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ALL 50 questions are compulsory and MUST be attempted.
1 The following break-even chart has been drawn showing lines for total cost (TC), total variable cost (TVC), total fixed
cost (TFC) and total sales revenue (TSR):
TSR
TC
TVC
TFC
3 Regression analysis is being used to find the line of best fit (y = a + bx) from eleven pairs of data. The calculations
have produced the following information:
x = 440, y = 330, x2 = 17,986, y2 = 10,366, xy = 13,467 and b = 0.69171
What is the value of a in the equation for the line of best fit (to 2 decimal places)?
A 0.63
B 0.69
C 2.33
D 5.33
(2 marks)
5 A company uses an overhead absorption rate of $3.50 per machine hour, based on 32,000 budgeted machine hours
for the period. During the same period the actual total overhead expenditure amounted to $108,875 and 30,000
machine hours were recorded on actual production.
By how much was the total overhead under or over absorbed for the period?
A Under absorbed by $3,875
B Under absorbed by $7,000
C Over absorbed by $3,875
D Over absorbed by $7,000
(2 marks)
13 A company is evaluating a project that requires 400kg of raw material X. The company has 150kg of X in stock that
were purchased six months ago for $55 per kg. The company no longer has any use for X. The inventory of X could be
sold for $40 per kg. The current purchase price for X is $53 per kg.
What is the total relevant cost of raw material X for the project?
A $17,950
B $19,250
C $21,200
D $21,500
(2 marks)
14 Which of the following is NOT a feasible value for the correlation coefficient?
A +1.4
B +0.7
C 0
D 0.7
(2 marks)
A B
0 0
C D
0 0
(2 marks)
20 A companys budgeted sales for last month were 10,000 units with a standard selling price of $20 per unit and a
standard contribution of $8 per unit. Last month actual sales of 10,500 units at an average selling price of $19.50 per
unit were achieved.
What were the sales price and sales volume contribution variances for last month?
Sales price variance ($) Sales volume contribution variance ($)
A 5,250 Adverse 4,000 Favourable
B 5,250 Adverse 4,000 Adverse
C 5,000 Adverse 4,000 Favourable
D 5,000 Adverse 4,000 Adverse
(2 marks)
21 A company manufactures and sells one product which requires 8 kg of raw material in its manufacture. The budgeted
data relating to the next period are as follows:
Units
Sales 19,000
Opening inventory of finished goods 4,000
Closing inventory of finished goods 3,000
Kg
Opening inventory of raw materials 50,000
Closing inventory of raw materials 53,000
What is the budgeted raw material purchases for next period (in kg)?
A 141,000
B 147,000
C 157,000
D 163,000
(2 marks)
24 Which one of the following is most likely to operate a system of service costing?
A A printing company
B A hospital
C A firm of solicitors.
(1 mark)
25 The following budgeted information relates to a manufacturing company for next period:
Units $
Production 14,000 Fixed production costs 63,000
Sales 12,000 Fixed selling costs 12,000
The normal level of activity is 14,000 units per period.
Using absorption costing the profit for next period has been calculated as $36,000.
What would the profit for next period be using marginal costing?
A $25,000
B $27,000
C $45,000
D $47,000
(2 marks)
26 A company manufactures a single product which it sells for $20 per unit. The product has a contribution to sales ratio
of 40%. The companys weekly break- even point is sales revenue of $18,000.
What would be the profit in a week when 1,200 units are sold?
A $1,200
B $2,400
C $3,600
D $6,000
(2 marks)
(1)
(2)
(3)
0 X
The objective is to maximise contribution and the dotted line on the graph depicts this function. There are three
constraints which are all of the less than or equal to type which are depicted on the graph by the three solid lines
labelled (1), (2) and (3).
At which of the following intersections is contribution maximised?
A Constraints (1) and (2)
B Constraints (2) and (3)
C Constraints (1) and (3)
D Constraint (1) and the x-axis
(2 marks)
28 In an organisation manufacturing a number of different products in one large factory, the rent of that factory is an
example of a direct expense when costing a product.
Is this statement true or false?
A True
B False
(1 mark)
30 A company manufactures and sells two products (X and Y) both of which utilise the same skilled labour. For the
coming period, the supply of skilled labour is limited to 2,000 hours. Data relating to each product are as follows:
Product X Y
Selling price per unit $20 $40
Variable cost per unit $12 $30
Skilled labour hours per unit 2 4
Maximum demand (units) per period 800 400
In order to maximise profit in the coming period, how many units of each product should the company manufacture
and sell?
A 200 units of X and 400 units of Y
B 400 units of X and 300 units of Y
C 600 units of X and 200 units of Y
D 800 units of X and 100 units of Y
(2 marks)
32 What was the variable overhead expenditure variance for last month?
A $5,000 Adverse
B $5,000 Favourable
C $6,000 Adverse
D $6,000 Favourable
(2 marks)
33 What was the variable overhead efficiency variance for last month?
A $5,000 Adverse
B $5,000 Favourable
C $6,000 Adverse
D $6,000 Favourable
(2 marks)
34 When a manufacturing company operates a standard marginal costing system there are no fixed production overhead
variances.
Is this statement true or false?
A True
B False
(1 mark)
35 A company operates a standard costing system. The variance analysis for last month shows a favourable materials price
variance and an adverse labour efficiency variance.
The following four statements, which make comparisons with the standards, have been made:
(1) Inferior quality materials were purchased and used.
(2) Superior quality materials were purchased and used.
(3) Lower graded workers were used on production.
(4) Higher graded workers were used on production.
Which statements are consistent with the variance analysis?
A (1) and (3)
B (1) and (4)
C (2) and (3)
D (2) and (4)
(2 marks)
11
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36 Which of the following best describes a principal budget factor?
A A factor that affects all budget centres.
B A factor that is controllable by a budget centre manager.
C A factor which limits the activities of an organisation.
D A factor that the management accountant builds into all budgets.
(2 marks)
37 Four vertical lines have been labelled G, H, J and K at different levels of activity on the following profit-volume chart:
0
Output
G
H J
38 Data is information that has been processed in such a way as to be meaningful to its recipients.
Is this statement true or false?
A True
B False
(1 mark)
12
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39 Two products G and H are created from a joint process. G can be sold immediately after split-off. H requires further
processing into product HH before it is in a saleable condition. There are no opening inventories and no work in
progress of products G, H or HH. The following data are available for last period:
$
Total joint production costs 350,000
Further processing costs of product H 66,000
Product Production Closing inventory
units units
G 420,000 20,000
HH 330,000 30,000
Using the physical unit method for apportioning joint production costs, what was the cost value of the closing
inventory of product HH for last period?
A $16,640
B $18,625
C $20,000
D $21,600
(2 marks)
40 A company purchased a machine several years ago for $50,000. Its written down value is now $10,000. The machine
is no longer used on normal production work and it could be sold now for $8,000.
A project is being considered which would make use of this machine for six months. After this time the machine would
be sold for $5,000.
What is the relevant cost of the machine to the project?
A $2,000
B $3,000
C $5,000
D $10,000
(2 marks)
41 A company operates a standard absorption costing system. The standard fixed production overhead rate is $15 per
hour.
The following data relate to last month:
Actual hours worked 5,500
Budgeted hours 5,000
Standard hours for actual production 4,800
What was the fixed production overhead capacity variance?
A $7,500 Adverse
B $7,500 Favourable
C $10,500 Adverse
D $10,500 Favourable
(2 marks)
43 A contract is under consideration which requires 600 labour hours to complete. There are 350 hours of spare labour
capacity for which the workers are still being paid the normal rate of pay. The remaining hours for the contract can
be found either by weekend overtime working paid at double the normal rate of pay or by diverting labour from other
production. This other production makes a contribution, net of labour cost, of $5 per hour. The normal rate of pay is
$9 per hour.
What is the total relevant cost of labour for the contract?
A $1,250
B $3,500
C $4,500
D $4,900
(2 marks)
44 An organisation operates a piecework system of remuneration, but also guarantees its employees 80% of a time-based
rate of pay which is based on $20 per hour for an eight hour working day. Three minutes is the standard time allowed
per unit of output. Piecework is paid at the rate of $18 per standard hour.
If an employee produces 200 units in eight hours on a particular day, what is the employees gross pay for that
day?
A $128
B $144
C $160
D $180
(2 marks)
45 A semi-variable cost is one that, in the short term, remains the same over a given range of activity but beyond that
increases and then remains constant at the higher level of activity.
Is this statement true or false?
A True
B False
(1 mark)
Product Y
(units)
100 Material G
090
Material H
Product X
000
125 150 (units)
47 What is the amount (in kg) of material G and material H used in each unit of product Y?
Material G Material H
A 10 20
B 10 10
C 20 20
D 20 10
(2 marks)
50 A company which operates a process costing system had work-in-progress at the start of last month of 300 units
(valued at 1,710) which were 60% complete in respect of all costs. Last month a total of 2,000 units were completed
and transferred to the finished goods warehouse. The cost per equivalent unit for costs arising last month was $10.
The company uses the FIFO method of cost allocation.
What was the total value of the 2,000 units transferred to the finished goods warehouse last month?
A $19,910
B $20,000
C $20,510
D $21,710
(2 marks)
Regression analysis
y bx
a= -
n n
y bx
a= -
nxy-xy
b= n n
nx2 -(x) 2
y bx
a= -
nnxy-xy
n
b=
nxy-xy
r= nx -(x)2
2
2 nxy-xy
(nxb= -(x)2 )(ny 2 -(y)2 )
nx2 -(x)2
nxy-xy
r=
2C0D (nx 2
-(x)2
)(ny 2 -(y)2 )
=Economic order nxy-xy
quantity
Ch r=
(nx2 -(x)2 )(ny 2 -(y)2 )
2C0D
=
2C0D Ch
= 2C0D
D
Ch (1-= ) C
Economic R batch
2C0Dquantity
h
=
D
Ch (1-
2C DR)
= 0
D
Ch (1- )
R
19
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Pilot Paper F2 Answers
Management Accounting
Summarised
1 C 26 B
2 B 27 D
3 C 28 B
4 C 29 D
5 A 30 D
6 C 31 A
7 C 32 B
8 C 33 C
9 C 34 B
10 C 35 A
11 A 36 C
12 D 37 C
13 B 38 B
14 A 39 C
15 A 40 B
16 D 41 B
17 C 42 C
18 A 43 B
19 C 44 D
20 A 45 B
21 B 46 D
22 C 47 A
23 D 48 A
24 B 49 B
25 B 50 A
In detail
1 C
2 B
6 C
8 C Month 1: Production > Sales Absorption costing profit > Marginal costing profit
Month 2: Sales > Production Marginal costing profit > absorption costing profit
A and C satisfy Month 1, C and D satisfy Month 2. Therefore C satisfies both.
9 C
12 D
14 A
15 A
16 D
17 C
18 A
22 C
23 D
24 B
25 B Production > Sales Absorption costing profit > Marginal costing profit
Marginal costing profit: {36,000 [2,000 (63,000 14,000)]} = $27,000
27 D
28 B
30 D
X Y
CPU $8 $10
Contribution per hour $4 $2.50
Ranking 1st 2nd
Therefore produce and sell the maximum 800 units of X using 1,600 hours and with the remaining 400 hours produce and sell
100 units of Y.
31 A
33 C
$
Actual hours standard rate 240,000
Standard cost of actual production
(3,900 6 10) 234,000
Efficiency variance 6,000 Adverse
34 B
35 A
36 C
37 C
38 B
42 C
46 D
Total overhead to cost centre P: $
Direct 95,000
Proportion of cost centre X [46,000 + (0.10 30,000)] 0.50 24,500
Proportion of cost centre Y [30,000 0.3] 9,000
128,500
47 A
100 units of Y with all of material G (1,000 kg) = 10 kg per unit
90 units of Y with all of material H (1,800 kg) = 20 kg per unit
48 A
Total contributions:
A [(0 8) + (90 20)] = $1,800
B [(50 8) + (60 20)] = $1,600
C [(60 8) + (50 20)] = $1,480
D [(125 8) + (0 20)] = $1,000
50 A
$
Value of 2,000 units transferred:
1,700 units 10 17,000
300 units 0.40 10 1,200
Opening work in progress value 1,710
19,910
PART 1
QUESTION PAPER
1 Which of the following statements are correct with regard to marginal costing?
(i) Period costs are costs treated as expenses in the period incurred.
(ii) Product costs can be identified with goods produced.
(iii) Unavoidable costs are relevant for decision making.
2 Canberra has established the following information regarding fixed overheads for the coming month:
Budgeted information:
Fixed overheads 180,000
Labour hours 3,000 hours
Machine hours 10,000 hours
Units of production 5,000 units
A 16
B 18
C 36
D 60.
4 Which of the following statements is correct with regard to time series analysis?
A The trend is the general upward movement of the variable over time.
B The multiplicative model assumes that the different variations are independent of one another.
C Time series can be completely predicted by regression analysis.
D The cyclical variation is the regular periodic variation that exists over a long duration.
6 Melbourne wishes to make a comparison between the sales revenue figures for two different time periods. The following
figures were recorded:
Inflation
Sales Index
000
Year 7 325 124
Year 10 435 130
What is the real increase in the sales revenue over this period in % terms?
A 79%
B 277%
C 338%
D 403%.
7 Darwin uses decision tree analysis in order to evaluate potential projects. The company has been looking at the launch
of a new product which it believes has a 70% probability of success. The company is, however, considering undertaking
an advertising campaign costing 50,000, which would increase the probability of success to 95%.
If successful the product would generate income of 200,000 otherwise 70,000 would be received.
What is the maximum that the company would be prepared to pay for the advertising?
A 32,500
B 29,000
C 17,500
D 50,000.
8 Which of the following relates to the cost of replacing (rather than retaining) labour due to high employee turnover?
A Improving working conditions
B Suffering the learning curve effect
C Provision of a pension
D Provision of welfare services.
A Contract costing is appropriate if each unit of production is unique and takes a considerable length of time to
complete.
B Batch costing refers to a system where either job or process costing techniques are used to manufacture a
product.
C Rectification costs should be charged to production overheads if the costs can not be specifically traced to a
job.
D Job costing is required when each unit of production is unique and production is of long duration.
A
units
E
B
D C
U units
Which points are most likely to give the optimal solution?
A A and B only
B A, B and C only
C D and E only
D B, D and E only.
11 Dalby is currently considering an investment that gives a positive net present value of 3,664 at 15%. At a discount rate
of 20% it has a negative net present value of 21,451.
A 157%
B 160%
C 193%
D 199%.
12 The management accountant of Gympie Limited has already allocated and apportioned the fixed overheads for the
period although she has yet to reapportion the service centre costs. Information for the period is as follows:
What are the total overheads included in production department 1 if the reciprocal method is used to reapportion
service centre costs?
A 27,618
B 28,171
C 28,398
D 28,453.
A 153 units
B 170 units
C 485 units
D 509 units.
14 Bollon uses residual income to appraise its divisions using a cost of capital of 10%. It gives the managers of these
divisions considerable autonomy although it retains the cash control function at head office.
What is the residual income for this division based on controllable profit and controllable net assets?
A 36,600
B 56,500
C 58,600
D 60,700.
15 Ayr is planning on paying 300 into a fund on a monthly basis starting three months from now, for twelve months.
The interest earned will be at a rate of 3% per month.
A 2,816
B 2,733
C 2,541
D 2,986.
What was the unit valuation for product 3 using the sales revenue basis for allocating joint cost?
A 470
B 480
C 500
D 510.
18 Bowen has established the following with regard to fixed overheads for the past month:
Actual costs incurred 132,400
Actual units produced 5,000 units
Actual labour hours worked 9,750 hours
Budgeted costs 135,000
Budgeted units of production 4,500 units
Budgeted labour hours 9,000 hours
A 750 favourable
B 11,250 favourable
C 22,500 favourable
D 11,250 adverse.
A A stores ledger account will be updated from a goods received note only.
B A stores requisition will only detail the type of product required by a customer.
C The term lead time is best used to describe the time between receiving an order and paying for it.
D To make an issue from stores authorisation should be required.
20 Perth operates a process costing system. The process is expected to lose 25% of input and this can be sold for 8
per kg.
Inputs for the month were:
Direct materials 3,500 kg at a total cost of 52,500
Direct labour 9,625 for the period
There is no opening or closing work in progress in the period. Actual output was 2,800 kg.
A 44,100
B 49,700
C 58,800
D 56,525.
General fixed overheads are allocated to each division on the basis of sales revenue; 60% of the total fixed costs incurred
by the company are specific to each division being split equally between them.
Using relevant costing techniques, which divisions should remain open if Camden wishes to maximise profits?
A A, B and C
B A and B only
C B only
D B and C only.
22 Brisbane Limited has recorded the following sales information for the past six months:
Month Advertising expenditure Sales revenue
000 000
1 15 30
2 2 27
3 175 25
4 3 40
5 25 32
6 275 38
The following has also been calculated:
A 0070
B 0086
C 8714
D 14286.
Material Labour
Opening WIP 100% 40%
Closing WIP 100% 30%
The company uses the FIFO method for valuing the output from the process and all losses occurred at the end of the
process.
A 4,380 units
B 4,270 units
C 4,320 units
D 4,420 units.
25 Sydney is considering making a monthly investment for her son who will be five years old on his next birthday. She
wishes to make payments until his 18th birthday and intends to pay 50 per month into an account yielding an APR of
1268%. She plans to start making payments into the account the month after her sons fifth birthday.
How much will be in the account immediately after the final payment has been made?
A 18,847
B 18,377
C 17,606
D 18,610.
(50 marks)
1 Albany has recently spent some time on researching and developing a new product for which they are trying to establish
a suitable price. Previously they have used cost plus 20% to set the selling price.
