ANSWERS

KA PLAN PUB L ISHIN G 37

M A2 : MA NAGIN G CO S TS A ND F INA NCES

MANAGEMENT INFORMATION

1 C
Data is unprocessed facts. (a) (b) and (d) all involve a degree of analysis and are therefore
information.

2 B
A cost unit is a unit of production or service. (b) is a cost centre.

3 C
Cost accounts are for internal use and do not have to comply with accounting standards.

4 A
Actual overheads would initially be recorded in the fixed overheads account as a debit. As
goods are produced (not sold) overheads are transferred (by a credit) into the work-in-
progress account (as a debit) using a standard absorption rate.

5 C
Item B describes the costs of an activity or cost centre. Item A describes cost units. Item D
describes budget centres. A cost centre is defined as ‘a production or service location,
function, activity or item of equipment for which costs can be ascertained’.

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COST CLASSIFICATION AND COST BEHAVIOUR

6 D
A direct cost is a cost that can be directly identified with a cost unit. Material is the most
common example.

7 D
Total variable cost must pass through the origin.

8 D
Using the high-low method

High Low Difference

(March) (January)
Output 570 525 45
Cost $1,462.50 $1,406.25 $56.25
Variable cost per unit $56.25
= $1.25
45
Total cost = fixed cost + variable cost
For March
$1,462.50 = fixed cost + (570 + $1.25)
Therefore: Fixed cost = $1,462.50 − $712.50 = $750

9 C
$23,62 – $19,800
Variable cost per vehicle =
15 – 12
$3,825
= = $1,275
3
Fixed cost per vehicle = $23,625 − 15 × $1,275 = $4,500
Forecast cost for 18 vehicles = 18 × $1,275 + $4,500 = $27,450

10 B
The cost is fixed at $60,000 between 50 and 150 units of output, but goes up a step to
$90,000 when output is 200 or more. A step cost increase is due to an increase in an item of
expenditure that is normally considered as a fixed cost item. Increased storage
requirements would result in higher 'fixed costs' of rental for storage space, extra
depreciation of the additional shelving or racking, and so on. Items A, C and D relate to
variable cost items, and changes in these would not show step cost behaviour.

KA PLAN PUB L ISHIN G 39

M A2 : MA NAGIN G CO S TS A ND F INA NCES

11 C
A cost unit is a unit of product or service.

12 B
Raw material costs are direct production costs. A period cost is a cost deducted from the
profit in the period it is incurred rather than being included in the cost of the product

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ELEMENTS OF COST – MATERIALS

13 C

2 × 60 ,000 × $8
EOQ =
0.20
= 2,191 units

14 A
60 ,000
Frequency = = 27.4 say 28 times a year
2,191
= 365/28
= 13 days

15 A
Opening inventory 400 $2.20
Issue 250 $2.20 = 550
Receipt 500 $2.50
Issue 150 $2.20 = 330
190 $2.50 = 475
Receipt 400 $2.70
Issue 310 $2.50 = 775
290 $2.70 = 783
–––––
2,913
–––––

16 D
Closing inventory 110 $2.70 = 297

17 D
Opening inventory 400 $2.20
Issue 250 $2.20 = 550
Receipt 500 $2.50
Issue 340 $2.50 = 850
Receipt 400 $2.70
Issue 400 $2.70 = 1,080
160 $2.50 = 400
40 $2.20 = 88
–––––
2,968
–––––

18 A
Closing inventory 110 $2.20 = 242

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M A2 : MA NAGIN G CO S TS A ND F INA NCES

19 B
Opening inventory 400 $2.20 880
Issue (250) $2.20 (550)
Receipt 500 $2.50 1,250
––––– –––––

650 $2.43077 1,580

Issue (340) $2.43077 (826)
Receipt 400 $2.70 1,080
––––– –––––

710 $2.5831 1,834

Issue (600) $2.5831 (1,550)
––––– –––––
Closing inventory 110 $2.582 284
––––– –––––

Issues = 550 + 826 + 1,550 = $2,926

20 C

21 B
When raw material prices are rising, FIFO will issue materials to production at the earliest
(lowest) prices. Lower material prices mean lower costs and higher profit. So statement 1 is
false.
Weighted average pricing will average earlier (lower) and later (higher) prices so production
costs will be higher than if FIFO was used. So statement 2 is true.

