CIMA P1 Management Accounting Performance Evaluation Solved Past Papers

The Chartered institute of Management Accountants 2004 1
Re-issued May 2004

MANAGERIAL LEVEL
MANAGEMENT ACCOUNTING PILLAR
PAPER P1 MANAGEMENT ACCOUNTING
PERFORMANCE EVALUATION
This is a Pilot Paper and is intended to be an indicative guide for
tutors and students of the style and type of questions that are likely
to appear in future examinations. It does not seek to cover the full
range of the syllabus learning outcomes for this subject.
Management Accounting Performance Evaluation will be a three
hour paper with two compulsory sections (50 marks and 30 marks
respectively) and one section with a choice of questions for 20
marks.
CONTENTS
Pilot Question Paper
Section A: Nineteen objective test questions Pages 2-12
Section B: Six short answer questions Pages 13
Section C: Two scenario questions Pages 14-16
Indicative Maths Tables and Formulae Pages 17-20
Pilot Solutions Pages 21-32
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FOR FREE CIMA, ACCA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot.com
P1 PILOT PAPER 2
P1 PILOT PAPER 3
SECTION A 50 MARKS
ANSWER ALL SUB-QUESTIONS
Questions 1.1 to 1.10 are worth 2 marks each (20 marks in total)
Questions 1.11 to 1.19 are worth 30 marks in total
Question One
The following data are given for questions 1.1 and 1.2 below
Trafalgar Limited budgets to produce 10,000 units of product D12, each requiring 45
minutes of labour. Labour is charged at 20 per hour, and variable overheads at 15
per labour hour. During September 2003, 11,000 units were produced. 8,000 hours of
labour were paid at a total cost of 168,000. Variable overheads in September
amounted to 132,000.
1.1 What is the correct labour efficiency variance for September 2003?
A 5,000 Adverse
B 5,000 Favourable
C 5,250 Favourable
D 10,000 Adverse
1.2 What is the correct variable overhead expenditure variance for September 2003?
A 3,750 Favourable
B 4,125 Favourable
C 12,000 Adverse
D 12,000 Favourable
REQUIRED:
On the indicative ANSWER SHEET, enter either your answer in the space provided
where the sub-question requires a written response, or place a circle O around the
letter that gives the correct answer to the sub-question where a list of distractors
has been provided.
If you wish to change your mind about an answer to such a sub-question, block
out your first answer completely and then circle another letter. You will not receive
marks if more than one letter is circled.
Space has been provided on the four-page answer sheet for workings. If you
require further space, please use the last page of your answer book and clearly
indicate which question(s) these workings refer to.
You must detach the answer sheet from the question paper and attach it to the
front cover of your answer book before you hand it to the invigilators at the end of
the examination.
P1 PILOT PAPER 4
Management Accounting Performance Write here your full examination number:
Evaluation Centre Code
INDICATIVE ANSWER SHEET FOR SECTION A Hall Code
SUB-QUESTIONS 1.1 TO 1.10 Desk Number
1.1 A B C D
1.2 A B C D
1.3 A B C D
1.4 A B C D
1.5 A B C D
1.6 A B C D
1.7 A B C D
1.8 A B C D
1.9 A B C D
1.10 A B C D
You must detach the answer sheet from the question paper and attach it to the
inside front cover of your answer book before you hand it in to the invigilators at the
end of the examination.
P1 PILOT PAPER 5
Space for workings for Section A
P1 PILOT PAPER 6
P1 PILOT PAPER 7
P1 PILOT PAPER 8
1.3 Which of the following definitions best describes Zero-Based Budgeting?
A A method of budgeting where an attempt is made to make the expenditure under
each cost heading as close to zero as possible.
B A method of budgeting whereby all activities are re-evaluated each time a budget
is formulated.
C A method of budgeting that recognises the difference between the behaviour of
fixed and variable costs with respect to changes in output and the budget is
designed to change appropriately with such fluctuations.
D A method of budgeting where the sum of revenues and expenditures in each
budget centre must equal zero.
1.4 Copenhagen plc is an insurance company. Recently there has been concern that
too many quotations have been sent to clients either late or containing errors.
The department concerned has responded that it is understaffed, and a high
proportion of current staff has recently joined the firm. The performance of this
department is to be carefully monitored.
Which ONE of the following non-financial performance indicators would NOT be an
appropriate measure to monitor and improve the departments performance?
A Percentage of quotations found to contain errors when checked.
B Percentage of quotations not issued within company policy of three working days.
C Percentage of departments quota of staff actually employed.
D Percentage of budgeted number of quotations actually issued.
1.5 Nile Limited is preparing its sales budget for 2004. The sales manager estimates
that sales will be 120,000 units if the Summer is rainy, and 80,000 units if the
Summer is dry. The probability of a dry Summer is 04.
What is the expected value for sales volume for 2004?
A 96,000 units
B 100,000 units
C 104,000 units
D 120,000 units
P1 PILOT PAPER 9
1.6 MN plc uses a Just-in-Time (JIT) system and backflush accounting. It does not
use a raw material stock control account. During April, 1,000 units were produced
and sold. The standard cost per unit is 100: this includes materials of 45.
During April, conversion costs of 60,000 were incurred.
What was the debit balance on the cost of goods sold account for April?
A 90,000
B 95,000
C 105,000
D 110,000
1.7 Division A transfers 100,000 units of a component to Division B each year.
The market price of the component is 25 per unit.
Division A's variable cost is 15 per unit.
Division A's fixed costs are 500,000 each year.
What price per unit would be credited to Division A for each component that it transfers
to Division B under marginal cost pricing and under two-part tariff pricing (where the
Divisions have agreed that the fixed fee will be 200,000)?
Marginal cost pricing Two-part tariff pricing
A 15 15
B 25 15
C 15 17
D 25 17
1.8 Which of the following statements are true?
(i) A flexible budget can be used to control operational efficiency.
(ii) Incremental budgeting can be defined as a system of budgetary planning
and control that measures the additional costs that are incurred when there
are unplanned extra units of activity.
(iii) Rolling budgets review and, if necessary, revise the budget for the next
quarter to ensure that budgets remain relevant for the remainder of the
accounting period.
A (i) and (ii) only
B (ii) and (iii) only
