Financial Information for Management

PART 1 FRIDAY 9 JUNE 2006

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A ALL 25 questions are compulsory and MUST be answered ALL FIVE questions are compulsory and MUST be answered

Section B

Formulae Sheet is on page 13

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

The Association of Chartered Certified Accountants

Paper 1.2

Section A ALL 25 questions are compulsory and MUST be attempted. Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question. Each question within this section is worth 2 marks. 1 A supplier of telephone services charges a fixed line rental per period. The first 10 hours of telephone calls by the customer are free, after that all calls are charged at a constant rate per minute up to a maximum, thereafter all calls in the period are again free. Which of the following graphs depicts the total cost to the customer of the telephone services in a period?
AA BB

Hours

Hours

CC

D D

Hours

Hours

Four vertical lines have been labelled P, Q, R and S at different levels of activity on the following profit-volume chart:

S 0 P Q R Output

Which line represents the total contribution at that level of activity? A B C D Line Line Line Line P Q R S 2

A company manufactures a single product which it sells for 15 per unit. The product has a contribution to sales ratio of 40%. The companys weekly break-even point is sales of 18,000. What would be the profit in a week when 1,500 units are sold? A B C D 900 1,800 2,700 4,500

The following production and total cost information relates to a single product organisation for the last three months: Month 1 2 3 Production units 1,200 1,900 1,400 Total cost 66,600 58,200 68,200

The variable cost per unit is constant up to a production level of 2,000 units per month but a step up of 6,000 in the monthly total fixed cost occurs when production reaches 1,100 units per month. What is the total cost for a month when 1,000 units are produced? A B C D 54,200 55,000 59,000 60,200

Which of the following is NOT a feasible value for the correlation coefficient? A B C D + 12 + 06 +0 06

The following statements relate to responsibility centres: (i) Return on capital employed is a suitable measure of performance in both profit and investment centres. (ii) Cost centres are found in manufacturing organisations but not in service organisations. (iii) The manager of a revenue centre is responsible for both sales and costs in a part of an organisation. Which of the statements, if any, is true? A B C D (i) only (ii) only (iii) only None of them

The purchase price of a stock item is 25 per unit. In each three month period the usage of the item is 20,000 units. The annual holding costs associated with one unit equate to 6% of its purchase price. The cost of placing an order for the item is 20. What is the Economic Order Quantity (EOQ) for the stock item to the nearest whole unit? A B C D 1,730 1,894 1,461 1,633

[P.T.O.

A company determines its order quantity for a raw material using the EOQ model. What would be the effects on the EOQ and on the total annual stockholding cost of a decrease in the cost of placing an order for the raw material? EOQ A B C D Increase Decrease Increase Decrease Total annual stockholding cost No effect No effect Increase Decrease

A company uses standard absorption costing. The following data relate to last month: Budget Actual Sales and production (units) 1,000 900 Standard Actual Selling price per unit 50 52 Total production cost per unit 39 40 What was the adverse sales volume profit variance last month? A B C D 1,000 1,100 1,200 1,300

10 A company operates a standard marginal costing system. Last month actual fixed overhead expenditure was 2% below budget and the fixed overhead expenditure variance was 1,250. What was the actual fixed overhead expenditure for last month? A B C D 61,250 62,475 62,500 63,750

11 An organisations stock records show the following transactions for a specific item during last month: Date 4th 13th 20th 27th Receipts units 200 50 50 Issues units 50

The stock at the beginning of last month consisted of 100 units valued at 6,700. The receipts last month cost 62 per unit. The value of the closing stock for last month has been calculated twice once using a FIFO valuation and once using a LIFO valuation. Which of the following statements about the valuation of closing stock for last month is correct? A B C D The The The The FIFO LIFO FIFO LIFO valuation valuation valuation valuation is is is is higher higher higher higher than than than than the the the the LIFO FIFO LIFO FIFO valuation valuation valuation valuation by by by by 250. 250. 500. 500.

12 A company uses absorption costing with a predetermined hourly overhead absorption rate. The following situations arose last month: (i) Actual hours worked exceeded planned hours. (ii) Actual overhead expenditure exceeded planned expenditure. Which of the following statements is correct? A B C D Situation (i) would cause overheads to be over absorbed and situation (ii) would cause overheads to be under absorbed. Situation (i) would cause overheads to be under absorbed and situation (ii) would cause overheads to be over absorbed. Both situations would cause overheads to be over absorbed. Both situations would cause overheads to be under absorbed.

