Traditional costing methods — Paper 2 · A Level Accounting 9706

4 Zinan is a manufacturer and makes a single product. He currently uses marginal costing. The following budgeted information is available for two years. Year 1 Year 2 $ $ Direct labour 38 500 45 500 Direct material 24 750 29 250 Factory costs 13 750 15 250 Units Units Sales 10 000 11 000 Production 11 000 13 000 The following information is also available. 1 Of the factory costs, $5500 are fixed for each year and the remainder are variable. 2 Variable cost per unit is not expected to change. 3 Fixed selling costs are $3500 for Year 1. These are expected to increase by 2% for Year 2. 4 Variable selling costs are expected to be 5% of the sales revenue for each year. 5 The selling price is $18 per unit. 6 There was no opening inventory in Year 1. REQUIRED (a) Calculate the budgeted variable cost of production per unit. [2] (b) Calculate the total budgeted contribution for each year. [6] (c) Calculate the budgeted production cost per unit for each year. [2] Additional information Zinan is considering using absorption costing. REQUIRED (d) State two limitations of absorption costing. 1 2 [2] (e) Calculate the total budgeted profit for each of the two years using absorption costing. [7]

19 marks

Mark scheme: 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

This question in 9706/21 May/June 2018

4 Jessie is a manufacturer and uses a single raw material to make her product. The following table shows inventory transactions for the month of March 2019. Per kilo Date Kilos $ March 1 Opening balance 1500 1.90 3 Receipts 3500 1.92 10 Receipts 2000 1.95 17 Receipts 1500 2.00 Jessie uses the First In First Out (FIFO) method to value her inventory. The following issues to production took place. Date Kilos March 5 3000 23 4500 REQUIRED (a) Calculate the following in dollars: (i) the value of issues to production on 5 March [2] (ii) the value of issues to production on 23 March [3] (iii) the value of closing inventory at 31 March. [1] (b) State two advantages to a business of using the FIFO method of inventory valuation. 1 2 [2] Additional information The business has two production cost centres: machining and assembly, and one service cost centre: stores. The following budgeted information is available for the year ending 31 December 2019. Budgeted overheads $ Basis of apportionment Depreciation 9 760 Non-current asset at cost Heat and light 13 850 Kilowatt hours Machinery maintenance 6 500 Machine hours The following budgeted information is also available. Service Production cost centres cost centre Machining Assembly Stores Kilowatt hours 4 200 2 100 700 Non-current assets at cost ($) 91 000 28 000 21 000 Stores requisitions 375 125 Direct labour hours 2 700 6 300 Machine hours 13 400 3 350 REQUIRED (c) Complete the following table to show the apportionment of budgeted overhead costs for the year ending 31 December 2019. Service cost Production cost centres Total centre $ Machining Assembly Stores $ $ $ Depreciation Heat and light Machinery maintenance Total overheads apportioned Re-apportionment of stores Total overheads cost [6] (d) Calculate, to two decimal places, an overhead absorption rate for each production cost centre, using a suitable basis. [4] Question 4 (e) is on the next page.

18 marks

Mark scheme: 4(a) Workings: Date Kilos Per kilo $ Issues $ Total $ March 1 Opening balance 1500 1.90 3 Receipts 3500 1.92 5 Issues 3000 1500 × 1.90 1500 × 1.92 2850 2880 5730 10 Receipts 2000 1.95 17 Receipts 1500 2.00 23 Issues 4500 2000 × 1.92 2000 × 1.95 500 × 2.00 3840 3900 1000 8740 31 Closing balance 1000 × 2.00 2000 4(a)(i) 2850 (1) + 2880 (1) = 5730 2 4(a)(ii) 3840 (1) + 3900 (1) + 1000 (1) = 8740 3 4(a)(iii) 2000 (1) 1 Question Answer Marks 4(b) Easy to calculate (1) Inventory value is closer to current market value (1) An accepted method of valuing inventory for the financial statements (1) Max 2 marks Accept other valid points. 2 4(c) Total $ Production cost centres Service cost centre Machining $ Assembly $ Stores $ Depreciation 9 760 6 344 1 952 1 464 (1) row Heat and Light 13 850 8 310 4 155 1 385 (1) row Machinery maintenance 6 500 5 200 1 300 - (1) row Total overheads apportioned 19 854 7 407 2 849 Re-apportionment of stores 2 137 712 (2 849) (1) row Total overhead cost 21 991 (1) OF 8 119 (1) OF 6 Question Answer Marks 4(d) Machining Overhead cost $21 991 Machine hours 13 400 = $1.64 (1) OF per machine hour (1) Assembly Overhead cost $8 119 Labour hours 6 300 = $1.29 (1) OF per direct labour hour (1) 4 4(e) $ Direct materials (3 kilos × $2.00 ) 6.00 (1) Direct labour (2.5 hours × $4) 10.00 (1) Overheads (machining 1.5 hours × $ 1.64) 2.46 (1) OF Overheads (assembly 2 hours × $1.29 ) 2.58 (1) OF Cost per unit 21.04 × 200 units Total cost 4 208 (1) OF Mark-up/profit (25%) 1 052 (1) OF Total selling price 5 260 (1) OF OR $ Direct materials 1 200 (1) Direct labour 2 000 (1) Overheads 492 (1) OF Overheads 516 (1) OF Total cost 4 208 (1) OF Mark-up/profit (25%) 1 052 (1) OF Total selling price 5 260 (1) OF 7 Question Answer Marks 4(f) The offer still provides a positive contribution/generates profit (1) This will result in increased overall profits for the business (1) albeit the offer price will not achieve the usual mark up of 25% (1) The order will make use of existing spare capacity (1) which could be used to manufacture goods with a better mark-up (1) Is this a one-off order or will the customer expect future orders at the same price (1). Other customers could also want to buy at a reduced price (1) , and it could cause ill feeling with other customers (1) Decision (1) (1 mark) × any 4 points – Max 4 for comments 5

This question in 9706/22 May/June 2019

4 D Limited is a large company and operates from several sites. It uses different systems of costing for its different sites. REQUIRED (a) State three advantages to a business of using a system of absorption costing. 1 2 3 [3] Additional information At one of its sites the company specialises in printing brochures and leaflets for local organisations. At this site it uses a system of absorption costing. There are two production departments: Assembly and Printing and two service departments: Technical support and Personnel. The following information is available. Production departments Service departments Technical Assembly Printing Personnel support Floor area (square metres) 90 70 15 5 Power (kilowatt-hours) 120 320 40 20 Replacement cost of machinery and equipment ($) 105 000 30 000 12 000 3 000 Number of employees 20 15 5 Technical support hours 400 60 The following budgeted overhead costs for August 2019 are still to be apportioned. $ Electricity 20 500 Insurance of machinery 7 500 Insurance of buildings 11 880 REQUIRED (b) Complete the following table to show the apportionment of budgeted overhead costs for August 2019. Apportionment of overheads Production departments Service departments Technical Total Assembly Printing support Personnel $ $ $ $ $ Overheads already apportioned 40 210 17 530 11 360 5020 6300 Electricity Insurance of machinery Insurance of buildings Total overheads apportioned Reapportionment of personnel overheads Reapportionment of technical support overheads [7] Additional information The following budgeted information is also available for August 2019. Assembly Printing Direct labour hours 3200 2000 Direct machine hours 1400 5500 REQUIRED (c) Calculate an overhead absorption rate for each production department using an appropriate basis. [4] Additional information The company received an order for a set of brochures to be produced in August 2019. It was budgeted that this order would require the following: Direct material and labour cost $1330 Direct labour hours Assembly department 12.5 hours Printing department 7.2 hours Machine hours Assembly department 5.5 hours Printing department 6.0 hours The company requires a profit margin of 25% on all orders.

14 marks

Mark scheme: 4(a) Enables selling prices to be set, because all costs are included in the pricing of a product. (1) Supports long-term planning, because this depends on revenue. It must cover not just direct costs but overhead costs as well. (1) Absorption costing conforms to the accruals concept, because the total cost of unsold inventory is charged to the period in which it is sold. (1) Accept other valid points. Max 3 3 Question Answer Marks 4(b) Production debts Service departments Total Assembly Printing Technical support Personnel $ $ $ $ $ Overheads already apportioned 40 210 17 530 11 360 5 020 6 300 Electricity 20 500 4 920 13 120 1 640 820 (1) Insurance of machinery 7 500 5 250 1 500 600 150 (1) Insurance of buildings 11 880 5 940 4 620 990 330 (1) 80 090 33 640 30 600 8 250 7 600 Personnel 3 800 2 850 950 (7 600) (1) OF 37 440 33 450 9 200 0 Technical support 8 000 1 200 (9 200) (1) OF 45 440 34 650 0 (1) OF (1) OF 7 4(c) Assembly 45440 3200 OF $14.20 (1) OF per labour hour (1) Printing 34650 5500 OF $6.30 (1) OF per machine hour (1) 4 Question Answer Marks 4(d) $ Direct costs 1 330.00 Overheads Assembly dept 12.5 × $14.20 177.50 (1) OF Overheads Printing dept 6 × $6.30 37.80 (1) OF Total cost 1 545.30 (1) OF Profit 1 3 of cost 515.10 (1) OF 4 4(e) $ Assembly department 1.5 hours less than forecast: Under-absorbed (1) 1.5 × $14.20 (OF) 21.30 (1) OF Printing department 2 hours more than forecast Over-absorbed (1) 2 × $6.30 (OF) (12.60) (1) OF Overheads under-absorbed 8.70 (1) OF 5 Question Answer Marks 4(f) Financial – Max 2 All models make a positive contribution. (1) If any model was discontinued fixed costs would be reallocated to the remaining models. (1) Method of allocating fixed costs may be inappropriate. (1) Non-financial – Max 4 Discontinuing any model may result in loss of customers/sales. (1) Would the workforce be fully employed on the remaining models? (1) Would employees need training to produce alternative models? (1) Possible redundancies. (1) Demotivated workforce. (1) Adverse publicity. (1) Accept other valid points. Overall Max 6 for justification + 1 for recommendation. 7

This question in 9706/21 Oct/Nov 2019

4 D Limited manufactures a single product. The company has two production departments: machining and finishing. There are two service departments: stores and maintenance. The accountant has allocated and apportioned total factory overheads to the four departments. REQUIRED (a) Explain the difference between allocation and apportionment of overheads. [4] Additional information The directors of D Limited have provided the following information: Machining Finishing Stores Maintenance Issues from stores 60% 30% - 10% Maintenance 75% 25% - – Budgeted direct labour hours 22 000 52 000 - – Budgeted machine hours 84 000 12 000 - – REQUIRED (b) Re-apportion the service departments’ costs to the production departments. Machining Finishing Stores Maintenance $ $ $ $ Total apportioned 177 255 101 150 26 585 33 010 overheads Re-apportionment of stores Subtotal Re-apportionment of maintenance Total [4] (c) Calculate a suitable overhead absorption rate to two decimal places for each production department. [4] (d) Explain why a business calculates separate overhead absorption rates for each production department rather than a single rate for the whole factory. [4] Additional information The company accountant has been asked to provide a quotation for a customer who requires 200 units of the company’s product. The directors wish to quote a selling price which will achieve a 25% gross margin. Budgeted cost per unit of product Direct material $16.00 Direct labour hours Machining 10 minutes at $9.60 per hour Finishing 45 minutes at $10.80 per hour Machine hours Machining 90 minutes Finishing 20 minutes REQUIRED (e) Prepare a statement to show the quoted selling price of one unit of the product. [6] (f) Calculate the total amount the company would receive if the customer accepted the quoted price and then took a cash discount of 7 ½ %. [1]

