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ACCA f2 topic wise question

ACCA | Paper F2 Topic-Wise
Past Papers
2001-2007

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Topic-Wise | Past exam Papers

ACCA
F2

2

Material
Costing

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3
1
A business currently orders 1,000 units of product X at a time. It has decided that it may be better to use
the Economic Order Quantity method to establish an optimal reorder quantity.
Information regarding stocks is given below:

Topic-Wise | Past exam Papers

Purchase price
Fixed cost per order
Holding cost
Annual demand

£15/unit
£200
8% of the purchase price per annum
12,000 units

Current annual total stock costs are £183,000, being the total of the purchasing, ordering and holding
costs of product X.
Required:
(a) Calculate the Economic Order Quantity.
(2 marks)
(b) Using your answer to (a) above calculate the revised annual total stock costs for product X and so
establish the difference compared to the current ordering policy.
(4 marks)
(c) List ways in which discounts might affect this Economic Order Quantity calculation and subsequent
stock costs.
(4 marks)
[Sec: B, Q: 4 F2 December 2003]

2
The following data for the current year relate to a sterile pack purchased by the Goodheart Hospital:
Annual demand


Annual holding cost per unit
Cost of placing an order

90,000 units
£8
£25

From the start of next year the cost of placing an order will rise by £11 but all the other data will remain
the same.
The hospital bases its purchasing decisions on the Economic Order Quantity (EOQ) model.
Required:
(a) Calculate the EOQ for:
(i) The current year
(ii) Next year.
(4 marks)
(b) Calculate the total extra annual cost to the hospital for next year of ordering and holding stock of the
sterile packs.
(4 marks)
(c) Identify TWO major costs associated with each of the following:
(i) Holding stock;
(ii) Ordering stock.
(2 marks)
[Sec: B, Q: 4 F2 December 2004]

3
Jane plc purchases its requirements for component RB at a price of £80 per unit. Its annual usage of
component RB is 8,760 units. The annual holding cost of one unit of component RB is 5% of its purchase
price and the cost of placing an order is £12·50.
Required:
(a) Calculate the economic order quantity (to the nearest unit) for component RB.
(2 marks)
(b) Assuming that usage of component RB is constant throughout the year (365 days) and that the lead
time from placing an order to its receipt is 21 days, calculate the stock level (in units) at which an order
should be placed.
(2 marks)
(c) (i) Explain the terms ‘stockout’ and ‘buffer stock’.
(ii) Briefly describe the circumstances in which Jane plc should consider having a buffer stock of
component RB.
(4 marks)
[Sec: B, Q: 3 F2 June 2005]

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4

Topic-Wise | Past exam Papers

4
Point Ltd uses the economic order quantity (EOQ) model to establish the reorder quantity for raw material
Y. The company holds no buffer stock. Information relating to raw material Y is as follows:
Annual usage 48,000 units
Purchase price £80 per unit
Ordering costs £120 per order
Annual holding costs 10% of the purchase price
Required:
(a) Calculate:
(i) the EOQ for raw material Y, and
(ii) the total annual cost of purchasing, ordering and holding stocks of raw material Y. (4 marks)
The supplier has offered Point Ltd a discount of 1% on the purchase price if each order placed is for
2,000 units.
(b) Calculate the total annual saving to Point Ltd of accepting this offer. (3 marks)
(c) List FOUR examples of holding costs. (2 marks)

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Topic-Wise | Past exam Papers

ACCA
F2

5

Overhead
Costing

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6
1
A business operates with two production centres and three service centres. Costs have been allocated
and apportioned to these centres as follows:
Production Centres

Topic-Wise | Past exam Papers

1
£2,000

2
£3,500

Service Centres
B
£500

A
£300

C
£700

Information regarding how the service centres work for each other and for the production centres is given
as:
Work done for:
Production Centres
Service Centres
1
2
A
B
C
By A
45%
45%

10%

By B
50%
20%
20%

10%
By C
60%
40%




Information concerning production requirements in the two production centres is as follows:

Units produced
Machine hours
Labour hours

Centre 1
1,500 units
3,000 hours
2,000 hours

Centre 2
2,000 units
4,500 hours
6,000 hours

Required:
(a) Using the reciprocal method calculate the total overheads in production centres 1 and 2 after
reapportionment of the service centre costs.
(7 marks)
(b) Using the most appropriate basis establish the overhead absorption rate for production centre 1. Briefly
explain the reason for your chosen absorption basis.
(3 marks)
[Sec: B, Q: 1 F2 December 2003]

2
Sangazure Ltd manufactures many different products in a factory that has two production cost centres (T
and W) and several service cost centres.
The total budgeted overhead costs (after the allocation, apportionment and reapportionment of service
cost centre costs), and other information for production cost centres T and W are as follows:
Cost centre Budgeted Basis of overhead Budgeted activity overheads absorption T £780,000 Machine
hours 16,250 machine hours
W £173,400 Direct labour hours 14,450 direct labour hours
Required:
(a) Calculate the overhead absorption rates for cost centres T and W.

