Costs and cost behaviour — Paper 2 — A Level Accounting 9706 topical questions

Question 1

Ken produces components for mobile telephones. The following budgeted data is available for the year ending 31 December 2018: Per unit $ Se…

Accepted Answer

4(a) $ $ 3 Selling price 5.25 Direct materials 0.50 Direct labour 0.75 Direct expenses 0.25 1.50 3.75 Contribution per unit: 3.75 (1) × 16 000 units (1) = $60 000 (1) 4(b)(i) $ 2 Fixed costs 60 000 + Profit 75 000 Contribution required: 135 000 (1)OF ÷ 3.75 = 36 000 units (1OF) 4(b)(ii) $3.75* 2 = 71.43% (1)OF $5.25* *1 OF both 4(c) It shows how much contribution is earned from each $1 of sales revenue (1) 1 4(d)(i) It represents the margin of safety (1) 1 4(d)(ii) The amount by which actual sales can fall short of the budgeted sales before he 2 reaches break-even point (1) and then makes no profit (1). 4(e) Units $ 7 Total revenue (TR) 0, 0 0, 189 000 36 000 units × $5.25 Fixed costs (FC) 0, 60 000 Total costs (TC) 0, 60 000 36 000, 114 000 36 000 units × $1.50 = 54 000 + 60 000 $ 000s TR 200 (1) 180 160 Profit area 140 break-even TC 120 point (1) 100 80 (1) Fixed costs 60 40 Loss area 20 0 5000 000 000 000 000 000 000 000 10 15 20 25 30 35 40 Output in units Marks (incl labels) 1 × 3 = 3 marks 1 mark profit area, 1 mark loss area and 1 mark break-even point 1 mark for axis 4(f) Limitations: 3 • Some costs are not easily classified as fixed or variable. • Some costs are semi-variable. • It assumes fixed costs stay the same. • Straight lines can be misleading – discounts can cause curved lines. • A chart can be time consuming to prepare. • It assumes the selling price is constant at all levels of output. • It can be misleading for those with limited accounting knowledge. • Can only be applied to one product at a time (1 mark) × any 3 limitations, max 3 4(g) New contribution = 6.00 – 1.50 = $4.50 (1) 5 Fixed cost $60 000 Profit $75 000 Target 135 000 (1) Sales per month = (135 000 / 4.50) (1)OF = 30 000 / 12 (1) = 2500 units (1)OF 4(h) Proceed because 4 • It covers the budgeted total costs and provides a profit. • It provides a positive contribution. Need to bear in mind • The market price of similar products. • How innovative is his product to justify the price increase / will customers expect higher quality for higher price. • Will customers accept the increase or go elsewhere / decrease in demand. • Fixed costs are covered for now but they may change in the future. • Short term view – he could lose profit in the long term. Advice 1 mark (1 mark) × any 3 reasons, max 3 Total: 30

Question 2

Y Limited manufactures three products, Exe, Wye and Zed. The following budgeted information is available for the month of July 2017: Per un…

Accepted Answer

4(a) Exe Wye Zed 3 Selling price 96.00 128.00 140.00 Variable costs 54.40 71.20 95.20 Contribution 41.60 (1) 56.80 (1) 44.80 (1) 4(b) $ 3 Exe $41.60×100 4 160 Wye $56.80×120 6 816 Zed $44.80×60 2 688 Contribution 13 664 (1)OF Fixed costs 7 000 (1) Profit 6 664 (1)OF 4(c) Exe 1×100 100 1 Wye 2.5×120 300 Zed 5×60 300 Total machine hours 700 (1) 4(d) Exe Wye Zed 10 Unit contribution 41.60 56.80 44.80 Machine hours 1 2.5 5 Contribution per machine hour 41.60 22.72 8.96 (1)OF Ranking 1 2 3 (1)OF Production plan Exe × 100 (1OF) 100 hours Wye × 120 (1OF) 300 hours Zed × 20 (1OF) 100 hours Total 500 hours $ Exe $41.60×100 4 160 (1)OF Wye $56.80×120 6 816 (1)OF Zed $44.80×20 896 (1)OF Contribution 11 872 (1)OF Fixed costs 7 000 Profit 4 872 (1)OF 4(e) Decision. (1) 4 Advantages (Maximum 2) Will enable company to fulfil maximum demand. (1) Will enable full utilisation of resources. (1) Disadvantages (Maximum 2) Will reduce profit. (1) Forecast maximum demand may not be achieved thus reducing profit even further. (1) 1 mark for decision plus maximum 3 marks for justification 4(f) Make or buy decisions. (1) 3 Special order decisions. (1) Decide whether or not to cease manufacturing of a product. (1) Decide whether to close a department. (1) Maximum 3 marks 4(g) Department 1: 560 000/140 000=$4.00 per labour hour (1) 2 Department 2: 304 000/160 000=$1.90 per machine hour (1) 4(h) Department 1: (124 000×$4.00)=496 000–533 000=$37 000 (1)OF under 4 absorbed (1)OF Department 2: (151 000×$1.90)=286 900–294 000=$7100 (1)OF under absorbed (1)OF Total: 30

Question 3

J Limited manufactures a single product, a leather suitcase. The following forecast information is available. Costs per unit $ Direct mater…

Accepted Answer

4(a) Benefits (Max 2) 4 Calculate the break-even point Calculate margin of safety Helps with (short term) decision making Easy to predict profits and losses at different levels of output. Quick method of calculating to show impact of decision on profits. Limitations (Max 2) Some costs are difficult to classify as fixed or variable. Not applicable when multiple products are involved. Assumes selling price remains constant. Assumes variable/fixed costs remain constant. Based on estimates that may not be accurate. Assumes that all production is sold. Accept other valid answers. 4(b) $ 3 Variable costs (15 + 8 + 2) 25 (1) Selling price (25 × 1.8) 45 (1) Contribution per unit 20 Fixed costs ((17 400 + 7800 + 12 000 + 13 200) / 12) 4200 Breakeven point (4200 / 20) 210 units (1) 4(c)(i) In units: 240 – 210 = 30 units (1)OF 2 4(c)(ii) In revenue: $45 × 30 = $1350 (1)OF 4(d) Maximum capacity 240 × 100 / 75 320 units (1) 3 $ Contribution 320 × $20 6400 (1OF) Fixed costs 4200 Maximum profit 2200 (1OF) 4(e) 8 Sales revenue 240 × $49.50 11 880 (1) 150 × $42 6 300 (1) 18 180 Variable costs Direct material (390 × $15) (5 850) (1) Direct labour (320 × $8) + (70 × $10) (3 260) (1) Variable overheads (390 × $2) (780) (1) (9 890) Contribution 8 290 (1of) Fixed costs (4200+500+200) (4 900) (1) Maximum profit 3 390 (1of) Alternative presentation Contribution Existing customers 240 × (49.50 – 25.00) 5 880 (1) Bart Supplies 80 (1) × (42 – 25) (1) 1 100 70 (1) × (42 – 27) (1) 1 710 Total contribution 8 290 (1) Fixed costs (4200 + 500 + 200) 4 900 (1) Maximum profit 3 390 (1) 4(f) Benefits (maximum 4 marks) 7 • Profits increase (1) by $2790 (1) (3390 – 600) • Directors’ target profit (of $40 680) (1of) per annum is greater than (30 000) target. (1) • Business utilises full capacity (1) which will maximise profits. (1) • Increased advertising may result in increased business (1) and new customers leading to growth. (1) • Produces a positive contribution (1) $1890 (1) Limitations (maximum 4 marks) • Workforce working to full capacity (1) may affect product quality/output. (1) • Existing customers may be dissatisfied with the price increase, (1) resulting in lost sales/lower profits (1) • Additional storage rental commitment may not be required if new contract ceases, (1) reducing profits (1) • Becoming reliant on one customer (1) as don’t know how long the order may last (1) (1) Mark for advice and overall max 6 marks for justification 4(g) Facilitates profit maximisation (1) 3 Enhanced cash management by identifying future inflows and outflows. (1) Facilitates working capital requirement planning. (1) Enables capital expenditure planning. (1) Note Benefits must be financial benefits. Do not reward: co-ordination, planning, decision making etc. unless developed from a financial perspective. 1 mark for each valid benefit. Maximum 3 marks.

Question 4

S Limited manufactures three different products. The following budgeted information is available: Products A B C $ $ $ Monthly sales revenu…

Accepted Answer

4(a) Product A Product B Product C Contribution per unit ($) 9 9 21 (1)row Contribution per limiting factor ($) 1.5 (1) 1 (1) 7 (1) Ranking 2 3 1 (1)OF for row Production (units) Contribution per unit $ Total $ Product A 2500 (1) 9 22 500 Product B 1000 (1) 9 9 000 Product C 5000 (1) 21 105 000 Total contribution 136 500 (1)OF Less: Fixed overheads 138 000 (1) Budgeted profit / loss (1 500) (1)OF 11 4(b) Production (units) Contribution per unit $ Total $ Product A 4000 9 36 000 (1)row Product B 0 9 0 (1)row Product C 5000 21 105 000 (1)row Total contribution 141 000 (1)OF Less: Fixed overheads 138 000 (1) Budgeted profit / loss 3 000 (1)OF 6 Question Answer Marks 4(c) Advantages: The company has a better chance of fulfilling customers’ orders. If the shortage is only short term there is less chance of losing customers in the long term. Fewer dissatisfied customers. Less chance of idle resources. Disadvantages: Products may be dependent on each other. Customers may cease purchasing some products if some are unavailable. Company makes a budgeted loss if minimum demand is met. If the shortage is long term, the company will always be operating at a loss. Competitors may exploit the material shortage. 1 for decision, 3 for advantages and 3 for disadvantages. 7 4(d) Margin of safety is the difference between a given volume of sales (1) and break-even point (1). It can be expressed in units or as a percentage of sales (1). Max 2 2 4(e) Margin of safety provides an assessment of risk (1) by indicating the extent to which expected output can fall (1) before a loss is made (1). It shows the ability to withstand adverse trading conditions (1). 4

Question 5

Zinan is a manufacturer and makes a single product. He currently uses marginal costing. The following budgeted information is available for…