13 A factory consists of two production cost centres (G and H) and two service cost centres (J and K). The total overheads allocated and apportioned to each centre are as follows: G H J K 40,000 50,000 30,000 18,000 The work done by the service cost centres can be represented as follows: G H J K Percentage of service cost centre J to 30% 70% Percentage of service cost centre K to 50% 40% 10% The company apportions service cost centre costs to production cost centres using a method that fully recognises any work done by one service cost centre for another. What are the total overheads for production cost centre G after the reapportionment of all service cost centre costs? A B C D 58,000 58,540 59,000 59,540

14 The (i) (ii) (iii)

following statements refer to strategic planning: It is concerned with quantifiable and qualitative matters. It is mainly undertaken by middle management in an organisation. It is concerned predominantly with the long term.

Which of the statements are correct? A B C D (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii)

15 The following statements refer to situations occurring in Process Q of an organisation which operates a series of consecutive processes: (i) Direct labour is working at below the agreed productivity level. (ii) A machine breakdown has occurred. (iii) Direct labour is waiting for work to be completed in a previous process. Which of these situations could give rise to idle time? A B C D (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii) 5 [P.T.O.

16 The (i) (ii) (iii)

following terms relate to computers: Spreadsheets Floppy disks Operating systems

Which of these terms are examples of computer software? A B C D (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii)

17 A company operates a job costing system. Job number 506 requires 64 of direct materials and 7 hours of direct labour. Direct labour is paid 8 per hour. Production overheads are absorbed at the rate of 20 per direct labour hour and non-production overheads at a rate of 60% of prime cost. What is the total cost of job number 506? A B C D 332 352 416 448

18 All of a companys skilled labour, which is paid 8 per hour, is fully employed manufacturing a product to which the following data refer: per unit Selling price Less Variable costs: Less Skilled labour Less Others per unit 60

20 15 (35) 25

Contribution

The company is evaluating a contract which requires 90 skilled labour hours to complete. No other supplies of skilled labour are available. What is the total relevant skilled labour cost of the contract? A B C D 720 900 1,620 2,160

19 A company requires 600 kg of raw material Z for a contract it is evaluating. It has 400 kg of material Z in stock which were purchased last month. Since then the purchase price of material Z has risen by 8% to 27 per kg. Raw material Z is used regularly by the company in normal production. What is the total relevant cost of raw material Z to the contract? A B C D 15,336 15,400 16,200 17,496

The following information relates to questions 20 and 21: A company operates a process costing system using the first-in-first-out (FIFO) method of valuation. No losses occur in the process. All materials are input at the commencement of the process. Conversion costs are incurred evenly through the process. The following data relate to last period: Units Degree of completion Opening work in progress 12,000 60% Total number of units completed 14,000 Closing work in progress 13,000 30% Costs arising: Materials 151,000 Conversion 193,170

20 What was the total number of units input during last period? A B C D 12,000 13,000 15,000 17,000

21 What was the value of the closing work in progress for last period? A B C D 21,330 21,690 22,530 22,890

22 A company is attempting to break into an existing market by launching a new product at an initially low selling price. What pricing policy is the company following? A B C D Premium pricing Price skimming Price discrimination Penetration pricing

23 A company has established the following equations for one of its products: Selling price ( per unit) = Marginal revenue ( per unit) = Total cost per week () = Q in each case represents the number 40 0008Q 40 0016Q 2,500 + 8Q of units produced and sold per week.

At what selling price per unit will weekly profits be maximised? A B C D 8 16 24 32

[P.T.O.

The following information relates to questions 24 and 25: A company which manufactures and sells two products (X and Y) aims to maximise its profits. It holds no stocks. Product X makes a contribution per unit of 4 and product Y makes a contribution per unit of 1. Next period the company faces three less than production constraints and these are shown as the lines labelled (1), (2) and (3) on the following graph:
Product Y units 11 000 10 9 8 7 6 5 4 3 2 K 1 L 1 2 3 4 5 6 7 8 9 10 11 12 13 Product X 14 units 000 (1) J H (2) (3)

24 Which of the following points shown on the graph is optimal for next period? A B C D Point Point Point Point H J K L

25 Which of the following constraint formulations is represented by the line labelled (2) on the graph? A B C D 10X 17X 17X 13X + + + + 17Y 10Y 13Y 1 7Y 70,000 70,000 91,000 91,000

(50 marks)

