Cambridge A Level Accounting 9706 — 2021 Oct/Nov Paper 3 · Variant 1

This document has 24 pages. Any blank pages are indicated. Cambridge International AS & A Level * 1 3 7 9 5 7 5 6 7 6 * DC (PQ) 206065/3 © UCLES 2021 [Turn over ACCOUNTING 9706/31 Paper 3 Structured Questions October/November 2021 3 hours You must answer on the question paper. You will need: Insert (enclosed) INSTRUCTIONS ● Answer all questions. ● Use a black or dark blue pen. ● Write your name, centre number and candidate number in the boxes at the top of the page. ● Write your answer to each question in the space provided. ● Do not use an erasable pen or correction fluid. ● Do not write on any bar codes. ● You may use an HB pencil for any diagrams, graphs or rough working. ● You may use a calculator. ● International accounting terms and formats should be used as appropriate. ● You should show your workings. INFORMATION ● The total mark for this paper is 150. ● The number of marks for each question or part question is shown in brackets [ ]. ● The insert contains all of the required information and questions.

2 9706/31/O/N/21 © UCLES 2021 Section A: Financial Accounting Answer all questions. 1 Read Source A1 in the insert. (a) State which bookkeeping entry reduced the ability of the company to pay dividends legally in the future. … … [1] Additional information 1 On 1 January 2020 the business had a bank overdraft of $42 000. It paid interest of $3000 on the overdraft during the year ended 31 December 2020. 2 Depreciation charges for the year totalled $112 000. 3 During the year ended 31 December 2020 some machinery was disposed of for $47 000. This had originally cost $92 000 and depreciation of $31 000 had been provided on it. 4 Several new delivery vehicles were purchased during the year, at a total cost of $185 000. New machinery costing $106 000 was also purchased. 5 On 1 April 2020 the company issued a 10% debenture of $200 000. By the year end only six months’ interest had been paid. 6 The working capital of the company, excluding the bank account and accrued interest, increased by $45 000 during the year ended 31 December 2020. 7 The directors planned to expand the factory during 2021, using funds raised by the debenture issue.

3 9706/31/O/N/21 © UCLES 2021 [Turn over (b) Prepare the statement of cash flows for the year ended 31 December 2020 in accordance with IAS 7. … … … … … … … … … … … … … … … … … … … … … … … … … … … [15]

4 9706/31/O/N/21 © UCLES 2021 (c) Advise the directors whether or not the performance of the company is satisfactory. Justify your answer. … … … … … … … … … … [4] (d) Discuss the decision to issue the debenture to fund the planned expansion. … … … … … … … … … … … … [5] [Total: 25]

5 9706/31/O/N/21 © UCLES 2021 [Turn over 2 Read Source A2 in the insert. (a) Outline the next steps the company needed to take to implement the computerised accounting system. Your answer should consider the need for both accuracy and security. … … … … … … … … … … … … … … … … … [8]

6 9706/31/O/N/21 © UCLES 2021 Additional information The company accountant prepared the draft income statement of the company for the year ended 31 December 2020. When the finance director reviewed it he thought that it might contain errors. He identified five areas where he thought an error might have occurred. These were as follows. 1 The staff training had cost $5000. Since the employees of the company usually stay with the company for about ten years, the accountant had decided to charge $500 to expenses for staff training each year for ten years, starting in 2020. 2 An impairment review had considered vehicles with a carrying amount of $72 000. It found that their fair value was $67 000 and their value in use was $65 000. The accountant included an impairment loss on vehicles of $7000 in expenses. 3 An impairment review had considered machinery with a carrying amount of $98 000. It found that its fair value was $81 000 and its value in use was $102 000. The accountant included an impairment loss on machinery of $17 000 in expenses. 4 Water damage had destroyed inventory costing $8000 on 5 January 2021. The accountant took this loss into account when preparing the income statement. 5 The premises had been revalued upwards by $28 000 at the year end. The accountant omitted to record this.