Accepted Answer

4(a) $ Direct labour 38 500 Direct material 24 750 Variable factory cost (13 750 – 5 500) 8 250 71 500 (1) ÷ 11 000 units = $6.50 per unit (1) or $84 500 ÷ 13 000 units = $6.50 per unit 2 Question Answer Marks 4(b) Year 1 Year 2 $ $ Revenue (10 000 × $18) 180 000 (11 000 × $18) 198 000 (1) both Variable production cost (10 000 (1) × $6.50) (65 000) (11 000 (1) × $6.50) (71 500) Variable selling costs (180 000 × 5%) (9 000) (198 000 × 5%) (9 900) (1)OF both Contribution 106 000 (1)OF 116 600 (1)OF Alternative layout Year 1 Year 2 Per unit $ $ $ Selling price 18 (1) Variable production costs (6.50) 11.50 × 10 000 (1) = 115 000 × 11 000 (1) = 126 500 Variable selling costs (9 000) (9 900) (1)OF both Contribution 106 000 (1)OF 116 600 (1)OF 6 Question Answer Marks 4(c) Year 1 Year 2 $ $ Direct labour 38 500 45 500 Direct material 24 750 29 250 Factory cost 13 750 15 250 $77 000 $90 000 ÷ 11 000 Units ÷ 13 000 = $7 Per unit (1) $6.92 Per unit (1) 2 4(d) It is more time consuming to calculate the overhead absorption rate and adjust for over / under absorption. It is more complicated to calculate and managers may need training. It is irrelevant in short term decision making as fixed costs don’t change. Fixed costs relate to a period in time and so can be misleading to charge to production units. The basis used to apportion and absorb overheads may be arbitrary. (1 mark) × any two limitations Max 2 2 Question Answer Marks 4(e) Year 1 Year 2 $ $ Revenue (10 000 × $18) 180 000 (11 000 × $18) 198 000 (1) row Production cost (10 000 × $7) (70 000)(1)OF (1 000 × $7) (7 000)(1)OF (10 000 × $6.92) (69 200)(1)OF Selling costs: – variable (180 000 × 5%) (9 000) (198 000 × 5%) (9 900) (1) row – fixed (3 500) (3 500 × 102%) (3 570) (1) row Profit 97 500 108 330 (1)OF row Alternative layout Year 1 Year 2 $ $ Revenue (10 000 × $18) 180 000 (11 000 × $18) 198 000 (1) row Opening inventory – – (1 000 × $7) 7 000 (1)OF Purchases (11 000 × $7) 77 000 (13 000 × $6.92) 89 960 } (1)OF } both Closing inventory (1 000 × $7) (7 000) (3 000 × $6.92) (20 760) } Production cost (70 000) (1)OF (76 200) Selling costs: – variable (180 000 × 5%) (9 000) (198 000 × 5%) (9 900)(1) row – fixed (3 500) (3 500 × 102%) (3 570)(1) row Profit 97 500 108 330 (1)OF row 7 Question Answer Marks 4(f) Using marginal costing Closing inventory is valued at variable production cost and so shows a lower closing inventory value. (1) Fixed overheads are treated as period costs (1) and are written off in the period’s income statement. (1) Using absorption costing Closing inventory is valued at full production cost and so shows a higher closing inventory value. (1) Fixed overheads are treated as part of production costs (1) and are carried forward as part of the inventory value. (1) Max 3 3 4(g) Calculation if variable selling expenses excluded (they remain the same) Workings Lost order in year 1 Replacement order $ $ Selling price 18 ($18 × –7.5%) 16.65 Variable production cost – 6.50 – 6.65 * Contribution 11.50 × 3 000 units = $34 500 10.00 × 3 000 units = $30 000 * Variable production cost 6.50 Additional direct labour 0.15 6.65 Change in budgeted profit: $ Loss of contribution $34 500 – $30 000 = (4 500) (1) Increase in advertising costs (1 000) (1) Decrease in profit (5 500) (1)OF 3 Question Answer Marks 4(g) Alternative calculation if variable selling expenses included Workings Lost order in year 1 Replacement order $ $ Selling price 18 16.65 Variable production cost – 6.50 – 6.65 Variable selling expenses – 0.9 * – 0.9 * Contribution 10.60 × 3 000 units = $31 800 9.10 × 3 000 units = $27 300 * $9 000 / 10 000 units = 0.9 Change in budgeted profit: $ Loss of contribution $31 800 – $27 300 (4 500) (1) Increase in advertising costs (1 000) (1) Decrease in profit (5 500) (1)OF 3 Question Answer Marks 4(h) Proceed or not (1) The campaign will result in a loss of profit but will still have positive contribution. How short term is the price decrease / is it only for this one order? Will it affect year 2 profits? Will fixed costs be covered in the long term? Will the increase in advertising be enough to generate the expected level of demand? What will the existing customers reactions be to the price decrease for new customers? If they do not get new customers: What will the morale of the existing workers be like after staff reduction? Will the quality of the goods go down if there are fewer workers? How temporary will the loss of staff be? Will Zinan be able to re-recruit the skilled staff in year 2 when new orders come in? At what extra cost? (1 mark) × any 4 considerations Max 5 5

Question 6

DP Limited is a large manufacturing and retailing company. The following information is available. Current selling price per unit $3.60 Cur…

Accepted Answer

4(a) 2 4(b) 2000 + (2000 × 150%) = 5000 (1) × 4 weeks = 20 000 units (1) 2 4(c) $ Selling price ($3.60 × 80%) 2.88 (1) Variable cost ($3.60 × 55%) 1.98 (1) Contribution per unit 0.90 (1) Total contribution (20 000 × 0.90) 18 000 (1)OF Additional fixed costs (6 000) (1) Profit 12 000 (1)OF Additional loss (12 960 – 12 000) 960 (1)OF 7 4(d) Required contribution 12 960 + 6 000 $18 960 (1) Required sales volume 18 960 / 0.90 21 067 units (1) Weekly sales volume 21 067 / 4 5 267 units (1) % increase required (5 267 / 2 000) × 100 263% (1) 4 Question Answer Marks 4(e) Based on directors’ forecasts, incremental loss $960 (1)(OF). The required increase of $960 is only slightly higher than the directors’ expectations. (1) Positive contribution made (1)(OF). How accurate are the directors’ forecasts of sales/additional costs? (1) The promotion may have a positive/negative impact on the company’s other products. (1) Have the directors considered the reaction of employees to the promotion? (1) Have the directors considered the reaction of competitors? (1) Does the company have the spare capacity to service the promotion? (1) Accept other valid points. Advice (1) Financial factors – Max 3 marks Non-financial factors – Max 3 marks 5 4(f) Used to determine the effect that changes in costs and volume (1) will have on the company’s operating income and net income (1). 2 Question Answer Marks 4(g) Sales price per unit is constant (1) Total fixed costs are constant (1) Variable cost per unit is constant (1) All production is sold (1) If the company sells more than one product, the product mix remains constant (1) Costs are only affected as a result of changes in activity (1) Max 4 marks 4 4(h)(i) 445 000 26 400 = $16.86 (1) per labour hour (1) 2 4(h)(ii) Based on budgeted data (1) which may lead to inaccurate absorption rates (1) Can artificially inflate profits (1) when there are changes in inventory values (1) Not useful for short-term decision making (1) as each unit of production includes fixed costs which remain the same (1) Not useful as a basis for responsibility accounting (1) as fixed costs are out of control of managers (1) Accept other valid points. 1 mark for identification and 1 mark for development Max 2 marks 2

Question 7

DH Limited manufactures a single product. The following information is available for one unit of that product: $ Selling price 20 Direct ma…

Accepted Answer

4(a) = $400 000 Contribution (20 – 8 – 5 – 3) = $4.00 (1) Breakeven point = 400000 4 = 100 000 units (1) OF 2 4(b) $ Contribution (200 000 × 4) = 800 000 (1) OF Fixed costs 400 000 Profit 400 000 (1) OF 2 4(c) $ $ Sales 300 000 × 18 5 400 000 (1) Direct materials 300 000 × 7 2 100 000 (1) Direct labour 250 000 × 5 1 250 000 (1) Direct labour 50 000 × 6.25 312 500 (1) Variable overheads 300 000 × 3 900 000 (1) Total variable costs 4 562 500 Contribution 837 500 (1) OF Fixed overheads 300 000 × 1.40 420 000 (1) Budgeted profit 417 500 (1) OF 8 Question Answer Marks 4(d) Contribution 837 500 300 000 = 2.79 Break-even point = 420000 2.79 (1) = 150 538 units (1) OF (Accept a range of units) 2 4(e) 300 000 – 150 538 (1) OF = 149 462 units       000 300 462 149 × 100 = 49.82% (1) OF 2 4(f) Positive (max 3) Margin of safety is high at 49.82% (1) Budgeted profit shows an increase of $17 500 (1) Will increase market share (1) Factory will be working at 100% capacity (1) Negative (max 3) How reliable are the directors’ estimates? (1) Will competitors reduce their price affecting the estimated sales growth? (1) Will employees be willing to work the overtime? (1) Will quality suffer because of working overtime? (1) Overall max (4) for comments Decision (1) 5 Question Answer Marks 4(g) Will new supplier offer the same quantity discount? (1) How certain is the possibility of the shortfall? (1) Will the quality of the material from the new supplier be acceptable? (1) How reliable will the new supplier be? (1) How long will new supplier maintain the same price? (1) Will the new supplier offer the same credit terms? (1) Accept other valid responses. Max 3 marks 3 4(h)(i) Allocation. Charging overheads/costs to a specific cost centre (1) where those overheads are clearly identified with that cost centre. (1) 2 4(h)(ii) Apportionment. Charging overheads/costs that cannot be clearly identified with a specific cost centre (1), to cost centres on an appropriate basis. (1) 2 4(h)(iii) Absorption. Where the total of allocated and apportioned overheads/costs (1) is charged to units of production. (1) 2

Question 8

W Limited operates a system of marginal costing. The company makes two products, Product A and Product B. The directors provided the follow…

Accepted Answer

4(a) Product A $ Product B $ Total $ revenue 600 000 (1) 480 000 (1) 1 080 000 direct materials 140 000 96 000 236 000 direct labour 150 000 126 000 276 000 variable overheads 100 000 90 000 190 000 total contribution 210 000 (1) 168 000 (1) 378 000 fixed costs 130 000 120 000 (1) both 250 000 budgeted profit 80 000 (1) OF 48 000 (1) OF 128 000 (1) OF OR Product A Product B Total unit contribution $21 (1) $28 (1) no of units × 10 000 × 6 000 total contribution $210 000 (1) $168 000 (1) $378 000 fixed costs $130 000 $120 000 (1) both $250 000 budgeted profit $80 000 (1) OF $48 000 (1) OF $128 000 (1) OF 8 4(b) Product A $ Product B $ Total $ Revised unit contribution 21 – 4 = 17 (1) OF 28 – 4 = 24 (1) OF Revised fixed costs, total for the year 130 000 – 75 000 (1) + 21 000 (1) = 76 000 120 000 – 25 000 (1) + 7 000 (1) = 102 000 Revised budgeted profit for the year (17 × 10 000) – 76 000 = 94 000 (1) OF (24 × 6 000) – 102 000 = 42 000 (1) OF 136 000 (1) OF 9 Question Answer Marks 4(c) Financial factors: Max 3 If the production level is as budgeted, machine rental is ($8000) lower / profit is ($8000) more with the new agreement. (1) Fixed costs will reduce by $72 000 (1) If the production level is below budget, the saving is greater with the new agreement. Therefore, the new agreement reduces risk. (1) Even if production levels rise and increase the total cost, unit contribution is still positive. (1) If production levels rise, machine rental will become higher than before under the new agreement. (1) The removal of the old machinery and installation of the new may incur additional costs. (1) There could be costs of staff training with the new machinery. (1) Non-financial factors: Max 3 The new agreement could mean new machinery which is more up-to-date / reliable / economical to run. (1) The removal of the old machinery and installation of the new would be very disruptive . (1) There could be teething problems with the new machinery. (1) There would be a learning curve. (1) Will new machinery produce equivalent quality The new machinery has unknown reliability/availability of spare parts. (1) Accept other valid points. Overall max 6 for justification + (1) for decision 7 Question Answer Marks 4(d) The business can calculate contribution per unit of scarce resource. (1) Thus, it can rank its products (1) and prepare a production schedule (1) to maximise profit (1) by prioritising products with the highest contribution per unit of scarce resource. (1) Max 4 4 4(e) Make or buy decisions (1) Accepting orders at below normal selling price (1) Closing department / discontinuing product (1) Accept other valid points. Max 2 2

Question 9

Ravi manufactures two products, Exe and Wye. Each product has allocated fixed costs. The following chart shows budgeted information for Exe…

Accepted Answer

4(a)(i) $60 000 (1) 1 4(a)(ii) $40 000 (1) 1 4(a)(iii) $30 000 (1) 1 4(a)(iv) $20 000 (1) 1 Workings: { 90 { { 80 (iii) { { 70 { { 60 50 $000 40 30 20 10 0 Sales revenue (iv) (i) Total costs (ii) Fixed costs Variable costs 0 10 20 30 40 50 60 Units (in thousands) Question Answer Marks 4(b) Budgeted profit Budgeted units 105 000 $ Sales revenue 315 000 Less direct labour 210 000 Less direct materials 52 500 Contribution 52 500 Less allocated fixed costs 34 500 Budgeted profit 18 000 (1) Profit with changes $ per unit or $ Selling price $3 × 1.05 = 3.15 (1) × 105 000 units 330 750 Less direct labour $4 ×1.05 = $4.20 × 0.5 hour = 2.10 (1) × 105 000 units 220 500 Less direct materials $2 × 1.02 = $2.04 × 0.25 kilos = 0.51 (1) × 105 000 units 53 550 Contribution 0.54 56 700 Alternate working for contribution per unit $ Selling price 000 105 000 $315 = $3.00 × 1.05 3.15 Less direct labour 000 105 000 $210 = $2 × 1.05 2.10 Less direct material 000 105 500 $52 = $0.5 × 1.02 0.51 Contribution per unit 0.54 $ Total contribution $0.54 × 105 000 units = 56 700 (1) OF Less sales bonus 1 575 * see working Less allocated fixed costs $34 500 + 6000 = 40 500 (1) 14 625 (1) OF * sales bonus 105 000 – 80 000 = 25 000 units × $3.15 = $78 750 (1) OF × 2% = $1575 (1) OF Budgeted profit = $18 000 New profit = − $14 625 Change = $3375 decrease (1) OF 10 Question Answer Marks 4(c) Break-even budgeted new Allocated fixed costs $34 500 $40 500 (1) OF both Contribution per unit ÷ 0.50 ÷ 0 .54 (1) OF both Break-even units 69 000 75 000 Selling price per unit × $3 × $3 .15 (1) OF both Break-even $207 000 $236 250 (1) OF both = increase of $29 250 (1) OF 5 4(d) Margin of safety New 105 000 – 75 000 = 30 000 units } (1) OF both budgeted 105 000 – 69 000 = 36 000 units } decrease of 6000 units (1) OF 2 4(e) Table to show analysis of results Budgeted After changes Contribution $52 500 $56 700 Profit $18 000 $14 625 Break-even 69 000 units 75 000 units Break-even $207 000 $236 250 Margin of safety 36 000 units 30 000 units 5 Question Answer Marks 4(e) Recommend: The changes are not worthwhile. (1) Because: Although budgeted contribution is higher, the profit after the changes is lower (1), due to allocated fixed costs increasing – advertising and sales bonus. (1) The margin of safety is lower (1) which means there is less of a buffer / comfort zone before Wye starts to make a loss. (1) The break-even point is higher (1) which increases the risk (1) of Wye not making enough sales to cover fixed costs. (1) Accept other valid points. (1 mark) × any 4 reasons − Max 4 4(f) Possible answers: Identify underperforming products (1) Ensure sufficiently skilled labour is available to meet production (1) Ensure sufficient finance is available to continue operations and any planned investments (1) Ensure the correct quality/cost of material / discounts can be obtained from suppliers (1) Be able to adapt to changes in the future / provides alternatives if financial targets are not being met (1) 4 Question Answer Marks 4(f) Price products competitively (1) Avoid ‘firefighting’ / avoid potential problems in the future (1) Assess any competition / markets for products (1) Estimate the likely future position of business − short term and long term (1) Identify areas of responsibility of managers (1) (1 mark) × any 4 advantages Accept other valid points.