22 B
Date Balance Value
units $
12 August Received (4,000 × $5) 4,000 20,000
15 August Issued (3,900 × $5) (3,900) (19,500)
–––––– ––––––
(100 × $5) 100 500
19 August Received (1,200 × $6) 1,200 7,200
–––––– ––––––
1,300 7,700
21 August Issued (100 × $5) + (1,000 × $6) (1,100) (6,500)
–––––– ––––––
(200 × $6) 200 1,200
24 August Received (2,800 × $7.5) 2,800 21,000
–––––– ––––––
3,000 22,200
–––––– ––––––

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23 C
Date Units Inventory Issues
$ $
1 May Opening 200 at $5 200 1,000
5 May Receipts 300 at $4.50 300 1,350
–––– ––––––
500 2,350
7 May Issues 300 at $4.50 + 100 at $5 (400) (1,850) 1,850
–––– ––––––
100 500
12 May Receipts 100 at $6 100 600
22 May Receipts 400 at $5.50 400 2,200
–––– ––––––
600 3,300
23 May Issues 400 at $5.50 (400) (2,200) 2,200
–––– ––––––
200 1,100
29 May Receipts 200 at $7 200 1,400
–––– ––––––
400 2,500
30 May Issues 200 at $7 (200) (1,400) 1,400
–––– ––––––
200 1,100 5,450
–––– ––––––

24 C

2 × $250 × 13,000
12% of $40
= √1,354,167
= 1,164 units.

KA PLAN PUB L ISHIN G 43

M A2 : MA NAGIN G CO S TS A ND F INA NCES

25 POPE & KG
(a) Litres

Maximum inventory level 150

Current inventory level 90
––––
60
Expected usage in lead time
(40 litres × 2 weeks) 80
––––
Re-order quantity 140
––––
(b) Re-order level = Maximum demand per day × Maximum lead time in days
4 ,000
= ×6
25
= 960 units

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ELEMENTS OF COST – LABOUR

26 A
A straight piece rate system is a variable cost so cost increases in direct proportion to
output.

27 D
$
Skilled labour
Product A 1,750 units × 2 × $10 35,000
Product B 5,000 units × 2 × $10 100,000
–––––––
135,000
–––––––
Unskilled labour
Product A 1,750 units × 3 hours/unit × $7/hour 36,750
Product B 5,000 units × 4 hours/unit × $7/hour 140,000
–––––––
176,750
–––––––
Total = $311,750

28 C
Employees
At start of year 4,600
Recruited during the year 1,800
–––––
6,400
At end of year 5,500
–––––
Therefore leavers during the year 900
–––––
Average number of employees = (4,600 + 5,500)/2 = 5,050.
Labour turnover rate = (900/5,050) × 100% = 17.8%, or 18% to the nearest percentage
figure.

29 A
Good output = 210 – 17 = 193 units.
$
100 units at $0.20 20.00
93 units at $0.30 27.90
–––––
For 193 good units 47.90
–––––

KA PLAN PUB L ISHIN G 45

M A2 : MA NAGIN G CO S TS A ND F INA NCES

30 TWISTER
Tutorial note:
Make it very clear what each part of your answer represents, and show all your workings to
gain maximum marks. You are told about overtime payments and idle time; these will need
to be split out as they are treated as overheads. You are given total hours worked and basic
hours which will allow you to calculate overtime.
(a) Total wages = $106,956.80.
Basic hours = 80 workers × 4 weeks × 38 hours per week = 12,160 hours
Overtime = Total hours worked – Basic hours = 13,056 – 12,160 =
896 hours
Total wages = basic pay + overtime premium = (13,056 × £8.00)
+ (896 × $8.00 × 35%)
= $104,448.00 + $2,508.80
= $106,956.80
(b) Labour overheads = $5,516.80.
$
Idle time = 376 hours × $8.00 = 3,008.00
Overtime premium = 2,508.80
––––––––
Labour overheads = 5,516.80
––––––––
(c)
Wages control account
$ $
Total wages 106,956.80 WIP account 101,440.00
Production overhead account:
Overtime premium 2,508.80
Idle time 3,008.00
–––––––––– ––––––––––
$106,956.80 $106,956.80
–––––––––– ––––––––––

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31 PIECEWORK BONUS
(a) Piecework

80 units $35.20 (guaranteed minimum wage)

