Mark Scheme Summer 2007

GCE

GCE Accounting (8011/9011)

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Summer 2007 All the material in this publication is copyright © Edexcel Ltd 2007

Contents 6001 Unit 1 Mark Scheme……………………………………………04 6002 Unit 2 Mark Scheme……………………………………………20

8011-9011 GCE Accounting Summer 2007

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three for Investment income 20 +40 60 five or 8245) 9 305 1 200 310 1 610 600 2 000 2 120 1 650 250 9 740 435 less Mortgage interest 1 100+100 Insurance 320 +25 – 35 Electricity 1 410 -150 +350 Accounting fees Redecoration Depreciation – premises .70 -420 +95 -1 080 7 165 (one for three.fixtures Visiting speakers Deficit 8011-9011 GCE Accounting Summer 2007 4 .Unit 1 Mark Scheme Question 1 (a) Nutwell Book Club – Book trading account for the year ended 30 April 2007 £ £ Book sales 19 980 less Opening stock of books 1 650 Book purchases 16 700-2 750+4 400 18 350 (one for each correct adjustment) 20 000 Closing stock of books 2 100 Cost of sales 17 900 Profit on book sales 2 080 Income and expenditure account £ £ Profit on book sales 2 080 Subscriptions 8 100 +540 . two for four.

Revenue (4) 8011-9011 GCE Accounting Summer 2007 5 . this is revenue expenditure because there is no long term addition to the premises and therefore the whole of the expenditure will be charged to the year of expenditure and the accruals concept will not apply. In the case of a premises extension this is capital expenditure and the benefit will be received for a number of years and therefore the cost should be apportioned to those years by matching only a small element of the cost to each year. Capital In the case of the redecoration of the premises.Balance sheet as at 30 April 2007 £ Fixed assets Premises 98 000 + 5 880 Fixtures and fittings Current assets Book stock Investment account Subs in arrears Insurance prepaid Investment income due Bank Current liabilities Book creditors Building creditors Subs in advance 420 + 1 080 Electricity accrued Mortgage interest accrued Net current assets less Mortgage Accumulated fund Deficit 103 880 9 350 £ 113 230 2 100 2 000 95 35 10 6 445 10 685 4 400 8 000 1 500 350 100 14 350 (3 665) (18 000) 91 565 92 000 (435) 91 565 (16) (b) Market price is different from cost (2) (c) The accrual (matching) concept apportions the value of capital items which will be used for more than one accounting period to those accounting periods on the basis that cost is matched to the benefit gained.

Disadvantages: Cash received in single payment will be low to tempt members to pay for ten years in a single payment.(d) Evaluation Valid points may include: • • • • • • Benefits: Cash received early May result in lower borrowings and savings in interest Members maintained for 10 years No collection costs for 10 years. Liability to provide services long after the cash has been spent. For each benefit or disadvantage x 3 MAX two benefits or disadvantages For decision if supported by rationale (4) (Total 26 marks) 8011-9011 GCE Accounting Summer 2007 6 .

Question 2 (a) Eclipse manufacturing account for the year ended 30 April 2007 Regular Premium Total £ £ £ Opening stock of raw materials 48 000 Purchases of raw materials 176 000 224 000 Closing stock of raw material 49 000 Raw materials consumed 100 000 75 000 175 000 or 4x if no workings above Direct labour 88 000 102 000 190 000 PRIME COST 188 000 177 000 365 000 OF if RM + DL Factory overheads: Management salaries Premises and general running Depreciation W.I.P at start at end MANUFACTURING/PRODUTION COST 309 600 334 000 643 600 OF 30 000 60 000 32 000 122 000 8 600 (9 000) (400) 36 000 80 000 41 500 157 500 10 500 (11 000) (500) 66 000 140 000 73 500 279 500 19 100 (20 000) (900) one each one each Balance b/d Creditor/Bank £ 200 000 80 000 280 000 Machinery account Disposal balance c/d £ 50 000 230 000 280 000 Disposal Balance c/d Machinery – provision for depreciation account £ £ 12 500 Balance b/d 100 000 129 000 Profit and loss 41 500 141 500 141 500 Disposal account Machinery £ 50 000 Depreciation Creditor Loss £ 12 500 20 000 17 500 50 000 OF if 3 other items 50 000 included in account (16) 8011-9011 GCE Accounting Summer 2007 7 .