7 9706/31/O/N/21 © UCLES 2021 [Turn over (b) Complete the table showing the effect of the correction of errors on the draft profit for the year. In the second column enter the amount by which the draft profit for the year would change due to any correction of errors. State whether the correction increases or decreases the profit. If no correction is needed enter Nil. In the third column explain why the correction is needed, or why no correction is needed. $ Explanation 1 Training … … … … 2 Vehicles … … … … 3 Machinery … … … … 4 Inventory … … … … 5 Premises … … … … [15]

8 9706/31/O/N/21 © UCLES 2021 (c) Explain why the errors, corrected in (b), had not been caused by the computerised accounting system. … … … … [2] [Total: 25]

9 9706/31/O/N/21 © UCLES 2021 [Turn over 3 Read Source A3 in the insert. (a) Suggest two ways, other than the profit sharing ratio, in which a partnership could reward the introduction of capital and labour by partners. 1 … … 2 … … [2] Additional information Eunice and Malcolm decided to retire and agreed to sell their business to FD Limited, receiving shares in return. (b) State three differences between being a partner in a partnership and a shareholder in a limited company. 1 … … … … 2 … … … … 3 … … … … [6]

10 9706/31/O/N/21 © UCLES 2021 Additional information The partnership was sold on 31 December 2020. The summarised statement of financial position of the partnership on that date was as follows. $ Non-current assets 88 000 Trade receivables 19 600 Bank 100 107 700 Capital accounts – Eunice 80 000 – Malcolm 15 000 Current accounts – Eunice 10 000 – Malcolm (5 000) Trade payables 7 700 107 700 FD Limited took over all the assets and liabilities of the partnership including the bank account. The purchase consideration was $175 000, consisting of 140 000 ordinary shares of $1 each. These were divided between Eunice and Malcolm on the basis of the balance on each partner’s capital account on dissolution. (c) Calculate the number of shares received by each partner. Eunice Malcolm … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6]

11 9706/31/O/N/21 © UCLES 2021 [Turn over Additional information The profit for the partnership had been $30 000 a year. FD Limited had a profit for the year of $600 000 in the year ended 31 December 2020. On that date the company had 1 million ordinary shares in issue. It was the policy of the company to have a dividend cover of 3 times. (d) Advise Malcolm whether or not he made the right decision when agreeing to sell the partnership. Support your answer with calculations. … … … … … … … … … … … … … … … [7]

12 9706/31/O/N/21 © UCLES 2021 Additional information FD Limited took over the non-current assets at a valuation of $130 000. All other assets and liabilities were taken over at their book values. (e) Prepare the journal entry recording the acquisition of the partnership in the books of FD Limited. A narrative is not required. … … … … … … … … [4] [Total: 25]

13 9706/31/O/N/21 © UCLES 2021 [Turn over 4 Read Source A4 in the insert. (a) Explain how the trading account of a charity shop is different from that of a business. … … … … … … … … [4] Additional information 1 Advertising costs included $7200 for a series of advertisements running from November 2020 to April 2021. 2 On 31 December 2020 deposits paid for wheelchairs ordered but not yet manufactured amounted to $39 400. 3 Accruals at the year end included $450 for administrative expenses. 4 It was decided that the cost of the computer should be written off in equal instalments over five years.

14 9706/31/O/N/21 © UCLES 2021 (b) Prepare the income and expenditure account for the year ended 31 December 2020. … … … … … … … … … … … … … … … … … … … … … … … … … … … [7]

15 9706/31/O/N/21 © UCLES 2021 [Turn over (c) Prepare the statement of financial position at 31 December 2020. … … … … … … … … … … … … … … … … … … … … [8] (d) Suggest two ways in which X Soc could increase its income. 1 … … 2 … … [2]

16 9706/31/O/N/21 © UCLES 2021 (e) Explain why the accumulated fund of a not for profit organisation may not be equal to the balance on its bank account. … … … … … [2] (f) Explain why the financial statements of some not for profit organisations may contain entries for subscriptions. … … … … … [2] [Total: 25]

17 9706/31/O/N/21 © UCLES 2021 [Turn over Section B: Cost and Management Accounting Answer all questions. 5 Read Source B1 in the insert. (a) Prepare the purchases budget for direct materials (in dollars) for each of the months February, March and April 2022. February $ March $ April $ … … … … … … … … … … … … … … … … … … … … … … … … [6]

18 9706/31/O/N/21 © UCLES 2021 (b) Prepare the cash budget for each of the months March and April 2022. March $ April $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [14]

19 9706/31/O/N/21 © UCLES 2021 [Turn over (c) Comment on the suitability of the month of April for the replacement of the machinery. … … … … … … [2] Additional information One of the directors has suggested that the company limit production to 140 units every month to avoid having to pay the overtime premium and so reduce costs. (d) Advise the directors whether or not they should limit production to 140 units a month. Justify your answer. … … … … … … … … [3] [Total: 25]

