FINANCIAL INFORMATION FOR MANAGEMENT

Question 1 TOTAL COSTS

(a) “The analysis of total cost into its behavioural elements is essential for effective cost and
management accounting.”

Required:

Comment on the statement above, illustrating your answer with examples of cost
behaviour patterns. (5 marks)

(b) The total costs incurred at various output levels, for a process operation in a factory, have
been measured as follows:

Output Total cost

(units) £
11,500 102,476
12,000 104,730
12,500 106,263
13,000 108,021
13,500 110,727
14,000 113,201

Required:

Using the high-low method, analyse the costs of the process operation into fixed and
variable components. (4 marks)

(c) Calculate, and comment upon, the break-even output level of the process operation in
(b) above, based upon the fixed and variable costs identified and assuming a selling price
of £10.60 per unit. (5 marks)

(14 marks)

Question 2 AVOIDABLE

Distinguish between, and provide an illustration of:

(a) “avoidable” and “unavoidable” costs; (4 marks)

(b) “cost centres” and “cost units”. (4 marks)

(8 marks)

Question 3 COSTING TERMS

Describe THREE of the following costing terms:

(i) abnormal loss;

(ii) efficiency ratio;
(iii) stores ledger control account;
(iv) under-absorbed overhead.
(9 marks)

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Question 4 MATERIAL Z, A AND B

A company uses Material Z (cost £3·50 per kg) in the manufacture of Products A and B. The following
forecast information is provided for the year ahead:

Product A Product B
Sales (units) 24,600 9,720
Finished goods stock increase by year end (units) 447 178
Post-production rejection rate (%) 1 2
Material Z usage (kg per completed unit, net of wastage) 1·8 3·0
Material Z wastage (%) 5 11

Additional information:

„ Average purchasing lead time for Material Z is two weeks.

„ Usage of Material Z is expected to be even over the year.
„ Annual stock holding costs are 18% of the material cost.
„ The cost of placing orders is £30 per order.
„ The re-order level for Material Z is set at the average usage in average lead time, plus 1,000
kilograms of safety (buffer) stock.

Required:

(a) State two items that would be regarded as “stock holding costs” and explain how they
may be controlled effectively. (5 marks)

(b) Calculate for the year ahead:

(i) the required production of Products A and B (in units), (3 marks)

(ii) the total requirement for Material Z (in kgs), (3 marks)
(iii) the Economic Order Quantity for Material Z (in kgs). (5 marks)

(c) Calculate the average stock investment (£) and the annual stock holding costs (£) for
Material Z. (4 marks)

(20 marks)

Question 5 AVERAGE STOCKHOLDING

(a) Describe the features of a continuous stocktaking and perpetual inventory system.
(5 marks)

(b) The following data relates to a retail product:

maximum daily sales 150 units
average daily sales 120 units
maximum lead time 10 days
average lead time 8 days
economic order quantity 2,900 units

NB. The re-order level is established so as to ensure no stock-outs.

Required:

Calculate the average stockholding (in units). (5 marks)

(10 marks)

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Question 6 JOB Z

A company constructs equipment to customer specification and uses a job costing system to determine
the costs of each customer order.

The information set out below provides details for a period from the stock account of one of the
components used in the manufacture of the equipment:

Working
day
1 Opening stock 40 units at £4.50 each
5 Purchases 50 units at £4.54 each
11 Purchases 50 units at £4.52 each
18 Purchases 45 units at £4.60 each.

Total for period

Issues to production, 138 units
Damaged and written-off, 2 units

The issues during the period include 16 units to Job Z.

Required:

(a) Calculate the value of the closing stock of the component at the end of the period if the
LIFO method is used to price issues (all charges are made at the end of the period).
(3 marks)

(b) Using the periodic weighted average pricing method (the issue price should be
calculated to three decimal places of £):

(i) determine the value of the 16 units of the component issued to Job Z (to two
decimal places of £). (5 marks)

(ii) show the journal entry for the component write-off. (2 marks)

(10 marks)

Question 7 10 BOXES

A company is planning to purchase 90,800 units of a particular item in the year ahead. The item is
purchased in boxes, each containing 10 units of the item, at a price of £200 per box. A safety stock of
250 boxes is kept.

The cost of holding an item in stock for a year (including insurance, interest and space costs) is 15% of
the purchase price. The cost of placing and receiving orders is to be estimated from cost data collected
relating to similar orders, where costs of £5,910 were incurred on 30 orders. It should be assumed that
ordering costs change in proportion to the number of orders placed. 2% should be added to the above
ordering costs to allow for inflation.

Required:

Calculate the order quantity that would minimise the cost of the above item, and determine the
required frequency of placing orders, assuming that usage of the item will be even over the year.

(8 marks)

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Question 8 THREE PRODUCTS

A retail company has been reviewing the adequacy of its stock control systems and has identified three
products for investigation. Relevant details for the three products are set out below:

Item EOQ Stock Weekly sales (£000) Gross*

code (warehouse and stores) margin
(000 (000 (£/unit minimum normal maximum (%of
units) units) at cost) sales)
14/363 25 32.5 2.25 26 28 30 42
11/175 500 422.7 0.36 130 143 160 46
14/243 250 190 0.87 60 96 128 37

* Gross margin = sales – purchase cost of product.

Outstanding order: Item code 14/243 – order for 250,000 units placed 2 trading days ago.

There are 6 trading days per week.

All orders are delivered by suppliers into the retailer’s central warehouse. The lead time is one week
from placement of order. A further week is required by the retailer in order to transfer stock from
central warehouse to stores. Both of these lead times can be relied upon.

Required:

(a) Calculate for each product:

(i) the minimum and maximum weekly sales units

(ii) the stock re-order level
(iii) the maximum stock control level. (9 marks)

(b) Comment upon the adequacy of the existing stock control of the three products.(5 marks)

(14 marks)

Question 9 WIVELSFIELD

Wivelsfield currently uses the economic order quantity (EOQ) to establish the optimal reorder levels for
their main raw material. The company has been approached by an alternative supplier who would be
willing to offer the following discounts:

Order level Discount

0 – 199 units 1%
200 – 499 units 3%
500 – 699 units 5%
700 units or more 7%

Information regarding current stock costs are as follows:

Holding cost per unit per annum = 10% of purchase price

Order costs = £2 per order
Annual demand = 15,000 units
Purchase price = £15
Current EOQ = 200 units

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Required:

(a) Calculate the new optimal reorder level. (6 marks)

(b) Explain your approach with regard to each discount band. (4 marks)

(10 marks)

Question 10 7½ HOUR DAY

(a) A factory operates a standard 7½ hour day.

The following charts show the production direct wages, at various levels of production, under
two different remuneration schemes.

(i)

direct
wages
(£)

production (units)

(ii)

direct
wages
(£)

production (units)

Required:

Describe each of the remuneration schemes. (5 marks)

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(b) The following information relates to the wages paid to workers for a four week period in a
factory department (Department A) where two products (Products M & N) are manufactured:

All workers are paid at hourly rates. Basic rates (gross) are £8.00 per hour for direct workers
and £6.00 per hour for indirect workers for a 40 hour week.

The department employs 24 direct workers and 9 indirect workers. Overtime is regularly
worked to meet general production requirements and is paid at a premium of 25% over basic
rate for all workers. Overtime hours in the four week period were 256 and 84 for direct and
indirect workers respectively.

Production of the two products during the four week period was:

Product M – 9,640 units in 1,620 hours of direct workers’ time.

Product N – 22,800 units in 2,270 hours of direct workers’ time.

The balance of the direct workers’ time in the period was non-productive time.

The net wages paid (i.e. net of employee deductions) in the period were:

Direct workers – £25,090

Indirect workers – £7,150

The factory uses a batch costing system, based on actual costs, which is integrated with the
financial accounts.

Required:

(i) Calculate the gross wages, for the four week period in Department A, for both
direct workers and indirect workers. (4 marks)

(ii) Prepare the Department A Wages Control Account for the period. (Show all
workings to justify the calculation of both direct and indirect wages.)
(6 marks)

(c) “Cost classification is important to the work of the cost and management accountant”.

Required:

Identify three different ways of classifying the wages of an employee and outline the
purpose of each classification. (5 marks)

(20 marks)

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Question 11 GROSS WAGES

The finishing department in a factory has the following payroll data for the month just ended:

Direct Indirect
workers workers
Total attendance time (including overtime) 2,640 hours 940 hours
Productive time 2,515 hours
Non-productive time:
Machine breakdown 85 hours
Waiting for work 40 hours
Overtime 180 hours 75 hours
Basic hourly rate £5.00 £4.00
Group bonuses £2,840 £710
Employers’ National Insurance Contributions £1,460 £405

Overtime, which is paid at 140% of basic rate, is usually worked in order to meet the factory’s general
requirements. However, 40% of the overtime hours of both direct and indirect workers in the month
were worked to meet the urgent request of a particular customer.

Required:

(a) Calculate the gross wages paid to direct workers and to indirect workers in the month.
(4 marks)

(b) Using the above information, record the relevant entries for the month in the finishing
department’s wages control account and production overhead control account. (You
should clearly indicate the account in which the corresponding entry would be made in
the company’s separate cost accounting system.) (10 marks)

(14 marks)

Question 12 LABOUR TURNOVER

(a) Identify the costs to a business arising from labour turnover. (5 marks)

(b) A company operates a factory which employed 40 direct workers throughout the four week
period just ended. Direct employees were paid at a basic rate of £4.00 per hour for a 38 hour
week. Total hours of the direct workers in the four week period were 6,528. Overtime, which
is paid at a premium of 35%, is worked in order to meet general production requirements.
Employee deductions total 30% of gross wages. 188 hours of direct workers’ time were
registered as idle.

Required:

Prepare journal entries to account for the labour costs of direct workers for the period.
(7 marks)

(12 marks)

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Question 13 SPECIFIC ORDER AND JOB COSTING

(a) Describe the key features of TWO examples of specific order costing systems. (4 marks)

(b) Describe ways in which overtime wages of direct workers may be treated in a job costing
system. (6 marks)

(10 marks)

Question 14 IDLE

(a) Explain how the following cost items, relating to direct personnel, would be processed in
a manufacturing business’ cost accounts:

(i) idle time; (3 marks)

(ii) overtime. (3 marks)

(b) The following information is available regarding the labour costs in a factory department for a
week:

Direct personnel Indirect personnel

Payroll hours:
Production 432 117
Training 24 –
Idle time 32 4
Total 488 121
Rate per hour:
Basic £7.50 £6.00
Overtime premium £2.50 £2.00

The following additional information is provided:

(i) There are 12 direct personnel and 3 indirect personnel in the department.

(ii) Group bonuses for the week, shared by all workers in the department, total £520.

(iii) The basic wage rates apply to a normal working week of 37 hours.

(iv) Overtime is worked in order to meet the general requirements of production.

(v) The idle time and the time spent training during the week are regarded as normal.

(vi) The expected number of payroll hours of direct personnel in the week (excluding
time spent training), required to produce the output achieved, is 470.

Required:

(i) Calculate the total amounts paid in the week (before share of group bonus) to
direct personnel and indirect personnel respectively. (4 marks)

(ii) Determine the total amounts to be charged as direct wages and indirect wages
respectively. (5 marks)

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(iii) Complete the Wages Control Account in the company’s separate cost
accounting system, clearly indicating the account in which each corresponding
entry would be made. (3 marks)

(iv) Calculate the efficiency ratio relating to the direct personnel (expressed as a
percentage to one decimal place). (2 marks)

(20 marks)

Question 15 A HOTEL

A company operates a hotel and analyses trading performance into three separate trading areas,
Bedrooms, Catering and Meetings. Direct costs of the three areas for a period were:

(£) Bedrooms Catering Meetings

Food and beverages — 239,702 —
Staff 96,217 191,123 47,891
Other 24,762 17,654 15,337

There are 79 bedrooms in the hotel at an average bed/night rate of £64. Bedroom occupancy in the 365
day period was 61%.

38,760 meals were served at an average price of £10·80. Bar sales were £182,572. The Catering area is
expected to achieve a profit margin (net of direct costs) of 30%.

Revenue from meetings in the period was £293,100.

There are two service (support) departments in the hotel; General Administration and Domestic
Services. Costs allocated to the two departments in the period were:

General Administration £167,255

Domestic Services £155,108

In addition, hotel occupancy costs (e.g. rent & rates, heating & lighting, insurance, general
depreciation) totalled £876,230 in the period. Occupancy costs are apportioned according to floor
space, an analysis of which is as follows:

Bedrooms 75%
Catering 9%
Meetings 13%
General administration 2%
Domestic services 1%

The costs of the two service (support) departments are apportioned as follows:

Bedrooms Catering Meetings General Domestic

administration services
General Admin 30% 30% 30% — 10%
Domestic Services 60% 14% 23% 3% —

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Required:

(a) Apportion the hotel overhead costs, for the 365 day period, to the three trading areas
within the hotel. (6 marks)

(b) Tabulate the trading performance of each area. (7 marks)

(c) Comment upon the trading performance. (7 marks)

(20 marks)

Question 16 DEPARTMENT ABC

A company makes a range of products with total budgeted manufacturing overheads of £973,560
incurred in three production departments (A, B and C) and one service department.

Department A has 10 direct employees who each work 37 hours per week. Department B has five
machines each of which is operated for 24 hours per week. Department C is expected to produce
148,000 units of final product in the budget period.

The company will operate for 48 weeks in the budget period.

Budgeted overheads incurred directly by each department are:

Production Department A £261,745

Production Department B £226,120
Production Department C £93,890
Service Department £53,305

The balance of budgeted overheads are apportioned to departments as follows:

Production Department A 40%

Production Department B 35%
Production Department C 20%
Service Department 5%

Service department overheads are apportioned equally to each production department.

