A2 Accounting

Unit 7 June 2002 Paper

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AQA Unit 7

Question 1a(i)

See Next Slide For

triangle

Key to this question …is to make use of your triangle and to recognise wording that shows that the actual output of units is DIFFERENT from the standard output

Where actual output and expected output are different …so that like is compared to like ..we must use the actual output figures as standard and actual

Materials

(20000x2) x £4 = £160,000Actual Quantity x Standard Price

(18500x2) x £4 = £148,000Standard Quantity x Standard Price

(2000x2) x 3.50 £140,000Actual Quantity x Actual Price

Usage Variance = £12,000 Adverse Price Variance = £20,000 Favourable

Total Variance = £8,000 Favourable

Key point

Because actual production was 18500 units ..standard hours will need to be adjusted to this

4 marks

Key point

Because actual production was 18500 units ..standard hours will need to be adjusted to this

Labour

45000 x £10 = £450,000Actual Hours x Standard Wage Rate

(18500x2.25) x £10 = £416,250Standard Hours x Standard Wage Rate

45000 x £9.00 £405,000Actual Hours x Actual Wage Rate

Efficiency variance = £33,750 adverse Wage rate variance = £45,000 fav

Total Variance = £11,250 fav

4 marks

Question 1b

4 marks

Explain why these sub-variances may have occurred

Award up to 2 marks for each reason ..providing the reason is developed

Material usage £12000 adv and price £20000 fav

Cheaper price* paid for material than expected due to a cheaper supplier*/discount/lower quality

More material used* may be due to material of a lesser quality

Unskilled labour* may be wasting more material than budgeted

Labour wage rate £45000 fav and efficiency £33750 adv

Cheaper rate* paid for labour than expected due to less skilled workers

More hours taken* may be due to a lesser level of skill

More unskilled labour* may be working less efficiently wasting more material

Cheaper rate affects staff motivation

4 marks

Question 2a Calculate the contribution per unit

4 marks

Question 2b Calculate the contribution per labour hour per unit (NB question is taking you through limiting factor)

Selling Price 390Variable Costsmaterials 50Labour 220Var O/H 32 302Contribution 88

Alto350

10016018 278

72

Bass

Alto8844

£2

Bass7232

£2.25

4 marks

Contribution per unit

Direct Labour hours

Question 2 b [cont]

State the optimum production plan which Donaldson could introduce which would maximise profit

Since Bass (£2.25 as opposed to Alto £2) has the higher contribution per unit Donaldson would maximise the production of Bass

2 marks

1 mark

Production Plan Labour Hours ProductionBass 256,000 8,000Alto 264,000 6,000

Limiting factor ..only 520,000 labour hours are available

So, make all 8,000 of Bass (8000 x 32 hours) will use 256,000 hoursThis will leave 264,000 hours for Alto ..(264,000/44 hours) gives production of 6,000

Q2

7 marks

(c) Assess the effects this new production plan would have on the manufacturing companies in competition with Donaldson Ltd

Donaldson Ltd is able to satisfy the demand for Product Bass* (8,000), however is only able to satisfy one third (6,000) of their demand for Product Alto*

This will allow the competitors of Product Alto to raise their price above £390* due to limited supply*

The competitors of Product Bass may have to decrease their price to compete with Donaldson Ltd (**), or alternatively satisfy customer need by better service/quality of product etc **

Question 3 (a) Calculate the annual net cash flows for each year, which are expected to result from the purchase of the machine

5 marks

6 marks

Cash inflow Cash outflow Net Cash FlowYear 1 540,000 432,000 108,000Year 2 630,000 504,000 126,000Year 3 724,500 552,000 172,500

(b) Using the expected annual net cash flows, calculate the net present value for the replacement machine

Year Net Cash Flow Discount F Present Value

0 -300,000 1 -3000001 108000 0.909 981722 126000 0.826 1040763 172500 0.751 129547.5

NPV 31795.5

Question 3

(c)State whether or not MV Wilkins should purchase the machine.

