Financial Information for Management

PART 1 FRIDAY 8 DECEMBER 2006

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A ALL 25 questions are compulsory and MUST be answered ALL FIVE questions are compulsory and MUST be answered

Section B

Formulae Sheet is on page 12

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

The Association of Chartered Certified Accountants

Paper 1.2

Section A ALL 25 questions are compulsory and MUST be attempted. Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1 The following diagram represents a profit/volume chart for an organisation:

H 0 G Output

At the specific levels indicated what do the lines G and H represent? A B C D Line G Loss Loss Contribution Contribution Line H Profit Contribution Profit Contribution

The following diagram represents the behaviour of one element of cost: Total cost

Volume of activity

Which one of the following descriptions is consistent with the above diagram? A B C D Annual total cost of factory power where the supplier sets a tariff based on a fixed charge plus a constant unit cost for consumption which is subject to a maximum annual charge. Total annual direct material cost where the supplier charges a constant amount per unit which then reduces to a lower amount per unit after a certain level of purchases. Total annual direct material cost where the supplier charges a constant amount per unit but when purchases exceed a certain level a lower amount per unit applies to all purchases in the year. Annual total cost of telephone services where the supplier makes a fixed charge and then a constant unit rate for calls up to a certain level. This rate then reduces for all calls above this level.

An organisation has the following total costs at three activity levels: Activity level (units) Total cost 8,000 204,000 12,000 250,000 15,000 274,000

Variable cost per unit is constant within this activity range and there is a step up of 10% in the total fixed costs when the activity level exceeds 11,000 units. What is the total cost at an activity level of 10,000 units? A B C D 220,000 224,000 227,000 234,000

An organisation manufactures and sells a single product which has a variable cost of 24 per unit and a contribution to sales ratio of 40%. Total monthly fixed costs are 720,000. What is the monthly breakeven point (in units)? A B C D 18,000 20,000 30,000 45,000

The following statements refer to qualities of good information: (i) It should be communicated to the right person. (ii) It should always be completely accurate before it is used. (iii) It should be understandable by the recipient. Which of the above statements are correct? A B C D (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii)

A company is considering the launch of a new product at a high initial selling price. Which of the following statements is correct? A B C D This This This This is is is is an an an an example example example example of of of of strategic planning involving the application of penetration pricing. operational planning involving the application of penetration pricing. strategic planning involving the application of price skimming. operational planning involving the application of price skimming.

[P.T.O.

The following statements relate to an organisations management information system: (i) It is used only by top and middle management to aid in strategic and tactical decision-making. (ii) It generates both financial and non-financial information. (iii) It often uses a database system. Which of the above statements are correct? A B C D (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii)

Regression analysis is being used to find the line of best fit (y = a + bx) from five pairs of data. The calculations have produced the following information: x = 129 y = 890 xy = 23,091 x2 = 3,433 y2 = 29,929

What is the value of a in the equation for the line of best fit (to the nearest whole number)? A B C D 146 152 210 245

Which of the following is a feasible value for a correlation coefficient? A B C D +12 0 12 20

10 The following data relate to material J for last month: Opening stock Purchases: 4th 18th Issues: 13th 25th 300 kg valued at 400 kg for 500 kg for 600 kg 300 kg 3,300 4,800 6,500

Using the LIFO valuation method, what was the value of the closing stock for last month? A B C D 3,300 3,500 3,700 3,900

11 A jobbing company operates a premium bonus scheme for its employees of 75% of the time saved compared with the standard time allowance for a job, at the normal hourly rate. The data relating to Job 1206 completed by an employee is as follows: Allowed time for Job 1206 Time taken to complete Job 1206 Normal hourly rate of pay 4 hours 3 hours 8

What is the total pay of the employee for Job 1206? A B C D 24 30 32 38

12 A paint manufacturer has a number of departments. Each department is located in a separate building on the same factory site. In the mixing department the basic raw materials are mixed together in very large vessels. These are then moved on to the colour adding department where paints of different colours are created in these vessels. In the next department the pouring department the paint is poured from these vessels into litre sized tins. The tins then go on to the labelling department prior to going on to the finished goods department. The following statements relate to the paint manufacturer: (i) The mixing department is a cost centre. (ii) A suitable cost unit for the colour adding department is a litre tin of paint. (iii) The pouring department is a profit centre. Which statement or statements is/are correct? A B C D (i) only (i) and (ii) only (i) and (iii) only (ii) and (iii) only

13 The following statements relate to spreadsheets: (i) (ii) (iii) (iv) A spreadsheet consists of records and files. Most spreadsheets have a facility to allow data within them to be displayed graphically. A spreadsheet could be used to prepare a budgeted profit and loss account. A spreadsheet is the most suitable software for storing large volumes of data.