e. • Total costs of ownership will increase using straight line as maintenance costs rise as the asset becomes older for recognition x 3 ( MAX 2 benefits or disadvantages). per point for recognition plus per point for development x 3 (6) (c) Evaluation: Valid points may include: Benefits: • Straight line is simpler to operate.(b) Characteristics: • Expense is a fixed cost or contains a high fixed cost element. (4) (Total 26 marks) 8011-9011 GCE Accounting Summer 2007 8 .g. • Does not distort profit with higher levels of depreciation in early years.. rent. • Cost has to be absorbed into product cost. • Gives equal depreciation for equal benefit received in each year. Disadvantages: • Machinery will lose more value in early years of ownership than later years. • Expense does not vary with levels of production. • Balance sheet values may not be in line with market value of machinery. • Expense is an indirect cost and therefore cannot be directly related to a product. for decision based upon a valid rationale.

Discount received (850 – 20) 830 Balance c/d 21 000 55 980 8011-9011 GCE Accounting Summer 2007 9 .Question 3 (a) Journal Purchases Office stationery Returns inwards Debtor Bank Suspense Rent receivable Discount received Creditor/supplier Debtors Sales Bad debts Debtor (b) Purchases ledger control account Returns outward Bank £ 950 33 200 ( Balance b/d Purchases (29 470+1 200) OF) 55 980 Sales ledger control account Balance b/d Sales (68 650 + 4 000) Dishonoured cheques £ 36 400 72 650 1 450 110 500 Returns in (900 + 2 800) Bad debts (2 100 + 1 500) Bank Balance c/d £ 3 700 3 600 63 000 40 200 110 500 one each adjustment ( OF) (10) £ Mark number only 25 310 30 670 one each adjustment Dr £ 1 200 Cr £ Account + entry 1 200 2 800 2 800 400 122 522 20 20 4 000 4 000 1 500 1 500 (8) Account one entry one .

for decision based upon a valid rationale. • Only records the position as at a point in time.g debit sales credit the debtor.(c) Limitations of trial balance: • Does not reveal errors if one account has been debited and another account credited with the same value. • Provides a summarised position for many creditors and debtors which may contain many errors. • Act as a protection against fraud. • Reveal errors such as incorrect addition Disadvantages • The control account will not identify errors in individual accounts. (4) (Total 26 marks) 8011-9011 GCE Accounting Summer 2007 10 . • Errors not revealed by the trial balance will not be revealed by the control accounts. • Considerable additional work will be required to pinpoint errors. e. • If transaction omitted from the accounts the trial balance will not record the error.g motor vehicles instead of motor expenses. for recognition x 3 ( MAX 2 benefits or disadvantages). per limitation x 2 Errors of principle – One account has been correctly posted but the other account is incorrect because the wrong class of account has been posted e. Error of reversal – Both accounts have been incorrectly posted with the debit entry credited and the credit entry debited. (4) (d) Valid points may include: Benefits of control accounts: • Control accounts act as a check against the total of debtors or creditors.

vehicle Profit on realisation: Bank Gill 33 000 Hameed 22 000 240 400 Capital accounts Realisation Bank Hameed £ 30 700 93 000 71 300 93 000 102 000 Gill £ Balance b/d Realisation Gill £ 60 000 33 000 93 000 Hameed £ 80 000 22 000 102 000 9 700 30 700 200 000 _________ 240 400 OF Bank account Balance b/d Solar Systems £ 4 300 200 000 204 300 Loan Capital: Gill Hameed £ 40 000 93 000 71 300 204 300 (8) (b) (i) The balance sheet will record the values of the tangible assets. Value of business above not value of tangible assets Examples of goodwill could: • Location of the business • Established customers • Product being offered x 2 for examples (ii) • Asset that becomes realised on sale of business • To enable the asset to be split between parties x2 (6) 8011-9011 GCE Accounting Summer 2007 11 .Question 4 (a) Realisation Account £ £ Fixed assets 127 000 Current liabilities Current assets 58 400 Hameed . Solar Systems will be prepared to pay more than the net value of the tangible assets if they believe that there are intangible assets known as goodwill.