The standard cost per unit has been estimated as follows:
Direct materials
Material 1 10 (4 kg at 250/kg)
Material 2 7 (1 kg at 7/kg)
Direct labour 13 (2 hours at 650/hour)
Fixed overheads 7 (2 hours at 350/hour)
37
Required:
(a) Using the standard costs calculate two different cost plus prices using two different bases and explain an
advantage and disadvantage of each method. (6 marks)
(b) Give two other possible pricing strategies that could be adopted and describe the impact of each one on the
price of the product. (4 marks)
(10 marks)
2 Newcastle Limited uses variance analysis as a method of cost control. The following information is available for the year
ended 30 September 2001:
Required:
(a) Prepare a reconciliation statement between the original budgeted and actual prime costs. (7 marks)
(b) Explain what the labour variances calculated in (a) show and indicate the possible interdependence between
these variances. (3 marks)
(10 marks)
Fixed costs of 50,000 have been allocated to a specific product but are expected to increase to 100,000 once
production exceeds 30,000 units, as a new factory will need to be rented in order to produce the extra units. Variable
costs per unit are stable at 5 per unit over all levels of activity. Revenue from this product will be 750 per unit.
Required:
(b) Prepare a breakeven chart and clearly identify the breakeven point or points. (6 marks)
(c) Discuss the implications of the results from your graph in (b) with regard to Toowombas production plans.
(2 marks)
(10 marks)
4 Wollongong wishes to calculate an operating budget for the forthcoming period. Information regarding products, costs
and sales levels is as follows:
Product A B
Materials required
X (kg) 2 3
Y (litres) 1 4
Labour hours required
Skilled (hours) 4 2
Semi skilled (hours) 2 5
Sales level (units) 2,000 1,500
Opening stocks (units) 100 200
Closing stock of materials and finished goods will be sufficient to meet 10% of demand. Opening stocks of material X
was 300 kg and for material Y was 1,000 litres. Material prices are 10 per kg for material X and 7 per litre for
material Y. Labour costs are 12 per hour for the skilled workers and 8 per hour for the semi skilled workers.
Required:
Produce the following budgets:
(10 marks)
000 000
Sales 48
Cost of sales:
Opening stock 3
Production costs 36
Closing stock (7)
(32)
16
Other variable costs:
Selling (32)
Contribution 128
Fixed costs:
Production overheads (4)
Administration (36)
Selling (12)
Net profit 40
The normal level of activity is 2,000 units per month. Fixed production costs are budgeted at 4,000 per month and
absorbed on the normal level of activity of units produced.
Required:
(a) Prepare a budgeted profit and loss account under absorption costing for the month ended 31 December 2001.
(6 marks)
(b) Reconcile the profits under these two methods and explain why a business may prefer to use marginal costing
rather than absorption costing. (4 marks)
(10 marks)
1 0990 0980 0971 0962 0952 0943 0935 0926 0917 0909 1
2 0980 0961 0943 0925 0907 0890 0873 0857 0842 0826 2
3 0971 0942 0915 0889 0864 0840 0816 0794 0772 0751 3
4 0961 0924 0888 0855 0823 0792 0763 0735 0708 0683 4
5 0951 0906 0863 0822 0784 0747 0713 0681 0650 0621 5
6 0942 0888 0837 0790 0746 0705 0666 0630 0596 0564 6
7 0933 0871 0813 0760 0711 0665 0623 0583 0547 0513 7
8 0923 0853 0789 0731 0677 0627 0582 0540 0502 0467 8
9 0941 0837 0766 0703 0645 0592 0544 0500 0460 0424 9
10 0905 0820 0744 0676 0614 0558 0508 0463 0422 0386 10
11 0896 0804 0722 0650 0585 0527 0475 0429 0388 0305 11
12 0887 0788 0701 0625 0557 0497 0444 0397 0356 0319 12
13 0879 0773 0681 0601 0530 0469 0415 0368 0326 0290 13
14 0870 0758 0661 0577 0505 0442 0388 0340 0299 0263 14
15 0861 0743 0642 0555 0481 0417 0362 0315 0275 0239 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0901 0893 0885 0877 0870 0862 0855 0847 0840 0833 1
2 0812 0797 0783 0769 0756 0743 0731 0718 0706 0694 2
3 0731 0712 0693 0675 0658 0641 0624 0609 0593 0579 3
4 0659 0636 0613 0592 0572 0552 0534 0516 0499 0482 4
5 0593 0567 0543 0519 0497 0476 0456 0437 0419 0402 5
6 0535 0507 0480 0456 0432 0410 0390 0370 0352 0335 6
7 0482 0452 0425 0400 0376 0354 0333 0314 0296 0279 7
8 0434 0404 0376 0351 0327 0305 0285 0266 0249 0233 8
9 0391 0361 0333 0308 0284 0263 0243 0225 0209 0194 9
10 0352 0322 0295 0270 0247 0227 0208 0191 0176 0162 10
11 0317 0287 0261 0237 0215 0195 0178 0162 0148 0135 11
12 0286 0257 0231 0208 0187 0168 0152 0137 0124 0112 12
13 0258 0229 0204 0182 0163 0145 0130 0116 0104 0093 13
14 0232 0205 0181 0160 0141 0125 0111 0099 0088 0078 14
15 0209 0183 0160 0140 0123 0108 0095 0084 0074 0065 15
13 [P.T.O.
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Annuity Table
1 (1 + r)n
Present value of an annuity of 1 i.e. r
1 0990 0980 0971 0962 0952 0943 0935 0926 0917 0909 1
2 1970 1942 1913 1886 1859 1833 1808 1783 1759 1736 2
3 2941 2884 2829 2775 2723 2673 2624 2577 2531 2487 3
4 3902 3808 3717 3630 3546 3465 3387 3312 3240 3170 4
5 4853 4713 4580 4452 4329 4212 4100 3993 3890 3791 5
6 5795 5601 5417 5242 5076 4917 4767 4623 4486 4355 6
7 6728 6472 6230 6002 5786 5582 5389 5206 5033 4868 7
8 7652 7325 7020 6733 6463 6210 5971 5747 5535 5335 8
9 8566 8162 7786 7435 7108 6802 6515 6247 5995 5759 9
10 9471 8983 8530 8111 7722 7360 7024 6710 6418 6145 10
11 1037 9787 9253 8760 8306 7887 7499 7139 6805 6495 11
12 1126 1058 9954 9385 8863 8384 7943 7536 7161 6814 12
13 1213 1135 1063 9986 9394 8853 8358 7904 7487 7103 13
14 1300 1211 1130 1056 9899 9295 8745 8244 7786 7367 14
15 1387 1285 1194 1112 1038 9712 9108 8559 8061 7606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0901 0893 0885 0877 0870 0862 0855 0847 0840 0833 1
2 1713 1690 1668 1647 1626 1605 1585 1566 1547 1528 2
3 2444 2402 2361 2322 2283 2246 2210 2174 2140 2106 3
4 3102 3037 2974 2914 2855 2798 2743 2690 2639 2589 4
5 3696 3605 3517 3433 3352 3274 3199 3127 3058 2991 5
6 4231 4111 3998 3889 3784 3685 3589 3498 3410 3326 6
7 4712 4564 4423 4288 4160 4039 3922 3812 3706 3605 7
8 5146 4968 4799 4639 4487 4344 4207 4078 3954 3837 8
9 5537 5328 5132 4946 4772 4607 4451 4303 4163 4031 9
10 5889 5650 5426 5216 5019 4833 4659 4494 4339 4192 10
11 6207 5938 5687 5453 5234 5029 4836 4656 4486 4327 11
12 6492 6194 5918 5660 5421 5197 4988 4793 4611 4439 12
13 6750 6424 6122 5842 5583 5342 5118 4910 4715 4533 13
14 6982 6628 6302 6002 5724 5468 5229 5008 4802 4611 14
15 7191 6811 6462 6142 5847 5575 5324 5092 4876 4675 15
14
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Answers
Section A
180,000
2 B OAR/machine hour = = 18/machine hour
10,000
4 D The trend is the general upward or downward movement of the variable over time.
The additive model assumes independence, not the multiplicative model.
Regression analysis can be used to predict the trend but adjustments still need to be made regarding variations.
5 A Cost accounting can be used for stock valuation to meet the requirements of both internal and external reporting.
130
6 B 325,000 x = 340,726 adjusted year 7 sales figure
124
435,000
% = 1277% 100% = 277%
340,726
7 A
( )
8 B Working conditions, pension provisions and welfare are all costs relating to retaining, not replacing, labour.
10 C Since the company has an objective of minimising costs the potential optimal solutions will be the points closest to the origin i.e.
D and E.
3,664
11 A IRR = 15% + x (20% 15%)
3,664 + 21,451
= 157%
2ChD 2 x (50 + 5) x 4,000
13 D EOQ = = = 509 units
Co (15 x 01) + 02
135,000
18 B OAR/labour hour = = 15/labour hour
9,000
Capacity variance:
Actual 9,750 hours
Budget 9,000 hours
750 hours
x 15 = 11,250 favourable
20 C Process account
Units Units
Materials 3,500 52,000 Normal loss 875 7,000
Labour 9,625
Abnormal gain 175 Output 2,800
3,675 3,675
23 A Higher level management could be involved with all level of decision making within a business.
12
25 D 11268 = 101
50 x 10113x12 1 = 18,610
101 1
19
2 (a)
Budgeted prime cost (30 + 24) x 12,000 (648,000)
Cost volume variance (500 x 54) 27,000
(621,000)
Materials
Price: Did cost 345,000
Should cost (37,250 x 10) 372,500
27,500F
Usage: Did use 37,250 kg
Should use (11,500 x 3) 34,500 kg
2,750 kg
x 10 (27,500)A
Labour
Rate: Did cost 300,000
Should cost (45,350 x 6) 272,100
(27,900)A
Efficiency: Did take 45,350 hours
Should take (11,500 x 4 hours) 46,000 hours
650 hours
x 6 3,900F
Actual prime cost (300,000 + 345,000) (645,000)
(b) Labour rate variance this shows that labour were paid at a higher rate
Labour efficiency variance this shows that labour worked harder than expected as they made more in less time
Interdependence since labour were paid more they were motivated to work harder
(b)
(c) Implications of having two breakeven points: the product is only profitable between 20,000 and 30,000 units and above
40,000 units, so the production plan should be set accordingly.
Workings
1. Standard cost per unit
Direct variable costs 20
4,000
Fixed overheads = 2
2,000 units
22
(b)
Profit under absorption costing 4,400
Add fixed costs in opening stock (150 x 2) 300
Less fixed costs in closing stock (350 x 2) (700)
Profit under marginal costing 4,000
A business may prefer marginal costing as it only includes costs that are relevant for decision making i.e. variable ones. Also the
business may not have significant fixed overheads and so marginal costing could be more appropriate.
Marks
Section A
Each question within this section is worth 2 marks 25 x 2
50
Section B
1 (a) Calculation of marginal cost plus 1
Advantage of marginal cost plus 1
Disadvantage of marginal cost plus 1
Calculation of fixed cost plus 1
Advantage of fixed cost plus 1
Disadvantage of fixed cost plus 1
6
QUESTION PAPER
1 Jim is reviewing his pay rises over the last four years compared with the Retail Price Index (RPI) and the Average
Earnings Index (AEI). He has obtained the following:
Year Jims wage increase Retail Price Average Earnings
on prior year Index Index
%
1998 1575 1080
1999 50 1629 1135
2000 30 1654 1190
2001 40 1703 1244
Jim earned 150 per week in 1998 and is carrying out the review in the year 2001 after receiving the 4% increase.
Required:
(a) Calculate Jims actual weekly earnings in each year from 1998 to 2001 using the percentage wage increase
(to one decimal place). (2 marks)
(b) Using your answer from part (a) calculate Jims weekly earnings in each year in year 2001 terms using:
(i) the Retail Price Index (RPI); and
(ii) the Average Earnings Index (AEI).
(c) Comment on the results obtained from parts (a) and (b). (2 marks)
(d) The Average Earnings Index for 1995 is 100. What does this mean? (2 marks)
(10 marks)
3 (a) Define the terms operational planning and strategic planning and explain how one impacts upon the other.
(3 marks)
(b) List the stages in a planning and control process and briefly explain what is involved at each stage.
(7 marks)
(10 marks)
(b) Doug wishes to take out a loan for 2,000. He has the choice of two loans:
Loan 1: monthly payments for 36 months at an APR of 938%
Loan 2: monthly payments for 24 months at an APR of 1268%
Required:
(i) Calculate the monthly repayments for loans 1 and 2 to two decimal places. (5 marks)
(ii) Calculate the total amount repaid under each loan and purely on the basis of this information
recommend which loan Doug should choose. (2 marks)
(10 marks)
5 Adam, the management accountant of Mark Limited, has on file the costs per equivalent unit for the companys
process for the last month but the input costs and quantities appear to have been mislaid.
Information that is available to Adam for last month is as follows:
Opening work in progress 100 units, 30% complete
Closing work in progress 200 units, 40% complete
Normal loss 10% of input valued at 2 per unit
Output 1,250 units
The losses were as expected and Adam has a record of there being 150 units scrapped during the month. All materials
are input at the start of the process. The cost per equivalent unit for materials was 260 and for conversion costs
was 150.
Mark Limited uses the FIFO method of stock valuation in its process account.
Required:
(a) Calculate the units input into the process. (2 marks)
(b) Calculate the equivalent units for materials and conversion costs. (4 marks)
(c) Using your answer from (b) calculate the input costs. (4 marks)
(10 marks)
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Section B
1 (a) Earnings
1998 = 150 (given in the question)
1999 = 150 105 = 1575
2000 = 1575 103 = 1622
2001 = 1622 104 = 1687
(b)
Year (i) RPI (ii) AEI
150 150
1998 1622 = 1703 1728 = 1244
1575 108
1575 1575
1999 1647 = 1703 1726 = 1244
1629 1135
1622 1622
2000 1670 = 1703 1696 = 1244
1654 119
1687 1687
2001 1687 = 1703 1687 = 1244
1703 1244
(c) Using the RPI it shows that Jim has had a real increase in his wages over the four year period.
Using the AEI shows that Jim has actually seen a reduction in his earnings compared to the average wages earned.
(d) 1995 is the base year for the Average Earnings Index. This means that all figures are compared to the average earnings in
the year.
Notes:
1 The historic cost of 10 is not relevant as it is sunk. The relevant cost is the opportunity cost relating to lost scrap proceeds
= 300 3 = 900.
2 Again the historic cost is irrelevant as it is a sunk cost. Since the material is in continuous use in the business the relevant
cost will be the current replacement cost of the material = 1,000 650 = 6,500.
3 Since there is only 300 kg in stock 250 kg would need to be purchased at the current replacement cost = 250 4 =
1,000. If the stock of 300 kg is not used for the contract it would be used to replace material Y in an alternative production
process.
7
Therefore the relevant cost for the stock of 300 kg is = 300 = 1,050 bearing in mind the 2 for 1 substitution.
2
Total relevant cost for material C = 1,000 + 1,050 = 2,050
4 Since there is spare capacity in this department there is no relevant cost.
5 For this department the two alternatives need to be considered:
Cost of working overtime = 2,000 10 15 = 30,000
Cost of diverting labour = 2,000 (10 + 3) = 26,000
It would be cheaper to divert the labour from the other production processes so the relevant cost for department 2 is 26,000.
6 Since the overheads are absorbed and there is no mention of the overheads actually increasing as a direct result of the contract
there is no relevant cost for overheads.
2,000 = A1 1 1
0 0075 0 0075 1 007536
2,000 = A1 31447
2,000
A1 = = 6360
31447
Loan 2
1
APR = 1268%, then the monthly rate is 11268 12 1 = 001%
1
2,000 = A2
1
0 001 0 001 1 0124
2,000 = A2 21243
2,000
A2 = = 9415
21243
150 units
Or from the normal loss figure = = 1,500 units
01
(b)
Statement of equivalent Total Material Conversion
units costs
Opening WIP (to complete) 100 70
= 100 70% = 100 70%
Units started and finished 1,150 1,150 1,150
Output 1,250
Normal loss 150
Closing WIP 200 200 80
= 200 10% = 200 10%
1,350 1,300
(c)
Costs incurred in period Materials Conversion
costs
3,510 1,950
= 1,350 260 = 1,300 150
Add scrap proceeds from 300
normal loss = 150 2
3,810 1,950
Marks
1 (a) Noting Jims wages for 1998 1/
2
Calculating the figure for 1999 1/
2
Calculating the figure for 2000 1/
2
Calculating the figure for 2001 1/
2
2
(b) Calculating the wage figures adjusted for the RPI for:
1998 1/
2
1999 1/
2
2000 1/
2
2001 1/
2
QUESTION PAPER
1 Consider the following graph for total costs and total revenue:
Total costs
Costs/revenue
Total revenue
A B C D Units
At which point on the above graph is it most likely that profits will be maximised?
A
B
C
D
2 A company has established a budgeted sales revenue for the forthcoming period of 500,000 with an associated
contribution of 275,000. Fixed production costs are 137,500 and fixed selling costs are 27,500.
What is the breakeven sales revenue?
A 75,625
B 90,750
C 250,000
D 300,000
4 A company uses process costing to value output. During the last month the following information was recorded:
Output: 2,800 kg valued at 750/kg
Normal loss: 300 kg which has a scrap value of 3/kg
Actual loss: 200 kg
What was the value of the input?
A 22,650
B 21,900
C 21,600
D 21,150
7 What would be the overhead absorption rate in Department 1 (to 3 decimal places)?
A 0788/machine hour
B 0814/machine hour
C 1125/labour hour
D 1163/labour hour
11 Augustine wishes to take out a loan for 2,000. The interest rate on this loan would be 10% per annum and
Augustine wishes to make equal monthly repayments, comprising interest and principal, over three years starting one
month after the loan is taken out.