Required:

(a) Calculate an appropriate predetermined overhead absorption rate in each production

department. (9 marks)

(b) Calculate the manufacturing overhead cost per unit of finished product in a batch of 100
units which take nine direct labour hours in Department A and three machine hours in
Department B to produce. (3 marks)

(12 marks)

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Question 17 COST CENTRES

(a) Define the term “cost centre” and detail the factors influencing the choice of cost centres
within a business. (6 marks)

(b) One of the cost centres in a factory is involved in the final stage of production. Budgeted
fixed overhead costs for the cost centre for a period were:

Apportioned costs £74,610

Directly incurred costs £98,328

A predetermined machine hour rate is established for the absorption of fixed production
overhead into product cost. Budgeted machine hours for the cost centre in the period were
1,900.

Actual overheads (apportioned and directly incurred) in the period were £173,732. The
volume variance was £4,551 favourable.

Required:

Calculate for the period:

(i) the predetermined fixed overhead absorption rate, (2 marks)

(ii) the actual machine hours, (4 marks)

(iii) the over/under absorption of fixed overhead. (4 marks)

(c) Explain the nature of the “apportioned” costs and the “directly incurred” costs in (b)
above. (4 marks)

(20 marks)

Question 18 COMPANY P

Company P makes several products which pass through the two production departments in its factory.
These two departments are concerned with filling and sealing operations. There are two service
departments in the factory – maintenance and canteen.

Predetermined overhead absorption rates, based on direct labour hours, are established for the two
production departments. The budgeted expenditure for these departments for the period just ended,
including the apportionment of service department overheads, was £110,040 for filling, and £53,300 for
sealing. Budgeted direct labour hours were 13,100 for filling and 10,250 for sealing.

Service department overheads are apportioned as follows:

Maintenance:
Filling 70%
Sealing 27%
Canteen 3%

Canteen:
Filling 60%
Sealing 32%
Maintenance 8%

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During the period just ended, actual overhead costs and activity were as follows:

£ Direct labour hours

Filling 74,260 12,820
Sealing 38,115 10,075
Maintenance 25,050
Canteen 24,375

Required:

Calculate the overheads absorbed in the period and the extent of the under/over absorption in
each of the two production departments.
(14 marks)

Question 19 ONE SERVICE COST CENTRE

A manufacturing company has two production cost centres (Departments A and B) and one service cost
centre (Department C) in its factory.

A predetermined overhead absorption rate (to two decimal places of £) is established for each of the
production cost centres on the basis of budgeted overheads and budgeted machine hours.

The overheads of each production cost centre comprise directly allocated costs and a share of the costs
of the service cost centre.

Budgeted production overhead data for a period is as follows:

Department A Department B Department C

Allocated costs £217,860 £374,450 £103,970
Apportioned costs £45,150 £58,820 (£103,970)
Machine hours 13,730 16,110
Direct labour hours 16,360 27,390

Actual production overhead costs and activity for the same period are:

Department A Department B Department C

Allocated costs £219,917 £387,181 £103,254
Machine hours 13,672 16,953
Direct labour hours 16,402 27,568

70% of the actual costs of Department C are to be apportioned to production cost centres on the basis of
actual machine hours worked and the remainder on the basis of actual direct labour hours.

Required:

(a) Establish the production overhead absorption rates for the period. (3 marks)

(b) Determine the under or over absorption of production overhead for the period in each
production cost centre. (Show workings clearly). (9 marks)

(12 marks)

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Question 20 OVERHEAD APPORTIONMENT

(a) State, and critically assess, the objectives of overhead apportionment and absorption.
(6 marks)

(b) Explain when, and how, the repeated distribution method may be applied in the
overhead apportionment process. (4 marks)

(10 marks)

Question 21 WARNINGLID

Warninglid has two production centres and two service centres to which the following applies:

Production departments Service centres

1 2 Stores Maintenance Total
Floor area (m2) 5,900 1,400 400 300 8,000
Cubic capacity (m3) 18,000 5,000 1,000 1,000 25,000
Number of employees 14 6 3 2 25
Direct labour hours 2,400 1,040
Machine hours 1,500 4,570

The following overheads were recorded for the month just ended:

£000
Rent 12
Heat and light 6
Welfare costs 2
Supervisors
Department 1 1·5
Department 2 1

The service centres work for the other centres as follows:

1 2 Stores Maintenance
Work done by:
Stores 50% 40% – 10%
Maintenance 45% 50% 5% –

Required:

(a) What would be the overheads allocated and apportioned to each department? (3 marks)

(b) Calculate the total overheads included in the production departments after
reapportionment using the reciprocal method. (4 marks)

(c) Calculate the overhead absorption rate for each production department. Justify the
basis that you have used. (3 marks)

(10 marks)

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Question 22 PERIOD 1 AND PERIOD 2

A company manufactures a single product with the following unit costs:

Variable manufacturing £4.50

Fixed manufacturing £3.50
Variable selling and administration £0.80
Fixed selling and administration £3.00

Fixed manufacturing costs per unit are based on a predetermined absorption rate, established at normal
activity of 90,000 production units per period. Fixed selling and administration costs are absorbed into
the cost of sales at 20% of selling price. Under/over absorbed overhead balances are transferred to the
profit and loss account at the end of each period.

The following information is available for two consecutive periods:

Period 1 Period 2
units £ units £
Sales 85,000 1,275,000 90,000 1,350,000
Production 80,000 92,000
Variable manufacturing costs 360,000 414,000
Fixed manufacturing costs 320,000 315,000
Variable selling and
administration costs 68,000 72,000
Fixed selling and
administration costs 270,000 270,000

Required:

(a) Prepare the trading and profit and loss account for each of the two periods showing
clearly both gross and net profit and any over/under absorbed overheads. (9 marks)

(b) Explain the reason for the change in profits between the two periods (with supporting
calculations). (7 marks)

(c) Explain how the profits would differ from those calculated in (a) above if a marginal
costing system were employed. (4 marks)

(20 marks)

Question 23 PRODUCT X & Y

A company produces and sells two products (Products X and Y) and uses an absorption costing system.

Fixed production overheads are absorbed at a rate of £9.00 per machine hour based upon normal levels
of production.

Estimates for the following period include:

Product X Product Y
Sales (units) 15,800 26,300
Selling price (£/unit) 1.15 2.40
Production (units) 15,300 26,400
Variable costs of production (£) 7,650 32,472
Machine hours 1,020 2,200
Opening stock (units) 1,940 1,870

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Fixed production overheads are estimated at £28,350 for the following period, and selling and
administration overheads at £9,580. Any under or over absorbed production overheads are transferred
to Profit and Loss Account in the period.

Required:

(a) Determine the net profit for the following period based upon the estimates above. (You
are to assume that opening stock has the same unit cost as the period under review).
(11 marks)

(b) The company is considering changing to a marginal costing system. Prepare a

statement in a marginal costing format showing performance expected in the following
period (for each product and in total). (5 marks)

(c) State the reason for, and clearly demonstrate in figures, the difference in net profit
between (a) and (b) above. (4 marks)

(20 marks)

Question 24 SINGLE PRODUCT

A company sells a single product at a price of £14 per unit. Variable manufacturing costs of the
product are £6.40 per unit. Fixed manufacturing overheads, which are absorbed into the cost of
production at a unit rate (based on normal activity of 20,000 units per period), are £92,000 per period.
Any over or under absorbed fixed manufacturing overhead balances are transferred to the profit and
loss account at the end of each period, in order to establish the manufacturing profit.

Sales and production (in units) for two periods are as follows:

Period 1 Period 2
Sales 15,000 22,000
Production 18,000 21,000

The manufacturing profit in Period 1 was reported as £35,800.

Required:

(a) Prepare a trading statement to identify the manufacturing profit for Period 2 using the
existing absorption costing method. (7 marks)

(b) Determine the manufacturing profit that would be reported in Period 2 if marginal
costing was used. (4 marks)

(c) Explain, with supporting calculations:

(i) the reasons for the change in manufacturing profit between Periods 1 and 2
where absorption costing is used in each period; (5 marks)

(ii) why the manufacturing profit in (a) and (b) differs. (4 marks)

(20 marks)

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Question 25 A COMPANY

A company, which has been in existence for several years, manufactures a single product with a unit
selling price of £34. Production and sales volumes of the product over a three-month period have been:

Month 1 Month 2 Month 3

Production (units) 12,000 10,500 10,000
Sales (units) 12,000 10,000 11,000

Total production costs per unit over the three-month period were £23.75, £25.00 and £25.50
respectively. Variable production costs per unit, and fixed production costs per month, were the same
throughout the period. Selling and administration overheads totalled £87,000 in each month.

Required:

(a) Calculate the variable production costs per unit, and the fixed production costs per
month, over the three month period. (4 marks)

(b) Estimate the total cost that would be incurred in Month 4 if 12,500 units are
manufactured. (2 marks)

(c) Prepare a profit statement for Month 2 using the absorption costing method. Assume
that the fixed production overhead absorption rate is based upon normal production of 12,000
units per month. (6 marks)

(d) Prepare a profit statement for Month 3 using the marginal costing method. (4 marks)

(e) Explain, with supporting figures, the profit difference in Month 2 if the marginal costing
method had been used instead of absorption costing. (4 marks)

(20 marks)

Question 26 SURAT

Surat is a small business which has the following budgeted marginal costing profit and loss account for
the month ended 31 December 2001:
£000 £000
Sales 48
Cost of sales:
Opening stock 3
Production costs 36
Closing stock (7)
__
(32)
__
16
Other variable costs:
Selling (3·2)
____
Contribution 12·8
Fixed costs:
Production overheads (4)
Administration (3·6)
Selling (1·2)
____
Net profit 4·0
____

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The standard cost per unit is:

£
Direct materials (1 kg) 8
Direct labour (3 hours) 9
Variable overheads (3 hours) 3
__
20
__
Budgeted selling price per unit 30
__

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)

Question 27 PRODUCT X

On 30 October the following were among the balances in the cost ledger of a company manufacturing a
single product (Product X) in a single process operation:

Dr Cr
Raw material control account £87,460
Manufacturing overhead control account £5,123
Finished goods account £148,352

The raw material ledger comprised the following balances at 30 October:

Direct materials:
Material A: 18,760 kg, £52,715
Material B: 4,242 kg, £29,994
Indirect materials: £4,751

12,160 kg of Product X were in finished goods stock on 30 October.

During November the following occurred:

(i) Raw materials purchased on credit:

Material A: 34,220 kg at £2·85/kg
Material B: 13,520 kg at £7·10/kg
Indirect: £7,221

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(ii) Raw materials issued from stock:

Material A: 35,176 kg
Material B: 13,364 kg
Indirect: £6,917

Direct materials are issued at weighted average prices (calculated at the end of each month to
three decimal places of £).

(iii) Wages incurred:

Direct: £186,743 (23,900 hours)
Indirect: £74,887

(iv) Other manufacturing overhead costs totalled £112,194. Manufacturing overheads are
absorbed at a predetermined rate of £8·00 per direct labour hour. Any over/under absorbed
overhead at the end of November should be left as a balance on the manufacturing overhead
control account.

(v) 45,937 kg of Product X were manufactured. There was no work-in-progress at the beginning
or end of the period. A normal loss of 5% of input is expected.

(vi) 43,210 kg of Product X were sold. A monthly weighted average cost per kg (to three decimal
places of £) is used to determine the production cost of sales.

Required:

(a) Prepare the following cost accounts for the month of November:

(i) Raw material control account

(ii) Manufacturing overhead control account
(iii) Work-in-progress account
(iv) Finished goods account.

All entries to the accounts should be rounded to the nearest whole £. Clearly show all
workings supporting your answer. (16 marks)

(b) Explain the concept of equivalent units and its relevance in a process costing system.
(4 marks)

(20 marks)

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Question 28 MATERIAL YANKEE

Set out below are incomplete cost accounts for a period for a manufacturing business:

Stores Ledger Control Account

£ £
Opening Balance 60,140
Cost Ledger Control A/c 93,106
_______ _______
153,246 153,246
_______ _______

Production Wages Control Account

£ £
Cost Ledger Control A/c Finished Goods A/c 87,480
Production Overhead Control A/c
_______ _______

_______ _______

Production Overhead Control Account

£ £
Cost Ledger Control A/c 116,202
Prod. Wages Control A/c
_______ _______

_______ _______

Finished Goods Control Account

£ £
Opening Balance 147,890 Prod. Cost of Sales (variable)
Closing Balance 150,187
_______ _______

_______ _______

Notes:

(1) Raw materials:

Issues of materials from stores for the period:

„ Material Y: 1164 kg (issued at a periodic weighted average price, calculated to two

decimal places of £).

„ Other materials: £78,520.

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No indirect materials are held on the Stores ledger.

Transactions for Material Y in the period:

„ Opening stock: 540 kg, £7,663

„ Purchases: 1,100 kg purchased at £14.40 per kg.

(2) Payroll:

Direct workers Indirect workers

Hours worked:
Basic time 11,140 4,250
Overtime 1,075 405
Productive time – direct workers 11,664
Basic hourly rate (£) 7.50 5.70
Overtime, which is paid at basic rate plus one third, is regularly worked to meet production
targets.

(3) Production overheads:

The business uses a marginal costing system. 60% of production overheads are fixed costs.
Variable production overhead costs are absorbed at a rate of 70% of actual direct labour.

(4) Finished goods:

There is no work in progress at the beginning or end of the period, and a Work in Progress
Account is not kept. Direct materials issued, direct labour and production overheads absorbed
are transferred to the Finished Goods Control Account.