20 9706/31/O/N/21 © UCLES 2021 6 Read Source B2 in the insert. (a) Prepare a statement showing the production cost and the selling price of one unit for each size of product. Small $ Large $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] Additional information An analysis of the monthly production overheads showed the following. Activity $ Machine set ups 10 200 Order processing 12 600 Quality inspections 7 200 Total 30 000 These activities took place as follows. Small Large Machine set ups (times) 72 30 Order processing (times) 120 60 Quality inspections (times) 12 12

21 9706/31/O/N/21 © UCLES 2021 [Turn over (b) Prepare a revised statement showing the production cost and the selling price of one unit for each size of product using the activity information. (The basis of apportionment for the selling and administrative costs should be unchanged.) Small $ Large $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [8] Additional information On 31 January 2021 it was established that 400 units of the small product and 200 units of the large product remained unsold. There was no work in progress. The profit for January 2021 using absorption costing was calculated at $48 400.

22 9706/31/O/N/21 © UCLES 2021 (c) Calculate the profit which would have been earned if selling prices had been amended to account for the levels of activity which took place. … … … … … … … … … … … … [6] (d) Advise the directors whether or not they should change the basis of allocation of overheads and the selling prices. Justify your answer. … … … … … … … … … … … [5] [Total: 25]

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24 9706/31/O/N/21 © UCLES 2021 Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. To avoid the issue of disclosure of answer-related information to candidates, all copyright acknowledgements are reproduced online in the Cambridge Assessment International Education Copyright Acknowledgements Booklet. This is produced for each series of examinations and is freely available to download at www.cambridgeinternational.org after the live examination series. Cambridge Assessment International Education is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of the University of Cambridge Local Examinations Syndicate (UCLES), which itself is a department of the University of Cambridge. BLANK PAGE

This document consists of 16 printed pages. © UCLES 2021 [Turn over Cambridge International AS & A Level ACCOUNTING 9706/31 Paper 3 Structured Questions October/November 2021 MARK SCHEME Maximum Mark: 150 Published This mark scheme is published as an aid to teachers and candidates, to indicate the requirements of the examination. It shows the basis on which Examiners were instructed to award marks. It does not indicate the details of the discussions that took place at an Examiners’ meeting before marking began, which would have considered the acceptability of alternative answers. Mark schemes should be read in conjunction with the question paper and the Principal Examiner Report for Teachers. Cambridge International will not enter into discussions about these mark schemes. Cambridge International is publishing the mark schemes for the October/November 2021 series for most Cambridge IGCSE™, Cambridge International A and AS Level components and some Cambridge O Level components.

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 2 of 16 Generic Marking Principles These general marking principles must be applied by all examiners when marking candidate answers. They should be applied alongside the specific content of the mark scheme or generic level descriptors for a question. Each question paper and mark scheme will also comply with these marking principles. GENERIC MARKING PRINCIPLE 1: Marks must be awarded in line with: • the specific content of the mark scheme or the generic level descriptors for the question • the specific skills defined in the mark scheme or in the generic level descriptors for the question • the standard of response required by a candidate as exemplified by the standardisation scripts. GENERIC MARKING PRINCIPLE 2: Marks awarded are always whole marks (not half marks, or other fractions). GENERIC MARKING PRINCIPLE 3: Marks must be awarded positively: • marks are awarded for correct/valid answers, as defined in the mark scheme. However, credit is given for valid answers which go beyond the scope of the syllabus and mark scheme, referring to your Team Leader as appropriate • marks are awarded when candidates clearly demonstrate what they know and can do • marks are not deducted for errors • marks are not deducted for omissions • answers should only be judged on the quality of spelling, punctuation and grammar when these features are specifically assessed by the question as indicated by the mark scheme. The meaning, however, should be unambiguous. GENERIC MARKING PRINCIPLE 4: Rules must be applied consistently, e.g. in situations where candidates have not followed instructions or in the application of generic level descriptors.

