10,000 units x 24 = 240,000, or 5,000 hours x 48 = 240,000. the actual price of materials per kilogram

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1 NVQ/SVQ Level 4 in Accounting Contributing to the Management of Performance and Enhancement of Value (PEV) (2003 standards) June 2006 SUGGESTED ANSWERS Note: The suggested answers may, in parts, be longer than would be expected of candidates in the exam. The fuller version is given for tutorial purposes. SECTION 1 Task 1.1 (a) (i) the budgeted production overheads 10,000 units x 24 = 240,000, or 5,000 hours x 48 = 240,000 (ii) the actual price of materials per kilogram 123,750 = ,500 (iii) the standard usage of materials for actual production 11,500 x 2 = 23,000 kgs (iv) the standard labour hours for actual production. 11,500 x 0.5 = 5,750 hours (b) (i) the direct material price variance ( ) x 22,500 = 11,250 (A) or 5.00 x 22,500 = 112, x 22,500 = 123,750 = ( 11,250) (A) (ii) the direct material usage variance (23,000 kgs 22,500) x 5 = 2,500 (F) or 5.00 x 23,000 = 115, x 22,500 = 112,500 = 2,500 (F) (iii) the direct labour rate variance ( ) x 6,000 = 6,000 (F) or 7.00 x 6,000 = 42, x 6,000 = 36,000 = 6,000 (F)

2 (iv) (v) (vi) (vii) the direct labour efficiency variance (5,750 hours - 6,000 hours) x 7 = 1,750 (A) or 7.00 x 5,750 = 40, x 6,000 = 42,000 = ( 1,750) (A) fixed overhead expenditure variance 240, ,000 = 20,000 (A) fixed overhead capacity variance (6,000 hours 10,000 x 0.5 hours) x 48 = 48,000 (F) or 48 x 6,000 = 288, x 5,000 = 240,000 = 48,000 (F) fixed overhead efficiency variance (11,500 x 0.5 hours 6,000 hours) x 48 = 12,000 (A) or 48 x 5,750 = 276, x 6,000 = 288,000 (c) Budgeted costs for actual production 11,500 units X ,250 Variances Variance Direct material price - 11,250 Direct material usage 2,500 Direct labour rate 6,000 Direct labour efficiency - 1,750 Fixed overhead expenditure - 20,000 Fixed overhead capacity 48,000 Fixed overhead efficiency - 12,000 Total variance 11, ,750 Working for 419,750 Direct materials 123,750 Direct labour 36,000 Fixed overheads 260, ,750 2

3 (d) Quantity Cost per unit Total Budgeted cost 11, ,250 Fixed overheads 240,000 Total budgeted cost 395,250 Variances Direct material price - 11,250 Direct material usage 2,500 Direct labour rate 6,000 Direct labour usage - 1,750 Fixed overhead expenditure - 20,000-24,500 Actual costs 419,750 (e) Under standard absorption costing, the budgeted cost per unit includes the budgeted overhead absorption rate and therefore the total budgeted cost is equal to the total quantity multiplied by the full absorption cost. The fixed overheads are effectively flexed when the budget is flexed (in the question the flexed budget includes 11,500 units x 24 per unit or 276,000 for the fixed overhead). Therefore there is a volume variance due to the fixed overheads changing; in the question it is 1,500 x 24, or 36,000. Under standard marginal costing, the budgeted cost per unit is based only on marginal cost with the fixed costs remaining constant, even when the budget is flexed for actual output. Therefore the budgeted total cost is different under marginal costing and there is no volume variance (nor capacity or efficiency). Task 1.2 (a) Quarter 1 Quarter 2 Quarter 3 Quarter 4 March-May June-August Sept-Nov Dec-Feb Actual sales volume 22,000 19,400 21,800 19,200 Seasonal variation 2,000-1,000 1,000-2,000 Trend 20,000 20,400 20,800 21,200 (b) 21,200/20,000 1 = 6% (c) The Managing Director has calculated the growth in sales volume without taking into account seasonal fluctuations. Based upon the data (22,000 down to 19,200), this appears to show a fall in demand. However, when the seasonal fluctuations are taken into account, the demand has actually increased by 6% - a performance which is better than the market growth of 4%. 3

4 SECTION 2 Task 2.1 (a) Brake Ltd First Disc Ltd Gross profit margin 2,060/5,150= 40% 1,925/3,500 = 55% Distribution costs as a percentage of turnover 850/5,150 = 16.50% 875/3,500 = 25% Admin expenses as a percentage of turnover 750/5,150 = 14.56% 875/3,500 = 25% Operating profit margin 460/5150 = 8.93% 175/3,500 = 5% Return on Capital Employed 460/4,000 = 11.50% 175/2,500 = 7% Stock turnover 3,090/500 = ,575/388 = 4.06 Capacity ratio 37,500/41,000 = 91.46% 22,000/20,000 = 110% Efficiency ratio 40,000/37,500 = % 21,750/ 22,000 = 98.86% (b) To: Managing Director Subject: Differences in performance indicators From: Accounting Technician Date: 12 June 2006 (i) (ii) The gross profit margin of First Disc Ltd is 55%, whereas that of Brake Ltd is only 40%. This difference could be caused by the type of service. First Disc may be able to charge a higher price due to the next-day delivery service. The operating profit margin of First Disc is 5%, compared to 9% for Brake Ltd. This is caused by the administration costs and selling and distribution costs being higher for First Disc Ltd than those of Brake Ltd. (iii) The Return on Capital Employed (ROCE) for First Disc is 7% compared to 11.5% for Brake. This is caused by a lower operating profit for First Disc Ltd, even though the asset turnover is higher. (iv) Stock turnover is lower for First Disc Ltd, indicating that stock is taking longer to sell. Or perhaps First Disc Ltd has to carry higher stock levels in order to satisfy next-day delivery, whereas Brake can take advantage of longer lead times to manufacture for orders as well as for stock. 4

5 (c) Operating profit for Brake 460,000 Operating profit for First Disc 175,000 Adjustment to operating profit as a result of reduction in administration costs 400,000 Combined operating profit 1,035,000 Net assets of Brake before acquisition 4,000,000 Increase in net assets of Brake 3,000,000 Total net assets post acquisition 7,000,000 New Return on Capital Employed 14.79% Task 2.2 (a) Target costing is a method whereby the company has to take a given market price for its product. A target cost is set to give a desired profit margin. The target cost is calculated by taking the market price of the product and deducting the desired profit margin. (b) Target cost = Market Price x (1 - profit margin) = 1,000 x (1 0.55) = 450 5