C (iii) only
D (i) only
P1 PILOT PAPER 10
1.9 Green division is one of many divisions in Colour plc. At its year-end, the fixed
assets invested in Green were 30 million, and the net current assets were
5 million. Included in this total was a new item of plant that was delivered three
days before the year end. This item cost 4 million and had been paid for by
Colour, which had increased the amount of long term debt owed by Green by this
amount.
The profit earned in the year by Green was 6 million before the deduction of
14 million of interest payable to Colour.
What is the most appropriate measure of ROI for the Green division?
A 131%
B 148%
C 171%
D 194%
1.10 Division G has reported annual operating profits of 202 million. This was after
charging 3 million for the full cost of launching a new product that is expected to
last three years. Division G has a risk adjusted cost of capital of 11% and is
paying interest on a substantial bank loan at 8%. The historical cost of the assets
in Division G, as shown on its balance sheet, is 60 million, and the replacement
cost has been estimated at 84 million.
Ignore the effects of taxation.
What would be the EVA for Division G?
A 1540 million
B 1548 million
C 1660 million
D 1296 million
(Total for sub-questions 1.1 1.10 = 20 marks)
P1 PILOT PAPER 11
1.11 The overhead costs of RP Limited have been found to be accurately represented
by the formula
y = 10,000 + 025x
where y is the monthly cost and x represents the activity level measured as the
number of orders.
Monthly activity levels of orders may be estimated using a combined regression
analysis and time series model:
a = 100,000 + 30b
where a represents the de-seasonalised monthly activity level and b represents
the month number.
In month 240, the seasonal index value is 108.
Required:
Calculate the overhead cost for RP Limited for month 240 to the nearest 1,000.
(3 marks)
1.12 The following data have been extracted from the budget working papers of
WR Limited:
Activity Overhead cost
(machine hours)
10,000 13,468
12,000 14,162
16,000 15,549
18,000 16,242
In November 2003, the actual activity was 13,780 machine hours and the actual
overhead cost incurred was 14,521.
Required:
Calculate the total overhead expenditure variance for November 2003.
(4 marks)
REQUIRED:
Each of the sub-questions numbered 1.11 to 1.19 below require a brief written
response.
This response should be in note form and should not exceed 50 words.
Write your answers to these sub-questions in your answer book.
P1 PILOT PAPER 12
DRP Limited has recently introduced an Activity Based Costing system. It manufactures
three products, details of which are set out below:
Product D Product R Product P
Budgeted annual production (units) 100,000 100,000 50,000
Batch size (units) 100 50 25
Machine set-ups per batch 3 4 6
Purchase orders per batch 2 1 1
Processing time per unit (minutes) 2 3 3
Three cost pools have been identified. Their budgeted costs for the year ending
31 December 2004 are as follows:
Machine set-up costs 150,000
Purchasing of materials 70,000
Processing 80,000
1.13 Calculate the annual budgeted number of:
(a) batches
(b) machine set-ups
(c) purchase orders
(d) processing minutes
(2 marks)
1.14 Calculate the budgeted overhead unit cost for Product R for inclusion in the
budget for 2004.
(4 marks)
SW plc manufactures a product known as the TRD100 by mixing two materials. The
standard material cost per unit of the TRD100 is as follows:
Material X 12 litres
@
250 30
Material Y 18 litres
@
300 54
In October 2003, the actual mix used was 984 litres of X and 1,230 litres of Y. The
actual output was 72 units of TRD100.
1.15 Calculate the total material mix variance for October 2003.
(3 marks)
P1 PILOT PAPER 13
1.16 Calculate the total material yield variance for October 2003.
(2 marks)
The following data are given for questions 1.17 and 1.18
A company produces three products using three different machines. No other products
are made on these particular machines. The following data is available for December
2003.
Product A B C
Contribution per unit 36 28 18
Machine hours required per unit
Machine 1 5 2 1.5
Machine 2 5 5.5 15
Machine 3 2.5 1 05
Estimated sales demand (units) 50 50 60
Maximum machine capacity in December will be 400 hours per machine.
1.17
(a) Calculate the machine utilisation rates for each machine for December
2003.
(2 marks)
(b) Identify which of the machines is the bottleneck machine.
(2 marks)
1.18
(a) State the recommended procedure given by Goldratt in his Theory of
Constraints for dealing with a bottleneck activity.
(2 marks)
(b) Calculate the optimum allocation of the bottleneck machine hours to the
three products.
(3 marks)
1.19 Explain three circumstances where the First in, First out (FIFO) valuation method
of process costing will give very similar results to the Weighted Average valuation
method.
(3 marks)
(Total for sub-questions 1.11 1.19 = 30 marks)
(Total for Section A = 50 marks)
P1 PILOT PAPER 14
End of Section A
P1 PILOT PAPER 15
SECTION B 30 MARKS
ANSWER ALL PARTS OF THIS QUESTION ALL PARTS CARRY EQUAL
MARKS
Question Two
(a) Briefly outline the main features of feedback control, and the feedback loop
and explain how, in practice, the procedures of feedback control can be
transformed into feed-forward control.
(b) Give FOUR reasons why the adoption of Total Quality Management (TQM) is
particularly important within a Just-in-Time (JIT) production environment.
(c) Briefly outline the advantages and disadvantages of allowing profit centre
managers to participate actively in the setting of the budget for their units.
(d) Explain and discuss the similarities and differences between Residual Income
and Economic Value Added as methods for assessing the performance of
divisions.
(e) Define the controllability principle and give arguments for and against its
implementation in determining performance measures.
(f) Discuss the problems that arise specifically when determining transfer prices
where divisions are located in different countries.
(Total = 30 marks)
End of Section B
P1 PILOT PAPER 16
SECTION C ANSWER ONE QUESTION ONLY
BOTH QUESTIONS CARRY 20 MARKS
Question Three
Marshall Limited operates a business that sells advanced photocopying machines and
offers on-site servicing. There is a separate department that provides servicing. The
standard cost for one service is shown below along with the operating statements for
the Service Department for the six months to 30 September 2003. Each service is very
similar and involves the replacement of two sets of materials and parts.
Marshall Limiteds budgets for 5,000 services per month.
Standard cost for one service
Materials 2 sets @ 20 per set 40

