Answers
Part 1 Examination Paper 1.2 Financial Information for Management June 2007 Answers Section A 1 B 2 A 3 A 4 A 5 D 6 C 7 B 8 C 9 D 10 C 11 C 12 A 13 C 14 B 15 C 16 C 17 B 18 C 19 D 20 C 21 C 22 D 23 D 24 C 25 C 1 B 2 A 3 A Contribution per unit (CPU) = (36 0 60) 0 40 = 24 Break-even point = (81,000 24) = 3,375 units Margin of safety = (5,000 3,375) = 1,625 units 4 A Using the high low method: Variable cost per unit = [(470,000 18,000) 380,000] [24,000 15,000] = 8 Total fixed costs (below 20,000 units) = 380,000 (15,000 8) = 260,000 Total costs for 18,000 units = 260,000 + (18,000 8) = 404,000 5 D 6 C 7 B Weighted average after receipts on 7th = [(2,900 2) + (400 17 50)] 500 = 16 90 Value of issues = 100 (2,900 200) + [(190 + 170) 16 90] = 7,534 8 C Reorder level (Minimum usage in shortest lead time) + Reorder quantity = 1,800 (50 11) + 2,000 = 3,250 units = Maximum stock level 9 D 10 C Prime cost (300 + 400 + 100) = 800 + Production overheads (400 8) 40 = 2,000 + Non-production overheads (1 5 800) = 1,200 Total cost 4,000 11 C 17
12 A Absorption rate (Y) = 576,000 [(5 + 3) 12,000] = 6 per hour Absorption rate (Z) = 288,000 [(2 + 4) 12,000] = 4 per hour Fixed overhead cost per unit (K2) = [(3 6) + (4 4)] = 34 13 C Total overheads (T) = 128,000 + (0 30 140,000) = 170,000 Total overheads (P) = 180,000 + (0 70 170,000) + (0 40 140,000) = 355,000 14 B Closing work in progress (WIP) = (200 + 1,000 1,040) = 160 units WIP valuation = (160 0 40 20) = 1,280 15 C Opening WIP value 1,530 + Completion of opening WIP (200 0 60 20) 2,400 + Units started and finished in the month [(1,040 200) 20] 16,800 Total value of 1,040 completed units 20,730 16 C 17 B 18 C 19 D Fixed production overhead capacity variance: (Budgeted hours Actual hours worked) Standard fixed overhead rate = (8,000 8,400) 9 = 3,600 Favourable 20 C 200 units standard contribution per unit = [200 (40 30)] = 2,000 (F) 21 C 22 D 23 D 24 C CPU = (160,000 40,000) = 4 and variable cost per unit = (10 4) = 6 Units Selling price per unit CPU Total contribution 000 44,000 9 50 3 50 154 40,000 10 00 4 00 160 36,000 10 50 4 50 162 31,000 11 00 5 00 155 25 C Additional cost of Hours per unit to Additional cost Component buying in per unit manufacture per hour A 48 4 12 B 60 6 10 C 45 5 9 D 39 3 13 Lowest additional cost per hour saved is 9 and component C should be bought in. 18
Section B 1 (a) (i) Actual cost 532,800 Standard cost of actual production 520,000 (26,000 20) (ii) Actual cost 614,000 Standard cost of actual production 624,000 (26,000 24) (iii) and (iv) Actual cost 1,221,000 Actual hours at standard rate 1,200,000 (150,000 8) Standard cost of actual production 1,248,000 (26,000 48) Total variance 12,800 A Total variance 10,000 F Wage rate variance 21,000 A (iii) Efficiency variance 48,000 F (iv) (b) Budgeted contribution 700,000 [25,000 (120 92)] Sales variances: Price [(25,000 120) 2,995,000] 5,000 A Cost variances: Total direct materials [(a) (i)] 12,800 A Total variable production overhead [(a) (ii)] 10,000 F Direct labour: rate [(a) (iii)] 21,000 A efficiency [(a) (iv)] 48,000 F Total direct labour 27,000 F Actual contribution (See workings) 719,200 Workings: Actual sales (25,000 units) 2,995,000 Less: Actual production costs (26,000 units): Material + Labour + Production overhead 2,367,800 Less: Closing stock at standard cost (1,000 92) (92,000) (2,275,800) Actual contribution 719,200 (c) The rate variance is adverse ( 21,000) and the efficiency variance is favourable ( 48,000). A possible explanation of how these could be interrelated is that higher graded, more skilled workers, were used last month to produce gonds and were paid at a higher wage rate than standard thus giving the adverse rate variance. These higher graded, more skilled workers were more efficient and produced the gonds in less than the standard time allowed 26,000 units should have taken 156,000 hours (that is 6 hours per unit) to manufacture whereas they were produced in only 150,000 hours thus giving a favourable efficiency variance. 19
