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Recording and Evaluating Costs and Revenues (ECR)

(2003 standards)

Suggested Answers
SECTION 1

Task 1.1

STOCK CARD
Product: Leather

Receipts Issues Balance


Date Quantity Cost per Total Quantity Cost Total Quantity Total
(metres) metre Cost (metres) per metre Cost (metres) Cost

B/f at
1 Nov 10,000 10,000

5 Nov 15,000 1.20 18,000 25,000 28,000

12 Nov 10,000 10,000 10,000 15,000 18,000


x 1.00

19 Nov 10,000 1.10 11,000 25,000 29,000

26 Nov 20,000 15,000 18,000 5,000 5,500


x 1.20 5,500
5,000 23,500
x 1.10
Task 1.2

Date Code Dr Cr
5 November 1000 18,000
5 November 3000 18,000
12 November 1100 10,000
12 November 1000 10,000
19 November 1000 11,000
19 November 3000 11,000
26 November 1100 23,500
26 November 1000 23,500

Task 1.3
Normal rate 9,500 hours x 5 = 47,500
Overtime premium 700 hours x 2 = 1,400

Total direct labour cost is 48,900


Task 1.4

Fixed overheads for November Basis Total Cutting Finishing Maintenance


Machine insurance Net Book Value 6,000 2,400 3,000 600


Rent and other property overheads Floor space 17,100 10,260 5,130 1,710
Power costs Allocated 1,800 600 1,050 150
Staff costs Allocated 20,250 5,940 4,770 9,540

45,150 19,200 13,950 12,000


Maintenance Reapportioned 4,800 7,200 (12,000)
45,150 24,000 21,150 -
Task 1.5
Budgeted fixed overhead absorption rate for the cutting department.

24,000 = 2.50
9,600

Budgeted fixed overhead absorption rate for the finishing department.

21,150 = 3.00
7,050

Task 1.6

(a)
(i) 9,250 x 2.50 = 23,125

(ii) 7,350 x 3.00 = 22,050

(b)
(i) 24,000 - 23,125 = 875 underabsorbed

(ii) 21,150 - 22,050 = 900 overabsorbed

(c) The underabsorbed cutting department overheads will be debited to the


profit and loss account and will increase costs. The overabsorbed finishing
department overheads will be credited to the profit and loss account and will
reduce costs.
SECTION 2
Task 2.1

Product Exe Wye Zed Total



Sales revenue 60,000 75,000 100,000 235,000
Less: Variable costs
Direct materials (20,000) (24,000) (30,000) (74,000)
Direct labour (5,000) (6,000) (10,000) (21,000)
Total contribution 35,000 45,000 60,000 140,000
Fixed overheads (32,000)
Forecast profit 108,000
Task 2.2
(a)

Product: Exe Production volume


1,600 units 2,000 units

Monthly variable costs 20,000 25,000
Monthly fixed costs 32,000 32,000
Total cost of production 52,000 57,000
Unit cost of production (to the
nearest penny) 32.50 28.50

(b)

32,000 + 2,000 = 1,943 units


17.50

Task 2.3
(a)

Product Exe Wye Zed


Unit contribution 17.50 15.00 12.00
Labour hours per unit 0.5 0.4 0.4
Contribution per labour hour 35.00 37.50 30.00

(b)

Make and sell 3,000 Wye units (this leaves 1,800 hours, that is 3,000 hours less 1,200
hours)

Make and sell 2,000 Exe units (this leaves 800 hours, that is 1,800 hours less 1,000
hours)

Make and sell 2,000 Zed units (this requires the remaining 800 hours)
Task 2.4
(a) 2.9 years

(b)

Year 0 Year 1 Year 2 Year 3 Year 4


000 000 000 000 000
Net cashflows (500) 60 150 320 80
Present value factors 1.000 0.909 0.826 0.751 0.683
Present values (500) 54.54 123.90 240.32 54.64
Net Present Value (26.60)

Task 2.5

MEMO

To: Managing Director Subject: Sports clothing project

From: Accounting Technician Date: December 2003


_______________________________________________________________________________________

On the basis of the information provided, the project has a negative net present value and
should be not be undertaken.

The net present value technique relies on discounting relevant cashflows at an appropriate
rate of return. It would be helpful to know:

1. Does the capital equipment have a residual value? If so, this amount should be
included in the investment appraisal.

2. Are there any additional cashflows beyond year 4? Again, any cashflows arising
after year 4 should be included in the investment appraisal.