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Answers

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Part 1 Examination – Paper 1.2Financial Information for Management June 2005 Answers

Section A

1 C2 C3 A

4 C5 B6 B7 B8 A9 D10 D11 A12 A13 B14 C15 B16 C17 A18 B19 C20 B21 D22 B23 A24 A25 A

1 C

2 C

3 A Total cost per unit (£) Total cost per unit (£)(125 units) (180 units)

T1 8 ·00 7 ·00T2 14 ·00 14 ·00T3 19 ·80 15 ·70T4 25 ·80 25 ·80Cost types T2 and T4 are variable and T1 and T3 are semi-variable.

4 C Contribution per unit (CPU) = (80 – 30 – 10) = £40Total fixed cost = 2,880 × 25 = £72,000Break-even point = 72,000 ÷ 40 = 1,800 units

5 B CPU = 0 ·40 × 60 = £24Break-even point = 54,000 ÷ 24 = 2,250 unitsMargin of safety = 4,000 – 2,250 = 1,750 units

6 B Σ x = Σ Advertising expenditure = 100,000Σ y = Σ Sales = 600,000n = number of pairs of data = 5

7 B

8 A

9 D

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10 D Total hours in cost centre X = 8,000 × (3 + 2 ·5) = 44,000Total hours in cost centre Y = 8,000 × (1 + 2) = 24,000Overhead rate (X) = £88,000 ÷ 44,000 = £2 per hourOverhead rate (Y) = £96,000 ÷ 24,000 = £4 per hourOverhead cost per unit (P2) = (2 ·5 × 2) + (2 ·0 × 4) = £13

11 A £Actual overheads 128,480Absorbed overhead (8,800 × 14 ·50) 127,600Under absorption 880

12 A

13 B Date Units £ per unit £1st 300 9 2,7003rd 500 11 5,500

12th (600) (6,400) [5,500 + 900]——– ———

200 9 1,80017th 400 10 ·5 4,20019th (300) 10 ·5 (3,150)

——– ———300 2,850

——– ———

14 C £Prime cost (300 + 400) 700Production overheads (50 × £26) 1,300

———Total production cost 2,000Non-production overheads (1 ·20 × 700) 840

———Total cost 2,840

———

15 B (150 × 0 ·48) equivalent units × £12 = £864

16 C £Units started and finished last month (900 – 100) = 800 × £12 9,600Opening work in progress (WIP) value 680Work done to complete opening WIP (100 × 0 ·40) × £12 480

———10,760———

17 A Price variance: £Actual sales revenue 204,750Actual sales units at standard selling price (10,500 × £20) 210,000

————Sales price variance 5,250 A

———Volume variance (500 units × £20 × 0 ·40) 4,000 F

18 B Capacity variance (5,000 – 5,500) hours at £15 per hour 7,500 F

19 C 250 hours at [£9 per hour + the opportunity cost £(12 ÷ 3) per hour] = £3,250The incremental labour cost of weekend working is £4,500 (250 × £18) andbeing higher than £3,250 is therefore not relevant.

20 B Opportunity cost now £8,000Realisable value in six months £5,000Relevant cost £3,000

21 D Additional cost of buying in (compared with manufacture) per hour:A B C D£10 £8 £12 £7

Buy in component with the lowest additional cost per hour (limiting factor).

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2 (a) £ £Standard cost of actual production9,000 units × £(15 + 20 + 12) 423,000Total variances:Direct materials (W1) 3,000 ADirect labour (W2) 2,000 FFixed overheads (W3) 5,000 F

———— 4,000 F

————Actual cost 419,000————

Workings:W1 £ Variance (£)Actual 138,000

3,000 AStandard cost of actual production (9,000 × £15) 135,000

W2Actual 178,000

2,000 FStandard cost of actual production (9,000 × £20) 180,000

W3Actual 103,000

5,000 FStandard cost of actual production (9,000 × £20) 108,000

(b) Actual quantity × actual cost 138,000Price

6,000 F

Actual quantity × standard cost 144,000(24,000 × £6) Usage

9,000 AStandard quantity for actual productionX standard cost [(as in (a)] 135,000

(c) (i) The standard price per litre is set by the person in the organisation with the specialist knowledge about the pricescharged by suppliers for the raw materials used by Murgatroyd Ltd. This would be the manager responsible forpurchasing (sometimes referred to as the Buying Manager or the Procurement Manager).

