# Financial information for managemetn paper 1 2 2004 answers

Part 1 Examination – Paper 1.2
Financial Information for Management

Section A
1
2
3
4
5
6
7
8
9
10
11

12
13
14
15
16
17
18
19
20
21
22
23
24
25

A
A
C
A
B
A
C
A
D
B
A
B
A
C
C
B
A
B
D
D
C
A
D
C
D

1

A

2

A

3

C

4

A
Date
1st
4th
12th
19th
27th

Units
200
(150)
–––––
50
500
–––––
550
(200)
(300)

Average price (£)
20·00
20·00
26·60
26·00
26·00
26·00

£
4,000
(3,000)
–––––––
1,000
13,300
–––––––
14,300
(5,200)
(7,800)

Total value of issues = 3,000 + 5,200 + 7,800 = £16,000
5

B
(9,250 – 6,750) ÷ (5,000 – 3,000) = £1·25

6

A

7

C
£
144,500
127,500
––––––––
––––––––

Actual cost
Standard cost of actual production (8,500 x 15)
8

A

17

9

D
Actual cost

£
110,750

Actual hours at standard rate (9,200 x 12·50)

115,000

Variance (£)
4,250 F Rate
5,250 A Efficiency

Standard hours for actual production at
standard rate (2,195 x 4 x 12·50)

109,750

10 B
£
56,389
53,754
–––––––
2,635
–––––––

Actual expenditure
Absorbed cost (12,400 x 1·02 x 4·25)
Total under absorption
11 A

£
1,710
1,200

Opening WIP
Completion of opening WIP (300 x 0·40 x 10)
Units started and completed in the month
(2,000 – 300) x 10

17,000
–––––––
19,910
–––––––

Total value (2,000 units)

12 B
∑y = 17,500 + 19,500 + 20,500 + 18,500 + 17,000 = 93,000
∑x = 300 + 360 + 400 + 320 + 280 = 1,660
a = (93,000 ÷ 5) – 29·53(1,660 ÷ 5) = 8,796·04
13 A
£
45
30
––––
75
50
––––
125
45
––––
170
––––

Direct materials
Direct labour (4 hours)
Prime cost
Total production cost
Total cost
14 C
Maximum usage x Longest lead time = 520 x 15 = 7,800
15 C
16 B
Absorption costing profit
Less Increase in stock at fixed overhead cost per unit
(18,000 – 16,500) x 10

£
40,000
(15,000)
–––––––
25,000
–––––––

Marginal costing profit
17 A
18 B
Material
T (500 x 45)
V (200 x 40) + (200 x 52)

£
22,500
18,400
–––––––
40,900
–––––––

Total relevant cost

18

19 D
£
1,200
800
––––––
2,000
––––––

Opportunity cost now
Cost of disposal in one year’s time

20 D
21 C
Profits maximised when Marginal revenue (MR) = Marginal cost (MC)
MR = 40 – 0·06Q
MC = 10
MR = MC
Therefore 10 = 40 – 0·06Q
Q = 30 ÷ 0·6 = 500
Price (P) = 40 – 0·03(500) = 25
22 A
Profit = Total revenue (TR) – Total cost (TC)
When P = 31 then 31 = 40 – 0·03Q and Q = 300
£
9,300
(6,500)
–––––––
2,800
–––––––

TR = P x Q = 31 x 300 =
TC = 3,500 + (10 x 300) =
Profit
23 D
CPU = £27
Contribution to sales ratio = 45%
Selling price = 27 ÷ 0·45 = £60
Margin of safety in units = 13,500 ÷ 60 = 225
Break-even point (BEP) = 1,000 – 225 = 775 units
At BEP: total contribution = total fixed costs
Total fixed costs = 775 x 27 = £20,925
24 C
25 D
P = 95,000 + 0·4X + 0·3Y
X = 46,000 + 0·1Y
Y = 30,000 + 0·2X

X = 46,000 + 0·1(30,000 + 0·2X) = 46,000 + 3,000 + 0·02X
0·98X = 49,000 and X = 50,000
Y = 30,000 + 0·2(50,000) = 40,000
P = 95,000 + 0·4(50,000) + 0·3(40,000) = 127,000

