Financial

Information for
Management
PART 1
FRIDAY 6 DECEMBER 2002
QUESTION PAPER
Time allowed 3 hours
This paper is divided into two sections
Section A ALL 25 questions are compulsory and MUST be
answered
Section B ALL FIVE questions are compulsory and MUST be
answered
P
a
p
e
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1
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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 Consider the following graph for total costs and total revenue:
At which point on the above graph is it most likely that profits will be maximised?
A
B
C
D
2 A company has established a budgeted sales revenue for the forthcoming period of 500,000 with an associated
contribution of 275,000. Fixed production costs are 137,500 and fixed selling costs are 27,500.
What is the breakeven sales revenue?
A 75,625
B 90,750
C 250,000
D 300,000
2

Costs/revenue
Units A B C
D
Total revenue
Total costs
3 A company has just purchased a new machine, costing 150,000, for a contract. It has an installation cost of
25,000 and is expected to have a scrap value of 10,000 in five years time. The machine will be depreciated on
a straight line basis over five years.
What is the relevant cost of the machine for the contract?
A 140,000
B 150,000
C 165,000
D 175,000
4 A company uses process costing to value output. During the last month the following information was recorded:
Output: 2,800 kg valued at 750/kg
Normal loss: 300 kg which has a scrap value of 3/kg
Actual loss: 200 kg
What was the value of the input?
A 22,650
B 21,900
C 21,600
D 21,150
3 [P.T.O.
4
5 A company produces three products which have the following details:
Product
I II III
Per unit Per unit Per unit
Direct materials (at 5/kg) 8 kg 5 kg 6 kg
Contribution per unit 35 25 48
Contribution per kg of material 4375 5 8
Demand (excluding special contract) (units) 3,000 5,000 2,000
The company must produce 1,000 units of Product I for a special contract before meeting normal demand.
Unfortunately there are only 35,000 kg of material available.
What is the optimal production plan?
Product
I II III
A 1,000 4,600 2,000
B 1,000 3,000 2,000
C 2,875 2,000
D 3,000 2,200
The following information relates to questions 6 and 7:
A company has established the following budgeted fixed overheads for the forthcoming period:
000 Bases of
apportionment
Heating and Lighting 12 Cubic capacity
Welfare costs 7 Number of employees
Power 42 Kwh usage

Total 61

Other information:
Department 1 Department 2 Maintenance Total
Cubic capacity (m
3
) 6,000 7,500 2,500 16,000
Employees (number) 20 30 6 56
Power
(kwh usage) 35,000 25,000 60,000
Labour hours 28,000 48,500 76,500
Machine hours 40,000 39,000 79,000
The maintenance department splits its time between Department 1 and Department 2 on a ratio of 2:3.
The management accountant has partially completed an allocation and apportionment statement:
Department 1 Department 2 Maintenance

Heat and Light 4,500 5,625 1,875
Welfare 2,500
Power 24,500

Total 31,500

6 What would be the total cost allocated and apportioned to Department 2 excluding the reapportionment of the
maintenance costs?
A 21,250
B 26,875
C 27,625
D 29,500
7 What would be the overhead absorption rate in Department 1 (to 3 decimal places)?
A 0788/machine hour
B 0814/machine hour
C 1125/labour hour
D 1163/labour hour
8 The following statements relate to long-term contracts:
(i) Levels of completion of the contract can be estimated using either costs to date or work certified to date.
(ii) Any anticipated losses should be taken as soon as they are expected.
(iii) If the contract is half complete it is expected that half the expected profit will always be taken.
Which of the above are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
9 The following relate to procedures for materials:
1. Check the goods received note
2. Raise a stores requisition note
3. Update the stores ledger account for the purchase
4. Raise a purchase order
What would be the correct order of the above when in the process of purchasing and using materials?
A 4, 2, 1, 3
B 2, 1, 3, 4
C 4, 1, 3, 2
D 1, 4, 3, 2
5 [P.T.O.
10 A company has a budget for two products A and B as follows:
Product A Product B
Sales (units) 2,000 4,500
Production (units) 1,750 5,000
Labour:
Skilled at 10/hour 2 hours/unit 2 hours/unit
Unskilled at 7/hour 3 hours/unit 4 hours/unit
What is the budgeted cost for unskilled labour for the period?
A 105,000
B 135,000
C 176,750
D 252,500
11 Augustine wishes to take out a loan for 2,000. The interest rate on this loan would be 10% per annum and
Augustine wishes to make equal monthly repayments, comprising interest and principal, over three years starting one
month after the loan is taken out.
What would be the monthly repayment on the loan (to the nearest )?
A 56
B 64
C 66
D 67
12 Which of the following best describes the term equivalent units when using the FIFO method?
A The number of units worked on during a period including the opening and closing stock units.
B The number of whole units worked on during a period ignoring the levels on completion of opening and closing
stock units.
C The number of effective whole units worked on during a period allowing for the levels of completion of opening
and closing stock units.
D The total number of whole units started during a period ignoring the opening stock units as these were started
in the previous period.
13 A company has established the following information for the costs and revenues at an activity level of 500 units:

Direct materials 2,500

Direct labour 5,000
Production overheads 1,000
Selling costs 1,250

Total cost 9,750

Sales revenue 17,500

Profit 7,750

20% of the selling costs and 50% of the production overheads are fixed over all levels of activity.
What would be the profit at an activity level of 1,000 units?
A 15,500
B 16,250
C 16,500
D 17,750
6
14 A company has been reviewing its total costs over the last few periods and has established the following:
Period Sales Total cost
(units)
1 225 2,300
2 150 1,500
3 350 2,800
The company is aware that fixed costs increase by 500 when sales exceed 200 units.
What would be the total cost at a sales level of 180 units?
A 2,120
B 1,800
C 1,695
D 1,620
15 The following statements relate to business objectives:
(i) The short-term objectives of an organisation are described in very general terms.
(ii) Corporate objectives relate to the organisation as a whole.
(iii) It is possible for a division of an organisation to have its own specific objectives.
Which of the above are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
16 The following information relates to prices and units over two different periods:
Prices Units sold
/unit
Time 0 Product 1 75 300
Product 2 50 100
Time 1 Product 1 80 250
Product 2 45 150
What would be the Laspeyre price index?
A 938
B 955
C 1019
D 1036
7 [P.T.O.
17 The statements below relate to the internal rate of return:
The internal rate of return
(i) calculates the highest possible net present value.
(ii) represents the intrinsic discount rate of an investment over its life.
(iii) will always give the investor the correct decision when comparing well behaved projects.
Which of the above are NOT CORRECT?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
The following information relates to questions 18 and 19:
The following variations and trend have been calculated for sales over a period of time using the additive model:
Seasonal
variation
Quarter 1 +25
Quarter 2 10
Quarter 3 30
Quarter 4 ?
Trend +50 per quarter
The last known trend reading was taken in year 3, quarter 3 and was 1,750.
18 What would be the seasonal variation for quarter 4?
A +15
B 15
C +35
D 35
19 What would be the time series value for year 4 quarter 3?
A 1,950
B 1,920
C 1,900
D 1,870
8
20 The following statements relate to labour costs:
There would be an increase in the total cost for labour as a result of
(i) additional labour being employed on a temporary basis.
(ii) a department with spare capacity being made to work more hours.
(iii) a department which is at full capacity switching from the production of one product to another.
Which of the above is/are correct?
A (i) only
B (ii) only
C (iii) only
D (i) and (iii) only
21 A company achieves bulk buying discounts on quantities above a certain level. These discounts are only available for
the units above the specified level and not on all the units purchased.
Which of the following graphs of total purchase cost against units best illustrates the above situation?
22 Mr Manaton has recently won a competition where he has the choice between receiving 5,000 now or an annual
amount forever starting now (i.e. a level perpetuity starting immediately). The interest rate is 8% per annum.
What would be the value of the annual perpetuity to the nearest ?
A 370
B 500
C 400
D 620
23 When considering the economic batch quantity model what does (1D/R) represent?
A The rate at which production decreases.
B The rate at which production increases.
C The rate at which stock decreases.
D The rate at which stock increases.
9 [P.T.O.
units
A B
C D
units
units
units


24 A company has calculated its margin of safety as 20% on budgeted sales and budgeted sales are 5,000 units per
month.
What would be the budgeted fixed costs if the budgeted contribution was 25 per unit?
A 100,000
B 125,000
C 150,000
D 160,000
25 A company is reviewing actual performance to budget to see where there are differences. The following standard
information is relevant:

per unit
Selling price 50

Direct materials 4
Direct labour 16
Fixed production overheads 5
Variable production overheads 10
Fixed selling costs 1
Variable selling cost 1

Total costs 37

Budgeted sales units 3,000

Actual sales units 3,500
What was the favourable sales volume variance using marginal costing?
A 9,500
B 7,500
C 7,000
D 6,500
(50 marks)
10
Section B ALL FIVE questions are compulsory and MUST be attempted
1 A company is seeking to establish whether there is a linear relationship between the level of advertising expenditure
and the subsequent sales revenue generated.
Figures for the last eight months are as follows:
Month Advertising Sales
Expenditure Revenue
000 000
1 265 300
2 425 450
3 100 175
4 525 460
5 475 445
6 195 250
7 350 430
8 300 385

