Analysing financial performance

Transcription

1 NEW for 2015 Osborne Books Tutor Zone Analysing financial performance Exam preparation exercises I n t r o d u c t i o n These questions have been written as practice for selected numerical tasks from the AAT assessment. Osborne Books Limited, 2015

2 e x a m p r e p a r a t i o n e x e r c i s e s 1 1 Standard cost cards (AAT Assessment Task 1) I N T R O D U C T I O N This task covers the preparation of standard cost cards and their use in the preparation of budgets. Both the standard cost cards and budgets are normally in absorption costing format which is to say that they included fixed production overheads. This means that testing will also cover overhead absorption and overhead over or under recovery. Questions can ask you to derive standard costing information from details of planned unit costs. They can also ask you to take apart budgeted figures to work out what the underlying standard costs are. P R E PA R AT I O N A N D U S E O F A S TA N D A R D C O S T C A R D p r a c t i c e e x e r c i s e s 1.1 (a) A firm makes a single product, the inputs required to make a unit are shown below. 0.75kg direct materials which costs 10 per kg. 12 minutes of direct labour; direct labour is paid at the rate of 13 per hour. Fixed overheads total 140,000 and are recovered on a unit basis. The estimated output will be 20,000 units. Complete the standard cost card below: 1 unit Quantity Cost per unit Total Direct materials Direct labour Fixed overheads Total

3 2 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e (b) Complete the following: (1) The standard quantity of materials for the production of 20,000 units is kg (2) The standard labour hours for the production of 20,000 units is hours (c) Output is 21,000, fixed overheads are 143,200. Complete the following sentence: The fixed overheads were under/over absorbed by 1.2 (a) A firm makes a single product, the inputs required to make a unit are shown below litres direct materials which costs 6 per litre direct labour hours; direct labour is paid at the rate of 12 per hour. Fixed overheads total 250,000 and are absorbed on a unit basis, the estimated output will be 50,000 units. Complete the standard cost card below: 1 unit Quantity Cost per unit Total Direct materials Direct labour Fixed overheads Total (b) Complete the following: (1) The standard quantity of materials for the production of 50,000 units is litres (2) The standard labour hours for the production of 50,000 units is hours (c) Output is 47,000, fixed overheads are 253,700. Complete the following sentence: The fixed overheads were under/over absorbed by

4 e x a m p r e p a r a t i o n e x e r c i s e s 3 U S E O F B U D G E T E D I N F O R M AT I O N T O C A L C U L AT E S TA N D A R D C O S T S In these questions you initially need to work backwards to derive the standard cost data. Once you have done this, expect to be asked to use the standard costs to calculate the standard quantities and costs for output. p r a c t i c e e x e r c i s e s 1.3 The budgeted and actual results for Zed Limited are shown in the operating statement below, use the information to calculate the required data. Budget Actual Production units 65,000 68,400 Direct materials 227,500 kg 955, ,100 kg 988,300 Direct labour 13,000 hours 136,500 13,600 hours 143,600 Production overheads 552, ,700 1,644,500 1,682,600 Complete the following standard cost card: 1 unit Quantity Cost per unit Total Direct materials Direct labour Fixed overheads Total Note: Fixed overheads are absorbed per unit.

5 4 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e 1.4 The budgeted and actual results for Wye Limited are shown in the operating statement below, use the information to calculate the required data. Budget Actual Production units 8,000 8,700 Direct materials 40,000 kg 80,000 44,370 kg 86,522 Direct labour 4,000 hours 48,000 4,250 hours 51,750 Production overheads 72,000 74, , ,472 Complete the following sentences: (a) The standard quantity of materials per unit is kg (b) The standard direct labour time per unit is hours (c) The budgeted overhead absorption rate per unit is (d) The standard materials required to produce 8,700 units is kg (e) The standard direct labour hours to produce 8,700 units is hours (f) The standard materials cost of 8,700 units is (g) The standard labour cost of 8,700 units is