(2 marks)

The prime cost of product PP, one of the products made by Sangazure Ltd, is as follows:
£ per unit
Direct material
10
Direct labour:
Cost centre T
14
Cost centre W
21
One unit of product PP takes 35 minutes of machine time in cost centre T. The direct labour in cost centre
T is paid £7 per hour and £6 per hour in cost centre W.
(b) Calculate the total production cost for one unit of PP.

(3 marks)

(c) Briefly explain why service cost centre costs need to be reapportioned to production cost centres. Which
method of reapportionment fully recognises the work that service cost centres do for each other? (3 marks)
[Sec: B, Q: 5 F2 December 2005]

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7
3
Phoebe Ltd manufactures many different products which pass through two production cost centres (P1
and P2).

Topic-Wise | Past exam Papers

There are also two service cost centres (S1 and S2) in the factory. The following information has been
extracted from the budget for the coming year:

Allocated and apportioned
production overheads
Number of employees
Total machine hours
Total direct labour hours

P1

P2

S1

S2

£477,550
30
68,000
4,000

£404,250
65
11,400
14,000

£132,000
10

£96,000
15

Service cost centre S1 costs are reapportioned to all other cost centres based on the number of
employees. Service cost centre S2 only does work for P1 and P2 and its costs are reapportioned to these
centres in the ratio 5:3 respectively.
Required:
(a) Calculate:
(i) The machine hour absorption rate for cost centre P1, and
(ii) The direct labour hour absorption rate for cost centre P2.
(6 marks)
(b) Explain the difference between production overheads that have been ‘allocated’ and those which have
been ‘apportioned’ to cost centres. Explain why some manufacturing companies are able to allocate electric
power costs to production cost centres, whereas others can only apportion them.
(3 marks)
[Sec: B, Q: 5 F2 December 2006]

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Topic-Wise | Past exam Papers

ACCA
F2

8

Job
Costing

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9
Sangazure Ltd manufactures many different products in a factory that has two production cost centres (T
and W) and several service cost centres.
The total budgeted overhead costs (after the allocation, apportionment and reapportionment of service
cost centre costs), and other information for production cost centres T and W are as follows:
Cost centre Budgeted Basis of overhead Budgeted activity overheads absorption T £780,000 Machine
hours 16,250 machine hours
W £173,400 Direct labour hours 14,450 direct labour hours
Required:

Topic-Wise | Past exam Papers

(a) Calculate the overhead absorption rates for cost centres T and W.

(2 marks)

The prime cost of product PP, one of the products made by Sangazure Ltd, is as follows:
£ per unit
Direct material
10
Direct labour:
Cost centre T
14
Cost centre W
21
One unit of product PP takes 35 minutes of machine time in cost centre T. The direct labour in cost centre
T is paid £7 per hour and £6 per hour in cost centre W.
(b) Calculate the total production cost for one unit of PP.

(3 marks)

(c) Briefly explain why service cost centre costs need to be reapportioned to production cost centres. Which
method of reapportionment fully recognises the work that service cost centres do for each other? (3 marks)

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Topic-Wise | Past exam Papers

ACCA
F2

10

Process
Costing

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11
1
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:

Topic-Wise | Past exam Papers

Opening work in progress
Closing work in progress
Normal loss
Output

100 units, 30% complete
200 units, 40% complete
10% of input valued at £2 per unit
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.
(b) Calculate the equivalent units for materials and conversion costs.
(c) Using your answer from (b) calculate the input costs.

