1.24MA

MA0609 1 [Turn over

Special placesThere are particular places which mean a lot to us – our own secret places where we can be ourselves, places we have visited that give us happy memories. These could be places such as the local park, your school or church, the town hall or the corner shop.

* Could you visit a place that is special to you and record what you have seen to produce a 3-D structure perhaps using scrap materials?

* People often visit market stalls, car boot sales, auctions, shops selling old clothes and junk. How could you record the “buzz’ you might experience in such a place?

* Is there somewhere special in the town or the country you could visit – a playground or a park, woodland or a river, a church or a castle? could you design an exciting website, a poster or a brochure to advertise this special place?

References: Nancy Ross – ‘Dolls at an Outdoor Market’; Andy Warhol – ‘Purple Cow Stamps’; Barbara Mock – ‘Pansy Teacup’; Cindy Thornton – ‘Glass Bottles’; Catherine Wood – ‘Books’; Cassie Haynes – ‘Clocks Clocks Clocks’; Nelly Boyd – ‘Car Boot Sale, Colliers Wood, London’; David Hockney – ‘Art Car’; Arthur Madderson – ‘The Night Market’; Barry Orr – ‘The Antiques gallery’; The ‘Biba’ Colletion Special Logo Publicity Material; William conor – ‘Street Games’; Claude Monet – ‘Rouen Cathedral’.

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Answer any FOUR questions

Q1 A company is considering investing in either Project Alpha or Project Beta. Relevant financial information is as follows:

Project Alpha Project Beta $ $

Initial capital cost of equipment 52,000 100,000

Estimated net annual cash inflows:

Year 1 25,000 10,000 Year 2 20,000 36,000 Year 3 14,000 40,000 Year 4 4,000 42,000

Life of project 4 years 4 years

Anticipated re-sale value of equipment at the end of Year 4 12,000 nil

The company’s cost of capital is 8% and the applicable discount rates are as follows:

Year 1 0.926 Year 2 0.857 Year 3 0.794 Year 4 0.735

Required:

(a) Calculate, in years and months, the simple payback period for each project. Assume that there are 12 months in a year, that each month has 30 days and that annual cash flows occur at an even rate throughout the year. (4 marks)

(b) Calculate, to the nearest $1, the net present value of each project. Assume that net cash inflows are received at the end of each year and the anticipated re-sale value of equipment is achieved. (13 marks)

(c) Using only the results calculated in (b) above, recommend which project should be undertaken and give one reason for your recommendation. (4 marks)

(d) Give two disadvantages of using the simple payback method of appraisal when compared to the net present value method of appraisal. (4 marks)

(Total 25 marks)

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Q2 The following details relate to a shop which currently sells 40,000 pairs of shoes annually:

$ Selling price per pair of shoes 60 Buying price per pair of shoes 40

Total annual fixed costs:

$ Salaries and wages 200,000 Rent and rates 60,000 Other fixed costs 300,000

Required:

(a) Calculate, both in number of units sold and sales value, the: (i) Breakeven point (ii) Margin of safety (8 marks)

Note: Required parts (b) to (d) are to be considered individually and are not related to each other.

(b) Calculate the shop’s profit or loss if 26,500 pairs of shoes were sold during a year.

(5 marks)

(c) Calculate how many pairs of shoes would need to be sold if a sales commission of $2 per pair of shoes was paid in addition to other costs and the owner required a net profit of $240,100. (2 marks)

(d) Calculate how many pairs of shoes would need to be sold to breakeven if an advertising campaign costing $20,000 was undertaken while, at the same time, selling prices were increased by 15%. (2 marks)

(e) Explain what is meant by each of the following terms and give one example of each: (i) Fixed cost (ii) Variable cost (8 marks)

(Total 25 marks)

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Q3 ABC Ltd has two production departments, a Machine Shop and an Assembly Shop, and three service departments, Stores, Engineering Service and General Services. The Engineering Service Department serves the Machine Shop only.