Disadvantages: • Generally requires legal services to prepare. benefit disadvantages (2) (Total 16 marks) 8011-9011 GCE Accounting Summer 2007 12 . • Clear agreement of how profit will be apportioned • Less room for disputes at a later date.(c) Valid points may include: Benefits: • Clear statement of how the partners will work together and their responsibilities. • If not prepared provisions of 1890 Partnership Act imposed.

6:1 125 60 = 0.17 per £1 230 of sales or 46% 140 = 2:1 70 95 = 1. Kalid Minimal stock available.36:1 70 Kalid 160 x 100 = 32% 500 340 20 = 17 times 500 = £2.50 per £1 200 of sales 75 = 0. The profit is then measured against a yardstick of sales or capital employed to generate that profit to ensure its’ sufficiency. More/newer fixed assets Less on expenses service may be slower. for recognition x 2 Creditor Good current ratio Good acid test ratio Funded by long term debt Low risk to provide credit for recognition x 2 (4) Very poor current ratio Poor acid test ratio Funded by short term creditors High risk to provide credit. (2) (c) Customer Jameel More stock in evidence. No OF 8011-9011 GCE Accounting Summer 2007 13 .48:1 125 or 40% (8) (b) Profitability is the ability to make an surplus of income as measured by sales turnover less costs/expenditure as measured by the total costs/expenditure incurred during an accounting period. Fewer/older fixed assets More on expenses service May be quicker.Question 5 (a) Gross profit to sales % Stock turnover Fixed assets to sales Current ratio Liquid ( acid test) Jameel 180 x 100 =36% 500 320 = 8 times 40 500 =£2.

• Does not take account of non financial factors e.g probability of debtors paying.(d) Valid points may include: Benefits • Provides a yardstick against accepted standards e.g skill of workforce or management. Disadvantages • Does not take account of state of assets e. • A quantitative objective measure.g current ratio • Provides a yardstick against other similar businesses. Benefit Disadvantage (2) (Total 16 marks) 8011-9011 GCE Accounting Summer 2007 14 .

Spare capacity Digger currently used only 120 days out of approx 250 working days available.Question 6 (a) Fixed cost – A cost which tends to be unaffected by variations in volume of output. for recignition x 2 (4) £ per day 50 25 40 50 165 120 285 e. The rate charged for Greg of an additional £100 (350-250) seems low compared to the above additional cost of £120 (285-165) for recognition x 2 (ii) • • • • Vary his pricing to reflect actual cost. Reduce cost of digger hire but increase operator cost. By reducing costs overall increase demand and spread fixed costs over greater level of activity. (4) OF if all costs present OF if all costs present 8011-9011 GCE Accounting Summer 2007 15 .g business rent or rates. e.g telephone. Semi fixed cost – A cost which is partly fixed and partly variable (b) Cost of mini digger £ Depreciation 6 000 Maintenance 3 000 Labour 2 hrs @ £20 Gen overhead 6 000 Daily cost of mini digger Cost of Greg Labour 8 – 2 hours @ £20 Daily cost inc Greg Alternative: Depreciation Maintenance Salary Gen overhead ÷ Per Day Digger 2 500 1 250 2 000 2 500 8 250 50 165 Digger + Driver 3 500 1 750 40 11 200 3 500 19 950 70 285 (6) (c) (i) • • The rate charged of £250 per day for the digger alone. compared to a cost including the time of Greg seems high.