Required:

(a) Complete the above four accounts for the period, by listing the missing amounts and
descriptions. (13 marks)

(b) Provide an analysis of the indirect labour for the period. (3 marks)

(c) Calculate the contribution and the net profit for the period, based on the cost accounts
prepared in (a) and using the following additional information:

Sales 479,462

Selling and administration overheads:

variable 38,575
fixed 74,360
(4 marks)

(20 marks)

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Question 29 STORES LEDGER

(a) Describe briefly THREE major differences between:

(i) financial accounting; and

(ii) cost and management accounting. (6 marks)

(b) Below are incomplete cost accounts for a period:

Stores ledger control account

£000
Opening balance 176.0
Financial ledger control A/c 224.2

Production wages control account

£000
Financial ledger control A/c 196.0

Production overhead control account

£000
Financial ledger control A/c 119.3

Job ledger control account

£000
Opening balance 114.9

The balances are the end of the period were:

£000
Stores ledger 169.5
Job ledger 153.0

During the period 64,500 kilos of direct material were issued from stores at a weighted
average price of £3.20 per kilo. The balance of materials issued from stores represented
indirect materials.

75% of the production wages are classified as “direct”. Average gross wages of direct
workers was £5.00 per hour. Production overheads are absorbed at a predetermined rate of
£6.50 per direct labour hour.

Required

Complete the cost accounts for the period. (8 marks)

(14 marks)

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Question 30 A AND B

A company manufactures two products (A and B). In the period just ended production and sales of the
two products were:

Product A Product B
000 units 000 units
Production 41 27
Sales 38 28

The selling prices of the products were £35 and £39 per unit for A and B respectively.

Opening stocks were:

Raw materials 0 £72,460
Finished goods:
Product A 0 £80,640 (3,200 units)
Product B £102,920 (3,100 units)

Raw material purchases (on credit) during the period totalled £631,220. Raw material costs per unit are
£7·20 for Product A and £11·60 for Product B.

Direct labour hours worked during the period totalled 73,400 (1 hour per unit of Product A and 1·2
hours per unit of Product B), paid at a basic rate of £8·00 per hour.

3,250 overtime hours were worked by direct workers, paid at a premium of 25% over the basic rate.
Overtime premiums are treated as indirect production costs. Other indirect labour costs during the
period totalled £186,470 and production overhead costs (other than indirect labour) were £549,630.
Production overheads are absorbed at a rate of £10·00 per direct labour hour (including £6·80 per hour
for fixed production overheads). Any over/under absorbed balances are transferred to the Profit and
Loss Account in the period in which they arise. Non-production overheads totalled £394,700 in the
period.

Required:

(a) Prepare the following accounts for the period in the company’s integrated accounting
system:

(i) Raw material stock control;

(ii) Production overhead control;

(iii) Finished goods stock control (showing the details of the valuation of closing
stocks as a note).
(12 marks)

(b) Prepare the profit and loss account for the period, clearly showing sales, production cost
of sales and gross profit for each product. (4 marks)

(c) Calculate, and explain, the difference in the net profit (loss) for the period if the
marginal costing method is employed. (4 marks)

(20 marks)

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Question 31 CONTRACT ABC

A company has been carrying out work on a number of building contracts (including Contract ABC)
over the six month period ended 31 May 2002. The following information is available:

All Contracts Contract ABC

(including ABC)
Number of contracts worked on in the six months to 31.5.02 10 –
Value £7.62 m £6.4 m
Duration 8 – 22 months 11 months
(average 13 months)
Contract months 531 6
Direct labour costs in the period £9.762 m £1.017 m
Raw material costs in the period £10.817 m £1.456 m
Distance from base 16 kilometres 23 kilometres
(average)
Value of work certified at 31.5.02 – £5.180 m
Note:
1.
Contract months for “All Contracts” are the sum of the number of months work on each individual
contract during the six month period.

Contract ABC commenced on 1 September 2001. As at 30 November 2001 cumulative costs on the
contract, held in work-in-progress, totaled £1.063 m (including overheads).

The company confidently predicts that further costs after 31 May 2002 to complete Contract ABC on
time (including overheads) will not exceed £0.937 m. Overheads incurred over the six month period to
31 May 2002, which are to be apportioned to individual contracts, are:
£m
Stores operations 1.56
Contract general management 1.22
Transport 1.37
General administration 4.25

The bases of apportionment are:

Stores operations – contract value × contract months

Contract general management – direct labour costs
Transport – distance from base × contract months
General administration – contract months

Required:

(a) (i) Apportion overheads to Contract ABC for the six month period to 31 May
2002 (to the nearest £000 for each overhead item). (6 marks)

(ii) Determine the expected profit/loss on Contract ABC, and the amount of
profit/loss on the contract that you recommend be included in the accounts of
the company for the six month period to 31 May 2002. (7 marks)

(b) The company is introducing a service costing system into its stores operations department.

Outline the key factors to consider when introducing the service costing system.
(7 marks)

(20 marks)

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Question 32 JOB YIPPEE

A company carries out production jobs in its factory to customer requirements.

Production overheads are absorbed using a factory wide direct labour hour rate based upon the actual
overhead expenditure and hours worked in the most recent calendar quarter. Relevant information for
the most recent quarter is:

Direct labour:
Grade 1 80,000 hours £480,000
Grade 2 130,000 hours £650,000

Indirect labour:
Grade M 30,000 hours at £4.50 per hour
Grade N 45,000 hours at £4.00 per hour

Indirect materials £85,000

General factory expenses £325,000
Depreciation of plant and machinery £370,000
Rent and rates £249,000

Issues of raw materials to production jobs are charged at a weighted average cost (to four decimal
places of £) calculated at the end of each week. Each stock issue is rounded in total to the nearest £.

During the week just ended, stock movements of Material X were as follows:

Opening stock 962 kilos: £2,532.16

Day 1 273 kilos issued
Day 2 660 kilos received: £1,745.70
Day 3 328 kilos issued
Day 5 114 kilos issued

Stores requisitions for Material X included:

Day 1 177 kilos to Job Y
Day 3 185 kilos to Job Y

Direct labour hours worked in the week just ended included:

Grade 1 105 hours on Job Y at £6 /hr
Grade 2 192 hours on Job Y at £5/hr

Required:

(a) Calculate the production costs, charged to Job Y for the week just ended, from the
above information. (9 marks)

(b) Job Y is now complete at a total production cost of £15,740. Non-production costs represent
25% of total costs. The selling price of Job Y is to be determined so as to provide a net
profit/sales ratio of 10%.

Calculate the selling price of Job Y (to the nearest £). (4 marks)

(c) Comment upon the production overhead absorption method in use. (7 marks)

(20 marks)

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Question 33 SOLICITORS

A large firm of solicitors use a job costing system to identify costs with individual clients. Hours
worked by professional staff are used as the basis for charging overhead costs to client services. A
predetermined rate is used derived from budgets drawn up at the beginning of each year commencing
on 1 April.

In the year to 31 March 2001, the overheads of the solicitors’ practice, which were absorbed at a rate of
£7.50 per hour of professional staff, were over-absorbed by £4,760. Actual overheads incurred were
£742,600. Professional hours worked were 1,360 over budget.

The solicitors’ practice has decided to refine its overhead charging system by differentiating between
hours of senior and junior professional staff respectively. A premium of 40% is to be applied to the
hourly overhead rate for senior staff compared with junior staff.

Budgets for the year to 31 March 2002 are as follows:

Senior professional staff hours 21,600

Junior professional staff hours 79,300
Practice overheads £784,000

Required:

(a) Calculate for the year ended 31 March 2001:

(i) Budgeted professional staff hours

(ii) Budgeted overhead expenditure. (5 marks)

(b) Calculate, for the year ended 31 March 2002, the overhead absorption rates (to three
decimal places of a £) to be applied to:

(i) Senior professional staff hours

(ii) Junior professional staff hours. (4 marks)

(c) How is the change in method of charging overheads likely to improve the firm’s job
costing system? (3 marks)

(d) Explain briefly why overhead absorbed using predetermined rates may differ from
actual overhead incurred for the same period. (2 marks)

(14 marks)

Question 34 PRINTING

A printing and publishing company has been asked to provide an estimate for the production of 100,000
catalogues, of 64 pages (32 sheets of paper) each, for a potential customer.

Four operations are involved in the production process: photography, set-up, printing and binding.

Each page of the catalogue requires a separate photographic session. Each session costs £150.

Set-up would require a plate to be made for each page of the catalogue. Each plate requires four hours
of labour at £7 per hour and £35 of materials. Overheads are absorbed on the basis of labour hours at
an hourly rate of £9.50.

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In printing, paper costs £12 per thousand sheets. Material losses are expected to be 2% of input. Other
printing materials will cost £7 per 500 catalogues. 1,000 catalogues are printed per hour of machine
time. Labour and overhead costs incurred in printing are absorbed at a rate of £62 per machine hour.

Binding costs are recovered at a rate per machine hour. The rate is £43 per hour and 2,500 catalogues
are bound per hour of machine time.

A profit margin of 10% of selling price is required.

Required:

Calculate the price that should be quoted for the catalogue job by the printing and publishing
company.

(11 marks)

Question 35 JOB COSTING SYSTEM

(a) Explain how the following documents are used in a job costing system:

(i) materials requisition; (3 marks)

(ii) job cost card. (3 marks)

(b) A company uses a job costing system in order to identify the production costs incurred in
carrying out a range of work to customer specification in its factory. The system allocates
costs to each job wherever these can be identified directly, as long as they are considered as
being “normal”. “Abnormal” costs are analysed by cost centre and are charged indirectly to
jobs.

In the completion of Job XYZ, £17,560 of raw materials were initially allocated to the job.
This included £620 of raw materials that were wasted, and a further £756 that were used for
rectification work on the job. “Normal” wastage and rectification costs (raw materials only)
are allowed at 2% and 3% respectively of the direct raw material costs of each job.

During the period, raw materials totalling £234,720 were initially allocated to jobs, including
£5,164 and £6,105 for wastage and rectification respectively.

Required:

(i) Identify the “normal” raw material costs that are to be allocated to Job XYZ.
(3 marks)

(ii) Evaluate the efficiency of the company in respect to wastage and rectification
both on Job XYZ and for the period as a whole. (4 marks)

(c) Production overheads of the company are charged to jobs using a predetermined machine
hour rate in each of the two production cost centres (PCC1 and PCC2). The overheads of
each production cost centre comprise directly allocated costs, plus a share of factory-wide
indirect costs (budgeted at £109,848 and apportioned on the basis of floor area), plus a share
of the overheads of the single service cost centre (apportioned to production cost centres
PCC1 and PCC2 in the ratio 3:5).

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The following incomplete information from the company’s budgets is available for a period:

Production Cost Centre

PCC1 PCC2
Directly allocated costs (£) 75,210 80,120
Factory-wide indirect costs (£)* (i) (ii)
Service cost centre apportionment (£) 19,980 (iii)
Machine hours 0 6,110 (iv)
Predetermined absorption rate (£ per m/c hour) (v) 17·50

* Floor area 7,960 sq m (PCC1 2,400; PCC2 3,600; Service cost centre 1,960)

Required:

Calculate the missing figures (i) to (v) above. (7 marks)

(20 marks)

Question 36 PROCESS 1 & 2

A company manufactures a product which passes through two processes before completion. The
following data relates to the manufacture of the product during the period just ended when 100,000
units were input to Process 1:

Process 1 Process 2
Basic raw material (£) 143,969 (from Process 1)
Materials added in process (£) – 76,023
Direct labour costs (£) 47,104 34,337
Production overhead (% of direct labour cost) 125 108
Normal loss (% of input units) 4.1 3.0
Scrap value of process losses (£/unit) 0.36 0.52
Output (units) 95,725 92,984

There was no work in progress at the beginning or end of the period. Lost units are fully complete.

Required:

(a) Prepare the process cost accounts for the period. (Loss/gain accounts are not required.)
(13 marks)

(b) Describe how process accounts are prepared where work remains in progress at the end
of each period and the FIFO valuation method is used. (Assume no process losses.)
(7 marks)

(20 marks)

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Question 37 PROCESS REJECTS

Summarised below is data for two production processes in a factory for the month just ended:

Process 1:

Materials £6,335
Labour and overheads £7,677

Five per cent of input units are expected to be rejected; rejects occur at the end of the process. 190
units failed inspection in the month and were rejected. After inspection, units are transferred
immediately to the next process.

Process 2:

Opening work in process: 500 units £3,576

Completed output from Process 1 4,110 units
Additional materials £11,672
Labour and overheads £9,485
Closing work in process 400 units

The FIFO method is used to value completed production. There are no losses in the process. Work in
process is 100% complete as to materials, and both opening and closing work in process were 50%
complete as to labour and overheads:

Required:

(a) Prepare the Process 1 account for the month just ended. (7 marks)

(b) Prepare the Process 2 account for the month just ended. (9 marks)

(16 marks)

Question 38 PROCESS SCRAP

The following information relates to a manufacturing process for a period:

Materials costs £16,445

Labour and overhead costs £28,596

10,000 units of output were produced by the process in the period, of which 420 failed testing and were
scrapped. Scrapped units normally represent 5% of total production output. Testing takes place when
production units are 60% complete in terms of labour and overheads. Materials are input at the
beginning of the process. All scrapped units were sold in the period for £0.40 per unit.

Required:

Prepare the process accounts for the period including those for process scrap and abnormal
losses/gains.

(12 marks)

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Question 39 MIKE & NIKE

A company has two divisions (A and B). In Division A small mechanical assemblies are manufactured
in the two production departments to customer order. The following information is available for the
two production departments for a period:

Machining Welding
Dept Dept
Budgeted production overhead £256,200 £168,100
Budgeted machine hours 4,200 820
Budgeted direct labour hours 8,100 15,500
Actual machine hours 4,384 734
Actual direct labour hours 8,296 15,109

Job No 1763 (order for 800 assemblies):

Materials issued £16,740 £264
Machine hours 293 40
Direct labour hours 440 726

Labour hourly rates are £8 in the Machining Department and £10 in the Welding Department.

Division A operates an integrated absorption costing system, with predetermined overhead absorption
rates calculated to two decimal places of £.

Actual production overhead in Division A in the period comprised:

Indirect materials £47,440

Indirect labour £203,740
General expenses (on credit) £172,838

Payments to general expense creditors in the period totalled £169,763.