Labour 3 hours @ 11 per hour 33
Variable overheads 3 hours @ 5 per hour 15
Fixed overheads 3 hours @ 8 per hour 24
Total standard cost 112
Operating Statements for six months ending 30 September 2003
Months 1 2 3 4 5 6 Total
Number of
services per
month
5,000 5,200 5,400 4,800 4,700 4,500 29,600

Flexible budget
costs
560,000 582,400 604,800 537,600 526,400 504,000 3,315,200
Less: Variances:
Materials
Price 5,150F 3,090F 1,100F -2,040A -5,700A -2,700A -1,100A
Usage -6,000A 2,000F -4,000A -12,000A -2,000A 0 -22,000A
Labour
Rate 26,100F 25,725F 27,331F 18,600F 17,400F 15,515F 130,671F
Efficiency 5,500F 9,900F 12,100F -12,100A -4,400A -11,000A 0
Variable overheads:
Spending -3,500A -3,500A -2,500A -4,500A 500F 2,500F -11,000A
Efficiency 2,500F 4,500F 5,500F -5,500A -2,000A -5,000A 0
Fixed overheads:
Expenditure -3,000A -5,000A -5,000A -15,000A 5,000F 5,000F -18,000A
Volume 0 4,800F 9,600F - 4,800A -7,200A -12,000A -9,600A
Actual costs 533,250 540,885 560,669 574,940 524,800 511,685 3,246,229
Note: A = adverse variance; F = favourable variance
P1 PILOT PAPER 17
Required:
(a) Prepare a summary financial statement showing the overall performance of the
Service Department for the six months to 30 September 2003.
(4 marks)
(b) Write a report to the Operations Director of Marshall Limited commenting on the
performance of the Service Department for the six months to 30 September 2003.
Suggest possible causes for the features you have included in your report and
state the further information that would be helpful in assessing the performance of
the department.
(16 marks)
(Total = 20 marks)
P1 PILOT PAPER 18
Question Four
PQR plc is a chemical processing company. The company produces a range of
solvents by passing materials through a series of processes. The company uses the
First In First Out (FIFO) valuation method.
In Process 2, the output from Process 1 (XP1) is blended with two other materials (P2A
and P2B) to form XP2. It is expected that 10% of any new input to Process 2 (that is,
transfers from Process 1 plus Process 2 materials added) will be immediately lost and
that this loss will have no resale value. It is also expected that in addition to the loss,
5% of any new input will form a by-product, Z, which can be sold without additional
processing for 200 per litre.
Data from Process 2 for November 2003 was as follows:
Opening work in process
Process 2 had 1,200 litres of opening work in process. The value and degree of
completion of this was as follows:
% degree of completion
XP1 1,560 100
P2A 1,540 100
P2B 750 100
Conversion costs 3,790 40
7,640
Input
During November, the inputs to Process 2 were:
XP1 5,000 litres 15,679

P2A 1,200 litres 6,000
P2B 3,000 litres 4,500
Conversion costs 22,800
Closing work in process
At the end of November, the work in process was 1,450 litres. This was fully complete
in respect of all materials, but only 30% complete for conversion costs.
Output
The output from Process 2 during November was:
Z 460 litres
XP2 7,850 litres
Required:
Prepare the Process 2 account for November 2003.
(17 marks)
Note: 3 marks will be awarded for presentation.
(Total = 20 marks)
End of question paper
Maths Tables and Formulae follow on pages 17-20
P1 PILOT PAPER 19
INDICATIVE MATHS TABLES AND FORMULAE
P1 PILOT PAPER 20
P1 PILOT PAPER 21
Formulae
PROBABILITY
A B = A or B. A B = A and B (overlap).
P(B A) = probability of B, given A.
Rules of Addition
If A and B are mutually exclusive: P(A B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A B) = P(A) + P(B) P(A B)
Rules of Multiplication
If A and B are independent: P(A B) = P(A) * P(B)
If A and B are not independent: P(A B) = P(A) * P(B A)
E(X) = (probability * payoff)
Quadratic Equations
If aX
2
+ bX + c = 0 is the general quadratic equation, the two solutions (roots) are given
by:
a
ac b b
X
2
4
2

=
DESCRIPTIVE STATISTICS
Arithmetic Mean
n
x
x

=
f
fx
x
= (frequency distribution)
Standard Deviation
n
x x
SD
2
) (
=
2
2
x
f
fx
SD
INDEX NUMBERS
Price relative = 100 * P
1
/P
0
Quantity relative = 100 * Q
1
/Q
0
Price: 100 x
1
w
P
p
w
o
|
|
.
|
\
|

Quantity: 100 x
1
w
Q
Q
w
o
|
|
.
|
\
|

TIME SERIES
Additive Model
Series = Trend + Seasonal + Random
Multiplicative Model
Series = Trend * Seasonal * Random
P1 PILOT PAPER 22
LINEAR REGRESSION AND CORRELATION
The linear regression equation of y on x is given by:
Y = a + bX or Y - Y = b(X X)
where
b =
2 2
) (
) )( (
) ( Variance
) ( Covariance
x x n
y x XY n
X
XY

=
and a = Y bX
or solve
Y = na + b x
XY = a x + b x
2
Coefficient of correlation
} ) ( }{ ) ( {
) )( (
) ( ). (
) ( Covariance
2 2 2 2
y y n x x n
Y X XY n
Y Var X Var
XY
r

= =
R(rank) = 1 -
) 1 (
6
2
2
n n
d
FINANCIAL MATHEMATICS
Compound Interest (Values and Sums)
Future Value of S, of a sum of X, invested for n periods, compounded at r% interest
S = X[1 + r]n
Annuity
Present value of an annuity of 1 per annum receivable or payable for n years,
commencing in one year, discounted at r% per annum:
PV =
(
(
n
r
r
] 1 [
1
1
1
Perpetuity
Present value of 1 per annum, payable or receivable in perpetuity, commencing in one
year, discounted at r% per annum:
PV =
r
1
P1 PILOT PAPER 23
SOLUTIONS TO PILOT PAPER
Note:
In some cases, these solutions are more substantial and wide ranging than
would be expected of candidates under exam conditions. They provide
background on theorists, frameworks and approaches to guide students
and lecturers in their studies, preparation and revision.
SECTION A
Question One
1.1 [(11,000 x 075) - 8,000] x 20 = 5,000 Favourable
Therefore the answer is B
1.2 [8,000 x 15] - 132,000 = 12,000 Adverse
Therefore the answer is C
1.3 The answer is B
1.4 The answer is D
1.5 104,000 units = [80,000 x 04] + [120,000 x 06]
1.6
Cost of goods sold 100,000