120 units $36.00
210 units $63.00
Working

Guaranteed wage = 80% (8 × $5.50)

= $35.20
80 units standard time 80 × 3 = 240 minutes
∴ Piecework = $24
∴ Pay guaranteed wage
120 units standard time 120 × 3 = 360 minutes
∴ Piecework = $36
210 units standard time 210 × 3 = 630 minutes
∴ Piecework = $63
(b) Premium bonus
80 units $44.00
120 units $44.00
210 units $54.31
Working
Basic pay = 8 × $5.50 = $44
Units Time taken Time Saved
(minutes) allowed
80 480 240 –
120 480 360 –
210 480 630 150
Bonus for 210 units
150
× 75% × $5.50 = $10.31
60
Total wage = $44.00 + $10.31 = $54.31

KA PLAN PUB L ISHIN G 47

M A2 : MA NAGIN G CO S TS A ND F INA NCES

ELEMENTS OF COST – EXPENSES

32 EXPENSE CLASSIFICATION
Tutorial notes:
(1) A fairly straightforward question on fundamental cost accounting topics.
(2) Most of part (a) is obvious and students should be able to gain a majority of the
marks using very little time.
(3) Part (b) requires some thought.
(a) Ref no. Production Selling & Admin R&D
overhead dist overhead overhead overhead
1 x
2 x
3 x
4 x
5 x
6 x
7 x
8 x
9 x
10 x
11 x
12 x
13 x
14 x
15 x
16 x
(b) Direct production labour costs are treated as fixed because:
(i) workers are often paid on a time basis and have secured, guaranteed wages
(ii) employees are not hired and fired with small changes in activity – in this way
they tend to be more a type of ‘stepped cost’, not a true variable cost
(iii) bonuses and other incentives invalidate uniform unit cost assumptions.

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ABSORPTION COSTING

33 B
Budgeted overheads $691,125
= = $14.25
Budgeted labour hours 48,500

34 C
Incurred = $746,625
Absorbed 49,775 × $14.25 = $709,294
––––––––
Under absorbed 37,331
––––––––

35 A
$216,000
Budgeted hours =
$32
= 6,750

36 B
Actual overhead $225,900
Overhead absorbed 7,530 × $32 $240,960
––––––––
Over absorbed 15,060
––––––––

37 A
Actual overhead $170,800
Over absorption 6,000
––––––––
Overhead absorbed 176,800
––––––––
176,800
OAR =
34,000
= $5.20 per hour
156,000
Budgeted hours =
5.20
= 30,000

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M A2 : MA NAGIN G CO S TS A ND F INA NCES

38 C
The question must be asking about Cost Centre A only, since there is insufficient
information for Cost Centre B.
Absorption rate, Cost Centre A = $140,000/40,000 = $3.50 per machine hour.
$
Overhead absorbed (21,500 machine hours × $3.50) 75,250
Overhead incurred 73,500
––––––
Over-absorption of overhead 1,750
––––––

39 C
The answer has to be A or C. A supervisor’s time is probably more likely to be spent on
supervising employees in proportion to the hours worked rather than in proportion to the
numbers of employees. However, answer A should also be acceptable.

40 C
$
Actual overheads 500,000
Over-absorbed overhead 50,000
–––––––
Absorbed overheads 550,000
–––––––
Units produced: 110,000
Absorption rate = $550,000/110,000 = $5 per unit.

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MARGINAL COSTING AND ABSORPTION COSTING

41 C
$
Absorption costing profit 26,500
Decrease in inventory 200 × $7.40 1,480
––––––
Marginal costing profit 27,980
––––––

42 C
Increase in inventory 14,200 – 13,500 = 700 units
Profit difference $84,500 – 78,550 = £5,950
OAR $5,950/700 = £8.50

43 A
Fixed costs = $40 × 45% = $18
Increase in inventory 24,000 – 20,000 units = 4,000 units
As inventory is increasing absorption profit will be higher by 4,000 units × $18 = $72,000.

44 B
$
Sales price per unit 50.00
Variable cost per unit ($7.50 + $4.50 + $15.75) 27.75
–––––

Contribution per unit 22.25

–––––
Units of production/sale 50,000
Budgeted contribution (50,000 × $22.25) $1,112,500

45 D
Inventory would be valued at marginal production cost:
= 4,200 units × $27.75 = $116,550.

46 C
Budgeted fixed overhead cost per unit = $6
Budgeted production = 50,000 units.
Budgeted fixed overhead costs = $6 × 50,000 = $300,000.