Question 10

DL Limited will soon be introducing a system of budgetary control. The directors are aware that this should provide a number of advantages.…

Accepted Answer

4(a) Managers could be involved in setting targets/budgets for their areas of responsibility (1) 6 resulting in possible increase in motivation (1) If managers are not involved in setting targets/budgets motivation could be reduced (1) especially if targets are seen to be unachievable/unrealistic (1) Managers’ efficiency could be improved (1) as a result of having clear objectives/targets (1) However, budgetary control might prove to be restrictive (1) resulting in otherwise beneficial opportunities being rejected by managers(1) Any three points (1 + 1 for development) Accept other valid responses. 4(b) Contribution per unit 3 $ $ Selling price 69 (1) Less Variable costs Direct materials 6.60 Direct labour 43.16 Other 2.24 52 (1) Contribution 17 (1)OF 4(c) $ 3 Total contribution 24 500 × $17 416 500 (1) Less fixed costs 374 000 Actual profit 42 500 (1) Target profit 50 000 7 500 (1) Que Ma stio Answer rks n 4(d) Option A profit 6 (i) Maximum capacity using overtime is 28 000 units + 20%, i.e. 33 600 units Demand for Option A: 24 500 units + 40%, i.e. 34 300 units Hence 33 600 will be produced (1) Normal contribution becomes $17 – $3 (reduction in selling price) + 0.33 (discount on materials) = $14.33 (1)OF  1  Contribution in overtime = $14.33 −  × $43.06,i.e.10.79  = $3.54 (1)OF  4  $ Contribution from normal working 28 000 × $14.33 (of) 401 240 (1)OF Contribution in overtime 5 600 (of) × $3.54 19 824 421 064 (1)OF Less fixed costs 374 000 47 064 (1)OF 4(d) Option B profit 5 (ii) Change in contribution: $17 + 0.60 (cheaper materials), i.e. $17.60 per unit Change in fixed costs per annum: $ Current fixed costs 374 000 Increased depreciation 4 000 (1) Interest charges (8% × $20 000) 1 600 Advertising campaign 60 000 (1) 439 600 (1)OF $ Contribution from normal working 28 000 × $17.60 (of) 492 800 (1)OF Less fixed costs 439 600 53 200 (1)OF Que Ma stio Answer rks n 4(e) Advice (1) 7 Justification Reasons for choosing Option A: Will increase profits by $4 564 (1of) on latest performance (1) Will not involve any permanent change in fixed costs (1) Not changing fixed costs will be beneficial if increased demand is not maintained (1) Will ensure factory is working to full capacity making most efficient use of existing resources (1) Will avoid applying for bank loan which will increase company’s liabilities (1) Application for bank loan for Option B may be refused (1) Reasons for choosing Option B Will increase profits by the larger amount $10 700 (1)OF on latest performance (1) Will achieve target profit for factory (1) and exceed target by $3 200 (1) Option A does not achieve target profit ((1) and misses target by $2 936 (1) Will avoid the use of overtime working which may not suit workforce (1) Will avoid the use of overtime working which may cause deterioration in quality of production (1) Will ensure factory is working to full capacity making most efficient use of existing resources (1) Advice (1) plus Max (6) for justification

Question 11

Kevin runs a small manufacturing business. He is considering which method of inventory valuation he should use. REQUIRED (a) State two adva…

Accepted Answer

4(a)(i) FIFO 2 Simple to calculate (1). Approved by IAS2 (1) Inventory valuations are based on the most recent receipts (1) Max 2 Accept other valid responses. 4(a)(ii) LIFO 2 Simple to calculate (1) When prices rise profits will fall (1). May correspond to flow of inventory – ‘top of pile’ (1). Max 2 Accept other valid responses. 4(a)(iii) AVCO 2 Automatically adjusts for price rises and falls (1). Approved by IAS2 (1) Provides an average price for goods issued (1) Max 2 Accept other valid responses. 4(b) The use of selling price would result in an overstatement of profit / current 3 assets (1) so inventory should be valued at lower of cost and net realisable value (1) in accordance with the prudence concept (1) Max 3 Accept other valid responses. 4(c) Kevin 5 Marginal costing income statement January February $ $ $ $ Sales 300 000 420 000 (1) both Opening Inv – 27 000 Cost of prod 162 000 162 000 Closing Inv (27 000) (135 000) - (189 000) (1) Contribution 165 000 231 000 (1)OF both Fixed costs (100 000) (100 000) (1) both Profit 65 000 131 000 (1)OF both 4(d) Kevin 6 Absorption costing income statement January February $ $ $ $ Sales 300 000 420 000 (1) both Opening Inv - 42 000 Cost of prod 252 000 252 000 Closing Inv (42 000) (210 000) - (294 000) (1) 90 000 126 000 (1) both Under absorbed (10 000) (10 000) (1) (1) Profit 80 000 116 000 (1)OF both 4(e) Marginal costing profit $65 000 (1)OF 3 Closing inventory (3000 × $5) $15 000 (1) Absorption costing profit $80 000 (1)OF 4(f) Marginal costing 7 • Easier to operate (1). • Aids short-term decision making (1). • Enables optimum allocation of resources (1). • Avoids the problems of over/under absorption (1). Absorption costing • More complex / may require specialist knowledge (1) • Gives higher profit when inventory levels increase (1) • Includes an element of fixed cost in the inventory valuation (1). • Absorbing overheads into costs aids the setting of prices (1). • Reviewing under and over absorption may aid control and management of the business (1). Accept other valid responses. 1 mark for decision and Max 6 marks for valid points.

Question 12

Connie manufactures three products: A, B and C. She has provided the following budgeted information for one unit of each product for the ye…

Accepted Answer

4(a) Contribution is the amount remaining after all variable costs have been 3 subtracted from revenue (1). This amount is available to service the fixed costs (1). The amount remaining after this is the profit (1). Accept other valid responses. 4(b) A B C 3 Selling Price 15.00 20.00 25.00 Variable costs (11.50) (14.00) (16.00) Contribution 3.50 (1) 6.00 (1) 9.00 (1) 4(c) A 12 000 × 3.50 = 42 000 3 B 12 000 × 6.00 = 72 000 C 12 000 × 9.00 = 108 000 Contribution 222 000 (1)OF Fixed costs (100 000) (1) Profit 122 000 (1)OF 4(d)(i) Contribution per machine hour: 5 A B C 3.50/2 6.00/4 9.00/4 1.75 1.50 2.25 (1)OF Ranking 2 3 1 (1)OF Hours required 24 000 48 000 48 000 Optimum Production Plan Hours available 78 000 C 12 000 (1)OF (48 000) A 12 000 (1)OF (24 000) B 1 500 (1)OF (6 000) 4(d)(ii) C 12 000 × 9.00 108 000 3 A 12 000 × 3.50 42 000 B 1 500 × 6.00 9 000 159 000 (1)OF Fixed costs (100 000) (1) Profit 59 000 (1)OF 4(e) Reduction in profit 122 000 – 59 000 = 63 000 (1) OF 7 On a financial basis Connie will be worse off by $2000 (1). Consider loss of goodwill of customers (1). Would customers who normally buy non-available products go elsewhere even for those available? (1). Would Connie be able to resume full production in the future if she reduced output now? (1). Are there staffing implications? (1). Decision (1). Max. 6 for comments. Accept other valid responses. 4(f)(i) Those costs which vary in direct proportion to production (1). 1 4(f)(ii) Those costs which are partially fixed and partially variable (1). 1 4(f)(iii) Those costs which remain the same at all levels of production (1). 1 4(g) Costs can be split into fixed and variable costs (1). 3 Fixed costs are unchanged at all levels of production (1). Variable cost is constant per unit at all levels of production (1). All production is sold (1) Selling price remains constant (1) Sales mix should be constant (1) Accept other valid responses.

Question 13

K Limited produces goods at two sites and uses marginal costing. At one site the company makes a single product. The following details are …

Accepted Answer

4(a) $216 000)/($90 –$72) (1) =12 000 units (1) 2 4(b) Margin of safety is difference between actual/forecast sales (1) and break-even 2 point (1). 4(c) K Limited 6 Marginal costing statement for one month $ $ Revenue $88.20 × 14 210 1 253 322 (1) Less Variable costs Direct materials $20 × 14 210 284 200 (1) Direct labour $36 × 14 210 511 560 Other variable costs $11 × 14 210 156 310 Commission $2 × 9 210 18 420 (1) (970 490) Contribution 282 832 (1)OF Less fixed costs $216 000 + $4 000 (220 000) (1) Profit for month 62 832 (1)OF) 4(d) Marginal costing is used because: 4 It is useful for short-term decision making (1) as it focuses on the controllable aspects of business by separating fixed and variable costs (1). It avoids the arbitrary allocation of fixed overheads (1) and so provides more useful data for cost control (1) Accept other valid responses. Max 2 advantages (1 for identifying + 1 for developing) 4(e) Machine hours available 2 X: 1.5 X 600 900 Y: 2.5 X 300 750 Z: 3 X 200 600 Total 2 250 (1) x 2/3 1 500 (1)OF 4(f)(i) Workings: 4 Product X Product Y Product Z $ $ $ Contribution per unit 15 20 27 Contribution per machine hour 10 8 9 (1) Option 1 Hours $ remaining Full production X 600 units: 900 hrs × $10 600 9 000 (1) per hr Full production Z 200 units: 600 hrs × $9 per 0 5 400 (1) hr Total contribution 14 400 Less Fixed costs (14 100) Profit for month 300 (1)OF 4(f)(ii) Option 2 5 $ Product X for customer 300 units: 450 hours × $10 1050 4 500 (1) per hr Product Y for customer 150 units: 375 hours × $8 675 3 000 (1) per hr Product Z for customer 100 units: 300 hours × $9 375 2 700 (1) per hr Product X remaining 250 units: 375 hours × $10 0 3 750 (1) quantity Total contribution 13 950 Less fixed costs Less fixed costs (14 100) Loss for month (150) (1)OF 4(g) Option 1 (Max 2) 5 For: As the company makes the most profit possible (1) Might be possible to make up the missing element of major customer’s order by holding products over from previous month’s production (1) Against: Major customer may look elsewhere to fulfil order and loss of custom may become permanent for part or all of regular order (1) Option 2 ((Max 2) For: Ensures major customer is not disappointed and danger of losing business is averted (1) Against: A loss is made (1) Loss during month could have impact on company’s liquidity affecting ability to meet commitments (1) Advice (1) Accept other valid answers.

