Answers

Part 1 Examination – Paper 1.2

Financial Information for Management June 2006 Answers

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

1 A

2 C

3 B Contribution per unit = 15 x 0·4 = £6

Break even point = 18,000 ÷ 15 = 1,200 units
Profit when 1,500 units sold = (1,500 – 1,200) x 6 = £1,800

4 C Units Total cost (£)

1,400 68,200
1,200 66,600
––––– ––––––––
1,200 1,600
––––– ––––––––
Variable cost per unit = (1,600 ÷ 200) = £8
Total fixed cost (above 1,000 units) = [68,200 – (1,400 x 8)] = £57,000
Total cost for 1,000 units = [(57,000 – 6,000) + (1,000 x 8)] = £59,000

5 A

6 D

7 C EOQ = {[ 2 x 20 x (4 x 20,000) ] ÷ [0·06 x 25]}0·5 = 1,461 units

8 D

9 B (Budgeted quantity – Actual quantity) x standard profit per unit

(1,000 – 900) x (50 – 39) = £1,100

10 A Budgeted overhead – actual overhead = 1,250

Actual overhead = 0·98 x Budgeted overhead
Budgeted overhead – (0·98 x Budgeted overhead) = 1,250
Budgeted overhead = 1,250 ÷ 0·02 = 62,500
Actual overhead = 62,500 – 1,250 = £61,250

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11 B Closing stock = 100 – 50 + 200 – 50 – 50 = 150 units
FIFO = 150 x 62 = £9,300
LIFO = (100 x 62) + (50 x 67) = £9,550
LIFO valuation greater than FIFO valuation by £250

12 A

13 B Cost centre G = 40,000 + (0·50 x 18,000) + 0·30 [30,000 + (0·10 x 18,000)]

13 B Cost centre G = £58,540

14 B

15 C

16 B

17 A £
Prime cost [64 + (7 x 8)] 120
Production overhead (7 x 20) 140
––––
260
Non-production overhead (0·60 x 120) 72
––––
Total cost 332
––––

18 C Opportunity cost per skilled labour hour = [25 ÷ (20 ÷ 8)] = £10
Relevant cost: £
Skilled labour cost (90 x 8) 1,720
Opportunity cost (90 x 10) 1,900
–––––
1,620
–––––

19 C Relevant cost of a regularly used material in stock is its replacement cost (600 x 27) = £16,200

20 C Input = (14,000 + 3,000 – 2,000) = 15,000 units

21 D Material cost per unit = [51,000 ÷ (12,000 + 3,000)] = £3·40

Conversion:
Cost per equivalent unit = [193,170 ÷ (12,000 + 0·40 x 2,000 + 0·30 x 3,000)]
Cost per equivalent unit = 193,170 ÷ 13,700 = £14·10
Closing stock valuation = (3,000 x 3·40) + (900 x 14·1) = £22,890

22 D

23 C Profits maximised when: Marginal revenue (MR) = Marginal cost (MC)

MC = 8
MR = (40 – 0·016Q)
MR = MC 40 – 0·016Q = 8,000
MR = MC 40 – 0·016 Q = 2,000
When Q = 2,000 Price = 40 – (0·008 x 2,000) = £24

24 C Objective function (maximisation of contribution) = 4X + Y

Let 4X + Y = 40,000 (assumed)
When X = 0, Y = 40,000
When Y = 0, X = 10,000
These two points are plotted on the graph and joined by a (dotted) line. This line is then moved away from the origin keeping
it parallel to the originally drawn dotted line until it reaches the furthest most point in the feasible area ((OHJKL).
In this case that will be the point K which is optimal.

25 A 10X + 7Y = 70,000
When X = 0, Y = 10,000
When Y = 0, X = 7,000
Constraint line (2) joins these two points on the axes.

