# Financial information for managemetn paper 1 2 2005 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

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

1

D

2

C

1,700 units – Breakeven level units (1,200) = 500 units

3

C

Contribution per unit = 22 ÷ 0·55 × 0·45 = £18
Breakeven point = 198,000 ÷ 18 = 11,000

4

C

Variable cost per unit = [(170,000 – 5,000) – 140,000)] ÷ (22,000 –17,000) = £5
Total fixed cost above 18,000 units = 170,000 – (22,000 × 5) = £60,000
Total cost of 20,000 units = (20,000 × 5) + 60,000 = £160,000

5

B

6

D

7

C

Weighted average after 13th = [(200 × 9,300 ÷ 300) + (600 × 33)] ÷ (200 + 600) = £32·50
Closing stock valuation = 300 × 32·50 = £9,750

8

C

EOQ = [(2 × 160 × 9,000) ÷ (0·08 × 40)]0·5 = 949

9

A

10 B

17

11 A

Absorption rate = 247,500 ÷ 30,000 = £8·25
Absorbed cost = 28,000 × 8·25 = £231,000
Actual cost =
£238,000
Under absorption =
£7,000

12 B

Marginal costing profit = 36,000 – (2,000 × 63,000 ÷ 14,000) = £27,000

13 C

Process F: expected output = 0·92 × 65,000 =
actual output =
∴ abnormal loss
Process G: expected output = 0·95 × 37,500 =
actual output =
∴ abnormal gain

14 D
Actual hours at standard rate (27,000 × 8·50)
Standard hours of production at standard rate
∴Labour efficiency variance is

15 A

Sales price variance:
Actual sales at standard price (4,650 × 6)
Actual sales at actual price
Favourable price variance
350 units × (6 × 0·60)

59,800
58,900
35,625
35,700

£
229,500
253,980
––––––––
24,480 Favourable
––––––––

£
27,900
30,225
–––––––
2,325
–––––––
1,260

16 C

17 D

18 A

19 A

Coefficient of determination = r2 = 0·6 × 0·6 = 0·36 = 36%

20 C

21 D

4,000 × [(20,000 ÷ 2,500) × 1·025] = £32,800

22 D

Production (units):
J: (6,000 – 100 + 300) =
K: (4,000 – 400 + 200) =

6,200
3,800
––––––
10,000
––––––
Joint costs apportioned to J: (6,200 ÷ 10,000) × 110,000 = £68,200

23 D

Material required to meet maximum demand:
6,000 × (13 ÷ 4) + 8,000 × (19 ÷ 4) = 57,500 litres
Material available:
50,000 litres
∴ Material is a limiting factor
Labour required to meet maximum demand:
6,000 × (35 ÷ 7) + 8,000 × (28 ÷ 7) = 62,000 hours
Labour available:
60,000 hours
∴ Labour is a limiting factor

18

24 D

Profits maximised when: marginal revenue (MR) = marginal cost (MC)
MR = 50 – 0·05Q
MC = 15
MR = MC
∴ 50 – 0·05Q = 15
and
Q = 700
P = 50 – (0·025 × 700) = £32·50

25 B

When P = 20

then
and

20 = 50 – 0·025Q
Q = 1,200
£
Total revenue (P × Q) = 1,200 × 20 = 24,000
Less total costs 2,000 + (15 × 1,200) = 20,000
––––––
∴Profit
4,000
––––––

Section B
1

(a)

Using the high-low method:
Units
120,000 (W1)
102,000
––––––––
18,000
––––––––

Total cost (£)
700,000
619,000
––––––––
81,000
––––––––

Working (W1)
Full capacity = 102,000 ÷ 0·85 = 120,000
(i)

Variable cost per unit = 81,000 ÷ 18,000 = £4·50

(ii)

Total fixed costs = 700,000 – (120,000 × 4·50) = £160,000

(iii) Selling price per unit = variable cost per unit ÷ (1·00 – 0·40)
= 4·50 ÷ 0·6 = £7·50
(iv) Contribution per unit = (7·50 – 4·50) = £3·00
(b)