(2 marks)
(4 marks)
(4 marks)
[Sec: B, Q: 5 F2 June 2002]

2
A business uses process costing to establish stock valuations and profitability of its products. Output from
the process consists of three separate products: two joint products and a by-product. Details of the
process are as follows:
Input costs:
Materials
Labour
Overheads

£45,625 for 12,500 kg
£29,500
£26,875

The process is expected to lose 20% of the input. This is sold for scrap for £4 per unit.
The following details relate to the output from the process:
Product
Type
% of output
Final sales
Further costs
value per unit
to complete
A
Joint
50%
£20
£10
B
Joint
40%
£25
C
By-product
10%
£2
Joint costs are allocated on the basis of net realisable value at split-off.
Required:
(a) Establish the total cost of the output from the process.
(b) Calculate the profit per unit for each of the joint products, A and B.

(4 marks)
(6 marks)
[Sec: B, Q: 2 F2 June 2003]

3
Duddon Ltd makes a product that has to pass through two manufacturing processes, I and II. All the
material is input at the start of process I. No losses occur in process I but there is a normal loss in process
II equal to 7% of the input into that process. Losses have no realisable value.
Process I is operated only in the first part of every month followed by process II in the second part of the
month. All completed production from process I is transferred into process II in the same month. There is
no work in progress in process II.

Information for last month for each process is as follows:

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12

Topic-Wise | Past exam Papers

Process I
Opening work in progress
Input into the process
Conversion costs incurred
Closing work in progress

200 units (40% complete for conversion costs)
valued in total at £16,500
1,900 units with a material cost of £133,000
£93,500
50% complete for conversion costs

Process II
Transfer from process I
Conversion costs incurred

1,800 units
£78,450

1,650 completed units were transferred to the finished goods warehouse.
Required:
(a) Calculate for process I:
(i) The value of the closing work in progress; and
(ii) The total value of the units transferred to process II.
(b) Prepare the process II account for last month.
(c) Identify TWO main differences between process costing and job costing.

(4 marks)
(4 marks)
(2 marks)
[Sec: B, Q: 1 F2 June 2004]

4
Maybud Ltd operates Process X which creates two joint products, A and B, in the ratio of 3:2 by volume.
There is no work in progress. The following information relates to Process X for last month:
(i) 80,000 litres of raw materials with a total cost of £158,800 were input into the process and conversion
costs were £133,000.
(ii) A normal process loss of 5% of the input was expected. An actual loss of 5,500 litres was identified at
the end of the process. Losses have a realisable value of 75p per litre.
It is company policy to apportion joint costs to products using the net realisable value method. After
Process X, both product A and product B are further processed at a cost of £2 per litre and £3 per litre
respectively.
The final selling prices of the products are as follows:
Product
£ per litre
A
8
B
12
Required:
(a) Prepare the process account for last month including the output volume and cost of products A and B
separately.
(7 marks)
(b) Explain clearly how an abnormal gain arises in a process. Indicate where it would appear in a process
account and how it would be valued.
(3 marks)
[Sec: B, Q: 1 F2 December 2004]

5
Saphir Ltd operates a process which creates two joint products, X and Y, in the ratio of 7 : 5 by weight.
No stocks of work in progress are held in the process and there is a normal process loss equal to 5% of
input. Losses have a realisable value of £2 per kg.
The following information relates to the process for last month:
10,000 kg of raw materials with a total cost of £18,750 were input into the process and the direct labour
costs were £50,000. Overheads were absorbed at a rate of 140% of direct labour. The actual loss was
400 kg.
Joint production costs are apportioned to products using the sales value method. Selling prices of the
joint products are:

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13
Product
X
Y

Selling price per unit
£25·00
£37·50

Required:
(a) Prepare the process account for last month in which both the output weight and value for each of the joint
products are shown.
(8 marks)
(b) Explain briefly the characteristics of a by-product.
(2 marks)
[Sec: B, Q: 1 F2 June 2005]

Topic-Wise | Past exam Papers

6
Partlet Ltd makes a product that passes through two manufacturing processes. A normal loss equal to 8%
of the rawmaterial input occurs in Process I but no loss occurs in Process II. Losses have no realisable
value.
All the raw material required to make the product is input at the start of Process I. The output from
Process I each month is input into Process II in the same month. Work in progress occurs in Process II
only.
Information for last month for each process is as follows:
Process I
Raw material input
Conversion costs
Output to Process II

50,000 litres at a cost of £365,000
£256,000
47,000 litres

Process II
Opening work in progress
Conversion costs
Closing work in progress

5,000 litres (40% complete for conversion costs) valued at £80,000
£392,000
2,000 litres (50% complete for conversion costs)