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Section B

1 (a) Process G
Litres £ Litres £
Raw material 60,000 381,000 Output (W3):
Direct labour 180,000 P1 (W4) 36,250 507,500
Direct expenses 54,000 P2 (W4) 21,750 304,500
Production Normal loss (W2) 3,000 15,000
overheads (W1) 198,000
Abnormal gain
(W4) 1,000 14,000
––––––– –––––––– ––––––– ––––––––
61,000 827,000 61,000 827,000
––––––– –––––––– ––––––– ––––––––
Workings:
W1 Production overheads = 110% x 180,000 = £198,000
W2 Normal loss = 5% x 60,000 = 3,000 litres at 5 = £15,000
W3 Total output = 61,000 – 3,000 = 58,000
W3 Split P1 : P2 in ratio 5 : 3
W3 P1 = (5 ÷ 8) x 58,000 = 36,250 litres
W3 P2 = (3 ÷ 8) x 58,000 = 21,750 litres
W4 Cost per litre:
W3 Net total cost = 381,000 + 180,000 + 54,000 + 198,000 – 15,000
W3 Net total cost = £798,000
W3 Expected output = 60,000 x 95% = 57,000 litres
W3 Cost per litre = 798,000 ÷ 57,000 = £14
W3 Valuations:
W3 Abnormal gain = 1,000 x 14 = £14,000
W3 Joint products:
W3 Joint prodP1 36,250 x 14 = £507,500
W3 Joint prodP2 21,750 x 14 = £304,500

(b) Assuming 100 litres of product P1 £

Revenue if sold at point of split-off without
further processing (100 x 20) 2,000
Revenue (from PP1) if sold after
further processing (100 x 90%) x 26 2,340
–––––
Additional revenue 1,340
–––––
Additional cost (in process H) 1,400
–––––
The additional cost exceeds the additional revenue by £60 for every 100 litres of product P1 further processed. For example,
if the output of 36,250 litres of product P1 last month were further processed to make product PP1 then the additional costs
would exceed the additional revenue by (36,250 ÷ 100 x 60) = £21,750.
Therefore product P1 should not be further processed into product PP1.

(c) (i) Direct expenses are costs, other than material and labour, which are specifically traceable to the process (G). An example
of such a cost would be the cost of hiring special equipment required for that process only.
(ii) Production overheads are general factory wide costs which need to be apportioned to the various processes that benefit
from them. An example of production overhead would be factory rates.

2 (a) Monthly machining hours required to meet maximum demand:

Product Units Hours/unit Total hours
R 9,000 (40 ÷ 60) = 0·667 16,000
S 6,000 (54 ÷ 60) = 0·900 15,400
T 3,000 (75 ÷ 60) = 1·250 13,750
––––––
15,150
Available hours 10,500
––––––
Shortfall in machining hours 14,650
––––––

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 (b) Calculation of the contribution per machining hour for each product:
R S T
Selling price per unit £60 £75 £84
Contribution to sales ratio 20% 24% 25%
Contribution per unit £12 £18 £21
Machining hours per unit 0·667 0·900 1·250
Contribution per machine hour £18 £20 £16·80
Ranking 2nd 1st 3rd
Optimal production plan and resultant contribution:
Product Units Machine hours used Contribution (£)
S 6,000 15,400 108,000
R 7,650 15,100 (balance) 191,800
––––––– ––––––––
Total 10,500 199,800
––––––– ––––––––

3 (a) Direct material variances: £ Variance (£)

Actual quantity purchased at actual price 294,000 
 6,000 F Price

Actual quantity purchased at standard price 300,000 
(40,000 kg at 7·50 )
Actual quantity used at standard price 273,750 
(36,500 kg at 7·50 )  14,550 A Usage

Standard quantity for actual production at 259,200 
standard price [(7,200 units x 4·8) at 7·50]

(b) Reconciliation: £ £
Actual cost of purchases 294,000
Less: Adverse/Plus: Favourable variances:
Less: Price variance [as in (a)] 6,000 F
Less: Usage variance [as in (a)] 14,550 A
–––––––
(8,550) A
Less: Increase in stock at standard cost
Less: [(40,000 – 36,500) x 7·50] (26,250)
––––––––
Standard material cost of actual production [per (a)] 259,200
––––––––

(c) (i) Price variance (£6,000 F)

Cheaper materials, but with a lower quality than standard, may have been purchased because the normal supplier was
unable to deliver.
Usage variance (£14,550 A)
The lower quality materials purchased may have required higher than standard usage per unit in production.
(ii) The purchase price variance should be reported to the purchasing (procurement) manager as this is the person within
the organisation who is responsible for buying the materials. This manager would be able to take any appropriate action.