What would be the monthly repayment on the loan (to the nearest )?
A 56
B 64
C 66
D 67
12 Which of the following best describes the term equivalent units when using the FIFO method?
A The number of units worked on during a period including the opening and closing stock units.
B The number of whole units worked on during a period ignoring the levels on completion of opening and closing
stock units.
C The number of effective whole units worked on during a period allowing for the levels of completion of opening
and closing stock units.
D The total number of whole units started during a period ignoring the opening stock units as these were started
in the previous period.
13 A company has established the following information for the costs and revenues at an activity level of 500 units:
Direct materials 2,500
Direct labour 5,000
Production overheads 1,000
Selling costs 1,250
Total cost 9,750
Sales revenue 17,500
Profit 7,750
20% of the selling costs and 50% of the production overheads are fixed over all levels of activity.
What would be the profit at an activity level of 1,000 units?
A 15,500
B 16,250
C 16,500
D 17,750
16 The following information relates to prices and units over two different periods:
Prices Units sold
/unit
Time 0 Product 1 75 300
Product 2 50 100
Time 1 Product 1 80 250
Product 2 45 150
What would be the Laspeyre price index?
A 938
B 955
C 1019
D 1036
21 A company achieves bulk buying discounts on quantities above a certain level. These discounts are only available for
the units above the specified level and not on all the units purchased.
Which of the following graphs of total purchase cost against units best illustrates the above situation?
A B
units units
C D
units units
22 Mr Manaton has recently won a competition where he has the choice between receiving 5,000 now or an annual
amount forever starting now (i.e. a level perpetuity starting immediately). The interest rate is 8% per annum.
What would be the value of the annual perpetuity to the nearest ?
A 370
B 500
C 400
D 620
23 When considering the economic batch quantity model what does (1D/R) represent?
A The rate at which production decreases.
B The rate at which production increases.
C The rate at which stock decreases.
D The rate at which stock increases.
25 A company is reviewing actual performance to budget to see where there are differences. The following standard
information is relevant:
per unit
Selling price 50
Direct materials 4
Direct labour 16
Fixed production overheads 5
Variable production overheads 10
Fixed selling costs 1
Variable selling cost 1
Total costs 37
Budgeted sales units 3,000
Actual sales units 3,500
What was the favourable sales volume variance using marginal costing?
A 9,500
B 7,500
C 7,000
D 6,500
(50 marks)
1 A company is seeking to establish whether there is a linear relationship between the level of advertising expenditure
and the subsequent sales revenue generated.
Figures for the last eight months are as follows:
Month Advertising Sales
Expenditure Revenue
000 000
1 265 300
2 425 450
3 100 175
4 525 460
5 475 445
6 195 250
7 350 430
8 300 385
Total 2635 2895
Further information is available as follows:
(Advertising Expenditure Sales Revenue) = 1,055875
(Advertising Expenditure)2 = 1012625
(Sales Revenue)2 = 11,28375
All of the above are given in million.
Required:
(a) On a suitable graph plot advertising expenditure against sales revenue or vice versa as appropriate. Explain
your choice of axes. (5 marks)
(b) Using regression analysis calculate a line of best fit. Plot this on your graph from (a). (5 marks)
(10 marks)
2 Firlands Limited, a retail outlet, is faced with a decision regarding whether or not to expand and build small or large
premises at a prime location. Small premises would cost 300,000 to build and large premises would cost
550,000.
Regardless of the type of premises built, if high demand exists then the net income is expected to be 1,500,000.
Alternatively, if low demand exists, then net income is expected to be 600,000.
If large premises are built then the probability of high demand is 075. If the smaller premises are built then the
probability of high demand falls to 06.
Firlands has the option of undertaking a survey costing 50,000. The survey predicts whether there is likely to be a
good or bad response to the size of the premises. The likelihood of there being a good response, from previous
surveys, has been estimated at 08.
If the survey indicates a good response then the company will build the large premises. If the survey does give a good
result then the probability that there will be high demand from the large premises increases to 095.
If the survey indicates a bad response then the company will abandon all expansion plans.
Required:
Using decision tree analysis, establish the best course of action for Firlands Limited.
(10 marks)
Required:
(a) Prepare the budgeted profit and loss account for a month for Oathall Limited using absorption costing. Clearly
show the valuation of any stock figures.
(6 marks)
(b) Prepare the budgeted profit and loss account for a month for Oathall Limited using marginal costing. Clearly
show the valuation of any stock figures.
(4 marks)
(10 marks)
4 Swainsthorpe Limited is a small old-fashioned company. They have a very simple manual accounting system to record
all of the information of the business.
A bookkeeper comes in once a week to make all the relevant entries to the various manual ledgers. Complete stock-
takes take place once a month, during which the business shuts down for the day, and the information from the
stock-take is used to check that the store bin cards are correct. The stock-take information is also used to prepare a
profit and loss account and balance sheet for the owners of the business.
The business has just been taken over by Ms Swainsthorpe who wishes to change the manual accounting system to
a computerised management information system.
Required:
Prepare a report for Ms Swainsthorpe that:
(a) gives three advantages and three disadvantages of introducing a computer system;
(b) explains what a management information system is and what Ms Swainsthorpe should hope to be able to
use it for in general terms;
(c) comments critically on the current stock-take procedures and explains how the system could be improved.
(10 marks)
Required:
(a) Using the information above, calculate the return on investment and residual income figures for the two
divisions under review and comment on your results. (5 marks)
(b) State which method of performance evaluation (i.e. return on investment or residual income) would be more
useful when comparing divisional performance and why. (2 marks)
(c) List three general aspects of performance measures that would be appropriate for a service sector company.
(3 marks)
(10 marks)
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Section A
11 C
12 D
13 C
14 D
15 B
16 B
17 B
18 A
19 C
10 C
11 B
12 C
13 B
14 D
15 C
16 D
17 B
18 A
19 B
20 A
21 C
22 A
23 D
24 A
25 A
60
Sales
Revenue
000
000
50
x
x x
x
40
30 x
20
x
10
1 2 3 4 5 6 Advertising
000
expenditure
000
(b) Regression line: y = a + bx
n xy x y
b =
n x2 ( x)2
y bx
a =
n n
In this example the advertising expenditure is the independent variable (x) and the sales revenue the dependent variable (y).
(8 1,055875) (2635 2895) 818675
b = = = 707
(8 1012625) 2635 2
1157775
2895 2635
a = 707 = 129
8 8
regression line: y = 129 + 707x where x and y are in 000
Line drawn on above graph.
B
Abandon project
Bad
02
Survey
(50,000)
Hi
(550,000) 075
A C 1,500,000
Large
Premises Lo
025
(300,000)
600,000
Small Hi
Premises 06
D 1,500,000
Lo 600,000
04
Conclusion: It would be better to build the small premises without any survey as this gives the largest expected value.
(b)
Marginal costing 000 000
Sales (50 100,000) 5,000
Cost of sales:
Opening stock
Production costs
Variable (19 120,000) 2,280
2,280
Closing stock (19 20,000) (380)
Variable selling costs 200
(2,100)
Contribution 2,900
Fixed costs
Production (300)
Selling (150)
Net profit 2,450
Section A
Section B
(b) calculation of b 2
calculation of a 11/2
stating the regression line 1/
2
putting the regression line on the graph from (a) 1
5
10
QUESTION PAPER
1 A company has established a marginal costing profit of 72,300. Opening stock was 300 units and closing stock is
750 units. The fixed production overhead absorption rate has been calculated as 5/unit.
What was the profit under absorption costing?
A 67,050
B 70,050
C 74,550
D 77,550
7 A company is preparing a production budget for the next year. The following information is relevant:
Budgeted Sales 10,000 units
Opening stock 600 units
Closing stock 5% of budgeted sales
The production process is such that 10% of the units produced are rejected.
What is the number of units required to be produced to meet demand?
A 8,900 units
B 9,900 units
C 10,900 units
D 11,000 units
8 A company produces and sells a single product whose variable cost is 6 per unit.
Fixed costs have been absorbed over the normal level of activity of 200,000 units and have been calculated as 2
per unit.
The current selling price is 10 per unit.
How much profit is made under marginal costing if the company sells 250,000 units?
A 500,000
B 600,000
C 900,000
D 1,000,000
11 James wants to invest his pocket money. He receives 5 a month which he puts into a savings account earning
compound interest at 05% per month.
If James saves his money, how much will be in the account in five years time (to the nearest )?
A 303
B 338
C 349
D 354
13 A company wishes to make a profit of 150,000. It has fixed costs of 75,000 with a C/S ratio of 075 and a selling
price of 10 per unit.
How many units would the company need to sell in order to achieve the required level of profit?
A 10,000 units
B 15,000 units
C 22,500 units
D 30,000 units
15 A company is considering its options with regard to a machine which cost 60,000 four years ago.
If sold the machine would generate scrap proceeds of 75,000. If kept, this machine would generate net income of
90,000.
The current replacement cost for this machine is 105,000.
What is the deprival value of the machine?
A 105,000
B 90,000
C 75,000
D 60,000
0
5%
Interest rate
10% 15%
19 Which of the following is correct when considering the allocation, apportionment and reapportionment of
overheads in an absorption costing situation?
A Only production related costs should be considered.
B Allocation is the situation where part of an overhead is assigned to a cost centre.
C Costs may only be reapportioned from production centres to service centres.
D Any overheads assigned to a single department should be ignored.
20 A company uses limiting factor analysis to calculate an optimal production plan given a scarce resource.
23 The following information for advertising and sales has been established over the past six months:
Month Sales Revenue Advertising expenditure
000 000
1 155 3
2 125 25
3 200 6
4 175 55
5 150 45
6 225 65
Using the high-low method which of the following is the correct equation for linking advertising and sales from
the above data?
A sales revenue = 62,500 + (25 x advertising expenditure)
B advertising expenditure = 2,500 + (004 x sales revenue)
C sales revenue = 95,000 + (20 x advertising expenditure)
D advertising expenditure = 4,750 + (005 x sales revenue)
What would be the cost of the upgrade that would make the company financially indifferent between building
new premises and upgrading the old one?
A 100,000
B 900,000
C 1,000,000
D 1,700,000
25 Which of the following could be true with regard to a management information system (MIS)?
An MIS is
(i) a database system.
(ii) used for planning, directing and controlling activities.
(iii) a hierarchy of information within an organisation.
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
(50 marks)
1 A company uses absorption costing for both internal and external reporting purposes as it has a considerable level of
fixed production costs.
The following information has been recorded for the past year:
Budgeted fixed production overheads 2,500,000
Budgeted (Normal) activity levels:
Units 62,500 units
Labour hours 500,000 hours
Actual fixed production overheads 2,890,350
Actual levels of activity:
Units produced 70,000 units
Labour hours 525,000 hours
Required:
(a) Calculate the fixed production overhead expenditure and volume variances and briefly explain what each
variance shows. (5 marks)
(b) Calculate the fixed production overhead efficiency and capacity variances and briefly explain what each
variance shows. (5 marks)
(10 marks)
2 A business uses process costing to establish stock valuations and profitability of its products. Output from the process
consists of three separate products: two joint products and a by-product. Details of the process is as follows:
Input costs:
Materials 45,625 for 12,500 kg
Labour 29,500
Overheads 26,875
The process is expected to lose 20% of the input. This is sold for scrap for 4 per unit.
The following details relate to the output from the process:
Product Type % of output Final sales Further costs
value per unit to complete
A Joint 50% 20 10
B Joint 40% 25
C By-product 10% 2
Joint costs are allocated on the basis of net realisable value at split-off.
Required:
(a) Establish the total cost of the output from the process. (4 marks)
(b) Calculate the profit per unit for each of the joint products, A and B. (6 marks)
(10 marks)
(b) Explain how Activity Based Costing differs from traditional absorption costing, giving an example.
(4 marks)
(10 marks)
4 A company uses linear programming to establish an optimal production plan in order to maximise profit.
The company finds that for the next year materials and labour are likely to be in short supply.
Details of the companys products are as follows:
A B
Materials (at 2 per kg) 6 8
Labour (at 6 per hour) 30 18
Variable overheads (at 1 per hour) 5 3
Variable cost 41 29
Selling price 50 52
Contribution 9 23
There are only 30,000 kg of material and 36,000 labour hours available. The company also has an agreement to
supply 1,000 units of product A which must be met.
Required:
(a) Formulate the objective function and constraint equations for this problem. (4 marks)
(b) Plot the constraints on a suitable graph and determine the optimal production plan. (6 marks)
(10 marks)
Required:
Calculate the net present value of each of the three investments at the companys cost of capital and state which
investment would be preferred.
(10 marks)
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315
2 B x 117 = 235
157
3 D
4 C
5 B Price variance
Did cost 136,000
Should cost
(53,000 kg x 250) 132,500
3,500 adverse
6 A Usage variance
Did use 53,000 kg
Should use
(27,000 units x 2 kg) 54,000 kg
1,000 kg
x 250
2,500 favourable
9 C
19
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10 A
Process
Units Units
Opening stock 400 Losses 400
Input 3,000 Output 2,800
Closing stock 200
3,400 3,400
1 00560 1
11 C 5 = 348 85 349
0 005
12 D
13 D 150,000 + 75,000
= 300,000 Breakeven revenue
075
300,000
= 30,000 units
10
y x
14 A a= b
n n
200 5 75
a= (17 14 ) = 25 36
4 4
15 B Lower of
16 A
17 C
19 A
22 D
25 D
Units Units
Materials 12,500 45,625 Normal loss 2,500 10,000
Labour 29,500 Output 10,000 92,000
Overheads 26,875
12,500 102,000 12,500 102,000
3 (a) A service centre is a department that does not directly produce units but is required to support the other departments.
Examples include maintenance departments, stores or a canteen.
A production centre is a centre where units are actually made, examples being a machining department or a welding
department.
Although a service will have overheads allocated and apportioned to it, these will be reapportioned to the production centres
so that, at the end of a period, all overheads are included in the production centres only. Once all the overheads are included
in the production centres they can be absorbed into production.
(b) Activity based costing uses a number of different cost drivers to absorb different overheads, whereas traditional absorption
costing only uses one, for example labour hours, machine hours or per unit.
In activity based costing fixed overhead costs may include machine set-up costs. These costs will not be incurred on a per
unit basis but will be incurred each time the machine has to be set-up. It would not, therefore, be sensible to allocate costs
per unit since that is not how the cost is incurred. It is, however, better to use the number of set-ups for this particular cost
to allocate costs to units.
b units a = 1,000
000
13
12
11
10
9
5a + 3b = 36,000
8
3a + 4b = 30,000
3 lso-contribution
line
0
1 2 3 4 5 6 7 8 9 10 11 12
a units
000
Optimal point is the intersect of the a = 1,000 line and the materials constraint line 3a + 4b = 30,000.
(3 x 1,000) + 4b = 30,000
3,000 + 4b = 30,000 therefore 4b = 30,000 3,000 giving 4b = 27,000
so b = 27,000/4,000 therefore b= 6,750 units
The optimal production plan is to make 1,000 units of A and 6,750 units of B.
Marks
1 (i) C 2
(ii) B 2
(iii) D 2
(iv) C 2
(v) B 2
(vi) A 2
(vii) D 2
(viii) B 2
(ix) C 2
(x) A 2
(xi) C 2
(xii) D 2
(xiii) D 2
(xiv) A 2
(xv) B 2
(xvi) A 2
(xvii) C 2
(xviii) A 2
(xix) A 2
(xx) B 2
(xxi) C 2
(xxii) D 2
(xxiii) A 2
(xxiv) B 2
(xxv) D 2
50
(b) Explanation of difference including the use of the term cost driver 2
Example 2
4
10
QUESTION PAPER
1 A cost is described as staying the same over a certain activity range and then increasing but remaining stable over a
revised activity range in the short term.
What type of cost is this?
A A fixed cost
B A variable cost
C A semi-variable cost
D A stepped fixed cost
2 The following quarterly adjustments have been calculated using the multiplicative model for time series analysis:
Quarter 1 Quarter 2 Quarter 3
095 125 070
What would be the adjustment for quarter 4 to two decimal places?
A 083
B 091
C 110
D 120
3 A company which uses marginal costing has a profit of 37,500 for a period. Opening stock was 100 units and
closing stock was 350 units.
The fixed production overhead absorption rate is 4 per unit.
What is the profit under absorption costing?
A 35,700
B 36,500
C 38,500
D 39,300
What is the value of the closing stock using this weighted average method?
A 1,01250
B 97650
C 96250
D 92500
6 Sydney wishes to make an investment on a monthly basis starting next month for five years. The payments into the
fund would be made on the first day of each month.
The interest rate will be 05% per month. Sydney needs a terminal value of 7,000.
What should be the monthly payments into the fund to the nearest ?
A 75
B 86
C 100
D 117
9 Which of the following would be best described as a short term tactical plan?
A Reviewing cost variances and investigate as appropriate
B Comparing actual market share to budget
C Lowering the selling price by 15%
D Monitoring actual sales to budget
300
200
B C
100
A D
OF
The objective function (OF) for the company has also been plotted on the graph and the feasible region is bounded
by the area ABCD.
At which point on the graph will profits be maximised?
A
B
C
D
15 The following information has been obtained for sales of two products for a three year period:
Price Quantity
Product A Product B Product A Product B
2000 (base year) 100 150 3 4
2001 125 140 2 3
2002 130 135 2 4
What is the Paasche quantity index for 2002?
A 086
B 089
C 119
D 120
19 A company has the following budgeted information for the coming month:
Budgeted sales revenue 500,000
Budgeted contribution 200,000
Budgeted profit 50,000
What is the budgeted break-even sales revenue?