Question 14

December 2020. REQUIRED (e) Calculate the amount of the proposed dividend. ................................................................…

Question 15

B Limited is a manufacturing business. The business uses marginal costing techniques and manufactures three products, Ess, Tee and Ewe. The…

Accepted Answer

4(a) Ess Tee Ewe $ $ $ Selling price 30 43 69 Direct material 18 22 36 Direct labour 4 6 14 Variable overhead 2 3 5 Contribution 6 12 14 (1) (1) (1) 3 4(b) $ Ess 1 800 Tee 4 800 Ewe 5 040 Contribution 11 640 (1) OF Fixed overheads 8 000 (1) Profit 3 640 (1) OF 3 4(c) Hours Ess (300 × 0.5) 150 Tee (400 × 0.75) 300 Ewe (360 × 1.75) 630 1 080 (1) 1 Question Answer Marks 4(d) Ess Tee Ewe Contribution per unit ($) $6 $12 $14 Direct labour hours 0.5 0.75 1.75 Contribution per direct labour hour ($) $12 (1) $16 (1) $8 (1) Ranking 2 1 3 (1) Production plan $ Tee 400 × 12 4 800 (1) Ess 300 × 6 1 800 (1) Ewe 257 (1) × 14 3 598 (1) OF Maximum contribution 10 198 (1) OF Fixed overheads (8 000) (1) Maximum profit 2 198 (1) OF 11 4(e) $ Original maximum contribution 11 640 Less: overtime premium (360) (1) Contribution 11 280 (1) OF Fixed overheads (8 200) (1) Profit 3 080 (1) OF 4 4(f) • May cause workers to rush (1) which may affect the quality of the product (1) • Will incur additional expenses (1) which may not be able to be passed on to the customer/may reduce profit (1) Accept other valid responses Max 2 Marks x 2 points ( 1 mark for identifying the disadvantage and 1 mark for its development) 4 4(g) • Based on estimates which may be inaccurate (1) leading to bad decision-making (1) • Budgets may be set too high (1) which may demotivate employees (1) Accept other valid responses Max 2 Marks x 2 points ( 1 mark for identifying the disadvantage and 1 mark for its development) 4

Question 16

Wages and salaries are to be charged as follows: Administrative expenses 25% Distribution costs 75%

Question 17

Expenses were to be allocated as follows: Administrative Distribution expenses costs Wages and salaries 30% 70% Directors’ remuneration 75%…

Accepted Answer

4(a) 188 units (3) W Variable costs $0.50 + $0.30 + $36.00 = $36.80 Fixed costs $410 + $180 + $120 + $400 + $240 = $1350 (1) Contribution $44.00 - $36.80 = $7.20 (1) Breakeven point $1 350 (1) / $7.20 (1) = 188 units (1) OF 3 4(b)(i) The difference between the breakeven point and forecast sales. (1) 1 4(b)(ii) Allows a business to see how far sales could fall before making a loss. (1) It is a basic measure of risk (1) 2 4(c) $ Revenue 9 680 Cost of sales 8 096 Contribution 1 584 (1) Fixed costs 1 350 (1) OF Profit for the week 234 (1) OF 3 Question Answer Marks 4(d) $53.00 (3) W $ Variable costs 36.80 OF Additional direct material 5.40 (1) Additional finishing labour bonus 0.20 Total variable costs 42.40 (1) OF Selling price $42.40 × 100/80 = $53.00 (1) OF 3 4(e) $ Sales revenue (220 × $44) + (80 × $48) 13 520 (1) Variable costs (220 × $36.80) + (80 × $42.40) (11 488) (1) OF Contribution 2 032 (1) OF Fixed costs ($1 350 (OF) + $150) (1 500) (1) OF Profit for the week 532 (1) OF 5 4(f) 532 (OF) – 192 = $340 (1)OF 1 Question Answer Marks 4(g) Financial (max 3 marks) Will earn additional annual profit of $5512. (1) OF Target profit will be met. (1) OF Will H Co expect a similar settlement discount? (1) Produces a positive contribution. (1) Non-financial (max 3 marks) Less reliance on only one customer (1) Utilises spare capacity (1) How long-term will the contract be? (1) Will customer abide by the agreed settlement terms? (1) Accept any other valid responses Advise (1) 7 4(h) Aids short-term decision making. (1) Enables the setting of the most profitable combination of selling price, cost and volume. (1) Assists management in reviewing and controlling costs. (1) Accept any other valid responses Max 2 marks 2 4(i) Only relevant when dealing with a single product / constant product mix. (1) Assumes that the selling price remain constant. (1) Assumes that production volume matches sales volume. (1) Assumes variable cost per unit remains constant (1) Assumes fixed costs remain fixed (1) Accept any other valid responses Max 3 marks 3

Question 18

N Limited manufactures a single product at one of its factories. The company uses marginal costing. REQUIRED (a) State two benefits of usin…

Accepted Answer

4(a) (Easily) Identifies point at which a business will make a profit/margin of safety (1) Aids understanding of risk involved in a proposed manufacturing venture (1) Focuses attention on the importance of keeping fixed costs under control (1) Accept other valid responses. Max. 2 2 4(b) Fixed costs are those which do not change (1) with differing levels of output/sales (1) 2 4(c) $70 000/Contribution = 8000 units (1) Contribution is $8.75 per unit (1) Selling price $20 – contribution $8.75 = variable cost = $11.25 per unit (1) 3 4d(i) Original units (8000 + (80 000/20)) = 12 000  1.2 = 14 400(1) Revenue =14 400  19 = 273 600 (1)OF 2 4(d)(ii) Budgeted Marginal costing statement for one month $ Per unit Revenue: $19  14 400 273 600 (1)OF $19.00 Less variable costs: $11.25  14 400 162 000 (1)OF $11.25 Contribution 111 600 (1)OF $7.75 Less fixed costs 71 800 (2)W1 Profit for one month 39 800 (1)OF W1 70 000 + 1200 (1) +600 (1) = 71 800 6 Question Answer Marks 4(e) Product X Product Y $ $ Contribution per unit 10 11 Contribution per $1 materials 10/10 = $1 11/14 = $0.79 So fully produce Product X (1) Materials available $ Normal supply X 50 000 Normal supply Y 56 000 106 000 75% normal supply 79 500 (1) Materials used $ $ 5000 units Product X  $10 50 000 (1) 50 000 29 500/14= 2107 units  $11 23 177 (1)OF 29 500(1)OF 73 177 (1)OF 79 500 Less fixed costs (58 000) 15 177 (1)OF 7 4(f) Produce 1893 units of Product Y (1) OF New contribution $11 – $9.50 = $1.50 per unit (1) Profit: Contribution ($1.50  1893, i.e. $2839.5 less additional Fc $4000 (1) = loss $1160.5 (1) OF 3 Question Answer Marks 4(g) Production plan (Max 3 marks) Overtime option (Max 1 mark) Will produce optimum profit (1) Will result in loss on additional units (1) Some regular customers may not receive their order (1) All regular customers will receive their order (1) Disappointed customers may find alternative suppliers for the future (1) No loss of future orders from regular customers Labour force morale may be adversely affected by reduction in labour hours (1) No reduction in labour hours No problem with reduced output if there are no regular/disappointed customers for Product Y (1) Will labour force be able to/wish to provide the overtime hours required (1) Advice (1) Accept other valid responses. 5

Question 19

A credit note, $90, issued to a credit customer had been recorded correctly in the sales return journal but posted to the debit side of the…

Accepted Answer

4(a) no changes in levels of inventory (1) a single product/ constant mix is made (1) costs are either fixed or variable/semi-variable costs are not considered (1) total fixed costs remain unchanged/stepped costs are ignored (1) variable cost per unit remain perfectly linear (1) selling price per unit does not change (1) Max 4 Accept other valid responses. 4(b)(i) Margin of safety in units: Sales in units less Break-even point in units (1) 1 4(b)(ii) Margin of safety in sales value: (Sales in units– Break-even point in units)  Selling price per unit (1) 1 4(c) Variable costs: Direct materials $15 + Direct labour $19 = $34 (1) Contribution: Selling price $48 – Variable costs $34 = $14 (1) Break-even = $66000 $14 = 4715 (1) OF Margin of safety: 8000 – 4715 = 3285 (1) OF 4 Question Answer Marks 4(d) New material cost: 3.15kg (1)  $3.60 (1) = $11.34 New variable costs: $11.34 + $19 + $0.50 commission = $30.84 (1) OF New contribution: $47.28 (1) - $30.84 = $16.44 (1) OF New break-even point: $66500 $16.44 (1) = 4046 units (1) OF Decrease in break-even point = 4715 – 4046 = 669 (1) OF 8 4(e)(i) Option A $ 10 000 units  $17 170 000 (1) Less Fixed costs + $2 200 130 200 (1) 39 800 (1) OF 3 4(e)(ii) Option B $ 8 500 units  $17 144 500 (1) 5 500 units  ($5 – $1.80, i.e. $3.20) 17 600 (1) 162 100 Less Fixed costs $128 000 + $6 000 storage costs 134 000 (1) 28 100 (1) OF 4 4(f) Option A (max 2) Produces larger profit (1) Will advertising campaign be successful? (1) Effect on workforce of reduced production (1) Option B (max 2) Produces less profit (1) Will goods deteriorate while stored? (1) Effect on existing customers of offering special price (1) Decision (1) Accept other valid responses 5

Question 20

Reduce the selling price by 1.5% per unit. REQUIRED (d) Calculate the decrease in the monthly break‑even point in units if these changes ar…

Question 21

Mandeep owns two manufacturing businesses. REQUIRED (a) State what is meant by: (i) Variable costs ........................................…

Accepted Answer

4(a)(i) Costs that vary in direct proportion to the level of activity (1) 1 Accept other valid responses. 4(a)(ii) Costs that remain the same irrespective of the level of activity. (1) 1 Accept other valid responses. 4(a)(iii) Costs that are partly fixed and partly variable. (1) 1 Accept other valid responses. 4(b) $ 3 Ess 41.50  80 3 320 Tee 45.00  50 2 250 Ewe 55.20  75 4 140 Contribution 9 710 (1) Fixed overheads 2 870 (1) Profit 6 840 (1) OF 4(c) 400 + 300 + 600 = 1300 metres (1) 1 4(d) 6 Ess Tee Ewe Contribution per unit $41.50 $45.00 $55.20 Metres per unit 5 6 8 Contribution per metre $8.30 $7.50 $6.90 (1) Ranking 1 2 3 (1) Production plan $ Ess 80  $41.50 3 320.00 Tee 50  $45.00 2 250.00 Ewe 37(1)  $55.20 2 042.40 Contribution 7 612.40 (1) OF Fixed overheads 2 870.00 (1) Profit 4 742.40 (1) OF 4(e) If Mandeep does purchase from the overseas supplier (Max 3) 7 • Enables full maximum demand to be met. (1) • Will result in cost saving of $1300 per month. (1) • Will ensure no idle time. (1) But: • Will quality be up to Mandeep’s expectation? (1) • Will delivery be guaranteed on time? (1) • Will exchange rates affect the quoted price? (1) • Does price quoted include delivery / customs charges? (1) If Mandeep does not purchase from the overseas supplier (Max 3) • Cannot meet maximum demand. (1) • May affect sales of the other products. (1) • Will result in lost revenue and profit. (1) • May result in redundancies. (1) Decision (1) Accept other valid responses. 4(f) $ 5 Direct material 28.80 Direct labour – Machining 18.00 (1) Direct labour Assembly 24.00 Overheads – Machining 20.25 (1) Overheads – Assembly 13.80 (1) Total cost 104.85 Margin 26.21 (1) OF Selling price 131.06 (1) OF 4(g) Facilitates future detailed planning (1) 3 Encourages co-ordination and cooperation between departments (1) Encourages communication between departments (1) Provides a framework for responsibility accounting (1) Provides a framework for budgetary control / variance analysis (1) Motivates employees by providing realistic targets (1) Max 3 marks Accept other valid responses. 4(h) Based on estimates (1) 2 Can restrict innovation (1) If unrealistic, may demotivate employees (1) Must be constantly updated to be useful (1) Max 2 marks Accept other valid responses. Marking guidance: Allow: P1: May become out of date/historical data/inaccurate P2: Unexpected opportunities may be ignored P3: If imposed may demotivate/cause resentment P4: No control over external influences/changes. Do not allow if say does not consider external influences (the budget would have considered these but key point for mark is no control of changes) Specialist knowledge may be required/expensive Time consuming to prepare Managers may build in budget slack Surplus budgets may be used for the sake of it/inefficient use of resources Conflicts between departments

Question 22

Brady manufactures one product which is sold through agents who receive a 10% commission based on the selling price. The following budgeted…