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M A2 : MA NAGIN G CO S TS A ND F INA NCES

47 B
Sales = 50,000 – 4,200 – 45,800 units $
Contribution (45,800 units × $22.25) 1,019,050
Fixed costs 300,000
––––––––
Profit 719,050
––––––––

48 B
Sales = 50,000 – 4,200 – 45,800 units $
Sales (45,800 units × $50) 2,290,000
Full cost of sales (45,800 units × $33.75) 1,545,750
––––––––
Profit 744,250
––––––––
Note: Since actual production and budgeted production volumes are the same, there is no
over-absorbed overhead or under-absorbed overhead adjustment to profit.

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PRODUCT COSTS – JOB AND BATCH COSTING

49 C
Use % of labour cost as the overhead absorption method.
Total labour cost ($14,500 + $3,500 + $24,600) = $42,600

CC20 $24 ,600 $42,600 × $126,000 = $72,761

50 C
Total Cost BB15

51 D
Job BB15 was completed in the period and therefore there is no WIP value.
Job CC20 ($18,500 + $24,600 + $72,761) = $115,861
Job AA10 ($26,800 + $17,275 + $14,500) +
$14 ,500
( × $126,000) = $101,462
$2,600
––––––––
$217,323
––––––––

52 JOB X
PRODUCT X – JOB COST CARD
Department Total
A B C
$ $ $ $
Direct materials 700 800 850 2,350.00
Direct labour 1,260 350 200 1,810.00
Factory overhead (W) 630 280 250 1,160.00
TOTAL PRODUCTION COST 5,320.00
Administration overhead ($5,320 × 12%) 638.40
TOTAL COST 80% 5,958.40
Profit 20% 1,489.60
SELLING PRICE 100% 7,448.00
Working
Factory overheads:
A $72,000/24,000 = $3 per hour × 210 hours = $630
B $80,000/20,000 = $4 per hour × 70 hours = $280
C $60,000/12,000 = $5 per hour × 50 hours = $250

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M A2 : MA NAGIN G CO S TS A ND F INA NCES

PRODUCT COSTS – PROCESS COSTING

53 D
Input = 8,500 + 4,250 = 12,750 kg
Normal loss = 4% × 12,750 = 510 kg
Scrap value = 510 × $0.20 = $102

54 D
kg
Input 12,750
Output: Normal loss 510
––––––
Finished goods 12,700
––––––
13,210
––––––
Abnormal gain 460
––––––

55 B
Total input cost:
$
Process 1 8,500 × $2.68 = 22,780
Materials 1,615
Labour 2,278
Overheads $2,278 × 1.5 = 3,417
Normal loss scrap value (102)
––––––
29,988 ÷ 12,240
––––––
Cost per kg of output = $2.45.

56 A
An abnormal gain occurs when actual output from a process exceeds the expected output.
This occurs when actual loss is less than the expected (‘normal’) loss.

57 D
(340 ÷ [100 – 10 – 5])% = 340 ÷ 0.85 = 400

58 C
A, B and D are relevant to separate processes. The point of separation is specifically
relevant to joint products.

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59 JOINT PROCESS
(a) Total process costs:
$
Direct materials 24,000
Direct labour 48,000
–––––––
Prime cost 72,000
Factory overheads (1.2 × prime cost) 86,400
–––––––
Gross process cost 158,400
Less: Scrap proceeds (0.1 × 3,200 × $16.2) (5,184)
–––––––
Net process cost 153,216
–––––––
Chemical
X Y Z TOTAL
Output volume (litres) 1,440 864 576 2,880
Selling price per litre ($) 100 80 60
Sales value ($) 144,000 69,120 34,560 247,680
(i) Split by relative sales value ($) (W1) 89,079 42,758 21,379 153,216
(ii) Split by volume($) (W2) 76,608 45,965 30,643 153,216
Workings
(W1) $153,216 split in the proportions 144,000 : 69,120 : 34,560
(W2) $153,216 split in the proportions 1,440 : 864 : 576
(b) Conversion cost of 200 litres Chemical Z2
200 litres of good output represents 90% of the input. Input is thus 200 × 100/90 =
222.22 litres, with a conversion cost of:
$
Direct labour (222.22 × $50) 11,111
Factory overheads (222.22 × $40) 8,889
––––––
20,000
––––––