The following data has been provided:

Departments Book Value Area Effective Production Capacity of Machinery (sq m) Horse Direct Machine $ Power Labour Hours % Hours Production: Machine Shop 210,000 11,000 85 350,000 90,000 Assembly Shop 30,000 8,000 5 300,000 -

Service: Stores 12,000 2,000 - Engineering Service 36,000 2,500 10 General Services 12,000 1,500 - ––––––– –––––– ––– 300,000 25,000 100 ––––––– –––––– –––

The annual budgeted overhead costs for the year are:

Indirect Consumable Wages Supplies $ $ Machine Shop 88,580 30,800 Assembly Shop 16,220 4,200 Stores 8,200 2,800 Engineering Service 5,340 4,000 General Services 7,340 3,400 –––––– –––––– 125,680 45,200 –––––– ––––––

$ Depreciation of machinery 44,000 Insurance of machinery 8,000 Insurance of building 3,600 (Note 1) Power 7,200 Light and heat 6,000 Rent and rates 14,100 (Note 2)

Notes:

(1) Because of certain fi re risks, the Machine Shop is responsible for a special loading of insurance on the building. This results in a total building insurance cost for the Machine Shop of 50% of the annual premium.

(2) The General Services Department is located in a building owned by the company. This building is valued at $80,000 and is charged into costs at a notional rental value of 6% per annum. This cost is additional to the rent and rates shown above.

(3) The values of issues of materials to the production departments are in the same proportions as shown above for consumable supplies.


Required:

(a) Prepare and complete an overhead analysis sheet showing the bases of any apportionments of overhead to departments. (20 marks)

(b) Calculate suitable overhead absorption rates for the production departments. No service department costs are to be apportioned amongst other service departments.

(2 marks)

(c) The following information relates to Job 149 undertaken by ABC Ltd on behalf of a customer:

$ Direct materials 35,000 Direct labour 62,000 Time spent in Machine Shop 10 machine hours Time spent in Assembly Shop 8 labour hours Profit mark-up decided upon by ABC Ltd 50%

Required:

Calculate the total price to be charged to the customer by ABC Ltd in respect of Job 149.(3 marks)

(Total 25 marks)

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Q4 Royce Ltd manufactures and sells a single product. The selling price of each product is $48 and each product has the following unit cost:

$ Direct material 8 Direct labour 4 Variable production overhead 8 Fixed production overhead 12 –– 32 ––

Administration costs amount to $80,000 per annum.

Royce Ltd achieved the following production and sales figures:

Year ended 31 December 2006 2007 2008 000 000 000 Units produced 100 110 90 Units sold 90 110 95

Additional information:

(1) Fixed production overhead per unit is calculated on the basis of a budgeted production volume of 90,000 units.

(2) There was no opening stock at 1 January 2006.

(3) There were no differences between actual and standard costs or selling prices.

Required:

(a) Prepare a profit statement for each of the three years, using marginal costing.(6 marks)

(b) Prepare a profit statement for each of the three years, using absorption costing.(7 marks)

(c) Reconcile the profit figures shown under marginal costing and absorption costing.

(4 marks)

(d) Describe two advantages of marginal costing. (4 marks)

(e) Describe two disadvantages of marginal costing. (4 marks)(Total 25 marks)


Q5 Foxtrot Ltd sells high quality chocolates and fl owers which it buys in bulk, packages and then distributes to customers. The following is a table of estimated revenues and their related costs for the period July 2009 to December 2009. Other costs are included in the notes below:

July Aug Sept Oct Nov Dec $000 $000 $000 $000 $000 $000

Sales of chocolates and fl owers 500 532 564 612 640 660 Purchases of chocolates and fl owers 250 266 282 306 320 330 Administration expenses 110 120 124 130 136 140 Packaging costs 4 6 6 6 8 8 Miscellaneous expenses 12 12 14 14 16 16 Loan repayments 100 - - - 100 -

Notes:

(1) Stocks of chocolates and fl owers at 1 July 2009 will amount to $500,000. Stocks at 31 December 2009 are estimated at $340,000.

(2) Suppliers allow one month’s credit. Purchases in June 2009 will total $120,000.

(3) 30% of sales are paid for in the month of sale. The remainder are paid for in the month following the month of sale. June 2009 sales are expected to be $280,000.

(4) Delivery costs are 1% of sales revenue each month, paid in the month in which they are incurred. Administration and miscellaneous expenses are also paid when they are incurred.

(5) Packaging expenses are paid two months after they are incurred. These costs were $2,000 in May 2009 and will be the same in June 2009.