A 125,000
B 350,000
C 375,000
D 450,000
What is the net present value of the investment at a discount rate of 8%?
A (2,416)
B 7,046
C 6,981
D 2,351
22 A company has over absorbed fixed production overheads for the period by 6,000. The fixed production overhead
absorption rate was 8 per unit and is based on the normal level of activity of 5,000 units. Actual production was
4,500 units.
What was the actual fixed production overheads incurred for the period?
A 30,000
B 36,000
C 40,000
D 42,000
23 A company uses process costing to value its output. The following was recorded for the period:
Input materials 2,000 units at 450 per unit
Conversion costs 13,340
Normal loss 5% of input valued at 3 per unit
Actual loss 150 units
There were no opening or closing stocks.
What was the valuation of one unit of output to one decimal place?
A 118
B 116
C 112
D 110
25 The following information relates to labour costs for the past month:
Budget Labour rate 10 per hour
Production time 15,000 hours
Time per unit 3 hours
Production units 5,000 units
Actual Wages paid 176,000
Production 5,500 units
Total hours worked 14,000 hours
There was no idle time.
What were the labour rate and efficiency variances?
Rate variance Efficiency variance
A 26,000 adverse 25,000 favourable
B 26,000 adverse 10,000 favourable
C 36,000 adverse 12,500 favourable
D 36,000 adverse 25,000 favourable
(50 marks)
1 A business operates with two production centres and three service centres. Costs have been allocated and apportioned
to these centres as follows:
Information regarding how the service centres work for each other and for the production centres is given as:
(b) (i) Sketch a profit-volume chart and indicate where the break-even point would be for a single product firm.
Clearly label the axes and indicate the profit line and fixed costs.
(ii) How would contribution be established from your chart in (b)(i)? (4 marks)
[Note: no specific numbers are required.]
(10 marks)
3 A company has obtained the following information regarding costs and revenue for the past financial year:
Original budget:
Sales 10,000 units
Production 12,000 units
Standard cost per unit:
Direct materials 5
Direct labour 9
Fixed production overheads 8
22
Selling price 30
Actual results:
Sales 9,750 units
Revenue 325,000
Production 11,000 units
Material cost 65,000
Labour cost 100,000
Fixed production overheads 95,000
There were no opening stocks.
Required:
(a) Produce a flexed budget statement showing the flexed budget and actual results. Calculate the variances
between the actual and flexed figures for the following:
sales;
materials;
labour; and
fixed production overhead. (7 marks)
(b) Explain briefly how the sales and materials variances calculated in (a) may have arisen. (3 marks)
(10 marks)
5 A company manufactures a single product, product Y. It has documented levels of demand at certain selling prices
for this product as follows:
Required:
Using a tabular approach calculate the marginal revenues and marginal costs for product Y at the different levels
of demand, and so determine the selling price at which the company profits are maximised.
(10 marks)
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Section A
11 D
12 C
13 C
14 D
15 B
16 C
17 D
18 C
19 C
10 B
11 B
12 D
13 A
14 D
15 A
16 C
17 A
18 C
19 C
20 D
21 D
22 A
23 B
24 A
25 D
1 D
3 C
Marginal costing profit 37,500
Add: fixed costs in closing stock
(350 4) 11,400
Less: fixed costs in opening stock
(100 4) 1,1(400)
Absorption costing profit 38,500
4 D
5 B
Receipts and issues
Units Price per unit Cost
100 500 500
150 5.50 825
250 530 1,325
(100) 530 (530)
100 600 600
250 558 1,395
(75) 558 (4185)
175 558 97650
1005125 1
A = 7,000
0005
A A 6977 = 7,000
7,000
A A = = 10033 100
6977
7 D Materials
Usage 7,200 3 kg = 21,600 kg
kg
Usage 21,600
Opening stock (400)
Closing stock 500
Purchases 21,700
8 C
9 C
11 B
383
IRR = 10% + (15% 10%)
383 ( 246)
383
IRR = 10% + 5%
383 + 246
383
IRR = 10% + 5%
629
12 D conversion costs
Output 9,850
Closing stock 135 = 450 30%
9,985
13 A
y OF
200
C
B
100
A D
OF
17 A
18 C Volume variance
Budgeted volume 10,000 units
Actual volume 9,800 units
Difference 200 units
At standard profit per unit 5
Variance 1,000 adverse
fixed costs
19 C Breakeven sales revenue =
C/S ratio
Fixed costs = 200,000 50,000 = 150,000
200,000
C/S ratio = = 04
500,000
150,000
Breakeven sales revenue = = 375,000
04
21 D
22 A
Over absorbed fixed production overheads (6,000)
Absorbed overheads
(4,500 8) 36,000
Actual overheads incurred 30,000
24 A
25 D Rate variance
Did cost 176,000
Should cost
(14,000 10) 140,000
36,000 adverse
Efficiency variance hours
Did take 14,000
Should take
(5,500 3) 16,500
2,500 favourable
At standard cost 10
25,000 favourable
2,900 4,088 8 0 4
8 45% = 4 8 45% = 4 (8) 8 10% = 0
2,904 4,092 0 0 4
4 60% = 2 4 40% = 2 (4)
2,906 4,094 0 0 0
The total amount for overheads in production centre 1 is 2,906 and in production centre 2 is 4,094.
(b) Centre 1
The most appropriate basis is to use machine hours as it is machine intensive.
2,906
Overhead absorption rate = = 0969/machine hour
3,000 hours
2 (a) (i)
Total revenue
Costs and
revenue
Total costs
Fixed costs
0
Breakeven units
volume
(ii) Contribution would be established by taking the difference between the sales revenue line and the variable costs line.
Breakeven point
0
Units
Loss
Fixed costs
(ii) Contribution would be established by taking the difference between profit and fixed costs.
(b) The sales price variance will have arisen due to a higher selling price than budgeted being obtained.
The material variance may have arisen either because the number of kg used were more than expected, and/or the amount
paid per kg was higher than expected.
(c) Discounts are likely to increase the EOQ as the holding cost will be reduced.
Since the purchase price is lower the total purchase cost will be reduced.
As the order cost uses the EOQ to divide the total demand, this cost will be reduced as the EOQ has increased.
The holding cost will change as it uses both the increased EOQ and a reduced purchase price.
MR MC at 1,300 units, therefore profits will be maximised at this point which is a selling price of 45.
Marks
Section A
2 marks per question giving a total of 50 marks.
Section B
1 (a) reapportionment
1 mark for each correct line using correct %s max 6
Note: any method with sound bases for allocation
should be accepted and given full credit.
Conclusion 1
7
QUESTION PAPER
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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.
Total
cost
0 Volume of activity
Which ONE of the following statements is consistent with the above diagram?
A Annual factory power cost where the electricity supplier sets a tariff based on a fixed charge plus a constant unit
cost for consumption but subject to a maximum annual charge.
B Weekly total labour cost when there is a fixed wage for a standard 40 hour week but overtime is paid at a
premium rate.
C Total direct material cost for a period if the supplier charges a lower unit cost on all units once a certain quantity
has been purchased in that period.
D Total direct material cost for a period where the supplier charges a constant amount per unit for all units supplied
up to a maximum charge for the period.
V
0 Units
At the specific levels of activity indicated, what do the lines depicted as T and V represent?
Line T Line V
A Loss Profit
B Loss Contribution
C Total fixed costs Profit
D Total fixed costs Contribution
2
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3 An organisation manufactures and sells a single product. At the budgeted level of output of 2,400 units per week, the
unit cost and selling price structure is as follows:
per unit per unit
Selling price 60
Less variable production cost 15
Less other variable cost 15
Less fixed cost 30
(50)
Profit 10
What is the breakeven point (in units per week)?
A 1,200
B 1,600
C 1,800
D 2,400
4 A company manufactures one product which it sells for 40 per unit. The product has a contribution to sales ratio of
40%. Monthly total fixed costs are 60,000. At the planned level of activity for next month, the company has a
margin of safety of 64,000 expressed in terms of sales value.
What is the planned activity level (in units) for next month?
A 3,100
B 4,100
C 5,350
D 7,750
5 A company manufactures and sells two products (X and Y) both of which utilise the same skilled labour. For the
coming period, the supply of skilled labour is limited to 2,000 hours. Data relating to each product are as follows:
Product X Y
Selling price per unit 20 40
Variable cost per unit 12 30
Skilled labour hours per unit 2 4
Maximum demand (units) per period 800 400
In order to maximise profit in the coming period, how many units of each product should the company
manufacture and sell?
A 200 units of X and 400 units of Y
B 400 units of X and 300 units of Y
C 600 units of X and 200 units of Y
D 800 units of X and 100 units of Y
7 In a short-term decision-making context, which ONE of the following would be a relevant cost?
A Specific development costs already incurred.
B The cost of special material which will be purchased.
C Depreciation on existing fixed assets.
D The original cost of raw materials currently in stock which will be used on the project.
8 The stock records for one specific stores item for last month show the following information:
Date Receipts Issues
units units
14th 150
13th 600
15th 200
22nd 250
The stock at the beginning of last month consisted of 200 units valued at 5,200.
The receipts last month cost 3250 per unit.
Using the FIFO method of valuation, what was the total cost of last months issues?
A 18,200
B 18,300
C 18,525
D 19,500
9 The demand for a product is 12,500 units for a three month period. Each unit of product has a purchase price of
15 and ordering costs are 20 per order placed.
The annual holding cost of one unit of product is 10% of its purchase price.
What is the Economic Order Quantity (to the nearest unit)?
A 1,577
B 1,816
C 1,866
D 1,155
11 A company manufactures two products, X and Y, in a factory divided into two production cost centres, Primary and
Finishing. The following budgeted data are available:
Cost centre Primary Finishing
Allocated and apportioned fixed
overhead costs 96,000 82,500
Direct labour minutes per unit:
product X 36 25
product Y 48 35
Budgeted production is 6,000 units of product X and 7,500 units of product Y.
Fixed overhead costs are to be absorbed on a direct labour hour basis.
What is the budgeted fixed overhead cost per unit for product Y?
A 11
B 12
C 14
D 15
12 A company uses an overhead absorption rate of 350 per machine hour, based on 32,000 budgeted machine hours
for the period. During the same period the actual total overhead expenditure amounted to 108,875 and 30,000
machine hours were recorded on actual production.
By how much was the total overhead under or over absorbed for the period?
A Under absorbed by 3,875
B Under absorbed by 7,000
C Over absorbed by 3,875
D Over absorbed by 7,000
13 A company manufactures and sells a single product. For this month the budgeted fixed production overheads are
48,000, budgeted production is 12,000 units and budgeted sales are 11,720 units.
The company currently uses absorption costing.
If the company used marginal costing principles instead of absorption costing for this month, what would be the
effect on the budgeted profit?
A 1,120 higher
B 1,120 lower
C 3,920 higher
D 3,920 lower
15 What was the adverse direct material price variance for last month?
A 1,000
B 1,200
C 1,212
D 1,260
17 A company operates a standard marginal costing system. Last month its actual fixed overhead expenditure was 10%
above budget resulting in a fixed overhead expenditure variance of 36,000.
What was the actual expenditure on fixed overheads last month?
A 324,000
B 360,000
C 396,000
D 400,000
18 Last month a company budgeted to sell 8,000 units at a price of 1250 per unit.
Actual sales last month were 9,000 units giving a total sales revenue of 117,000.
What was the sales price variance for last month?
A 4,000 favourable
B 4,000 adverse
C 4,500 favourable
D 4,500 adverse
20 Regression analysis is being used to find the line of best fit (y = a + bx) from eleven pairs of data. The calculations
have produced the following information:
x = 440, y = 330, x2 = 17,986, y2 = 10,366 and xy = 13,467
What is the value of a in the equation for the line of best fit (to 2 decimal places)?
A 063
B 069
C 233
D 533
23 A company manufactures and sells a single product. The variable cost of the product is 250 per unit and all
production each month is sold at a price of 370 per unit. A potential new customer has offered to buy 6,000 units
per month at a price of 295 per unit. The company has sufficient spare capacity to produce this quantity. If the new
business is accepted, sales to existing customers are expected to fall by two units for every 15 units sold to the new
customer.
What would be the overall increase in monthly profit which would result from accepting the new business?
A 1,740
B 2,220
C 2,340
D 2,700
24 A company manufactures four components (L, M, N and P) using the same general purpose machinery. Weekly
demand is 1,500 units of each component but only 24,000 machine hours are available each week. A decision
has to be made on which component to buy in from an outside supplier. The following data are available:
11 L M N P
Variable production cost ( per unit) 45 40 30 20
General purpose machinery hours per unit 13 15 14 16
Purchase price from outside supplier ( per unit) 57 55 54 50
In order to minimise total cost, which component should be purchased from the outside supplier each week?
A Component L
B Component M
C Component N
D Component P
y
(1)
(3) (2)
0 x
The objective is to maximise contribution and the dotted line on the graph depicts this function. There are three
constraints which are all of the less than or equal to type which are depicted on the graph by the three solid lines
labelled (1), (2) and (3).
At which of the following intersections is contribution maximised?
A Constraints (1) and (2)
B Constraints (2) and (3)
C Constraints (1) and (3)
D Constraint (1) and the x-axis
(50 marks)
1 Duddon Ltd makes a product that has to pass through two manufacturing processes, I and II. All the material is input
at the start of process I. No losses occur in process I but there is a normal loss in process II equal to 7% of the input
into that process. Losses have no realisable value.
Process I is operated only in the first part of every month followed by process II in the second part of the month. All
completed production from process I is transferred into process II in the same month. There is no work in progress in
process II.
Information for last month for each process is as follows:
Process I
Opening work in progress 200 units (40% complete for conversion
costs) valued in total at 16,500
Input into the process 1,900 units with a material cost of 133,000
Conversion costs incurred 93,500
Closing work in progress 50% complete for conversion costs
Process II
Transfer from process I 1,800 units
Conversion costs incurred 78,450
1,650 completed units were transferred to the finished goods warehouse.
Required:
(a) Calculate for process I:
(i) the value of the closing work in progress; and
(ii) the total value of the units transferred to process II. (4 marks)
(b) Prepare the process II account for last month. (4 marks)
(c) Identify TWO main differences between process costing and job costing. (2 marks)
(10 marks)
3 Braithwaite Ltd manufactures and sells a single product. The following data have been extracted from the current
years budget:
Contribution per unit 8
Total weekly fixed costs 10,000
Weekly profit 22,000
Contribution to sales ratio 40%
The companys production capacity is not being fully utilised in the current year and three possible strategies are under
consideration. Each strategy involves reducing the unit selling price on all units sold with a consequential effect on
the budgeted volume of sales. Details of each strategy are as follows:
Strategy Reduction in unit Expected increase in weekly
selling price sales volume over budget
% %
A 2 10
B 5 18
C 7 25
The company does not hold stocks of finished goods.
Required:
(a) Calculate for the current year:
(i) the selling price per unit for the product; and
(ii) the weekly sales (in units). (3 marks)
(b) Determine, with supporting calculations, which one of the three strategies should be adopted by the company
in order to maximise weekly profits. (4 marks)
(c) Briefly explain the practical problems that a management accountant might encounter in separating costs
into their fixed and variable components. (3 marks)
(10 marks)
13 [P.T.O.
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Formulae Sheet
Section A
1 A
2 D
3 C
4 C
5 D
6 C
7 B
8 A
9 D
10 D
11 D
12 A
13 B
14 C
15 B
16 C
17 C
18 C
19 B
20 C
21 C
22 A
23 A
24 B
25 D
1 A
2 D
3 C Contribution per unit (CPU) (60 15 5) 40
Total fixed cost (30 x 2,400) 72,000
Breakeven point (72,000 40) 1,800 units
4 C CPU (40 x 040) 16
Breakeven point (60,000 16) 3,750 units
Margin of safety (64,000 40) 1,600 units
Planned activity level 5,350 units
5 D X Y
CPU 8 10
Contribution per hour 4 250
Ranking 1st 2nd
800 units of product X uses 1,600 hours and in the remaining 400 hours, 100 units of product Y can be manufactured.
6 C (40,000 20,000) (20,000 4,000) units = 125 per unit
7 B
8 A Closing stock (units) = 200 + 600 150 200 250 = 200
Issues = 5,200 + (600 200) x 3250 = 18,200
9 D
(2 x 20 x (4 x 12,500)
EOQ = = 1,155
0 10 x 15
10 D
11 D Total direct labour hours:
Primary (6,000 x 36 60) + (7,500 x 48 60) 9,600
Finishing (6,000 x 25 60) + (7,500 x 35 60) 6,875
Absorption rates:
Primary (96,000 9,600) 10 per hour
Finishing (82,500 6,875) 12 per hour
Fixed cost per unit (Y): (48 60) x 10 + (35 60) x 12 = 15
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12 A
Actual overhead 108,875
Absorbed overhead (30,000 350) 105,000
-
Under absorption 113,875
13 B Sales < production by 280 units
Marginal costing profit would be lower by 280 x (48,000 12,000) = 1,120
14 C
15 B Adverse price variance (004 x 250 x 12,000) = 1,200
16 C
12,000 litres at 250 per litre 30,000
Add Favourable usage variance 11,815
-
Standard cost of actual production 31,815
-
Actual production 31,815 (105 x 250) 1,212 units
-
17 C Let x = budgeted expenditure
11x x = 136,000
1.1x x = 360,000
11 x = 396,000 = actual expenditure ()
18 C
Actual sales at standard selling price 112,500
(9,000 x 1250)
Actual sales at actual selling price 117,000
-
Sales price variance 4,500 favourable
-
19 B
20 C
11 x 13,467 (440 x 330)
b = = 06917
(11 x 17,986) (440)2
a = (330 11) 06917 (440 11) = 233
21 C
Salary costs (54 x 40) + (110 x 25) 4,910
Overhead cost (164 x 20) 3,280
-
Total cost 8,190
Mark-up (40% on total cost) 3,276
-
Final fee 11,466
-
22 A Joint costs apportioned to product H:
(228 640) x 384,000 136,800
Further processing costs 159,600
-
Total cost of H production (228,000 units) 296,400
-
Closing stock: 28,000 x (296,400 228,000) = 36,400
23 A CPU from existing business (370 250) 120
New business CPU (295 2.50) 045
Total contribution from new business (6,000 x 045) 2,700
Less Lost contribution from existing business
2 x (6,000 15) x 120 (960)
-
Overall increase in contribution and profit 1,740
-
24 B L M N P
Additional cost of buying in one unit () 12 15 24 30
Machine hours per unit 13 15 14 16
Additional cost of buying in per machine hour () 14 13 16 15
Ranking for buying in 2nd 1st 4th 3rd
Buy in component M.