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60 LUDLUM PLC
(a) (i) A normal loss is an expected loss. It is a natural part of the process, e.g.
evaporation, sawdust from making furniture, etc, and does not indicate
inefficient working.
Normal loss does not pick up a share of the process costs. Normal loss is
shown in the process account at its scrap value if it has one.
(ii) An abnormal loss is a loss greater than expected. It is not a natural part of the
process and it does indicate inefficient working.
Abnormal loss does pick up a share of the process costs. It is costed on the
same basis as ordinary output. The abnormal loss is credited out of the
process account to an abnormal loss account and from there to the income
statement.

(b) Tutorial note: The most common mistake on this question is made when calculating
the cost per unit for the second process. It must be remembered that the output
from Process 1 is an input to Process 2 and should therefore be counted as part of
the costs of Process 2 and as part of the input in terms of kg as well.

Process 1
Total costs – Scrap value of normal loss
Cost/kg =
Expected output
$(2,500 + 800 + 1,600) – (1,000 × $0.30)
=
5,000 – (20% × 5,000)
= $1.15/kg
Process 1
Kg $ Kg $
Materials 5,000 2,500 Normal loss 1,000 300
Labour 800 Process 2 3,800 4,370
Production overhead 1,600 Abnormal loss 200 230
–––––– –––––– –––––– ––––––
5,000 4,900 5,000 4,900
–––––– –––––– –––––– ––––––
Process 2
$(4,370 + 3,200 + 1,753 + 1,753) – (780 × $0.70)
Cost per kg = = $1.50/kg
3,800 + 4,000 – (10% × 7,800)

Tutorial note: The normal loss has been calculated on the total input to Process 2 i.e.
10% of the 3,800 kg from Process 1 and the 4,000 kg of additional materials.

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Process 2
Kg $ Kg $
Process 1 3,800 4,370 Normal loss 780 546
Materials 4,000 3,200 Finished goods 7,270 10,905
Labour 1,753
Production overhead 1,753
Abnormal gain 250 375
–––––– ––––––
8,050 11,451
–––––– –––––– –––––– ––––––
8,050 11,451
–––––– ––––––
Abnormal loss a/c
Kg $ Kg $
Process 1 200 230 Scrap a/c 200 60
Income statement 170
–––– –––– –––– ––––
200 230 200 230
–––– –––– –––– ––––
Abnormal gain a/c
Kg $ Kg $
Scrap a/c 250 175 Process 2 250 375
Income statement 200
–––– –––– –––– ––––
250 375 250 375
–––– –––– –––– ––––
Finished goods a/c
Kg $ Kg $
Process 2 7,270 10,905

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SERVICE COSTING

61 MR G AND MRS H
(a)
Other
business
costs Vehicles
$ $
Salaries 40,000
 (13,000 – 4,000) × 2 
Car depreciation 6,000  
 3 years 
Electricity 1,200
Fuel 1,800
Insurance 600 800
Telephone – mobile 1,200
– office 1,800
Rent 8,400
Postage and stationery 500
Secretarial 8,400
Vehicle servicing 1,200
Road tax 280
–––––– ––––––
62,100 10,080
–––––– ––––––
(b)
Rates per hour
Productive $62,100/1,575 $39.43 per hour
Vehicle $10,080/18,000 $0.56 per km
(c) The business is providing a service which is specific to the needs of individual clients,
a job costing system is therefore appropriate.
Each client should have their own record sheet on which is entered details of time
spent, km travelled and any specific costs.
This will ensure that each client is charged for services received and where fees have
been agreed in advance, the profitability of the work can be measured.

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ESTIMATING COSTS AND REVENUES – CVP ANALYSIS

62 B
$210,000
BEP = = 17,500
$12 (W)
Working
c = 30%
s
c = 30%
£40
So c = $12

63 B
$210,000 + $60,000
BEP =
$12
= 22,500 units

64 C
The contribution/sales ratio is 20%.
If fixed costs go up by $8,000, the breakeven point will go up by $8,000/20% = $40,000.
Since the sales price is $40 per unit, the breakeven point would rise by 1,000 units.