2 (a) Let x = the number of units of product X and let y = the number of units of product Y. Objective function (maximisation of contribution): (200 170) x + (250 210) y = 30x + 40y Constraint formulations: Materials: 12x + 8y 540,000 Labour: 5x + 8y 400,000 Demand (Y): y 40,000 Non-negative x, y 0 The constraints and objective function can be represented as follows: Y Units 000 67 5 50 0 Materials 40 0 A B C Demand (Y) 15 0 Labour 0 20 0 D 45 0 80 0 X Units 000 The feasible region is OABCD. By moving the objective function line (dotted) away from the origin it can be determined that the optimal point is C (the intersection of the material and labour constraint lines). The values of x and y at this point can be read from the graph or found by solving the equations for the two constraint lines simultaneously, as follows: (1) 12x + 8y = 540,000 (Materials) (2) 5x + 8y = 400,000 (Labour) Subtracting (2) from (1) gives 7x = 140,000 x = 20,000 Substituting for x in (1) gives (12 20,000) + 8y = 540,000 8y = 300,000 y = 37,500 The optimal production plan for next year is to manufacture and sell 20,000 units of product X and 37,500 units of product Y. The resultant total contribution is [(20,000 30) + (37,500 40)] = 2,100,000. Alternative approach (which does not involve drawing a graph): Each production possibility is evaluated in terms of total contribution, as follows: (1) Materials. Using all the materials available (540,000 kg), 45,000 units of X or 67,500 units of Y could be produced. For Y, this exceeds the demand constraint. The contribution from 45,000 units of X is (45,000 30) = 1,350,000. (2) Labour. Using all the labour hours available (400,000), 80,000 units of X or 50,000 units of Y could be produced. There is insufficient material available for this quantity of X [see (1)]. In the case of Y, production is restricted to 40,000 units which uses only 320,000 hours, leaving 80,000 hours for the production of 16,000 units of X. The total contribution from this production mix is [(16,000 30) + (40,000 40)] = 2,080,000. (3) The other production mix possibility is found by solving the following equations simultaneously: 12x + 8y = 540,000 and 5x + 8y = 400,000 This calculation has been done above under the graphical approach and gives a total contribution of 2,100,000. The optimal solution is (3) as it gives the highest total contribution. It involves the production of 20,000 units of product X and 37,500 units of product Y. 20
(b) Any scarce resource that is fully utilised in the optimal solution will have a shadow price. It would be worth paying more than the normal price to obtain more of the scarce resource because of the contribution foregone by not being able to satisfy the sales demand. Hence the shadow price of a so-called binding constraint is the amount by which the total contribution would increase if one more unit of the scarce resource became available. In the case of Plaza Ltd there are two binding constraints next year materials and labour (all available materials and labour are used in the optimal solution) therefore each will have a shadow price. 3 (a) Process K Account Litres Litres Materials input 90,000 450,000 Normal loss 3,600 18,000 (4% 90,000) Conversion costs 216,000 Abnormal loss [W1] 1,200 9,000 (4,800 3,600) Output: Product P1 [W2] 56,800 355,000 Product P2 [W2] 28,400 284,000 90,000 666,000 90,000 666,000 Workings: W1 Valuation of abnormal loss and combined total output of 85,200 litres (P1 + P2) is at a cost per litre of: (666,000 18,000) (90,000 3,600) = 7 50 Abnormal loss valuation: (1,200 7 50) = 9,000 W2 Total output (85,200) split P1 : P2 in ratio 2 : 1, P1 = 56,800 and P2 = 28,400 Combined total output of P1 + P2 valued at: (85,200 7 50) = 639,000 Split between P1 and P2 in the ratio of the sales value of production : P1 : P2 is (56,800 25) : (28,400 40) = 1,420 : 1,136 = 1 25 : 1 Product P1 valuation = (1 25 2 25) 639,000 = 355,000 Product P2 valuation = (1 00 2 25) 639,000 = 284,000 (b) Assuming 100 litres of product P1: Revenue from sale of 100 litres of P1 (100 25) 2,500 Revenue from sale of (100 0 92) litres of XP1 (92 30) 2,760 Additional revenue 260 Further processing costs of converting P1 into XP1 (100 3) 300 Additional costs exceed additional revenue by (40) Product P1 should not be further processed to make product XP1 as additional costs exceed additional revenue by 40 for every 100 litres of product P1. 21