19

Section B
1

(a)
Litres
80,000

Raw materials input

Conversion costs

–––––––
80,000
–––––––

Process X Account
£
158,800
Joint products (W1)
Product A
Product B
133,000
Normal loss (W2)
Abnormal loss (W3)
––––––––
291,800
––––––––

Litres

£

44,700
29,800
4,000
1,500
–––––––
80,000
–––––––

141,550
141,550
3,000
5,700
––––––––
291,800
––––––––

Cost per equivalent litre (EL):
Materials and conversion
EL
74,500
1,500
–––––––
76,000
–––––––
£
291,800
(3,000)
––––––––
288,800
––––––––

Output (joint products combined)
Abnormal loss
Total work done
Costs arising
Less: Normal loss (scrap value)

Cost per equivalent litre:
Materials and conversion (288,800 ÷ 76,000)
Workings:
W1 Product

Selling price
£/litre

A
B

8
12

£3·80

Further
processing
cost
£/litre
2
3

Net
realisable
value
£/litre
6
9

Production
(ratio 3:2)
litres
44,700
29,800

Net realisable
value of
production
£
268,200
268,200

Total joint production cost (A + B) = 74,500 litres at £3·80 = £283,100
Apportioned A:B in the ratio 268,200:268,200 (= 1:1)
Product A = £141,550 and Product B = £141,550
W2 5% of 80,000 = 4,000 litres at 75p per litre = £3,000
W3 5,500 – 4,000 = 1,500 litres at £3·80 per litre = £5,700

2

(b)

An abnormal gain occurs when the actual loss is less than the normal loss expected. In other words the actual output of
good production is higher than would normally be expected from the given level of input.
The abnormal gain is shown as a debit entry in the process account.
The abnormal gain is valued at its full process cost.

(a)

Calculations for the current year:
(i)

Contribution per unit £50 x (75 ÷ 25) = £150

(ii)

Total contribution
(5,000 x £150)
Less Total fixed costs (5,000 x £70)
Total profit

(b)

£’000
750
(350)
––––
400
––––

Calculations for next year:
Selling price
Less Variable cost

50 x (100 ÷ 25) x 1·08
(50 x 1·12)

Contribution
Total fixed costs
(5,000 x £70) x 1·12
Target/required profit [as per (a)(ii)]
Required contribution for next year

£/unit
216
(56)
––––
160
––––
£’000
392
400
––––
792
––––

Number of units required = (792,000 ÷ 160) = 4,950 units.

20

3

(c)

A mixed or semi-variable cost is one that is partly fixed and partly variable in behaviour. An example would be power costs
(gas or electricity, for instance) which consist of a fixed charge irrespective of the number of units of power consumed and a
variable charge based on the number of units of power consumed.
For cost-volume-profit analysis the fixed and variable elements need to be separately identified by using, for example, the high
low method or linear regression. Each would then be considered along with the other variable and other fixed costs in the
analysis.

(a)

Sales variances:
Actual sales units at actual selling price
Actual sales units at standard selling price (46,000 x £15)
Sales price variance
Sales volume profit variance: (46,000 – 45,000) x £(15 – 9)

£
678,500
690,000
––––––––
11,500 A
––––––––
6,000 F
––––––––

(b)

The person (or persons) who should receive the information generated by any system in an organisation should be the person
with responsibility for that aspect or part of the business to which the information relates. In the case of sales variance
information, it would be the person responsible for sales in the organisation. This could be the sales manager or marketing
manager. In a large divisionalised company it may be the divisional manager. A summary of the sales and cost variances
would be issued to senior management in the organisation.