23 marks

Mark scheme: 4(a) Overhead allocation is charging costs to a cost centre (1) those costs which 4 are directly attributable to it. (1) Overhead apportionment is charging costs to a cost centre which are not directly attributable (1) to it using a suitable basis (1) 4(b) Machining Finishing Stores Maintenance 4 $ $ $ $ Total apportioned 177 255 101 26 33 overheads 150 585 010 Reapportionment of 15 951 7 975 (26 2 (1) for stores 585) 659 row Subtotal 193 206 109 – 35 125 669 Reapportionment of 26 752 8 917 – (35 (1) OF maintenance 669) for row Total 219 958 118 042 (1) OF (1) OF 4(c) $219958 4 Machining = $2.62 (1) OF per machine hour (1) OF 84000 $118042 Finishing = $2.27 (1) OF per direct labour hour (1) OF 52000 4(d) The overhead absorption rate should be chosen to reflect the activity of that 4 department (1). If the department is machine-intensive then machine hours should be chosen / If the department is labour intensive then labour hours should be chosen (1) This should lead to a more accurate absorption of overheads (1) which in turn leads to a more accurate cost figure / selling price (1) Accept other valid points. Max 4 4(e) $ 6 Direct materials 16.00  10  Direct labour – machining  × 9.60  1.60 (1)  60   45  Direct labour – finishing  × $10.80  8.10 (1)  60   90  Overheads – machining  × $2.62  3.93 (1) OF  60   45  Overheads – finishing  × $2.27  1.70 (1) OF  60  31.33  25  Mark-up  $31.33 ×  10.44 (1) OF  75  Selling price* 41.77 (1) OF * Must include direct materials for final OF 4(f) $41.77 × 200 = $8354.00 × 92.5% = $7727.45 (1) OF 1 4(g) 1 mark for identification, max 2 marks for development 7 Benefits Formal budget will inform all departments of the common goal (1) and therefore improve communication between the departments. (1) Will provide clear indication of individual managers’ areas of responsibility (1) and therefore improve co-ordination between departments. (1) Will motivate managers and employees (1) thus improving company performance. (1) Facilitates planning (1) which enables targets to be set (1) and improve performance by analysing variances. (1) Drawbacks Short term costs will increase (1) which would reduce profits though long term benefits should accrue. (1) May be problems implementing the control system (1), employees may be resistant to change. (1) Causes a straightjacket effect (1) which may prevent innovation (1) and missed opportunities (1) May result in demotivation (1) if the budgets are unrealistic (1) Accept other valid points. Decision 1 mark Max 3 marks for identification Max 3 marks for development Overall max 6

This question in 9706/23 Oct/Nov 2019

4 Cuthbert runs a manufacturing business which has two production departments and one service department. The business allocates and apportions overhead expenditure between production and service departments. REQUIRED (a) Explain one difference between overhead allocation and overhead apportionment. … … … … [2] (b) State what is meant by: (i) a production department … … … [1] (ii) a service department … … … [1] Additional information The following budgeted information has been provided. $ Rent 18 000 Heating and lighting 12 500 Depreciation 11 200 Employee overheads 8 300 50 000 Production Production Service department 1 department 2 department Area (Square metres) 4 500 3 000 1 500 Electricity used (Kilowatt hours) 60 000 30 000 10 000 Non-current assets at net book value ($) 75 000 45 000 Number of employees 45 25 13 Direct labour hours 4 000 1 200 Machine hours 1 500 2 000 Service department costs are re-apportioned on the basis of electricity used. REQUIRED (c) Complete the table to apportion the budgeted overheads to each department. Re-apportion the service department costs to the two production departments. Production Production Service Overhead department 1 department 2 department Total $ $ $ $ Rent Heating and lighting Depreciation Employee overheads Service department re-apportionment [8] (d) Calculate the overhead absorption rate for both production departments using an appropriate basis. Give your answers to two decimal places. Production department 1 … … … … … Production department 2 … … … … … [4] (e) Explain the reason for the re-apportionment of the service department costs. … … … … [2] (f) State three limitations of using absorption costing. 1 … … 2 … … 3 … … [3]

21 marks

Mark scheme: 4(a) Overhead allocation is used when the whole expense is directly related to one 2 department (1). Overhead apportionment is used when the overhead is related to more than one department (1). 4(b)(i) A production department is one which is directly involved in manufacturing the 1 products (1). 4(b)(ii) A service department is one which is not directly involved in manufacturing the 1 products but provides support to other departments (1). 4(c) 8 Overhead Production Production Service Total Centre 1 Centre 2 Centre Rent 9 000 6 000 3 000 18 000 (1) row Heating and 7 500 3 750 1 250 12 500 (1) lighting row Depreciation 7 000 4 200 11 200 (1) row Employee 4 500 2 500 1 300 8 300 (1) Overheads row 28 000 16 450 5 550 50 000 Service centre 3 700 (1)OF 1 850 (1)OF (5 550) re-apportionment 31 700 18 300 (1)OF (1)OF 4(d) 31700 4 Prod.1 = $7.93 (1)OF per direct labour hour (1) 4 000 18 300 Prod. 2 = $9.15 (1)OF per machine hour (1) 2 000 4(e) Service centres incur overhead costs and these costs are charged to the product by 2 transferring to the production centres on an appropriate basis (1). To ensure that all costs are recovered in the sale of products (1). Accept other valid responses. 4(f) Not used for short-term decision making (1). 3 Cannot calculate break-even point (1). Can be subjective (1). Accept other valid responses. 4(g) Direct costs ($2800 + $3200) 6 000.00 (1) 4 Overheads Dept 1 ($7.93 × 80) 634.40 (1)OF Overheads Dept 2 ($9.15 × 100) 915.00 (1)OF Total cost 7 549.40 Price to quote $7 549.40 ( OF) × 100/65: $11 614.46 (1)OF 4(h) Accept the order (1). 5 There is both a positive contribution (1) and profit / lower profit margin (1) Is there spare capacity? (1) Would acceptance of the order restrict other orders that would be more profitable? (1) Consider whether customer is likely to make more orders (1) and at which price (1). Consider effect on other customers learning of reduced price (1). 1 for decision and max. 4 for discussion.

This question in 9706/22 Feb/March 2020

4 G Limited manufactures cakes for celebrations. The company uses absorption costing. REQUIRED (a) Explain three benefits to a business of using absorption costing. 1 … … … … 2 … … … … 3 … … … … [6] Additional information There are two production departments: baking and decoration. There are two service departments: stores and maintenance. Some overheads have already been allocated. The following forecast information is available for the year ending 31 December 2020. Budgeted overheads to be apportioned $ Machinery depreciation 33 600 Power 45 500 Lighting and heating 18 000 Baking Decoration Stores Maintenance department department department department Floor space (m2) 4 100 2 300 600 200 Kilowatt hours 22 000 9 000 1 000 3 000 Machinery (net book value) ($) 33 000 10 000 4 000 9 000 Number of employees 14 29 4 5 Issues from stores 64% 24% 12% Budgeted maintenance hours 2 500 1 800 Budgeted machine hours 86 400 37 600 Budgeted labour hours 26 300 51 000 REQUIRED (b) Complete the table to show the apportionment of overheads and the reapportionment of the service department overheads using suitable bases. Total Baking Decoration Stores Maintenance department department department department $ $ $ $ $ Budgeted overheads 57 620 38 530 14 150 2 800 2 140 already allocated Machinery depreciation 33 600 Power 45 500 Lighting and heating 18 000 Total overheads 154 720 Reapportionment of first service department overheads Subtotal Reapportionment of second service department overheads Total overheads [7]

13 marks

Mark scheme: 4(a) • Takes account of fixed costs when determining product cost (1); as a result is useful in setting a selling price for a product (1). • Avoids separating fixed costs from variable costs (1) which can be difficult and so lead to inaccuracies (1) • As it takes account of all costs it conforms to the matching principle (1) which requires costs to be matched to revenues for a period (1) • As it takes account of all costs (1) it is the recognised method for inventory valuation (1) Max 3 advantages Each advantage 1 mark for main point + 1 mark for development. Accept other valid responses. Question Answer Marks 4(b) Total Baking department Decoration Department Stores Maintenance $ $ $ $ Budgeted overheads already apportioned 57 620 38 530 14 150 2 800 2 140 Machinery depreciation 33 600 19 800 6 000 2 400 5 400 (1) Power 45 500 28 600 11 700 1 300 3 900 (1) Lighting and heating 18 000 10 250 5 750 1 500 500 (1) Total overheads 154 720 97 180 37 600 8 000 11 940 Reapportionment of first service department overheads 5 120 1 920 (8 000) 960 (1)OF Subtotal 102 300 39 520 -- 12 900 Reapportionment of second service department overheads 7 500 5 400 -- (12 900) (1)OF Total overheads 109 800 44 920 -- -- (1)OF (1)OF 7 4(c) Overhead absorption rates Baking department: ( ) = $109800 $1.27 86400 1 per machine hour (1)OF Decoration department: ( ) = $44920 $0.88 51000 1 per labour hour (1)OF 4 Question Answer Marks 4(d) Overheads may be under-absorbed because: actual overheads exceed forecast overheads (1); actual production is less than forecast production (1) calculation error (1). Max 2 Accept other valid responses 2 4(e) Profit when offer is accepted Contribution from usual production: $49 – 25 = $24 (1) Contribution from offer: $45 – 25 = $20 (1) Fixed costs are: $12 × 850 = $10 200 Contribution from usual production: 570 units × $24 = $13 680 (1)OF Contribution from offer: 280 × $20 = $5 600 (1)OF Profit: Contribution $19 280 – $10 200 (1) = $9 080 (1)OF 6 4(f) Advice (1) Accept the offer The company will make more profit in April than had been forecast (1). Profit in April would have been: (680 units × $24)(1) – $10 200, i.e. $6 120 (1) The company will be in full production (1) avoiding cancellation of orders for materials which might cause a deterioration in relationships with suppliers (1), avoiding laying off staff which could affect morale (1), avoiding machinery lying idle which could affect their efficiency (1) Max 2 marks Accept other valid points. Not accept the offer The company will have to reduce its usual output (1) which could mean that some regular customers’ orders are not fulfilled (1) leading to a possible long-term loss of their custom (1) and a loss of profit if the special offer is not repeated (1). 5 Question Answer Marks 4(f) The directors need to consider whether the order can be produced to the quality expected (1), whether the labour force have the appropriate skills for the products if they vary from the normal output (1) and whether the machinery is capable of producing the products if they vary from the normal output (1). Max 2 marks Accept other valid points.