Which of the above statements are correct? A B C D (i) and (ii) only (i), (iii) and (iv) only (ii) and (iii) only (iii) and (iv) only

[P.T.O.

14 A company uses absorption costing with a predetermined hourly overhead absorption rate. The following situations have both occurred: (i) Actual overhead expenditure exceeded planned expenditure; and (ii) Actual hours worked were less than the planned hours. Which of the following statements is correct? A B C D Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be under absorbed. Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be over absorbed. Both situations would cause overheads to be over absorbed. Both situations would cause overheads to be under absorbed.

15 A company operates a job costing system. Job 812 requires 60 of direct materials, 40 of direct labour and 20 of direct expenses. Direct labour is paid 8 per hour. Production overheads are absorbed at a rate of 16 per direct labour hour and non-production overheads are absorbed at a rate of 60% of prime cost. What is the total cost of Job 812? A B C D 240 260 272 320

16 At the end of manufacturing in Process I, product K can be sold for 10 per litre. Alternatively product K could be further processed into product KK in Process II at an additional cost of 1 per litre input into this process. Process II is an existing process with spare capacity in which a loss of 10% of the input volume occurs. At the end of the further processing, product KK could be sold for 12 per litre. Which of the following statements is correct in respect of 9,000 litres of product K? A B C D Further Further Further Further processing processing processing processing into into into into product product product product KK KK KK KK would would would would increase profits by 9,000. increase profits by 8,100. decrease profits by 900. decrease profits by 1,800.

The following information relates to questions 17 and 18: The standard direct material cost for a product is 50 per unit (125 kg at 4 per kg). Last month the actual amount paid for 45,600 kg of material purchased and used was 173,280 and the direct material usage variance was 15,200 adverse. 17 What was the direct material price variance last month? A B C D 8,800 8,800 9,120 9,120 Adverse Favourable Adverse Favourable

18 What was the actual production last month? A B C D 3,344 3,520 3,952 4,160 units units units units

19 Equipment owned by a company has a net book value of 1,800 and has been idle for some months. It could now be used on a six months contract which is being considered. If not used on this contract, the equipment would be sold now for a net amount of 2,000. After use on the contract, the equipment would have no saleable value and would be dismantled. The cost of dismantling and disposing of it would be 800. What is the total relevant cost of the equipment to the contract? A B C D 1,200 1,800 2,000 2,800

20 A contract is under consideration which requires 800 labour hours to complete. There are 450 hours of spare labour capacity for which the workers are still being paid the normal rate of pay. The remaining hours required for the contract can be found either by overtime working paid at 50% above the normal rate of pay or by diverting labour from the manufacture of product OT. If the contract is undertaken and labour is diverted, then sales of product OT will be lost. Product OT takes seven labour hours per unit to manufacture and makes a contribution of 14 per unit. The normal rate of pay for labour is 8 per hour. What is the total relevant labour cost to the contract? A B C D 3,500 4,200 4,500 4,900

The following information relates to questions 21 and 22: In the following price, revenue and cost functions, which have been established by an organisation for one of its products, Q represents the number of units produced and sold per week: Price ( per unit) = 50 0025Q Marginal revenue ( per unit) = 50 005Q Total weekly cost = 1,000 + 15Q 21 What price per unit should be set in order to maximise weekly profit? A B C D 1500 1750 2500 3250

22 What would the weekly total contribution be if the price of the product was set at 20 per unit? A B C D 2,000 3,000 5,000 6,000

[P.T.O.

23 A company has three shops (R, S and T) to which the following budgeted information relates: Shop R 000 400 100 (60) 40 Shop S 000 500 60 (70) (10) Shop T 000 600 120 (70) 50 Total 000 1,500 280 (200) 80

Sales Contribution Less: Fixed costs Profit/(Loss)

60% of the total fixed costs are general company overheads. These are apportioned to the shops on the basis of sales value. The other fixed costs are specific to each shop and are avoidable if the shop closes down. If shop S is closed down and the sales of the other two shops remained unchanged, what would be the revised budgeted profit for the company? A B C D 50,000 60,000 70,000 90,000

24 Which of the following statements correctly describes the shadow price of a resource in linear programming? A B C D The The The The minimum sum payable for one more unit of the scarce resource. maximum sum payable for one more unit of the scarce resource. increase in total contribution if one more unit of a non-binding constraint is made available. increase in total contribution if one more unit of a binding constraint is made available.

