Paper 1.

2
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
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:

Total costs
£
Costs/revenue
Total revenue

A B C D Units

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
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 £7·50/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.
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 £4·375 £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
3
Cubic capacity (m ) 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
–––––––

4
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 £0·788/machine hour
B £0·814/machine hour
C £1·125/labour hour
D £1·163/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 93·8
B 95·5
C 101·9
D 103·6

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?

A B

£ £

units units

C D
£ £

units units

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 (1–D/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.
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 2·65 30·0
2 4·25 45·0
3 1·00 17·5
4 5·25 46·0
5 4·75 44·5
6 1·95 25·0
7 3·50 43·0
8 3·00 38·5
––––– –––––
Total 26·35 289·5
––––– –––––
Further information is available as follows:
∑ (Advertising Expenditure × Sales Revenue) = £1,055·875
∑ (Advertising Expenditure)2 = £101·2625
∑ (Sales Revenue)2 = £11,283·75
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 0·75. If the smaller premises are built then the
probability of high demand falls to 0·6.
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 0·8.
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 0·95.
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
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)

13 [P.T.O.
Formulae Sheet

14
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15 [P.T.O.
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End of Question Paper

16