6 e x a m p r e p a r a t i o n e x e r c i s e s 5 2 Material and labour variances (AAT Assessment Task 2) I N T R O D U C T I O N This task examines the direct materials and direct labour variances, these include not just the materials price and usage, labour rate and efficiency variances, but also the idle time variance. In questions, information about actual quantities and prices is usually easy to find, but you should expect to have to calculate the standard costs and quantities from question data. There are two main formats for these questions. In the first, you are given budgeted and actual data and asked to analyse it. In the second, you have a series of independent questions, each with its own data which you need to analyse. VA R I A N C E S F R O M B U D G E T A N D A C T U A L D ATA p r a c t i c e e x e r c i s e s 2.1 The budgeted and actual results for the month of March are as follows: Budget Actual Production units 16,000 15,200 Direct materials 160,000m 480, ,300m 489,195 Direct labour 8,000 hours 80,000 7,680 hours 76,500 Production overheads 174, , , ,995 Complete the following table: Variance Amount Sign Total direct materials Direct materials price Direct materials usage Adverse/Favourable Adverse/Favourable Adverse/Favourable

7 6 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e Complete the following table: Variance Amount Sign Total direct labour Direct labour rate Direct labour efficiency Adverse/Favourable Adverse/Favourable Adverse/Favourable 2.2 The budgeted and actual results for the month of April are as follows: Budget Actual Production units 20,000 21,800 Direct materials 5,000 kg 19,000 5,720 kg 20,650 Direct labour 15,000 hours 120,000 16,380 hours 132,678 Production overheads 220, , , ,928 Complete the following table: Variance Amount Sign Total direct materials Direct materials price Direct materials usage Adverse/Favourable Adverse/Favourable Adverse/Favourable Complete the following table: Variance Amount Sign Total direct labour Direct labour rate Direct labour efficiency Adverse/Favourable Adverse/Favourable Adverse/Favourable

8 e x a m p r e p a r a t i o n e x e r c i s e s 7 I n d e p e n d e n t q u e s t i o n s (a) A company plans to produce 8,000 units of its product Tra-lah using 4,000 litres of raw material with a standard cost of 8,400. Output is 7,850 units using 3,930 litres, costing 8,445. The materials price variance is adverse/favourable (b) A company plans to produce 5,000 units of its product Ta-dah using 7,000 kg raw materials with a standard cost of 43,750. Output is 4,720 units using 6,592 kg, costing 41,850. The materials usage variance is adverse/favourable (c) A company produces a product which has a standard direct labour time of eight minutes to manufacture. Direct labour is paid at the standard rate of 15 per hour. During March, 11,900 units were produced. Actual direct labour pay was 24,800, direct labour hours paid were 1,600, direct labour hours worked were 1,560. Complete the following: (1) The direct labour rate variance was adverse/favourable (2) The idle time variance was adverse/favourable (3) The direct labour efficiency variance was adverse/favourable (d) A company expects to produce 5,000 units of a product using 12,500 labour hours, with a standard cost of 106,250. The company produces 5,400 units and pays 120,060 for 13,800 direct labour hours. Machine breakdown meant that only 13,400 hours were actually worked. Complete the following: (1) The total direct labour efficiency variance was adverse/favourable (2) The idle time variance was adverse/favourable (e) A company purchases 800 kg of direct materials at a total cost of 5,880. The raw materials price variance is 120 favourable. The raw material standard price per kg is (f) A company purchases 1,450 litres of direct materials at a total cost of 14,495. The raw materials price variance is 285 adverse. The raw material standard price per litre is

9 8 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e (g) During May, employees worked 8,600 hours and produced 16,900 units. Budgeted production was 15,000 units using 7,500 hours at a cost of 86,250. The labour rate variance was 430 adverse. The actual rate of pay per hour was (h) Budgeted production was 1,000 units with a budgeted direct labour cost of 6,000, actual production was 1,050 units using 500 direct labour hours at a cost of 6,250. The labour rate variance was 250 adverse and the efficiency variance 300 favourable. The standard hours per unit were

10 e x a m p r e p a r a t i o n e x e r c i s e s 9 3 Fixed overhead variances (AAT Assessment Task 3) I N T R O D U C T I O N This task examines the calculation of the four fixed production overhead variances: fixed overhead expenditure, volume, capacity and efficiency. Information can be laid out in a straightforward way, for instance you could be given a table of budgeted and actual data and asked to calculate the variances. However, there is some variety of questioning and you may also need to work backwards and use variances to determine actual costs. p r a c t i c e e x e r c i s e s 3.1 You have been given the following information: Budgeted output 15,000 units; budgeted production overheads 61,500. Actual output 14,350 units; actual production overheads 59,700. (a) The fixed overhead volume variance is adverse/favourable (b) The fixed overhead expenditure variance is adverse/favourable