(6) The bank charges interest of 1% per month for the overdraft, calculated on the closing balance each month, and payable the following month. The bank overdraft at 1 July 2009 is expected to be $310,000.

(7) Loan repayments refer to a bank loan which is interest free until January 2010.

(8) The business has no depreciable fi xed assets.

Required:

Making all calculations to the nearest $000, prepare for Foxtrot Ltd a:

(a) Monthly cash budget, in columnar form, for each of the six months to 31 December 2009, showing the cash balance at the end of each month. (17 marks)

(b) Budgeted Trading and Profi t & Loss Account for Foxtrot Ltd for the six month period ending 31 December 2009. A monthly Trading and Profi t & Loss Account is not required.

(8 marks)(Total 25 marks)

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Q6 A company manufactures and sells two types of refrigerators, details of which are as follows:

Refrigerator A B Projected annual sales in units 100,000 400,000 Selling price per unit $100 $200

Costs as a percentage of selling price:

Raw material 25% 40% Direct labour 25% 20% Overheads 25% 20%

Working capital information:

Average debtors collection period 4 weeks 6 weeks Average raw material stock holding period 4 weeks 4 weeks Average work-in-progress holding period 2 weeks 4 weeks Average finished goods stock holding period 3 weeks 3 weeks Average raw material supplier credit 6 weeks 5 weeks Average period of credit on overhead expenses 4 weeks 4 weeks Average period of credit on direct labour 1 week 1 week


(1) All raw materials are input at the start of the production process.

(2) Work-in-progress is valued as follows:

Raw material 100% Labour 50% Overhead 50%

(3) Production and sales are spread evenly over the year and production volume is expected to equal sales volume.

Required:

(a) Calculate the estimated average working capital required, assuming a 52 week year. All workings should be to the nearest $000. (19 marks)

(b) Stock is frequently a high value component of working capital and needs strict monitoring. To achieve this, companies often use the economic order quantity (EOQ) as a means of control.

Name three assumptions that are made when calculating the economic order quantity for a stock item. (6 marks)

(Total 25 marks)


Q7 The investigation of variances is an integral part of a standard costing system.

(a) Explain what is meant by each of the following terms: (i) Direct labour rate variance (ii) Direct labour effi ciency variance (iii) Direct material price variance (iv) Direct material usage variance (8 marks)

(b) Explain why a favourable labour rate variance might also lead to an adverse labour effi ciency variance. (2 marks)

(c) Explain why an adverse material price variance might also lead to a favourable material usage variance. (2 marks)

(d) Activity based costing (ABC) has been defi ned as “an approach to the costing and monitoring of activities which involves identifying the activities that are responsible for the generation of costs”.

State two advantages and two disadvantages of using ABC. (4 marks)

(e) The valuation of work-in-progress is an important part of process costing.

Explain what is meant by the term Equivalent Units in relation to process costing.(2 marks)

(f) A company starts to manufacture on 1 April 2009. During the month of April the company commences the production of 40,000 units. At the end of April there are 3,000 units still in process.


(1) All materials have been input to the process.

(2) Work-in-progress is only one-third complete as regards labour.

(3) Costs for the period are: materials $20,000 and labour $19,000.

Required:

Calculate both the cost of fi nished production and the cost of work-in-progress.(7 marks)

(Total 25 marks)

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Q8 The following financial statements relate to Blue Ltd:

Trading and Profit & Loss Account for the year ended 31 December 2008

$000 Sales 900 Less: cost of sales 400 ––– Gross profit 500 Less: expenses 283 ––– Net profit 217 –––

–––

Balance Sheet at 31 December 2008

$000 $000 Fixed assets 550

Current Assets: Stock 80 Trade debtors 250 Bank 90 ––– 420 Liabilities due within 1 year: Trade creditors 120 ––– Net current assets 300 ––– 850 Liabilities due after more than 1 year: 6% debentures 200 ––– 650 –––

–––

Capital and reserves: Ordinary shares of $1 each 400 Retained profits 250 ––– 650 –––

–––

Note: Stock at 1 January 2008 was $60,000.


Required:

(a) Calculate the following ratios for Blue Ltd for the year ended 31 December 2008:

(i) Creditors’ payment period in days, using cost of sales. All purchases are made on credit.