This question in 9706/21 May/June 2020

4 Y Limited is a furniture manufacturer. One of the company’s factories operates a system of absorption costing. REQUIRED (a) State two limitations of absorption costing. 1 … … 2 … … [2] Additional information The factory makes kitchen tables. There are two production departments: cutting and assembly. The following forecast information is available for the year: Cutting department Assembly department Overheads $68 400 $49 200 Total labour hours 13 720 15 820 Total machine hours 24 810 7 290 REQUIRED (b) Calculate, to two decimal places, appropriate overhead absorption rates for each department. Cutting department … … … … Assembly department … … … … [2] Additional information Each kitchen table requires the following. Materials 4.2 kg at $4.90 per kg Labour hours: cutting department 3.8 hours assembly department 2.2 hours Machine hours: cutting department 2.1 hours assembly department 1.3 hours All direct labour is paid at the rate of $10.50 per hour. The selling price of a table is calculated to achieve a gross margin of 40%. REQUIRED (c) Calculate the selling price of a kitchen table. … … … … … … … … … [6] Additional information At the end of the year on 31 December 2019 it was discovered that overheads had been over absorbed. REQUIRED (d) State two reasons why overheads may be over absorbed in a business. 1 … … 2 … … [2] Additional information At another factory the company manufactures bookcases. The following information is available. Selling price per unit $55 Materials per unit $10 Direct labour per unit $21 Fixed costs per month $54 000 Factory capacity per month 3800 units Recently demand for the product has fallen due to increased competition and the target profit of $12 500 per month has not been met. The directors are considering the following options. Option A 1 Reduce the selling price of each bookcase by $3 per unit. 2 Introduce a sales commission of 5% of selling price. 3 It is expected that demand will be 3800 units. Option B 1 Change the design to improve quality resulting in an increase of 20% in the material cost per unit. 2 Labour hours per unit will increase by 10%. 3 The revised selling price of each bookcase will be $59. 4 Start an advertising campaign at a cost of $24 000 per annum.

12 marks

Mark scheme: 4(a) • It is more time consuming to calculate the overhead absorption rate and 2 adjust for over / under absorption. (1) • It is more complicated to calculate and managers may need training. (1) • It is irrelevant in short-term decision making as fixed costs don’t change. (1) • Fixed costs relate to a period in time and so can be misleading to charge to production units. (1) • The basis used to apportion and absorb overheads may be arbitrary. (1) Max 2 Accept other valid responses. 4(b) Cutting department $68 400 2 = $2.76 per machine hour (1) 24810 Assembly department $49200 = $3.11 per labour hour (1) 15820 4(c) 6 $ Materials 4.2 kg × $4.90 20.58 (1) Labour 6 × $10.50 63.00 (1) Overheads Cutting department 2.1 machine hrs × $2.76 (OF) 5.80 (1)OF Assembly department 2.2 labour hrs × $3.11 (OF) 6.84 (1)OF 96.22 Add profit 64.15 (1)OF Selling price 160.37 (1)OF 4(d) More units were produced than forecast (1) 2 Actual overheads were less than forecast (1) 4(e)(i) Option A (allow either approach) 11 $ $ Selling price 52 (1) Variable costs Materials 10 (1) Labour 21 (1) Sales commission 2.60 (1) OF 33.60 Contribution per unit 18.40 Quantity X 3 800 Total contribution 69 920 Fixed costs 54 000 Profit 15 920 (1) OF $ $ Selling price 197 600 (1) Variable costs Materials 38 000 (1) Labour 79 800 (1) Sales commission 9 880 (1) OF 127 680 Contribution per unit Quantity Total contribution 69 920 Fixed costs 54 000 Profit 15 920 (1) OF 4(e)(ii) Option B (allow either approach) $ $ Selling price 59 (1) Variable costs Materials 12 (1) Labour 23.10 (1) 35.10 Contribution per unit 23.90 Quantity X 3 040 Total contribution 72 656 Fixed costs 56 000 (2)CF/(1)OF Profit 16 656 (1) OF $ $ Selling price 179 360 (1) Variable costs Materials 36 480 (1) Labour 70 224 (1) 106 704 Contribution per unit Quantity Total contribution 72 656 Fixed costs 56 000 (2)CF/(1)OF Profit 16 656 (1) OF 4(f) Option A 7 Max 4 Reasons for • Will achieve target profit (1) • Makes full use of capacity (1) • Reduced price may increase sales (1) Possible drawbacks • Will sales commission be effective? (1) • Will forecast increase in demand materialise/are forecasts reliable? (1) • Reduced price may be perceived as reduced quality (1) Option B Max 4 Reasons for • Will achieve highest profit (1) • Will achieve target profit (1) • Increased price may be perceived as increased quality (1) Possible drawbacks • There will be unused factory capacity/what will happen about unused labour (1) • Will forecast demand materialise/are forecast reliable? (1) • Will advertising campaign be effective? (1) • Increased price may reduce sales(1) Overall maximum 6 marks Recommendation (1) Accept other valid responses.

This question in 9706/21 Oct/Nov 2020

31 December 2020. REQUIRED (e) Calculate the amount of the proposed dividend. … … … … [2] [Total: 15] 4 P Limited is a manufacturing business. REQUIRED (a) Define the following terms: (i) Direct costs … … [1] (ii) Stepped costs … … [2] (b) State the formula for finding the margin of safety in units. … … [1] (c) Explain the term ‘limiting factor’ when using marginal costing. … … … … [2] Additional information P Limited manufactures a single product. The factory has the capacity to make 40 000 units per month. All production is sold. The following budgeted information is available for December 2021. Sales 30 000 units at $48 per unit Direct materials per unit 4.5 m at $4 per metre Direct labour per unit 3 hours at $8.50 per labour hour Fixed costs $112 000 The company has a target profit of $40 000 per month. REQUIRED (d) Calculate the number of units to be sold for the company to achieve its target profit for December 2021. … … … … … … … … [3]

11 marks

This question in 9706/21 May/June 2021

4 T Limited manufactures goods at two factories: Factory A and Factory B. Factory A Factory A has two production departments, Assembly and Finishing; and two service departments, Administration and Canteen. Absorption costing is used at this factory. Budgeted overheads for February 2021 have already been apportioned. The basis for reapportioning the service department overheads is as follows: Production departments Service departments Assembly Finishing Administration Canteen Canteen 50% 40% 10% - Administration 75% 25% - - REQUIRED (a) Prepare a statement showing the reapportionment of service department overheads for February 2021. Production departments Service departments Assembly Finishing Administration Canteen $ $ $ $ Overheads 83 500 70 100 28 300 15 400 Reapportionment of canteen Subtotal Reapportionment of administration Total overheads [4] Additional information Assembly Finishing Direct labour hours per month 1700 1400 Machine hours per month 2800 900 Direct labour rate per hour $8.40 $8.20 REQUIRED (b) Calculate the overhead absorption rate for each production department to two decimal places. Assembly department … … … … Finishing department … … … … [4] Additional information The company received an order from a customer. The following details are available: Direct materials $1880 Direct labour: Assembly department 11.5 hours Finishing department 6.1 hours Machine hours: Assembly department 5.7 hours Finishing department 2.4 hours The company’s policy is to achieve a profit of 40% on selling price. REQUIRED (c) Prepare a statement to show the total selling price that T Limited will quote to the customer. … … … … … … … … … … … … [7]

15 marks

Mark scheme: 4(a) Production departments Service departments Assembly Finishing Administration Canteen $ $ $ $ Overheads 83 500 70 100 28 300 15 400 Reapportion service department 7 700 6 160 1 540 (15 400) (1) for row Subtotal 91 200 76 260 29 840 - (1)OF for row Reapportion service department 22 380 7 460 (29 840) - (1)OF for row Total overheads 113 580 83 720 - - (1)OF for row 4 4(b) Assembly $113 580/2 800 $40.56 (1)OF per machine hour (1) Finishing $83 720/1 400 $59.80 (1)OF per labour hour (1) 4 Question Answer Marks 4(c) $ Direct materials 1 880 Direct labour Assembly department 11.5 × $8.40 96.60 (1) Finishing department 6.1 × $8.20 50.02 (1) Overheads Assembly department 5.7 × $40.56 (OF) 231.19 (1)OF Finishing department 6.1 × $59.80 (OF) 364.78 (1)OF 2 622.59 (1)OF Profit 40% × Selling price 1 748.39 (1)OF 4 370.98 (1)OF 7 4(d) Overheads are more than budgeted (1) Actual production is less than budgeted (1) 2 4(e)(i) Allocation: where overheads can be directly attributed to a cost centre (1) 1 4(e)(ii) Apportionment: where it is necessary to divide costs between cost centres on some appropriate basis (1) 1 Question Answer Marks 4(f) $41 400 (4) Workings $ Revenue 7 600 × $30 228 000 Direct material 7 600 × $5.50 (41 800) Direct labour 7 600 × $8.00 (60 800) (1) Variable costs 7 600 × $2.50 (19 000) (1) Contribution 106 400 Fixed costs (65 000) (1) Profit for the month 41 400 (1) 4 Question Answer Marks 4(f) Alternative answer $ Revenue 30.00 Direct material (5.50) Direct labour (8.00) (1) Variable costs (2.50) (1) Contribution 14.00 Total contribution 106 400 Fixed costs (65 000) (1) Profit for the month 41 400 (1) 4(g) For changing supplier (Max 3) • Profits/contribution will be greater (1) • Will not have to rely on overtime working which will reduce costs (1) • Better working relationship with the sole supplier (1) Against changing supplier (Max 3) • Will quality of materials be less? (1) • Will there be supply problems when delivering from overseas (1) • Will new supplier be reliable? (1) • Will reduced output lead to the loss of regular orders(1) • Will reduced output lead to possible redundancies.(1) Advice (1) Accept other valid responses. 7

This question in 9706/22 May/June 2021

4 Hayden manufactures two products, Aye and Bee. The business operates two production departments, Machining and Finishing, and two service departments, Stores and Maintenance. REQUIRED (a) Identify one possible basis of apportionment that a business could use in respect of: (i) rent and rates … (ii) machinery depreciation … (iii) electricity for machinery. … [3] Additional information The following information is available. Machining Finishing Number of orders from Stores 3 200 1 800 Maintenance call-outs 160 32 Budgeted direct labour hours 6 200 19 800 Budgeted machine hours 38 600 9 400 REQUIRED (b) Complete the following table to show the apportionment of budgeted overhead costs for the year ended 30 September 2021. Production Service departments departments Total Machining Finishing Stores Maintenance $ $ $ $ $ Total apportioned overheads 449 800 188 850 172 850 53 325 34 775 Re-apportion Stores Subtotal Re-apportion Maintenance Total overheads cost [4] (c) Calculate, to two decimal places, an overhead absorption rate for each production department, using a suitable basis. … … … … … … … … [4] Additional information The actual results for the year ended 30 September 2021 were as follows: Machining Finishing Factory overheads $265 800 $187 420 Direct labour hours 6 350 19 260 Machine hours 36 940 9 810 REQUIRED (d) Calculate the over-absorption or under-absorption of overheads for each department for the year ended 30 September 2021. … … … … … … [4] Additional information The following information is available for one unit of product Aye. Direct material $36.20 Direct labour hours Machining ($8 per hour) 45 minutes Finishing ($10 per hour) 60 minutes Machine hours Machining 20 minutes Finishing 30 minutes During September 2021, a customer requested a quotation for supplying 200 units of Aye. Hayden required a 30% gross profit margin on the order. REQUIRED (e) Prepare a statement to show the total selling price that Hayden quoted to the customer. … … … … … … … … … … [6]