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 3 of 16 GENERIC MARKING PRINCIPLE 5: Marks should be awarded using the full range of marks defined in the mark scheme for the question (however; the use of the full mark range may be limited according to the quality of the candidate responses seen). GENERIC MARKING PRINCIPLE 6: Marks awarded are based solely on the requirements as defined in the mark scheme. Marks should not be awarded with grade thresholds or grade descriptors in mind. Social Science-Specific Marking Principles (for point-based marking) 1 Components using point-based marking: • Point marking is often used to reward knowledge, understanding and application of skills. We give credit where the candidate’s answer shows relevant knowledge, understanding and application of skills in answering the question. We do not give credit where the answer shows confusion. From this it follows that we: a DO credit answers which are worded differently from the mark scheme if they clearly convey the same meaning (unless the mark scheme requires a specific term) b DO credit alternative answers/examples which are not written in the mark scheme if they are correct c DO credit answers where candidates give more than one correct answer in one prompt/numbered/scaffolded space where extended writing is required rather than list-type answers. For example, questions that require n reasons (e.g. State two reasons …). d DO NOT credit answers simply for using a ‘key term’ unless that is all that is required. (Check for evidence it is understood and not used wrongly.) e DO NOT credit answers which are obviously self-contradicting or trying to cover all possibilities f DO NOT give further credit for what is effectively repetition of a correct point already credited unless the language itself is being tested. This applies equally to ‘mirror statements’ (i.e. polluted/not polluted). g DO NOT require spellings to be correct, unless this is part of the test. However spellings of syllabus terms must allow for clear and unambiguous separation from other syllabus terms with which they may be confused (e.g. Corrasion/Corrosion)

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 4 of 16 2 Presentation of mark scheme: • Slashes (/) or the word ‘or’ separate alternative ways of making the same point. • Semi colons (;) bullet points (•) or figures in brackets (1) separate different points. • Content in the answer column in brackets is for examiner information/context to clarify the marking but is not required to earn the mark (except Accounting syllabuses where they indicate negative numbers). 3 Calculation questions: • The mark scheme will show the steps in the most likely correct method(s), the mark for each step, the correct answer(s) and the mark for each answer • If working/explanation is considered essential for full credit, this will be indicated in the question paper and in the mark scheme. In all other instances, the correct answer to a calculation should be given full credit, even if no supporting working is shown. • Where the candidate uses a valid method which is not covered by the mark scheme, award equivalent marks for reaching equivalent stages. • Where an answer makes use of a candidate’s own incorrect figure from previous working, the ‘own figure rule’ applies: full marks will be given if a correct and complete method is used. Further guidance will be included in the mark scheme where necessary and any exceptions to this general principle will be noted. 4 Annotation: • For point marking, ticks can be used to indicate correct answers and crosses can be used to indicate wrong answers. There is no direct relationship between ticks and marks. Ticks have no defined meaning for levels of response marking. • For levels of response marking, the level awarded should be annotated on the script. • Other annotations will be used by examiners as agreed during standardisation, and the meaning will be understood by all examiners who marked that paper.

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 5 of 16 Question Answer Marks 1(a) Debiting the bonus issue to retained earnings rather than to share premium (1) 1 1(b) EN plc Statement of cash flows for the year ended 31 December 2020 $000 $000 Profit from operations (10 + 3 + 15) 28 (1) Depreciation 112 (1) Loss on disposal of machinery 14 (1) Increase in working capital (45) (1) Cash from operations 109 Interest paid (13) (1) Net cash from operating activities 96 (1)OF Cash flow from investing activities Purchase of non-current assets (291) (1) Proceeds of sale of machinery 47 (1) Net cash used in investing activities (244) (1)OF Cash flow from financing activities Proceeds from rights issue of shares 180 (1) Proceeds from issue of debentures 200 (1) Dividends paid (40) (1) Net cash from financing activities 340 (1)OF Net increase in cash and cash equivalents 192 (1)OF Cash and cash equivalents on 31 December 2019 (42) Cash and cash equivalents on 31 December 2020 150 (1)OF 15

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 6 of 16 Question Answer Marks 1(c) The company is profitable/is making a profit. (1) The profit for the year seems quite low. (1) ROCE using opening capital is (28/440) 6.36%/using closing capital (28/910) 3.08%. (1)OF Substantial capital receipts were needed to clear the overdraft. (1) Dividends were considerably higher than profits. (1) The trend would appear to be towards negative retained earnings leading to no dividends at a future date. (1) Accept other valid points Comments Max 3 Decision (1) mark 4 1(d) The debenture has increased gearing/risk for the company (1) but it still remains low. (1) The debenture must be repaid. (1) The interest must be paid (1) irrespective of the level of profit/unpaid interest could lead to liquidation. (1) The high bank balance at the year-end may indicate that the debenture was issued earlier than was necessary. (1) The interest on the debenture appears to be less than the dividend paid. (1) May require security/collateral. (1) Will avoid dilution of ownership. (1) Accept other valid points Max 5 5