Selling price (0·80 × 7·50)
Less variable cost

£ per unit
6·00
(4·50)
–––––
1·50
–––––

Contribution
Contribution from 15,000 units (15,000 × 1·50)
Less opportunity cost (15,000 ÷ 6) × £3·00
Net increase in contribution (and profit)
(c)

2

£
22,500
(7,500)
–––––––
15,000
–––––––

An opportunity cost is the cost of the best alternative forgone in a situation of choice. Opportunity costs are relevant costs.
In the situation of Pointdextre Ltd, if it goes ahead with the new business (that is the decision) then it will lose (forgo) the
contribution from some existing sales. This lost contribution is an opportunity cost relevant to the decision.

(a)

Process I
Input
Conversion
Abnormal gain (W2)

Litres
50,000
1,000
–––––––
51,000
–––––––

£
365,000
256,000
13,500
––––––––
634,500
––––––––

Output (W1)
Normal loss (0·08 × 50,000)

Workings:
W1 Cost per litre (365,000 + 256,000) ÷ (50,000 × 0·92) = £13·50
Output value = 47,000 × 13·50 = £634,500
W2 Abnormal gain = 47,000 – (50,000 × 0·92) = 1,000
Valuation (1,000 × 13·50) = £13,500

19

Litres
47,000
4,000

£
634,500

–––––––
51,000
–––––––

––––––––
634,500
––––––––

(b)

Workings:
Cost per equivalent litre (EL):
Completion of opening WIP
Started and finished within the month (50,000 – 5,000)
Work done so far on closing WIP

Conversion
EL
3,000
45,000
1,000
–––––––
49,000
–––––––

∴Cost per EL = 392,000 ÷ 49,000 = £8

(c)

3

(i)

Output = 80,000 + (45,000 × 13·50) + (48,000 × 8·00) = £1,071,500

(ii)

Closing WIP = (2,000 × 13·50) + (1,000 × 8·00) = £35,000

The disposal costs would be debited to the process account. Alternatively, they could be shown as a negative value on the
credit side of the account.

Let X = the number of units of product X
and Y = the number of units of product Y
Contribution per unit:
Product X
£ per unit
60
(45)
––––
15
––––

Selling price
Less variable cost
Contribution

Product Y
£ per unit
25
(13)
––––
12
––––

Objective function:
Total contribution = 15X + 12Y
Constraints:
3X + Y ≤ 4,200

Material (£5 per kg)
Labour (£6 per hour)

4X + 0·5Y ≤ 3,000
X, Y ≥ 0

Non negative

Using a graphical approach, the constraints (solid lines) and the objective function (dotted line) can be shown as follows:
Y
units
6,000

Labour
4,200 A
B

Material
750
0

C
600 750

X units
1,400

Note: the objective function line has been shown on the above graph for a total contribution of £9,000 (assumed). Thus 15X +
12Y = 9,000.
Therefore when X = 0, Y = (9,000 ÷ 12) = 750
and when Y = 0, X = (9,000 ÷ 15) = 600
The ‘feasible region’ is the area OABC shown on the graph. If the objective function line is moved away from the origin (at the
same gradient) the last point it reaches in the feasible region is point A which must therefore be the optimal point.
Therefore the optimal production is to produce and sell 4,200 units of product Y and no units of product X.

20

An alternative approach would be to calculate the total contributions at points A, B and C shown on the graph and select the point
giving the highest total contribution, as follows:
Point A
Total contribution from 4,200 units of Y is (4,200 × £12) = £50,400
Point B
To find the units at this point, solve the following equations simultaneously:
3X +
Y = 4,200
… (1)
4X + 0·5Y = 3,000
… (2)
From (1)
Y = 4,200 – 3X
Substituting into (2)
4X + 0·5(4,200 – 3X) = 3,000

4X + 2,100 – 1·5X = 3,000

2·5X
= 900

X = 360
Substituting into (1)
(3 × 360) + Y
= 4,200

Y = 3,120
Total contribution from 360 units of X and 3,120 units of Y is (360 × £15) + (3,120 × £12) = £42,840
Point C
Total contribution from 750 units of X is (750 × £15) = £11,250
Point A gives the highest contribution (£50,400 from producing 4,200 units of Y and no units of X) and is therefore the optimal
solution (as before).