25 D
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Section B
(c) In job costing each job is costed separately whereas in process costing it is the process itself which is costed. The total
cost of the process is then averaged over all the units of production.
In job costing production is to customer specification and therefore each job is likely to be different. In process costing
all units are identical in any one process.
2 (a)
Total
variance
Direct material
Actual quantity at actual price 417,900
2,100 F
Standard quantity for actual production at standard price 420,000
Direct labour
Actual hours at actual rate 949,620
4,620 A
Standard hours for actual production at standard rate 945,000
Variable production overheads
Actual expenditure 565,740
1,260 F
Standard cost of actual production 567,000
(c) Rate:
Higher graded workers paid at a higher rate.
Higher than expected wage settlement for the company.
Efficiency:
The higher graded workers being more skilled took less than the standard time.
Highly motivated workers.
(b) Strategy A B C
Units per week 4,400 4,720 5,000
/unit /unit /unit
Selling price 1960 1900 1860
Less Variable cost (1200) (1200) (1200)
Contribution 760 700 660
Total contribution 33,440 33,040 33,000
Contribution and therefore profit is maximised when Strategy A is adopted.
(c) Some costs do not fall clearly into being either variable or fixed. They are the costs that are a mix of variable and fixed
sometimes called semi-variable or mixed costs.
The following techniques could be used to separate the fixed and variable components of semi-variable or mixed costs:
the high-low method
linear regression.
Many costs are a mix of variable and fixed elements, for example power costs (gas or electricity). The tariffs for power costs
often consist of a fixed charge irrespective of the amount of power consumed and a variable charge per unit of consumption.
(b) Any variable overhead costs associated with the contract would be relevant because they would represent additional or
incremental costs caused directly by the contract.
Fixed overhead costs would only be relevant if the total fixed overhead costs of the company increased as a direct consequence
of the contract being undertaken. In that case the relevant amount would be the specific increase in the total fixed overhead
costs caused by the acceptance of the contract.
Arbitrary apportionments of existing fixed overhead costs would not be relevant. Similarly sunk and committed costs would
not be relevant.
(c) For both products Lang and Dale production is greater than sales for the coming year. In other words, stocks of finished
products will be increasing. In this situation, profits calculated using marginal costing principles will be lower than the profits
calculated using absorption costing principles.
Fixed production costs are written off as they arise under marginal costing whereas under absorption costing they form part
of the product cost and the inventory valuation. Therefore in the coming year with stocks increasing and using absorption
costing, a higher amount of fixed production cost will be carried forward at the year end than was brought forward in any
opening stocks. The effect is that some of the costs that would have been written off and would have reduced the profit under
marginal costing are being carried forward under absorption costing to be written off against profits in later years.
Marks
Section A
Each of the 25 questions in this section is worth 2 marks 50
Section B
1 (a) Equivalent units of work done 1
Cost per equivalent unit 1
Value of work in progress 1
Value of transfer 1
4
(b) Transfer in from Process I 1/
2
Conversion costs 1/
2
Normal loss 1
Abnormal loss 1
Finished production 1
4
(c) Two differences 1 mark for each 2
10
4 (a) Material K 2
Material L 2
Skilled labour: cost 1
Skilled labour: opportunity cost 2
7
(b) Explanation of relevant cost concept 1
Variable overhead costs 1
Fixed overhead costs 1
3
10
QUESTION PAPER
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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 When total purchases of raw material exceed 30,000 units in any one period then all units purchased, including the
initial 30,000, are invoiced at a lower cost per unit.
Which of the following graphs is consistent with the behaviour of the total materials cost in a period?
A B
UNITS UNITS
0 30,000 0 30,000
C D
UNITS UNITS
0 30,000 0 30,000
SALES REVENUE
TOTAL COSTS
UNITS
0
4,000
Which one of the following statements is consistent with the above chart?
A Both selling price per unit and variable cost per unit are constant.
B Selling price per unit is constant but variable cost per unit increases for sales over 4,000 units.
C Variable cost per unit is constant but the selling price per unit increases for sales over 4,000 units.
D Selling price per unit increases for sales over 4,000 units and there is an increase in the total fixed costs at
4,000 units.
4 An organisations records for last month show the following in respect of one particular stores item:
Date Receipts Issues Stock
units units units
1st 200
4th 150 50
12th 500 550
19th 200 350
27th 300 50
The opening stock for last month was valued at a total of 4,000 and all receipts during the month were purchased
at a cost of 2660 per unit.
The organisation uses the weighted average method of valuation and calculates a new weighted average price after
each stores receipt.
What was the total value of the issues during last month?
A 16,000
B 16,900
C 17,000
D 17,290
6 Monthly variance reports are an example of which one of the following types of management information?
A Tactical
B Strategic
C Planning
D Operational
8 What was the direct labour rate variance for last month?
A 4,250 favourable
B 4,250 adverse
C 5,250 favourable
D 5,250 adverse
9 What was the direct labour efficiency variance for last month?
A 4,250 favourable
B 4,250 adverse
C 5,250 favourable
D 5,250 adverse
10 A cost centre has an overhead absorption rate of 425 per machine hour, based on a budgeted activity level of
12,400 machine hours.
In the period covered by the budget, actual machine hours worked were 2% more than the budgeted hours and the
actual overhead expenditure incurred in the cost centre was 56,389.
What was the total over or under absorption of overheads in the cost centre for the period?
A 1,054 over absorbed
B 2,635 under absorbed
C 3,689 over absorbed
D 3,689 under absorbed
4
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11 A company which operates a process costing system had work in progress at the start of last month of 300 units
(valued at 1,710) which were 60% complete in respect of all costs.
Last month a total of 2,000 units were completed and transferred to the finished goods warehouse. The cost per
equivalent unit for costs arising last month was 10. The company uses the FIFO method of cost allocation.
What was the total value of the 2,000 units transferred to the finished goods warehouse last month?
A 19,910
B 20,000
C 20,510
D 21,710
12 A company has recorded its total cost for different levels of activity over the last five months as follows:
Month Activity level (units) Total cost ()
7 300 17,500
8 360 19,500
9 400 20,500
10 320 18,500
11 280 17,000
The equation for total cost is being calculated using regression analysis on the above data. The equation for total cost
is of the general form y = a + bx and the value of b has been calculated correctly as 2953.
What is the value of a (to the nearest ) in the total cost equation?
A 7,338
B 8,796
C 10,430
D 10,995
13 A company operates a job costing system. Job number 1012 requires 45 of direct materials and 30 of direct
labour. Direct labour is paid at the rate of 750 per hour. Production overheads are absorbed at a rate of 1250
per direct labour hour and non-production overheads are absorbed at a rate of 60% of prime cost.
What is the total cost of job number 1012?
A 170
B 195
C 200
D 240
15 Which one of the following statements correctly describes the shadow price of a resource in linear programming?
A The maximum sum payable for one more unit of the scarce resource.
B The minimum sum payable for one more unit of the scarce resource.
C The increase in total contribution if one extra unit of a binding constraint is made available.
D The increase in total contribution if one extra unit of a non-binding constraint is made available.
16 Last month, when a company had an opening stock of 16,500 units and a closing stock of 18,000 units, the profit
using absorption costing was 40,000. The fixed production overhead rate was 10 per unit.
What would the profit for last month have been using marginal costing?
A 15,000
B 25,000
C 55,000
D 65,000
19 A machine owned by a company has been idle for some months but could now be used on a one year contract which
is under consideration. The net book value of the machine is 1,000. If not used on this contract, the machine
could be sold now for a net amount of 1,200. After use on the contract, the machine would have no saleable value
and the cost of disposing of it in one years time would be 800.
What is the total relevant cost of the machine to the contract?
A 400
B 800
C 1,200
D 2,000
20 An organisation launching a new product has set a relatively high initial selling price.
Which one of the following pricing policies is this an example of?
A Premium pricing
B Price differentiation
C Penetration pricing
D Price skimming
22 What would be the profit per week if the selling price of the product was set at 31 per unit?
A 2,800
B 3,150
C 5,490
D 5,800
23 A company sells a single product which has a contribution of 27 per unit and a contribution to sales ratio of 45%.
This period it is forecast to sell 1,000 units giving it a margin of safety of 13,500 in sales revenue terms.
What are the companys total fixed costs per period?
A 6,075
B 7,425
C 13,500
D 20,925
24 Which one of the following groups of workers would be classified as indirect labour?
A Machinists in an organisation manufacturing clothes
B Bricklayers in a house building company
C Maintenance workers in a shoe factory
D Assembly workers in a vehicle manufacturing business
(50 marks)
1 Maybud Ltd operates Process X which creates two joint products, A and B, in the ratio of 3:2 by volume. There is
no work in progress. The following information relates to Process X for last month:
(i) 80,000 litres of raw materials with a total cost of 158,800 were input into the process and conversion costs
were 133,000.
(ii) A normal process loss of 5% of the input was expected. An actual loss of 5,500 litres was identified at the end
of the process. Losses have a realisable value of 75p per litre.
It is company policy to apportion joint costs to products using the net realisable value method. After Process X, both
product A and product B are further processed at a cost of 2 per litre and 3 per litre respectively. The final selling
prices of the products are as follows:
Product per litre
A 8
B 12
Required:
(a) Prepare the process account for last month including the output volume and cost of products A and B
separately. (7 marks)
(b) Explain clearly how an abnormal gain arises in a process. Indicate where it would appear in a process
account and how it would be valued. (3 marks)
(10 marks)
2 Despard Ltd manufactures and sells a single product. The following data have been extracted from the current years
budget:
Sales and production (units) 5,000
Variable cost per unit 50
Fixed cost per unit 70
Contribution to sales ratio 75%
The selling price per unit for next year is to be 8% above the current years budgeted figure, whereas both the variable
cost per unit and the total fixed costs are forecast to increase by 12% above their budgeted level in the current year.
The target for next year is that total profit should remain the same as that budgeted for the current year.
Required:
(a) Calculate for the CURRENT YEAR the budgeted:
(i) contribution per unit;
(ii) total profit. (3 marks)
(b) Calculate the number of units which the company should produce and sell next year in order to achieve the
target level of profit. (4 marks)
(c) Explain, with an example, the term semi-variable (mixed) cost. How would such a cost be dealt with in
undertaking the analysis in (a)? (3 marks)
(10 marks)
Required:
(a) Calculate the sales price and sales volume profit variances for the month just ended. (4 marks)
One of the qualities of good information is that it should be communicated to the right person or persons in an
organisation.
(b) To whom should the variances calculated in (a) be communicated and why? (3 marks)
The company is also considering a change from absorption costing to marginal costing.
(c) Calculate the BUDGETED profit for the month just ended under:
(i) absorption costing;
(ii) marginal costing. (3 marks)
(10 marks)
4 The following data for the current year relate to a sterile pack purchased by the Goodheart Hospital:
Annual demand 90,000 units
Annual holding cost per unit 8
Cost of placing an order 25
From the start of next year the cost of placing an order will rise by 11 but all the other data will remain the same.
The hospital bases its purchasing decisions on the Economic Order Quantity (EOQ) model.
Required:
(a) Calculate the EOQ for:
(i) the current year
(ii) next year. (4 marks)
(b) Calculate the total extra annual cost to the hospital for next year of ordering and holding stock of the sterile
packs. (4 marks)
(c) Identify TWO major costs associated with each of the following:
(i) holding stock;
(ii) ordering stock. (2 marks)
(10 marks)
Required:
(a) Determine the optimal production plan in units for the first three months of next year and the resultant total
contribution. (4 marks)
The companys management accountant has already carried out some preliminary calculations relating to the second
three month period. Using linear programming, she has determined that the optimal production plan for that quarter
involves a combination of product X and product Y.
(b) Determine the optimal production plan in units for the second three month period of next year and the
resultant total contribution. (6 marks)
(10 marks)
Section A
1 A
2 A
3 C
4 A
5 B
6 A
7 C
8 A
9 D
10 B
11 A
12 B
13 A
14 C
15 C
16 B
17 A
18 B
19 D
20 D
21 C
22 A
23 D
24 C
25 D
1 A
2 A
3 C
4 A
Date Units Average price ()
1st 200 2000 4,000
4th (150) 2000 (3,000)
50 1,000
12th 500 2660 13,300
550 2600 14,300
19th (200) 2600 (5,200)
27th (300) 2600 (7,800)
Total value of issues = 3,000 + 5,200 + 7,800 = 16,000
5 B
(9,250 6,750) (5,000 3,000) = 125
6 A
7 C
Actual cost 144,500
Standard cost of actual production (8,500 x 15) 127,500
Total overhead variance 17,000 Adverse
8 A
10 B
Actual expenditure 56,389
Absorbed cost (12,400 x 102 x 425) 53,754
Total under absorption 2,635
11 A
Opening WIP 1,710
Completion of opening WIP (300 x 040 x 10) 1,200
Units started and completed in the month
(2,000 300) x 10 17,000
Total value (2,000 units) 19,910
12 B
y = 17,500 + 19,500 + 20,500 + 18,500 + 17,000 = 93,000
x = 300 + 360 + 400 + 320 + 280 = 1,660
a = (93,000 5) 2953(1,660 5) = 8,79604
13 A
Direct materials 45
Direct labour (4 hours) 30
Prime cost 75
Production overheads (4 x 1250) 50
Total production cost 125
Non-production overheads (75 x 06) 45
Total cost 170
14 C
Maximum usage x Longest lead time = 520 x 15 = 7,800
15 C
16 B
Absorption costing profit 40,000
Less Increase in stock at fixed overhead cost per unit
(18,000 16,500) x 10 (15,000)
Marginal costing profit 25,000
17 A
18 B
Material
T (500 x 45) 22,500
V (200 x 40) + (200 x 52) 18,400
Total relevant cost 40,900
20 D
21 C
Profits maximised when Marginal revenue (MR) = Marginal cost (MC)
MR = 40 006Q
MC = 10
MR = MC Therefore 10 = 40 006Q
Q = 30 06 = 500
Price (P) = 40 003(500) = 25
22 A
Profit = Total revenue (TR) Total cost (TC)
When P = 31 then 31 = 40 003Q and Q = 300
TR = P x Q = 31 x 300 = 9,300
TC = 3,500 + (10 x 300) = (6,500)
Profit 2,800
23 D
CPU = 27
Contribution to sales ratio = 45%
Selling price = 27 045 = 60
Margin of safety in units = 13,500 60 = 225
Break-even point (BEP) = 1,000 225 = 775 units
At BEP: total contribution = total fixed costs
Total fixed costs = 775 x 27 = 20,925
24 C
25 D
P = 95,000 + 04X + 03Y
X = 46,000 + 01Y
Y = 30,000 + 02X
(b) An abnormal gain occurs when the actual loss is less than the normal loss expected. In other words the actual output of
good production is higher than would normally be expected from the given level of input.
The abnormal gain is shown as a debit entry in the process account.
The abnormal gain is valued at its full process cost.
(b) The person (or persons) who should receive the information generated by any system in an organisation should be the person
with responsibility for that aspect or part of the business to which the information relates. In the case of sales variance
information, it would be the person responsible for sales in the organisation. This could be the sales manager or marketing
manager. In a large divisionalised company it may be the divisional manager. A summary of the sales and cost variances
would be issued to senior management in the organisation.
Alternative answer:
Absorption costing net profit [as above in (i)] 226,000
Deduct Increase in stocks at standard fixed
production cost per unit
(3,000 units at 5 per unit) (15,000)
Marginal costing net profit 211,000
4 (a) (i) EOQ for the current year = [(2 x 25 x 90,000) 8]05 = 750 units
(ii) EOQ for next year = [(2 x 36 x 90,000) 8]05 = 900 units
Marks
Section A
Each of the 25 questions in this section is worth 2 marks 50
Section B
1 (a) Inputs into process 1
Normal loss 2
Abnormal loss 1
Joint products 3
7
(b) Equations/formulations 3
Optimal units for products X and Y 2
Resultant contribution 1
6
10
QUESTION PAPER
1 Four lines representing expected costs and revenue have been drawn on a break-even chart:
Output
0
A Line A
B Line B
C Line C
D Line D
2 Four lines have been labelled as J, K, L and M at different levels of output on the following profit-volume chart:
0 Output
L
J
K
Which line represents the total contribution at the corresponding level of output?
A Line J
B Line K
C Line L
D Line M
2
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3 A manufacturing company has four types of cost (identified as T1, T2 , T3 and T4).
The total cost for each type at two different production levels is:
Total cost for Total cost for
Cost type 125 units 180 units
T1 1,000 1,260
T2 1,750 2,520
T3 2,475 2,826
T4 3,225 4,644
Which two cost types would be classified as being semi-variable?