(ii) Rate of stock-turnover using average stock. Give your answer in times not days. (iii) Current/working capital ratio. (iv) Liquidity/acid test ratio. (v) Debtors’ collection period in days. All sales are made on credit. (10 marks)

(b) Calculate the value of purchases for the year ended 31 December 2008. (4 marks)

(c) With reference to the rate of stock turnover only, state whether Blue Ltd is more likely to be a supplier of durable goods or fresh produce. Give one reason for your answer.

(3 marks)

(d) State what the current/working capital ratio measures. (2 marks)

(e) Explain why the liquidity/acid test ratio is often considered more meaningful than the current/working capital ratio. (2 marks)

(f) Describe two ways in which Blue Ltd might reduce its debtors’ collection period. (4 marks)

(Total 25 marks)

End of Question Paper

MA0609 12

Diploma

Managerial Accounting

Examiner’s Suggested Answers

Q1 (a) Project Alpha Project Beta $ $ Outlay 52,000 100,000

Receipts $ Year 1 25,000 12 months 10,000 12 months 2 20,000 12 months 36,000 12 months 3 7,000/14,000 6 months 40,000 12 months 4 14,000/42,000 4 months Total 2 years and 6 months 3 years and 4 months

(b) Project Project Alpha Beta Year Value Discount NPV Value NPV $ $ $ $ 1 25,000 0.926 23,150 10,000 9,260 2 20,000 0.857 17,140 36,000 30,852 3 14,000 0.794 11,116 40,000 31,760 4 4,000 0.735 2,940 42,000 30,870 4 12,000 0.735 8,820 –––––– ––––––– 63,166 102,742

Less: initial expenditure 52,000 100,000 –––––– ––––––– Net Present Value 11,166 2,742 –––––– –––––––

(c) Project Alpha should be undertaken.

Although both projects have a positive net present value, Project Beta has a return of 2.74% as a percentage of the initial capital expenditure. Project Alpha has a return of 21.47%.

(d) (1) Payback ignores the time value of money. Two projects could have identical payback periods although one project might receive greater inflows of cash earlier in the process than the other project.

(2) Payback ignores the cash flows arising after the payback period has passed.

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Q2 (a) Units Sales Price Value $ $ (i) Fixed costs

Contribution (60 - 40) 560,000

20 28,000 60 1,680,000

(ii) Unit sales - breakeven (40,000 - 28,000) 12,000 60 720,000

(b) Value $ 26,500 x 20 contribution 530,000 Less: fixed costs 560,000 ––––––– Loss 30,000 –––––––

Units (c) Fixed costs (560,000 + 240,100)

Contribution (60 - 40 - 2)800,100

18 44,450 pairs of shoes

(d) Fixed costs (560,000 + 20,000)

Contribution (([60 x 1.15] - 40)580,000

29 20,000 pairs of shoes

(e) (i) Fixed cost: A cost that is not affected in total by the level of activity, but remains the same amount regardless of how much or how little work is undertaken in a period.

Example: Factory rent

(ii) Variable cost: A cost that changes in total in direct proportion to the level of activity. If an item is not manufactured or a service not undertaken a variable cost is not incurred.

Example: Direct materials

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Q3 (a) Total Basis Machine Assembly Stores Eng General Shop Service Service $ $ $ $ $ $

Indirect wages 125,680 Allocated 88,580 16,220 8,200 5,340 7,340 Consumable supplies 45,200 Allocated 30,800 4,200 2,800 4,000 3,400 Depreciation of machinery 44,000 Book value 30,800 4,400 1,760 5,280 1,760 Insurance of machinery 8,000 Book value 5,600 800 320 960 320 Insurance of building 1,800 Allocated 1,800 1,800 Floor area (exc machine shop) 1,029 257 321 193 Power 7,200 HP hours 6,120 360 720 Light and heat 6,000 Floor area 2,640 1,920 480 600 360 Rent and rates 14,100 Floor area (exc general services) 6,600 4,800 1,200 1,500 Notional rent 4,800 4,800 ––––––– ––––––– –––––– –––––– –––––– –––––– 258,580 172,940 33,729 15,017 18,721 18,173 ––––––– Apportionment of service departments Stores (consumable supplies) 13,215 1,802 -15,017 Eng Service (machine hours) 18,721 -18,721 General Service (direct labour) 9,785 8,388 -18,173 ––––––– –––––– ––––––– –––––– –––––– –––––– 258,580 214,661 43,919 ––––––– ––––––– –––––– –––––– –––––– ––––––