Less material cost 45 x 1,000 45,000
Conversion cost allocated 55,000
Conversion cost incurred 60,000
Excess charged to cost of goods sold account 5,000
Total debit on cost of goods sold account 100,000 + 5,000 = 105,000
P1 PILOT PAPER 24
1.7 Marginal cost will be same as Variable cost, that is 15
The two-part tariff transfer price per unit is the marginal cost 15. This is because
the 200,000 will be transferred as a total fixed fee and not, therefore, as part of
the unit transfer price.
Therefore the answer is A
1.8 The answer is D
1.9 The most appropriate measure of ROI will include only assets available to earn
profit during the year and will not include interest payable.
Thus ROI will be 6 million/(35 million - 4 million) = 194%
Therefore the answer is D
1.10 Adjustment needed for launch costs spread over 3 years, and need to use
replacement cost of net assets so EVA = (202 million + 2million) (84 million
x 11%) = 1296 million.
Therefore the answer is D
1.11 Orders = [100,000 + (30 x 240)] x 108 = 115,776
Overhead cost = 10,000 + (025 x 115,776) = 38,944
Answer is 39,000
1.12 Use high/low method to separate fixed and variable budgeted overhead cost:
Hours
High 18,000 16,242
Low 10,000 13,468
Difference 8,000 2,774
Variable cost per machine hour
= 34675 0
8,000
2,774
=
By substitution fixed cost
= 13,468 - (10,000 x 034675) = 10,000
Budget cost allowance
= 10,000 + (13,780 x 034675) = 14,778
Actual cost = 14,521
257 (F)
P1 PILOT PAPER 25
P1 PILOT PAPER 26
1.13
Budgeted number of batches:
Product D (100,000/100) = 1,000
Product R (100,000/50) = 2,000
Product P (50,000/25) = 2,000
5,000
Budgeted machine set-ups:
Product D (1,000 x 3) = 3,000
Product R (2,000 x 4) = 8,000
Product P (2,000 x 6) = 12,000
23,000
Budgeted number of purchase orders:
Product D (1,000 x 2) = 2,000
Product R (2,000 x 1) = 2,000
Product P (2,000 x 1) = 2,000
Budgeted processing minutes:
Product D (100,000 x 2)
Product R (100,000 x 3)
Product P (50,000 x 3)
=
=
=
6,000
200,000
300,000
150,000
650,000
minutes
1.14 Budgeted cost/set-up:
= 52 6
23,000
150,000
= Budgeted unit cost of R: = 52 0
50
4 x 52 6
=
Budgeted cost/purchase orders

= 67 11
000 , 6
000 , 70
= Budgeted unit cost of R: = 23 0
50
1 x 67 11
=
Budgeted processing cost per minute:

= 2 1 0
650,000
80,000
= Budgeted unit cost of R= 0.12 x 3 = 0.36
Total budgeted unit cost of R is:

Set-up costs = 052
Purchasing costs = 023
Processing costs = 036
Total cost = 1.11 per unit
P1 PILOT PAPER 27
1.15
Actual mix Standard
mix
Difference Price Variance
litres litres litres
X 984 8856 984 (A) 250 2460 (A)
Y 1,230 1,3284 984 (F) 300 2952 (F)
Totals 2,214 2,2140 nil 492 (F)
1.16
Expected output =
30
214 , 2 = 738 units
Actual output = 720 units
Shortfall = 18 units
18 units x 84/unit = 1512 (A)
An alternative would be only 73 complete units of output were expected, thus the
shortfall would be 1 unit. The variance would be 10 x 84 per unit = 84 adverse.
1.17
(a) Machine utilisation rates
Product
Required machine hours A B C Total
Machine 1 250 100 90 440
Machine 2 250 275 90 615
Machine 3 125 50 30 205
Utilisation rates:
Machine 1 (440/400) = 110%
Machine 2 (615/400) = 154%
Machine 3 (205/400) = 51%
(b) Machine 2 is the bottleneck it has the highest utilisation and this is greater
than 100%.
P1 PILOT PAPER 28
1.18
(a) The Goldratt procedure is:
Identify the systems bottleneck
Decide how to exploit or relieve the bottleneck
Sub-ordinate everything else to relieving the bottleneck
Elevate the systems bottlenecks
When one bottleneck is no longer a constraint, start procedure again (there
will always be a new bottleneck).
(b) Optimal allocation would be on the basis of contribution from the bottleneck
resource.
Ranking of contribution per product from machine 2 is:
Product A B C
Machine 2 hours 5 5.5 15
Contribution per machine hour 720 509 1200
Ranking 2 3 1
Thus allocation on this ranking
Product C 60 units Using 90 hours
Product B 50 units Using 250 hours
This uses 340 hours, leaving an available balance of 60 hours.
This will make 60/5.5 = 10.9 units of Product B or 10 whole units.
1.19 FIFO and weighted average methods give very similar results under various
circumstances including the following:
Where the conversion percentage is virtually constant between accounting
periods.
Where the conversion costs in work-in-process at the end of the month are
very small in relation to the total conversion costs during the month. This is
likely to occur where the process time is short and the process is repeated
many times in the month.
In general, where unit cost fluctuations are minimal between the months.
End of Section A
P1 PILOT PAPER 29
SECTION B
Answer to Question Two
Requirement (a)
The classic control loop, shown above for a budgeting context, controls by setting an ex
ante target (budget), measuring ex post performance (activity), making a comparison,
seeking explanation for any significant variation and then taking one or both of two
possible actions. Either action is taken to ensure that activity in future periods is in line
with target, or in exceptional circumstances, the target is changed to conform with
changes that have occurred since the target was set.
A major criticism of this approach is that it is reactive and backward looking. In other
words, action is triggered by a report of variations from the set target or budget. One
counter to this argument is the notion of feed-forward control. The same procedures
take place as in feedback control outlined above. However, it is argued that the fact that
a comparison and explanation will take place in the future affects behaviour and thus
managers act to ensure that when the comparison takes place, the actual performance
will be in line with the set target. This results in control being forward looking and
proactive.
Requirement (b)
The aim of TQM (Total Quality Management) is that all goods and services produced
can be relied upon to meet their specifications at all times. These specifications will
include technical features and timing. The importance of TQM in a JIT environment
includes the following:
JIT requires very precise planning that is only possible when goods can be
relied upon.
JIT requires very low, or no, stocks to be held; thus there must be total
reliability that goods will perform to specification, as there will be no
alternative stock if goods or services fail.