11 1 0 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e 3.2 You are given the following information: Budget Actual Output 7,000 7,800 Hours 21,000 21,800 Fixed production overheads 136, ,200 (a) The fixed overhead expenditure variance is adverse/favourable (b) The fixed overhead volume variance is adverse/favourable (c) The fixed overhead efficiency variance is adverse/favourable (d) The fixed overhead capacity variance is adverse/favourable 3.3 You are given the following information: Budget Actual Output 18,000 17,500 Hours 2,700 2,680 Fixed production overheads 288, ,500 (a) The fixed overhead expenditure variance is adverse/favourable (b) The fixed overhead volume variance is adverse/favourable (c) The fixed overhead efficiency variance is adverse/favourable (d) The fixed overhead capacity variance is adverse/favourable

12 e x a m p r e p a r a t i o n e x e r c i s e s A firm had budgeted fixed overheads of 325,000 and a fixed overhead expenditure variance of 10,500 favourable. What were the actual overheads? 3.5 A firm budgeted to produce 11,000 units, the budgeted fixed production overheads were 60,500. The fixed overhead volume variance was 4,125 adverse. How many units were produced? 3.6 The overhead absorption rate per unit is 14 and budgeted output is 25,000. The fixed overhead expenditure variance is 13,400 adverse. What were the actual overheads?

13 1 2 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e 4 Operating statements (AAT Assessment Task 4) I N T R O D U C T I O N In Task 4 you are required to populate operating statements. The operating statements reconcile standard costs to actual costs and can be in a variety of formats: Reconciliation of total standard cost to total actual cost in an absorption costing format. Reconciliation of budgeted costs for actual production with the actual cost of production in a marginal costing format. Reconciliation of the budgeted/standard cost of a cost element (direct materials, direct labour or fixed production cost) with the actual cost for that cost element. For all of these reconciliations, you are given a budgetary control report along with the amounts, although not necessarily the signs of the variances. The signs of the variances can be identified by analysis of the data in the budgetary control report. You will usually need to calculate the standard cost of actual production this can be done by flexing the original budget. p r a c t i c e e x e r c i s e s 4.1 A budgetary control report has been provided for June and variances have been calculated. Budget Actual Production units 10,000 9,400 Direct materials 200 kg 20, kg 19,320 Direct labour 5,000 hours 60,000 4,750 hours 54,600 Fixed overheads 45,000 45,400 Total cost 125, ,320

14 e x a m p r e p a r a t i o n e x e r c i s e s 1 3 Variance Amount Direct materials price 920 A Direct materials usage 400 Direct labour rate 2,400 Direct labour efficiency 600 A Fixed overhead expenditure 400 Fixed overhead capacity 2,250 A Fixed overhead efficiency 450 Complete the operating statement for the month of June. Do not use brackets or minus signs for the variances. Operating statement June Standard cost of production Variances Favourable Adverse Direct materials price Direct materials usage Direct labour rate Direct labour efficiency Fixed overhead expenditure Fixed overhead capacity Fixed overhead efficiency Total variance Actual cost of production

15 1 4 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e 4.2 A budgetary control report has been provided for July and variances have been calculated. Budget Actual Production units 9,000 9,320 Direct materials 36,000 litres 225,000 37,240 litres 228,156 Direct labour 10,800 hours 129,600 11,456 hours 136,122 Fixed overheads 157, ,300 Total cost 511, ,578 Variance Amount Direct materials price 4,594 Direct materials usage 250 F Direct labour rate 1,350 F Direct labour efficiency 3,264 Fixed overhead expenditure 1,900 Complete the operating statement for the month of July. Do not use brackets or minus signs for the variances. Operating statement July Standard marginal cost of production Budgeted fixed costs Budgeted costs for actual production Variances Adverse Favourable Direct materials price Direct materials usage Direct labour rate Direct labour efficiency Fixed overhead expenditure Total variance Actual cost of production