• Link costing to financial accounts. for benefit disadvantage (2) (Total 16 marks) for benefit for a 8011-9011 GCE Accounting Summer 2007 16 .(d) Valid points may include: Benefits: • Calculate current costs accurately. Disadvantages: • Cost of employing an accountant disadvantage • Personal time commitment in dealing with accountant. • Project impact of different levels of activity.

The materiality concept attempts to write off expenses in the period in which they are paid unless in so doing this would distort the calculation of profit. (MAX 4) Profit and loss Balance c/d Balance b/d Suspense Profit and loss £ 475 475 745 475 500 2 670 } Could be 2170 8011-9011 GCE Accounting Summer 2007 17 . Therefore. for small expenditures which will be used up over more than one accounting period.Question 7 (a) Provision for doubtful debts account £ £ 170 Balance b/d 1 120 950 1 120 1 120 Rent receivable account £ 475 Bank 270 Bank 1 925 Bank Bank Balance c/d 2 670 Telephone account £ Balance b/d 480 Western telephones 2 060 Blue phones 2 000 Balance c/d 320 4 860 Balance b/d Profit and loss Balance c/d £ 160 4 450 250 4 860 (10) (b) (i) A provision for doubtful debts prudently withholds profit where debtors payment is in doubt. the concepts are in conflict. The value of debtors in the balance sheet is reduced by the value of the provision therefore not overstating the projected value (i) The accruals concept attempts to match all expenditure to the accounting period that it will be used up.

for decision based upon a valid rationale.(c) Valid points may include: Benefits • Provides a framework for preparation. • Profit calculations can be relied upon. • Requires professional skills to implement. (2) (Total 16 marks) 8011-9011 GCE Accounting Summer 2007 18 . Disadvantages • Concepts can be in conflict with each other. • Accounts of different businesses can be compared. each point x 3 ( MAX 2 benefits or disadvantages).

(b) (c) (d) 6.(b) (c) TOTAL % PAPER % SPEC 32 2 3 2 2 4 2 2 1 2 2 AO1 4 2 2 4 4 3 4 2 3 2 4 2 2 2 2 4 2 50 35 20 AO2 7 2 4 7 2 5 4 3 3 4 3 2 2 1 2 2 2 2 4 2 44 32 34 2 2 28 19 1 20 14 100 AO3 5 AO4 Total 16 2 4 4 16 6 4 8 10 4 4 8 6 2 8 2 4 2 4 6 4 2 10 4 2 142 100 8011-9011 GCE Accounting Summer 2007 19 . (a) (b) (c) (d) 7 (a) .ASSESSMENT GRID Question 1 (a) (b) (c) (d) 2 (a) (b) (c) 3 (a) (b) (c) (d) 4 (a) (b) (c) 5 (a) .

Unit 2 Mark Scheme Question 1 (a) (i) Profit and Loss Appropriation Ordinary Share Dividend Ordinary Share Dividend Bank (ii) Profit and Loss Appropriation Preference Share Dividend (iii) Profit and Loss Appropriation General Reserve (iv) Profit and Loss Appropriation Provision for Licence Fee (v) Ordinary Shares of £1 Bank Profit and Loss Appropriation Capital Redemption Reserve (vi) Trading & Profit and Loss Stock (b) Authorised Share Capital Ordinary Shares of £1 100 000 8% £1 Preference Shares Issued Share Capital Ordinary Shares of £1 8% £1 Preference Shares Capital Redemption Reserve Profit and Loss Reserve General Reserve Debit 20 000 Credit 20 000 20 000 20 000 8 800 for 8800 50 000 50 000 120 000 120 000 100 000 100 000 100 000 100 000 8 000 8 000 9 marks 800 000 100 000 400 000 80 000 100 000 128 200 70 000 C 8 800 } } Total Shareholders Interest 778 200 o/f 7 marks 8011-9011 GCE Accounting Summer 2007 20 .