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 7 of 16 Question Answer Marks 2(a) The company had to: select a specific date for the transfer (1) ensure the data on the manual system is up to date (1) carry out control and verification procedures on the data from the manual system (1) set up passwords for the new system (1) ensure that there is adequate virus/firewall protection (1) physical location of equipment (1) set up the account names in the new system (1) enter the opening balances on the new system (1) run both manual and computerised systems in parallel (1) organise back up of data for the new system (1) discontinue the manual system once satisfied with the new system (1) Accept other valid points Max 8 8 2(b) $ explanation 1 training 4 500 decrease (1) staff training should not be capitalised (1) and the full cost should be written off when incurred (1) 2 vehicles 2 000 increase (1) the recoverable amount is the higher of value in use and fair value (1) and the impairment loss was only $5 000 (1) 3 machinery 17 000 increase (1) the recoverable amount is higher than the carrying amount (1) and so there is no impairment loss to account for (1) 4 inventory 8 000 increase (1) the damage did not relate to a condition at the year end and is a non-adjusting event (1) which only needs to be disclosed in a note if material (1) 5 premises Nil (1) revaluation does not affect profit (1) as it is credited to a revaluation reserve (1) Accept other valid points. 15 2(c) Because they arose from errors in data input (1) rather than processing errors (1) 2

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 8 of 16 Question Answer Marks 3(a) Interest on capital (1) Partnership salary (1) 2 3(b) partner shareholder has joint and several liability (1) enjoys limited liability (1) receives appropriations of profit (1) receives dividends (1) death of partner causes legal end of partnership (1) death of shareholder does not affect legal existence of company (1) has control of the business (1) has voting rights/ appoints board of directors (1) Accept other valid points Any three pairs, Max 6 6 3(c) Eunice Malcolm $ $ Capital 80 000 15 000 (1) both Current 10 000 (5 000) (1) both Profit on realisation 60 000 (1) 15 000 (1) 150 000 25 000 (1)OF both Number of shares 120 000 20 000 (1)OF both 6

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 9 of 16 Question Answer Marks 3(d) FD Limited has been paying a dividend per share of $0.20 (1) per year. If this continues Malcolm will receive $4 000 a year (1)OF as a shareholder. As a partner his share of profit was $6 000 a year (1). It would therefore appear that his income will be lower (1)OF. However he is no longer providing labour to the partnership and so is free to work and earn elsewhere (1). The debit balance on his current account suggests his need for funds was higher than his share of profit (1). He now has the possibility of capital growth in the value of his shares (1). He now will have limited liability (1). He has less control (1). Accept other valid points. Comments Max 3 Calculations Max 3 Decision (1) 7 3(e) Debit Credit $ $ Tangible non-current assets 130 000 (1) Goodwill 33 000 (1) Trade receivables 19 600 Bank 100 Trade payables 7 700 Ordinary share capital 140 000 (1) Share premium 35 000 (1) 4 Question Answer Marks 4(a) There is no value for cost of sales (1) as there have been no purchases (1). No value is ascribed to inventory held in the shop (1) which is prudent (1) and as the goods are donated cost will always be less than net realisable value (1). No wages are payable as the society is run by volunteers (1). Accept other valid points. Max 4 4

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 10 of 16 Question Answer Marks 4(b) X Soc Income and expenditure account for the year ended 31 December 2020 $ $ Grants 80 000 }(1) Cash donations 96 520 } Profit from shop 90 600 (1) 267 120 Cost of wheelchairs 173 260 (1) Administrative expenses 14 670 (1) Advertising and fundraising 22 440 (1) Depreciation of computer 1 400 (1) 211 770 Surplus/excess of income over expenditure 55 350 (1)OF 7 4(c) X Soc Statement of financial position at 31 December 2020 $ Non-current asset Computer 5 600 (1) Current assets Other receivables W1 45 200 (3) Bank 7 720 (1) Total assets 58 520 Accumulated fund 55 350 (1)OF Current liabilities Other payables W2 3 170 (2) 58 520 W1 shop rent 1 000 (1) + advertising 4 800 (1) + deposits 39 400 (1) = $45 200 W2 administrative expenses 450 (1) + shop operating costs 2 720 (1) = $3 170 8

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 11 of 16 Question Answer Marks 4(d) Keep cash in a deposit account to earn interest (1) Open shops in different towns (1) Undertake fundraising activities (1) Seek sponsorship (1) Accept other valid points Max 2 2 4(e) The accumulated fund represents total surpluses and deficits (1) but the balance on the bank account represents net cash paid in to the account (1). Accept other valid points 2 4(f) These organisations have members (1) who pay a subscription to pay for the facilities that they are using (1). Accept other valid points 2 Question Answer Marks 5(a) February March April $ $ $ Production 5200 5920 6360 (1) row Closing inventory 1480 1590 1380 (1) row 6680 7510 7740 Opening inventory (1300) (1480) (1590) (1) row Purchases 5380 (1)OF 6030 (1)OF 6150 (1)OF 6