Required:
(a) Prepare the Process I account for last month.
(5 marks)
(b) Calculate in respect of Process II for last month:
(i) The value of the completed output; and
(ii) The value of closing work in progress.
(5 marks)
(c) If the losses in Process I were toxic and the company incurred costs in safely disposing of them, state
how the disposal costs associated with the normal loss would have been recorded in the Process I account.
No calculations are required.
(2 marks)
[Sec: B, Q: 2 F2 December 2005]

7
Corcoran Ltd operates several manufacturing processes. In process G, joint products (P1 and P2) are
created in the ratio 5:3 by volume from the raw materials input. In this process a normal loss of 5% of the
raw material input is expected. Losses have a realisable value of £5 per litre. The company holds no work
in progress. The joint costs are apportioned to the joint products using the physical measure basis.
The following information relates to process G for last month:
Raw materials input
Abnormal gain 1
Other costs incurred:
Direct labour
Direct expenses 1
Production overheads

60,000 litres (at a cost of £381,000)
1,000 litres
£180,000
£54,000
110% of direct labour cost.

Required:
(a) Prepare the process G account for last month in which both the output volumes and values for each of
the joint products are shown separately.
(7 marks)

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14
The company can sell product P1 for £20 per litre at the end of process G. It is considering a proposal to further
process product P1 in process H in order to create product PP1. Process H has sufficient spare capacity to do this
work. The further processing in process H would cost £4 per litre input from process G. In process H there would be a
normal loss in volume of 10% of the input to that process. This loss has no realisable value. Product PP1 could then
be sold for £26 per litre.
(b) Determine, based on financial considerations only, whether product P1 should be further processed to
create product PP1.
(3 marks)
(c) In the context of process G in Corcoran Ltd, explain the difference between ‘direct expenses’ and
‘production overheads’.
(2 marks)
[Sec: B, Q: 1 F2 June 2006]

Topic-Wise | Past exam Papers

8
Yeomen Ltd uses process costing and the FIFO method of valuation. The following information for last
month relates to Process G, where all the material is added at the beginning of the process:
Opening work-in-progress:

2,000 litres (30% complete in respect of conversion costs) valued in total
at £24,600 (£16,500 for direct materials; £8,100 for conversion).

Costs incurred:
Direct materials
Conversion

£99,600 for 12,500 litres of input
£155,250

Normal loss:

8% of input in the period. All losses, which are incurred evenly
throughout the process, can be sold for £3 per litre.

Actual output:

10,000 litres were transferred from Process G to the finished goods
warehouse.

Closing work-in-progress:

3,000 litres (45% complete in respect of conversion costs).

Required:
(a) Prepare the Process G Account for last month in £ and litres.
(10 marks)
(b) Identify TWO types of organisation where it would be appropriate to use service (operation) costing. For
each one suggest a suitable unit cost measure.
(2 marks)
[Sec: B, Q: 4 F2 December 2006]

9
Luiz Ltd operates several manufacturing processes in which stocks of work-in-progress are never held. In
process K, joint products (P1 and P2) are created in the ratio 2:1 by volume from the raw materials input.
In this process a normal loss of 4% of the raw materials input is expected. Losses have a realisable value
of £5 per litre. The joint costs of the process are apportioned to the joint products using the sales value
basis. At the end of process K, P1 and P2 can be sold for £25 and £40 per litre respectively.
The following information relates to process K for last month:
Raw materials input
90,000 litres at a total cost of £450,000
Actual loss incurred
4,800 litres
Conversion costs incurred
£216,000
Required:
(a) Prepare the process K account for last month in which both the output volumes and values for each joint
product are shown separately.
(7 marks)

The company could further process product P1 in process L to create product XP1 at an incremental cost
of £3 per litre input. Process L is an existing process with spare capacity. In process L a normal loss of
8% of input is incurred which has no value. Product XP1 could be sold for £30 per litre.
Required:
(b) Based on financial considerations only, determine, with supporting calculations, whether product P1
should be further processed in process L to create product XP1.
(3 marks)
[Sec: B, Q: 3 F2 June 2007]

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Topic-Wise | Past exam Papers

ACCA
F2

15

Absorption & Marginal
Costing

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16
1
Surat is a small business which has the following budgeted marginal costing profit and loss account for
the month ended 31 December 2001:
£.000