(b) Hourly Rate $ Machine shop overhead absorption rate

214,66190,000

2.39 per machine hour

Assembley overhead absorption rate

43,919300,000

0.15 per direct labour hour


(c) Job 149 $ Direct materials 35,000.00 Direct labour 62,000.00 Overheads: Machine shop (10 x 2.39) 23.90 Assembly (8 x 0.15) 1.20 ––––––––– 97,025.10 Mark-up (50%) 48,512.55 ––––––––– Total Price Charged 145,537.65 –––––––––

Q4 (a) Royce plc Profit Statement

Marginal costing 2006 2007 2008 $000 $000 $000 $000 $000 $000Sales 4,320 5,280 4,560 Opening stock @ $20 Nil 200 200 Production cost @ $20 2,000 2,200 1,800 ––––– ––––– ––––– 2,000 2,400 2,000 Less: Closing stock @ $20 200 200 100 ––––– ––––– –––––Cost of sales 1,800 2,200 1,900 ––––– ––––– –––––Contribution 2,520 3,080 2,660 Less: Production overhead (90k x $12) 1,080 1,080 1,080 Administration overhead 80 80 80 ––––– ––––– ––––– 1,160 1,160 1,160 ––––– ––––– –––––Profit 1,360 1,920 1,500 ––––– ––––– –––––

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(b) Absorption costing 2006 2007 2008 $000 $000 $000 $000 $000 $000Sales 4,320 5,280 4,560 Opening stock @ $32 Nil 320 320 Production cost @ $32 3,200 3,520 2,880 ––––– ––––– ––––– 3,200 3,840 3,200 Less: Closing stock @ $32 320 320 160 ––––– ––––– ––––– 2,880 3,520 3,040 ––––– ––––– –––––Standard profit on actual sales 1,440 1,760 1,520Over absorption (working) 120 240 Nil ––––– ––––– ––––– 1,560 2,000 1,520Less: Administration overhead 80 80 80 ––––– ––––– –––––Profit 1,480 1,920 1,440 ––––– ––––– –––––

Working 2006 2007 2008 $000 $000 $000 Fixed production overhead (90,000 x 12) 1,080 1,080 1,080 Recovered production overhead (units x 12) 1,200 1,320 1,080 ––––– ––––– ––––– Over recovered 120 240 nil ––––– ––––– –––––

(c) Reconciliation 2006 2007 2008 $000 $000 $000 Profit per marginal costing 1,360 1,920 1,500

Add: Increase in fixed overhead included in stock under absorption costing (10,000 x 12) 120

Less: Decrease in fixed overhead included in stock under absorption costing (5,000 x 12) -60 ––––– ––––– ––––– Profit per absorption costing 1,480 1,920 1,440 ––––– ––––– –––––


(d) Advantages of marginal costing: Any two relevant points e.g.

(1) It is simple to understand and apply. (2) It concentrates on the controllable aspects of business by separating fi xed and

variable costs. (3) It is a useful short-term survival technique in a competitive environment or

where a recession is being experienced. In such circumstances orders may be accepted as long as there is spare capacity and variable costs are covered. Any contribution will be offset against fi xed costs so that losses are kept to a minimum.

(e) Disadvantages of marginal costing: Any two relevant points e.g.

(1) Marginal costing tends to make use of historical data whilst management decisions relate to the future.

(2) It is often diffi cult to classify fi xed and variable costs. This is especially so when some costs may be classifi ed as semi-variable whilst fi xed costs may have to be stepped.

(3) It is not a good technique in the long run for pricing decisions as it ignores fi xed costs. Ultimately management has to consider the total costs and not simply the variable costs.