2 x 100 = 35.2 + 70 o/f = 380 1078.4% 4 marks 8011-9011 GCE Accounting Summer 2007 21 .(c) Calculation of Gearing Ratio Gearing Ratio = Debt_____ Debt + Equity x 100 = ___________300 + 80_____ _____ x 100 300 + 80 + 400 + 100 + 128.7% Using a different formula: Debt Equity = 380 x 100 698.2 % o/f Also accept: If Licence Fee transferred to Reserve: Debt_____ Debt + Equity = 380 x 100 1198.2 = 31.2 = 54.2 = 46.42% If Licence Fee Transferred to Reserve: Debt Equity = 380 x 100 818.

(d) Evaluation of redeeming ordinary shares . Answers may include : Case For : Leaves a gearing ratio of 35.2 % o/f which is medium/ low / not over 50% Redemption will improve the figure for ROCE or EPS Future dividends / cash leaving the company may be reduced. 6 marks Total 26 marks 8011-9011 GCE Accounting Summer 2007 22 .2 % could have been lower without redemption Company may not have surplus funds / excess working capital etc so may not afford/ be in a position to redeem May upset shareholders who receive lower future dividends overall as they have less shares √ Or who have stayed loyal when times were leaner eg last year The funds used to redeem may be needed for company growth etc Maximum for arguing one side only = 4 marks Conclusion Should reflect / relate to above. But shareholders probably receive higher dividends per share in the future which may keep them happy Company may have surplus funds / excess working capital etc so may afford / be in a position to redeem Case Against : Leaves a gearing ratio of 35.

Question 2 Profit and Loss Account for Achilles plc for Year Ended 31st March 2007 Turnover Cost of sales Gross profit Distribution costs Administrative expenses Other operating income Other investment income Interest payable 1850000 589500 1260500 431240 221250 1850 11650 25000 C C C o/f o/f } W1 Cost of Sales Direct Labour Direct materials Research + Devlmnt Factory Deprctn Stock Adjust W2 Distribution Costs Advertising Commission on sales Shop Rent Motor Lorries Depctn Lorry Drivers Wages Shop staff wages W3Administrative Expenses Bad Debts Written Off Legal Fees Office staff Managing director Finance Director 270000 195000 49000 80000 -4500 589500 18240 8500 84000 67500 65000 188000 431240 } 3 } } 4 250 14000 112000 52000 43000 221250 } } 2 Profit on ordinary activities before tax Corporation tax Profit on ordinary activities after tax 596510 100000 496510 7 marks o/f C W4 Interest Payable o/f Bank Overdraft Debenture TOTAL 3400 21600 25000 11 marks 18 Marks 2 8011-9011 GCE Accounting Summer 2007 23 .

Question 2 (b) (i) The sports book shops should be shown as a Discontinued Operation in the accounts next year. This may help future potential investors / shareholders / creditors etc with decision making. 2 marks (b) (ii) Benefits This will benefit users of accounts because they can see that profits or losses from the Discontinued Operations will not be expected to be realised in the future. Maximum for arguing only one side 4 marks Evaluation Should conclude that it is beneficial to show Continued and Discontinued Activities. This allows reader to predict more accurately future expected performance. Disadvantages Adds more figures and details to the accounts so makes them more difficult to understand. All revenues and expenses relating to these should be shown separately. 12 x = 6 marks TOTAL 26 Marks 8011-9011 GCE Accounting Summer 2007 24 . Should be beneficial if required to be shown by Accounting Standards / FRS3.

Question 3 (a) (i) Calculation of Purchase price for The Look Buildings Machinery Fixtures and Fittings Vehicles Stock Debtors Bank Cash Goodwill Creditors Purchase Price (a) (ii) Purchase Price £567 000 £1.25 each) Shareholders Account Share Capital Share Premium Profit & Loss Account Realisation Account (Profit on Realisation) 300 50 204 210 } o/f 764 764 4 marks 8011-9011 GCE Accounting Summer 2007 25 .25 (b) Buildings Fixtures and Fittings Vehicles Stock Bank Cash Sundry Shareholders (Profit on Realisation) Femme Fatalle Realisation Account 400 Creditors 80 Feeling Good 30 (Purchase Consideration) 25 37 28 o/f 210 The Look 450 40 22 45 80 26 6 3 40 } } (145) 567 } o/f 4 marks = 453 600 shares 1 mark } 46 764 810 810 4 marks Femme Fatalle Sundry Feeling Good 764 (Purchase Consideration 611 200 shares at £1.