Topic-Wise | Past exam Papers

Sales
Cost of sales:
Opening stock
Production costs
Closing stock

£.000
48

3
36
(7)
(32)
16

Other variable costs:
Selling
Contribution
Fixed costs:
Production overheads
Administration
Selling
Net profit
The standard cost per unit is:

(3·2)
12·8
(4)
(3·6)
(1·2)
4·00

Direct materials (1 kg)
Direct labour (3 hours)
Variable overheads (3 hours)

£
8
9
3

Budgeted selling price per unit

20
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)
[Sec: B, Q: 5 F2 December 2001]

2
Oathall Limited, which manufactures a single product, is considering whether to use marginal or
absorption costing to report its budgeted profit in its management accounts.
The following information is available:
£/unit
4
15
––
19
––
Selling price
50
––
Fixed production overheads are budgeted to be £300,000 per month and are absorbed on an activity
level of 100,000 units per month.
For the month in question, sales are expected to be 100,000 units although production units will be
120,000 units.
Fixed selling costs of £150,000 per month will need to be included in the budget as will the variable
selling costs of £2 per unit.
Direct materials
Direct labour

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17
There are no opening stocks.
Required:
(a) Prepare the budgeted profit and loss account for a month for Oathall Limited using absorption costing.
Clearly show the valuation of any stock figures.
(6 marks)
(b) Prepare the budgeted profit and loss account for a month for Oathall Limited using marginal costing.
Clearly show the valuation of any stock figures.
(4 marks)
[Sec: B, Q: 3 F2 December 2002]

Topic-Wise | Past exam Papers

3
Langdale Ltd is a small company manufacturing and selling two different products – the Lang and the
Dale. Each product passes through two separate production cost centres – a machining department,
where all the work is carried out on the same general purpose machinery, and a finishing section. There
is a general service cost centre providing facilities for all employees in the factory.
The company operates an absorption costing system using budgeted overhead absorption rates. The
management accountant has calculated the machine hour absorption rate for the machining department
as £3·10 but a direct labour hour absorption rate for the finishing section has yet to be calculated.
The following data have been extracted from the budget for the coming year:
Product
Lang
Sales (units)
Production (units)
Direct material cost per unit
Direct labour cost per unit:
– machining department (£8 per hour)
– finishing section (£6 per hour)
Machining department – machine hours per unit

Dale

6,000
7,200
£52

9,000
10,400
£44

£72
£42

£40
£36

5

3

Fixed production overhead costs:
– machining department
– finishing section
– general service cost centre

£
183,120
241,320
82,800

Number of employees:
– machining department
– finishing section
– general service cost centre

14
32
4

Service cost centre costs are reapportioned to production cost centres.
Required:
(a) Calculate the direct labour hour absorption rate for the finishing section.
(5 marks)
(b) Calculate the budgeted total cost for one unit of product Dale only, showing each main cost element
separately.
(2 marks)
(c) The company is considering a change over to marginal costing. State with reasons, whether the total
profit for the coming year calculated using marginal costing would be higher or lower than the profit
calculated using absorption costing. No calculations are required.
(3 marks)
[Sec: B, Q: 5 F2 June 2004]

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18
4
Oakapple Ltd manufactures a single product which has a standard selling price of £15 per unit. It
operates a standard absorption costing system. The total standard production cost is £9 per unit of which
£4 per unit represents the variable cost element. Non-production costs of £44,000 per month are all fixed.

Topic-Wise | Past exam Papers

The following data relate to the month just ended:
Budget
Actual
units
units
Production
48,000
47,000
Sales
45,000
46,000
The actual total sales revenue for the month just ended was £678,500.
Required:
(a) Calculate the sales price and sales volume profit variances for the month just ended.

(4 marks)

One of the qualities of good information is that it should be communicated to the right person or persons in an
organisation.
(b) To whom should the variances calculated in (a) be communicated and why?
(3 marks)
The company is also considering a change from absorption costing to marginal costing.
(c) Calculate the BUDGETED profit for the month just ended under:
(i) Absorption costing;
(ii) Marginal costing.
(3 marks)
[Sec: B, Q: 3 F2 December 2004]