Required:

Calculate the total production cost of Job No 1763 if production overheads are absorbed on:

(a) the basis of machine hours in the Machining Department and direct labour hours in the
Welding Department. (6 marks)

(b) a plant-wide direct labour hour basis. (2 marks)

(8 marks)

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Question 40 JOINT AND BY

(a) Distinguish between the cost accounting treatment of joint products and of by-products.
(3 marks)

(b) A company operates a manufacturing process which produces joint products A and B, and by-
product C.

Manufacturing costs for a period total £272,926, incurred in the manufacture of:

Product A – 16,000 kgs (selling price £6.10/kg)

B – 53,200 kgs (selling price £7.50/kg)
C – 2,770 kgs (selling price £0.80/kg)

Required:

Calculate the cost per kg (to 3 decimal places of a pound £) of Products A and B in the
period, using market values to apportion joint costs. (5 marks)

(c) In another of the company’s processes, Product X is manufactured using raw materials P and
T which are mixed in the proportions 1:2.

Material purchase prices are:

P £5.00 per kilo

T £1.60 per kilo

Normal weight loss of 5% is expected during the process.

In the period just ended 9,130 kilos of Product X were manufactured from 9,660 kilos of raw
materials. Conversion costs in the period were £23,796. There was no work in process at the
beginning or end of the period.

Required

Prepare the Product X process account for the period. (6 marks)

(14 marks)

Question 41 ANIMAL FEED

A company operates several production processes involving the mixing of ingredients to produce bulk
animal feedstuffs. One such product is mixed in two separate process operations. The information
below is of the costs incurred in, and output from, Process 2 during the period just completed.

£
Costs incurred:
Transfers from Process 1 187,264
Raw materials costs 47,880
Conversion costs 63,960
Opening work in process 3,009

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Units
Production:
Opening work in process 1,200
(100% complete, apart from Process 2
conversion costs which were 50% complete)
Transfers from Process 1 112,000
Completed output 106,000
Closing work in process 1,600
(100% complete, apart from Process 2
conversion costs which were 75% complete)

At the end of the process a random sample of output is tested to ensure the product complies with local
health and safety laws. The sample taken is equal to 5% of the opening WIP and transfers from process
1. These sample units are unable to be sold and are therefore thrown away after testing.

Required:

Prepare the Process 2 account for the period, using FIFO principles. (15 marks)

Question 42 FINAL PROCESS

The following information relates to the final process in a factory for the month just ended:

Units
Opening work-in-progress 500
Transfers in from previous process 6,500
Closing work-in-progress 600

Costs £
Opening work-in-progress 1,527
Transfers in:
Previous process costs 14,625
Materials added 5,760
Conversion costs 3,608

The degree of completion of work-in-progress (WIP) was:

Opening WIP Closing WIP

Previous process costs 100% 100%
Materials added 0 80% 0 80%
Conversion costs 0 40% 0 60%

There is no loss of units in the process. The company uses the FIFO method for charging out the costs
of production.

Required:

Prepare the process account for the period.

(10 marks)

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Question 43 JOINT PRODUCTS

A process in a factory produces joint products (M and N). Each joint product is further processed to
produce saleable output. The following data is available for a period:

Total Product M Product N

Joint processing costs (£) 44,730
Production (kg) 2,760 6,640
Selling price (£ per kg) 11.00 4.80
Further processing costs (£ per kg) 1.20 0.90

Required:

(a) Apportion the joint costs for the period using:

(i) a physical measure; and (2 marks)

(ii) the net realisable value method. (4 marks)

(b) Contrast the accounting treatment of joint products with that applied to by-products.
(4 marks)

(10 marks)

Question 44 WEIGHTED AVERAGE METHOD

A company manufactures a product that requires two separate processes for its completion. Output from
Process 1 is immediately input to Process 2.

The following information is available for Process 2 for a period:

(i) Opening work-in-progress units:

12,000 units: 90% complete as to materials, 50% complete as to conversion costs.

(ii) Opening work-in-progress value:

Process 1 output: £13,440
Process 2 materials added: £4,970
Conversion costs: £3,120.

(iii) Costs incurred during the period:

Process 1 output: £107,790 (95,000 units)
Process 2 materials added: £44,000
Conversion costs: £51,480.

(iv) Closing work-in-progress units

10,000 units: 90% complete as to materials, 70% complete as to conversion costs.

(v) The product is inspected when it is complete. 200 units of finished product were rejected
during the period, in line with the normal allowance. Units rejected have no disposal value.

Required:

(a) Calculate the unit cost of production for the period in Process 2 (to three decimal places
of £), using the periodic weighted average method. (7 marks)

(b) Prepare the Process 2 Account for the period using the unit cost of production
calculated in (a) above. (5 marks)

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(c) Explain why, and how, the Process 2 Account would be different if there was no normal
allowance for rejects.

NB The process account should not be reworked. (5 marks)

(d) Explain how the process account workings, required in (a) above to calculate the unit
cost, would differ if the FIFO valuation method was used instead. (3 marks)

(20 marks)

Question 45 ADAM

Adam, the management accountant of Mark Limited, has on file the costs per equivalent unit for the
company’s 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 £2·60
and for conversion costs was £1·50.

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)

Question 46 PUBLIC TRANSPORT

The following information is available for a public transport business for a period:

Service
1 2 3
Revenue from passengers (£000) 146.2 293.5 271.9
Number of vehicles 7 12 10
Total vehicle usage (000 kilometres) 56 96 85
Variable operating costs (£ per kilometre) 0.60 0.60 0.56
Service fixed costs (£000) 49.7 85.2 70.7

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FINANCIAL INFORMATION FOR MANAGEMENT

In addition to the above, general fixed costs are incurred. These include the costs of management,
supervision, and administration and are absorbed into the cost of journeys at a predetermined rate per
kilometre (to three decimal places of a £). The predetermined rate for the period was based upon:

Budgeted general fixed costs £312,000

Budgeted vehicle usage 233,000 kilometres

Required:

Calculate the profitability of each of the services provided by the public transport business in
terms of:

(a) total net profit (to one decimal place of £000);

(b) contribution per kilometre (to two decimal places of £) net of variable costs;
(c) contribution per vehicle (to one decimal place of £000) net of all direct service costs.

(10 marks)
Question 47 SERVICE COSTING

(a) Describe the characteristics of service costing. (3 marks)

(b) Describe briefly the process that you would recommend for the planning and control of
general overhead expenditure in the public transport business. (4 marks)

(c) Define the term “cost unit” and discuss appropriate cost unit(s) for the transport
business. (5 marks)

(12 marks)
Question 48 TRANSPORT BUSINESS

A transport business with a fleet of four similar vehicles is working at 80% of practical capacity for
three-quarters of the time. For the remainder of the time operations are at 60% of practical capacity.
Measured in operating hours, practical capacity of the business is 8,000 per annum; this is equivalent to
160,000 kilometres.

Operating costs of the business are as follows:

Vehicle depreciation, £4,000 per vehicle, per annum.

Basic maintenance, £110 per vehicle, per 6 monthly service.
Spares/replacement parts, £100 per 000 kilometres.
Vehicle licence, £140 per vehicle, per annum.
Vehicle insurance, £450 per vehicle, per annum.
Tyre replacements after 40,000 kilometres, six at £90 each.
Fuel, £0.40 per litre.
Average kilometres per litre, 4.0.
Drivers, £8,000 per annum each (four drivers are employed at all times, on a time rate basis)
General administration costs, £19,700 per annum (these are absorbed into the costs of jobs at
25% of total costs before general administration).

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Required:

(a) Demonstrate on a graph the total cost per kilometre from 60% to 100% of practical
capacity (plot costs at intervals of 8,000 kilometres). (10 marks)

(b) Calculate the extent of the fixed overhead under-absorption in a year, if jobs are costed
based upon unit costs per kilometre (to 3 decimal places of a £) at 80% of practical
capacity. (4 marks)

(c) Calculate the variable and total costs that would be charged to a job if it requires one
vehicle driving 64 kilometres. (3 marks)
(17 marks)

Question 49 PV CHART

A company has the following summary results for two trading periods:

Period 1 Period 2
£000 £000
Sales 742.7 794.1
Variable costs 408.3 409.0
_____ _____
Contribution 334.4 385.1
Fixed costs 297.8 312.7
_____ _____
Net profit 36.6 72.4
_____ _____

Required:

(a) Draw a profit volume chart, based on both periods, covering sales up to £1m per period.
(6 marks)

(b) Calculate (to the nearest £000) the sales required in Period 2 to achieve the same net
profit as Period 1. (3 marks)

(c) Selling prices were 10% higher in Period 2 than Period 1. Cost inflation was 5%.

Calculate the change in profit between the two periods resulting from:

(i) selling price increase

(ii) cost inflation
(iii) sales volume change
(iv) cost efficiency.

(Changes should be calculated in the above order working from Period 1 to Period 2. All
calculations should be to one decimal place of £000.) (8 marks)

(d) Define the following terms (which are used in the context of CVP analysis):

(i) C/S ratio

(ii) Margin of safety. (3 marks)

(20 marks)

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Question 50 APPLE & BANANA

A company has two products with the following unit costs for a period:

Product A Product B
£/unit £/unit
Direct materials 1.20 2.30
Direct labour 1.40 1.50
Variable production overheads 0.70 0.80
Fixed production overheads 1.10 1.10
Variable other overheads 0.15 0.20
Fixed other overheads 0.50 0.50

Production and sales of the two products for the period were:

Product A Product B
000 units 000 units
Production 250 100
Sales 225 110

Production was at normal levels. Unit costs in opening stock were the same as those for the period
listed above.

Required:

(a) State whether, and why, absorption or marginal costing would show a higher company
profit for the period, and calculate the difference in profit depending upon which
method is used. (4 marks)

(b) Calculate the break-even sales revenue for the period (to the nearest £000) based on the
above mix of sales. The selling prices of Products A and B were £5.70 and £6.90 per unit
respectively. (7 marks)

(11 marks)

Question 51 METHODS OF SELLING

A company makes a range of products, which are sold through agents on a commission basis. Selling
costs comprise the commission which is paid at 10% of selling price. The company is considering the
introduction of its own sales force to replace the selling of products via agents.

Estimates of sales and costs (excluding selling costs) per period have been made at three different levels
of activity as follows:

Low Medium High

£000 £000 £000
Sales 600 700 800
Manufacturing costs 350 380 410
Administration costs 160 160 160

Sales and costs (excluding selling costs) are expected to be unaffected by the decision regarding method
of selling. If the company’s own sales force is introduced, selling costs per period would be expected
to total £60,000.

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Required:

(a) Calculate the break-even point per period if selling via agents is continued. (5 marks)

(b) Calculate the break-even point per period if the company introduces its own sales force.
(4 marks)

Note that for (a) and (b) above you are not required to provide a break-even chart.

(c) Advise management on the decision regarding method of selling. (5 marks)

(14 marks)

Question 52 TOOWOMBA

Toowomba manufactures various products and uses CVP analysis to establish the minimum level of
production to ensure profitability.

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 £7·50 per unit.

Required:

(a) Formulate the equations for the total cost at:

(i) less than or equal to 30,000 units;

(ii) more than 30,000 units. (2 marks)

(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
Toowomba’s production plans. (2 marks)

(10 marks)

Question 53 APPLE, BRAVO AND CHARLIE

A company manufactures and sells three products which currently have the following annual trading
performance:

Product
A B C
£000 £000 £000
Sales 1,794 3,740 2,950
Production cost of sales 1,242 2,860 1,888
_____ _____ _____
Gross profit 552 880 1,062
Non production overheads 460 770 767
_____ _____ _____
Net profit 92 110 295
_____ _____ _____
Sales units (000) 1,150 2,200 2,360
_____ _____ _____

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For each product, units produced and sold were the same in the period.

Fixed production overheads are absorbed at a rate of £0.30 per unit for each product. Non-production
overheads include certain costs which vary with activity at, a rate of 10% of sales value. The remaining
non-production overheads are fixed costs.

Required:

(a) Prepare a statement, in marginal costing format, showing the sales, costs, and profit
contribution of each product expressed both in £ per unit (to three decimal places) and
also as a % of sales (to one decimal place) (8 marks)

(b) Calculate, based upon the current mix of sales, the sales required of each product (to the
nearest £000) in order to generate a total contribution of £3.75m per annum. (6 marks)

(14 marks)

Question 54 PRODUCT Z

(a) Product Z has the following weekly production overhead cost function (in £) over a
production range of 9,000 to 13,000 units:

–10x2 + 300x + 2700

where x represents weekly production in thousands of units.

The combined direct materials and direct labour costs total £580 per thousand units and
weekly selling and administration costs are £2,900 regardless of the level of production and
sales. Selling price of the product is £1.30 per unit.

Required:

Draw a graph showing total sales and costs over the relevant range for Product Z
(calculated in intervals of 1,000 units), indicating the break-even point clearly on your
graph and stating the weekly production at this point. (9 marks)

(b) In the most recent period 12,000 units of Product Z were produced and sold, and costs
incurred were in line with the cost functions described in (a). Production overheads are
absorbed at a rate per unit of output (to two decimal places of £), based on normal production
of 11,500 units.

Required:

Prepare a profit statement for the period, showing clearly any under/over absorbed
production overhead. (7 marks)

(c) Calculate the marginal cost per thousand units when production of Product Z is at
11,500 units in a week. (4 marks)

(20 marks)

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Question 55 PERSONAL DISPOSABLE INCOME

The following data refers to personal disposable income (Yd) and personal consumption expenditure
(C), in the USA between the years 1990 to 1999.