We do not know what the market price of Feeling Good shares are likely to be. The Look may be a drain on the liquid resources of the new company.2 1331 7 marks (d) Evaluation of merger Possible answers could include: For Merger Shareholders in Femme Fatalle receive a “profit” on realisation of £210 000√ also Goodwill valuation of £75 000 New company should enjoy benefits of vertical integration as in same line of business. Also liquidity position is worrying as they appear to have no working capital before adjustments . We do not know the market price of the Femme Fatalle shares. New company could enjoy economies of scale eg bulk buying Against Merger Dilution of ownership/voting power The Look do not appear to be in a healthy financial state. (Maximum of 4 marks for argument if candidate argues only one side of argument) Evaluation Should conclude and relate to points made above. Original balance sheet appears to have many assets overvalued √.8 266. 6 marks Total 26 marks 8011-9011 GCE Accounting Summer 2007 26 .(c) Balance sheet of Feeling Good Limited as at April 1st 2007 Buildings Machinery Fixtures and Fittings Vehicles Goodwill Fixed Assets Total Stock Debtors Bank Cash Current Assets Total Creditors Working capital Net Assets Ordinary Shares of £1 each Share Premium Capital Employed Feeling Good Limited 1010 40 82 75 115 1322 100 26 43 31 200 191 9 } } } 1331 1064. especially with the large amount of creditors to pay.

000 £1.650.9 0.000 £324.656.116.876.000 £1.8 0.000 o/f 12 4 years 7.980.000 £1.876.000 } } Payback is after 4 years £1.000 £1.Question 4 Years 1 Normal Years 1 Special Year 2 Year 3 Normal Year 3 Special Year 4 Year 5 Depreciation Running Expenses Year Year Year Year Year 1 2 3 4 5 23 3 23 3 5000 5000 5000 5000 0.132.760.000 £104.566.000 o/f 8000000 400000 1650000 1650000 1980000 1980000 1980000 100000 7900000 25 £84.000 Totals £1.876.8 0.000 £104.884.980.000 £104.876.000 £1.008.980.566.000 £84.000 £1.000 £270.000 £5.000 £1.000 £316.9 £15 £20 £18 £24 £1.000 £1.000 £8.000 £6.000 £1.380.000 £3.000 £1.000 £1.650.566.14 months o/f 12 Marks 8011-9011 GCE Accounting Summer 2007 27 .000 £1.

4 marks 8011-9011 GCE Accounting Summer 2007 28 . Question where the £8 million is coming from. (Could be conclusion) There are also years after the payback period which should be profitable as well. so invest. Against Investment Figures are only estimates. Figures may depend on how well the team is doing which is most important factor. or training facilities etc Pay back does not take into account the falling value of money over time unlike NPV Maximum of 2 marks if candidate argues for only one side Conclusion whether to invest or not and should relate to points made above. Will this huge outlay mean other areas of the club have to suffer shortage of funds eg team.Question 4 b) For Investment Pay back is after 4 years and 7 months which is within the five year period the directors require.