BUDGET
ACTIVITY
BUDGET
REVISION
EXPLAN-
ATION
EITHER/
OR
CORRECTIVE
ACTION

COMPARISON
P1 PILOT PAPER 30
Where JIT is operated with a Kanban system for stock replacement, the
stock re-order point is decided on the basis that all stock is usable and that
replacement stock will be delivered in the specified and very short time
period.
The consequences of poor quality are magnified in a JIT system and could
cause considerable hold-ups in a process.
Requirement (c)
Some of the main advantages of participation in the setting of budgets include:
Acceptance and commitment where managers have taken part in the
setting of the budget they are more likely to accept the resulting targets as
relevant;
Us v Them attitudes can be reduced when targets and budgets are set with
participation, not simply imposed. If managers are involved in the budget
setting process more knowledge is made available since the managers
have considerable detailed knowledge of day to day operations;
Better communication is achieved through participation, in particular
communication is both upwards and downwards within the organisation;
It is also generally accepted from research findings that participation will
lead to:
increased job satisfaction;
decreased job-related tension;
improved job attitudes.
However, there are potential disadvantages to participation, including:
Under some circumstances, participation may lead to setting less difficult
targets the creation of budget slack;
Some personality types have been shown to react much better to an
imposed budget, for example, externals under a locus of control
personality indicator;
Increased need for training for non-financial managers though this could
also be argued as an advantage;
The whole process may be more time-consuming.
Requirement (d)
There are significant similarities between Residual Income (RI) and Economic
Value Added (EVA). In both, the basic measure is the profit for the division less
an interest charge based on the net assets that have been invested in the
division. This results in an absolute value, whereas Return on Investment yields a
percentage or relative measure. There are considerable theoretical advantages
for the absolute measure.
P1 PILOT PAPER 31
The major differences between the two are that EVA has a number of
complications or developments from the simple RI. RI was developed in the early
years of the last century, whereas EVA became popular in the early 1990s.
EVA adjusts the operating profit to bring accounting profit in line with a measure
of economic profit. Thus, major long-term expenditure, such as R&D or
marketing costs for a new product, can be capitalised over the expected useful
life of the expenditure. More complex forms of depreciation are used, and
taxation is treated in a more complex manner.
EVA also calculates the interest charge in a more complex manner than was
traditionally the case for RI.
Requirement (e)
Controllability is defined by Horngren, Bhimani et al as the degree of influence
that a specific manager has over costs, revenues or other items in question.
Controllability refers to a specific manager a superior may be able to control a
cost, and for a period of time all costs are controllable in the long run. The
controllability principle is that managers should only be held responsible for costs
that they have direct control over. So, for example, a divisional manager would
not be held responsible for the allocation of central costs to her department if she
has no control over the incurrence or magnitude of these costs. Under this
principle, it would be held that dysfunctional consequences would arise if
managers were held accountable for costs over which they have no control.
An alternative view argues that there are considerable advantages to be gained
in holding managers responsible for costs even when they do not have any direct
control over them. For example, it stops managers treating some costs as free
goods and thus stops them over-using these goods and services. Further,
holding managers responsible for items outside their control may encourage them
to become more involved with such issues and, as a result, the total cost may be
reduced or the goods or services may be provided more efficiently.
There is no clear evidence as to which of these views will produce the best
performance from a division or a division manager.
Requirement (f)
The basic analysis of transfer pricing assumes that one of the key objectives in
setting such prices is that relevant divisions can be evaluated effectively, that is,
that the transfer price will not distort the divisional performance evaluation. In
practice, however, the existence of divisions in different countries, and particularly
different systems of taxation, can add another objective. It may be valuable to the
company to set transfer prices to minimise overall group tax liabilities and
maximise overall group profits.
For example, profits could be reduced in a country with high taxation and
increased in a country with low taxation, thus reducing the overall tax liability and
increasing overall profits. If customs duties were based on the value of the goods,
there would be an incentive to transfer the goods at a low transfer price to
minimise customs duties. Some countries levy withholding taxes on dividends
paid outside the country. Here it would be possible to set transfer prices for goods
in or out of the country in such a manner that minimise the profits, and thus the
dividends.
P1 PILOT PAPER 32
Most countries have tax legislation that limits the extent to which these practices
can be used, but there is still considerable scope for using transfer prices to
influence the incidence of profit and, through differing tax regimes, the overall
amount of group profit. Where this occurs, the effectiveness of measuring
divisional performance may have been substantially reduced.
P1 PILOT PAPER 33
SECTION C
Answer to Question Three
Summary Statement for six months to 30 September 2003
Cumulative
actual to
date
Cumulative
budget to
date
Total
variance
Price/spending
variance
Efficiency/
volume
variance

Production 29,600 30,000 400
Costs
Materials 1,207,100 1,184,000 (23,100) (1,100) (22,000)
Labour 846,129 976,800 130,671 130,671 0
Variable
overheads
455,000 444,000 (11,000) (11,000) 0
Fixed overheads 738,000 710,400 (27,600) (18,000) (9,600)
Total costs 3,246,229 3,315,200 68,971 100,571 (31,600)
() = Adverse variance
Note: Alternative statements that summarise the performance of the Service
Department would be acceptable.
Requirement (b)
Report to the Operations Director of Marshall Limited
Re: Performance of the Service Department for six months to 30 September 2003
A summary performance statement is attached to this report. The main features are set
out below, along with issues that require further explanation or information.
There has been a rise, then fall in volumes. Is this seasonal variation, such as
fewer services required during the summer, or the result of other factors, such as
action from competitors in months 4 to 6. If the trend in the last three months
continues, this could be a serious problem that needs to be addressed promptly.
A favourable material usage variance, as occurred in month 2 must mean that
some parts were not replaced during the service. Is this acceptable? There
seems to be a general inefficiency in material usage. Is this caused by a lack of
care by service engineers, or by poor quality sets? The price variance see
below does not indicate cheap parts are being purchased.
Material prices are on a general upward path. Is there a general drift in material
prices; is there a material shortage? Are there other suppliers offering a better
price?
Labour price is massively out of line with budget yielding large favourable
variances. Is this caused by a mistake in the budget or an unexpected change in
the price, for example, using different grades/mix of labour. This variance is more
than 13% of budgeted cost and thus must be investigated quickly and thoroughly.
P1 PILOT PAPER 34
Labour efficiency gets seriously worse after month 4. Has something unusual
happened to labour during this month, perhaps a dispute? Is this significantly
worse labour efficiency linked to the fall in output over the same months?
Month 4 is significantly out of line with other months. What happened? Was
production disrupted; was there a labour dispute or supplier problems or did
another factor affect the result? It is important to find satisfactory explanations for
the results in this month and attempt to ensure this performance is not repeated.
Only total variable overhead variance has meaning and reveals a worsening
position after the disaster in month 4, giving further evidence for some unusual
circumstances.
Fixed overhead spending seems to come under control from month 5, but what
caused the problems in the early months? Has management acted to remedy
matters?
The fixed overhead volume variance is purely technical and represents
differences between planned and actual production.
Overall costs are 2% below budget, but this apparently satisfactory position
masks considerable variation. Nevertheless, the general performance of the
Service Department has been close to budget.
Answer to Question Four
Process 2 Account
litres litres
Opening work in
process 1,200 7,640
Normal waste 920 nil
XP1 5,000 15,679 By-product Z 460 920
P2A 1,200 6,000 XP2 7,850 51,450
P2B 3,000 4,500
Conversion cost 22,800
Abnormal gain 280 1,753
Closing work in
process 1,450 6,002
10,680 58,372 10,680 58,372
P1 PILOT PAPER 35
Solution workings:
Equivalent Units Table Process 1 and
materials added
Conversion
Output:
Started & finished this period 6,650 6,650
Completion of opening work in process nil 720
Abnormal gain (280) (280)
Closing work in process 1,450 435
7,820 7,525