16 e x a m p r e p a r a t i o n e x e r c i s e s A budgetary control report has been provided for August and variances have been calculated. Budget Actual Production units 52,000 50,600 Direct materials 130,000 kg 88, ,100 kg 92,785 Variance Amount Direct materials price 2,277 A Direct materials usage 4,488 Complete the operating statement for the month of August. Do not use brackets or minus signs for the variances. Operating statement August Standard cost for materials for actual production Variances Adverse Favourable Direct materials price Direct materials usage Total variance Actual cost of materials for production

17 1 6 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e 4.4 A budgetary control report has been provided for September and variances have been calculated. Budget Actual Production units 32,000 34,500 Fixed production overhead 244, ,400 Variance Amount Overhead expenditure 6,600 A Overhead volume 19,125 Complete the operating statement for the month of September. Do not use brackets or minus signs for the variances. Operating statement September Standard fixed cost for actual production Variances Adverse Favourable Fixed overhead expenditure Fixed overhead volume Total variance Actual fixed cost for actual production

18 e x a m p r e p a r a t i o n e x e r c i s e s Statistical techniques (AAT Assessment Task 5) I N T R O D U C T I O N This question examines statistical techniques, which include index numbers, time series (analysis and extrapolation) and linear regression. Also included here is the sub-division of direct cost variances. The link between the two subject areas is, broadly speaking, prices. Index numbers in particular are used to identify the effects of inflation, and variances are frequently analysed to identify the part of the variance caused by inflation and the part caused by other factors. I N D E X N U M B E R S p r a c t i c e e x e r c i s e s 5.1 A price index is used to forecast the cost of raw material P. The index base was set (at 100) when the price per unit was Complete the table below to show the forecast price for material P to the nearest penny. Month Forecast index Forecast price May June July 115.7

19 1 8 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e 5.2 Raw material Q is imported and the price per litre is shown below January February March Cost per litre of Q (p) (a) Complete the table below by converting the cost per litre for each of the months to index numbers, using January 2012 as the base month. The price per litre in January 2012 was 133.3p. Round your answers to two decimal places. January February March Index for Q (b) The forecast index for September 2015 is What is the forecast price per litre of Q in p? (c) What is the percentage change in the index from January 2012 to March 2015? The change is an increase/a decrease of %

20 e x a m p r e p a r a t i o n e x e r c i s e s 1 9 T I M E S E R I E S A N A LY S I S 5.3 Sales of product AUT are changing at a steady rate and don t seem affected by any seasonal variations. You have data for the past three months and are required to use it to forecast future sales. Period Sales 212, , ,400 Forecast sales for period 7 are units 5.4 Sales of product UMN are changing at a steady rate and don t seem affected by any seasonal variations. You have data for the past 3 months and are required to use it to forecast future sales. Period Sales 185, , ,096 Forecast sales for period 10 are units (to the nearest unit) 5.5 (a) You are analysing sales volumes of product SPG. Complete the table below to identify the trend for the period January to March and to forecast the trend and actual sales for April to June. January February March April May June Actual sales 11,000 11,700 12,700 Seasonal variations 1, Trend (b) What is the forecast trend for sales of SPG in October?

21 2 0 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e 5.6 Complete the table to show the forecast trend and forecast actual figures for the months of April, May and June. Trend January February March April May June Seasonal variations Actual 3,820 3,820 3, One of your main raw materials is a food-stuff. Prices are subject to significant seasonal variations as shown in the table below. Use the data to answer the questions which follow. Actual price Seasonally adjusted price Quarter Quarter Quarter (a) The trend in prices is an increase/a decrease of per quarter (b) The seasonal variation for quarter 3 is an increase/a decrease of

22 e x a m p r e p a r a t i o n e x e r c i s e s 2 1 R E G R E S S I O N L I N E S 5.8 The price of a raw material can be found by using a regression line as follows: y = x where y is the price of the raw material and x is the time period. January 2015 was period 34. You are to complete the following table to forecast prices for each of the months of September to December Period September October November December Price 5.9 The price of raw material TER is forecast using a regression line with the formula: y = 1.74x where y is the price and x is the time period. The forecast price of TER for period 33 is 5.10 The costs of running the production line for product WIN are semi-variable and can be analysed using the formula: y = 375, x where y is the total cost of production and x is the units produced in a period. You are to complete the following table to forecast production costs for the output volumes shown. Period Output 25,000 28,700 27,120 Production costs