21 marks

Mark scheme: 4(a) (i) Floor space (1) (ii) Net book value/cost of machinery (1) (iii) Budgeted machine hours/power/Kw hours (1) Accept other valid responses. 3 4(b) Production departments Service departments Total $ Machining $ Finishing $ Stores $ Maintenance $ Total overheads 449 800 188 850 172 850 53 325 34 775 Re-apportion stores 34 128 19 197 (53 325) (1) Subtotal 222 978 192 047 - 34 775 Re-apportion Maintenance 28 979 5 796 (34 775) (1) Total overheads cost 251 957 197 843 – (1)OF (1)OF 4 4(c) Machining $251 957 / 38 600 hours = $6.53 (1)OF per machine hour (1) Finishing $197 843 / 19 800 hours = $9.99 (1)OF per labour hour (1) 4 Question Answer Marks 4(d) Machining $ Finishing $ Actual 265 800 187 420 Absorbed 36 940 x $6.53 241 218 Absorbed 19 260 x $9.99 192 407 24 582 (1)OF 4 987 (1)OF Under absorbed (1)OF Over absorbed (1)OF 4 Question Answer Marks 4(e) $ Alternative presentation $ Direct material 36.20 (1) 7 240.00 (1) Direct labour – Machining 6.00 1 200.00 Direct labour – Finishing 10.00 2 000.00 Overheads – Machining ($6.53 × 20 minutes) 2.18 (1)OF 436.00 (1)OF Overheads – Finishing ($9.99 × 60 minutes) 9.99 (1)OF 1 998.00 (1)OF Total cost per unit 64.37 (1)OF Mark-up (30/70) 27.59 (1)OF 91.96 12 874.00 (1)OF Number of units 200 5 517.43 (1)OF Quoted price 18 392.00 (1)OF 18 391.43 (1)OF 6 Question Answer Marks 4(f) For factory-wide (max 2 marks) Easier/less complicated to calculate (1) Saves time (1) Therefore, saves money (1) Against factory-wide (max 2 marks) Does not differentiate capital intensive production from labour intensive production (1) Produces less accurate selling prices (1) Produces less accurate overhead absorption rate (1) Products may spend differing amounts of time in each department/ Does not reflect accurate departmental usage (1) Advice (1) Accept other valid responses 5 4(g) Selling prices may be too high (1) making products uncompetitive/leading to lower demand (1) Lower demand (1) can lead to lower profits (1) The value of closing inventory may be overstated (1) causing profit to be overstated (1) Less expenses are recognised in the income statement (1) resulting in more profit being reported (1). Max 2 effects (1 mark for stating the effect and 1 mark for development). Accept other valid responses 4

This question in 9706/22 Oct/Nov 2021

4 R Limited uses absorption costing at one of its factories. This factory has two production departments: Machining and Assembly, and two service departments: Support and Canteen. Some budgeted overheads have already been apportioned for April 2022. The remaining budgeted overheads for April 2022 are as follows: $ Depreciation of machinery 25 000 Production departments’ supervisor’s wages 19 800 The following additional information is available. 1 Production departments Service departments Machining Assembly Support Canteen Floor area (m2) 7000 2000 400 600 Power (Kwh) 4500 1800 300 900 Machinery cost ($) 850 000 110 000 15 000 25 000 Number of employees 75 35 8 7 2 The canteen provides meals for staff in the Machining, Assembly and Support departments. 3 The Support department’s overheads should be reapportioned on the basis of production departments’ machinery cost. REQUIRED (a) Complete the following table showing the apportionment of overheads and the reapportionment of service department overheads. Production departments Service departments Machining Assembly Support Canteen $ $ $ $ Overheads already 106 350 28 600 7 180 13 870 apportioned Depreciation of machinery Production departments’ supervisor’s wages Reapportioned Canteen Reapportioned Support Total [5] Additional information Machining Assembly Direct labour hours per month 3200 2400 Machine hours per month 5600 1800 REQUIRED (b) Calculate the overhead absorption rate for each production department to two decimal places. Machining … … … … Assembly … … … … [4] (c) State two reasons why overheads may be under-absorbed. 1 … … 2 … … [2] Additional information At another factory a single product is made. This factory uses marginal costing. The following information is available. $ Direct materials per unit 8.80 Direct labour per unit 10.10 Selling price per unit 27.00 Fixed costs per month $44 000 Production capacity per month 15 000 units The factory has been operating at below its normal capacity. However, recently demand for the company’s product has increased considerably. The directors believe there is an opportunity to increase profits. They are considering two options to meet increased demand. Option 1 1 Increase the selling price per unit by 5%. 2 Increase production to 16 000 units per month. 3 Overtime is paid at an additional $4.10 per unit. 4 Reduce monthly advertising by $2 000. Option 2 1 Increase production capacity per month by 15% by purchasing additional machinery costing $78 000. This machinery will be depreciated at 20% per annum. 2 Selling price will remain at $27 per unit. 3 The supplier of materials currently offers a trade discount of 20%. This will increase to 30%. 4 The additional machinery will be more efficient and production will not require any overtime working.

11 marks

Mark scheme: 4(a) Production departments Service departments Machining $ Assembly $ Support $ Canteen $ Overheads already apportioned 106 350 28 600 7 180 13 870 Depreciation of machinery 21 250 2 750 375 625 (1) Production departments’ supervisor’s wages 13 500 6 300 (1) 141 100 37 650 7 555 14 495 Reapportioned canteen 9 213 4 299 983 (14 495) (1) OF 150 313 41 949 8 538 – Reapportioned Support 7 560 978 (8 538) (1) OF Total 157 873 42 927 – (1) OF 5 4(b) Machining department: 157 873/5 600 = $28.19 (1)OF per machine hour (1) Assembly department: 42 927/2 400 = $17.89 (1)OF per direct labour hour (1) 4 Question Answer Marks 4(c) Production lower than forecast (1) Actual overheads higher than forecast (1) 2 4(d)(i) Option 1 $ Revenue ($28.35 × 16 000) 453 600 (1) Direct materials ($8.80 × 16 000) (140 800) (1) Direct labour; normal working ($10.10 × 15 000) (151 500) (1) Direct labour: overtime working ($14.20 × 1000) (14 200) Contribution 147 100 Fixed costs ($44 000 – $2000) (42 000) (1) Profit 105 100 (1)OF 5 Question Answer Marks 4(d)(ii) Option 2 $ Revenue ($27 × 17 250) 465 750 (1) Direct materials ($7.70 × 17 250) (132 825) (1) Direct labour ($10.10 × 17 250) (174 225) (1) Contribution 158 700 Fixed costs ($44 000 + $1300 depreciation) (45 300) (1) Profit 113 400 (1)OF 5 Question Answer Marks 4(e) Financial (max 3) Non-financial (max 3) Produces less/more profit (1) Would training result in possible delay in production? (1) Possible low cost of finance (dividends optional)/shareholders will expect return (1) Will workforce need training on new machinery? (1) Will forecasts prove accurate? (1) Overtime may or may not be attractive to workforce (1) Would training costs apply (1) Higher selling price may reduce demand. (1) Will share issue be successful? (1) Costs of share issue (1) Overall max for comments (4) Advice (1) Accept other valid responses 5 4(f)(i) Employees can be provided with achievable targets / Can assist with motivation (1) Budgetary control can facilitate responsibility accounting (1) Helps planning/co-ordination/control/communication (1) Max 2 Accept other valid responses. 2 Question Answer Marks 4(f)(ii) A poorly set budget can demotivate (1) Based on estimates not accurate (1) Might encourage interdepartmental rivalry (1) May discourage innovation (1) Max 2 Accept other valid responses. 2

This question in 9706/22 Feb/March 2022

4 X Limited is a manufacturing business operating two production departments, Machining and Finishing and two service departments, Stores and Maintenance. All overhead costs have already been allocated to the departments. The service department costs are to be apportioned to production departments as follows: Stores department: in proportion to the number of parts orders Maintenance department: in proportion to the number of maintenance call-outs. The following budgeted information was available for the year ended 30 September 2022. Machining Finishing Maintenance department department department Direct labour hours 11 500 54 600 – Machine hours 48 000 12 000 – Number of parts orders 6 400 1 800 300 Number of maintenance call-outs 120 30 – REQUIRED (a) Complete the table to apportion the service department costs to production departments. Production departments Service departments Total Machining Finishing Stores Maintenance $ $ $ $ $ Allocated 803 900 288 500 515 400 – – overheads Indirect labour 459 000 106 000 52 000 70 000 231 000 Other indirect costs 360 000 114 000 56 000 78 000 112 000 Total overheads 1 622 900 508 500 623 400 148 000 343 000 [4] (b) Calculate, to two decimal places, a suitable overhead absorption rate for each production department. … … … … [4] Additional information The actual results for the year ended 30 September 2022 were as follows: Machining Finishing Total overheads $910 000 $705 000 Direct labour hours 12 100 51 800 Machine hours 49 200 10 900 REQUIRED (c) Calculate the over-absorption or under-absorption of overheads for each production department. … … … … … [4] (d) State two possible reasons why a business may under absorb overheads. 1 … … 2 … … [2] Additional information The total budgeted direct labour cost for the production departments for the year ended

14 marks

Mark scheme: 4(a) 4 Production departments Service departments Total Machining Finishing Stores Maintenanc $ $ $ $ e $ Allocated overheads 803 900 288 500 515 400 – – Indirect labour 459 000 106 000 52 000 70 000 231 000 Other indirect costs 360 000 114 000 56 000 78 000 112 000 Total overheads 1 622 900 508 500 623 400 148 000 343 000 Reapportion Stores 111 435 31 341 (148 000) 5 224 (1) for row 619 935 654 741 – 348 224 Reapportion Maintenance 278 579 69 645 (348 224) (1) OF for row Total overheads 898 514 724 386 – (1) OF (1) OF 4(b) Machining: $898 514 (OF) / 48 000 = $18.72 (1) OF per machine hour (1) 4 Finishing: $724 386 (OF) / 54 600 = $13.27 (1) OF per labour hour (1) 4(c) Machining: $18.72 (OF)  49 200 = $921 024 – $910 000 = $11 024 (1) OF over absorbed (1) OF 4 Finishing: $13.27 (OF)  51 800 = $687 386 – $705 000 = $17 614 (1) OF under absorbed (1) OF 4(d) Actual expenditure was higher than budgeted expenditure (1) 2 Actual output was less than budgeted output (1) 4(e) $594 900 / 66 100 hours = $9 per labour hour (1) 1 4(f) 6 $ Direct material 4  $2.45 9.80 (1) Direct labour – machining 3  $11.25 (OF) 33.75 (1) OF both Direct labour finishing 4.5  $9 (OF) 40.50 Overheads – machining 1.25  $18.72 (OF) 23.40 (1) OF Overheads – finishing 2.5  $13.27 (OF) 33.18 (1) OF Total unit cost 140.63 Units  50 Total cost 7 031.50 (1) OF Profit  25/75 2 343.83 Selling price 9 375.33 (1) OF 4(f) Alternative presentation $ 490.00 (1) 1 687.50 (1) OF both 2 025.00 1 170.00 (1) OF 1 659.00 (1) OF 7 031.50 (1) OF 2 343.83 9 375.33 (1) OF 4(g) If service centres’ costs are not included the costs will not be recovered (1) and the selling price will be incorrect (1). 2 Accept other valid responses. 4(h) A factory-wide absorption rate would be easier to calculate as it would require less detailed analysis (1) 7 However, it would be less accurate (1) as some work would require either more direct labour hours or more machine hours (1) than others. As a result, this would lead to under or over absorption of overheads on each job (1). If overheads are over absorbed, this may lead to a higher selling price (1) which in turn may lead to lower demand (1) and consequently, lower profits (1). If overheads are under absorbed, this may lead to a lower selling price (1) and consequently failure to cover all production costs (1) resulting in lower profits (1). Justification: Max 6 marks Decision (1) Accept other valid responses.