65 B
Current year:
Variable cost per unit = $50
Sales price = $50 × (100/(100 – 75)) = $200
Contribution per unit = $150.
$
Total contribution (5,000 units × $150) 750,000
Fixed costs (5,000 units × $70) 350,000
–––––––
Profit 400,000
–––––––
Next year:
Sales price = $200 × 1.08 = $216
Variable cost per unit = $50 × 1.12 = $56
Contribution per unit = $160.

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$
Target profit (minimum) 400,000
Fixed costs (350,000 × 1.12) 392,000
–––––––
Target contribution 792,000
–––––––

Contribution per unit $160

Minimum sales required ($792,000/$160) 4,950 units
––––––––

66 C
$
Net profit 56,400
Fixed costs 30,000
–––––––
Contribution 86,400
–––––––

Contribution/sales ratio 30%

Sales ($86,400/30%) $288,000
Variable costs (70% of $288,000) $201,600
Direct wages cost (20% of $201,600) $40,320

67 C
$125,000
C/S ratio = = 0.416666
$300,000
$100,000
Break-even revenue = = $240,000
0.416666
300,000 – 240,000
Margin of safety = = 20%
300,000

68 C
$(36.6 + 312.7)
Sales required to maintain profit =
385.1 / 794.1
= $720,000

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ESTIMATING COSTS AND REVENUES – DECISION MAKING

69 A
The relevant cost of the stock of 150 kg is its scrap value (opportunity cost).
The relevant cost of the remaining 100 kg is the purchase cost.
$
Relevant cost = 150 × 6 900
100 × 12 1,200
––––––
2,100
––––––

70 D
L M N
$ $ $
Contribution/unit 30 42 38
Contribution/£mat 2 2.1 1.26
Ranking 2nd 1st 3rd

71 C
Scarce resource − 7,000 labour hours
A B C
Labour hours per unit 2.5 6 7.5
Contribution per unit $6.50 $6.80 $15
Contribution per labour hour $2.60 $1.13 $2
Ranking 1st 3rd 2nd
Optimal production plan
Product Units Hours
A 1,000 2,500
C 200 1,500
––––––
4,000
B (balance: 7,000/6) 500 3,000
––––––
7,000
––––––

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72 C
Materials required to meet sales demand = 1,000 × (1 + 0.5 + 2) = 3,500 square metres.
Labour required = 1,000 × (3 + 1 + 1) = 5,000 hours.
Labour is a limiting factor but materials are not.
Kilts Skirts Dresses
Contribution per unit $12 $5.50 $7
Contribution per labour hour $4 $5.50 $7
Ranking 3rd 2nd 1st
Since only 1,000 hours are available, profit will be maximised by making 1,000 dresses.

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ESTIMATING COSTS AND REVENUES – DCF TECHNIQUES

73 C
Year Cash flow Cumulative
cash flow
0 (750) (750)
1 100 (650)
2 250 (400)
3 600 200
400
2 years and × 12 = 8 months
600

74 D
Year Cash flow Discount PV
($000) factor at 12%
($000)
0 (750) 1 (750)
1 100 .893 89.3
2 250 .797 199.25
3 600 .712 427.2
4 375 .636 238.5
––––––
204.25
––––––

75 A
A lower cost of capital results in a higher net present value.

76 SG
Net present value at a discount rate of 10%
Year Cash flow Discount factor at Present value
10%
$ $
0 (65,000) 1.000 (65,000)
1 15,000 0.909 13,635
2 18,000 0.826 14,868
3 30,000 0.751 22,530
4 15,000 0.683 10,245
5 12,000 0.621 7,452
––––––
NPV + 3,730
––––––

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Net present value at a discount rate of 15%

Year Cash flow Discount factor at Present value
15%
$ $
0 (65,000) 1.000 (65,000)
1 15,000 0.870 13,050
2 18,000 0.756 13,608
3 30,000 0.658 19,740
4 15,000 0.572 8,580
5 12,000 0.497 5,964
––––––
NPV (4,058)
––––––
3,730
IRR = 10% + × (15 – 10) %
(3,730 – (–4,058))
= 10% + 2.4% = 12.4%