A T1 and T3
B T1 and T4
C T2 and T3
D T2 and T4
4 A company manufactures and sells a single product. The following data relate to a weekly output of 2,880 units:
per unit per unit
Selling price 80
Less costs:
Variable production 30
Other variable 10
Fixed 25
(65)
Profit 15
What is the weekly break-even point (in units)?
A 1,900
B 1,440
C 1,800
D 4,800
5 An organisation manufactures a single product which is sold for 60 per unit. The organisations total monthly fixed
costs are 54,000 and it has a contribution to sales ratio of 40%. This month it plans to manufacture and sell
4,000 units.
What is the organisations margin of safety this month (in units)?
A 1,500
B 1,750
C 2,250
D 2,500
7 Which of the following correlation coefficients indicates the weakest relationship between two variables?
A + 10
B + 04
C 06
D 10
11 A manufacturing company uses a machine hour rate to absorb production overheads, which were budgeted to be
130,500 for 9,000 machine hours. Actual overheads incurred were 128,480 and 8,800 machine hours were
recorded.
What was the total under absorption of production overheads?
A 880
B 900
C 2,020
D 2,900
12 Which of the following would NOT be classified as a service cost centre in a manufacturing company?
A Product inspection department
B Materials handling department
C Maintenance department
D Stores
14 A company operates a job costing system. Job number 605 requires 300 of direct materials and 400 of direct
labour. Direct labour is paid at the rate of 8 per hour. Production overheads are absorbed at a rate of 26 per direct
labour hour and non-production overheads are absorbed at a rate of 120% of prime cost.
What is the total cost of job number 605?
A 2,000
B 2,400
C 2,840
D 4,400
17 A companys budgeted sales for last month were 10,000 units with a standard selling price of 20 per unit and a
contribution to sales ratio of 40%. Last month actual sales of 10,500 units with total revenue of 204,750 were
achieved.
What were the sales price and sales volume contribution variances?
Sales price variance () Sales volume contribution variance ()
A 5,250 adverse 4,000 favourable
B 5,250 adverse 4,000 adverse
C 5,000 adverse 4,000 favourable
D 5,000 adverse 4,000 adverse
18 A company operates a standard absorption costing system. The standard fixed production overhead rate is 15 per
hour.
The following data relate to last month:
Actual hours worked 5,500
Budgeted hours 5,000
Standard hours for actual production 4,800
What was the fixed production overhead capacity variance?
A 7,500 adverse
B 7,500 favourable
C 10,500 adverse
D 10,500 favourable
19 A contract is under consideration which requires 600 labour hours to complete. There are 350 hours of spare labour
capacity. The remaining hours for the contract can be found either by weekend overtime working paid at double the
normal rate of pay or by diverting labour from the manufacture of product QZ. If the contract is undertaken and labour
is diverted, then sales of product QZ will be lost. Product QZ takes three labour hours per unit to manufacture and
makes a contribution of 12 per unit. The normal rate of pay for labour is 9 per hour.
What is the total relevant cost of labour for the contract?
A 1,000
B 2,250
C 3,250
D 4,500
21 A company, which manufactures four components (A, B, C and D) using the same machinery, aims to maximise
profit. The following information is available:
Component
A B C D
Variable production cost per unit () 60 64 70 68
Purchase cost per unit from
an outside supplier () 100 120 130 110
Machine hours per unit to manufacture 4 7 5 6
As it has insufficient machine hours available to manufacture all the components required, the company will need to
buy some units of one component from the outside supplier.
Which component should be purchased from the outside supplier?
A Component A
B Component B
C Component C
D Component D
23 Reginald is the manager of production department M in a factory which has ten other production departments. He
receives monthly information that compares planned and actual expenditure for department M. After department M,
all production goes into other factory departments to be completed prior to being despatched to customers. Decisions
involving capital expenditure in department M are not taken by Reginald.
Which of the following describes Reginalds role in department M?
A A cost centre manager
B An investment centre manager
C A profit centre manager
D A revenue centre manager
Product Y
(units)
100 Material G
90
Material H
Product X
(units)
0 125 150
24 What is the amount (in kg) of material G and material H used in each unit of product Y?
Material G Material H
A 10 20
B 10 10
C 20 20
D 20 10
25 What is the optimal mix of production (in units) for the next period?
Product X Product Y
A 0 90
B 50 60
C 60 50
D 125 0
(50 marks)
1 Saphir Ltd operates a process which creates two joint products, X and Y, in the ratio of 7 : 5 by weight. No stocks
of work in progress are held in the process and there is a normal process loss equal to 5% of input. Losses have a
realisable value of 2 per kg.
The following information relates to the process for last month:
10,000 kg of raw materials with a total cost of 18,750 were input into the process and the direct labour costs were
50,000. Overheads were absorbed at a rate of 140% of direct labour. The actual loss was 400 kg.
Joint production costs are apportioned to products using the sales value method. Selling prices of the joint products
are:
Product Selling price per unit
X 2500
Y 3750
Required:
(a) Prepare the process account for last month in which both the output weight and value for each of the joint
products are shown. (8 marks)
(10 marks)
2 Murgatroyd Ltd, which manufactures a single product, uses standard absorption costing. A summary of the standard
product cost is as follows:
per unit
Direct materials 15
Direct labour 20
Fixed overheads 12
Budgeted and actual production for last month were 10,000 units and 9,000 units respectively. The actual costs
incurred were:
Direct materials 138,000
Direct labour 178,000
Fixed overheads 103,000
Required:
(a) Prepare a statement that reconciles the standard cost of actual production with its actual cost for last month
and highlights the total variance for each of the three elements of cost. (4 marks)
Last month 24,000 litres of direct material were purchased and used by the company. The standard allows for
25 litres of the material, at 6 per litre, to be used in each unit of product.
(b) Provide an appropriate breakdown of the total direct materials cost variance included in your statement
in (a). (3 marks)
(10 marks)
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3 Jane plc purchases its requirements for component RB at a price of 80 per unit. Its annual usage of component
RB is 8,760 units. The annual holding cost of one unit of component RB is 5% of its purchase price and the cost of
placing an order is 1250.
Required:
(a) Calculate the economic order quantity (to the nearest unit) for component RB. (2 marks)
(b) Assuming that usage of component RB is constant throughout the year (365 days) and that the lead time
from placing an order to its receipt is 21 days, calculate the stock level (in units) at which an order should
be placed. (2 marks)
(8 marks)
4 Archibald Ltd manufactures and sells one product. Its budgeted profit statement for the first month of trading is as
follows:
Sales (1,200 units at 180 per unit) 216,000
Less: Cost of sales:
Less: Production (1,800 units at 100 per unit) 180,000
Less: Less Closing stock (600 units at 100 per unit) (60,000)
(120,000 )
Gross profit 96,000
Less Fixed selling and distribution costs (41,000 )
Net profit 55,000
The budget was prepared using absorption costing principles. If budgeted production in the first month had been
2,000 units then the total production cost would have been 188,000.
Required:
(b) If the budget for the first month of trading had been prepared using marginal costing principles, calculate:
(i) the total contribution; and
(ii) the net profit. (4 marks)
(c) Explain clearly the circumstances in which the monthly profit or loss would be the same using absorption or
marginal costing principles. (2 marks)
(10 marks)
Required:
The management accountant has established that a linear relationship beween the unit selling price (P in ) and the
weekly demand (Q in units) for product DG is given by:
P = 20 0002Q
The marginal revenue (MR in per unit) is related to weekly demand (Q in units) by the equation:
MR = 20 0004Q
(b) Calculate the selling price per unit for product DG that should be set in order to maximise weekly profit.
(7 marks)
(c) Distinguish briefly between penetration and skimming pricing policies when launching a new product.
(2 marks)
(12 marks)
Section A
1 C
2 C
3 A
4 C
5 B
6 B
7 B
8 A
9 D
10 D
11 A
12 A
13 B
14 C
15 B
16 C
17 A
18 B
19 C
20 B
21 D
22 B
23 A
24 A
25 A
1 C
2 C
5 B CPU = 040 60 = 24
Break-even point = 54,000 24 = 2,250 units
Margin of safety = 4,000 2,250 = 1,750 units
7 B
8 A
9 D
11 A
Actual overheads 128,480
Absorbed overhead (8,800 1450) 127,600
Under absorption 880
12 A
14 C
Prime cost (300 + 400) 700
Production overheads (50 26) 1,300
Total production cost 2,000
Non-production overheads (120 700) 840
Total cost 2,840
16 C
Units started and finished last month (900 100) = 800 12 9,600
Opening work in progress (WIP) value 680
Work done to complete opening WIP (100 040) 12 480
10,760
17 A Price variance:
Actual sales revenue 204,750
Actual sales units at standard selling price (10,500 20) 210,000
Sales price variance 5,250 A
Volume variance (500 units 20 040) 4,000 F
19 C 250 hours at [9 per hour + the opportunity cost (12 3) per hour] = 3,250
The incremental labour cost of weekend working is 4,500 (250 18) and
being higher than 3,250 is therefore not relevant.
23 A
Section B
Abnormal gain (W3) 100 1,450 Normal loss (W2) 500 1,000
10,100 140,200 10,100 140,200
Cost per kg
Costs arising (18,750 + 50,000 + 70,000) 138,750
Less: Normal loss (realisable value) (1,000)
137,750
Cost per kg:
137,750 (Normal yield from 10,000 kg)
= 137,750 (095 10,000) = 1450
Workings:
W1 Product Selling price Production Sales value of
(ratio 7:5) production
/kg kg
X 2500 5,600 140,000
Y 3750 4,000 150,000
Total joint production cost (X + Y) = 9,600 kg at 1450 = 139,200
Apportioned A : B in the ratio 140,000:150,000 (= 14:15)
Product X = 67,200 and Product Y = 72,000
W2 5% of 10,000 = 500 kg at 2 per kg = 1,000
W3 (500 400) = 100 kg at 1450 per kg = 1,450
(b) A by-product is an output from a process that occurs incidentally to the main production and is insignificant in value terms.
The inputs to a process are intended to create the main product or products but sometimes quite incidentally a by-product is
also created, which has a relatively low value compared to the main products.
(c) (i) The standard price per litre is set by the person in the organisation with the specialist knowledge about the prices
charged by suppliers for the raw materials used by Murgatroyd Ltd. This would be the manager responsible for
purchasing (sometimes referred to as the Buying Manager or the Procurement Manager).
(ii) The standard quantity per unit is set by the person in the organisation with the specialist knowledge about the product
specification and the amount of each raw material that should be used in the manufacture of one unit of the product.
This would be a manager in the production (manufacturing) function or technical department in Murgatroyd Ltd.
(c) (i) A stockout occurs when a company runs out of stock. There are costs associated with this lost contribution from lost
sales, for example. In order to avoid a stockout the company could set a buffer stock in effect a safety level of stock
to cover emergency situations such as demand and/or lead times exceeding their average levels. The holding of a buffer
stock involves an additional cost.
(ii) Jane plc should consider having a buffer stock if either the usage of component RB starts to fluctuate from period to
period (at present it is constant) and/or the lead time starts to fluctuate from its present constant level of 21 days.
(ii)
Total production cost for 2,000 units 188,000
Less total variable production cost (2,000 40) (80,000)
Total monthly fixed production cost 108,000
(ii)
Total contribution [as in (b)(i)] 168,000
Less Total fixed costs (108,000 + 41,000) (149,000)
Net profit 19,000
(c) When the number of units produced and the number of units sold in a month are identical, the net profit or loss determined
by using absorption and marginal costing principles will also be the same. In other words the net profit or loss will be the
same when the opening and closing stocks for a month are unchanged.
5 (a) (i) Initial selling price = (variable + fixed cost per unit) + mark up of 40%
Initial selling price = [4 + (18,000 3,000)] 140 = 14
(c) A penetration price is an initially low selling price of a product, whereas a skimming price policy is one where the initial selling
price is set high.
Marks
Section A
Each of the 25 questions in this section is worth 2 marks 50
Section B
1 (a) Inputs into process 11/2
Normal loss 11/2
Abnormal gain 2
Joint products 3
8
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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 Up to a given level of activity in each period the purchase price per unit of a raw material is constant. After that point
a lower price per unit applies both to further units purchased and also retrospectively to all units already purchased.
Which of the following graphs depicts the total cost of the raw materials for a period?
A B
0 Units 0 Units
C D
0 Units 0 Units
2 The following breakeven chart has been drawn showing lines for total cost (TC), total variable cost (TVC), total fixed
cost (TFC) and total sales revenue (TSR):
TSR
TC
TVC
TFC
0 Units
675 1,200 1,500 1,700
5 The following statements relate to financial accounting or to cost and management accounting:
(i) The main users of financial accounting information are external to an organisation.
(ii) Cost accounting is part of financial accounting and establishes costs incurred by an organisation.
(iii) Management accounting is used to aid planning, control and decision making.
3 [P.T.O.
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7 An organisations stock records for last month show the following transactions in respect of one item:
Date Receipts Issues Stock
(units) (units) (units)
1st 300
5th 100 200
13th 600 800
20th 300 500
28th 200 300
The opening stock was valued at a total cost of 9,300 and all receipts on the 13th were purchased at a cost of 33
per unit.
The organisation uses the weighted average method of valuation and calculates a new weighted average after each
stores receipt.
8 A company uses 9,000 units of a component per annum. The component has a purchase price of 40 per unit and
the cost of placing an order is 160. The annual holding cost of one component is equal to 8% of its purchase price.
What is the Economic Order Quantity (to the nearest unit) of the component?
A 530
B 671
C 949
D 1,342
9 A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model.
What would be the effects on the EOQ and the total annual ordering cost of an increase in the annual cost of
holding one unit of the component in stock?
EOQ Total annual ordering cost
A Lower Higher
B Higher Lower
C Lower No effect
D Higher No effect
11 An organisation absorbs overheads on a machine hour basis. The planned level of activity for last month was 30,000
machine hours with a total overhead cost of 247,500. Actual results showed that 28,000 machine hours were
recorded with a total overhead cost of 238,000.
What would the profit for next period be using marginal costing?
A 25,000
B 27,000
C 45,000
D 47,000
14 Last month 27,000 direct labour hours were worked at an actual cost of 236,385 and the standard direct labour
hours of production were 29,880. The standard direct labour cost per hour was 850.
15 Last month a companys budgeted sales were 5,000 units. The standard selling price was 6 per unit with a standard
contribution to sales ratio of 60%. Actual sales were 4,650 units with a total revenue of 30,225
What were the favourable sales price and adverse sales volume contribution variances?
Sales price Sales volume contribution
A 2,325 1,260
B 2,500 1,260
C 2,325 2,100
D 2,500 2,100
18 The following statements relate to the calculation of the regression line y = a + bx using the information on the
formulae sheet at the end of this examination paper:
(i) n represents the number of pairs of data items used
(ii) ( x)2 is calculated by multiplying x by x
(iii) xy is calculated by multiplying x by y
19 The correlation coefficient (r) for measuring the connection between two variables (x and y) has been calculated as
06.
How much of the variation in the dependent variable (y) is explained by the variation in the independent variable
(x)?
A 36%
B 40%
C 60%
D 64%
What is the total relevant cost of the material for the project?
A 12,300
B 20,500
C 32,300
D 32,800
22 In a process where there are no work-in-progress stocks, two joint products (J and K) are created. Information (in
units) relating to last month is as follows:
Product Sales Opening stock of Closing stock of
finished goods finished goods
J 6,000 100 300
K 4,000 400 200
Joint production costs last month were 110,000 and these were apportioned to joint products based on the number
of units produced.
What were the joint production costs apportioned to product J for last month?
A 63,800
B 64,000
C 66,000
D 68,200
23 A company manufactures two products (L and M) using the same material and labour. It holds no stocks. Information
about the variable costs and maximum demands are as follows:
Product L Product M
/unit /unit
Material (4 per litre) 13 19
Labour (7 per hour) 35 28
Units Units
Maximum monthly demand 6,000 8,000
Each month 50,000 litres of material and 60,000 labour hours are available.
25 What would be the monthly profit if the selling price per unit was set at 20?
A 1,000
B 4,000
C 6,000
D 12,000
(50 marks)
1 Pointdextre Ltd, which manufactures and sells a single product, is currently producing and selling 102,000 units per
month, which represents 85% of its full capacity. Total monthly costs are 619,000 but at full capacity these would
be 700,000. Total fixed costs would remain unchanged at all activity levels up to full capacity. The normal selling
price of the product results in a contribution to sales ratio of 40%.
A new customer has offered to take a monthly delivery of 15,000 units at a price per unit 20% below the normal
selling price. If this new business is accepted, existing sales are expected to fall by one unit for every six units sold
to this new customer.
Required:
(a) For the current production and sales level, calculate:
(i) the variable cost per unit;
(ii) the total monthly fixed costs;
(iii) the selling price per unit;
(iv) the contribution per unit. (6 marks)
(b) Calculate the net increase or decrease in monthly profit which would result from acceptance of the new
business. (4 marks)
(c) In the context of decision making, explain the term opportunity cost and illustrate your answer by reference
to Pointdextre Ltd. (2 marks)
(12 marks)
2 Partlet Ltd makes a product that passes through two manufacturing processes. A normal loss equal to 8% of the raw
material input occurs in Process I but no loss occurs in Process II. Losses have no realisable value.
All the raw material required to make the product is input at the start of Process I. The output from Process I each
month is input into Process II in the same month. Work in progress occurs in Process II only.