This question in 9706/23 Oct/Nov 2022

30 September 2022 was $594 900. REQUIRED (e) Calculate the budgeted hourly direct labour rate for the production departments. … [1] Additional information X Limited have been asked to supply a quotation for a customer who requires 50 units of a product. Each unit would require the following: Direct material 4 kilos at $2.45 per kilo Direct labour Machining department – 3 hours Finishing department – 4.5 hours Overheads Machining department 2 direct labour hours 1.25 machine hours Finishing department 2.5 direct labour hours 1.75 machine hours The machining department is working at full capacity, so an overtime premium of 25% would be required to complete this work. X Limited would require a profit margin of 25% on this work. REQUIRED (f) Prepare a statement to show the total selling price that X Limited will quote to the customer. … … … … … … … … … … … [6] (g) Explain why a business apportions service department costs to production departments. … … … … [2] Additional information The directors of X Limited have been advised that they should change from a departmental overhead absorption rate to one factory-wide rate. They are concerned that this may affect the profits of the business. REQUIRED (h) Advise the directors whether or not they should make this change. Justify your answer. … … … … … … … … … … … … … … … … … … … … [7] [Total: 30]

16 marks

This question in 9706/23 Oct/Nov 2022

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 your workings. Mima Supplies Statement of profit or loss for the year ended 31 December 2022 … … … … … … … … … … … … … … … … … … … … … … Workings: [13] (d) Explain the importance of making an allowance for irrecoverable debts in a business’s financial statements. … … … … … [2] Additional information Mima would like to assess her business’s liquidity position at 31 December 2022. REQUIRED (e) Identify two ratios which could be used to assess a business’s liquidity position. 1 … 2 … [2] Additional information Mima has noticed that her business’s rate of inventory turnover has decreased since last year. She is considering two options to increase the rate of inventory turnover. Option A: reduce inventory levels. Option B: reduce selling prices by 2% and increase the annual advertising budget by 5%. REQUIRED (f) Advise Mima which option she should choose. Justify your choice by considering both options. … … … … … … … … … … … … … … … [7] [Total: 30] 2 Param uses control accounts to verify the accuracy of his business’s sales and purchases ledgers. He provided the following information for the month ended 30 April 2023 relating to trade receivables. $ Sales ledger balances, 1 April 2023 Debit 14 890 Credit 610 Contra entries with the purchases ledger 1 850 Credit sales 153 480 Credit customers’ cheques returned 880 Discounts allowed 4 830 Interest charged on overdue accounts 540 Irrecoverable debts written off 1 830 Receipts from credit customers 148 200 Returns inwards 2 790 There were no credit balances in the sales ledger on 30 April 2023. REQUIRED (a) Prepare the sales ledger control account for April 2023. Dates are not required. Sales ledger control account $ $ [6] (b) Identify the books of prime entry for each of the following: (i) discounts allowed … [1] (ii) irrecoverable debts written off. … [1] (c) State three benefits of maintaining control accounts. 1 … … 2 … … 3 … … [3] Additional information The balance of the sales ledger control account at 30 April 2023 did not agree with the total of the individual customer account balances at this date. The following errors were discovered, some of which affected the sales ledger control account and some of which affected the customer account balances. 1 Returns inwards of $720 had been credited to the account of Rafiq Stores instead of Raif Stores. 2 A sales invoice for $820 had been omitted from the books of account. 3 The balance of a credit customer’s account, $430, had been brought down as $340. 4 The total of the returns inwards journal had been understated by $470. 5 Interest of $40 charged on an overdue account had been correctly entered in the journal but had been credited to the customer’s account. REQUIRED (d) Calculate the revised sales ledger control account balance at 30 April 2023. … … … … … … … … [4] [Total: 15] 3 The following extract from J Limited’s statement of financial position at 1 January 2022 is available. $ Equity Issued capital: ordinary shares of $0.25 each 600 000 Share premium 175 000 Retained earnings 54 000 Total equity 829 000 Non‑current liabilities 7% Debentures (2028) 200 000 REQUIRED (a) State two features of revenue reserves which do not apply to capital reserves. 1 … … … 2 … … … [2] Additional information The directors wished to raise additional finance. On 1 April 2022 the company made a rights issue of 2 ordinary shares for every 3 shares held at a price of $0.35 per share. The issue was fully subscribed. REQUIRED (b) Calculate the amount raised by the rights issue of shares. … … … … … … [3] Additional information The directors had considered making an issue of debentures rather than a rights issue. (c) Identify two reasons why the directors of J Limited might prefer to raise additional finance through a rights issue rather than by issuing debentures. 1 … … 2 … … [2] Additional information The directors paid an interim dividend of $0.12 per share on 1 July 2022. REQUIRED (d) Calculate the total amount of the interim dividend. … … … … [2] Additional information The company made a profit of $535 000 for the year ended 31 December 2022. REQUIRED (e) Prepare the statement of changes in equity for the year ended 31 December 2022. J Limited Statement of changes in equity at 31 December 2022 Share capital Share Retained Total premium earnings $ $ $ $ [6] [Total: 15] 4 D Limited has two production departments and two service departments at one of its factories where absorption costing is used. Some forecast factory overheads have already been allocated and apportioned as follows: Production departments Service departments Cutting Assembly Maintenance Canteen $ $ $ $ Factory overheads 223 480 217 980 45 270 36 260 The following forecast factory overheads are still to be apportioned. $ Depreciation of machinery 48 000 Power 40 200 Canteen department overheads should be reapportioned on the basis of the number of employees. Maintenance department overheads should be reapportioned on the basis of the number of machines in production departments. The following data is available. Production departments Service departments Cutting Assembly Maintenance Canteen Machinery at carrying value $90 000 $66 000 $18 000 $6 000 Number of machines 43 27 Kilowatt hours 1 800 1 500 100 200 Number of employees 27 18 5 Budgeted machine hours 40 000 33 500 Budgeted direct labour hours 23 000 62 500 REQUIRED (a) Complete the following table to show the apportionment of factory overheads and the reapportionment of service department overheads. Production departments Service departments Cutting Assembly Maintenance Canteen $ $ $ $ Factory overheads 223 480 217 980 45 270 36 260 Depreciation of machinery Power Total overheads Reapportionment Subtotal Reapportionment Total overheads [5] (b) Calculate, to two decimal places, an overhead absorption rate for each production department, using a suitable basis. … … … … … … [2] Additional information The following information is available. Cutting department Assembly department Direct labour rate per hour $10.90 $8.20 Machine hours per unit 8 6 Labour hours per unit 3 4 Direct materials cost $6.95 per unit. Selling prices are set to achieve a profit margin of 25%. A customer has placed an order for 40 units. REQUIRED (c) Calculate the selling price to be quoted for this order of 40 units. … … … … … … … … … … … … [5] (d) State two causes of under absorption of overheads. 1 … … 2 … … [2] Additional information At the other factory a single product, Product Exe, is currently being made. Marginal costing is used at this factory. The following information is available. Selling price per unit $48 Contribution per unit $13 Direct labour 2.5 hours per unit at $10 per hour Fixed costs $96 000 per annum Factory capacity 28 000 labour hours per year Current production level 80% of factory capacity All units produced are sold. REQUIRED (e) Calculate the profit made each year from Product Exe. … … … … … … [4] Additional information The directors plan to make a new product, Product Wye, at this factory at the request of an important customer. The following details are available. 1 The factory will be able to operate at full capacity. 2 All units produced will be sold. 3 Product Wye will have a selling price of $64 per unit and a contribution of $8 per unit. 4 Product Wye will require direct labour at $10 per hour for 1.5 hours per unit. 5 The customer requires 10 000 units of Product Wye each year. The customer will only accept this quantity each year. 6 In order to complete the customer’s order, production of Product Exe will be reduced. 7 Some new machinery will be required costing $36 000. Machinery is depreciated by 20% per annum.

72 marks

This question in 9706/21 May/June 2023

4 K Limited is a manufacturing company which has two production departments and one service department at one of its factories. At this factory absorption costing is used. REQUIRED (a) Define each of the following terms: (i) cost centre … … [1] (ii) allocation of overheads … … [1] (iii) apportionment of overheads. … … [1] Additional information The following budgeted information is available for the year ended 31 August 2022. Production departments Cutting Finishing Service department $ $ $ Factory overheads 273 820 189 240 31 350 The service department’s overheads are reapportioned on the basis of the number of employees in each production department. Cutting department Finishing department Number of employees 125 84 REQUIRED (b) Reapportion the service department’s overheads to the production departments. Cutting department Finishing department Service department $ $ $ Factory overheads 273 820 189 240 31 350 Reapportionment Total overheads [2] Additional information The following forecast information is available for the year ended 31 August 2022. Cutting Finishing department department Direct labour hours per annum 9 400 7 420 Machine hours per annum 17 900 3 840 REQUIRED (c) Calculate an appropriate overhead absorption rate, correct to two decimal places, for each production department: (i) Cutting department … … [1] (ii) Finishing department. … … [1] Additional information The actual results for the year ended 31 August 2022 were as follows: Cutting Finishing department department Factory overheads $312 600 $193 400 Direct labour hours 9 800 7 210 Machine hours 17 200 4 220 (d) Calculate the under-absorption or over-absorption of factory overheads for each production department for the year ended 31 August 2022. (i) Cutting department … … … … [3] (ii) Finishing department … … … … [3] Additional information At a second factory marginal costing is used. A single product, Product X, is manufactured. However, demand for this product has fallen recently due to increased competition. The following information is available for Product X. Per unit $ Direct materials 22 Direct labour 18 Contribution 20 Normal capacity is 14 000 units per month. The factory is currently operating at 75% of normal capacity. All the units produced are sold. Fixed costs per month are $56 000. (e) Calculate the profit for one month. … … … … [1] Additional information The directors are considering two options to increase profits. Option A: 1 Reduce the selling price per unit by 5%. 2 Run a six-month advertising campaign at a cost of $1100 per month. 3 Monthly sales are forecast to increase by 25% on current levels. Option B 1 Discontinue manufacture of Product X. 2 Produce a different product, Product Y, with a selling price of $58 per unit. 3 It is forecast that demand will be such that the factory can operate at 110% normal capacity. 4 Direct material cost will increase by 10% per unit.

14 marks

Mark scheme: 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.

