15) + (3,120 × £12) = £42,840
Point C
Total contribution from 750 units of X is (750 × £15) = £11,250
Point A gives the highest contribution (£50,400 from producing 4,200 units of Y and no units of X) and is therefore the optimal
solution (as before).

4 (a) £
Standard cost of actual production [12,500 × (11 + 24 + 18)] 662,500
Total variances: Adverse Favourable
£ £
Materials (W1) 5,200
Labour (W2) 8,700
Fixed overhead (W3) 5,800
––––––– ––––––
11,000 8,700 2,300 A
––––––– –––––– ––––––––
Actual cost (142,700 + 291,300 + 230,800) 664,800
––––––––
Workings:
W1 Variance
£ £
Actual cost 142,700
5,200 A
Standard cost of actual production 137,500
W2
Actual cost 291,300
8,700 F
Standard cost of actual production 300,000
W3
Actual cost 230,800
5,800 A
Standard cost of actual production 225,000

(b) £ £
Expenditure variance:
Actual cost 230,800
14,800 A
Budgeted cost (12,000 × 18) 216,000
Volume variance:
Budgeted cost 216,000
9,000 F
Standard cost of actual production 225,000

(c) The total direct materials and labour variances would be the same under absorption and marginal costing. The total fixed
overhead variance under marginal costing would be different and would be the same as the expenditure variance under
absorption costing (£14,800 A). There is no volume variance under marginal costing as fixed production costs are treated
as period costs and not treated as product costs.

21
5 (a) Absorption rates:
Cost centre T: (780,000 ÷ 16,250) = £48 per machine hour
Cost centre W: (173,400 ÷ 14,450) = £12 per direct labour hour

(b) Prime costs: £

Direct materials 10
Direct labour:
Cost centre T 14
Cost centre W 21
––––
45
Production overheads:
Cost centre T: (35 ÷ 60) × 48 28
Cost centre W: (21 ÷ 6) × 12 42
––––
115
––––

(c) Products do not pass through service cost centres so the costs of such centres cannot be absorbed directly into products.
Products only pass through production cost centres. Therefore in order to calculate a total production cost per unit, service
cost centre costs have to be reapportioned to production cost centres for absorption.
The method of reapportionment that fully recognises any work that service cost centres do for each is called the reciprocal
method. There are two techniques for applying the reciprocal method – a repeated distribution approach or the use of
simultaneous equations.

22
Part 1 Examination – Paper 1.2
Financial Information for Management December 2005 Marking Scheme

Marks
Section A
Each of the 25 questions in this section is worth 2 marks 50
–––

Section B

1 (a) (i) Variable cost per unit 2

(ii) Total monthly fixed costs 2
(iii) Selling price per unit 1
(iv) Contribution per unit 1
–––
6

(b) Contribution from new business 2

Opportunity cost 11/2
Net increase in profit 1/
2
–––
4

(c) Explanation of opportunity cost 1

Reference to Pointdextre Ltd 1
–––
2
–––
12
–––

2 (a) Input and conversion 1

Normal loss 11/2
Abnormal gain 11/2
Output 1
–––
5

(b) Equivalent units for conversion 11/2

Cost per equivalent unit for conversion 1/
2
Valuation of output 2
Valuation of closing work in progress 1
–––
5

(c) Debit entry 2

–––
12
–––

3 (a) Contributions per unit 1

Objective function 1
Constraints 3
–––
5

(b) Graph (or total contributions at feasible points) 3

Optimal plan 1
–––
4
–––
9
–––

23
 Marks
4 (a) Total materials variance 1
Total labour variance 1
Total fixed overhead variance 1
Reconciliation statement 1
–––
4

(b) Expenditure variance 1

Volume variance 1
–––
2

(c) Direct materials and labour variances the same 1

Total variance = expenditure variance 1
No volume variance with reason 1
–––
3
–––
9
–––

5 (a) Cost centre T absorption rate 1

Cost centre W absorption rate 1
–––
2

(b) Prime cost 1/

2
Production overheads (T) 1
Production overheads (W) 1
Total unit cost 1/
2
–––
3

(c) Reapportionment explanation 2

Reapportionment method 1
–––
3
–––
8
–––

24