23 2 2 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e 5.11 You are told that the costs of production are semi-variable. Your manager wants to use a regression line formula of the form: y = a + bx where y is the total cost of production and x is the units produced in a period, a represents the fixed costs per period and b is the variable costs per unit. Use the data in the table below and the high-low method to calculate the values of a and b. Period Output Costs 1 42,000 1,388, ,000 1,543,000 The value of a is The value of b is S P L I T T I N G VA R I A N C E S 5.12 A raw material has a standard cost per kg of This was set when the relevant materials price index had a value of During March, 12,700 kg was purchased at a cost of 189,850. The price index for March was Complete the following statements, giving your answers in whole pounds. Do not use rounded cost per kg. (a) The materials price variance for March was adverse/favourable (b) The part of the variance due to the increase in the index is adverse/favourable (c) The part of the variance not due to the increase in the index is adverse/favourable

24 e x a m p r e p a r a t i o n e x e r c i s e s A raw material has a standard cost per litre of 180. This was set when the relevant materials price index had a value of 223. During February, 4,350 litres were purchased at a cost of 826,500. The price index for February was Complete the following statements, giving your answers in whole pounds. Do not round any figures within your calculations. (a) The materials price variance for February was adverse/favourable (b) The part of the variance due to the increase in the index is adverse/favourable (c) The part of the variance not due to the increase in the index is adverse/favourable 5.14 The actual price of raw material ING is subject to significant seasonal variations. The standard price per kg is ,720 kg were purchased during period 7 at a total price of 22,500. Seasonal variations are 30% during period 7. Complete the following statements, giving your answers in whole pounds. (a) The materials price variance for period 7 was adverse/favourable (b) The part of the variance due to the seasonal variation is adverse/favourable (c) The part of the variance not due to the seasonal variation is adverse/favourable 5.15 The actual price of raw material LIV is subject to significant seasonal variations. The standard price per kg is ,100 kg were purchased during May at a total price of 547,950. In May, the seasonal variations were 275p. Complete the following statements, giving your answers in whole pounds. (a) The materials price variance for May was adverse/favourable (b) The part of the variance due to the seasonal variation is adverse/favourable (c) The part of the variance not due to the seasonal variation is adverse/favourable

25 2 4 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e 6 Calculation of performance indicators (AAT Assessment Task 7) I N T R O D U C T I O N Task 7 examines the calculation of performance indicators. This is a topic examined in several level 4 units. The focus here is on the analysis of information for decision making and control. For example, the indicators may need to be calculated to assess the profitability of proposed selling strategies or to benchmark performance against competitors. They could also be asked for in the context of management monitoring of actual results. As a consequence of the above, the performance indicators include simple measures such as selling price per unit, in addition to the normal measures of margins, use of assets and financing. There are also a few non-financial ratios, such as the efficiency ratio, which are not included in other level 4 units and need to be learnt for financial performance. Where unusual performance indicators are set, the formulas for them will be given. Most questions simply give you a summary of operating results followed by a table of ratios to be completed. However, other formats are also used, for instance, being required to complete formulas for ratios.

26 e x a m p r e p a r a t i o n e x e r c i s e s 2 5 p r a c t i c e e x e r c i s e s 6.1 You have been provided with the following information for companies Alpha and Beta. Company Alpha Company Beta Sales units 200,000 50,000 Sales revenue 80,000 25,000 Direct materials 20,000 6,000 Direct labour 24,000 7,500 Fixed production costs 20,000 6,500 Total cost of sales 64,000 20,000 Gross profit 16,000 5,000 Selling and distribution 2, Administration costs 1, Operating profit 12,000 3,570 Net assets 120,000 42,000 Inventory 5,300 1,800 Total debt 140,000 28,000 Calculate the following performance indicators for companies Alpha and Beta, give your answers to two decimal places. Company Alpha Company Beta Selling price per unit Material costs per unit Labour costs per unit Fixed production costs per unit Full production cost per unit Gross profit margin % Operating profit margin % Return on net assets % Inventory holding period in days Gearing ratio %