Information for last month for each process is as follows:
Process I
Raw material input 50,000 litres at a cost of 365,000
Conversion costs 256,000
Output to Process II 47,000 litres
Process II
Opening work in progress 5,000 litres (40% complete for conversion costs) valued at 80,000
Conversion costs 392,000
Closing work in progress 2,000 litres (50% complete for conversion costs)
Required:
(a) Prepare the Process I account for last month. (5 marks)
(c) If the losses in Process I were toxic and the company incurred costs in safely disposing of them, state how
the disposal costs associated with the normal loss would have been recorded in the Process I account. No
calculations are required. (2 marks)
(12 marks)
Required:
(a) State the objective function and constraints in a form suitable for solving by linear programming.
(5 marks)
(b) Determine the optimal production plan for next month (in units). (4 marks)
(9 marks)
4 Ploverleigh Ltd, which manufactures a single product, uses standard absorption costing. The standard product cost
per unit is as follows:
Direct materials 11
Direct labour 24
Fixed production overhead 18
Budgeted and actual production for last month were 12,000 units and 12,500 units respectively. The actual costs
incurred last month were:
Direct materials 142,700
Direct labour 291,300
Fixed production overhead 230,800
Required:
(a) Prepare a statement that reconciles the standard cost of actual production with its actual cost for last month
and highlights the total variance for each of the three cost elements. (4 marks)
(b) Provide a breakdown of the total fixed production overhead variance in your statement in (a) by calculating
two sub variances. (2 marks)
(c) If Ploverleigh Ltd uses standard marginal costing instead of standard absorption costing, explain how AND
why any of the three total variances calculated in (a) would be different and state clearly which, if any, of
the variances would remain unchanged. No calculations are required. (3 marks)
(9 marks)
Required:
(a) Calculate the overhead absorption rates for cost centres T and W. (2 marks)
The prime cost of product PP, one of the products made by Sangazure Ltd, is as follows:
per unit
Direct material 10
Direct labour:
Cost centre T 14
Cost centre W 21
One unit of product PP takes 35 minutes of machine time in cost centre T. The direct labour in cost centre T is paid
7 per hour and 6 per hour in cost centre W.
(b) Calculate the total production cost for one unit of PP. (3 marks)
(c) Briefly explain why service cost centre costs need to be reapportioned to production cost centres. Which
method of reapportionment fully recognises the work that service cost centres do for each other?
(3 marks)
(8 marks)
Section A
1 D
2 C
3 C
4 C
5 B
6 D
7 C
8 C
9 A
10 B
11 A
12 B
13 C
14 D
15 A
16 C
17 D
18 A
19 A
20 C
21 D
22 D
23 D
24 D
25 B
1 D
5 B
6 D
7 C Weighted average after 13th = [(200 9,300 300) + (600 33)] (200 + 600) = 3250
Closing stock valuation = 300 3250 = 9,750
9 A
10 B
14 D
Actual hours at standard rate (27,000 850) 229,500
Standard hours of production at standard rate 253,980
Labour efficiency variance is 24,480 Favourable
16 C
17 D
18 A
20 C
22 D Production (units):
J: (6,000 100 + 300) = 6,200
K: (4,000 400 + 200) = 3,800
10,000
Joint costs apportioned to J: (6,200 10,000) 110,000 = 68,200
Section B
(c) An opportunity cost is the cost of the best alternative forgone in a situation of choice. Opportunity costs are relevant costs.
In the situation of Pointdextre Ltd, if it goes ahead with the new business (that is the decision) then it will lose (forgo) the
contribution from some existing sales. This lost contribution is an opportunity cost relevant to the decision.
2 (a) Process I
Litres Litres
Input 50,000 365,000 Output (W1) 47,000 634,500
Conversion 256,000 Normal loss (008 50,000) 4,000
Abnormal gain (W2) 1,000 13,500
51,000 634,500 51,000 634,500
Workings:
W1 Cost per litre (365,000 + 256,000) (50,000 092) = 1350
Output value = 47,000 1350 = 634,500
W2 Abnormal gain = 47,000 (50,000 092) = 1,000
Valuation (1,000 1350) = 13,500
(c) The disposal costs would be debited to the process account. Alternatively, they could be shown as a negative value on the
credit side of the account.
Y
units
6,000
Labour
4,200 A
Material
750
C
0 X units
600 750 1,400
Note: the objective function line has been shown on the above graph for a total contribution of 9,000 (assumed). Thus 15X +
12Y = 9,000.
Therefore when X = 0, Y = (9,000 12) = 750
and when Y = 0, X = (9,000 15) = 600
The feasible region is the area OABC shown on the graph. If the objective function line is moved away from the origin (at the
same gradient) the last point it reaches in the feasible region is point A which must therefore be the optimal point.
Therefore the optimal production is to produce and sell 4,200 units of product Y and no units of product X.
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An alternative approach would be to calculate the total contributions at points A, B and C shown on the graph and select the point
giving the highest total contribution, as follows:
Point A
Total contribution from 4,200 units of Y is (4,200 12) = 50,400
Point B
To find the units at this point, solve the following equations simultaneously:
3X + Y = 4,200 (1)
4X + 05Y = 3,000 (2)
From (1) Y = 4,200 3X
Substituting into (2) 4X + 05(4,200 3X) = 3,000
4X + 2,100 15X = 3,000
25X = 900
X = 360
Substituting into (1) (3 360) + Y = 4,200
Y = 3,120
Total contribution from 360 units of X and 3,120 units of Y is (360 15) + (3,120 12) = 42,840
Point C
Total contribution from 750 units of X is (750 15) = 11,250
Point A gives the highest contribution (50,400 from producing 4,200 units of Y and no units of X) and is therefore the optimal
solution (as before).
4 (a)
Standard cost of actual production [12,500 (11 + 24 + 18)] 662,500
Total variances: Adverse Favourable
Materials (W1) 5,200
Labour (W2) 8,700
Fixed overhead (W3) 5,800
11,000 8,700 2,300 A
Actual cost (142,700 + 291,300 + 230,800) 664,800
Workings:
W1 Variance
Actual cost 142,700
5,200 A
Standard cost of actual production 137,500
W2
Actual cost 291,300
8,700 F
Standard cost of actual production 300,000
W3
Actual cost 230,800
5,800 A
Standard cost of actual production 225,000
(b)
Expenditure variance:
Actual cost 230,800
14,800 A
Budgeted cost (12,000 18) 216,000
Volume variance:
Budgeted cost 216,000
9,000 F
Standard cost of actual production 225,000
(c) The total direct materials and labour variances would be the same under absorption and marginal costing. The total fixed
overhead variance under marginal costing would be different and would be the same as the expenditure variance under
absorption costing (14,800 A). There is no volume variance under marginal costing as fixed production costs are treated
as period costs and not treated as product costs.
(c) Products do not pass through service cost centres so the costs of such centres cannot be absorbed directly into products.
Products only pass through production cost centres. Therefore in order to calculate a total production cost per unit, service
cost centre costs have to be reapportioned to production cost centres for absorption.
The method of reapportionment that fully recognises any work that service cost centres do for each is called the reciprocal
method. There are two techniques for applying the reciprocal method a repeated distribution approach or the use of
simultaneous equations.
Marks
Section A
Each of the 25 questions in this section is worth 2 marks 50
Section B
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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
0 Hours 0 Hours
CC DD
0 Hours 0 Hours
2 Four vertical lines have been labelled P, Q, R and S at different levels of activity on the following profit-volume chart:
0 Output
Q R
4 The following production and total cost information relates to a single product organisation for the last three months:
Month Production Total cost
units
1 1,200 66,600
2 1,900 58,200
3 1,400 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 54,200
B 55,000
C 59,000
D 60,200
5 Which of the following is NOT a feasible value for the correlation coefficient?
A + 12
B + 06
C +0
D 06
7 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 1,730
B 1,894
C 1,461
D 1,633
9 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 1,000
B 1,100
C 1,200
D 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 61,250
B 62,475
C 62,500
D 63,750
11 An organisations stock records show the following transactions for a specific item during last month:
Date Receipts Issues
units units
4th 50
13th 200
20th 50
27th 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 The FIFO valuation is higher than the LIFO valuation by 250.
B The LIFO valuation is higher than the FIFO valuation by 250.
C The FIFO valuation is higher than the LIFO valuation by 500.
D The LIFO valuation is higher than the FIFO valuation by 500.
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 58,000
B 58,540
C 59,000
D 59,540
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 (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (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 332
B 352
C 416
D 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 per unit
Selling price 60
Less Variable costs:
Less Skilled labour 20
Less Others 15
(35)
Contribution 25
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 720
B 900
C 1,620
D 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 15,336
B 15,400
C 16,200
D 17,496
20 What was the total number of units input during last period?
A 12,000
B 13,000
C 15,000
D 17,000
21 What was the value of the closing work in progress for last period?
A 21,330
B 21,690
C 22,530
D 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 Premium pricing
B Price skimming
C Price discrimination
D Penetration pricing
23 A company has established the following equations for one of its products:
Selling price ( per unit) = 40 0008Q
Marginal revenue ( per unit) = 40 0016Q
Total cost per week () = 2,500 + 8Q
Q in each case represents the number of units produced and sold per week.
At what selling price per unit will weekly profits be maximised?
A 8
B 16
C 24
D 32
Product Y
units 11
000
10
9 (2)
(3)
8
H
7
J
5
2
K
(1)
1
L
Product X
1 2 3 4 5 6 7 8 9 10 11 12 13 14 units
000
24 Which of the following points shown on the graph is optimal for next period?
A Point H
B Point J
C Point K
D Point L
25 Which of the following constraint formulations is represented by the line labelled (2) on the graph?
A 10X + 17Y 70,000
B 17X + 10Y 70,000
C 17X + 13Y 91,000
D 13X + 1 7Y 91,000
(50 marks)
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)
3 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).
(ii) Who should the direct material price variance be reported to, and why? (4 marks)
(10 marks)
Section A
1 A
2 C
3 B
4 C
5 A
6 D
7 C
8 D
9 B
10 A
11 B
12 A
13 B
14 B
15 C
16 B
17 A
18 C
19 C
20 C
21 D
22 D
23 C
24 C
25 A
1 A
2 C
5 A
6 D
8 D
12 A
14 B
15 C
16 B
17 A
Prime cost [64 + (7 x 8)] 120
Production overhead (7 x 20) 140
260
Non-production overhead (060 x 120) 72
Total cost 332
19 C Relevant cost of a regularly used material in stock is its replacement cost (600 x 27) = 16,200
22 D
25 A 10X + 7Y = 70,000
When X = 0, Y = 10,000
When Y = 0, X = 7,000
Constraint line (2) joins these two points on the axes.
1 (a) Process G
Litres Litres
Raw material 60,000 381,000 Output (W3):
Direct labour 180,000 P1 (W4) 36,250 507,500
Direct expenses 54,000 P2 (W4) 21,750 304,500
Production Normal loss (W2) 3,000 15,000
overheads (W1) 198,000
Abnormal gain
(W4) 1,000 14,000
61,000 827,000 61,000 827,000
Workings:
W1 Production overheads = 110% x 180,000 = 198,000
W2 Normal loss = 5% x 60,000 = 3,000 litres at 5 = 15,000
W3 Total output = 61,000 3,000 = 58,000
W3 Split P1 : P2 in ratio 5 : 3
W3 P1 = (5 8) x 58,000 = 36,250 litres
W3 P2 = (3 8) x 58,000 = 21,750 litres
W4 Cost per litre:
W3 Net total cost = 381,000 + 180,000 + 54,000 + 198,000 15,000
W3 Net total cost = 798,000
W3 Expected output = 60,000 x 95% = 57,000 litres
W3 Cost per litre = 798,000 57,000 = 14
W3 Valuations:
W3 Abnormal gain = 1,000 x 14 = 14,000
W3 Joint products:
W3 Joint prodP1 36,250 x 14 = 507,500
W3 Joint prodP2 21,750 x 14 = 304,500
(c) (i) Direct expenses are costs, other than material and labour, which are specifically traceable to the process (G). An example
of such a cost would be the cost of hiring special equipment required for that process only.
(ii) Production overheads are general factory wide costs which need to be apportioned to the various processes that benefit
from them. An example of production overhead would be factory rates.
(b) Reconciliation:
Actual cost of purchases 294,000
Less: Adverse/Plus: Favourable variances:
Less: Price variance [as in (a)] 6,000 F
Less: Usage variance [as in (a)] 14,550 A
(8,550) A
Less: Increase in stock at standard cost
Less: [(40,000 36,500) x 750] (26,250)
Standard material cost of actual production [per (a)] 259,200
(b) Reconciliation:
000
Net profit per absorption costing (a) 77
Add: Decrease in stocks x fixed production overhead
Add: cost per unit [2,000 x 5] 10
Net profit per marginal costing (per question) 87
(c) Marginal costing is more relevant for short-term decision-making as it separates fixed and variable costs. In the short-term
fixed costs are more likely to remain unchanged and therefore would not be relevant.
Marks
Section A
Each of the 25 questions in this section is worth 2 marks 50
Section B
1 (a) Inputs 2
Abnormal gain 11/2
Normal loss 11/2
Joint products 2
7
(b) Additional revenue 11/2
Additional cost 1
Conclusion 1/
2
3
(c) Direct expenses 1
Production overheads 1
2
12
4 (a) y 1
x 1
Calculation of b 21/2
Calculation of a 11/2
Fixed/variable costs 1
7
(b) Total cost for 44,000 units 11/2
Reservation 11/2
3
10
5 (a) Sales 1/
2
Cost of sales 3
Under absorption of overhead 11/2
Variable selling cost 1/
2
Fixed selling and admin costs 1/
2
6
(b) Layout/presentation of statement 1
Change in stock and its evaluation 1
2
(c) Marginal costing 1
Separation of fixed and variable costs 1/
2
Fixed costs not relevant to short term decisions 1/
2
2
10
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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.
H
0 Output
Total
cost
Volume of
0 activity
Which one of the following descriptions is consistent with the above diagram?
A Annual total cost of factory power where the supplier sets a tariff based on a fixed charge plus a constant unit
cost for consumption which is subject to a maximum annual charge.
B Total annual direct material cost where the supplier charges a constant amount per unit which then reduces to
a lower amount per unit after a certain level of purchases.
C Total annual direct material cost where the supplier charges a constant amount per unit but when purchases
exceed a certain level a lower amount per unit applies to all purchases in the year.
D Annual total cost of telephone services where the supplier makes a fixed charge and then a constant unit rate for
calls up to a certain level. This rate then reduces for all calls above this level.
4 An organisation manufactures and sells a single product which has a variable cost of 24 per unit and a contribution
to sales ratio of 40%. Total monthly fixed costs are 720,000.
6 A company is considering the launch of a new product at a high initial selling price.
8 Regression analysis is being used to find the line of best fit (y = a + bx) from five pairs of data. The calculations have
produced the following information:
x = 129 y = 890 xy = 23,091 x2 = 3,433 y2 = 29,929
What is the value of a in the equation for the line of best fit (to the nearest whole number)?
A 146
B 152
C 210
D 245
Using the LIFO valuation method, what was the value of the closing stock for last month?
A 3,300
B 3,500
C 3,700
D 3,900
12 A paint manufacturer has a number of departments. Each department is located in a separate building on the same
factory site. In the mixing department the basic raw materials are mixed together in very large vessels. These are then
moved on to the colour adding department where paints of different colours are created in these vessels. In the next
department the pouring department the paint is poured from these vessels into litre sized tins. The tins then go
on to the labelling department prior to going on to the finished goods department.
The following statements relate to the paint manufacturer:
(i) The mixing department is a cost centre.
(ii) A suitable cost unit for the colour adding department is a litre tin of paint.
(iii) The pouring department is a profit centre.
15 A company operates a job costing system. Job 812 requires 60 of direct materials, 40 of direct labour and 20 of
direct expenses. Direct labour is paid 8 per hour. Production overheads are absorbed at a rate of 16 per direct
labour hour and non-production overheads are absorbed at a rate of 60% of prime cost.
16 At the end of manufacturing in Process I, product K can be sold for 10 per litre. Alternatively product K could be
further processed into product KK in Process II at an additional cost of 1 per litre input into this process. Process II
is an existing process with spare capacity in which a loss of 10% of the input volume occurs. At the end of the further
processing, product KK could be sold for 12 per litre.
6
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18 What was the actual production last month?
A 3,344 units
B 3,520 units
C 3,952 units
D 4,160 units
19 Equipment owned by a company has a net book value of 1,800 and has been idle for some months. It could now
be used on a six months contract which is being considered. If not used on this contract, the equipment would be
sold now for a net amount of 2,000. After use on the contract, the equipment would have no saleable value and
would be dismantled. The cost of dismantling and disposing of it would be 800.
20 A contract is under consideration which requires 800 labour hours to complete. There are 450 hours of spare labour
capacity for which the workers are still being paid the normal rate of pay. The remaining hours required for the contract
can be found either by overtime working paid at 50% above the normal rate of pay or by diverting labour from the
manufacture of product OT. If the contract is undertaken and labour is diverted, then sales of product OT will be lost.
Product OT takes seven labour hours per unit to manufacture and makes a contribution of 14 per unit. The normal
rate of pay for labour is 8 per hour.
21 What price per unit should be set in order to maximise weekly profit?
A 1500
B 1750
C 2500
D 3250
22 What would the weekly total contribution be if the price of the product was set at 20 per unit?
A 2,000
B 3,000
C 5,000
D 6,000
7 [P.T.O.
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23 A company has three shops (R, S and T) to which the following budgeted information relates:
Shop R Shop S Shop T Total
000 000 000 000
Sales 400 500 600 1,500
Contribution 100 60 120 280
Less: Fixed costs (60) (70) (70) (200)
Profit/(Loss) 40 (10) 50 80
60% of the total fixed costs are general company overheads. These are apportioned to the shops on the basis of sales
value. The other fixed costs are specific to each shop and are avoidable if the shop closes down.