Accepted Answer

4(a)(i) $29 400 (2) W1 2 W1 $78 000 – ($21 600 + $14 400 + $4800 + $7800 = $48 600) (1) = $29 400 (1) 4(a)(ii) $8700 (2) W1 2 W1 $29 400 – ($9200 + $6100 + $5400 = $20 700) (1) = $8700 (1) 4(a)(iii) 8449 units (2) W1 2 W1 ($20 700 / $2.45) (1) OF = 8449 units (1) OF 4(b) Actual sales – Break-even sales (1) 1 Allow other valid responses. 4(c) 12 858 units (2) W1 2 W1 $20 700 (OF) + $10 800 = $31 500 (1) OF / $2.45 (OF) = 12 858 units (1) OF 4(d) Brady 10 Budgeted marginal cost statement for the month of December 2022 $ $ Sales revenue 13 000  $6.80 88 400 (1) Variable costs Direct materials 13 000  $2.20 28 600 (1) Direct labour 13 000  $1.14 14 820 (1) Production overheads 13 000  $0.40 5 200 (1) Selling costs 88 400 (OF)  8% 7 072 (1) OF (55 692) Contribution 32 708 (1) OF Fixed costs Production overheads 9 200 (1) Administrative overheads $6100 – $1500 4 600 (1) Selling costs $5400 + $2500 7 900 (1) 21 700 Profit for the month 11 008 (1) OF 4(d) Alternative presentation $ $ Sales revenue 6.80 (1) Variable costs Direct materials 2.20 (1) Direct labour 1.14 (1) Production overheads 0.40 (1) Selling costs 0.544 (1) OF 4.284 Contribution per unit 2.516 Total contribution X 13 000 32 708 (1) OF Fixed costs Production overheads 9 200 (1) Administrative overheads $6100 – $1 500 4 600 (1) Selling costs $5400 + $2500 7 900 (1) 21 700 Profit for the month 11 008 (1) OF 4(e) Comments (Max 6 marks) 7 He will exceed his target profit by 1.9% depending on whether his customers are willing to pay the increased price. (1) Will turnover actually fall as a result if customers are not willing to pay the increased price (1) Will agents be demotivated as a result of reduced commission rates resulting in a fall in sales (1) What will be the cost of redundancies and what effect will that have on the company’s profit? (1) Will the decreased labour rate demotivate workers resulting in reduced production levels and poor quality? (1) Will overtime be required to meet the additional output, and will workers be prepared to work overtime? (1) How accurate is his forecast of 1000 additional units? and is the target achievable? (1) There is no guarantee that by increasing the advertising the increase in sales will be achieved. (1) Decision (1) Advise Brady to proceed with these changes provided he is confident he can produce the increase in monthly sales of 1000 units Accept other valid responses 4(f) • Facilitates short-term decision making (1). 2 • Enables identification of most profitable selling price, cost and volume combination (1). • Facilitates determination of viable selling price (1). • Helps control costs to maximise profitability (1). Max 2 marks Accept other valid responses. 4(g) • Assumes fixed costs remain constant over relevant range (1). 2 • Assumes variable costs per unit remain constant (1). • Assumes selling price per unit remains constant (1). • Only relevant for single product or constant product mix (1). Max 2 marks Accept other valid responses.

Question 23

Reduce the administrative overheads by $18 000 per annum by making one member of staff redundant.

Question 24

G Limited manufactures a single product type at one of its factories. The company uses marginal costing. REQUIRED (a) Define each of the fo…

Accepted Answer

4(a)(i) Define each of the following terms: 1 contribution per unit Contribution per unit is the difference between the selling price per unit and the variable costs per unit (1) 4(a)(ii) Define each of the following terms: 1 stepped costs. Stepped costs are fixed for a given level of activity and change when that level is exceeded (1) 4(a)(iii) Define each of the following terms: 1 margin of safety. Margin of safety is the difference between actual/forecast output and the break- even level of output (1) 4(b) State two benefits of using marginal costing. 2 Avoids the arbitrary apportionment of fixed costs (1) Avoids problems of under- or over-absorption of overheads (1) Useful for short-term decision making (1) Enables identification of breakeven point/margin of safety (1) Identifies the relative merits of each product where a variety of products are made (1) Max 2 Accept other valid responses. 4(c) Calculate the monthly break-even point in units. 3 Contribution per unit is: $59 – ($21.60 + $32.80) = $4.60 (1) Break-even point is: $18 400/$4.60 (1)OF = 4000 units (1) OF 4(d) Prepare a marginal costing statement to show the monthly forecast profit if 7 the improved product is made. G Limited Marginal costing statement for one month for improved product $ $ Revenue: 8640  $65 561 600 (1) Less variable costs Materials 8640  $27.60 238 464 (1) Labour Normal working: 8000  4  $8.20 262 400 (1) Overtime: 640  4  $12.30 31 488 (1) (532 352) Contribution 29 248 (1) O F Less fixed costs $18 400 + $500 (18 900) (1) Profit for month 10 348 (1) O F 4(e)(i) Calculate the profit for the 8 weeks for each option. 4 Option A $ Contribution from 6 machines 216 000 (1) Additional contribution from overseas supplier (75%  9600 units)  contribution ($42 – $34) 57 600 (1) 273 600 Less fixed costs ($12000  8) + $4200 (100 200) (1) Profit for two months 173 400 (1)OF 4(e)(ii) Calculate the profit for the 8 weeks for each option. 4 Option B $ Contribution from 6 machines 216 000 Additional contribution from 2 hired machines (7 weeks  2 machines  300 units)  $15 63 000 279 000 (1) Less fixed costs W1 (98 800) (2) Profit for two months 180 200 (1)OF W1 Fixed costs Option B: $96 000 + hire charges (7 weeks  2 machines  $150, i.e. $2 100) + training costs $700 (1) = $98 800 (1) OF 4(f) Advise the directors which option they should choose. Justify your answer 7 by considering both financial and non-financial factors. Option A (Max 3) • Regular customers are more likely to be supplied (1) • Will quality be maintained for goods bought in? (1) • Reliability of overseas supplier (1) • Risk losing customers if the quality is not acceptable (1) • Is delivery guaranteed? (1) • Is delivery cost guaranteed (1) • Any possibility of exchange rate problems? (1) • Possibility of damage in transit (1) • Effect on the labour force due to reduced production (1) Option B (Max 3) • Produces higher profit (1) • Regular customers may not be supplied / regular customers may go to competitors (1) • Will efficiency suffer due to working on new machines? (1) • Do they have any contingency plans for any further machinery problems (1) Decision supported by a comment (1) Accept other valid responses.

Question 25

The factory can operate in overtime conditions. Direct labour is paid 1.5 times the normal rate in overtime conditions.

Question 26

An additional machine costing $40 000 will be required. Non-current assets are depreciated by 15% per annum. REQUIRED (d) Prepare a margina…

Question 27

REQUIRED (c) Prepare the statement of profit or loss for the year ended 31 December 2022. Use the space provided on the next page to show y…

Question 28

K Limited is a manufacturing company which has two production departments and one service department at one of its factories. At this facto…

Accepted Answer

4(a)(i) Define each of the following terms: 1 cost centre: a department/activity/location to which costs can be directly attributed (1) 4(a)(ii) Define each of the following terms: 1 allocation of overheads: where overheads can be directly attributed to a cost centre. (1) 4(a)(iii) Define each of the following terms: 1 apportionment of overheads: where it is necessary to divide overheads between cost centres on some rational basis (1) 4(b) Reapportion the service department’s overheads to the production 2 departments. Cutting Finishing Service department department department $ $ $ Factory overheads 273 820 189 240 31 350 Reapportionment 18 750 12 600 (31 350) Total overheads 292 570 201 840 – (1) (1) 4(c)(i) Calculate an appropriate overhead absorption rate, correct to two decimal 1 places, for each production department: Cutting department $292570 = $16.34 per machine hour (1) OF 17900 4(c)(ii) Calculate an appropriate overhead absorption rate, correct to two decimal 1 places, for each production department: Finishing department. $201840 = $27.20 per labour hour (1)OF 7 420 4(d)(i) Calculate the under- or over-absorption of factory overheads for each 3 production department for the year ended 31 August 2022. Cutting department $312 600 – (17 200  $16.34) $312 600 – $281 048 (1) OF = $31 552 (1) OF under absorbed (1) OF 4(d)(ii) Calculate the under- or over-absorption of factory overheads for each 3 production department for the year ended 31 August 2022. Finishing department (7210  $27.20) – $196 112 $193 400 – $196 112 (1) OF = $2 712 (1) OF over absorbed (1) OF 4(e) Calculate the profit for one month. 1 $154 000 (1) 4(f)(i) Calculate the profit to be made on each option in the first month of 3 production. Option A $166 025 (3) Working Selling price: 60  95% = $57 per unit Contribution $17 per unit Total contribution: (10 500  125%)  $17 = $223 125 Profit = $223 125 (1) – Fixed costs $57 100 (1) = $166 025 (1) OF 4(f) (ii) Calculate the profit to be made on each option in the first month of 6 production. Option B $173 445 (6) Working $ Revenue: 15 400  $58 893 200 (1) Direct materials 15 400  $24.20 (372 680) (1) Direct labour Normal working: 14 000  $18 (252 000) (1) Overtime: 1 400  $27 (37 800) (1) Contribution 230 720 Fixed costs W1 (57 275) (1) Profit for month 173 445 (1)OF W1 New fixed costs: $56 000 + $1125 (depreciation) + $150 (interest) = $57 275 4(g) Advise the directors which option they should choose. Justify your answer 7 by considering both financial and non-financial factors. Financial (Max 2) Option A  Less profitable than option B (1)  More profitable than current situation.(1)  Cost of advertising will reduce profits (1) Option B  More profitable than Option A (1) (Allow once only)  More profitable than current situation.(1)  Additional interest and depreciation costs will reduce profits (1) Non-financial (Max 4) Option A  Will sales continue to decrease (1)  Will advertising campaign be effective for Option A? (1)  Will forecasts be reliable (1) (Allow once only) Option B  Are employees prepared to work overtime in Option B? (1)  Will overtime working result in decreased efficiency/deteriorated quality (1)  Will forecasts be reliable (1) Decision supported by a comment (1) Accept other valid responses.

Question 29

Direct labour costs will remain unchanged. However, workers will be paid an overtime premium of 50% for all work over normal capacity.

Question 30

REQUIRED (f) Calculate the profit to be made on each option in the first month of production. (i) Option A ................................…

Question 31

Direct labour costs and selling price will remain unchanged. REQUIRED (c) Calculate the increase in the monthly margin of safety in units, …

Question 32

Dev manufactures two products, Aye and Bee. He operates a system of marginal costing. (a) Explain one difference between marginal costing a…

Accepted Answer

4(a) Explain one difference between marginal costing and absorption 2 costing. Marginal costing values inventory at variable cost only (1) whereas absorption costing values inventory at full cost (1) OR Marginal costing treats fixed overheads as period costs (1) whereas absorption costing treats fixed overheads as a product cost (1) Accept other valid responses 4(b) Explain one difference between a direct cost and an indirect cost. 2 Direct costs can be specifically allocated to units of production (1) whereas indirect costs cannot economically be specifically attributed to units of production (1) Accept other valid responses 4(c)(i) State the meaning of the following terms: 1 break-even point Break-even point is the point at which total revenue equals total cost / there is no profit and no loss (1) 4(c)(ii) margin of safety 1 Margin of safety is the difference between actual / budgeted output and break- even point (1) 4(d) State three situations where marginal costing can help in decision 3 making. Make or buy decisions (1) Accepting a special order (1) In limiting resource situations (1) Closure of business unit (1) Discontinuance of a product line (1) Max 3 Accept other valid responses 4(e) Calculate the break-even point in units for Aye. 3 Contribution: 11.00 – (3.20 + 2.60 + 1.90) = $3.30 Fixed costs: 60 000 + 33 000 = $93 000 Break-even point: $93 000 (1) / $3.30 (1) = 28 182 (1) 4(f) Calculate the break-even point in units for Bee. 3 Contribution: 8.50 – (3.20 + 2.60 + 1.90) = $0.80 Fixed costs: 35 000 + 44 000 = $79 000 Break-even point: $79 000 (1) / $0.80 (1) = 98 750 (1) 4(g) Calculate the revised total profit of the business if option 1 is adopted. 5 $ Revised contribution: 0.80 – 0.45 + 0.85 = 1.20  96 000 115 200 (1) Revised fixed costs: 79 000 + 18 000 (97 000) (1) Revised profit Bee 18 200 (1) Profit Aye 105 000 (1) Revised total profit 123 200 (1)OF 4(h) Calculate the revised total profit of the business if option 2 is adopted. 5 $ Revised contribution: 3.30 – 0.44 = 2.86  90 000 257 400 (1) Revised fixed costs: W (151 000) (3) Revised profit Aye 106 400 (1)OF W Revised fixed costs (60 000 + 44 000 + 33 000) (1) + (6000 (1) + 8000) (1) = $151 000 4(i) Advise Dev which option he should choose. Justify your answer. 5 Option 1 Produces higher overall profit than option 2 (1) Will existing Bee customers favour the upgraded model? (1) How reliable is estimated 20% sales growth? (1) Option 2 Will redundancies affect staff morale? (1) Will discontinuing Bee have negative affect on sales of Aye? (1) How reliable is estimated 50% sales growth? (1) Additional advertising and redundancy costs are one-off expenses. (1) Max 4 for comments Advice supported with a comment (1) Accept other valid responses