27 2 6 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e 6.2 A new product is due to be launched, you have been provided with the following information for two different sales strategies. Strategy 1 Strategy 2 Sales units 2,000 5,000 Turnover 400, ,000 Direct materials 100, ,000 Direct labour 60, ,000 Fixed production costs 120, ,000 Total cost of sales 280, ,000 Gross profit 120, ,000 Selling and distribution 44,000 60,000 Administration costs 60,000 65,000 Net profit 16,000 85,000 Net assets 160, ,000 Current assets 60, ,000 Trade payables 12,500 28,000 Current liabilities 20,000 35,000 Calculate the following performance indicators for Strategy 1 and Strategy 2, give your answers to two decimal places. Selling price per unit Material costs as a % of turnover Fixed production costs per unit Gross profit margin % Net profit margin % Return on net assets % Trade payables days Current ratio Strategy 1 Strategy 2

28 e x a m p r e p a r a t i o n e x e r c i s e s During March, a company produced 15,200 units in 37,500 hours. Budgeted production was 14,400 units. The standard time to produce a unit is 2.5 hours. Calculate the labour efficiency, capacity and activity ratios for March and complete the table below. Give your answers to two decimal places. Formulas Labour efficiency ratio = standard hours for production hours worked x 100 Labour capacity ratio = actual hours worked budgeted hours worked Labour activity ratio = standard hours for actual production budgeted production hours Ratio % Labour efficiency ratio Labour capacity ratio Labour activity ratio 6.4 Complete the formula for the quick ratio (acid test ratio) by selecting the correct components from the list in the table. Current assets Current liabilities x Current assets minus inventory Total debt Inventory Operating profit %

29 2 8 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e 7 Decision-making (AAT Assessment Task 8) I N T R O D U C T I O N This task examines decision-making. Break-even analysis, together with the calculation of the margin of safety, is frequently assessed, as are limiting factors, make or buy decisions and special orders. p r a c t i c e e x e r c i s e s 7.1 A company is planning to launch a new product and is considering two possible selling prices. Forecasts for costs and revenues with each selling price are shown below. Strategy 1 Strategy 2 Selling price Demand 5,000 8,000 Materials cost/unit Labour cost/unit Fixed production cost/unit Total cost Complete the table below. Strategy 1 Strategy 2 Contribution per unit Total fixed production costs Forecast profit Breakeven point (units) Margin of safety (units) Margin of safety %

30 e x a m p r e p a r a t i o n e x e r c i s e s A company produces a product in two sizes, Regular and Large, with costs and revenues per unit as shown below. Regular Large Selling price Direct materials ( 20/kg) Direct labour Customers buy a total of 10,000 products each week. Complete the following sentences/delete as appropriate: (a) (b) If there is no shortage of resources, the company should prioritise the sales of Regular/Large as this will maximise profits. If fixed costs are 10,000 a week and forecast sales are 6,000 Regular and 4,000 Large, weekly forecast profits will be: (c) Raw materials are in short supply in the coming week. (1) The contribution per kg for Regular is (2) The contribution per kg for Large is (3) The company should maximise sales of Regular/Large to maximise profits.

31 3 0 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e 7.3 A company produces two products, the Shiver and the Shake with costs and revenues per unit as shown below. Shiver Shake Selling price Direct materials ( 10/kg) Direct labour Demand 12,000 15,000 Production capacity is restricted to a maximum of 20,000 units per week. Answer the following/delete as appropriate: (a) (b) If there is no shortage of resources, the company should prioritise the sales of Shiver/Shake as this will maximise profits. If there is no shortage of resources, the company should produce the following quantities of Shiver and Shake: Production plan Shiver Shake (c) Raw materials are in short supply in the coming week, only 36,000kg will be available. (1) The contribution per kg for Shiver is (2) The contribution per kg for Shake is (3) The company should produce the following quantities of Shiver and Shake: Production plan Shiver Shake

32 e x a m p r e p a r a t i o n e x e r c i s e s The following shows the standard costs of product LIQ: Total Selling price Direct materials 1.20 Direct labour 0.80 Fixed overheads (based on output of 8,000 units) 3.00 Total 5.00 Profit 5.00 The product is sold in the UK, 8,000 units are produced and sold per period, production capacity is 10,000 per period. A customer from the US has offered to buy 1,500 units per period at a price of 3.50 per unit. Complete the following sentences/delete as appropriate: (a) There is/is not enough capacity to accept the order. (b) The order should be accepted/rejected because the contribution/profit per unit is positive/negative.