C (billions of dollars) Yd (billions of dollars)

79 83
71 74
62 64
49 48
46 46
52 53
56 58
62 66
68 72
65 66

Required:

(a) (i) Using the equation C = a + bYd, find the least squares line of best fit. Interpret
and comment on the values of “a” and “b”. (12 marks)

(ii) Predict the value for consumption expenditure if the level of disposable income
is 70.4 billion dollars. (1 mark)

(b) Find the coefficient of determination, (r2), and interpret your result. What does this
indicate about your prediction in (a)(ii)? (3 marks)

(16 marks)

Question 56 TREND ANALYSIS

(a) Describe TWO methods of isolating the trend for a set of data presented as a time series,
indicating under what circumstances each method might be used. (6 marks)

(b) An example of a trend equation is:

Y = 190 + 16X

where Y is unit sales and X the quarter.

Required:

Briefly explain how an equation for a trend in sales could be obtained by a computer.
(4 marks)

(10 marks)

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Question 57 ABSENT WORKER

The following figures give the number of persons absent from work in Great Britain each quarter over a
period of five years, in units of a thousand people.

Calender Quarters
Year 1 2 3 4
1996 1,170 833 781 842
1997 950 787 774 895
1998 1,110 892 827 909
1999 1,061 897 821 910
2000 1,087 890 816 889

Required:

(a) Calculate the trend using the moving average method and estimate the average seasonal
variations. (10 marks)

(c) Plot the time series and trend on a sketch graph. (5 marks)

(d) Draw conclusions from your results and illustrate their use. (5 marks)

(20 marks)
Question 58 SOUTH

South has reported the following costs for the past four months:

Month Activity level (units) Total cost

1 300 £3,800
2 400 £4,000
3 150 £3,000
4 260 £3,500

Required:

(a) Using regression analysis calculate the total cost equation. (6 marks)

(b) Calculate the total cost at the following activity levels:

(i) 200 units

(ii) 500 units

and comment on the usefulness of your equation with regard to these estimates.
(4 marks)

(10 marks)

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Question 59 BENDY LTD

You have been provided with the following operating statement, for Bendy Ltd, which represents an
attempt to compare the actual performance for the quarter which has just ended with the budget.

Budget Actual Variance

Number of units sold (000) 640 720 80
___ ___ ___

£000 £000 £000

Sales 1,024 1,071 47
_____ _____ ___
Cost of sales (all variable)
Materials 168 144 28
Labour 240 288 (48)
Overheads 32 36 (4)
____ ____ ___
440 468 (28)
____ ____ ___
Fixed labour cost 100 94 6
Selling and distribution costs
Fixed 72 83 (11)
Variable 144 153 (9)
Administration costs
Fixed 184 176 8
Variable 48 54 (6)
____ ____ ___
548 560 (12)
____ ____ ___
Net profit 36 43 7
____ ____ ___

Required:

(a) Using a flexible budgeting approach, re-draft the operating statement so as to provide a
more realistic indication of the variances, and comment briefly on the possible reasons
(other than inflation) why they have occurred. (12 marks)

(b) Explain why the original operating statement was of little use to management. (2 Marks)

(c) Discuss the problems associated with the forecasting of figures which are used in flexible
budgeting. (6 marks)

(20 marks)

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Question 60 D & M

D & M Ltd manufacture luxury garden furniture. New to the “quality of life” range for summer 2001 is
“The Wilton”, a high quality park-style garden bench.

Derek and Mavis, the company directors, have produced the following information relating to the
Wilton for the first four months of 2001.

Derek believes that following an aggressive marketing campaign total sales of 10,800 benches can be
achieved within the first four months of the year. During this period sales are expected to be highly
seasonal, with the number of units being sold in April being three times the normal monthly sales.
Thereafter monthly sales for the remainder of the year are expected to be 1,500 units.

Furthermore, Derek, a marketing specialist, believes that as the Wilton becomes an established product
then it will be possible to increase its selling price. Derek intends that the selling price should be
increased by £5 per month with effect from February. The initial selling price will be set at a mark up
of 25% on full production cost.

Production of the Wilton will commence in January, all production will be fully completed on a
monthly basis and in order to be prepared for any unforeseen increases in monthly demand, the stock of
Wiltons held at the end of each month will be sufficient to be able to meet 20% of the following
month’s demand.

To manufacture each Wilton will require 5 cubic feet of oak and 4 cubic feet of willow. The cost of the
oak and willow is expected to be £4 per cubic foot and £5 per cubic foot respectively. Each Wilton will
also require one hour’s work by a skilled craftsmen and two hours of unskilled labour. Budgeted wage
rates for these two grades of labour are £15 per hour for skilled and £5 per hour for unskilled.

Before production commences, stocks of oak and willow will be 1,000 cubic feet and 500 cubic feet
respectively. To keep the production cycle running smoothly, it will then be necessary for sufficient
stocks of raw materials to be held to meet 10% of the following month’s production.

Production overheads are to be absorbed on the basis of direct labour hours worked at an hourly
absorption rate of £5.

Required:

(a) Prepare the following monthly functional budgets for D & M Ltd for the period from
January to April:

(i) sales revenue and production; (6 marks)

(ii) raw material purchases; (4 marks)
(iii) labour utilisation; (3 marks)

(b) Prepare a budgeted detailed trading and profit and loss account for the period of four
months ending April 2001. (7 marks)

(20 marks)

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Question 61 WINNERS LTD

Winners Ltd produces and sells a fishing trophy made from wood and plastic. Management are about
to prepare the functional budgets for the four-month period ending 31 August 2001.

The budget factor was known to be sales volume and a provisional sales budget had been prepared a
month ago by the Sales Director, Mrs Angry. Unfortunately following a dispute with the company Mrs
Angry resigned and took all her working papers with her, including the sales budget.

Mrs Angry’s assistant can remember that total budgeted revenue for the four month period was
£240,000 and that sales are at a constant level per month throughout the calendar year except for both
June and July, when they are expected to be twice the usual monthly figure. The selling price for the
trophy was also set by Mrs Angry, but she did not disclose this to her fellow board members. All the
assistant could remember was that it was calculated by applying a 662/3% mark-up on prime cost.
Prime cost had been static for quite a while and would be the same during the budget period.

The production manager supplied the board with the following data for the manufacture of one trophy:

Materials: Wood 6 ounces at 50p per ounce

Plastic 3 ounces at 60p per ounce

Labour: Moulders 2 hours at £1.60 per hour

Finishers 1 hour at £4.00 per hour

Variable overheads are incurred at a rate of £1.30 per labour hour and fixed costs for the four month
period are expected to be £40,000.

The stockholding policy of the company will be to maintain closing stocks of finished goods equal to
10% of the following month’s sales quantity and raw materials equal to 20% of the requirement for the
following month’s production.

Opening stock levels as at 1 May 2001 are expected to be:

Finished trophies 150 units

Wood 2,500 ounces
Plastic 1,000 ounces

Finished goods are to be valued on a marginal costing basis and the cost per unit used should be the
same for both opening and closing stock valuations.

Required:

(a) Prepare the following monthly functional budgets for Winners Ltd for the period from
May to August:

(i) sales volume (no. of units) and sales revenue (£); (6 marks)
(ii) production (no. of units) and raw material purchases (ounces and £); (7 marks)
(iii) labour utilisation (hours and £). (3 marks)

(b) Prepare a budgeted trading and profit and loss account for the period of four months
ending August 2001, detailing all opening and closing stocks. (7 marks)

(23 marks)

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Question 62 WOLLONGONG

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:

(a) production (units);

(b) materials usage (kg and litres);
(c) materials purchases (kg, litres and £); and
(d) labour (hours and £).
(10 marks)

Question 63 MATERIAL A

A company manufactures two components in one of its factories. Material A is one of several materials
used in the manufacture of both components.

The standard direct labour hours per unit of production, and budgeted production quantities, for a 13
week period were:
Standard Budgeted
direct production
labour hours quantities
Component X 0.40 hours 36,000 units
Component Y 0.56 hours 22,000 units

The standard wage rate for all direct workers was £5.00 per hour. Throughout the 13 week period 53
direct workers were employed, working a standard 40 hour week.

The following actual information for the 13 week period is available:

Production:
Component X, 35,000 units
Component Y, 25,000 units
Direct wages paid, £138,500
Material A purchases, 47,000 kilos costing £85,110
Material A price variance, £430 F
Material A usage (component X), 33,426 kilos
Material A usage variance (component X), £320.32 A

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Required:

(a) Calculate the direct labour variances for the period. (5 marks)

(b) Calculate the standard purchase price for Material A for the period and the standard
usage of Material A per unit of production for Component X. (8 marks)

(c) Describe the steps, and information, required to establish the material purchase
quantity budget for material A for the period. (7 marks)

(20 marks)

Question 64 PERSEUS CO LTD

The Perseus Co Ltd a medium sized company, produces a single product in its one overseas factory.
For control purposes, a standard costing system was recently introduced and is now in operation.

The standards set for the month of May were as follows:

Production and sales 16,000 units

Selling price per unit £140

Materials

Material 007 6 kilos per unit at £12.25 per kilo

Material XL90 3 kilos per unit at £3.20 per kilo

Labour

4.5 hours per unit at £8.40 per hour

Overheads (all fixed)

£86,400 per month, they are not absorbed into the product costs.

The actual data for the month of May is as follows:

Produced 15,400 units which were sold at £138.25 each.

Materials

Used 98,560 kilos of material 007 at a total cost of £1,256,640 and used 42,350 kilos of
material XL90 at a total cost of £132,979

Labour

Paid an actual rate of £8.65 per hour to the labour force. The total amount paid out, amounted
to £612,766.

Overheads (all fixed)

Total overheads £96,840

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Required:

(a) Prepare a standard costing profit statement, and a profit statement based on actual
figures for the month of May. (7 marks)

(b) Prepare a statement of the variances which reconciles the actual with the standard
profit or loss figure. (9 marks)

(c) Explain briefly the possible reasons for inter-relationships between material variances
and labour variances. (4 marks)

(20 marks)

Question 65 DEPARTMENT X

The following statement has been produced for presentation to the general manager of Department X.

Month ended 30 June 2001

Original Actual Variance
Budget result
£ £ £
Sales 600,000 550,000 (50,000)
_______ _______ _______
Direct materials 150,000 130,000 20,000
Direct labour 200,000 189,000 11,000
Production overhead
Variable with direct labour 50,000 46,000 4,000
Fixed 25,000 29,000 (4,000)
Variable selling overhead 75,000 72,000 3,000
Fixed selling overhead 50,000 46,000 4,000
_______ _______ _______
Total costs 550,000 512,000 38,000
_______ _______ _______
Profit 50,000 38,000 (12,000)
_______ _______ _______
Direct labour hours 50,000 47,500
Sales and production units 5,000 4,500

Note: there are no opening and closing stocks.

The general manager says that this type of statement does not provide much relevant information for
him. He also thought that the profit for the month would be well up to budget and was surprised to see
a large adverse profit variance.

Required:

(a) Re-draft the above statement in a form which would be more relevant to the general
manager. (6 marks)

(b) Calculate all sales, material, labour and overhead variances and reconcile these to the
statement produced in (a). (9 marks)

(c) Produce a short report explaining the principles upon which your re-drafted statement
is based and what information it provides. (5 marks)

(20 marks)

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Question 66 NEWCASTLE LTD

Newcastle Limited uses variance analysis as a method of cost control. The following information is
available for the year ended 30 September 2001:

Budget Production for the year 12,000 units

Standard cost per unit: £
Direct materials (3 kg at £10/kg) 30
Direct labour (4 hours at £6/hour) 24
Overheads (4 hours at £2/hour) 8
__
62
__
Actual Actual production units for year 11,500 units
Labour – hours for the year 45,350 hours
– cost for the year £300,000
Materials – kg used in the year 37,250 kg
– cost for the year £345,000
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)

Question 67 FLASHHEART

Flashheart runs a business manufacturing aeroplanes. He has recently completed a special custom built
aeroplane for a customer who has become insolvent and is unable to take delivery. Fortunately, the
customer had paid a non-returnable deposit of £5,000 on ordering the aeroplane and this money,
together with the cash proceeds of £4,000 now available from scrapping the aircraft, will cover
Flashheart’s costs.

Flashheart has suddenly met a new customer, Bob, who is interested in buying the aircraft but only after
certain modifications. Bob wants to known how much the aeroplane will cost and has asked Flashheart
to prepare a tender for him.

Flashheart has investigated the modifications required and prepared a costing statement:
£
Material A: 5 kg @ £100 per kg 500
Material B: 10 kg @ £150 per kg 1,500
Material C: 10 kg @ £75 per kg 750
Material D: 7 kg @ £10 per kg 700
Skilled labour: 100 hours @ £10 per hour 1,000
Semi-skilled labour: 75 hours @ £7 per hour 525
Unskilled labour: 80 hours @ £5 per hour 400
Variable overhead: 255 hours @ £3 per hour 765
Fixed overhead: 255 hours @ £2 per hour 510
Cost of preparing statement 100
_____
6,750
_____

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He is uncertain about the price at which to tender and has asked you to review his figures for a fee of
£150. You establish the following:

Material A

There are 12 kg in stock, originally purchased for £100 per kg. The price has recently risen to £130 per
kg but Flashheart could only sell his stock for £120 per kg. Flashheart keeps stocks of material A as it
is an essential component for all of his aeroplanes.

Material B

The price of £150 per kg for material B also represents the historical cost of purchase of the 10 kg
which are in stock. Flashheart normally sells material B to his customers as a separate accessory. He
has recently been buying stocks at £160 per kg and selling them on for £200 per kg.

Material C

This is of no use elsewhere in the business, although Flashheart has 4 kg in stock and could sell these
for a total of £100. The price on the costing statement was the historic cost of purchase, which has not
changed for some time.

Material D

There are 20 kg of this in stock and these are of no use elsewhere in the business. It will be necessary
to dispose of any remaining Material D at a lump sum cost of £200.

Labour

Skilled labour is paid on an hourly basis, at the rate shown in the statement above, with a guaranteed
minimum wage of £300 per week. Flashheart has 15 skilled workers, all of whom are working only 25
hours per week at present. Semi-skilled labour is currently fully employed, but could be diverted from
a product which earns a contribution (after semi-skilled labour) of £6 per semi-skilled labour hour.
Alternatively, semi-skilled labour could be hired at a cost of £20 per hour. Unskilled labour is hired on
a casual basis. The contract will need to be completed in one week.