This question in 9706/22 May/June 2023

4 Javid manufactures a single product. He currently uses a system of absorption costing but is considering changing to marginal costing. The following budgeted information is available for one unit of the product. $ Selling price 18 Direct material 7 Direct labour 5 Budgeted production 12 000 units per month Budgeted fixed overheads $36 000 per month At 1 August, Javid held no inventory. The following actual results are available. August September Sales (units) 8 000 12 000 Production (units) 10 000 10 000 Fixed overheads $36 000 $36 000 (a) Prepare a profit statement for each of the months August and September using absorption costing. Javid Absorption cost profit statement August September $ $ $ $ [6] (b) Prepare a profit statement for each of the months August and September using marginal costing. Javid Marginal cost profit statement August September $ $ $ $ [6] (c) Prepare a statement reconciling the absorption cost profit for August with the marginal cost profit for August. … … … … … … [3] (d) Advise Javid whether or not he should change from absorption costing to marginal costing. Justify your answer. … … … … … … … … … … … … … … … … … … [7] (e) State two possible causes of over-absorption of overheads. 1 … … 2 … … [2]

24 marks

Mark scheme: 4(a) Prepare a profit statement for each of the months August and September using absorption costing. 6 Javid Absorption cost profit statement August September $ $ $ $ Revenue 216 000 144 000 (1) both Opening inventory – 30 000 Production cost 150 000 150 000 Closing inventory (30 000) 120 000 – 180 000 (1) 24 000 36 000 Overhead under absorbed (6 000) (6 000) (1) (1) Profit 18 000 30 000 (1) (1) 4(b) Prepare a profit statement for each of the months August and September using marginal costing. 6 Javid Marginal cost profit statement August September $ $ $ $ Revenue 216 000 144 000 (1) both Opening inventory – 24 000 Production cost 120 000 120 000 Closing inventory (24 000) 96 000 – 144 000 (1) Contribution 72 000 48 000 (1) both Fixed overheads (36 000) (36 000) (1) both Profit 12 000 36 000 (1) (1) 4(c) Prepare a statement reconciling the absorption cost profit for August with the marginal cost profit for August. 3 $ Absorption cost profit 18 000 (1) OF Closing inventory (6 000) (1) Marginal cost profit 12 000 (1) OF 4(d) Advise Javid whether or not he should change from absorption costing to marginal costing. Justify your answer. 7 Absorption costing • Gives higher profit when inventory levels increase (1). • Useful for long term decision making (1) • Can be used for setting selling prices (1) • Acceptable under IAS 2 (1) • Under absorption and over absorption of overheads can arise. (1) • The basis for apportionment may be arbitrary (1) Marginal costing • Enables optimum allocation of resources (1). • Does not include fixed costs in costs of production (1) • Not all costs can be split into fixed and variable costs (1) • Useful for short term decision making (1) • Useful for deciding whether to accept a special order (1) • Shows the impact of profit fluctuations in the volume of sales (1) • No need to calculate an overhead absorption rate (1) • More suitable for businesses that make a single product (1) Max 6 for comments Advice supported with a comment (1) Accept other valid responses. 4(e) State two possible causes of over absorption of overheads. 2 • Actual overheads are less than budgeted overheads (1) • Actual production is more than budgeted production (1) 4(f) Explain one difference between a cost centre and a cost unit. 2 A cost centre is a product / service / location where costs are allocated (1) whereas a cost unit is a unit of output to which costs can be charged (1) 4(g)(i) State how closing inventory is valued using each method of inventory valuation. 1 First in first out (FIFO) Assumes that goods are used in production or sold in the order in which they are received from the supplier (1). Accept other valid responses. 4(g)(ii) Weighted average cost (AVCO) 1 the average cost of inventory is recalculated after each purchase (1). Accept other valid responses. 4(h) Explain a principle of the JIT method of inventory management. 2 Supplies are received exactly when they are needed in the production process (1) and do not need to be stored beforehand (1) Accept other valid responses.

This question in 9706/21 Oct/Nov 2023

4 Dev manufactures two products, Aye and Bee. He operates a system of marginal costing. (a) Explain one difference between marginal costing and absorption costing. … … [2] (b) Explain one difference between a direct cost and an indirect cost. … … [2] (c) State the meaning of the following terms: (i) break-even point … … [1] (ii) margin of safety. … … [1] (d) State three situations where marginal costing can help in decision-making. 1 … … 2 … … 3 … … [3] Additional information Dev’s business operates from one rented factory. The forecast data for the year ending 31 December 2024 is as follows: Aye Bee $ $ Revenue (60 000 units at $11.00) 660 000 Revenue (80 000 units at $8.50) 680 000 Direct materials (192 000) (256 000) Direct labour (156 000) (208 000) Supervisor fixed salaries (60 000) (35 000) Variable overheads (114 000) (152 000) Fixed factory overheads (33 000) (44 000) Profit / (loss) 105 000 (15 000) The fixed factory overheads are allocated on the basis of units produced. (e) Calculate the break-even point in units for Aye. … … … … … … [3] (f) Calculate the break-even point in units for Bee. … … … … … … [3] Additional information Dev is concerned about the forecast loss for Bee. He is considering two options. Option 1 Replace the current model Bee with an upgraded model Bee. Increase the selling price of Bee by 10%. Increase the direct material price by $0.45 per unit using an upgraded material. Pay $18 000 for an advertising campaign to announce the upgraded model. Dev believes that this will result in a 20% increase in units of Bee sold. Option 2 Discontinue production of Bee. Make the supervisor of Bee redundant thereby incurring redundancy costs of $6000. Increase the advertising budget for Aye initially by $8000. Reduce the selling price of Aye by $0.44 per unit. Dev believes that this will result in a 50% increase in units of Aye sold. (g) Calculate the revised total profit of the business if option 1 is adopted. … … … … … … … … … … [5]

20 marks

Mark scheme: 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

This question in 9706/23 Oct/Nov 2023

4 K Limited uses absorption costing at one of its factories. The product manufactured in this factory goes through two production departments: cutting department and finishing department. The following budgeted information was available for the year ended 31 December 2023. Cutting department Finishing department Overhead absorption rate $3.62 $2.34 Labour hours 17 400 8 400 Machine hours 22 900 5 200 A customer placed an order for 250 units in November 2023. The following budgeted information is available about the production of one unit. Per unit Direct materials $17.28 Direct labour Cutting department 1.2 hours at $11.50 per hour Finishing department 3.1 hours at $11.50 per hour Machine hours Cutting department 2.2 hours Finishing department 1.4 hours Selling prices are set to achieve a profit margin of 40%. (a) Prepare a statement to show the total selling price for the customer’s order. … … … … … … … … … … … [5] Additional information Actual production hours for the year ended 31 December 2023 were as follows: Cutting department Finishing department Labour hours 16 200 7 900 Machine hours 24 300 5 800 Total actual overheads were the same as budgeted overheads. (b) Calculate the over-absorption or under-absorption of overheads for each production department for the year ended 31 December 2023. … … … … … … … … [4] Additional information K Limited uses marginal costing at another factory where a single type of product is made. The following budgeted information is available. $ per unit Selling price 42 Direct materials 12 Direct labour (1.5 hours per unit) 18 Other variable costs 3 Fixed costs per month are $38 500. Currently the factory is producing 9920 units per month. (c) Calculate both the total monthly contribution and the total monthly profit currently being made in this factory. … … … … [2] Additional information The directors hope to increase demand by changing the selling price. They are considering the following two options. Option A 1 Reduce the selling price per unit by 5%. 2 Increase production by 4000 units on the current production level. 3 A commission of $0.25 per unit will be paid. 4 Overtime will be required on all units produced over 12 400 units and is paid at a premium of 25%.

11 marks

Mark scheme: 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

This question in 9706/22 Feb/March 2024

4 K Limited is a manufacturing company which has recently changed from using absorption costing to using marginal costing. (a) Explain two reasons why a manufacturing company might change from using absorption costing to using marginal costing. 1 … … … … 2 … … … … [4] Additional information At one of K Limited’s factories a single type of product is manufactured. This month’s marginal cost statement is as follows: Marginal cost statement $ Sales revenue 660 000 Variable costs (462 000) Contribution 198 000 Fixed costs (95 000) Profit 103 000 (b) Calculate the contribution to sales ratio. … … [1] (c) Calculate the break-even point in sales revenue. … … [2] Additional information The directors require a target profit of $140 000 to be made next month. (d) Calculate the sales revenue required to achieve the target profit. … … … … … … [2] Additional information The directors are prepared to accept a special order with a negative contribution. (e) State three reasons why a special order with a negative contribution might be accepted. 1 … … 2 … … 3 … … [3] Additional information At another factory of K Limited three different types of product are made. The following details are available. Aye Bee Cee Selling price per unit $35 $43 $28 Maximum monthly demand per product 2400 units 3200 units 1800 units Materials used per unit 6 kg 8 kg 4 kg Labour cost per unit $12 $14 $10 Materials cost $1.50 per kg. Only 35 000 kg of material are forecast to be available in January 2025. Forecast fixed costs are $63 000 per month. (f) Calculate the optimum profit to be made in January 2025. … … … … … … … … … … … … … … … … [8]

20 marks

Mark scheme: 4(a) Explain two reasons why a manufacturing company might change from using absorption costing to using marginal costing. Easier to use (1) as no apportionment of fixed costs is required (1) Avoids problems of over absorption or under absorption of overheads (1) as overhead absorption rates are not used (1) Marginal costing is useful for short-term decision making (1) based on contribution (1) Accept other valid responses. 4(b) Calculate the contribution to sales ratio. Contribution Revenue = $198000 $660000 = 30% (1) 1 4(c) Calculate the break-even point in sales revenue. $316 667 (2) W1 W1 Fixed costs + Profit Contribution to sales ratio = $95000 0.3 (1)OF = $316 667 (1) OF 2 Question Answer Marks 4(d) Calculate the sales revenue required to achieve the target profit. $783 334 (2) W1 W1 Fixed costs + Profit Contribution to sales ratio = $235000 0.3 (1) (1) = $783 334 (1) OF 2 4(e) State three reasons why a special order might be accepted with a negative contribution. To avoid redundancies (1) To stimulate future orders at usual price (1) To raise brand awareness (1) To break into new market / to promote a new product (1) To dispose of discontinued inventory (1) Max 3 Accept other valid responses 3 Question Answer Marks 4(f) Calculate the optimum profit to be made in January 2025. $20 675 (8) W1 W1 Aye Bee Cee $ $ $ Contribution per unit 14 17 12 Contribution per kg 2.33 2.13 3 (1) (1) (1) Production plan $ Materials used kg 1st Cee 1800 units  $12 21 600 (1)OF 7 200 2nd Aye 2400 units  $14 33 600 (1)OF 14 400 3rd Bee 13 400/8 = 1675 units (1)  $17 28 475 (1)OF 13 400 Total contribution 83 675 Less fixed costs 63 000 Optimum profit 20 675 (1)OF 8 Question Answer Marks 4(g) Calculate the additional profit to be made if the shortfall in materials is made up by the overseas supplier. $4 505 (3) W1 W1 Additional output of Bee = 1525 units (1) OF New contribution per unit = $17 – (1.10  8) = $8.20 (1) Additional profit = 1525  $8.20 less fixed costs ($8000) = $4505 (1) OF 3 4(h) Advise the directors whether or not they should purchase the shortfall in materials from the overseas supplier. Justify your answer considering both advantages and disadvantages. Advantages (Max 3) More profit (1) No loss of regular customers (1) Retains workforce (1) Disadvantages (Max 3) Is supplier reliable? (1) Will quality of materials be maintained? (1) Risk of delay in delivery (1) Currency fluctuations could increase prices (1) Advice supported by a comment (1) Accept other valid responses. 7

This question in 9706/21 May/June 2024

4 D Limited is a manufacturing company. (a) Explain two uses of absorption costing. 1 … … 2 … … [4] Additional information D Limited uses marginal costing. At one of its factories a single type of product is made. The following budgeted information is available. Per unit $ Selling price 92 Direct materials 33 Direct labour 39 Fixed costs 8 The factory has a budgeted capacity of 15 000 units per month. (b) Calculate the monthly break-even point in units. … … … … [2] Additional information It was forecast that only 4920 units would be sold in January 2024. (c) Calculate the forecast profit or loss for January 2024. … … … … [2] Additional information The directors have set a target profit of $150 000 per month. (d) Calculate the number of units to be sold in order to achieve the target profit. … … … … [2] Additional information At another factory of D Limited a single different type of product is made. The following budgeted details are available for one month’s production: Per unit $ Direct materials 16 Direct labour 17 Other variable costs 3 Contribution 24 Normal capacity at this factory is 18 000 units per month. Recently, the factory has been operating at 80% capacity and this has resulted in a monthly profit of $150 600. The directors have been informed that a major competitor manufacturing the same product plans to stop production. The directors plan to take advantage of the situation and are considering two options. Option A 1 Increase monthly production by 6000 units on current output levels. 2 Sell all production at a price per unit 2% above the current price. 3 Any production above normal factory capacity will require direct labour to be paid an overtime premium of 50%. Option B 1 Increase factory capacity to 22 000 units per month. 2 Sell all production at a price per unit 3% above the current price. 3 Suppliers of direct materials will be expected to offer a trade discount of 25% instead of the current trade discount of 20%. 4 The direct labour rate per unit will be increased to $18.50.