Period costs 26,179 22,800
(920)
25,259 22,800
By-product value
Cost per equivalent unit 323 303
Requirement (b)
Valuation Statement
Finished output:
Started and finished 6,650 litres x (323 + 303) = 41,629
Opening work in process:
cost brought forward = 7,640
cost of completion 720 litres x 303 = 2,181
51,450
Abnormal gain
280 litres x (323 + 303) = 1,753
Closing work in process:
1,450 litres x 323 = 4,684
435 litres x 303 = 1,318
6,002
P1 PILOT PAPER 36
P1 PILOT PAPER 37
P1 PILOT PAPER 38
P1 PILOT PAPER 39
The Chartered Institute of Management Accountants 2005

Management Accounting Pillar
Managerial Level Paper
P1 Management Accounting
Performance Evaluation
24 May 2005 Tuesday Morning Session
Instructions to candidates
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper, and if you wish, make
annotations on the question paper. However, you will not be allowed, under
any circumstances, to open the answer book and start writing or use your
calculator during this reading time.
You are strongly advised to carefully read the question requirement before
attempting the question concerned. The requirements for the questions in
Section C are contained in a dotted box.
Answer the ONE compulsory question in Section A. This is comprised of 19
sub-questions and is on pages 2 to 9.
Answer all SIX compulsory sub-questions in Section B on pages 10 and 11.
Answer ONE of the two questions in Section C on pages 12 to 15.
Maths Tables and Formulae are provided on pages 17 to 21. These pages
are detachable for ease of reference.
Write your full examination number, paper number and the examination
subject title in the spaces provided on the front of the examination answer
book. Also write your contact ID and name in the space provided in the right
hand margin and seal to close.
Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

P
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TURN OVER
P1 2 May 2005

SECTION A 50 MARKS
[the indicative time for answering this section is 90 minutes]
ANSWER ALL NINETEEN SUB-QUESTIONS

Question One

The following data are given for sub-questions 1.1 and 1.2 below.

Summary financial statements are given below for one division of a large divisionalised
company.

Summary Divisional Financial Statements for the year to 31 December

Balance sheet Income statement
000 000
Non-current assets 1,500 Revenue 4,000
Current assets 600 Operating costs 3,600
Total assets 2,100 Operating profit 400
Interest paid 70
Divisional equity 1,000 Profit before tax 330
Long-term borrowings 700
Current liabilities 400
Total equity and liabilIties 2,100

The cost of capital for the division is estimated at 12% each year.
Annual rate of interest on the long term loans is 10%.
All decisions concerning the divisions capital structure are taken by central management.

1.1 The divisional Return on Investment (ROI) for the year ended 31 December is

A 190%

B 194%
C 235%
D 330%
(2 marks)

Sub-question 1.2 is on the opposite page
Instructions for answering Section A:

The answers to the nineteen sub-questions in Section A should ALL be written in
your answer book.

Your answers should be clearly numbered with the sub-question number then ruled
off, so that the markers know which sub-question you are answering.

For sub-questions 1.11 to 1.18 you should show your workings as marks are
available for the method you use to answer these sub-questions.

May 2005 3 P1

1.2 The divisional Residual Income (RI) for the year ended 31 December is

A 160,000

B 196,000

C 230,000

D 330,000
(2 marks)

The following data are given for sub-questions 1.3 and 1.4 below

X40 is one of many items produced by the manufacturing division. Its standard cost is based on
estimated production of 10,000 units per month. The standard cost schedule for one unit of X40
shows that 2 hours of direct labour are required at 15 per labour hour. The variable overhead
rate is 6 per direct labour hour. During April, 11,000 units were produced; 24,000 direct labour
hours were worked and charged; 336,000 was spent on direct labour; and 180,000 was spent
on variable overheads.

1.3 The direct labour rate variance for April is

A 20,000 Favourable

B 22,000 Favourable

C 24,000 Adverse

D 24,000 Favourable

(2 marks)

1.4 The variable overhead efficiency variance for April is

A 12,000 Adverse

B 12,000 Favourable

C 15,000 Adverse

D 15,000 Favourable

(2 marks)

TURN OVER
P1 4 May 2005

1.5 The fixed overhead volume variance is defined as

A the difference between the budgeted value of the fixed overheads and the standard fixed
overheads absorbed by actual production.

B the difference between the standard fixed overhead cost specified for the production
achieved, and the actual fixed overhead cost incurred.

C the difference between budgeted and actual fixed overhead expenditure.

D the difference between the standard fixed overhead cost specified in the original budget
and the same volume of fixed overheads, but at the actual prices incurred.
(2 marks)

1.6 Summary results for Y Limited for March are shown below.

000 Units
Sales revenue 820
Variable production costs 300
Variable selling costs 105
Fixed production costs 180
Fixed selling costs 110
Production in March 1,000
Opening inventory 0
Closing inventory 150

Using marginal costing, the profit for March was

A 170,000
B 185,750
C 197,000
D 229,250
(2 marks)

1.7 The CIMA definition of zero-based budgeting is set out below, with two blank sections.

Zero-based budgeting: A method of budgeting which requires each cost element
___________, as though the activities to which the budget relates _______________.

Which combination of two phrases correctly completes the definition?

Blank 1

Blank 2
A to be specifically justified could be out-sourced to an external supplier

B to be set at zero could be out-sourced to an external supplier

C to be specifically justified were being undertaken for the first time

D to be set at zero were being undertaken for the first time

(2 marks)

May 2005 5 P1

1.8 Definition A: A technique where the primary goal is to maximise throughput while
simultaneously maintaining or decreasing inventory and operating costs.

Definition B: A system whose objective is to produce or procure products or components
as they are required by a customer or for use, rather than for inventory.

Which of the following pairs of terms correctly matches the definitions A and B above?