Overheads

The variable overhead recovery rate of £3 per labour hour worked was established by a detailed
investigation of the business’ costs. The fixed overhead absorption rate of £2 per hour is designed to
cover general overheads of the whole business of £210, the rent of a workshop, to carry out the
modification work, of £100, and the hire of a special machine costing £200 needed to shape the
components.

Required:

Determine the minimum price to be tendered. Show all workings.

(16 marks)

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Question 68 MR LOCKSTOCK

Mr Lockstock has been asked to quote a price for a special contract. He has already prepared his tender
but has asked you to review it for him.

He has pointed out to you that he wants to quote the minimum price as he believes this will lead to
more lucrative work in the future.

Mr Lockstock’s tender

£
Material A, 2,000 kgs @ £10 per kg 20,000
B, 1,000 kgs @ £15 per kg 15,000
C, 500 kgs @ £40 per kg 20,000
D, 50 litres @ £12 per litre 600

Labour Skilled 1,000 hrs @ £25 per hr 25,000

Semi-skilled 2,000 hrs @ £15 per hr 30,000
Unskilled, 500 hrs @ £10 per hr 5,000

Fixed overheads 3,500 hrs @ £12 per hr 42,000

Costs of preparing the tender
Mr Lockstock’s time 1,000
Other expenses 500
Minimum profit (5% of total costs) 7,725
______
Minimum tender price 166,825
______
Other information

Material A: 1,000 kgs of this material is in stock at a cost of £5 per kg. Mr Lockstock has no
alternative use for his material and intends selling it for £2 per kg. However, if he sold any he would
have to pay a fixed sum of £300 to cover delivery costs. The current purchase price is £10 per kg.

Material B: There is plenty of this material in stock at a cost of £18 per kg. The current purchase price
has fallen to £15 per kg. This material is constantly used by Mr Lockstock in his business.

Material C: The total amount in stock of 500 kgs was bought for £10,000 some time ago for another
one-off contract which never happened. Mr Lockstock is considering selling it for £6,000 in total or
using it as a substitute for another material, constantly used in normal production. If used in this latter
manner it would save £8,000 of the other material. Current purchase price is £40 per kg.

Material D: There are 100 litres of this material in stock. It is dangerous and if not used in this contract,
will have to be disposed of at a cost to Mr Lockstock of £50 per litre. The current purchase price is £12
per litre.

Skilled labour: Mr Lockstock only hires skilled labour when he needs it. £25 per hour is the current
hourly rate.

Semi-skilled labour: Mr Lockstock has a workforce of 50 semi-skilled labourers who are not currently
fully employed. They are on annual contracts and the number of spare hours currently available for this
project are 1,500. Any hours in excess of this will have to be paid for at time and a half. The normal
hourly rate is £15 per hour.

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Unskilled labour: These are currently fully employed by Mr Lockstock on jobs where they produce a
contribution of £2 per unskilled labour hour. Their current rate is £10 per hour, although extra could be
hired at £20 an hour if necessary.

Fixed overheads: This is considered by Mr Lockstock to be an accurate estimate of the hourly rate
based on his existing production.

Costs of preparing the tender: Mr Lockstock has spent 10 hours working on this project at £100 per
hour, which he believes is his charge-out rate. Other expenses include the cost of travel and research
spent by Mr Lockstock on the project.

Profit: This is Mr Lockstock’s minimum profit margin which he believes is necessary to cover “general
day to day expenses of running a business”.

Required:

Calculate and explain, for Mr Lockstock, what the minimum tender price should be.
(16 marks)

Question 69 MIKE

Mike Limited has been asked to quote a price for a one off contract. Management have drawn up the
following schedule:

£
Contract price (cost plus 20%) 60,780
Costs:
Materials: V (300 kg at £10/kg) 3,000
I (1,000 litres at £7/litre) 7,000
C (550 kg at £3/kg) 1,650
Labour: Department 1 (1,500 hours at £8/hour) 12,000
Department 2 (2,000 hours at £10/hour) 20,000
Overheads: absorbed on a budgeted labour hour basis
(3,500 hours at £2/labour hour) 7,000
______
Total costs 50,650
______

The following is also relevant:

Material V The cost of £10 is the original purchase cost incurred some years ago. This material is
no longer in use by the company and if not used in the contract then it would be sold
for scrap at £3/kg.

Material I This is in continuous use by the business. £7 is the historic cost of the material although
current supplies are being purchased at £6·50.

Material C Mike Limited has 300 kg of this material in stock and new supplies would cost £4/kg.
If current stocks are not used for the contract then they would be used as a substitute
for material Y in another production process costing £7/kg. 2 kg of C replaces 1 kg of
Y.

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Department 1 This department has spare labour capacity sufficient for the contract and labour would
be retained.

Department 2 This department is currently working at full capacity. Mike Limited could get the men
to work overtime to complete the contract paid at time and a half, or they could divert
labour hours from the production of other units that currently average £3 contribution
per labour hour.

Overheads These are arbitrarily absorbed at a pre-determined rate. There will be no incremental
costs incurred.

Required:

Calculate the minimum contract price that Mike Limited could accept to breakeven using
relevant costing techniques.

(10 marks)

Question 70 BIL MOTOR COMPONENTS PLC

(a) In an attempt to win over key customers in the motor industry and to increase its market share,
BIL Motor Components plc have decided to charge a price lower than their normal price for
component TD463 when selling to the key customers who are being targeted. Details of
component TD463’s standard costs are as follows:

Batch size 200 units

Machine Machine Machine
Group 1 Group 7 Group 29 Assembly

Materials (per unit) 26.00 17.00 – 3.00

Labour (per unit) 2.00 1.60 0.75 1.20
Variable overheads (per unit) 0.65 0.72 0.80 0.36
Fixed overheads (per unit) 3.00 2.50 1.50 0.84
_____ _____ _____ _____
31.65 21.82 3.05 5.40
_____ _____ _____ _____
Setting-up costs per
batch of 200 units £10 £6 £4 –

Required:

Compute the lowest selling price at which one batch of 200 units could be offered, and
critically evaluate the adoption of such a pricing policy. (8 marks)

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(b) The company is also considering the launch of a new product, component TDX489, and have
provided you with the following information.

Product TDX489 Standard cost per box

£
Variable cost 6.20
Fixed cost 1.60
_____
7.80
_____
Market research – forecast of demand

Selling price (£) 13 12 11 10 9

Demand (boxes) 5,000 6,000 7,200 11,200 13,400

The company only has enough production capacity to make 7,000 boxes. However, it would
be possible to purchase product TDX489 from a sub-contractor at £7.75 per box for orders up
to 5,000 boxes, and £7 per box if the orders exceed 5,000 boxes.

Required:

Prepare and present a computation which illustrates which price should be selected in
order to maximise profits. (8 marks)

(c) Where production capacity is the limiting factor explain briefly the ways in which
management can increase it without having to acquire more plant and machinery.
(4 marks)

(20 marks)

Question 71 EXE AND WYE

A firm manufactures two products EXE and WYE in departments dedicated exclusively to them. There
are also three service departments, stores, maintenance and administration. No stocks are held as the
products deteriorate rapidly.

Direct costs of the products, which are variable in the context of the whole business, are identified to
each department. The step-wise apportionment of service department costs to the manufacturing
departments is based on estimates of the usage of the service provided. These are expressed as
percentages and assumed to be reliable over the current capacity range. The general factory overheads
of £3.6m, which are fixed, are apportioned based on floor space occupied. The company establishes
product costs based on budgeted volume and marks up these costs by 25% in order to set target selling
prices.

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Extracts from the budgets for 2001 are provided below:

Annual volume(000 units)
EXE WYE

Max capacity 200 100

Budget 150 70

EXE WYE Stores Maintenance Admin

Costs (£m)
Material 1.8 0.7 0.1 0.1
Other variable 0.8 0.5 0.1 0.2 0.2

Departmental usage (%)

Maintenance 50 25 25
Administration 40 30 20 10
Stores 60 40

Floor space (sq m) 640 480 240 80 160

Required:

Workings may be in £000s with unit prices to the nearest penny.

(a) Calculate the budgeted selling price of one unit of EXE and WYE based on the usual
mark up. (5 marks)

(b) Discuss how the company should respond to each of the following independent events,
which represent additional business opportunities:

(i) an enquiry from an overseas customer for 3,000 units only of WYE where a price of
£35 per unit is offered

(ii) an enquiry for 50,000 units of WYE to be supplied in full at regular intervals during
2001 at a price which is equivalent to full cost plus 10%.

Your answer should include calculations and comments on any assumptions and other
considerations which should be taken into account. (11 marks)

(c) Explain the implications of preparing product full costs based on maximum capacity
rather than annual budget volume. (4 marks)

(20 marks)

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Question 72 SALES VOLUME

(a) A company has the following trading results for a period:

£000
Sales (3,150,000 units at £2·30 per unit) 7,245
Production costs 4,986
_____
Gross profit 2,259
Selling and administration overhead 1,887
_____
Net profit 372
_____

Analysis of the market for the company’s product has led to the following estimates of the
impact on sales volume of a change in selling price:

Selling price Sales volume

+ 20% – 33%
+ 10% – 15%
– 10% + 14%
– 20% + 25%

Production costs comprise:

Direct costs £2,841,000

Overheads £2,145,000

A reduction in sales volume would be expected to lead to a proportionate reduction in direct

costs. An increase in sales volume would be expected to lead to economies of scale on direct
costs as follows:

Sales volume Direct costs

+ 14% + 12%
+ 25% + 20%

Overheads would be expected to decline or increase at a quarter of the rate of any sales
volume decline or increase.

Required:

(i) Using the above estimates, form a table showing the company’s sales, costs and
profits for relevant sales volumes; (5 marks)

(ii) Prepare a graph of the company’s sales revenue and cost functions over the
relevant sales volume range; (5 marks)

(iii) Advise, based upon the results of your analysis, whether the selling price
should be changed. (2 marks)

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(b) Overhead costs and activity, for the above company, over the last five periods have been:

Overheads Sales volume

£000 000 units
Period 1 3,409 2,850
Period 2 3,559 2,750
Period 3 3,764 2,980
Period 4 3,913 3,105
Period 5 4,032 3,150

The inflation index over the five periods (base Period 1) has been:

Period 2 1·052
Period 3 1·091
Period 4 1·125
Period 5 1·154

Required:

(i) Adjust the overheads so that they are valued at Period 5 prices; (3 marks)

(ii) Demonstrate, using the high-low method, how the above data has been used to
establish that overheads are expected to change at a quarter of the rate of any
change in sales volume. (5 marks)

(20 marks)

Question 73 ALBANY

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 £2·50/kg)
Material 2 7 (1 kg at £7/kg)
Direct labour 13 (2 hours at £6·50/hour)
Fixed overheads 7 (2 hours at £3·50/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)

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Question 74 PALACE

(a) A company manufactures two products (X and Y). The production and sales constraints in
each period may be expressed as:

2x + 4y ≤ 1980 (machine hours)

6x + 6y ≤ 4800 (labour hours)
y ≥ x
y ≥ 300
x ≥ 0

Required:

Draw a graph to represent the above constraints, clearly identifying the feasible
production area. (7 marks)

(b) The contributions of the two products are:

Product X £11.50 per unit

Product Y £21.30 per unit

Required:

Assuming that all the constraints in (a) above apply:

(i) Calculate the contribution of each product per unit of binding constraint.
(4 marks)

(ii) Determine the product mix, and the resulting contribution, in each period
which will maximise profit for the company. (3 marks)

(c) The constraints:

Y ≥ X
Y ≥ 300

no longer apply.

Required:

Using simultaneous equations, determine the product mix in each period which will
maximise profit for the company under this changed scenario. (6 marks)

(20 marks)

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Question 75 PRODUCTION POSSIBILITIES

A company manufactures two products in one of its factories. Information concerning the two products
is as follows:

Product A Product B
Selling price per unit £5.00 £3.50
Variable costs per unit £2.80 £1.40
Machine hours per 000 units 80 70
Direct labour hours per 000 units 125 62.5

The following graph shows the production possibilities in June 2001 given that direct labour hours and
machine hours will be in limited supply:

18
X
16,000
16

14
M
12 11,428

10
Product B
000 units 8
Z
P
6 4,762

2 Q 4,545 Y 8,000 N 10,000

0 2 4 6 8 10 12
Product A 000 units

MN represents production possibilities fully utilising the available machine hours. XY represents
production possibilities fully utilising the available direct labour hours. It may be assumed that any
combination of products A and B can be sold at the selling prices prevailing.

Required:

(a) With reference to the graph above:

(i) identify the feasible region and establish the equations for lines MN and XY
(5 marks)

(ii) explain fully the line PQ using any relevant information provided (3 marks)

(iii) using simultaneous equations, determine the co-ordinates of point Z, and

determine whether the resulting product mix would maximise profit. (6 marks)

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(b) Determine which product (A or B) would be more profitable in the following changed
situation:

there is no restriction on direct labour hours, whilst the restriction on machine hours remains.
Unit selling price and variable costs of Product A change such that:

selling price = £5.50 per unit

contribution % of sales = 48%

Product B details remain unchanged. (6 marks)

(20 marks)

Question 76 85,000 MACHINE HOURS

A company manufactures two products (X and Y) in one of its factories. Production capacity is limited
to 85,000 machine hours per period. There is no restriction on direct labour hours:

The following information is provided concerning the two products

Product Product
X Y
Estimated demand (000 units) 315 135
Selling price (per unit) £11.20 £15.70
Variable costs (per unit) £6.30 £8.70
Fixed costs (per unit) £4.00 £7.00
Machine hours (per 000 units) 160 280
Direct labour hours (per 000 units) 120 140
Fixed costs are absorbed into unit costs at a rate per machine hour based upon full capacity
Required:

(a) Calculate the production quantities of Products X and Y, which are required per period,
in order to maximise profit in the situation described above. (5 marks)

(b) Prepare a marginal costing statement in order to establish the total contribution of each
product, and the net profit per period, based on selling the quantities calculated in (a)
above. (4 marks)

(c) Calculate the production quantities of Products X and Y per period which would fully
utilise both machine capacity and direct labour hours, where the available direct labour
hours are restricted to 55,000 per period. (The limit of 85,000 machine hours remains.)
(5 marks)

(14 marks)

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Question 77 XY AND ABC

A company manufactures two products, X and Y. Each product comprises three materials, in the
following quantities per unit of product:

Raw materials (kg)

Product Material A Material B Material C
X 0.4 0.2 0.6
Y 0.3 0.5 0.2

Supplies of Materials A and B in the following period are limited to a maximum of 2,200 kgs and 2,500
kgs respectively. These quantities are insufficient to fully satisfy demand for the two products. There
is no limit on the quantity of Material C available.