Q5 (a) Foxtrot Ltd - Cash budget

July Aug Sept Oct Nov Dec

$000 $000 $000 $000 $000 $000

Receipts

Sales (W1) 346 510 541 579 620 646 ––– ––– ––– ––– ––– ––– 346 510 541 579 620 646 ––– ––– ––– ––– ––– –––

Payments

Purchases 120 250 266 282 306 320 Delivery costs 5 5 6 6 6 7 Administration 110 120 124 130 136 140 Packaging 2 2 4 6 6 6 Miscellaneous 12 12 14 14 16 16 Loan repayments 100 100 Overdraft interest 3 3 2 1

––– ––– ––– ––– ––– ––– 352 392 416 439 570 489

––– ––– ––– ––– ––– ––– Net cash fl ow - 6 118 125 140 50 157 Opening balance -310 -316 -198 -73 67 117 ––– ––– ––– ––– ––– ––– Closing balance -316 -198 -73 67 117 274 ––– ––– ––– ––– ––– –––

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(W1) June July Aug Sept Oct Nov Dec $000 $000 $000 $000 $000 $000 $000 Sales 280 500 532 564 612 640 660 Cash sales (30% of current month) 150 160 169 184 192 198 Credit sales (70% of previous month) 196 350 372 395 428 448 ––– ––– ––– ––– ––– ––– 346 510 541 579 620 646 ––– ––– ––– ––– ––– –––

(b) Foxtrot Ltd Budgeted Trading and Profit & Loss Account for the six months ended 31 December 2009

$000 $000 Sales (W1) 3,508 Less Cost of sales Opening stock 500 Purchases (W2) 1,754 Packaging costs (W3) 38 ––––– 2,292 Less: Closing stock 340 ––––– 1,952 ––––– Gross Profit 1,556

Delivery costs (W4) 35 Administration expenses (W5) 760 Miscellaneous expenses (W6) 84 Overdraft interest (W7) 6 ––––– 885 ––––– Net Profit 671 –––––

July Aug Sept Oct Nov Dec Total W1 500 532 564 612 640 660 3,508 W2 250 266 282 306 320 330 1,754 W3 4 6 6 6 8 8 38 W4 5 5 6 6 6 7 35 W5 110 120 124 130 136 140 760 W6 12 12 14 14 16 16 84 W7 3 2 1 6


Q6 (a) Refrigerator A $000 $000 Debtors W1 769 Raw material stocks W2 192 Work-in-progress W3 192 Finished goods W4 433 –––––– 1,586 Less: Trade creditors W5 288 Overhead creditors W6 192 Payroll creditors W7 48 ––––– 528 –––––– Net working capital 1,058 ––––––

Refrigerator B $000 $000 Debtors W1 9,230 Raw material stocks W2 2,462 Work-in-progress W3 3,692 Finished goods W4 3,692 –––––– 19,076 Less: Trade creditors W5 3,076 Overhead creditors W6 1,231 Payroll creditors W7 308 ––––– 4,615 –––––– 14,461 ––––––

Alternative

$000 $000 Debtors W1 9,999 Raw material stocks W2 2,654 Work-in-progress W3 3,884 Finished goods W4 4,125 –––––– 20,662 Less: Trade creditors W5 3,364 Overhead creditors W6 1,423 Payroll creditors W7 356 ––––– 5,143 –––––– 15,519 ––––––

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Refrigerator Refrigerator A B $000 $000 W1 W1

100,000 x 100 x 4 weeks52 weeks

769 400,000 x 00 x weeks52 weeks

2 6 9,230

W2 W2

100,000 x x weeks

52 weeks25 4

192 400,000 x x weeks52 weeks

80 4 2,462

W3 W3 25 + 12.5 + 12.5 = $50 per unit 80 + 20 + 20 = $120 per unit

100,000 x 50 x 2 weeks52 weeks

192 400,000 x 0 x weeks52 weeks

12 4 3,692

W4 W4 25 + 25 + 25 = $75 per unit 80 + 40 + 40 = $160 per unit


433 400,000 x 160 x 3 weeks52 weeks

3,692

W5 W5


288 400,000 x x weeks52 weeks

80 5 3,076

W6 W6


192 400,000 x 40 x 4 weeks52 weeks

1,231

W7 W7

100,000 x x week52 weeks

25 1 48 400,000 x x week52 weeks

40 1 308

(b) Any three appropriate answers e.g.

(1) There should be no stock-out of the item. (2) There should be no buffer stock. (3) A new delivery is received at the exact time that the existing stock runs out. (4) The stock item is used up at a predictable rate. (5) The delivery lead time from the supplier is both predictable and reliable.