Definition A

Definition B
A Manufacturing resource planning Just-in-time
B Enterprise resource planning Material requirements planning
C Optimised production technology Enterprise resource planning
D Optimised production technology Just-in-time

(2 marks)

1.9 Division P produces plastic mouldings, all of which are used as components by Division
Q. The cost schedule for one type of moulding item 103 is shown below.

Direct material cost per unit 300
Direct labour cost per unit 400
Variable overhead cost per unit 200
Fixed production overhead costs each year 120,000
Annual demand from Division Q is expected to be 20,000 units

Two methods of transfer pricing are being considered:

(i) Full production cost plus 40%
(ii) A two-part tariff with a fixed fee of 200,000 each year

The transfer price per unit of item 103 transferred to Division Q using both of the transfer pricing
methods listed above is

(i) Full production cost plus 40% (ii) Two-part tariff

A

2100 9
B

2100 15
C

1500 19
D

1260 9

(2 marks)

Section A continues on the next page

TURN OVER
P1 6 May 2005

1.10 Which of the following statements is/are true?

(i) Computer-integrated manufacturing (CIM) brings together advanced manufacturing
technology and modern quality control into a single computerised coherent system.

(ii) Flexible manufacturing systems (FMS) are simple systems with low levels of automation
that offer great flexibility through a skilled workforce working in teams.

(iii) Electronic data interchange (EDI) is primarily designed to allow the operating units in an
organisation to communicate immediately and automatically with the sales and
purchasing functions within the organisation.

A (i) only
B (i) and (ii) only
C (i) and (iii) only
D (ii) and (iii) only
(2 marks)

1.11 D Limited manufactures and sells musical instruments, and uses a standard cost system.
The budget for production and sale of one particular drum for April was 600 units at a
selling price of 72 each. When the sales director reviewed the results for April in the
light of the market conditions that had been experienced during the month, she believed
that D Limited should have sold 600 units of this drum at a price of 82 each. The actual
sales achieved were 600 units at 86 per unit.

Calculate the following variances for this particular drum for April:

(a) Selling price planning variance
(b) Selling price operating variance

(4 marks)

1.12 A plastics company operates a process in which all materials are added at the beginning
of the process. At the beginning of March, the work-in-process in a plastic moulding
machine was 200 units, which were 25% complete with respect to conversion costs.
During March, 1,400 units were completed and transferred to the next process. Also
during March, 50 units were scrapped due to an operator error at the end of the process,
although it is unusual for this to occur. At the end of March, there were 200 units in
process, which were 50% complete with respect to conversion costs.

Using the First-in-First-out (FIFO) method, calculate the equivalent units of production for the
month of March that would be used in the computation of the cost per equivalent unit for

(a) Material costs
(b) Conversion costs

(4 marks)

May 2005 7 P1

1.13 A company has a process in which the standard mix for producing 9 litres of output is as
follows:

$
40 litres of D at $9 per litre 3600
35 litres of E at $5 per litre 1750
25 litres of F at $2 per litre 500
5850

A standard loss of 10% of inputs is expected to occur. The actual inputs for the latest
period were:

$
4,300 litres of D at $900 per litre 38,700
3,600 litres of E at $550 per litre 19,800
2,100 litres of F at $220 per litre 4,620
63,120

Actual output for this period was 9,100 litres.

You are required to calculate

(a) the total materials mix variance
(b) the total materials yield variance

(4 marks)


TURN OVER
P1 8 May 2005

The following data are given for sub-questions 1.14 to 1.16 below
SM makes two products, Z1 and Z2. Its machines can only work on one product at a time. The
two products are worked on in two departments by differing grades of labour. The labour
requirements for the two products are as follow:

Minutes per unit of product
Z1 Z2
Department 1 12 16
Department 2 20 15

There is currently a shortage of labour and the maximum times available each day in
Departments 1 and 2 are 480 minutes and 840 minutes, respectively.

The current selling prices and costs for the two products are shown below:

Z1 Z2
per unit per unit
Selling price 5000 6500
Direct materials 1000 1500
Direct labour 1040 620
Variable overheads 640 920
Fixed overheads 1280 1840
Profit per unit 1040 1620

As part of the budget-setting process, SM needs to know the optimum output levels. All output
is sold.

1.14 Calculate the maximum number of each product that could be produced each day, and
identify the limiting factor/bottleneck.
(3 marks)

1.15 Using traditional contribution analysis, calculate the profit-maximising output each day,
and the contribution at this level of output.
(3 marks)

1.16 Using a throughput approach, calculate the throughput-maximising output each day, and
the throughput contribution at this level of output.
(3 marks)

1.17 A is a food processing company. The following data have been produced for one of its
processes for April. There were no inventories in the process at the beginning or end of
the month.

Inputs: 2,400kg at 8 per kg 19,200
Process costs 4,800
Transferred to packing department: 2,060kg 22,889

There is usually a loss of 10% by weight of inputs during the process. The normal loss
does not have a sale value.

During April there was an abnormal loss that was sold for 400.

Prepare the Process Account and the Abnormal Loss Account to record the events that
occurred in this process during April.
(4 marks)
May 2005 9 P1


The summarised financial statements for P Limited, a potential major supplier, are shown
below. Before a contract is signed, the financial performance of P Limited is to be reviewed.

Summary Balance Sheets for P Limited at year end
2003 2002
000 000
Non-current assets 1,600 1,400
Inventories 300 280
Trade receivables 200 210
Cash 50 10
Trade payables (280) (290)
Long-term borrowings (900) (800)
Net assets 970 810

Share capital 600 600
Retained earnings 370 210
970 810

Summary Income Statements for the years
2003 2002
000 000
Sales 3,000 2,500
Cost of sales 1,600 1,300
Operating profit 600 450

1.18 Calculate the following financial statistics for P Limited for 2003

(a) Receivables days
(b) Payables days
(c) Inventory days

(3 marks)

1.19 Calculate the following financial statistics for P Limited for 2003

(a) Current ratio
(b) Acid test (quick ratio)
(2 marks)


End of Section A

Section B starts on the next page

TURN OVER
P1 10 May 2005

SECTION B 30 MARKS
ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5
MARKS

Question Two

(a) A general insurance company is about to implement a Balanced Scorecard. You are
required to

(i) State the four perspectives of a Balanced Scorecard; and
(ii) Recommend one performance measure that would be appropriate for a general
insurance company, for each of the four perspectives, and give a reason to support
each measure. (You must recommend one measure only for each perspective.)