25 The following graph relates to a linear programming problem: y (3)

(2)

(1)

The objective is to maximise total contribution and the dotted line on the graph depicts this function. There are three constraints which are all of the less than or equal type which are depicted on the graph as the three solid lines labelled (1), (2) and (3). At which of the following intersections is total contribution maximised? A B C D Constraint Constraint Constraint Constraint (3) (2) (1) (1) and and and and the x-axis constraint (3) constraint (2) constraint (3) (50 marks)

Section B ALL FIVE questions are compulsory and MUST be attempted. 1 Fairfax Ltd manufactures a single product which has a standard selling price of 22 per unit. It operates a standard marginal costing system. The standard variable production cost is 9 per unit. Budgeted annual production is 360,000 units and budgeted non-production costs of 1,152,000 per annum are all fixed. The following data relate to last month: Budget units 30,000 32,000 Actual units 33,000 34,000

Production Sales

Last month the budgeted profit was 200,000 and the actual total sales revenue was 731,000. Required: (a) Calculate the sales price and sales volume contribution variances for last month showing clearly whether each variance is favourable or adverse. (4 marks) (b) Explain how the two variances calculated in (a) could be interrelated. (3 marks)

(c) Calculate the BUDGETED profit for last month assuming that the company was using absorption costing. (4 marks) (11 marks)

Point Ltd uses the economic order quantity (EOQ) model to establish the reorder quantity for raw material Y. The company holds no buffer stock. Information relating to raw material Y is as follows: Annual usage Purchase price Ordering costs Annual holding costs Required: (a) Calculate: (i) the EOQ for raw material Y, and (ii) the total annual cost of purchasing, ordering and holding stocks of raw material Y. (4 marks) 48,000 units 80 per unit 120 per order 10% of the purchase price

The supplier has offered Point Ltd a discount of 1% on the purchase price if each order placed is for 2,000 units. (b) Calculate the total annual saving to Point Ltd of accepting this offer. (c) List FOUR examples of holding costs. (3 marks) (2 marks) (9 marks)

[P.T.O.

Merryl Ltd manufactures four components (E, F, G and H) which are incorporated into different products made by the company. All the components are manufactured using the same general purpose machinery. The following production cost and machine hour data are available: Variable production cost ( per unit) Fixed production cost ( per unit) General purpose machine hours per unit E 32 6 5 F 27 14 6 G 34 8 7 H 35 16 8

The fixed production costs represent a share of factory-wide costs that have been related to the individual components by using a direct labour hour rate. There are no fixed costs which can be specifically related to individual components. From next month the companys monthly manufacturing requirements are for 2,000 units of each component. The maximum number of machine hours available for component manufacture is 35,000 per month. The company can purchase any quantity of each component from Sergeant Ltd at the following unit prices next month: E 48 Merryl Ltd aims to minimise its monthly costs. Required: (a) Calculate the shortfall in general purpose machine hours next month. (2 marks) F 51 G 55 H 63

(b) Determine how many units of which components should be purchased from Sergeant Ltd next month. (4 marks) (c) Briefly explain THREE other factors that the management of Merryl Ltd should consider before making a final decision to buy in components from Sergeant Ltd for next month. (3 marks) (9 marks)

Yeomen Ltd uses process costing and the FIFO method of valuation. The following information for last month relates to Process G, where all the material is added at the beginning of the process: Opening work-in-progress: Costs incurred: Direct materials 99,600 for 12,500 litres of input Conversion 155,250 8% of input in the period. All losses, which are incurred evenly throughout the process, can be sold for 3 per litre. 10,000 litres were transferred from Process G to the finished goods warehouse. 3,000 litres (45% complete in respect of conversion costs). 2,000 litres (30% complete in respect of conversion costs) valued in total at 24,600 (16,500 for direct materials; 8,100 for conversion).

Normal loss: Actual output: Closing work-in-progress: Required:

(a) Prepare the Process G Account for last month in and litres.

(10 marks)

(b) Identify TWO types of organisation where it would be appropriate to use service (operation) costing. For each one suggest a suitable unit cost measure. (2 marks) (12 marks)

10

Phoebe Ltd manufactures many different products which pass through two production cost centres (P1 and P2). There are also two service cost centres (S1 and S2) in the factory. The following information has been extracted from the budget for the coming year: P1 Allocated and apportioned production overheads Number of employees Total machine hours Total direct labour hours 477,550 30 68,000 4,000 P2 404,250 65 11,400 14,000 S1 132,000 10 S2 96,000 15

Service cost centre S1 costs are reapportioned to all other cost centres based on the number of employees. Service cost centre S2 only does work for P1 and P2 and its costs are reapportioned to these centres in the ratio 5:3 respectively. Required: (a) Calculate: (i) the machine hour absorption rate for cost centre P1, and (ii) the direct labour hour absorption rate for cost centre P2. (6 marks)

(b) Explain the difference between production overheads that have been allocated and those which have been apportioned to cost centres. Explain why some manufacturing companies are able to allocate electric power costs to production cost centres, whereas others can only apportion them. (3 marks) (9 marks)

11

[P.T.O.

Formulae Sheet

End of Question Paper

12