Q7 (a) (i) This is the difference between the actual rate of pay for the hours worked and what those hours should have cost.

(ii) This is the difference between the standard hours for the actual production achieved and the hours actually worked. The result is then multiplied by the standard hourly rate of pay.

(iii) This is the difference between the standard price and the actual price for the quantity of material used.

(iv) This is the difference between the standard quantity of materials used for the actual units produced and the actual quantity used. The result is then multiplied by the standard purchase price per unit of material.

(b) Using less well trained or inexperienced staff might well lead to a job taking longer to complete than the standard requires. This would lead to an adverse efficiency variance. By using lower grade staff, however, the actual hourly rate paid may well be less thus leading to a favourable rate variance.

(c) Using a higher grade of raw material(s) costing more than the standard unit cost will lead to an adverse direct material price variance. A higher grade of raw material, however, might well lead to less usage due to a reduction in wastage/breakages. This would result in a favourable usage variance.

(d) Advantages of using ABC: Any two reasonable suggestions e.g.

(1) The unit costs will more accurately reflect the activities performed and therefore the resources used.

(2) A more accurate product cost should enable a company to concentrate on a more profitable mix of products and/or customers. ABC can be effective in identifying customers who are unprofitable to service and products which are unprofitable to produce.

(3) Managers, by focussing attention on cost drivers, will gain a better understanding of the costs of production and the costs of the activities performed by the business.

Disadvantages of using ABC: Any two reasonable suggestions e.g.

(1) ABC is a relatively new technique and, as such, is not frequently used. (2) ABC is costly and complex to set up. (3) It might well prove difficult to identify what the cost driver is for a given cost pool.

(e) The idea behind this concept is that if processing has started on a unit of output, but it is not yet finished, the incomplete unit can be expressed as a proportion of a completed unit.

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(f) Materials Labour Units Proportion Equiv Proportion Equiv Completed Units Completed Units

Completed 37,000 100% 37,000 100% 37,000 Work-in-progress 3,000 100% 3,000 33.33% 1,000 –––––– –––––– Total equivalent units 40,000 38,000 –––––– ––––––

Cost per equivalent unit 20,00040,000

= $0.50 Unit cost 19,00038,000

= $0.50 Unit cost

$ $ Total FP WIP $ Materials Finished production (37,000 x 0.50) 18,500 Cost of work-in-progress (3,000 x 0.50) 1,500

Labour Finished production (37,000 x 0.50) 18,500 Cost of work-in-progress (1,000 x 0.50) 500 –––––– ––––– –––––– 37,000 2,000 39,000 –––––– ––––– ––––––

Q8 (a) Workings Answer

Creditors’ payment period 120400

x 365 109.5 days

Rate of stock-turnover 40070*

5.71 times *(80 + 60)/2

Current ratio 420120

3.5:1

Liquidity ratio 420 - 80120

2.83:1

Debtors’ collection period 250900

x 365 101.39 days

(b) 400,000 + 80,000 - 60,000 = $420,000

(c) (1) Durable goods. (2) If fresh produce stock is turned over less than six times a year there will be a

great deal of wastage due to deterioration in the quality of the goods.


(d) The current ratio is one of the liquidity ratios and measures the ability of a business to pay its debts as they become due. The ratio compares the value of current assets (debtors, cash stock and bank etc.) to the value of current liabilities (creditors, overdraft, taxation etc.). A ratio of 3:1, for example, means that a company owns $3 of current assets for every $1 owed to third parties.

(e) The liquidity or acid test ratio is another one of the liquidity ratios. The only difference between this and the current ratio is that stock is not included in the total of current assets. The remaining current assets can either be considered cash or near cash whereas stock would fi rst have to be sold before it could be converted into cash or near cash. The liquidity ratio therefore demonstrates the ability of a business to make immediate payment when a liability becomes due rather than fi rst having to wait for stock to be turned into cash.

(f) Any two reasonable answers e.g. (1) Offer a settlement discount to debtors for early settlement. (2) Improve credit control procedures. (3) Consider moving to cash sales only. (4) Refuse future supplies to late paying debtors unless payment is made in

advance.

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Documents

1.24MA