Section B ALL FIVE questions are compulsory and MUST be attempted 1 Corcoran Ltd operates several manufacturing processes. In process G, joint products (P1 and P2) are created in the ratio 5:3 by volume from the raw materials input. In this process a normal loss of 5% of the raw material input is expected. Losses have a realisable value of 5 per litre. The company holds no work in progress. The joint costs are apportioned to the joint products using the physical measure basis. The following information relates to process G for last month: Raw materials input 60,000 litres (at a cost of 381,000) Abnormal gain 11,000 litres Other costs incurred: Direct labour 180,000 Direct expenses 154,000 Production overheads 110% of direct labour cost. Required: (a) Prepare the process G account for last month in which both the output volumes and values for each of the joint products are shown separately. (7 marks) The company can sell product P1 for 20 per litre at the end of process G. It is considering a proposal to further process product P1 in process H in order to create product PP1. Process H has sufficient spare capacity to do this work. The further processing in process H would cost 4 per litre input from process G. In process H there would be a normal loss in volume of 10% of the input to that process. This loss has no realisable value. Product PP1 could then be sold for 26 per litre. (b) Determine, based on financial considerations only, whether product P1 should be further processed to create product PP1. (3 marks) (c) In the context of process G in Corcoran Ltd, explain the difference between direct expenses and production overheads. (2 marks) (12 marks)

[P.T.O.

Buttercup Ltd manufactures and sells three products (R, S and T). These products are made using the same machinery. The total machining time available each month is 10,500 hours but this is insufficient to produce all the units of R, S and T required to meet maximum demands. No stocks of these products are held. The following information is available: Selling price per unit Contribution to sales ratio Machining minutes per unit Maximum monthly demand (units) Required: (a) Calculate the monthly shortfall in machining hours. (2 marks) Product R 60 20% 40 9,000 Product S 75 24% 54 6,000 Product T 84 25% 75 3,000

(b) Determine the monthly production plan in units that will maximise the companys total contribution from products R, S and T and calculate this total contribution. (6 marks) (8 marks)

Deadeye Ltd operates a standard costing system in which all stocks are valued at standard cost. The standard direct material cost of one unit of product MS is 36, made up of 48 kg of material H at 750 per kg. Material H is used only in the manufacture of product MS. The following information relates to last month: Material H: Purchased 40,000 kg for 294,000 Issued into production 36,500 kg Finished output of MS 17,200 units Required: (a) Calculate the direct material price and usage variances for last month. (3 marks)

(b) Prepare a statement that reconciles the actual cost of material H purchased with the standard material cost of actual production of MS for last month. The statement should incorporate the variances calculated in (a). (3 marks) (c) (i) Suggest ONE possible cause for EACH of the variances calculated in (a). (4 marks) (10 marks)

(ii) Who should the direct material price variance be reported to, and why?

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The management accountant at Josephine Ltd is trying to predict the quarterly total maintenance cost for a group of similar machines. She has extracted the following information for the last eight quarters: Quarter number 1 2 3 4 5 6 7 8 Total maintenance cost (000) 265 302 222 240 362 295 404 400 Production units (000) 20 24 16 18 26 22 32 30 The effects of inflation have been eliminated from the above costs. The management accountant is using linear regression to establish an equation of the form y = a + bx and has produced the following preliminary calculations: (total maintenance cost x production units) (total maintenance cost)2 (production units)2 Required: (a) Establish the equation which will allow the management accountant to predict quarterly total maintenance costs for a given level of production. Interpret your answer in terms of fixed and variable maintenance costs. (7 marks) (b) Using the equation established in (a), predict the total maintenance cost for the next quarter when planned production is 44,000 units. Suggest a major reservation, other than the effect of inflation, you would have about this prediction. (3 marks) (10 marks) = 61,250 million = 809,598 million = 4,640 million

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[P.T.O.

Pinafore Ltd manufactures and sells a single product. The budgeted profit statement for this month, which has been prepared using marginal costing principles, is as follows: 000 000 Sales (24,000 units) 864 Less Variable production cost of sales: Less Opening stock (3,000 units) 169 Less Production (22,000 units) 506 Less Closing stock (1,000 units) 1(23) (552) 312 Less Variable selling cost 1(60) Contribution 252 Less Fixed overhead costs: Less Production 125 Less Selling and administration 140 (165) Net profit 187 The normal monthly level of production is 25,000 units and stocks are valued at standard cost. Required: (a) Prepare in full a budgeted profit statement for this month using absorption costing principles. Assume that fixed production overhead costs are absorbed using the normal level of activity. (6 marks) (b) Prepare a statement that reconciles the net profit calculated in (a) with the net profit using marginal costing. (2 marks) (c) Which of the two costing principles (absorption or marginal) is more relevant for short-run decision-making, and why? (2 marks) (10 marks)

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Formulae Sheet

End of Question Paper

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