Selling prices and variable costs of the products are as follows:

Product Selling price Variable costs

£ per unit £ per unit
X 10.00 4.50
Y 13.50 7.00

No finished goods stocks are held.

Required:

(a) Formulate a linear programming model that could be used to determine the production
quantities of each product in the following period so as to maximise profit. (4 marks)

(b) Using simultaneous equations determine the optimal production plan in the following
period. (8 marks)

(12 marks)

Question 78 KOBRIN ENGINEERS LTD

Kobrin Engineering Ltd is experiencing trouble with its suppliers. The firm produces a variety of
valves requiring a complex bought-in component and specially imported high grade steel. The standard
cost cards for the types of valve produced are as follows.

Valve type TW VE EC SE
£ £ £ £
Steel 250 500 190 390
Bought-in component 50 50 50 50
Direct labour 60 60 50 100
Variable production costs 40 50 40 50
Fixed production costs 180 240 150 270
Selling and administration costs 145 225 120 215
Profit 35 55 30 55
_____ _____ _____ _____
Selling price 760 1,180 630 1,130
_____ _____ _____ _____

All the selling and administration costs are fixed and the same single component is used for each of the
four products. Direct labour is paid £4 per standard hour and each member of the workforce is capable
of producing any of the valves.

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Kobrin’s major customer has ordered 30 TW, 30 EC, 20 VE and 20 SE valves for the coming month.
Despite the firm’s difficulties, it is felt that these must be supplied to ensure future business. It is
thought that this order represents some 10% of total demand for each valve.

Required:

Establish the best production plan for Kobrin if, in the coming month:

(i) supplies of steel are limited to £250,000

(ii) only 400 bought-in components are likely to be available

(iii) labour disputes will restrict productive hours to 4,250

(iv) all four products could be sub-contracted at a cost per unit of £475, £705, £380 and £640 for
TW, VE, EC and SE respectively; labour is still restricted to 4,250 hours but the major
customer insists that the special order is completed by Kobrin and not sub-contracted.

Each of the restrictions on production is to be treated independently.

(20 marks)
Question 79 CHAMBERS LTD

Chambers Ltd manufactures four products (W, X, Y and Z).

It prepares monthly budgets as follows.

W X Y Z
£ £ £ £
Direct material 16 40 30 20
Direct labour 6 12 6 8
Fixed overhead 2 8 6 4
Profit 18 25 28 18
___ ___ ___ ___
Selling price per unit 42 85 70 50
___ ___ ___ ___
Sales
(based on maximum demand) 117,600 212,500 196,000 180,000
_______ _______ _______ _______

(a) Raw materials will be in short supply for the coming year and Chambers will only be able to
purchase £280,000 of material per month. The directors have decided to make 2,000 units of
each product per month and, with the balance of the raw materials, to make the products that
maximise their profit.

Required:

Prepare statements showing the quantities of each product that the company should
make each month, and the profit earned. (12 marks)

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(b) Unfortunately the directors have had brought to their attention an agreement whereby the
quantity of product W sold must be exactly 300 units more than the quantity of product X
sold.

Required:

Present a revised statement of the quantities to be sold, and the profit earned.
(8 marks)

(20 marks)
Question 80 CUCKFIELD

Cuckfield manufactures two products, the D and the H, which have the following standard costs per
unit:

D H
£ £
Materials
A (at £3/kg) 9 6
N (at £7/litre) 3·50 14
Labour
Skilled (at £10/hour) 10 14
Semi skilled (at £6/hour) 9 9
Overheads
(at 60% of direct material cost) 5·70 13·80
––––– –––––
37·20 56·80
Selling Price 40·00 70·00
––––– –––––
Profit 2·80 13·20
––––– –––––

Unfortunately there is a problem obtaining some of the raw materials for production. Only 3,000kg of
material A is available and only 1,000 litres of material N can be found for the week.

There are 45 semi skilled workers who can only work a 40 hour week as there has been an overtime
ban. Skilled workers are guaranteed a 35 hour week. There are 20 of these workers and there is no
overtime ban for these employees.

The company’s objective is to maximise contribution.

Required:

(a) Formulate the constraint equations for this problem excluding the non-negativity
constraint. (4 marks)

(b) Plot the constraints on a graph and suggest possible points for the optimal solution.
(Note: calculations for the optimal solution are NOT required). (6 marks)

(10 marks)

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Question 81 NEW PRODUCTION LINE

(a) Investment in a new production line is being considered by a company. The project has the
following estimated cash inflows (£000) in current (real) terms, receivable at the end of each
year:

Year 1 148
Year 2 176
Year 3 210
Year 4 225

The annual rate of inflation for the period of the project is expected to be 4%. The company’s
required rate of return (including inflation) is 12% per annum. The new production line
would cost £558,000 at the start of the project with no terminal value after four years.

Required:

Calculate, based on cash flows evaluated in money terms,

(i) the net present value (NPV), and

(ii) the internal rate of return (IRR), to the nearest integer percentage, of the
project. (9 marks)

(b) 25% of the output (before rejects) of Product X would be supplied from the new production
line if the investment in (a) above went ahead. The level of rejects from the new line would
be expected to be 2%, compared with 5% from existing equipment.

Required:

Assuming that the investment in the new production line goes ahead, calculate:

(i) the number of units required to be manufactured to provide 1,000 good units
of output, and

(ii) the probability that an item will be rejected. (5 marks)

(14 marks)

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Question 82 MARKET RESEARCH

A company is considering the introduction of a new product. The-following data has been collected by
market research, relating to sales volume in the first year:

Sales units Probability

30,000 10%
40,000 30%
60,000 40%
80,000 20%

The selling price per unit in Year 1 would be £12.00.

Estimated sales volume growth index is:

Year 2 105 (versus 100 in Year 1)

Year 3 104 (versus 100 in Year 2)
Year 4 100 (versus 100 in Year 3)

Selling price increases are expected to be:

Year 2 4%
Year 3 4%
Year 4 3%

A contribution margin of 45% would be expected to be maintained throughout the lifetime of the
product.

Incremental (fixed) overhead cash flows (including inflation) are estimated at:

£000
Year 1 180
Year 2 187
Year 3 194
Year 4 200

The new product opportunity is to be evaluated assuming a four year life and no terminal value. The
company uses a discount rate of 12%, applied to expected cash flows including inflation, to evaluate
such opportunities. Investment of £330,000 in Year 0 is required to establish facilities for the
manufacture and distribution of the product.

Required:

Calculate:

(a) the expected sales revenue for each of the four years (4 marks)

(b) the expected net present value of the new product opportunity. (6 marks)

(c) an approximate internal rate of return for the investment (to the nearest integer
percentage), using the net present values at 0% and 12%, and state whether the
resulting figure will either understate or overstate the true return. (4 marks)

(14 marks)

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Question 83 NEW PRODUCT

A company is considering whether to launch a new product which would be expected to have a life of
four years.

If the product is to be launched, the company has to decide whether to build a large or a small plant for
its manufacture. Research and development costs, with a present value of £0.5m, have already been
incurred.
Demand for the new product has been estimated at two possible levels, leading to the following
estimated annual cash inflows:
High, £2.6m per annum, probability 0.5.
Low, £1.6m per annum, probability 0.5.

If demand in year 1 is high then demand in each subsequent year would be expected to be high. If
demand in year 1 is low then demand in each subsequent year would be expected to be low.
Annual cash inflows would be restricted to a maximum of £2.0m if the small plant is built.

Capital costs (year 0) and terminal values (year 5) would be:

Large plant, (£7.2m) and £2.6m.

Small plant, (£5.6m) and £1.9m.

If the large plant is built and demand in the first year is low, advertising expenditure of £0.3m in each
of years 2, 3 and 4 would be considered in order to boost sales. Annual cash inflows would then be
expected to be £1.7m in each of the three years (net of the expenditure on advertising).

The relevant discount rate is 12%.

Required:

(a) Draw a decision tree to show the structure of the situation above (show cash flows and
probabilities but do not calculate present values). (7 marks)

(b) Calculate the expected NPV if the large plant is built. (9 marks)

(c) Describe how you would reach a decision, including consideration of the relevance of the
research and development costs. (4 marks)

(20 marks)

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Question 84 INVESTMENT PROJECT I

An investment project has the following expected cash flows over its economic life of three years:

£
Year 0 (142,700)
1 51,000
2 62,000
3 73,000

Required:

(a) Calculate the net present value (NPV) of the project at discount rates of 0%, 10% and
20% respectively. (6 marks)

(b) Draw a graph of the project NPVs calculated in (i) and use the graph to estimate, and
clearly indicate, the project internal rate of return (IRR) to the nearest integer
percentage. (4 marks)

(10 marks)
Question 85 PRODUCT LAUNCH

A company is considering the launch of a new product, for which an investment in equipment of
£150,000 would be required. The project life would be limited to five years by the expected life cycle
of the product. It is expected that the equipment could be sold for £10,000 in Year 6.

Market research has indicated a 70% chance of demand for the new product being high and a 30%
chance of demand being low. Cash inflows are forecast as follows:

High demand Low demand

Year £000 £000
1 60 50
2 62 50
3 65 50
4 70 50
5 70 50

If the new product is launched now, an existing product, which could otherwise be retained for a further
five years, would be discontinued immediately. If retained, cash inflows of £12,000 per annum would
be expected for the existing product.

The company’s cost of capital (discount rate) is 15% per annum.

Assume that all cash flows occur at year ends.

Required:

(a) Calculate the expected net present value of the new product. (7 marks)

(b) Advise the company whether to launch the new product, or to retain the existing
product. (5 marks)

(12 marks)

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Question 86 PROJECT INVESTMENT

(a) A company is considering investment in a project requiring an outlay of £1·6 m. Net cash
inflows of £0·55 m per annum for five years are expected, with no residual value at the end of
the five-year period. The cost of capital (required discount rate) is 12% per annum.

Required:

(i) Calculate the NPV of the project at the cost of capital of 12% per annum.
(3 marks)

(ii) Calculate the IRR of the project, using discounted values at 12% and 20% per
annum. (5 marks)

(iii) Determine the equal annual cash inflow from the project that would produce a
zero NPV (i.e. at the cost of capital). (3 marks)

(iv) Determine the equal annual cash outflow, if paid in each of years 0 to 5, that
would be equivalent to investment of £1·6 m in Year 0 (at the cost of capital).
(4 marks)

(b) The most likely level of incremental sales, as a result of investment in the project, is estimated
to be £1·7 m per annum, with a 20% chance of sales being 15% higher, and a 30% chance of
being 15% lower. The contribution/sales ratio is expected to be 40%.

Required:

Calculate the expected value of the annual contribution. (5 marks)

(20 marks)

Question 87 BARCOMBE

Barcombe has been looking at a potential project which has the following cash inflows:

End of year £000

1 15
2 17
3 22
4 2

To acquire these inflows Barcombe would have to invest £36,000 in fixed assets now. The assets would
be expected to be sold at the end of the project for £2,000.

Required:

(a) Calculate the net present value of the project using 10% and 20% as the discount
factors. (5 marks)

(b) Using your results from part (a), calculate the internal rate of return for this investment
to one decimal place. (3 mark)

(c) Comment on the use of these two net present values to estimate the internal rate of
return. (2 marks)

(10 marks)

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Question 88 PHOTOCOPY MACHINE

DCH Supplies Ltd needs to purchase a photocopying machine for its administration department. The
mode that seems to best fit their needs is available from the manufacturers at a retail price of £4,200.
On the chance that the company could save some money, the departmental manager made enquiries
regarding the availability of a second-hand model. One is available at a price of £2,700. After
inspection the departmental manager believes that the basic body of the machine is fine but is
suspicious that a main component, the central copying unit, would not be acceptable. From experience,
he felt there was a 0. probability that the main component would not be acceptable. A new central
copying unit would cost £2,400. After purchasing the second-hand photocopying machine, DCH might
find that the main component was not acceptable, and a new one would have to be purchased at this
price.

Required:

(a) (i) Represent the information in a decision tree. Use the method of expectation to
make a suitable recommendation to the departmental manager. (5 marks)

(ii) What other features should the departmental manager bear in mind when
making his decision? (2 marks)

(b) Prior to making a decision, the second-hand photocopying machine could be sent for a
thorough test to a local engineering firm. The charge for this test would be £200, but the
company would then know for certain whether the main component was acceptable or not.

Using the financial information only, advise the departmental manager on this
possibility. (5 marks)

(12 marks)

Question 89 THE ALTERNATIVE SUSTENANCE CO

The Alternative Sustenance Company is considering introducing a new franchised product, Wholefood
Waffles.

Existing ovens now used for making some of the present “Half-Baked” range of products could be used
instead for Wholefood Waffles. However, new special batch-mixing equipment would be needed. This
cannot be purchased, but can be hired from the franchiser in three alternative specifications, for batch
sizes of 200, 300 and 600 units. The annual cost of hiring the mixing equipment would be £5,000,
£15,000 and £21,500 respectively.