each worker may have to work less hours (ie 35) hours per week If workers are skilled they may have to be “carried” until production increases If a way can be found to increase production in the long run the 6 workers could be reinstated hours increased 4 marks (Total 16 marks) or 8011-9011 GCE Accounting Summer 2007 29 .5 £8 3 150 75 50 100 £400 L £24 £9 £15 1.5 75 L 200 1.5 300 M 100 2.£2 500 = £2 250 2 marks (d) Total labour hours needed for optimum production J K L Lab Hours 300 100 300 M 0 Total 700 Therefore only 700 = 14 direct labour workers required 50 Therefore 6 direct labour workers not required could be laid off.5 £10 1 200 300 300 200 £3000 M £15 £12 £3 1 £3 4√ 100 100 0 0 0 6 marks o/f (c) Total contribution = £4 750 .Fixed Costs £2 500 = Profit for week £2250 Also accept: (Sales – Variable Costs) – Fixed Costs = Profit (£8 550 .£3800) . Or.5 250 1 100 TOTAL Sales Possible Labour Hours per Item Total Labour Hours Machine Hours per item Total Machine Hours 1000 Not >1000 so Not LF > 500 625 so LF 4 marks (b) Product Selling Price Variable Costs Contribution per unit Machine hours Contribution per machine hour Rank Order Sales Possible Machine hours required Optimum production hours Optimum production Contribution J £19 £10 £9 1 £9 2 150 150 150 150 £1350 K £9 £5 £4 0.5 300 1.Question 5 (a) Identifying Limiting factor J 150 2 300 1 150 K 150 1 150 0.

insurance for 2 examples. Increases in demand may mean firm does not have enough stock to meet demand Maximum of 2 marks if argument applies only one side. and / or production has to stop if part/component.Question 6 (a) Jupiter Neptune Saturn Total Sales Budget for 6 months July to December July Aug Sept Oct Nov 3 3 3 3 6 2 2 2 2 4 4 4 4 4 6 9 9 9 9 16 Dec 12 8 9 29 o/f 4 marks (b) Jupiter Neptune Saturn Total Production Budget for 6 months July to December July Aug Sept Oct Nov 3 6 6 6 6 2 2 4 5 5 4 5 6 6 6 9 13 16 17 17 Dec 3 2 4 9 o/f Apply pro rata for Neptune and Saturn ie need 3 correct for one 6 marks (c) Total Stock Budget for Chocolate Crumb for 6 months July to December July Aug Sept Oct Nov Dec 18 26 32 34 34 18 o/f Apply o/f rule 2 marks (d) Evaluation of holding minimum stock policy. security. Conclusion / Evaluation Should relate to points made above 4 marks Total 16 marks Apply pro rata ie need 3 correct for one 8011-9011 GCE Accounting Summer 2007 30 . electricity. For Reduces costs of holding stock. Helps cash flow situation as little cash tied up in stock. Unwanted stock may deteriorate or go past sell by date etc or stays fresh Against Possibility of running out of stock which may mean sales are lost and profit. Eg rent.

Before flexing the budget.3% error rate Variance of only 1 188 adverse on labour ie accurate . or labour efficiency (need any 2) Poorly Set Production was 20% more than planned – so not well set.Actual price ) x Actual Quantity = (0.0.Question 7 (a) Production Direct Materials Direct Labour Fixed Overheads Total Cost of Production Budget 6 600 21 120 54 780 2 300 78 200 o/f 3 marks (b) (i) Materials Price variance = (Standard Price .24) x 13 200 = £1 188 Adverse 3 marks (c) Possible causes of material price variance favourable (o/f) Purchasing dept/buyers negotiated strongly World price of material/cotton was lower than expected after budget prepared Supplier offered us unexpected discount as part of sales drive New supplier in market offered low price to gain customers Supply in market high due to good harvest / weather / new firm etc Poor quality materials supplied 3 marks (d) Evaluate how well the budget has been set : Answers could include the following: Well Set Overall variance is only 660 Adverse out of total of 78 200 ie accurate .6% error rate No variance on fixed overheads.Actual Rate) x Actual Hours = (4. material usage.Less than 1% error rate. Variance of only 528 favourable on materials ie accurate .15 . the variances are large.78) x 26 400 = £528 Fav 3 marks (ii) Labour Rate variance = (Standard Rate .2.80 . This could impact seriously on cash flow future production etc If argue only one side then maximum of 2 marks for argument Overall evaluation / Conclusion Should relate to points above 4 marks Total 16 marks 8011-9011 GCE Accounting Summer 2007 31 .4.

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