77 THE TRUFLY BALL

Year
0 1 2 3 4
Cash flow $ $ $ $ $
Equipment (145,000) 25,000
Contribution 52,000 67,600 114,400 104,000
Fixed costs (W) (36,000) (36,000) (36,000) (36,000)
Net cash flow (145,000) 16,000 31,600 78,400 93,000
16% d.f. 1.000 0.862 0.743 0.641 0.552
16% PV (145,000) 13,792 23,479 50,254 51,336
16% NPV $(6,139)
12% d.f. 1.000 0.893 0.797 0.712 0.636
12% PV (145,000) 14,288 25,185 55,821 59,148
12% NPV $9,442
(W) Depreciation = $145,000 – $25,000 = $120,000/4 = $30,000 per annum
Relevant fixed cost = $66,000 – $30,000 = $36,000
9,442 (16 – 12)%
IRR approximately = 12% + = 14.4%
9,442 – (6,139)

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CASH MANAGEMENT AND BUDGETS

78 B
Days
185
Days usage in inventory 420 × 365 160.8

Days sales in receivables 62.5

500 × 365 45.6
42
Days purchases in payables 280 × 365 (54.8)
–––––
WORKING CAPITAL CYCLE 151.6
–––––

79 A
Transaction 1
Transaction 1 results in a reduction in trade receivables and an equal reduction in the bank
overdraft. Current assets (CA) and current liabilities (CL) are therefore reduced by the same
amount. The company has positive working capital, which means that current assets are
greater than current liabilities. An equal reduction in CA and CL will therefore increase the
current ratio (which is the ratio of CA:CL).
If you are not sure about this, suppose that CA = 100,000 and CL = 50,000 so that the
current ratio is 2:1. An equal reduction in CA and CL by 10,000 would alter the current ratio
to 90,000:40,000 and increase the current ratio to 2.25:1.
Transaction 2
This transaction increases current assets (cash) but has no effect on current liabilities. The
current ratio will therefore increase.

80 C
Days
Inventory cycle 30
Trade receivables cycle 38
Trade payables cycle (44)
––––
Operating cycle 24
––––

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81 The answer is a net annual cost of $642,000.

$
Trade receivables with the discount offer
Half do not take the discount ($20 million/2) 10,000,000
Half take the discount and pay in 30 days ($60 million × 4,932,000
30/365) –––––––––
Total receivable 14,932,000
Trade receivables without the discount offer 20,000,000
–––––––––
Reduction in trade receivables 5,068,000
–––––––––

$
Interest saved (× 11%) 557,480
Cost of the discount (2% × $60 million) 1,200,000
–––––––––

82 The answer is $109,650.

January sales $150,000

February sales $165,000
Receipts in
February
$
January sales: 60% or $90,000 are credit sales. 3% are bad debts,
leaving $87,300 of collectables debts. Half are collected in February: 43,650
February sales: 40% are cash sales 66,000
–––––––
109,650
–––––––

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INFORMATION FOR COMPARISON

83 D
Actual Budget Variance Variance as a
$ $ $ percentage of
budget
Direct material 404,000 400,000 4,000 adverse 1.0% adverse
Labour 376,000 350,000 26,000 adverse 7.4% adverse

84 C

The labour variance would be investigated since it is more than 2% adverse.

85 C
Budgeted material cost per unit $25,500/600 = $42.50

$
580 units should cost (× $42.50) 24,650
did cost 25,839
––––––
Total material variance 1,189 A

86 A
Original budgeted labour cost = 8,000 × $6 = $48,000
Actual cost of labour = $47,600
Variance = $400 F

87 D
Original budgeted material cost = 6,500 × $12 = $78,000
Actual cost of material = $79,840
Variance = $1,840 A

88 B
Flexed budget = 8,800 × $5 = $44,000
Original budget = 9,000 × $5 = $45,000
Variance = $1,000 F

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89 B
Flexed budget sales: 12,000 units @ price of $20 = 240,000
Actual sales: 12,000 units @ price of $21 = 252,000
Difference 12,000

90 A
By definition.
B would give the variance due to price and efficiency differences.
C would give the variance due to activity volume differences.

91 B
Lower quality materials are likely to result in more waste and hence an adverse materials
usage variance

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REPORTING MANAGEMENT INFORMATION

92 C
The technical wizardry available should not distract the audience.

93 D

94 C
To be effective, communication must be clear, complete for its purpose and relevant to the
purpose. It does not have to be complex. On the contrary, complex information is
undesirable if it is not clear and understandable.

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