4 (a) per unit per unit Selling price (4,400,000 40,000) 110 Less Variable costs: Production (1,800,000 45,000) 40 Selling, admin and distribution (360,000 40,000) 9 (49) Contribution 61 (i) Total contribution (61 40,000) 2,440,000 000 (ii) Total contribution [as in (i)] 2,440 Less Total fixed costs: Production 1,476 Selling, admin and distribution 598 (2,074) Net profit 366 Alternative calculation of marginal costing net profit: 000 Net profit (absorption costing) 530 Less Increase in stock (5,000 units) at fixed production cost per unit (1,476,000 45,000) (164) Net profit (marginal costing) 366 (b) (c) Let x = number of units produced and sold at the break-even point. At the break-even point: Total contribution = Total fixed costs 61x = 2,074,000 x = 34,000 units When production units and sales units are not the same in a period, that is when opening and closing stocks are different, the profits calculated under absorption costing (AC) and marginal costing (MC) will not be the same. The stock valuation under AC includes a share of the fixed production overhead costs whereas under MC stocks are valued only at variable production cost. Marco Ltd has no opening stock next year but a closing stock of 5,000 units. Under AC this closing stock will contain an element of fixed production overhead costs which will be carried forward to the following year. Whereas under MC all the fixed production overhead costs will have been written off next year against profits and not included in the closing stock valuation. The effect of this is that next year s MC profit ( 366,000) will be lower than the AC profit ( 530,000). The two profits will be the same in a period when production and sales units are the same, that is when there is no change in stocks. 5 (a) (i) The relevant cost of material in regular usage will be its replacement cost. So the relevant cost of 2,500 kg of material R will be: (2,500 25 1 08) = 67,500. (ii) The relevant cost of skilled labour in short supply will be the labour cost itself plus its opportunity cost (lost contribution from its alternative use). The alternative use of the skilled labour is the production of product T which makes a contribution of 30 using (25 10) = 2 5 hours of the skilled labour. So the relevant cost of 600 hours of skilled labour will be: (600 10) + [600 (30 2 5)] = 13,200. (b) Relevant costs are those future cash costs that change as a direct consequence of undertaking the contract. This general approach applies to variable and fixed production overhead costs as well as to materials and labour. Generally variable production overhead costs tend to be relevant because by definition they vary with activity. So if the contract involves more activity then more variable production overhead costs will be incurred. An example of a variable production overhead cost is power charged at a rate per unit used (gas or electricity). On the other hand, if the fixed production overhead costs do not change as a result of undertaking the contract then they are not relevant. Examples of such costs would be rent or rates. However, if the contract causes a step up in the fixed production overhead costs then the amount by which they change is a relevant cost to the contract. 22
Part 1 Examination Paper 1.2 Financial Information for Management Section A June 2007 Marking Scheme Marks Each of the 25 questions in this section is worth 2 marks 50 Section B 1 (a) (i) to (iv) Variances (1 mark per variance) 4 (b) Budgeted contribution 1 Sales price variance 1 Variances from (a) 1 Actual contribution 2 Layout/presentation of statement 1 6 (c) Explanation 2 12 2 (a) Formulation of objective function 1 Formulation of constraints 3 Optimal production plan 3 Resultant contribution 1 8 (b) Explanation of shadow price 2 Shadow prices 1 3 11 3 (a) Debit entries 1 Normal loss 1 1 /2 Abnormal loss 2 Outputs 2 1 /2 7 (b) Additional revenue 1 1 /2 Additional costs 1 Decision 1 /2 3 10 4 (a) Total contribution 2 1 /2 Net profit 1 1 /2 4 (b) Break-even point 2 (c) Explanation for profit difference 2 Condition for equal profits 1 3 9 23
Marks 5 (a) Relevant cost material R 2 Relevant cost skilled labour 3 5 (b) Explanation of relevant cost concept 1 Application to variable and fixed production overhead costs 1 Examples 1 3 8 24