(ii) The standard quantity per unit is set by the person in the organisation with the specialist knowledge about the productspecification and the amount of each raw material that should be used in the manufacture of one unit of the product.This would be a manager in the production (manufacturing) function or technical department in Murgatroyd Ltd.

3 (a) EOQ = [(2 × 12 ·50 × 8,760) ÷ (0 ·05 × 80)] 0 ·5 = 234 units

(b) Usage per day = 8,760 ÷ 365 = 24Re-order level = 24 × 21 = 504 units

(c) (i) A stockout occurs when a company runs out of stock. There are costs associated with this – lost contribution from lostsales, for example. In order to avoid a stockout the company could set a buffer stock – in effect a safety level of stockto cover emergency situations such as demand and/or lead times exceeding their average levels. The holding of a bufferstock involves an additional cost.

(ii) Jane plc should consider having a buffer stock if either the usage of component RB starts to fluctuate from period toperiod (at present it is constant) and/or the lead time starts to fluctuate from its present constant level of 21 days.

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4 (a) (i) Units Total cost£

Higher level 2,000 188,000Lower level 1,800 180,000

——— ————Difference 200 8,000

——— ————

Variable production cost per unit = 8,000 ÷ 200 = £40

(ii) £Total production cost for 2,000 units 188,000Less total variable production cost (2,000 × 40) (80,000)

————Total monthly fixed production cost 108,000

————

(b) (i) Contribution per unit (180 – 40) = £140Total contribution from sales = 1,200 × 140 = £168,000

(ii) £Total contribution [as in (b)(i)] 168,000Less Total fixed costs (108,000 + 41,000) (149,000)

————Net profit 19,000

————

(c) When the number of units produced and the number of units sold in a month are identical, the net profit or loss determinedby using absorption and marginal costing principles will also be the same. In other words the net profit or loss will be thesame when the opening and closing stocks for a month are unchanged.

5 (a) (i) Initial selling price = (variable + fixed cost per unit) + mark up of 40%Initial selling price = [£4 + £(18,000 ÷ 3,000)] × 1·40 = £14

(ii) Profit = 3,000 units × £4 profit per unit = £12,000

(b) Profits are maximised when:Marginal cost (MC) = Marginal revenue (MR)MC = variable cost = 4MR = 20 – 0·004Q4 = 20 – 0·004QQ = 4,000 units

P = 20 – 0·002 (4,000) = £12 = profit maximising price.

(c) A penetration price is an initially low selling price of a product, whereas a skimming price policy is one where the initial sellingprice is set high.

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Part 1 Examination – Paper 1.2Financial Information for Management June 2005 Marking Scheme

MarksSection AEach of the 25 questions in this section is worth 2 marks 50

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Section B1 (a) Inputs into process 1 1 / 2

Normal loss 1 1 / 2Abnormal gain 2Joint products 3

–––8

(b) Incidental to main products 1Insignificant in value terms 1

–––2

–––10

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2 (a) Each total variance 1 mark 3Reconciliation statement 1

–––4

(b) Price variance 1 1 / 2Usage variance 1 1 / 2

–––3

(c) Purchasing management 1 1 / 2Production management 1 1 / 2

–––3

–––10

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3 (a) EOQ calculation 2

(b) Stock level for re-ordering 2

(c) (i) Stockout 1Buffer stock 1

(ii) Variable demand and fluctuating lead time 2–––

4–––8–––

4 (a) (i) Variable production cost per unit 2

(ii) Total monthly fixed production cost 2–––

4

(b) (i) Total contribution 2

(ii) Net profit 2–––

4

(c) Production = sales and/or opening stock = closing stock 2–––10

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Marks5 (a) (i) Initial selling price 2

(ii) Resultant weekly profit 1–––

3

(b) Marginal cost (MC) = Marginal revenue (MR) 1MC 1Optimal quantity (via MC = MR) 3Optimal price 2

–––7

(c) Penetration price 1Skimming price 1

–––2

–––12

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