Total 2635 2895

Further information is available as follows:
(Advertising Expenditure Sales Revenue) = 1,055875
(Advertising Expenditure)
2
= 1012625
(Sales Revenue)
2
= 11,28375
All of the above are given in million.
Required:
(a) On a suitable graph plot advertising expenditure against sales revenue or vice versa as appropriate. Explain
your choice of axes. (5 marks)
(b) Using regression analysis calculate a line of best fit. Plot this on your graph from (a). (5 marks)
(10 marks)
2 Firlands Limited, a retail outlet, is faced with a decision regarding whether or not to expand and build small or large
premises at a prime location. Small premises would cost 300,000 to build and large premises would cost
550,000.
Regardless of the type of premises built, if high demand exists then the net income is expected to be 1,500,000.
Alternatively, if low demand exists, then net income is expected to be 600,000.
If large premises are built then the probability of high demand is 075. If the smaller premises are built then the
probability of high demand falls to 06.
Firlands has the option of undertaking a survey costing 50,000. The survey predicts whether there is likely to be a
good or bad response to the size of the premises. The likelihood of there being a good response, from previous
surveys, has been estimated at 08.
If the survey indicates a good response then the company will build the large premises. If the survey does give a good
result then the probability that there will be high demand from the large premises increases to 095.
If the survey indicates a bad response then the company will abandon all expansion plans.
Required:
Using decision tree analysis, establish the best course of action for Firlands Limited.
(10 marks)
11 [P.T.O.
3 Oathall Limited, which manufactures a single product, is considering whether to use marginal or absorption costing
to report its budgeted profit in its management accounts.
The following information is available:
/unit
Direct materials 4
Direct labour 15