10 marks

Mark scheme: 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

This question in 9706/22 May/June 2024

6 An additional $20 000 per month will be spent on advertising. (e) Calculate the monthly profit to be made from Option A. … … … … … … … … [6] (f) Prepare a monthly marginal costing statement for Option B. … … … … … … … … … … … … [7] (g) Advise the directors whether or not they should go ahead with either of these options. Justify your choice by discussing both financial and non-financial factors. … … … … … … … … … … … … … … … … … … … … … … … … [7] [Total: 30]

20 marks

This question in 9706/22 May/June 2024

4 Alberto owns a manufacturing business. (a) Define each term: (i) cost centre … … [1] (ii) cost unit … … [1] (iii) direct cost … … [1] (iv) indirect cost. … … [1] Additional information Alberto’s business operates a system of absorption costing. There are two production departments, Machining and Finishing, and two service departments, Stores and Canteen. The budgeted information for the year ended 30 September 2024 is available. Production departments Service departments Machining Finishing Stores Canteen $ $ $ $ Number of employees 6 10 4 - Floor area (square metres) 3 000 5 000 1 500 500 Stores requisitions 3 600 5 400 – – Direct labour hours 14 300 18 500 – – Machine hours 28 900 3 600 – – The following indirect overheads have not yet been apportioned. $ Light and heat 12 800 Production supervisors’ wages 42 000 (b) Complete the table to apportion costs to the production departments. Total Production departments Service departments $ Machining Finishing Stores Canteen $ $ $ $ Allocated overheads 512 100 195 200 234 700 66 400 15 800 Light and heat 12 800 Production 42 000 supervisors’ wages Total overheads 566 900 Reapportion Canteen Reapportion Stores [6] (c) Calculate, to two decimal places, a suitable overhead absorption rate for each production department. … … … … … … [2] Additional information The actual results for the year ended 30 September 2024 were as follows: Machining Finishing Total overheads $249 200 $320 400 Direct labour hours 14 220 18 650 Machine hours 26 880 3 910 (d) Calculate the over-absorption or under-absorption of overheads for each production department. … … … … … … … … … … … … [4]

16 marks

Mark scheme: 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

This question in 9706/21 Oct/Nov 2024

4 D Limited is a manufacturing company which uses absorption costing. The factory has two production departments, Cutting and Finishing. It also has two service departments, Stores and Canteen. Some budgeted overheads have been allocated to departments as follows: Production departments Service departments Total Cutting Finishing Stores Canteen $ $ $ $ $ Overheads 424 560 183 270 145 990 45 380 49 920 allocated The following budgeted overheads have yet to be allocated or apportioned. $ Supervisor’s salary: Cutting department 28 200 Supervisor’s salary: Finishing department 26 300 Depreciation of machinery 87 000 Rent 48 000 Apportionment is based on the following information. Cutting Finishing Stores Canteen Cost of machinery ($) 220 000 152 000 37 000 26 000 Floor area (m2) 1500 890 280 330 Issues from stores 84 43 ‑ ‑ Number of employees 45 31 6 ‑ (a) Complete the following table to show the apportionment of overheads and the reapportionment of service department overheads. Production departments Service departments Total Cutting Finishing Stores Canteen $ $ $ $ $ Overheads 424 560 183 270 145 990 45 380 49 920 allocated Subtotal Reapportionment Canteen department Subtotal Reapportionment Stores department Total overheads [5] Additional information Budgeted hours for each production department were as follows: Cutting Finishing Labour hours 6350 7144 Machine hours 8220 5172 (b) Calculate, to two decimal places, an overhead absorption rate for each production department, using a suitable basis. Cutting department … … Finishing department … … [4] Additional information The Stores department issues component X to the Finishing department. The weighted average cost (AVCO) method of inventory control is used by the Stores department. The following details about this component are available for January 2025. On 1 January 2025, the Stores department held six component X in inventory which had cost $8 each. Receipts of X Issues of X 6 Jan 12 at $8 each 9 Jan 7 16 Jan 8 at $9 each 21 Jan 13 27 Jan 10 at $10 each

9 marks

Mark scheme: Question Answer Marks 4(a) Complete the following table to show the apportionment of overheads and the 5 reapportionment of service department overheads. Production Service departments departments Total Cutting Finishing Stores Canteen $ $ $ $ $ Overheads 424 560 183 270 145 990 45 380 49 920 allocated Supervisors’ 54 500 28 200 26 300 – – salaries Depreciation of 87 000 44 000 30 400 7 400 5 200 (1) machinery Rent 48 000 24 000 14 240 4 480 5 280 (1) Subtotal 614 060 279 470 216 930 57 260 60 400 Reapportionment – 33 146 22 834 4 420 (60 400) (1) Canteen department Subtotal – 312 616 239 764 61 680 – Reapportionment – 40 796 20 884 (61 680) – (1) OF Stores department 353 412 260 648 – – (1) OF 4(b) Calculate, to two decimal places, an overhead absorption rate for each production 4 department using a suitable basis. Cutting department = 353 412/8 220 = $42.99 (1) OF per machine hour (1) Finishing department = 260 648/7 144 = $36.48 (1) OF per labour hour (1) 4(c) Complete the following table to show the value of closing inventory of component 5  using AVCO. Inventory valuation $ 1 Jan 48 6 Jan 144 (1) 9 Jan 88 (1) 16 Jan 160 (1) 21 Jan 50.52 (1) 27 Jan 150.52 (1) 4(d)(i) Calculate the profit to be made in August 2025 for each option. 6 Option A Units  Contribution Materials Materials contribution $ used available Product Bee 60  $19 1 140 (1) 420 189 Product Cee 21  $21 441 (1) 189 – Total 1 581 contribution Less fixed 1 100 costs Profit for month 481 (1) OF Workings Bee Cee $ $ Contribution per unit 19 21 Kg required per unit 7 9 Contribution per kg materials 2.71 2.33 (1) Forecast materials for August: Bee (60  7 = 420) + Cee (50  9 = 450) = 870 (1) Materials available: 870  70% = 609 (1) 4(d)(ii) Calculate the profit to be made in August 2025 for each option. 3 Option B Remaining units of Cee (50-21) = 29 units (1) New contribution Cee: $21 – $9 = $12 (1) Profit: as for option A $481 + (29  $12) = $829 (1) 4(e) Advise the directors which option they should choose. Justify your answer. 7 Option A Advantages Disadvantages • Option A produces higher profit (1) • May lose consumers to competitors OF (1) leading to less sales or revenue • No concerns over reliability/meeting (1) deadlines (1) • Impact on workforce of reduced • Same quality of products (1) production (1) • No need to purchase from overseas • Reduced production means less (1) sales/profit (1) • Material price doesn’t increase (1) Option B Advantages Disadvantages • Option B produces higher profit (1) • Will exchange rates affect price for • No loss of sales/meet demand (1) Option B?(1) • Run at maximum capacity or • Will new supplier prove to be maintains production (1) reliable/trustworthy/meet delivery times? (1) • Will new supplier provide materials of usual quality/risk of damage during shipping (1) • Higher delivery costs (1) • Higher cost of materials/more expensive (1) • Possible import taxes (1) Comments Max 6 Decision supported by a comment (1) Accept other valid responses

This question in 9706/22 Feb/March 2025

4 Ameerah’s business uses absorption costing. (a) Define the following terms: (i) cost centre … … [1] (ii) fixed cost … … [1] (iii) indirect labour. … … [1] Additional information The business operates two production departments: Processing and Assembly, and it operates two service departments: Maintenance and Stores. The following budgeted information is available. Overheads $ Rent 63 000 Depreciation 45 000 Production departments Service departments Processing Assembly Maintenance Stores Floor area (square metres) 140 85 33 42 Machinery cost ($) 120 000 36 000 20 000 4 000 Number of machines 7 3 – – Stores requisitions 48 74 18 (b) Complete the table to show the total overheads for each department and the reapportionment of service department overheads. Total Production departments Service departments $ Processing Assembly Maintenance Stores $ $ $ $ Overheads allocated 570 760 256 480 193 980 65 720 54 580 Rent Depreciation Subtotal Reapportion Stores Subtotal Reapportion Maintenance Total overheads [5] Additional information Budgeted hours for each production department were as follows: Processing department Assembly department Direct labour hours 6 720 8 940 Direct machine hours 11 760 5 040 (c) Calculate, to two decimal places, an overhead absorption rate for each production department, using a suitable basis. Processing department Assembly department [4] (d) State two reasons why overheads may be under-absorbed. 1 … … 2 … … [2] Additional information The following information is available about pay rates for direct labour in the Processing department. • Normally direct labour is paid $9.60 per hour for a 32-hour week. Normal output is 24 units per hour. • Sometimes more experienced direct labour is available and is paid $10.50 per hour for a 30-hour week. Normal output is 30 units per hour. • The company expects to make a gain on the cost of labour per unit by paying a higher rate to more experienced employees. (e) Calculate the amount saved per unit by paying experienced labour at a higher rate. … … … … … … … … … … [3]

17 marks

Mark scheme: 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)