Give ONE reason for your answer

2 marks

M V Wilkins should purchase * the machine as with the 10% cost of capital, there is a positive NPV*

Question 4aPrepare an overhead apportionment schedule apportioning the factory overheads to the appropriate departments

8 marks

Factory OverheadBasis of Apportionment

Cutting Dept

Machining Dept

£ £Machinery insurance cost* 2000 * 26000Factory rent floor area* 3600 * 8400Factory depreciation cost* 4000 * 52000Light and heat floor area* 5400 * 12600

15000 99000

Question 4bCalculate the overhead absorption rates for each production department.

State the bases used and give ONE reason for your choice

6 marks

Cutting Department 15000 = £0.50 per labour hour**30000

Reason for choice …because the department is labour intensive*

Machining Department 99000 = £3.00 per labour hour**33000

Reason for choice …because the department is machine intensive*

Question 5(a)

12 marks

(i) Prepare the production budget for each of the 6 months ended 31 October 2001

Key Point ..Production Budget is in UNITS not MONEY

May units

June units

July units

August units

Sept units

Oct units

Sales 11000 14000 16000 14000 9000 10000less Op Stock -1100 -1400 -1600 -1400 -900 -1000add Cl Stock 1400 1600 1400 900 1000 1100PRODUCTION 11300 14200 15800 13500 9100 10100

Production Budget for six months ending 31 October 2001

Question 5(a)

6 marks

(ii) Write a memorandum to the managing director of Frost Ltd explaining 3 benefits of preparing a sales budget

2 marks for 4 components of Report Heading (To: From; Date; Subject

Make sure your information is related to SALES and not just general budgeting

Remember budget is a plan that enables the 4 C’s to be achieved (Compel/Co-ordinate/Control/Co-operate

Plans and co-ordinates production capacity

Plans amount of stock needed

Helps control the movement of cash

Plans the use of labour

Plans the quantity of labour needed

Compels performance evaluation of personnel

Question 5(b)

6 marks

Calculate the prime cost of production for the 6 months ended 31 October 2001

Key point ..remembering how to do a manufacturing account

Raw MaterialsOpening Stock 41000Production (74000 units x £4) 296000 337000

less Closing Stock 36000Cost of raw materials consumed 301000Direct labour (74000 units x £2.50) 185000PRIME COST 486000

Manufacturing Account (Prime Cost Section) for 6 months ended 31 October 2001

Question 5(c)

4 marks

Calculate the total cost of production per unit

Simply continue your Manufacturing Account to find the Cost of Production

Raw MaterialsOpening Stock 41000Production (74000 units x £4) 296000 337000

less Closing Stock 36000Cost of raw materials consumed 301000Direct labour (74000 units x £2.50) 185000PRIME COST 486000

Manufacturing Account (Prime Cost Section) for 6 months ended 31 October 2001

Factory Overheads 143000Cost of Production 629000

Cost per unit = Cost of ProductionNo. of units

Cost per unit = 62900074000

Cost per unit = £8.50

Question 5(d)

2 marks

(ii) Using SSAP 9, calculate the value of the finished goods as at 31 October 2001

(i) Briefly state the requirements of SSAP 9 for the valuation of stock

4 marks

SSAP 9 states stock should be valued at the lower of cost and net realisable value

Finished Goods at 31 October 2001100 @ £3 300

100 @ £4 400900 @ £8.50 7650

8350

Question 5(e)

6 marks

(e) Prepare the trading and profit and loss account for Frost Ltd for the 6 months ended 31 October 2001

Sales (74000 units x £12) 888000FINISHED GOODSOpening Stock 8800Cost of production 629000 637800less Closing Stock 8350Cost of Sales 629450Gross Profit 258550Administration expenses 126000Distribution costs 122000 248000NET PROFIT 10550

Trading and Profit and Loss Account for 6 months ended 31 October 2001