33 3 2 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e 7.5 The following shows the standard costs of product RIC: Total Selling price 17 Variable production costs 9 Fixed overheads (based on output of 7,000 units) 4 Total production cost 13 Profit 4 The product is sold in the UK, 7,000 units are produced and sold per week, production capacity is 8,000 per week. A customer from Argentina has offered to buy 1,500 units per week at a price of 15 per unit, they will not accept part delivery of the order. Finished RICs could be bought in from a competitor at a price of 16 per unit. Complete the following table and make a recommendation as to whether or not the order should be accepted and 500 finished RICs bought in. Total Incremental revenue Incremental costs: Variable production costs Purchase of finished components Fixed production costs Incremental profit/(loss) Recommendation: Accept/reject the order and buy in/do not buy in 500 components.

34 e x a m p r e p a r a t i o n e x e r c i s e s Cost management techniques (AAT Assessment Task 9) I N T R O D U C T I O N Task 9 examines cost management techniques, which include Lifecycle costing, Target costing and Activity based costing. Questions are often about Lifecycle costing or Target costing. Lifecycle costing questions are of two formats. You can be asked to decide between two different ways of paying for equipment leasing or buying and to calculate the net present cost of each option. Alternatively, you can be asked to evaluate the costs and benefits of, for instance, increased mechanisation and to work out if a proposed change has a positive or a negative present value. Care must be taken in these questions to use minus signs as instructed. Target costing exercises frequently ask you to calculate the target cost of a product and then to sub-divide this and calculate the target materials cost or the target fixed production cost. L I F E C Y C L E C O S T I N G p r a c t i c e e x e r c i s e s 8.1 A firm is planning the introduction of new computers on its production line. It has two options to finance the purchase it can buy the computers or lease them from the manufacturer. You are to calculate the net present cost of each option and recommend which one should be selected. If the computers are purchased, they will cost 50,000 and last for four years, at the end of which they will have a scrap value of 5,000. Annual service costs will be 2,000 paid in arrears. Complete the table to calculate the discounted lifecycle cost of purchasing the computers. Net cash outflows must be shown as positive figures and net cash inflows as negative figures. If there are nil cashflows for any years, you must enter zero in the appropriate box. Round your answers to the nearest. Time Net cash flow Discount factor Present value Net present cost

35 3 4 a n a l y s i n g f i n a n c i a l p e r f o r m a n c e t u t o r z o n e If the computers are leased, the lease payments will be 15,000 per annum, paid annually in advance. The lease payments will cover the annual service costs. Complete the table to calculate the discounted lifecycle cost of leasing the computers. Net cash outflows must be shown as positive figures and net cash inflows as negative figures. If there are nil cashflows for any years, you must enter zero in the appropriate box. Round your answers to the nearest. Time Net cash flow Discount factor Present value Net present cost Recommendation: the company should lease/buy the computers. 8.2 A firm is considering the purchase of new equipment which will reduce wastage in production. The equipment will cost 80,000 The equipment will reduce wastage of raw material from 4.5% to 2%. Raw materials used cost 900,000 per annum and are paid in arrears Annual maintenance costs will be 1,700 and are paid in arrears The machine will last five years and have a scrap value of 15,000 at the end of that time. Complete the table to calculate the net present value of the machine and recommend whether or not it should be purchased. Show net cash inflows as positive figures and net cash outflows as negative figures. If there are nil cashflows for any years, you must enter zero in the appropriate box. Round your answers to the nearest. Time Net cash flow Discount factor Present value Net present value Recommendation: the company should /should not buy the equipment.

36 e x a m p r e p a r a t i o n e x e r c i s e s 3 5 TA R G E T C O S T I N G 8.3 A company is introducing a new product which will be sold for 150. The target cost will be set to achieve a margin of 25%. The following information is available: Demand for the product is expected to be 40,000 units Fixed production costs are expected to be 800,000 Material cost per unit will be 70 Complete the table to calculate the target labour cost per unit to the nearest penny. Total target cost per unit Target material cost per unit Target fixed production costs per unit Target labour cost per unit 8.4 A company is introducing a new product which will be sold for 60. The target cost will be set to achieve a margin of 40%. The following information is available; Demand for the product is expected to be 25,000 units Material cost per unit will be minutes of direct labour will be required per unit at a cost of 12 per hour Complete the table to calculate the target fixed cost per unit. Total target cost per unit Target material cost per unit Target labour cost per unit Target fixed production cost per unit