This question in 9706/21 May/June 2025

4 Ameerah’s business uses absorption costing. (a) Define the following terms: (i) cost centre … … [1] (ii) fixed cost … … [1] (iii) indirect labour. … … [1] Additional information The business operates two production departments: Processing and Assembly, and it operates two service departments: Maintenance and Stores. The following budgeted information is available. Overheads $ Rent 63 000 Depreciation 45 000 Production departments Service departments Processing Assembly Maintenance Stores Floor area (square metres) 140 85 33 42 Machinery cost ($) 120 000 36 000 20 000 4 000 Number of machines 7 3 – – Stores requisitions 48 74 18 (b) Complete the table to show the total overheads for each department and the reapportionment of service department overheads. Total Production departments Service departments $ Processing Assembly Maintenance Stores $ $ $ $ Overheads allocated 570 760 256 480 193 980 65 720 54 580 Rent Depreciation Subtotal Reapportion Stores Subtotal Reapportion Maintenance Total overheads [5] Additional information Budgeted hours for each production department were as follows: Processing department Assembly department Direct labour hours 6 720 8 940 Direct machine hours 11 760 5 040 (c) Calculate, to two decimal places, an overhead absorption rate for each production department, using a suitable basis. Processing department Assembly department [4] (d) State two reasons why overheads may be under-absorbed. 1 … … 2 … … [2] Additional information The following information is available about pay rates for direct labour in the Processing department. • Normally direct labour is paid $9.60 per hour for a 32-hour week. Normal output is 24 units per hour. • Sometimes more experienced direct labour is available and is paid $10.50 per hour for a 30-hour week. Normal output is 30 units per hour. • The company expects to make a gain on the cost of labour per unit by paying a higher rate to more experienced employees. (e) Calculate the amount saved per unit by paying experienced labour at a higher rate. … … … … … … … … … … [3]

17 marks

Mark scheme: 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)

This question in 9706/23 May/June 2025

4 B Limited uses absorption costing at one of its factories where two products are made: Wye and Zed. The budgeted production for January 2026 is as follows: units direct labour hours per unit Wye 8 000 2.5 Zed 14 000 1.7 Budgeted overheads for January 2026 are $67 890. (a) Calculate, to two decimal places, the overheads to be absorbed by one unit of each product using the direct labour hour method. Wye … … … Zed … … … [4] (b) Calculate the total amount of overheads absorbed by each product if budgets are met. Wye … … Zed … … [2] (c) State two reasons why overheads may be under-absorbed. 1 … … 2 … … [2] Additional information A customer has ordered 1200 units of product Zed for delivery in January 2026. The following additional information is available about product Zed. • One unit of product Zed requires direct materials costing $7. • The direct labour rate is $11 per hour. 1 • The selling price of an order is set to achieve a profit margin of 33 3%. (d) Calculate the total selling price for the order. … … … … … … … … [5] Additional information B Limited manufactures a single type of product at a second factory where marginal costing is used. The following budgeted information is available. per unit selling price $108 direct materials 2.5 kg at $15.50 per kg direct labour 1.5 hours at $12 per hour The company relies on one supplier who is currently only able to supply a limited quantity of direct materials. As a result, the factory is producing 14 000 units per month, which is 70% of normal capacity. Currently, the supplier delivers direct materials 4 times each month. Each delivery incurs carriage charges of $4300. Fixed costs per month are forecast to be $136 000 including carriage charges. (e) Calculate the current profit per month. … … … … … … … … [4]

17 marks

Mark scheme: 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)

This question in 9706/21 Oct/Nov 2025

4 W Limited manufactures a single type of product at one of its factories. Currently, marginal costing is used, but the directors have been considering switching to absorption costing. (a) Identify two features of absorption costing. 1 … … 2 … … [2] Additional information The following information is available for September 2024. Quantity produced 3200 units Quantity sold 2800 units Selling price per unit $84 Contribution per unit $28 Fixed overheads per month $52 000 There was no inventory on 1 September 2024. (b) Prepare an absorption costing statement to show the profit for September 2024. … … … … … … … … … … … … [6] Additional information Using marginal costing, the profit for September has been calculated as $26 400. (c) Explain why the profit for marginal costing is different to the profit for absorption costing. … … … … … … [2] Additional information At a second factory, two different types of products, Wye and Zed, are made, and marginal costing is used. The following budgeted information is available. Per unit Wye Zed $ $ Selling price 61 64 Direct materials 20 28 Direct labour 18 20 Fixed costs 8 8 The budgeted production and sales for one month are: Wye 4000 units and Zed 1200 units. Demand for Zed has fallen recently and the directors have been considering the following options. Option A 1 Stop production of Zed and increase production and sales of Wye by 15%. 2 All employees will be switched to producing Wye instead of Zed. These employees will need retraining at a cost of $3000. 3 The supplier of materials for Wye will give a larger trade discount as a result of increased orders. Currently the supplier gives a 20% trade discount. This will increase to 30%. 4 It is possible to produce 4400 units of Wye in normal working conditions. Direct labour is paid a premium of 25% for any overtime working. Option B 1 Boost sales of Zed by 20% on current levels by improving its quality. 2 The selling price per unit of Zed will increase by 5%. 3 Direct material cost per unit of Zed will increase to $33 per unit. 4 Direct labour rate per unit of Zed will increase by 10%.

10 marks

Mark scheme: 4(a) Identify two features of absorption costing. 2 • Charges both variable and fixed costs/all costs (to each unit of production)/no need to separate fixed (and variable) costs (1) • Allocates costs (to cost centres) (1) • Requires apportionment of overheads (which cannot otherwise be allocated to cost centres) (1) • Useful for determining the selling price of a unit (1) • Recognised method for valuing inventory/required for financial statements/acceptable under IAS/IAS 2 or 1 (1) • Helps in long term decision making (1) • Based on the matching principle (1) • Will lead to over or under absorption of overheads (1) Max 2 Accept other valid responses 4(b) Prepare an absorption costing statement to show the profit for September 6 2024. $ $ Revenue/sales (2800  $84) 235 200 (1) Variable/direct costs (3200  $56) 179 200 (1) Fixed/indirect overheads 52 000 (1) 231 200 Less closing inventory W1 (28 900) (1) Cost of sales/cost of (202 300) (1) OF production/production Profit for the month 32 900 (1) OF 231200 W1 Closing inventory:  400 = $28 900 3 200 4(c) Explain why the profit for marginal costing is different to the profit for 2 absorption costing. The difference is due to the (valuation of closing) inventory (1) As a result of including fixed overheads/all costs in inventory valuation using absorption costing (1) Marginal costing measure inventory with only variable costs (1) For absorption fixed costs are absorbed into cost of sales (1) With a higher inventory value absorption costing gives a higher profit (1) Max 2 Accept other valid responses 4(d) Calculate the total monthly profit to be made if Option A is chosen. 6 Profit calculation $ Revenue 4 600 W1  $61 280 600 (1) Less materials 4 600  $17.50 W2 (80 500) (1) Less direct labour (normal working) 4 400  $18 (79 200) (1) Less direct labour (overtime) W3 200  22.5 (4 500) (1) Less fixed costs W4 (41 600 + 3 000) (44 600) (1) Profit for the month 71 800 (1) OF Alternative answer per unit: Selling price (61  4 600) (1) Less materials (17.5  4 600) (1) Direct labour (18  4 400) (1) Overtime labour (22.5  200) (1) Fixed costs (3 000 + 8  5 200) (1) 71 800 (1)OF W1 New production level: 4 600 units W2 New materials cost: full price $20 +25% = $25; new price per unit $17.50 W3 Overtime working: 200 units  ($18  125%), i.e. $22.50 per unit  200 = $4 500 W4 Fixed costs ($32 000 + $9 600) + $3 000 =$44 600 4(e) Prepare a marginal costing statement to show the total monthly profit to be 7 made if Option B is chosen. Marginal costing statement for one month Wye Zed $ $ Revenue/sales 244 000} 96 768} (1) both Direct materials (80 000)} (47 520)} (1) both Direct labour (72 000)} (31 680 }) (1) both Commission W1 (4 800) (1) Contribution 92 000} 12 768} (1) OF both Less fixed costs (32 000)} (8 300)} (1) both W2 Profit for month 60 000 4 468 Total profit for month: $64 468 (1) OF Total $ Revenue/sales 340 768 (1) Direct materials (127 520) (1) Direct labour (103 680) (1) Commission W1 (4 800) (1) Contribution 104 768 (1) OF Less fixed costs W2 (40 300) (1) Profit for month 64 468 (1) OF 4(e) Alternative answer, per unit Wye Zed $ $ Revenue/sales (4 000  61)} (1 440  67.20)} (1) both Direct materials (4 000  20)} (1 440  33)} (1) both Direct labour (4 000  18)} (1 440  22) )} (1) both Commission W1 (4 800) (1) Contribution 92 000} 12 768} (1) OF both Less fixed costs W2 (32 000)} (8 300)} (1) both Profit for month 60 000 4 468 Total profit for month: $64 468 (1) OF W1 Commission (1 200  3 = 3 600) + (240  $5 = 1 200) = $4 800 W2 Fixed costs for Product Zed: $9 600 – $1 300 = $8 300 4(f) Advise the directors which option they should choose. Justify your choice by 7 discussing both financial and non-financial factors. Option A (Max 4) For Produces more profit OF (1) Avoid redundancy (costs) by retraining employees (1) Larger trade discount which lowers material costs/cost of sales/increase profit (1) Workers become more efficient/specialised (1) Against Can additional production be sold (1) Will retained workforce be willing to work overtime/be re-trained? (1) Retraining cost ($3 000) increases (fixed) costs/reduces profit (1) May lose customers of Wye (who also bought Zed) (1) Option B (Max 4) For Ensures current customers for Zed retain their orders for this product and also for Wye (1) Retains current workforce so avoiding decline in morale (1) Increase in labour rate/using sales commission may motivate employees (1) Reduces the fixed cost of advertising (1) Sales/brand image may increase due to better quality (1) Against Will switch from advertising (to paying commission) be effective? (1) Will improvement in quality overcome decline in demand? (1) Increasing selling price may reduce demand (1) Will forecasts prove correct? = could be either option (1) Accept other valid responses. Decision supported with a comment (1)

This question in 9706/22 Oct/Nov 2025

4 V Limited is a manufacturing company which uses absorption costing at one of its factories. (a) Explain two differences between marginal costing and absorption costing. 1 … … … … 2 … … … … [4] Additional information At one of its factories, V Limited has two production departments: cutting and assembly. There are also two service departments: maintenance and stores. All budgeted overheads for the year ended 30 September 2025 have been allocated to departments as follows: Production departments Service departments Total Cutting Assembly Maintenance Stores $ $ $ $ $ Overheads 178 830 77 850 51 330 27 150 22 500 allocated The following additional budgeted information is available about the departments. Production departments Service departments Cutting Assembly Maintenance Stores Issues from 480 330 90 ‑ stores Number of 37 23 ‑ ‑ machines (b) Complete the table to show the reapportionment of service department overheads. Production departments Service departments Total Cutting Assembly Maintenance Stores $ $ $ $ $ Overheads 178 830 77 850 51 330 27 150 22 500 allocated [4] Additional information The following forecast information is available for the two production departments for the year ended 30 September 2025. Cutting Assembly Labour hours 6300 7855 Machine hours 8140 5020 (c) Calculate, to two decimal places, the overhead absorption rates for each department for the year ended 30 September 2025. Cutting department Assembly department [4] Additional information For the year ended 30 September 2025, actual results for the assembly department were as follows: Total overheads $65 600 Labour hours 6 050 Machine hours 5 620 (d) Calculate the over‑absorption or under‑absorption of overheads for the assembly department for the year ended 30 September 2025. … … … … [3] Additional information An order was received from a customer in August 2025. The following information is available. Direct costs (material and labour) $1450 Labour hours Cutting department 138 Assembly department 152 Machine hours Cutting department 197 Assembly department 161 Products are sold with a gross profit margin of 40%. (e) Calculate the selling price of the order. … … … … … …

15 marks

This question in 9706/23 Oct/Nov 2025