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 12 of 16 Question Answer Marks 5(b) March April $ $ Receipts Cash sales 7 500 8 000 (1) both Credit sales 19 500 (1) 22 500 (1) Sale of machinery 0 2 000 * 27 000 32 500 Payments Purchases 5 380 6 030 (1)OF both Labour – basic 11 840 (1) 12 720 (1) – overtime 80 (1) 190 (1) Variable overheads 3 700 (1) 3 975 (1) New machinery 0 13 000 (1)*both Other costs 3 800 3 800 (1) both 24 800 39 715 Net cash 2 200 (7 215) Balance b/f 1 700 (1) 3 900 Balance c/f 3 900 (3 315) (1)OF 14 5(c) April is the busiest month in terms of units of production (1) and therefore the one in which the company is least able to cope with a possible disruption of production (1). The funds are not available in April to pay for the new machinery without the bank account becoming overdrawn (1). As there may be a cash surplus in future a short delay could avoid the need to go overdrawn (1). April may be the only month in which the manufacturer can supply/install the machinery (1). Accept other valid points Max 2 2

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 13 of 16 Question Answer Marks 5(d) The company could restrict production and still manage the level of sales (1). If production was restricted then the inventory of units of finished goods at the end of April would be 6 rather than 33 (1). The risk of a shortage of finished goods would be increased as there would be less of a buffer against any problem which might arise (1). The cost of overtime is very small in relation to the whole of the labour cost and might be considered immaterial (1). Overtime payments are only necessary because of the rigid inventory policy (1). Even when overtime is paid the product still has a positive contribution (1). Accept other valid points Comments Max 2 Decision (1) 3 Question Answer Marks 6(a) Small Larg $ $ Direct material 5 20 Direct labour 2 6 7 26 (1) both Production overheads 5 5 (1) both Production cost per unit 12 31 (1)OF both Selling and administrative overheads 4 4 (1) both Total cost 16 35 Mark-up (50%) 8 17.50 (1)OF both Selling price per unit 24 52.50 (1)OF both 6

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 14 of 16 Question Answer Marks 6(b) Small Large $ $ $ $ Direct material and labour 7 26 * Production overheads Machine set ups total 7 200 3 000 (1) both Order processing total 8 400 4 200 (1) both Quality inspections total 3 600 3 600 (1) both 19 200 10 800 Per unit 3.84 10.80 (1)OF both Production cost per unit 10.84 36.80 (1)OF both Selling and administrative overheads 4 4 (1*) both Total cost 14.84 40.80 Mark-up (50%) 7.42 20.40 (1)OF both Selling price per unit 22.26 61.20 (1)OF both * both costs for both sizes needed for mark 8

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 15 of 16 Question Answer Marks 6(c) $ $ Sales revenue 4 600 × 22.26 = 102 396 (1)OF 151 356 + 800 × 61.20 = 48 960 (1)OF Cost of production (54 200 + 36 800) 91 000 (1) Closing inventory 400 × 10.84 (1)OF + 200 × 36.80(1)OF (11 696) Cost of sales 79 304 Gross profit 72 052 Selling and administrative 24 000 Profit 48 052 (1)OF OR Sales revenue 151 356 (2) Cost of sales W1 79 304 (3) Gross profit 72 052 Selling and administrative 24 000 Profit 48 052 (1)OF W1 4 600 × 10.84 = 49 864 (1)OF 800 × 36.80 = 29 440 (1)OF 79 304 (1)OF 6

9706/31 Cambridge International AS & A Level – Mark Scheme PUBLISHED October/November 2021 © UCLES 2021 Page 16 of 16 Question Answer Marks 6(d) The value for production cost is more realistic when it takes the level of activity into account (1). However the split of the selling and administrative costs is still arbitrary (1) as is the rate of mark-up (1) which does not take market conditions into account (1). As the small product seems to be selling well at $24 there is no reason to drop the price (1). However the price for the large product could possibly be increased (1). If the prices of both products were changed as per part (b) then profit would fall. (1)OF The change in inventory value has only short term significance/is only relevant until the items are sold (1). The directors should undertake some market research (1) and consider what competitors are charging (1). It can be costly/time consuming to split overheads by activity (1). Accept other valid points Comments Max 4 Decision (1) 5