5
Archibald Ltd manufactures and sells one product. Its budgeted profit statement for the first month of
trading is as follows:
£
£
Sales (1,200 units at £180 per unit)
216,000
Less: Cost of sales:
Less: Production (1,800 units at £100 per unit)
180,000
Less: Less Closing stock (600 units at £100 per unit)
(60,000)
————
(120,000)
————
Gross profit
96,000
Less Fixed selling and distribution costs
(41,000)
————
Net profit
55,000
————
The budget was prepared using absorption costing principles. If budgeted production in the first month
had been 2,000 units then the total production cost would have been £188,000.
Required:
(a) Using the high-low method, calculate:
(i) the variable production cost per unit; and
(ii) the total monthly fixed production cost.
(4 marks)
(b) If the budget for the first month of trading had been prepared using marginal costing principles, calculate:
(i) the total contribution; and
(ii) the net profit.
(4 marks)
(c) Explain clearly the circumstances in which the monthly profit or loss would be the same using absorption
or marginal costing principles.
(2 marks)
[Sec: B, Q: 4 F2 June 2005]

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19
6
Pinafore Ltd manufactures and sells a single product. The budgeted profit statement for this month, which
has been prepared using marginal costing principles, is as follows:
£’000

Topic-Wise | Past exam Papers

Sales (24,000 units)
Less Variable production cost of sales:
Less Opening stock (3,000 units) 1
Less Production (22,000 units)
Less Closing stock (1,000 units) 1

69
506
(23)
––––

Less Variable selling cost 1
Contribution
Less Fixed overhead costs:
Less Production
Less Selling and administration 1

£’000
864

(552)
––––
312
(60)
––––
252

125
40
––––

(165)
––––
Net profit 1
87
––––
The normal monthly level of production is 25,000 units and stocks are valued at standard cost.
Required:
(a) Prepare in full a budgeted profit statement for this month using absorption costing principles. Assume
that fixed production overhead costs are absorbed using the normal level of activity.
(6 marks)
(b) Prepare a statement that reconciles the net profit calculated in (a) with the net profit using marginal
costing.
(2 marks)
(c) Which of the two costing principles (absorption or marginal) is more relevant for short-run decisionmaking, and why?
(2 marks)
[Sec: B, Q: 5 F2 June 2006]

7
Marco Ltd manufactures and sells a single product. The budgeted profit and loss statement for next year,
which has been drawn up using absorption costing principles, is as follows:
£000
Sales (40,000 units)
Less Cost of sales:
Production cost (45,000 units):
Variable
Fixed
Less Closing stock (5,000 units)

Gross profit
Less Non-production expenses:
Variable selling costs
Fixed selling, administration and distribution costs

Net profit

£000
4,400

1,800
1,476
––––––
3,276
(364)
––––––
(2,912)
––––––
1,488
360
598
––––––
(958)
––––––
530

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20
There will be no stock at the beginning of next year.

Topic-Wise | Past exam Papers

Required:
(a) Using marginal costing principles, calculate the following for next year:
(i) The total budgeted contribution from sales; and
(ii) The budgeted net profit.
(4 marks)
(b) Calculate the break-even point (in units) for next year.
(2 marks)
(c) Explain clearly why Marco Ltd’s net profit for next year using marginal costing principles differs from that
under absorption costing. Under what conditions would the two net profits be the same?
(3 marks)
[Sec: B, Q: 4 F2 June 2007]

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Topic-Wise | Past exam Papers

ACCA
F2

21

Breakeven & CVP
Analysis

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22
1
Toowomba manufactures various products and uses CVP analysis to establish the minimum level of
production to ensure profitability.

Topic-Wise | Past exam Papers

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)
[Sec: B, Q: 3 F2 December 2001]

2
Break-even charts and profit-volume charts are commonly associated with cost-volume-profit analysis
(break-even analysis).
Required:
(a)
(i) Sketch a break-even chart and indicate where the break-even point would be for a single
product firm.
Clearly label the axes and indicate the following lines:
– total revenue;
– variable cost;
– fixed costs; and
– total cost.
(ii) How would contribution be established from your chart in (a)(i)?
(6 marks)
(b)
(i) Sketch a profit-volume chart and indicate where the break-even point would be for a single
product firm. Clearly label the axes and indicate the profit line and fixed costs.
(ii) How would contribution be established from your chart in (b)(i)?
(4 marks)
[Note: no specific numbers are required.]
[Sec: B, Q: 2 F2 December 2003]

3
A company manufactures a single product, product Y. It has documented levels of demand at certain
selling prices for this product as follows:
Demand
Selling price per unit
Cost per unit
Units
£
£
1,100
48
24
1,200
46
21
1,300
45
20
1,400
42
19
Required:
Using a tabular approach calculate the marginal revenues and marginal costs for product Y at the different
levels of demand, and so determine the selling price at which the company profits are maximised.
[Sec: B, Q: 3 F2 December 2003]