(c)

(i)

Absorption costing profit:
Gross profit 45,000 x £(15 – 9)
Less Non-production costs

£
270,000
(44,000)
––––––––
226,000
––––––––

Absorption costing net profit
(ii)

Marginal costing profit:
Total contribution 45,000 x £(15 – 4)
Less Fixed production costs (48,000 x £5)
Fixed non-production costs

£
495,000
(240,000)
(44,000)
––––––––
211,000
––––––––

Marginal costing net profit
Absorption costing net profit [as above in (i)]
Deduct Increase in stocks at standard fixed
production cost per unit
(3,000 units at £5 per unit)

£
226,000

(15,000)
––––––––
211,000
––––––––

Marginal costing net profit

4

(a)

(i)

EOQ for the current year = [(2 x 25 x 90,000) ÷ 8]0·5 = 750 units

(ii)

EOQ for next year = [(2 x 36 x 90,000) ÷ 8]0·5 = 900 units

(b)

Annual
holding cost
£
Current year
(750 ÷ 2) x 8
(90,000 ÷ 750) x 25

3,000

Next year
(900 ÷ 2) x 8
(90,000 ÷ 900) x 36

3,600

Annual
ordering cost
£

3,000

3,600

Total extra cost of holding and ordering stock for next year
(compared with current year)

21

Annual
total cost
£
3,000
3,000
––––––
6,000
––––––
3,600
3,600
––––––
7,200
––––––
£1,200

(c)

5

Any two for each of the following:
(i) Interest on net working capital, costs of storage space, insurance costs, obsolescence, pilferage and deterioration.
(ii) Costs of contacting supplier to place an order, costs associated with checking goods received and transport costs.

(a)

Product X
90
5
18
1st

Contribution per unit (£)
Litres of Material L per unit
Contribution per litre of Material L
Ranking

Product Y
96
6
16
2nd

Optimal production plan for first three months of next year is to produce and sell 4,800 units of Product X (24,000 litres ÷
5 litres/unit) giving a total contribution of £432,000 (4,800 units at £90 per unit).
(b)

Let x = the number of units of product X
and y = the number of units of product Y
Formulation of constraints:
Material L

5x + 6y ≤ 24,000

Material M

6x + 4y ≤ 24,000

Optimal point is the intersection of
and

5x + 6y = 24,000 ……….(1)
6x + 4y = 24,000 ……….(2)

Solving these simultaneously gives:
(1) X 6
(2) X 5
(1) – (2)

30x + 36y = 144,000
30x + 20y = 120,000
––––––––––––––––––––
16y = 24,000
y = 1,500
and x = 3,000

The optimal production plan for the second three months of next year is to produce 3,000 units of product X and 1,500 units
of product Y. This will give a resultant total contribution of [(3,000 x 90) + (1,500 x 96)] = £414,000.

22

Part 1 Examination – Paper 1.2
Financial Information for Management

December 2004 Marking Scheme
Marks

Section A
Each of the 25 questions in this section is worth 2 marks

50
–––

Section B
1
(a) Inputs into process
Normal loss
Abnormal loss
Joint products

1
2
1
3
–––
7

(b)

Actual loss less than normal loss
Debit entry in process account
Valuation at full process cost

1
1
1
–––
3
–––
10
–––

2

(a)

Contribution per unit
Total profit

1
2
–––
3

(b)

Contribution per unit
Total fixed costs
Required contribution
Number of units

2
1
1/
2
1/
–––2
4

(c)

Partly fixed/partly variable
Example
Separation of fixed/variable elements

1
1
1
–––
3
–––
10
–––

3

(a)

Sales price variance
Sales volume profit variance

2
2
–––
4

(b)

General principle/suggested person(s)

(c)

Absorption costing profit
Marginal costing profit

3
1
2
–––
3
–––
10
–––

23

Marks
4

(a)

(i)
(ii)

EOQ this year
EOQ next year

2
2
–––
4

(b)

Annual holding costs
Annual ordering costs

2
2
–––
4

5

(c)

1/
2

(a)

Contribution per unit
Contribution per litre (L)
Optimal units for product X
Resultant contribution

mark for each of four costs identified

2
–––
10
–––

1
1
1
1
–––
4

(b)

Equations/formulations
Optimal units for products X and Y
Resultant contribution

3
2
1
–––
6
–––
10
–––

24

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