Question 33

K Limited uses absorption costing at one of its factories. The product manufactured in this factory goes through two production departments…

Accepted Answer

4(a) Prepare a statement to show the total selling price for the customer’s 5 order. $ Direct materials 4 320.00 Direct labour Cutting department 250  1.2  $11.5 3 450.00 (1)both Finishing department 250  3.1  $11.5 8 912.50 Overheads Cutting department 250  2.2  $3.62 1 991.00 (1) Finishing department 250  3.1  $2.34 1 813.50 (1) Total cost 20 487.00 Add profit 2/3  cost 13 658.00 (1) OF Total selling price 34 145.00 (1) OF Alternative approach $ Direct materials 17.28 Direct labour Cutting department (1.2  $11.50 13.80 (1)both Finishing department (3.1  $11.50) 35.65 Overheads Cutting department (2.2  $3.62) 7.96 (1) Finishing department (3.1  $2.34) 7.25 (1) Total cost 81.94 Add profit 2/3  cost 54.63 (1) OF Unit selling price 136.57 Total selling price 3 4 142.50 (1) OF 4(b) Calculate the over absorption or under absorption of overheads for each 4 production department for the year ended 31 December 2023. Cutting department 24 300 – 22 900 = 1400  $3.62 = $5068 (1) Over absorbed (1): Finishing department 500  $2.34 = $1170 (1) Under absorbed (1) 4(c) Calculate both the total monthly contribution and the total monthly profit 2 currently being made. Contribution = $9  9920 = $89 280 (1) Profit = $89 280 – $38 500 fixed costs = $50 780 (1) OF 4(d)(i) Prepare monthly marginal costing statements for each option. 6 Option A $ Revenue: 13 920  $39.90 555 408 Direct materials: 13 920  $12 (167 040) (1)both Direct labour: normal working 12 400  $18 (223 200) Direct labour: overtime 1 520  $22.50 (34 200) (1) Other variable costs 13 920  ($3 + $0.25) (45 240) (1) Contribution 85 728 (1) OF Fixed costs: $38 500 – $8000 (30 500) (1) Profit per month 55 228 (1) OF 4(d)(ii) Prepare monthly marginal costing statements for each option. 6 Option B $ Revenue: 10 912  $41 447 392 Direct materials: 10 912  $12 (130 944) (1)both Other variable costs 10 912  $3 (32 736) Direct labour (180 703) (1) Contribution 103 009 (1) OF Fixed costs W (43 250) (2) Profit per month 59 759 (1) OF W $38 500 +$3750 (1) + $1000 (1) 4(e) Advise the directors which option they should choose. Justify your 7 advice by discussing both financial and non-financial factors. Option A For (max 1) Increased profit on current levels (1) OF Greater reduction in selling price may increase demand (1) Against (max 2) Are staff prepared to work in overtime conditions? (1) Will cancelling the advertising campaign affect demand? (1) Are forecasts likely to be accurate? (1) Option B For (max 1) Is the most profitable option (1) OF Against (max 2) Can finance be obtained? (1) Will collateral be required for the loan? (1) Loan interest charges/depreciation will reduce profits (1) Will training be required for new machinery which would decrease profits? (1) Will installation of machinery cause a delay in production? (1) Are forecasts likely to be accurate? (1) Advice: supported by valid comments (1) Accept other valid responses

Question 34

(d) Prepare marginal costing statements to show the monthly forecast profit, rounded to the nearest dollar, for each option. (i) Option A .…

Question 35

D Limited is a manufacturing company. (a) Explain two uses of absorption costing. 1 .......................................................…

Accepted Answer

4(a) Explain two uses of absorption costing. 4 Useful for setting selling prices (1) because all costs are included (1) Useful for long-term decision making (1) example (1) Must be used for inventory valuation (1) as it takes account of fixed costs (1) Accept other valid responses. 4(b) Calculate the monthly break-even point in units. 2 6000 units (2) (W1) W1 $120 000 (1) = 6000 units (1) $20 4(c) Calculate the forecast profit or loss for January 2024. 2 $21 600 loss (2) W1 W1 (4920  $20 = $98 400) - $120 000 = $21 600 (1) Loss (1) 4(d) Calculate the number of units to be sold in order to achieve the target 2 profit. 13 500 units (2) W1 W1 ($150 000 + $120 000 (1) = 13 500 units (1) $20) 4(e) Calculate the monthly profit to be made from Option A. 6 $298 680 (6) W1 W1 $ Revenue 1 248 480 Direct materials (326 400) (1) Direct labour (basic hours (346 800) (1) Direct labour (overtime) (20 400) (1) Variable costs (61 200) 493 680 Less fixed costs (195 000) (2) Profit per month 298 680 (1) Alternative presentation $ Contribution: 18 000  $25.20 453 600 (1) Contribution: 2400 (1)  $16.70 40 080 (1) 493 680 Less fixed costs W1 195 000 (2) Profit per month 298 680 (1) W1 Fixed costs: (14 400 (1)  $24) less profit $150 600 = $195 000 (1) 4(f) Prepare a monthly marginal costing statement for Option B. 7 Marginal costing statement for one month $ Revenue: 22 000  $61.80 1 359 600 (1) Direct materials: 22 000  $15 (330 000) (1) Direct labour: 22 000  $18.50 (407 000) (1)fb Other variable costs 22 000  $3 (66 000) Contribution 22 000  25.30 556 600 (1) OF Less fixed costs W1 (217 000) (2) Profit per month 339 600 (1) OF W1 $195 000 + $2 000 (1) + $20 000 = $217 000 (1) Alternative presentation $ Revenue: 22 000  $61.80 61.80 (1) Direct materials: 22 000  $15 (15.00) (1) Direct labour: 22 000  $18.50 (18.50) (1)fb Other variable costs 22 000  $3 (3.00) 25.30  22 000 Contribution 22 000  25.30 556 600 (1) OF Less fixed costs W1 (217 000) (2) Profit per month 339 600 (1) OF 4(g) Advise the directors whether or not they should go ahead with either of 7 these options. Justify your choice by discussing both financial and non- financial factors. Award 1 mark for identification of each comment and a further 1 mark for valid development of the comment Max 3 marks for identification and max 3 marks for valid linked development of the comments Applying to both Options (Award marks for either option, once only)  Both more profitable than present situation (1)  Are forecasts accurate? (1)  Will price increases result in decreased demand for products (1)  Option A   Less risky as no permanent increase in fixed costs (1)  Are labour force prepared to work overtime (1)  Will quality suffer resulting in a loss of customers? (1) Option B  Will advertising be effective? (1)  Cost of advertising will reduce profit (1)  Depreciation will result in fixed costs increase (1) Advice supported with a comment (1) Accept other valid responses

Question 36

Alberto owns a manufacturing business. (a) Define each term: (i) cost centre ..............................................................…

Accepted Answer

4(a)(i) Define each term: 1 cost centre A cost centre is a production location where costs may be attributed to cost units (1) Accept other valid responses 4(a)(ii) Define each term: 1 cost unit A cost unit is a unit of production that absorbs the cost centre’s overhead costs. (1) Accept other valid responses 4(a)(iii) Define each term: 1 direct cost A direct cost is one that can be specifically associated with the manufacture of one unit of production. (1) Accept other valid responses 4(a)(iv) Define each term: 1 indirect cost An indirect cost is one that cannot economically be specifically associated with the manufacture of one unit of production. (1) Accept other valid responses 4(b) Complete the table to apportion costs to the production departments. 6 Total Production Service $ departments departments Machining Finishing Stores Canteen Allocated 512 100 195 200 234 700 66 400 15 800 overheads Light and heat 12 800 3 840 6 400 1 920 640 (1) for row Production 42 000 15 750 26 250 – – supervisors’ (1) for wages row Total 566 900 214 790 267 350 68 320 16 440 overheads Reapportion 4 932 8 220 3 288 (16 440) Canteen (1) for row 219 722 275 570 71 608 – Reapportion 28 643 42 965 (71 608) – Stores (1) for row 248 365 318 535 – – (1) OF (1) OF 4(c) Calculate, to two decimal places, a suitable overhead absorption rate for 2 each production department. Machining department $248 366 / 28 900 = $8.59 per machine hour (1) OF Finishing department $318 534 / 18 500 = $17.22 per labour hour (1) OF 4(d) Calculate the over-absorption or under-absorption of overheads for 4 each production department. Machining department $8.59  26 880 = $230 899 – $249 200 = $18 301 (1) OF under absorbed (1) OF Finishing department $17.22  18 650 = $321 153 – $320 400 = $753 (1) OF over absorbed (1) OF 4(e)(i) Calculate the budgeted hourly direct labour rate for each department. 2 Machining department $127 270 / 14 300 hours = $8.90 (1) Finishing department $183 150 / 18 500 hours = $9.90 (1) 4(e)(ii) Prepare a statement to show the total selling price that Alberto should 7 quote the customer. $ Direct material 4 metres  3.85 15.40 (1) Direct labour Machining 0.75  $8.90 6.68 (1) OF department Finishing department 1.5  $9.90 14.85 (1) OF Overheads Machining 0.5  $8.59 4.30 (1) OF department Finishing department 1  $17.22 17.22 (1) OF Total cost 58.45 (1) OF Profit margin 38.97 Unit cost 97.42 Units 12 Quotation 1 169.04 (1) OF Alternative answer $ Direct material 4 mtrs  3.85  12 184.80 (1) Direct labour Machining 0.75  $8.90  12 80.16 (1) OF department Finishing department 1.5  $9.90  12 178.20 (1) OF Overheads Machining 0.5  $8.59  12 51.60 (1) OF department Finishing department 1  $17.22  12 206.64 (1) OF Total cost 701.40 (1) OF Profit margin 467.60 Quotation 1 169.00 (1) OF 4(f) Advise Alberto whether or not he should accept the proposed terms 5 offered by the customer. Justify your advice by discussing both financial and non-financial matters. Financial • Will still make a profit on the work (1) • Will achieve 25% margin on the work so fails to achieve target margin of 40% (1) • Will result in an under absorption of fixed overheads incurred (1) Non-financial • Will increase capacity of the factory (1) • May have negative effect on existing customers if they find out (1) • May have a positive effect on employees to have less down-time (1) Advice supported with a comment (1) Accept other valid responses

Question 37

Martina produces and sells a single type of product. The following budgeted information is available for the year ending 30 November 2025. …

Accepted Answer

4(a)(i) Calculate: the budgeted contribution per unit. 3 $88.25 (3) W Working $96.00 (1) – $7.75 (1) = $88.25 (1)OF 4(a)(ii) Calculate: the budgeted fixed overheads for the year. 3 $242 375 (3) W Working $ Selling overheads $157 500 – ($7.75  3 500) 130 375 (1) Production overheads $126 000 – ($4  3 500) 112 000 (1) Budgeted fixed overheads 242 375 (1) OF Alternative answer if using $2.25 in part (a) $261 625 (3) W Working $ Selling overheads $157 500 – ($2.25  3 500) 149 625 (1) Production overheads $126 000 – ($4  3 500) 112 000 (1) Budgeted fixed overheads 261 625 (1) OF 4(a)(iii) Calculate: the budgeted margin of safety in units. 2 753 (2) W Working Units Breakeven ($242 375 / $88.25) 2 747 (1) Budgeted production 3 500 Margin of safety 753 (1) OF Alternative answer if using $2.25 in part (a) 709 (2) W Working Units Breakeven ($261 625 / $93.75) 2 791 (1) OF Budgeted production 3 500 Margin of safety 709 (1) OF 4(b) Prepare a marginal cost statement for the year ended 30 November 2025 to show the revised contribution and 9 revised profit for the year if Martina decides to go ahead with the plan. Martina Budgeted marginal cost statement for the year ending 30 November 2025 Revenue 4 200  $149 625 800 (1) Direct materials 4 200  $28 (117 600) (1) Direct labour 4 200  $28.50 (119 700) (1) Variable production overhead 4 200  $3.20 (13 440) (1) Sales commission basic 3 500  $7.45 (26 075) (1) Sales commission proposed 700  $14.90 (10 430) (1) Contribution 338 555 (1) OF Fixed costs 267 375 (1) OF Profit 71 180 (1) OF 4(c) Advise Martina whether or not she should go ahead with the plan. Justify your answer by considering both 7 financial and non-financial factors. Financial ( Max 3) • Will increase profits by less than 5%. (1) • Sales force will have greater incentive to sell with increased commission. (1) • Will machinery incur maintenance costs not budgeted for? (1) • Have finance costs been factored into the plan? (1) • Depreciation and advertising will increase fixed costs, reducing profit (1) Non-financial (Max 3) • Will customers remain loyal to the new product design? (1) • Will the new machinery actually save 5% labour hours? (1) • Will the workforce accept the effective lower unit wage rate? (1) • Will the advertising campaign result in the anticipated increased sales? (1) • How accurate are the estimates? (1) Decision supported with a comment (1) Accept other valid responses 4(d) Explain one advantage of cost – volume – profit analysis. 2 It enables a business to know the amount of profit generated at different levels of output (1) and therefore how much to produce and sell in order to prevent a loss (1) Accept other valid responses 4(e) Explain one reason why marginal costing is considered to be more useful for short-term decision making than 2 absorption costing. Marginal costing enables a business to calculate contribution which helps decide whether special orders etc should be accepted (1) whereas absorption costing treats fixed costs as part of the product cost which makes such decisions impractical (1) Accept other valid responses 4(f) Explain the effect on profit of using marginal costing rather than using absorption costing. 2 Using marginal costing will result in higher profits if inventory levels decrease/lower profits if inventory levels increase (1) as inventory valuation in marginal costing does not consider fixed costs as part of the product cost, unlike absorption costing (1) Accept other valid responses