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23
4

Topic-Wise | Past exam Papers

Braithwaite Ltd manufactures and sells a single product. The following data have been extracted from the
current year’s budget:
Contribution per unit £8
Total weekly fixed costs £10,000
Weekly profit £22,000
Contribution to sales ratio 40%
The company’s production capacity is not being fully utilised in the current year and three possible
strategies are under consideration. Each strategy involves reducing the unit selling price on all units sold
with a consequential effect on the budgeted volume of sales. Details of each strategy are as follows:
Strategy

A
B
C

Reduction in unit
selling price
%
2
5
7

Expected increase in weekly
sales volume over budget
%
10
18
25

The company does not hold stocks of finished goods.
Required:
(a) Calculate for the current year:
(i) The selling price per unit for the product; and
(ii) The weekly sales (in units).
(3 marks)
(b) Determine, with supporting calculations, which one of the three strategies should be adopted by the
company in order to maximise weekly profits.
(4 marks)
(c) Briefly explain the practical problems that a management accountant might encounter in separating costs
into their fixed and variable components.
(3 marks)
[Sec: B, Q: 3 F2 June 2004]

5
Despard Ltd manufactures and sells a single product. The following data have been extracted from the
current year’s budget:
Sales and production (units)
Variable cost per unit
Fixed cost per unit
Contribution to sales ratio

5,000
£50
£70
75%

The selling price per unit for next year is to be 8% above the current year’s budgeted figure, whereas both
the variable cost per unit and the total fixed costs are forecast to increase by 12% above their budgeted
level in the current year.
The target for next year is that total profit should remain the same as that budgeted for the current year.
Required:
(a) Calculate for the CURRENT YEAR the budgeted:
(i) contribution per unit;
(ii) total profit.
(3 marks)
(b) Calculate the number of units which the company should produce and sell next year in order to achieve
the target level of profit.
(4 marks)
(c) Explain, with an example, the term semi-variable (mixed) cost. How would such a cost be dealt with in
undertaking the analysis in (a)?
(3 marks)
[Sec: B, Q: 2 F2 December 2004]

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Topic-Wise | Past exam Papers

ACCA
F2

24

Decision Making &
Limiting Factor

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25
1
Firlands Limited, a retail outlet, is faced with a decision regarding whether or not to expand and build
small or large premises at a prime location. Small premises would cost £300,000 to build and large
premises would cost £550,000.

Topic-Wise | Past exam Papers

Regardless of the type of premises built, if high demand exists then the net income is expected to be
£1,500,000. Alternatively, if low demand exists, then net income is expected to be £600,000.
If large premises are built then the probability of high demand is 0·75. If the smaller premises are built
then the probability of high demand falls to 0·6.
Firlands has the option of undertaking a survey costing £50,000. The survey predicts whether there is
likely to be a good or bad response to the size of the premises. The likelihood of there being a good
response, from previous surveys, has been estimated at 0·8.
If the survey indicates a good response then the company will build the large premises. If the survey does
give a good result then the probability that there will be high demand from the large premises increases to
0·95.
If the survey indicates a bad response then the company will abandon all expansion plans.
Required:
Using decision tree analysis, establish the best course of action for Firlands Limited.
(10 marks)
[Sec: B, Q: 2 F2 December 2002]

2
Ennerdale Ltd has been asked to quote a price for a one-off contract. The company’s management
accountant has asked for your advice on the relevant costs for the contract. The following information is
available:
Materials
The contract requires 3,000 kg of material K, which is a material used regularly by the company in other
production.
The company has 2,000 kg of material K currently in stock which had been purchased last month for a
total cost of £19,600. Since then the price per kilogram for material K has increased by 5%.
The contract also requires 200 kg of material L. There are 250 kg of material L in stock which are not
required for normal production. This material originally cost a total of £3,125. If not used on this contract,
the stock of material L would be sold for £11 per kg.
Labour
The contract requires 800 hours of skilled labour. Skilled labour is paid £9·50 per hour. There is a
shortage of skilled labour and all the available skilled labour is fully employed in the company in the
manufacture of product P. The following information relates to product P:
£ per unit
Selling price
Less
Skilled labour
Other variable costs

£ per unit
100

38
22
–––
(60)
–––
40
–––

Required:

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