The “Half-Baked” product, which would be dropped from the range, currently earns a contribution of
£90,000 per annum, which it is confidently expected could be continued if the product were retained in
the range.

The company’s marketing manager considers that, at the market price for Wholefood Waffles of 40
pence per unit, it is equally probable that the demand for this product would be 600,000 or 1,000,000
units per annum.

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The company’s production manager has estimated the variable costs per unit of making Wholefood
Waffles, and the probabilities of those costs being incurred, as follows.

Batch size 200 units 300 units 600 units 600 units
Probability if Probability if Probability if Probability if
annual sales annual sales annual sales annual sales
are either are either are 600,000 are 1,000,000
600,000 or 600,000 or units units
1,000,000 units 1,000,000 units
Cost per unit (pence)
20 0.1 0.2 0.3 0.5
25 0.1 0.5 0.1 0.2
30 0.8 0.3 0.6 0.3

Required:

(a) Draw a decision tree setting out the problem faced by the company. (7 marks)

(b) Show in each of the following two independent situations which size of mixing machine,
if any, the company should hire:

(i) to maximise the expected value of contribution per annum, and

(ii) to minimise the probability of earning an annual contribution of less than £100,000.
(9 marks)

(c) Outline briefly the strengths and limitations of the methods of analysis which you have
used in parts (a) and (b) above. (4 marks)

(20 marks)

Question 90 VITELLIUS VEHICLES LTD

Vitellius Vehicles Ltd is trying to decide whether or not to buy a paint-spraying plant with a view to
expanding its current vehicle repair business. The plant will cost £35,000 to buy and install but could
be sold, net of removal costs, for £18,000 after one year or £10,000 after two years. Thereafter any
scrap proceeds would just cover the cost of dismantling and removal.

The firm intends to concentrate on quick-service, complete re-sprays at very competitive prices. It will
charge £200 per car, and estimates that direct costs (paint, labour, power) will be £70 per car. Fixed
costs (rental of additional space, indirect labour) are expected to amount to £50,000 a year.

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The above figures are thought to be fairly certain, although a degree of uncertainty exists over the likely
demand for re-sprays. The firm would only purchase the plant if the venture had a three-year payback
period. Current estimates for demand are as follows.

Year 1 Year 2 Year 3

Demand Probability Demand Probability Demand Probability
1,200 0.40 1,250 0.75 1,200 1.00
——
750 0.25 750 0.80
500 0.20
—— ——
1.00 1.00
—— ——

500 0.60 500 0.50 500 1.00

——

300 0.50 250 0.70

150 0.30
—— —— ——
1.00 1.00 1.00
—— —— ——

Required:

(a) Draw a decision tree and use it to find whether the investment in the spraying plant is
worthwhile. (12 marks)

(b) Determine how sensitive the decision is to the initial probabilities of high and low
demand. (3 marks)

(15 marks)

Question 91 MARKET SEGMENTS

A retailer, with a chain of stores, is reviewing business performance across three major market
segments:

Sales (per period):

Market A £96.5m (at an average price of £2.718/unit)

Market B £198.2m (at an average price of £1.810/unit)
Market C £166.7m (at an average price of £3.823/unit)

Gross Profit Margin (gross profit = sales less bought-in product cost):

Market A 42.7%
Market B 45.3%
Market C 47.4%

Variable Operating Costs:

£0.29/unit + 10.8% of sales value

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Fixed Costs (per period):

£81.4m, including £49.0m for the cost of occupying floor space in stores which is allocated:

Market A £14.6m
Market B £16.7m
Market C £17.7m

The remainder of the fixed costs are allocated to markets on the basis of sales value.

Required:

(a) Calculate the profitability of each market segment, net of a full allocation of costs (all
calculations should be to one decimal place of £m). (6 marks)

(b) Comment upon the market performance. (5 marks)

(c) Calculate the break-even sales value for a period based on the existing market mix.
(3 marks)

(d) Discuss the factors which should influence the allocation of costs to each market.
(6 marks)

(20 marks)

Question 92 ROCKINGHAM HOSPITAL LTD

A new private hospital of 100 beds was opened to receive patients on 2 January 2001 although many
senior staff members, including the supervisor of the laundry department, had been in situ for some
time previously. The first three months were expected to be a settling-in period, the hospital facilities
being used to full capacity only in the second and subsequent quarters.

On 1 May 2001 the supervisor of the laundry department received her first quarterly performance report
from the hospital administrator, together with an explanatory memorandum. Copies of both documents
are set out below.

The supervisor had never seen the original budget, nor had she been informed that there would be a
quarterly performance report. She knew she was responsible for her department and had made every
endeavour to run it as efficiently as possible. It had been made clear to her that there would be a slow
build-up in the number of patients accepted by the hospital and so she would need only three members
of staff, but she had had to take on a fourth during the quarter due to the extra work. This extra hiring
had been anticipated for May, not late February.

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Rockingham Private Patients Hospital Ltd

Memorandum

To All department heads/supervisors

From Hospital administrator
Date 30 April 2001

Attached is the quarterly performance report for your department. The hospital has adopted a
responsibility accounting system so you will be receiving one of these reports quarterly. Responsibility
accounting means that you are accountable for ensuring that the expenses of running your department
are kept in line with the budget. Each report compares the actual expenses of running your department
for the quarter with our budget for the same period. The difference between the actual and forecast will
be highlighted so that you can identify the important variations from budget and take corrective action
to get back on budget. Any variation in excess of 5% from budget should be investigated and an
explanatory memorandum sent to me giving reasons for the variations and the proposed corrective
actions.

Performance report – Laundry department

Three months to 31 March 2001

Actual Budget Variation %

(over) variation
under
Patient days 8,000 6,500 (1,500) (23.0)
Weight of laundry processed (lbs) 101,170 81,250 (19,920) (24.5)
———– ——— ——— ——–

Department expenses £ £ £ %
Wages 4,125 3,450 (675) (19.5)
Supervisor salary 1,490 1,495 5 –
Washing materials 920 770 (150) (19.5)
Heating and power 560 510 (50) (10.0)
Equipment depreciation 250 250 – –
Allocated administration costs 2,460 2,000 (460) (23.0)
Equipment maintenance 10 45 35 78.0
——— ——— ——— ——–
9,815 8,520 (1,295) (15.0)
——— ——— ——— ——–

Comment. We need to have a discussion about the over-expenditure of the department.

Required:

(a) Identify and briefly describe FOUR features of the way that the laundry supervisor’s
budget was prepared and the form and content of the performance report that might
affect her behaviour. (6 marks)

(b) Explain THREE ways in which the laundry supervisor’s behaviour might be affected.
(6 marks)

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(c) Re-draft, giving explanations, the performance report and supporting memorandum
in a way which, in your opinion, would make them more effective management tools.
(8 marks)

(20 marks)
Question 93 OSBORNE LTD

Osborne Ltd is a subsidiary of Butler Ltd, which operates a decentralised system of management.

Group companies have control over their own working capital and make proposals to the main board
for capital expenditure projects. They are appraised by reference to two measures as follows.

(1) Return on investment, where a minimum return of 12% is expected

(2) Residual income, which must be positive.

Extracts from the 2000 accounts of Osborne Ltd yield the following information.

Balance sheet
£000
Fixed assets
Land and buildings 2,000
Plant and machinery 1,200
Fixtures and fittings 300
Current assets
Stock 800
Debtors 500
Cash 100
Current liabilities
Trade creditors 400
Other creditors 200
Long-term loan 1,000

Profit and loss account

£000
Turnover 8,500
Cost of sales 5,300
Controllable overheads 1,700
Non-controllable overheads 950
Head office recharge 700

A project, involving an investment of £840,000 financed by an increase in the company’s loan, is under
discussion by the board of Osborne Ltd.

The project is expected to last three years, at the end of which there will be no scrap proceeds. Net cash
flows are expected as follows.

Year Flow
1 300,000
2 600,000
3 700,000

The finance director, Mr Rhodes, says “We must go for this project. It has a positive net present value
and enhances both ROI and RI of the company”.

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The managing director of Osborne Ltd, Mr Iommi, whose bonus is linked to the division achieving its
targets and is due to retire at the end of next year, is not so sure.

Required:

(a) Establish whether the company will achieve its two performance targets for 2000.
(4 marks)

(b) Assuming that (with the exception of changes resulting from acceptance of the proposed
project) the profitability and assets employed by Osborne Ltd will be constant for the
foreseeable future, show why Mr Iommi might be reluctant about accepting the project.
(6 marks)

(10 marks)

Question 94 CP DIVISION

The CP Division of R plc had budgeted a net profit before tax of £3 million per annum over the period
of the foreseeable future, based on a net capital employed of £10 million.

Plant replacement anticipated over this period is expected to be approximately equal to the annual
depreciation each year. These figures compare well with the organisation’s required rate of return of
20% before tax. CP Division uses straight line depreciation.

CP’s management is currently considering a substantial expansion of its manufacturing capacity to cope
with the forecast demands of a new customer. The customer is prepared to offer a five year contract
providing CP with annual sales of £2 million. In order to meet this contract, a total additional capacity
outlay of £2 million is envisaged, being £1.5 million of new fixed assets plus £0.5 million working
capital. A five year plant life is expected.

Operating costs on the contract are estimated to be £1.35 million per annum, excluding depreciation.

This is considered to be a low risk venture, as the contract would be firm for five years and the
manufacturing processes are well understood within CP.

Required:

Calculate the impact of accepting the contract on the CP divisional return on capital employed
(ROCE) and residual income (RI), indicating whether it would be attractive to CP’s management.

Note: ROCE and RI should be calculated for each year of the contract’s life. (8 marks)

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Question 95 COST INFLATION

The following information is available for a company:

Year 1 Year 2 Year 3 Year 4

Sales/production (units) 67,200 71,300 75,600 75,100
Total costs (£) 135,000 144,072 156,090 158,950
Cost inflation index 100 103·5 107·5 110·0

Required:

(a) Determine a linear function for total costs per annum (at Year 1 prices) from the above
data, using the high-low method (unit costs should be calculated to three decimal places
of £). (5 marks)

(b) Using the function in (a) and the data above, evaluate and comment upon the accuracy
of the function as a predictor of costs. (5 marks)

(c) Using the function in (a), forecast the total costs in Year 5 based on a volume of 77,200
units and a cost inflation index of 112·9. (2 marks)

(d) Selling prices in Year 5 are expected to be 15% higher than those in Year 1, when total sales
revenue was £159,936.

Draw a profit-volume chart for Year 5, showing sales up to 90,000 units per annum.
(8 marks)

(20 marks)

Question 96 FOUR PRODUCTS

(a) Sales of a company’s four products for the last two years have been:

Quantity (units) Average Price (£/unit)

Year 1 Year 2 Year 1 Year 2
Product W 62,013 68,118 2.10 2.15
Product X 128,508 126,126 2.50 2.59
Product Y 130,610 131,815 1.16 1.22
Product Z 207,613 214,755 1.80 1.86

Required:

Calculate the Laspeyres price index for Year 2 based on Year 1. (6 marks)

(b) Sales of Product X over the last four years have been:

Year 1 £273,691
Year 2 £293,379
Year 3 £321,270
Year 4 £326,666

Annual price inflation of the product over the same period has been:

From Year 1 to Year 2 3.0%

From Year 2 to Year 3 2.5%
From Year 3 to Year 4 3.6%

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Required:

Calculate the index number series of annual sales volume for Product X for Years 1 to 4.
(using Year 1 as the base). (6 marks)

(c) Describe the key difference between Laspeyres and Paasche price index formulae and
explain the implications for the calculation and use of such indices. (8 marks)

(20 marks)

Question 97 ACE, BASE AND CASE

A company manufactures and sells three products, A, B and C. Sales data for the three products over
the last four periods is set out below:

Product A Product B Product C

Sales Sales Sales Sales Sales Sales
volume value volume value volume value
units £ units £ units £
Period 1 20,200 15,352 51,320 61,584 10,400 16,848
Period 2 16,360 13,088 52,100 66,688 12,080 20,536
Period 3 15,100 12,382 57,300 76,209 15,960 27,930
Period 4 16,200 13,770 57,530 80,542 22,725 40,905

Required:

(a) Calculate the base weighted (Laspeyre) sales price index for Period 4 based on Period 1.
(5 marks)

(b) Calculate the current weighted (Paasche) sales quantity index for Period 4 based on
Period 3. (4 marks)

(c) Outline the factors relevant to the choice between base weighted and current weighted
indices. (5 marks)

(14 marks)

Question 98 WEIGHTED INDEX

(a) Explain the term “weighted index”. (5 marks)

(b) The following information relates to three products sold by a company over a five year
period:

Year 1 Year 5
000 units Selling price 000 units Selling price
sold per unit sold per unit
Product A 76 0.60 72 0.78
Product B 52 0.75 60 1.00
Product C 28 1.10 40 1.32

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Required:

(i) Calculate the percentage increase in total sales revenue over the period.
(2 marks)

(ii) Calculate the Laspeyres price index for Year 5 based on Year 1. (3 marks)

(iii) Provide an explanation of the change in sales over the period, using the
answers to (b)(i) and (ii) above. (5 marks)

(15 marks)

Question 99 JIM

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 Jim’s wage increase Retail Price Average Earnings

on prior year Index Index
%
1998 – 157·5 108·0
1999 5·0 162·9 113·5
2000 3·0 165·4 119·0
2001 4·0 170·3 124·4

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 Jim’s 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 Jim’s weekly earnings in each year in year
2001 terms using:

(i) the Retail Price Index (RPI); and

(ii) the Average Earnings Index (AEI).

Your calculations should be to one decimal place. (4 marks)

(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)

Question 100 IT TERMS

Explain briefly the meaning and role of the following in the context of information technology:

(a) ROM
(b) RAM
(c) CPU.
(6 marks)

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