Question 38

(b) Prepare a marginal cost statement for the year ending 30 November 2025 to show the revised contribution and revised profit for the year…

Question 39

H Limited is a service company providing administrative support to businesses. The company operates two separate departments, Payroll servi…

Accepted Answer

Question Answer Marks 4(a)(i) Calculate for the Payroll services department only: 1 the total number of chargeable hours available for the year ending 31 December 2025 5 employees  48 weeks  40 hours = 9600 hours (1) 4(a)(ii) Calculate for the Payroll services department only: 3 the break-even point in hours. 7422 hours (3) OF W Workings Contribution: $35 – $7 = $28 (1) Fixed costs: 9600  18 = $172 800 + $35 000 = $207 800 (1) Breakeven point – $207 800 / $28 = 7422 hours (1) OF 4(a)(iii) Calculate for the Payroll services department only: 1 the number of chargeable hours required to produce a profit of $45 000 for the year ending 31 December 2025. 9029 hours (1) W Working $207 800 (OF) + $45 000 = $252 800/$28 (OF) = 9029 hours (1) OF 4(b) Prepare a budgeted marginal cost statement to show the Payroll 4 services department profit for the year ending 31 December 2025. H Limited Payroll services department Budgeted marginal cost statement for the year ending 31 December 2025 Revenue 8160  $35 285 600 (1) Variable costs 8160  $7 (57 120) Contribution 228 480 (1) Fixed costs 207 800 (1) OF Profit for the year 20 680 (1) OF 4(c) Calculate the number of overtime hours required for the payroll services 3 department for the year ending 31 December 2025 if the directors chose Option 1. 340 hours (3) Workings Hours Available 9 600 Additional required 4 180 Total required 13 780 (1) Now available (7  48  40) 13 440 (1) Overtime required 340 (1) 4(d) Prepare a budgeted marginal cost statement to show the Payroll 7 services department profit for the year ending 31 December 2025 if the directors choose Option 1. H Limited Payroll department Budgeted marginal cost statement for the year ending 31 December 2025 Revenue 13 780  $35 482 300 (1) OF Variable costs 13 780  $7 (96 460) (1) OF Overtime payments 340  $31.50 (10 710) (1) OF Contribution 375 130 (1) OF Fixed costs salaries 13 440  $21 (282 240) (1) OF Fixed costs other (35 000) (1) Profit for the year 57 890 (1) OF 4(e) Calculate the Payroll services department contribution for the year 1 ended 31 December 2025 if the directors choose Option 2. $390 000  22% = $85 800 (1) 4(f) Advise the directors which option they should choose. Justify your 7 answer by considering both financial and non-financial factors. Financial Option 1 • Exceeds the target profit by $12 890 (1) • Results in total company profit of $107 690 (1) • Will Accountancy department staff demand increased salary? (1) Option 2 • Achieves positive contribution of $85 800 (1) • Additional fixed costs must be borne leaving profit of $50 800 (1) • Results in total company profit of $108 690 (1) • Possible redundancy costs incurred (1) Non-financial • Will quality of work meet company’s requirements? (1) • Will there be confidentiality issues? (1) • Will deadlines be met? (1) • Will staff be prepared to work overtime? (1) • Will closure of payroll department result in loss of Accountancy clients? (1) Overall comments max 6 marks Decision supported with a comment(1) Accept other valid responses 4(g) State three limitations of cost-volume-profit analysis. 3 • Only relevant for single product or constant mix of products (1) • Assumes that all variable costs per unit remain constant (1) • Assumes that selling price remains constant (1) • Fixed costs remain constant over the relevant range (1) • All production is sold (1) Max 3 marks Accept other valid responses

Question 40

December 2025. The Accountancy services department is budgeted to make a profit of $49 800 for the year. (f) Advise the directors which opt…

Question 41

Ameerah’s business uses absorption costing. (a) Define the following terms: (i) cost centre ...............................................…

Accepted Answer

4(a)(i) Define the following terms: 1 cost centre a department/service location/activity to which costs can be attributed (1) 4(a)(ii) Define the following terms: 1 fixed cost A cost that remains unchanged within a certain level of activity / output (1) 4(a)(iii) Define the following terms: 1 indirect labour costs of employees whose work cannot be directly identified with the finished product (1) 4(b) Complete the table to show the total overheads for each department and the 5 reapportionment of service department overheads. Total Production Service departments departments $ Processing Assembly Maintenance Stores $ $ $ Overheads 570 760 256 480 193 980 65 720 54 580 allocated Rent 63 000 29 400 17 850 6 930 8 820 (1) Depreciation 45 000 30 000 9 000 5 000 1 000 (1) Subtotal 678 760 315 880 220 830 77 650 64 400 Reapportion – 22 080 34 040 8 280 (64 400) (1) Stores Subtotal – 337 960 254 870 85 930 – Reapportion – 60 151 25 779 (85 930) (1)OF Maintenance Total 398 111 280 649 – – overheads (1) OF 4(c) Calculate, to two decimal places, an overhead absorption rate for each 4 production department using a suitable basis. Processing department $398 111 = $33.85 (1) OF per machine hour (1) 11760 Assembly department $280 649 = $31.39 (1) OF per labour hour (1) 8 940 4(d) State two reasons why overheads may be under-absorbed. 2 Under absorption of overheads occurs when either actual expenditure is more than budgeted expenditure (1) and/or production is less than planned (1). 4(e) Calculate the amount saved per unit by paying experienced labour at a higher 3 rate. Lower rate: $9.60 per hour / 24 units = $0.40 per unit (1) Higher rate: $10.50 per hour/30 units = $0.35 per unit (1) The amount saved is $0.05 per unit (1) OF 4(f) Prepare a statement to show the total selling price for the customer’s order. 8 $ Direct materials 300  1.8  $4.80 2 592.00 (1) Direct labour Processing department 300  $9.60  2.25 6 480.00 (1) Assembly department 300  $12.20  1.75 6 405.00 (1) Other overheads Processing department 300  1.80  $33.85 18 279.00 (1) OF Assembly department 300  1.75  $31.39 16 479.75 (1) OF Total cost 50 235.75 (1) OF Profit W1 75 353.63 (1) OF Selling price 125 589.38 (1) OF W1 Profit = 1.5  cost $50 235.75 OR $ Direct materials 1.8  $4.80 8.64 (1) Direct labour Processing department $9.60  2.25 21.60 (1) Assembly department $12.20  1.75 21.35 (1) Other overheads Processing department 1.80  $33.85 60.93 (1) OF Assembly department 1.75  $31.39 54.93 (1) OF Total cost per unit 167.45 (1) OF Profit W1 251.18 (1) OF Selling price 418.63  125 589.00 (1) OF 300 4(g) Advise Ameerah whether or not she should use marginal costing rather than 5 absorption costing. Justify your advice. For the change (max 2) Marginal costing will enable prices to be set more flexibly (1) enabling the business to be more competitive Will be useful for other short-term decision making situations (such as limiting factor decisions as well as special order pricing) (1) Avoids some problems associated with absorption costing (such as arbitrary apportionment of overheads) (1) Against the change (max 2) Risk that fixed costs may not be covered (1) May be difficulties in establishing the marginal cost where some costs have both fixed and variable elements (1) Ignores the fact that in the long run all costs are variable (1) Max 4 Accept other valid responses Decision supported with a comment (1)

Question 42

M Limited manufactures a single product at one of its factories. The company uses marginal costing. (a) Define the following terms: (i) con…

Accepted Answer

Question Answer Marks 4(a)(i) Define the following terms: 1 contribution Contribution is the difference between selling price and variable costs (1) 4(a)(ii) Define the following terms: 1 fixed costs Fixed costs are costs which do not change with levels of business activity (1) 4(a)(iii) Define the following terms: 1 margin of safety Margin of safety is the difference between sales and break-even level of sales (1) 4(b)(i) Calculate the following in units: 3 break-even point Contribution $11 (1); Fixed costs 6  8 300 = $49 800 (1) Break-even point 4 528 units (1) 4(b)(ii) Calculate the following in units: 1 margin of safety 8 300 – 4 528 = 3 772 units (1) OF 4(c) Calculate the amount by which the monthly target profit is exceeded. 2 Monthly profit: (8 300  $11) – $49 800 = $41 500 (1) Excess of profit: $41 500 – $35 000 = $6 500 (1)OF 4(d) Prepare a marginal costing statement for Option A to show the total monthly 6 profit being made. Marginal costing statement for one month for Option A Exe Wye $ $ Revenue 476 000 (1) Revenue 152 000 11 900  $40 4 000  $38 Direct materials (166 600) (1) Direct materials (60 000) 11 900  $14 4 000  $15 (1) Direct labour (142 800) Direct labour (40 000) 11 900  $12 4 000  $10 Contribution 166 600 (1)OF Contribution 52 000 (1)OF Total contributions 218 600 Less fixed costs 126 000 Profit per month 92 600 (1) OF 4(e) Calculate the total profit to be made in the first month of operation if Option B 8 is adopted. Option B Exe $ 14 000  $39 546 000 (1) Direct materials 14 000  $13.125 W1 (183 750) (1) Direct labour 14 000  $12 (168 000) (1) Contribution 194 250 (1) Wye Contribution: 3 000  $17 51 000 (1) Total contribution 245 250 Less fixed costs ($126 000 + $5 000 + $23 000 (1) 154 000 (1) Profit for first month 91 250 (1) OF W1 Direct materials: price was $14 per unit with 20% discount; so price pre-discount was $17.50; and new price after 25% discount is $13.13 4(f) Advise the directors which option they should choose. Justify your choice by 7 discussing both financial and non-financial factors for both options. Financial (max 4) Option A = continue with production of both • Produces greater profit in first month of operation by very small amount $1350 (1) • Can meet all existing customer’s requirements for product Wye (4000 units) (1) • Business is still not operating at full capacity (1) Option B = use overseas supplier for Wye • Produces significantly greater profit in subsequent months (no training costs; no loss on disposal) (1) • Risk of losing some customers for product Exe who make joint purchases of Wye and Exe (and whose order for Wye cannot be satisfied) reducing revenue and profits (1) • Some possible redundancy costs for direct labour currently producing product Exe (1) • Will reduction in price for product Exe be effective? (1) Non-financial (max 4) • Will overseas supplier prove reliable/deliveries on time? (1) • Are future supplies guaranteed? (1) • How will direct labour react to any redundancies/requirement to retrain? (1) • Will retraining be effective? (1) • Foreign exchange rates (1) (Overall max 6) Decision supported with a comment (1) Accept other valid responses

Question 43

Ameerah’s business uses absorption costing. (a) Define the following terms: (i) cost centre ...............................................…