If shop S is closed down and the sales of the other two shops remained unchanged, what would be the revised
budgeted profit for the company?
A 50,000
B 60,000
C 70,000
D 90,000
24 Which of the following statements correctly describes the shadow price of a resource in linear programming?
A The minimum sum payable for one more unit of the scarce resource.
B The maximum sum payable for one more unit of the scarce resource.
C The increase in total contribution if one more unit of a non-binding constraint is made available.
D The increase in total contribution if one more unit of a binding constraint is made available.
(2)
(1)
0 x
The objective is to maximise total contribution and the dotted line on the graph depicts this function. There are three
constraints which are all of the less than or equal type which are depicted on the graph as the three solid lines
labelled (1), (2) and (3).
(50 marks)
1 Fairfax Ltd manufactures a single product which has a standard selling price of 22 per unit. It operates a standard
marginal costing system. The standard variable production cost is 9 per unit. Budgeted annual production is
360,000 units and budgeted non-production costs of 1,152,000 per annum are all fixed.
The following data relate to last month:
Budget Actual
units units
Production 30,000 33,000
Sales 32,000 34,000
Last month the budgeted profit was 200,000 and the actual total sales revenue was 731,000.
Required:
(a) Calculate the sales price and sales volume contribution variances for last month showing clearly whether
each variance is favourable or adverse. (4 marks)
(b) Explain how the two variances calculated in (a) could be interrelated. (3 marks)
(c) Calculate the BUDGETED profit for last month assuming that the company was using absorption costing.
(4 marks)
(11 marks)
2 Point Ltd uses the economic order quantity (EOQ) model to establish the reorder quantity for raw material Y. The
company holds no buffer stock. Information relating to raw material Y is as follows:
Annual usage 48,000 units
Purchase price 80 per unit
Ordering costs 120 per order
Annual holding costs 10% of the purchase price
Required:
(a) Calculate:
(i) the EOQ for raw material Y, and
(ii) the total annual cost of purchasing, ordering and holding stocks of raw material Y. (4 marks)
The supplier has offered Point Ltd a discount of 1% on the purchase price if each order placed is for 2,000 units.
(b) Calculate the total annual saving to Point Ltd of accepting this offer. (3 marks)
(9 marks)
Required:
(a) Calculate the shortfall in general purpose machine hours next month. (2 marks)
(b) Determine how many units of which components should be purchased from Sergeant Ltd next month.
(4 marks)
(c) Briefly explain THREE other factors that the management of Merryl Ltd should consider before making a final
decision to buy in components from Sergeant Ltd for next month. (3 marks)
(9 marks)
4 Yeomen Ltd uses process costing and the FIFO method of valuation. The following information for last month relates
to Process G, where all the material is added at the beginning of the process:
Opening work-in-progress: 2,000 litres (30% complete in respect of conversion costs) valued in total at
24,600 (16,500 for direct materials; 8,100 for conversion).
Costs incurred:
Direct materials 99,600 for 12,500 litres of input
Conversion 155,250
Normal loss: 8% of input in the period. All losses, which are incurred evenly throughout the
process, can be sold for 3 per litre.
Actual output: 10,000 litres were transferred from Process G to the finished goods warehouse.
Closing work-in-progress: 3,000 litres (45% complete in respect of conversion costs).
Required:
(a) Prepare the Process G Account for last month in and litres. (10 marks)
(b) Identify TWO types of organisation where it would be appropriate to use service (operation) costing. For each
one suggest a suitable unit cost measure. (2 marks)
(12 marks)
Required:
(a) Calculate:
(i) the machine hour absorption rate for cost centre P1, and
(ii) the direct labour hour absorption rate for cost centre P2. (6 marks)
(b) Explain the difference between production overheads that have been allocated and those which have been
apportioned to cost centres. Explain why some manufacturing companies are able to allocate electric power
costs to production cost centres, whereas others can only apportion them. (3 marks)
(9 marks)
Section A
1 D
2 D
3 A
4 D
5 B
6 C
7 C
8 A
9 B
10 C
11 B
12 A
13 C
14 D
15 C
16 D
17 D
18 A
19 D
20 A
21 D
22 D
23 A
24 D
25 A
1 D
2 D
3 A
Variable cost per unit = [(274,000 250,000) (15,000 12,000)] = 8
Total fixed cost above 11,000 units = [274,000 (15,000 x 8)] = 154,000
Total fixed cost below 11,000 units = (10 11) x 154,000 = 140,000
Total cost for 10,000 units = [(10,000 x 8) + 140,000] = 220,000
4 D
Contribution per unit = (24 060 x 040) = 16
Breakeven point = (720,000 16) = 45,000 units
5 B
6 C
7 C
8 A
b = [(5 x 23,091) (129 x 890)] [(5 x 3,433) (1292)] = 1231
a = (890 5) [(1231 x 129) 5] = 146 (nearest whole number)
15
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9 B
10 C
Closing stock (units) = 300 + 400 + 500 600 300 = 300
Valuation = (100 x11) + (200 x 13) = 3,700
11 B
(3 x 8) + [(4 3) x 075 x 8] = 30
12 A
13 C
14 D
15 C
(60 + 40 + 20) + [(40 8) x 16] + (060 x 120) = 272
16 D
Sales value after further processing = (9,000 x 09) x 12 = 97,200
Sales value without further processing = (9,000 x 10) 90,000
Increase in sales revenue 7,200
Less: Further processing cost = (9,000 x 1) (9,000)
Decrease in profit by further processing 1,800
17 D
[(45,600 x 4) 173,280] = 9,120 Favourable
18 A
Actual usage at standard cost (45,600 x 4) 182,400
Less: Adverse usage variance (15,200)
Standard cost for actual production 167,200
Actual production (units) = (167,200 50) = 3,344
19 D
Opportunity cost now + disposal cost at end of contract (2,000 + 800) = 2,800
20 A
(800 450) x [8 + (14 7)] = 3,500
21 D
Marginal cost (MC) = 15
Profit maximised when MC = MR
15 = 50 005Q
Q = 700
P = 50 (0025 x 700) = 3250
23 A
Total fixed costs for shop S 70,000
Less: Apportioned general costs (200 x 0.60) (500 1,500) (40,000)
Specific avoidable fixed costs for shop S 30,000
If shop S closed down net contribution lost (60,000 30,000) 30,000
Revised budgeted profit for company (80,000 30,000) 50,000
24 D
25 A
Section B
(b) The actual selling price (2150) was lower than the standard selling price (2200) hence the adverse sales price
variance. This reduction in price may have directly encouraged customers to buy more units. The company sold 2,000 more
units than planned giving the favourable sales volume contribution variance of 26,000. Thus the two variances may be
interrelated and if so the variances should be considered together one partially offsetting the other.
(c)
Budgeted contribution (32,000 x 13) 416,000
Less: Budgeted profit (marginal costing) (200,000)
Budgeted fixed costs 216,000
Less: Budgeted non-production fixed costs (1,152,000 12) (96,000)
Budgeted fixed production costs 120,000
Standard fixed production cost per unit (120,000 30,000) 4
Calculation of absorption costing profit:
Marginal costing profit 200,000
Less: Decrease in stocks at standard fixed production
cost per unit [(32,000 30,000) x 4] (8,000)
Absorption costing profit 192,000
Alternatively:
Budgeted absorption costing manufacturing profit
32,000 x (13 4) 288,000
Less: budgeted non-production fixed costs (96,000)
Absorption costing profit 192,000
(b) E F G H
/unit /unit /unit /unit
Variable production cost 32 27 34 35
Buy-in price 48 51 55 63
Extra cost of buying in 16 24 21 28
Machine hours per unit 5 6 7 8
Extra cost per machine hour saved 32 40 30 35
Ranking for buying in 2nd 4th 1st 3rd
Optimal plan for buying in components:
Ranking Component Units Machine hours
saved
1st G 2,000 14,000
2nd E 600 3,000 (balancing figure)
Total shortfall of hours [as per (a)] 17,000
Litres Litres
Opening WIP 2,000 24,600 Output (W4):
Ex opening WIP 2,000
Costs arising: Started and finished
Direct materials 12,500 99,600 in month 8,000
Conversion 155,250 10,000 221,520
Normal loss
(008 x 12,500) 1,000 3,000
Abnormal loss (W2) 500 11,100
Closing WIP (W3) 3,000 43,830
14,500 279,450 14,500 279,450
(b) Allocated overheads are specifically traceable to cost centres. Apportioned overheads are those for which only a total factory-
wide figure is available. Therefore in order to get such overheads related to individual cost centres, the total has to be
apportioned on a logical but arbitrary basis to the cost centres. For example the total factory rates could be apportioned on
the basis of the floor area occupied by each cost centre. Electric power can be allocated if each cost centre is separately
metered. Thus allowing an accurate measure of the amount of power used in each cost centre. Otherwise if there is only one
meter for the whole factory, then the total cost of electric power would need to be apportioned to the factory cost centres. For
example by using the kilowatt hour rating of the machines and equipment in the various cost centres.
Marks
Section A
Each of the 25 questions in this section is worth 2 marks 50
Section B
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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 Four lines representing expected costs and revenue have been drawn on the following break-even chart:
E
F
Output
0
Which statement is correct?
A Line F represents total variable cost.
B The break-even point occurs at the intersection of lines E and F.
C Line G represents total revenue.
D The break-even point occurs at the intersection of lines G and H.
2 The following diagram depicts a line which relates the quantity demanded (Q) to the selling price (P):
Price
(P)
25
Quantity (Q)
0 40,000
What is the equation of the line?
A P = 25 0.000625Q
B P = 25 1,600Q
C P = 25 16Q
D P = 25 0625Q
5 The following statements refer to different types of planning within a manufacturing organisation:
(i) Operational planning includes the scheduling of work to be done in the short term.
(ii) Tactical planning includes consideration of ways in which the productivity of the factory workforce could be
improved.
(iii) Strategic planning includes the setting of the organisations long term objectives.
Which of the statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
9 A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model.
What would be the effects on the EOQ and the total annual ordering cost of a decrease in the annual cost of
holding one unit of the component in stock?
EOQ Total annual ordering cost
A Lower No effect
B Higher No effect
C Lower Higher
D Higher Lower
10 A company operates a job costing system. Job number 607 requires 300 of direct materials, 400 of direct labour
and 100 of direct expenses. Direct labour is paid at a rate of 8 per hour. Production overheads are absorbed at a
rate of 40 per direct labour hour and non-production overheads are absorbed at a rate of 150% of prime cost.
What is the total cost of job number 607?
A 3,750
B 3,850
C 4,000
D 4,200
12 A company manufactures two products K1 and K2 in a factory consisting of two cost centres, Y and Z. The following
budgeted data are available:
Cost centre
Y Z
Allocated and apportioned fixed
overhead costs 576,000 288,000
Direct labour hours per unit:
Product K1 5 2
Product K2 3 4
Budgeted output is 12,000 units of each product. Fixed overhead costs are absorbed on a direct labour hour basis.
What is the budgeted fixed overhead cost per unit for product K2?
A 34
B 36
C 38
D 42
13 A factory consists of two production cost centres (P and Q) and two service cost centres (T and V). The total overheads
allocated and apportioned to each cost centre are as follows:
P Q T V
Total overheads 180,000 120,000 128,000 140,000
The work done by the service cost centres can be represented as follows:
P Q T V
Percentage of service cost centre T to: 70% 30%
Percentage of service cost centre V to: 40% 30% 30%
The service cost centre costs are apportioned 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 P after the reapportionment of all service cost centre
costs?
A 325,600
B 349,600
C 355,000
D 379,000
14 What was the value (at cost) of last months closing work-in-progress?
A 1,224
B 1,280
C 1,836
D 1,920
15 What was the cost of the 1,040 units completed last month?
A 19,200
B 19,930
C 20,730
D 20,800
16 The following statements relate to the calculation of the regression line y = a + bx using the information on the
formulae sheet at the end of this examination paper:
(i) xy is calculated by multiplying x by y.
(ii) y2 is not the same as (y)2 .
(iii) n represents the number of pairs of data items used.
Which statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
17 Which of the following correlation coefficients indicates the weakest relationship between two variables?
A +09
B 06
C 08
D 10
20 A company operates a standard marginal costing system. Last month the company sold 200 units more than it
planned to sell. The following data relate to last month:
Standard Actual
Selling price per unit 40 38
Variable cost per unit 30 29
What was the favourable sales volume contribution variance last month?
A 1,600
B 1,800
C 2,000
D 2,200
22 Which of the following should NOT be classified as a service cost centre in a manufacturing organisation?
A Factory canteen
B Stores
C Materials handling department
D Final product inspection department
23 A long established city centre hotel charges a higher price for its executive bedrooms on weekdays than it does for the
same rooms at weekends and on public holidays.
Which pricing policy is the hotel adopting?
A Penetration pricing
B Price skimming
C Premium pricing
D Price discrimination
25 A company which manufactures four components (A, B, C and D), using the same skilled labour, aims to maximise
its profits. The following information is available:
Component
A B C D
Variable production cost per unit () 60 70 75 85
Purchase price per unit from
another supplier () 108 130 120 124
Skilled labour hours per unit
to manufacture 4 6 5 3
As it has insufficient skilled labour hours available to manufacture all the components required, the company will need
to buy some units of one component from the other supplier.
Which component should be purchased from the other supplier?
A Component A
B Component B
C Component C
D Component D
(50 marks)
1 Casilda Ltd manufactures gonds, which have a standard selling price of 120 per gond. The company operates a
standard marginal costing system and values stocks at standard cost.
The standard variable cost of a gond is as follows:
per gond
Direct material 20
Direct labour (6 hours at 8 per hour) 48
Production overhead 24
92
The budgeted and actual activity levels for last month were as follows:
Budget Actual
units units
Sales 25,000 25,000
Production 25,000 26,000
The actual sales and variable costs for last month were as follows:
Sales 2,995,000
Direct material (purchased and used) 532,800
Direct labour (150,000 hours) 1,221,000
Variable production overhead 614,000
Required:
(a) Calculate the following cost variances for last month:
(i) Total direct materials;
(ii) Total variable production overhead;
(iii) Direct labour rate;
(iv) Direct labour efficiency. (4 marks)
(b) Prepare a statement that reconciles the budgeted contribution with the actual contribution for last month
and which incorporates the variances calculated in (a). (6 marks)
(c) Suggest ONE possible explanation of how the two direct labour variances calculated in (a) could be
interrelated. (2 marks)
(12 marks)
Required:
(a) Determine the optimal production plan in units for next year and calculate the resultant total contribution.
Workings should be clearly shown.
Note: Graph paper is available.
(8 marks)
(b) Explain the term shadow price in the context of scarce resources. State clearly which, if any, of the
companys resources will have a shadow price next year. No calculations are required. (3 marks)
(11 marks)
3 Luiz Ltd operates several manufacturing processes in which stocks of work-in-progress are never held. In process K,
joint products (P1 and P2) are created in the ratio 2:1 by volume from the raw materials input. In this process a
normal loss of 4% of the raw materials input is expected. Losses have a realisable value of 5 per litre. The joint costs
of the process are apportioned to the joint products using the sales value basis. At the end of process K, P1 and P2
can be sold for 25 and 40 per litre respectively.
The following information relates to process K for last month:
Raw materials input 90,000 litres at a total cost of 450,000
Actual loss incurred 4,800 litres
Conversion costs incurred 216,000
Required:
(a) Prepare the process K account for last month in which both the output volumes and values for each joint
product are shown separately. (7 marks)
The company could further process product P1 in process L to create product XP1 at an incremental cost of 3 per
litre input. Process L is an existing process with spare capacity. In process L a normal loss of 8% of input is incurred
which has no value. Product XP1 could be sold for 30 per litre.
Required:
(b) Based on financial considerations only, determine, with supporting calculations, whether product P1 should
be further processed in process L to create product XP1. (3 marks)
(10 marks)
Required:
(a) Using marginal costing principles, calculate the following for next year:
(i) the total budgeted contribution from sales; and
(ii) the budgeted net profit. (4 marks)
(b) Calculate the break-even point (in units) for next year. (2 marks)
(c) Explain clearly why Marco Ltds net profit for next year using marginal costing principles differs from that
under absorption costing. Under what conditions would the two net profits be the same? (3 marks)
(9 marks)
(b) Explain the basis you would use to determine if any production overhead costs would be relevant to the
evaluation of the contract. Illustrate your answer with examples of such costs but no calculations are
required. (3 marks)
(8 marks)
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
5 D
6 C
7 B Weighted average after receipts on 7th = [(2,900 2) + (400 1750)] 500 = 1690
Value of issues = 100 (2,900 200) + [(190 + 170) 1690] = 7,534
9 D
10 C
Prime cost (300 + 400 + 100) = 800
+ Production overheads (400 8) 40 = 2,000
+ Non-production overheads (15 800) = 1,200
Total cost 4,000
11 C
15 C
Opening WIP value 1,530
+ Completion of opening WIP (200 060 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
20 C 200 units standard contribution per unit = [200 (40 30)] = 2,000 (F)
21 C
22 D
23 D
(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.
Y
Units
000
675
Materials
500
A
400 Demand (Y)
B
C
150
Labour
D
X Units
0 800 000
200 450
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.
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) = 750
Abnormal loss valuation: (1,200 750) = 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: (85,200 750) = 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 = 125 : 1
Product P1 valuation = (125 225) 639,000 = 355,000
Product P2 valuation = (100 225) 639,000 = 284,000
21
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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
(b) 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
(c) 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 years 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 25 108) = 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) = 25 hours of the skilled labour.
So the relevant cost of 600 hours of skilled labour will be:
(600 10) + [600 (30 25)] = 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.
Marks
Section A
Section B
(c) Explanation 2
12
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