Model answers. Diploma pathway Advanced certificate Recording and Analysing Costs and Revenues (ECR) 2003 Standards

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1 Model answers NVQ/SVQ in Accounting Level 3 Recording and Evaluating Costs and Revenues (ECR) 2003 Standards Diploma pathway Advanced certificate Recording and Analysing Costs and Revenues (ECR) 2003 Standards June 2008

2 Section 1 Task 1.1 The method used is Weighted Average Cost (AVCO) The remaining entries in the stock record card using this method. Stock record card for plastic part AT3 Receipts Issues Balance Date Quantity Cost per kg Total cost Quantity Cost per kg Total cost Quantity Total cost kgs kgs kgs Balance as at 1 May 6,000 16,800 6 May 10, ,000 16,000 46, May 7, ,475 9,000 26, May 10, ,525 19,000 59, May 12, ,800 7,000 22,050 Task 1.2 From: AATStudent@Premier.net To: ManagementAccountant@Premier.net Sent: 16 June 2008 Re: Compliance with stock control policy The policy of only re-ordering when the stock balance falls to 4,000 kgs has not been complied with. An order was delivered on 6 May when we had 6,000 kgs in stock, and another order on 23 May when we had 9,000 kgs in stock. The policy of ordering in quantities of 8,000 kgs has also not been complied with. Both orders were for 10,000 kgs. The financial implications of non-compliance are that we are holding extra inventory, which will probably cost us more money for interest charges, stock handling, storage costs and stock administration costs. 2

3 Task 1.3 The correct total cost of direct labour for the bottles is: Cost at normal rate: 1,215 hours at 8 = 9,720 Cost at time and a half: 180 hours at 4 = 720 Cost at double time: 135 hours at 8 = 1,080 Total direct labour cost 11,520 Alternative presentation: Cost at normal rate: 900 hours at 8 = 7,200 Cost at time and a half: 180 hours at 12 = 2,160 Cost at double time: 135 hours at 16 = 2,160 Total direct labour cost 11,520 The cost of direct labour per bottle is: Total direct labour cost: 11,520 Divided by number of bottles 57,600 Cost of direct labour per bottle 0.20 Task 1.4 Overhead Heat and lighting fixed cost Heat and lighting variable cost Power for machinery Supervision Basis of allocation Plastics Labelling Equipment Stores Total Moulding Maintenance Equal 6,000 6,000 6,000 6,000 24,000 Floor area 19,200 10,800 4,800 1,200 36,000 Percentages given Direct labour costs 19,600 8,400 28,000 50,000 70, ,000 Stores wages Allocated 72,000 72,000 Equipment Maintenance salaries Depreciation of fixed assets Other overhead costs Allocated 188, ,200 Net book value of fixed assets Percentages given 48,000 24,000 9,000 3,000 84,000 76,800 25,600 12,800 12, ,000 Total of primary apportionments Reapportion Equipment Maintenance Reapportion Stores Total production department overheads 219, , , , ,200 Equal charges 70,400 70,400 70,400 (211,200) Material requisitions 130,200 44,800 (175,000) 420, ,000 3

4 Task 1.5 The budgeted overhead recovery (absorption) rates are: The Plastics Moulding department The Labelling department 420,200/8,404 = 50/machine hour 260,000/16,250 = 16/direct labour hour Task 1.6 The cost per batch of labelled pet food tins: Prime cost Direct materials 14,870 Direct labour 42,206 Prime cost 57,076 Divided by number of batches 15,020 Prime cost/batch 3.80 Variable (marginal) cost Prime cost 57,076 Variable overheads 48,064 Variable cost 105,140 Divided by number of batches 15,020 Variable cost/batch 7.00 (c) Full absorption cost Variable cost 105,140 Fixed overheads 75,100 Full absorption cost 180,240 Divided by number of batches 15,020 Full absorption cost/batch

5 Section 2 Task 2.1 Estimate of the production cost per unit at the different activity levels: Units made 50,000 60,000 70,000 Costs: Variable costs: Direct materials 5,250 6,300 7,350 Direct labour 2,250 2,700 3,150 Overheads 11,100 13,320 15,540 Fixed costs: Indirect labour 9,200 9,200 9,200 Overheads 15,600 15,600 15,600 Total cost 43,400 47,120 50,840 Cost per unit Explanation of why the cost per unit changes as the units made increases: The table above assumes that the existing fixed costs remain the same when activity levels increase by 20% or by 40%. Therefore, these costs are spread over a bigger volume and the effect of this is to decrease the cost per unit of the product. (c) The likely effect on the fixed costs and cost per unit of the production volume increasing to 150,000 units per period: If the production volume were to increase to 150,000 units then the fixed costs would almost certainly change as more indirect labour and fixed overheads would need to be added to cope with this large increase in volume. The existing fixed overheads are only fixed over a limited range and the company s ability to reduce the cost per unit by increasing volume is also, therefore, limited to this range. The cost per can would initially increase and then gradually decrease until the next step up in the fixed cost is reached. It is not possible to estimate the revised costs per can from the limited data supplied. 5

6 Task 2.2 The budgeted contribution per unit of A and B sold, and the company s budgeted profit for the year from these two products: A ( ) B ( ) Total ( ) Selling price per unit Less: variable costs per unit Direct materials Direct labour Variable overheads Contribution per unit Sales volume (units) 300, ,000 Total contribution 309, , ,000 Less: fixed costs 264,020 Budgeted profit 354,980 Task 2.3 Completion of table: Product A B Fixed costs ( ) 158, ,400 Unit contribution ( ) Break-even sales (units) 154, ,000 Forecast sales (units) 250, ,000 Margin of safety (units) 96, ,000 Margin of safety (%) 38.40% 57.50% Product B has the better margin of safety because its sales can drop by 57.5% before it starts to lose money. Product A s sales can only drop by 38.4% before it starts to lose money. 6

7 Task 2.4 The recommended number units of products A and B that should be made in order to maximise the profit that can be made taking account of the machine hours available: Product A B Total Contribution/unit ( ) Machine hours/unit Contribution/machine hr. ( ) Product ranking second first Machine hours available 70,000 Machine hours allocated to: Product B Product A (balance) 30,000 40,000 Total contribution earned ( ) 154, , ,500 Less: Fixed costs ( ) 264,020 Profit made ( ) 200,480 Task 2.5 The net present value Year Year Year Year Capital expenditure (600) 100 Sales income 900 1, Operating costs (710) (895) (560) Net cash flows (600) PV factors Discounted cash flows (600) Net present value The payback period The cumulative net cash flow is: Net cash flows (600) Cumulative (600) (410) The project, therefore, pays back in 1 and 410/455 years = 1.90 years, or just under 1 year and 11 months. 7

8 Task 2.6 Report To: The Management Accountant From: AAT Student Subject: Investment Appraisal Date: 16 June 2008 The NPV for the new product is 152,500 positive, while the payback is 1.9 years. Purely on the basis of the NPV, the project should be accepted, since it would increase the present value of the company by 152,500. The payback period is also well within the three-year expected life of the project. Commercial factors that are relevant to this decision include (two only): The risks involved in the project and the degree of certainty relating to the cash flows The probability of the three-year expected life being extended The accuracy of the estimated residual value Note: Other valid points can earn marks here. (c) The internal rate of return (IRR) of a project is another method of appraising capital investments. IRR represents the true interest rate that, when used to discount all the project s cash flows, will make the present value of the cash inflows equal to that of the cash outflows. In other words, it is the discount rate that will cause the net present value of the project to be zero. It can also be viewed as the maximum cost of capital that can be used to finance the project without reducing shareholder value. 8