19

Selling price 50

Fixed production overheads are budgeted to be 300,000 per month and are absorbed on an activity level of
100,000 units per month.
For the month in question, sales are expected to be 100,000 units although production units will be 120,000 units.
Fixed selling costs of 150,000 per month will need to be included in the budget as will the variable selling costs of
2 per unit.
There are no opening stocks.
Required:
(a) Prepare the budgeted profit and loss account for a month for Oathall Limited using absorption costing. Clearly
show the valuation of any stock figures.
(6 marks)
(b) Prepare the budgeted profit and loss account for a month for Oathall Limited using marginal costing. Clearly
show the valuation of any stock figures.
(4 marks)
(10 marks)
4 Swainsthorpe Limited is a small old-fashioned company. They have a very simple manual accounting system to record
all of the information of the business.
A bookkeeper comes in once a week to make all the relevant entries to the various manual ledgers. Complete stock-
takes take place once a month, during which the business shuts down for the day, and the information from the
stock-take is used to check that the store bin cards are correct. The stock-take information is also used to prepare a
profit and loss account and balance sheet for the owners of the business.
The business has just been taken over by Ms Swainsthorpe who wishes to change the manual accounting system to
a computerised management information system.
Required:
Prepare a report for Ms Swainsthorpe that:
(a) gives three advantages and three disadvantages of introducing a computer system;
(b) explains what a management information system is and what Ms Swainsthorpe should hope to be able to
use it for in general terms;
(c) comments critically on the current stock-take procedures and explains how the system could be improved.
(10 marks)
12
13 [P.T.O.
5 South Plc has two divisions, A and B, whose respective performances are under review.
Division A is currently earning a profit of 35,000 and has net assets of 150,000.
Division B currently earns a profit of 70,000 with net assets of 325,000.
South Plc has a current cost of capital of 15%.
Required:
(a) Using the information above, calculate the return on investment and residual income figures for the two
divisions under review and comment on your results. (5 marks)
(b) State which method of performance evaluation (i.e. return on investment or residual income) would be more
useful when comparing divisional performance and why. (2 marks)
(c) List three general aspects of performance measures that would be appropriate for a service sector company.
(3 marks)
(10 marks)
14
Formulae Sheet
15
Present value cf 1 i.e. (1 + U)
Q
Where r ~ cisccunt rate
n ~ number cf periccs until payment
'LVFRXQW UDWH U
3HULRGV
(n) 1 2 3 4 5 6 7 8 9 10
1 0990 0980 0971 0962 0952 0943 0935 0926 0917 0909 1
2 0980 0961 0943 0925 0907 0890 0873 0857 0842 0826 2
3 0971 0942 0915 0889 0864 0840 0816 0794 0772 0751 3
4 0961 0924 0888 0855 0823 0792 0763 0735 0708 0683 4
5 0951 0906 0863 0822 0784 0747 0713 0681 0650 0621 5
6 0942 0888 0837 0790 0746 0705 0666 0630 0596 0564 6
7 0933 0871 0813 0760 0711 0665 0623 0583 0547 0513 7
8 0923 0853 0789 0731 0677 0627 0582 0540 0502 0467 8
9 0914 0837 0766 0703 0645 0592 0544 0500 0460 0424 9
10 0905 0820 0744 0676 0614 0558 0508 0463 0422 0386 10
11 0896 0804 0722 0650 0585 0527 0475 0429 0388 0350 11
12 0887 0788 0701 0625 0557 0497 0444 0397 0356 0319 12
13 0879 0773 0681 0601 0530 0469 0415 0368 0326 0290 13
14 0870 0758 0661 0577 0505 0442 0388 0340 0299 0263 14
15 0861 0743 0642 0555 0481 0417 0362 0315 0275 0239 15
(n) 11 12 13 14 15 16 17 18 19 20
1 0901 0893 0885 0877 0870 0862 0855 0847 0840 0833 1
2 0812 0797 0783 0769 0756 0743 0731 0718 0706 0694 2
3 0731 0712 0693 0675 0658 0641 0624 0609 0593 0579 3
4 0659 0636 0613 0592 0572 0552 0534 0516 0499 0482 4
5 0593 0567 0543 0519 0497 0476 0456 0437 0419 0402 5
6 0535 0507 0480 0456 0432 0410 0390 0370 0352 0335 6
7 0482 0452 0425 0400 0376 0354 0333 0314 0296 0279 7
8 0434 0404 0376 0351 0327 0305 0285 0266 0249 0233 8
9 0391 0361 0333 0308 0284 0263 0243 0225 0209 0194 9
10 0352 0322 0295 0270 0247 0227 0208 0191 0176 0162 10
11 0317 0287 0261 0237 0215 0195 0178 0162 0148 0135 11
12 0286 0257 0231 0208 0187 0168 0152 0137 0124 0112 12
13 0258 0229 0204 0182 0163 0145 0130 0116 0104 0093 13
14 0232 0205 0181 0160 0141 0125 0111 0099 0088 0078 14
15 0209 0183 0160 0140 0123 0108 0095 0084 0074 0065 15
Present Value Table
[P.T.O.
Present value cf an annuity cf 1 i.e.
Where r ~ cisccunt rate
n ~ number cf periccs
'LVFRXQW UDWH U
3HULRGV
(n) 1 2 3 4 5 6 7 8 9 10
1 0990 0980 0971 0962 0952 0943 0935 0926 0917 0909 1
2 1970 1942 1913 1886 1859 1833 1808 1783 1759 1736 2
3 2941 2884 2829 2775 2723 2673 2624 2577 2531 2487 3
4 3902 3808 3717 3630 3546 3465 3387 3312 3240 3170 4
5 4853 4713 4580 4452 4329 4212 4100 3993 3890 3791 5
6 5795 5601 5417 5242 5076 4917 4767 4623 4486 4355 6
7 6728 6472 6230 6002 5786 5582 5389 5206 5033 4868 7
8 7652 7325 7020 6733 6463 6210 5971 5747 5535 5335 8
9 8566 8162 7786 7435 7108 6802 6515 6247 5995 5759 9
10 9471 8983 8530 8111 7722 7360 7024 6710 6418 6145 10
11 1037 9787 9253 8760 8306 7887 7499 7139 6805 6495 11
12 1126 1058 9954 9385 8863 8384 7943 7536 7161 6814 12
13 1213 1135 1063 9986 9394 8853 8358 7904 7487 7103 13
14 1300 1211 1130 1056 9899 9295 8745 8244 7786 7367 14
15 1387 1285 1194 1112 1038 9712 9108 8559 8061 7606 15
(n) 11 12 13 14 15 16 17 18 19 20
1 0901 0893 0885 0877 0870 0862 0855 0847 0840 0833 1
2 1713 1690 1668 1647 1626 1605 1585 1566 1547 1528 2
3 2444 2402 2361 2322 2283 2246 2210 2174 2140 2106 3
4 3102 3037 2974 2914 2855 2798 2743 2690 2639 2589 4
5 3696 3605 3517 3433 3352 3274 3199 3127 3058 2991 5
6 4231 4111 3998 3889 3784 3685 3589 3498 3410 3326 6
7 4712 4564 4423 4288 4160 4039 3922 3812 3706 3605 7
8 5146 4968 4799 4639 4487 4344 4207 4078 3954 3837 8
9 5537 5328 5132 4946 4772 4607 4451 4303 4163 4031 9
10 5889 5650 5426 5216 5019 4833 4659 4494 4339 4192 10
11 6207 5938 5687 5453 5234 5029 4836 4656 4486 4327 11
12 6492 6194 5918 5660 5421 5197 4988 4793 4611 4439 12
13 6750 6424 6122 5842 5583 5342 5118 4910 4715 4533 13
14 6982 6628 6302 6002 5724 5468 5229 5008 4802 4611 14
15 7191 6811 6462 6142 5847 5575 5324 5092 4876 4675 15
1 (1 U)
Q

U
Annuity Table
End of Question Paper
16