Accepted Answer

4(a)(i) Define the following terms: 1 cost centre a department/service location/activity to which costs can be attributed (1) 4(a)(ii) Define the following terms: 1 fixed cost A cost that remains unchanged within a certain level of activity / output (1) 4(a)(iii) Define the following terms: 1 indirect labour costs of employees whose work cannot be directly identified with the finished product (1) 4(b) Complete the table to show the total overheads for each department and the 5 reapportionment of service department overheads. Total Production Service departments departments $ Processing Assembly Maintenance Stores $ $ $ Overheads 570 760 256 480 193 980 65 720 54 580 allocated Rent 63 000 29 400 17 850 6 930 8 820 (1) Depreciation 45 000 30 000 9 000 5 000 1 000 (1) Subtotal 678 760 315 880 220 830 77 650 64 400 Reapportion – 22 080 34 040 8 280 (64 400) (1) Stores Subtotal – 337 960 254 870 85 930 – Reapportion – 60 151 25 779 (85 930) (1)OF Maintenance Total 398 111 280 649 – – overheads (1) OF 4(c) Calculate, to two decimal places, an overhead absorption rate for each 4 production department using a suitable basis. Processing department $398 111 = $33.85 (1) OF per machine hour (1) 11760 Assembly department $280 649 = $31.39 (1) OF per labour hour (1) 8 940 4(d) State two reasons why overheads may be under-absorbed. 2 Under absorption of overheads occurs when either actual expenditure is more than budgeted expenditure (1) and/or production is less than planned (1). 4(e) Calculate the amount saved per unit by paying experienced labour at a higher 3 rate. Lower rate: $9.60 per hour / 24 units = $0.40 per unit (1) Higher rate: $10.50 per hour/30 units = $0.35 per unit (1) The amount saved is $0.05 per unit (1) OF 4(f) Prepare a statement to show the total selling price for the customer’s order. 8 $ Direct materials 300  1.8  $4.80 2 592.00 (1) Direct labour Processing department 300  $9.60  2.25 6 480.00 (1) Assembly department 300  $12.20  1.75 6 405.00 (1) Other overheads Processing department 300  1.80  $33.85 18 279.00 (1) OF Assembly department 300  1.75  $31.39 16 479.75 (1) OF Total cost 50 235.75 (1) OF Profit W1 75 353.63 (1) OF Selling price 125 589.38 (1) OF W1 Profit = 1.5  cost $50 235.75 OR $ Direct materials 1.8  $4.80 8.64 (1) Direct labour Processing department $9.60  2.25 21.60 (1) Assembly department $12.20  1.75 21.35 (1) Other overheads Processing department 1.80  $33.85 60.93 (1) OF Assembly department 1.75  $31.39 54.93 (1) OF Total cost per unit 167.45 (1) OF Profit W1 251.18 (1) OF Selling price 418.63  125 589.00 (1) OF 300 4(g) Advise Ameerah whether or not she should use marginal costing rather than 5 absorption costing. Justify your advice. For the change (max 2) Marginal costing will enable prices to be set more flexibly (1) enabling the business to be more competitive Will be useful for other short-term decision making situations (such as limiting factor decisions as well as special order pricing) (1) Avoids some problems associated with absorption costing (such as arbitrary apportionment of overheads) (1) Against the change (max 2) Risk that fixed costs may not be covered (1) May be difficulties in establishing the marginal cost where some costs have both fixed and variable elements (1) Ignores the fact that in the long run all costs are variable (1) Max 4 Accept other valid responses Decision supported with a comment (1)

Question 44

B Limited uses absorption costing at one of its factories where two products are made: Wye and Zed. The budgeted production for January 202…

Accepted Answer

4(a) Calculate, to two decimal places, the overheads to be absorbed by one unit of 4 each product using the direct labour hour method. Total direct labour hours = 20 000 + 23 800 = 43 800 hours (1) $67890 Labour hour overhead absorption rate = = $1.55 per hour (1) 43800 Wye: 2.5  $1.55 = $3.88 per unit (1) Zed: 1.7  $1.55 = $2.64 per unit (1) 4(b) Calculate the total amount of overheads absorbed by each product if budgets are 2 met. Overheads absorbed by: Wye: 8 000  $3.88 = $31 040 (1) OF Zed: 14 000  $2.64 = $36 960 (1) OF Alternative method: 20000 Wye:  $67 890 = $31 000 (1) OF 43800 23800 Zed:  $67 890 = $36 890 (1) OF 43800 4(c) State two reasons why overheads may be under absorbed. 2 Actual activity/production level/units produced is less than budgeted activity (1) Actual overheads are greater than budgeted overheads/indirect costs have increased (1) 4(d) Calculate the total selling price for the order. 5 $ Materials: 1 200  $7 8 400 (1) Labour 1 200  1.7  $11 22 440 Overheads: 1 200  $2.64 3 168 (1) OF Total cost 34008 (1) OF Profit 17 004 (1) OF Selling price 51 012 (1) OF 4(e) Calculate the current profit per month. 4 $ Revenue: 14 000  $108 1 512 000 (1) Direct materials: 14 000  $38.75 (542 500) (1) Direct labour: 14 000  $18 (252 000) (1) Fixed costs (136 000) Profit per month 581 500 (1) Alternative method: Contribution per unit: $108 – $56.75 (1) = $51.25 (1) Total contribution = 14 000  $51.25 = $717 500 (1) Profit per month = $717 500 – $136 000 = $581 500 (1) 4(f) Prepare a marginal costing statement for one month if the directors use the 6 overseas supplier. $ Revenue/sales: 18 000  $108 1 944 000 (1) Direct materials: 18 000  $50 (900 000) (1) Direct labour: 18 000  $18 (324000) (1) Contribution: 18 000  $40 720 000 (1) OF Fixed costs ($136 000 – $17 200) (118 800) (1) Profit (per month) 601 200 (1) OF Alternate answer: $ Selling price 108 (1) Direct materials (50) (1) Direct labour (18) (1) Contribution per unit 40 (total) contribution 7200 (1)OF Fixed costs (118 800) (1) Profit (per month) 601 200 (1)OF 4(g) Advise the directors whether or not they should purchase the direct materials from 7 the overseas supplier. Justify your answer by discussing both financial and non- financial factors. For (max 4) Larger profit (1)OF Increased production ensuring more of workforce is retained/less risk of redundancy payments (1) Machinery will be fully used avoiding deterioration due to idleness (1) It reduces transport costs so reduced fixed costs (1) It increases capacity to meet demand (1) Against (max 4) Can all extra production be sold? (1) Will there be extra storage costs as only one delivery per month (1) Reliability of supply/ time to deliver (1) Quality of supply (1) Exchange/rate considerations (1) Tariff/import tax considerations (1) Contribution per unit less (1)OF Are forecasts accurate (1) Accept other valid responses Decision supported with a comment (1)

Question 45

A sales commission will be paid of $3 per unit for every sale up to the current level of 1200 units per month of Zed, and $5 per unit for e…

Question 46

(d) Calculate the total monthly profit to be made if Option A is chosen. ..................................................................…

Question	Answer	Marks	From
1	see sheet	18	9706/21 May/June 2017
2	see sheet	17	9706/23 May/June 2017
3	see sheet	20	9706/22 Oct/Nov 2017
4	see sheet	30	9706/23 Oct/Nov 2017
5	see sheet	19	9706/21 May/June 2018
6	see sheet	26	9706/23 May/June 2018
7	see sheet	24	9706/21 Oct/Nov 2018
8	see sheet	28	9706/22 Feb/March 2019
9	see sheet	4	9706/21 May/June 2019
10	see sheet	12	9706/22 May/June 2020
11	see sheet	14	9706/22 Oct/Nov 2020
12	see sheet	24	9706/23 Oct/Nov 2020
13	see sheet	16	9706/22 Feb/March 2021
14	see sheet	11	9706/21 May/June 2021
15	see sheet	18	9706/21 Oct/Nov 2021
16	see sheet	0	9706/22 Oct/Nov 2021
17	see sheet	0	9706/23 Oct/Nov 2021
18	see sheet	22	9706/21 May/June 2022
19	see sheet	20	9706/23 May/June 2022
20	see sheet	20	9706/23 May/June 2022
21	see sheet	13	9706/21 Oct/Nov 2022
22	see sheet	9	9706/22 Oct/Nov 2022
23	see sheet	0	9706/22 Oct/Nov 2022
24	see sheet	8	9706/22 Feb/March 2023
25	see sheet	0	9706/22 Feb/March 2023
26	see sheet	11	9706/22 Feb/March 2023
27	see sheet	72	9706/21 May/June 2023
28	see sheet	14	9706/22 May/June 2023
29	see sheet	0	9706/22 May/June 2023
30	see sheet	16	9706/22 May/June 2023
31	see sheet	13	9706/23 May/June 2023
32	see sheet	20	9706/23 Oct/Nov 2023
33	see sheet	11	9706/22 Feb/March 2024
34	see sheet	12	9706/22 Feb/March 2024
35	see sheet	10	9706/22 May/June 2024
36	see sheet	16	9706/21 Oct/Nov 2024
37	see sheet	8	9706/22 Oct/Nov 2024
38	see sheet	16	9706/22 Oct/Nov 2024
39	see sheet	12	9706/23 Oct/Nov 2024
40	see sheet	10	9706/23 Oct/Nov 2024
41	see sheet	17	9706/21 May/June 2025
42	see sheet	9	9706/22 May/June 2025
43	see sheet	17	9706/23 May/June 2025
44	see sheet	17	9706/21 Oct/Nov 2025
45	see sheet	0	9706/22 Oct/Nov 2025
46	see sheet	20	9706/22 Oct/Nov 2025

Questions101 pages

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Questions as text

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Q7 · DH Limited manufactures a single product 9706/21 Oct/Nov 2018

Q8 · W Limited operates a system of marginal costing 9706/22 Feb/March 2019

Q9 · Ravi manufactures two products, Exe and Wye 9706/21 May/June 2019

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Q11 · Kevin runs a small manufacturing business 9706/22 Oct/Nov 2020

Q12 · Connie manufactures three products: A, B and C 9706/23 Oct/Nov 2020

Q13 · K Limited produces goods at two sites and uses marginal costing 9706/22 Feb/March 2021

Question 14 9706/21 May/June 2021

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Q17 · Expenses were to be allocated as follows: Administrative Distribution expenses costs… 9706/23 Oct/Nov 2021

Q18 · N Limited manufactures a single product at one of its factories 9706/21 May/June 2022

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Q20 · Reduce the selling price by 1.5% per unit 9706/23 May/June 2022

Q21 · Mandeep owns two manufacturing businesses 9706/21 Oct/Nov 2022

Q22 · Brady manufactures one product which is sold through agents who receive a 10% commission… 9706/22 Oct/Nov 2022

Q23 · Reduce the administrative overheads by $18 000 per annum by making one member of staff… 9706/22 Oct/Nov 2022

Q24 · G Limited manufactures a single product type at one of its factories 9706/22 Feb/March 2023

Q25 · The factory can operate in overtime conditions 9706/22 Feb/March 2023

Q26 · An additional machine costing $40 000 will be required 9706/22 Feb/March 2023

Q27 · REQUIRED (c) Prepare the statement of profit or loss for the year ended 31 December 2022 9706/21 May/June 2023

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Q29 · Direct labour costs will remain unchanged 9706/22 May/June 2023

Q30 · REQUIRED (f) Calculate the profit to be made on each option in the first month of… 9706/22 May/June 2023

Q31 · Direct labour costs and selling price will remain unchanged 9706/23 May/June 2023

Q32 · Dev manufactures two products, Aye and Bee 9706/23 Oct/Nov 2023

Q33 · K Limited uses absorption costing at one of its factories 9706/22 Feb/March 2024

Q34 · Prepare marginal costing statements to show the monthly forecast profit, rounded to the… 9706/22 Feb/March 2024

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Q36 · Alberto owns a manufacturing business 9706/21 Oct/Nov 2024

Q37 · Martina produces and sells a single type of product 9706/22 Oct/Nov 2024

Q38 · Prepare a marginal cost statement for the year ending 30 November 2025 to show the… 9706/22 Oct/Nov 2024

Q39 · H Limited is a service company providing administrative support to businesses 9706/23 Oct/Nov 2024

Question 40 9706/23 Oct/Nov 2024

Q41 · Ameerah’s business uses absorption costing 9706/21 May/June 2025

Q42 · M Limited manufactures a single product at one of its factories 9706/22 May/June 2025

Q43 · Ameerah’s business uses absorption costing 9706/23 May/June 2025

Q44 · B Limited uses absorption costing at one of its factories where two products are made… 9706/21 Oct/Nov 2025

Q45 · A sales commission will be paid of $3 per unit for every sale up to the current level of… 9706/22 Oct/Nov 2025

Q46 · Calculate the total monthly profit to be made if Option A is chosen 9706/22 Oct/Nov 2025