4 (a) In the linear regression equation y = a + bx:

y = maintenance cost in £’000 (dependent variable), and
x = production units in ’000 (independent variable)
Σ y = (265 + 302 + 222 + 240 + 362 + 295 + 404 + 400) = 2,490
Σ x = (20 + 24 + 16 + 18 + 26 + 22 + 32 + 30) = 188
n=8
Using formulae provided in the examination:
b = [(8 x 61,250) – (188 x 2,490)] ÷ [ (8 x 4,640) – (188 x 188)]
b = 12·32
a = (2,490 ÷ 8) – (12·32 x 188 ÷ 8) = 21·73
Linear equation is:
y = 21·73 + 12·32x where x and y are in ’000
The interpretation is that the fixed maintenance cost per quarter is £21,730 and the variable cost per unit of production is
£12·32.

20
 (b) Predicted maintenance cost for next quarter (44,000 units) is:
21·730 + (12·320 x 44) = 563·81 or £563,810
The major reservation about this prediction is that 44,000 units of production is well outside the range of data used to
establish the linear regression equation. The data related to a range 16,000 to 32,000 units per quarter. The behaviour of
costs outside this range may be quite different. For example there may be a step in the fixed costs.

5 (a) Budgeted profit statement (absorption costing):

£’000 £’000
Sales (24,000 units) 864
Less: Production cost of sales:
Less: Opening stock (3,000 x 28) [W1] 84
Less: Production (22,000 x 28) 616
Less: Closing stock (1,000 x 28) (28)
–––– (672)
––––
192
Less: Under absorption of fixed
Less: production overhead cost [W2]
Less: (3,000 x 5) (15)
––––
Gross profit 177
Less: Non-production costs:
Less: Variable selling cost 60
Less: Fixed selling and admin costs 40
––– (100)
––––
Net profit 77
––––
Workings: £
W1 Variable production cost per unit 23
W1 [For example, from opening stock under
W1 marginal costing: (69,000 ÷ 3,000)]
W1 Fixed production cost per unit 5
W1 [125,000 ÷ 25,000] –––
W1 28
–––
W2 Under absorption (25,000 – 22,000) = 3,000 units

(b) Reconciliation:
£’000
Net profit per absorption costing (a) 77
Add: Decrease in stocks x fixed production overhead
Add: cost per unit [2,000 x 5] 10
–––
Net profit per marginal costing (per question) 87
–––

(c) Marginal costing is more relevant for short-term decision-making as it separates fixed and variable costs. In the short-term
fixed costs are more likely to remain unchanged and therefore would not be relevant.

21
Part 1 Examination – Paper 1.2
Financial Information for Management June 2006 Marking Scheme

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

Section B

1 (a) Inputs 2
Abnormal gain 11/2
Normal loss 11/2
Joint products 2
–––
7
(b) Additional revenue 11/2
Additional cost 1
Conclusion 1/
2
–––
3
(c) Direct expenses 1
Production overheads 1
–––
2
–––
12
–––

2 (a) Required hours 11/2

Shortfall 1/
2
–––
2
(b) Contribution per unit 11/2
Contribution per machining hour 11/2
Ranking 1/
2
Optimal plan 11/2
Resultant contribution 1
–––
6
–––
8
–––

3 (a) Price variance 11/2

Usage variance 11/2
–––
3
(b) Variances 1
Change in stock 1
Layout/presentation of statement 1
–––
3
(c) (i) Causes (1 mark for each) 2
(ii) Purchasing manager 1
Responsibility for buying 1
–––
4
–––
10
–––

23
 Marks

4 (a) Σy 1
Σx 1
Calculation of ‘b’ 21/2
Calculation of ‘a’ 11/2
Fixed/variable costs 1
–––
7
(b) Total cost for 44,000 units 11/2
Reservation 11/2
–––
3
–––
10
–––

5 (a) Sales 1/
2
Cost of sales 3
Under absorption of overhead 11/2
Variable selling cost 1/
2
Fixed selling and admin costs 1/
2
–––
6
(b) Layout/presentation of statement 1
Change in stock and its evaluation 1
–––
2
(c) Marginal costing 1
Separation of fixed and variable costs 1/
2
Fixed costs not relevant to short term decisions 1/
2
–––
2
–––
10
–––

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