4

(a)
Standard cost of actual production [12,500 × (11 + 24 + 18)]
Total variances:
Favourable
£
£
Materials (W1)
5,200
Labour (W2)
8,700
5,800
–––––––
––––––
11,000
8,700
–––––––
––––––
Actual cost (142,700 + 291,300 + 230,800)
Workings:
W1
Actual cost

£
142,700

Standard cost of actual production

137,500

Actual cost

291,300

Standard cost of actual production

300,000

Actual cost

230,800

Standard cost of actual production

225,000

£
662,500

2,300 A
––––––––
664,800
––––––––
Variance
£
5,200 A

W2
8,700 F
W3
5,800 A

(b)

£
Expenditure variance:
Actual cost

230,800

Budgeted cost (12,000 × 18)

216,000

Volume variance:
Budgeted cost

216,000

Standard cost of actual production

225,000

£

14,800 A

9,000 F

(c)

The total direct materials and labour variances would be the same under absorption and marginal costing. The total fixed
overhead variance under marginal costing would be different and would be the same as the expenditure variance under
absorption costing (£14,800 A). There is no volume variance under marginal costing as fixed production costs are treated
as period costs and not treated as product costs.

21

5

(a)

Absorption rates:
Cost centre T: (780,000 ÷ 16,250) = £48 per machine hour
Cost centre W: (173,400 ÷ 14,450) = £12 per direct labour hour

(b)

Prime costs:
Direct materials
Direct labour:
Cost centre T
Cost centre W
Cost centre T: (35 ÷ 60) × 48
Cost centre W: (21 ÷ 6) × 12

(c)

£
10
14
21
––––
45
28
42
––––
115
––––

Products do not pass through service cost centres so the costs of such centres cannot be absorbed directly into products.
Products only pass through production cost centres. Therefore in order to calculate a total production cost per unit, service
cost centre costs have to be reapportioned to production cost centres for absorption.
The method of reapportionment that fully recognises any work that service cost centres do for each is called the reciprocal
method. There are two techniques for applying the reciprocal method – a repeated distribution approach or the use of
simultaneous equations.

22

Part 1 Examination – Paper 1.2
Financial Information for Management

December 2005 Marking Scheme
Marks

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

50
–––

Section B
1

(a)

(i)
(ii)
(iii)
(iv)

Variable cost per unit
Total monthly fixed costs
Selling price per unit
Contribution per unit

2
2
1
1
–––
6

(b)

Opportunity cost
Net increase in profit

2
11/2
1/
2
–––
4

(c)

Explanation of opportunity cost
Reference to Pointdextre Ltd

1
1
–––
2
–––
12
–––

2

(a)

Input and conversion
Normal loss
Abnormal gain
Output

1
11/2
11/2
1
–––
5

(b)

11/2
1/
2
2
1
–––

Equivalent units for conversion
Cost per equivalent unit for conversion
Valuation of output
Valuation of closing work in progress

5

3

(c)

Debit entry

(a)

Contributions per unit
Objective function
Constraints

2
–––
12
–––

1
1
3
–––
5

(b)

Graph (or total contributions at feasible points)
Optimal plan

3
1
–––
4
–––
9
–––

23

Marks
4

(a)

Total materials variance
Total labour variance
Reconciliation statement

1
1
1
1
–––
4

(b)

Expenditure variance
Volume variance

1
1
–––
2

(c)

Direct materials and labour variances the same
Total variance = expenditure variance
No volume variance with reason

1
1
1
–––
3
–––
9
–––

5

(a)

Cost centre T absorption rate
Cost centre W absorption rate

1
1
–––
2

(b)

1/
2

Prime cost
Total unit cost

1
1
1/
2
–––
3

(c)

Reapportionment explanation
Reapportionment method

2
1
–––
3
–––
8
–––

24

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