(5 marks)

(b) (i) Briefly explain the main features of Economic Value Added (EVA
) as it would be
used to assess the performance of divisions.

(2 marks)

(ii) Briefly explain how the use of EVA
to assess divisional performance might affect

the behaviour of divisional senior executives.

(3 marks)

(c) Briefly discuss three different circumstances where participation in setting budgets is
likely to contribute to poor performance from managers.
(5 marks)

(d) W Limited designs and sells computer games. There are many other firms in this
industry. For the last five years the senior management has required detailed budgets to
be produced for each year with slightly less detailed plans for the following two years.
The managing director of W Limited has recently attended a seminar on budgeting and
heard the Beyond Budgeting arguments that have been advanced by Hope and Fraser,
among others.

You are required to

(i) Briefly describe the Beyond Budgeting approach; and
(2 marks)

(ii) Advise the management of W Limited whether or not it should change its current
budgeting system to a Beyond Budgeting approach.
(3 marks)

Sub-questions (e) and (f) are on the opposite page
May 2005 11 P1

The following information is to be used to answer sub-questions (e) and (f)

C plc is a large company that manufactures and sells wooden garden furniture. It has three
divisions:

The Wood Division (WD) purchases logs and produces finished timber as planks or beams.
Approximately two-thirds of its output is sold to the Products Division, with the remainder
sold on the open market.

The Products Division (PD) manufactures wooden garden furniture. The policy of C plc is
that the PD must buy all its timber from the WD and sell all its output to the Trading
Division.

The Trading Division (TD) sells wooden garden furniture to garden centres, large
supermarkets, and similar outlets. It only sells items purchased from PD.

The current position is that all three divisions are profit centres and C plc uses Return on
Investment (ROI) measures as the primary means to assess divisional performance. Each
division adopts a cost-plus pricing policy for external sales and for internal transfers
between divisions. The senior management of C plc has stated that the divisions should
consider themselves to be independent businesses as far as possible.

(e) For each division suggest, with reasons, the behavioural consequences that might arise
as a result of the current policy for the structure and performance evaluation of the
divisions.

(5 marks)

(f) The senior management of C plc has requested a review of the cost-plus transfer pricing
policy that is currently used.

Suggest with reasons, an appropriate transfer pricing policy that could be used for
transfers from PD to TD, indicating any problems that may arise as a consequence of the
policy you suggest.

(5 marks)
(Total for Question Two = 30 marks)

(Total for Section B = 30 marks)

End of Section B

Section C starts on the next page

TURN OVER
P1 12 May 2005

SECTION C 20 MARKS
ANSWER ONE OF THE TWO QUESTIONS

Question Three

F plc supplies pharmaceutical drugs to drug stores. Although the company makes a satisfactory
return, the directors are concerned that some orders are profitable and others are not. The
management has decided to investigate a new budgeting system using activity based costing
principles to ensure that all orders they accept are making a profit.

Each customer order is charged as follows. Customers are charged the list price of the drugs
ordered plus a charge for selling and distribution costs (overheads). A profit margin is also
added, but that does not form part of this analysis.

Currently F plc uses a simple absorption rate to absorb these overheads. The rate is calculated
based on the budgeted annual selling and distribution costs and the budgeted annual total list
price of the drugs ordered.

An analysis of customers has revealed that many customers place frequent small orders with
each order requesting a variety of drugs. The management of F plc has examined more
carefully the nature of its selling and distribution costs, and the following data have been
prepared for the budget for next year:

Total list price of drugs supplied 8m
Number of customer orders 8,000

Selling and Distribution Costs 000 Cost driver
Invoice processing 280 See Note 2
Packing 220 Size of package see Note 3
Delivery 180 Number of deliveries see Note 4
Other overheads 200 Number of orders
Total overheads 880

Notes:

1. Each order will be shipped in one package and will result in one delivery to the customer
and one invoice (an order never results in more than one delivery).

2. Each invoice has a different line for each drug ordered. There are 28,000 invoice lines
each year. It is estimated that 25% of invoice processing costs are related to the
number of invoices, and 75% are related to the number of invoice lines.

3. Packing costs are 32 for a large package, and 25 for a small package.

4. The delivery vehicles are always filled to capacity for each journey. The delivery
vehicles can carry either 6 large packages or 12 small packages (or appropriate
combinations of large and small packages). It is estimated that there will be 1,000
delivery journeys each year, and the total delivery mileage that is specific to particular
customers is estimated at 350,000 miles each year. 40,000 of delivery costs are
related to loading the delivery vehicles, and the remainder of these costs are related to
specific delivery distance to customers.
May 2005 13 P1

The management has asked for two typical orders to be costed using next years budget data,
using the current method, and the proposed activity-based costing approach. Details of two
typical orders are shown below:

Order A Order B
Lines on invoice 2 8
Package size small large
Specific delivery distance 8 miles 40 miles
List price of drugs supplied 1,200 900

Required:

(a) Calculate the charge for selling and distribution overheads for Order A and Order B
using:

(i) the current system; and
(ii) the activity-based costing approach.
(10 marks)

(b) Write a report to the management of F plc in which you

(i) assess the strengths and weaknesses of the proposed activity-based costing
approach for F plc; and
(5 marks)

(ii) recommend actions that the management of F plc might consider in the light of
the data produced using the activity-based-costing approach.
(5 marks)

(Total for requirement (b) = 10 marks)

(Total for Question Three = 20 marks)

Section C continues on the next page

TURN OVER
P1 14 May 2005

Question Four

S Limited installs complex satellite navigation systems in cars, at a very large national depot.
The standard cost of an installation is shown below. The budgeted volume is 1,000 units
installed each month. The operations manager is responsible for three departments, namely:
purchasing, fitting and quality control. S Limited purchases navigation systems and other
equipment from different suppliers, and most items are imported. The fitting of different systems
takes differing amounts of time, but the differences are not more than 25% from the average, so
a standard labour time is applied.

Standard cost of installation of one navigation system
Quantity Price ()
Materials 400 1 unit 400
Labour 320 20 hours 16
Variable overheads 140 20 hours 7
Fixed overheads 300 20 hours 15
Total standard cost 1,160

The Operations Department has gathered the following information over the last few months.
There are significant difficulties in retaining skilled staff. Many have left for similar but better
paid jobs and as a result there is a high labour turnover. Exchange rates have moved and
commentators have argued this will make exports cheaper, but S Limited has no exports and
has not benefited. Some of the fitters have complained that one large batch of systems did not
have the correct adapters and would not fit certain cars, but this was not apparent until fitting
was attempted. Rent, rates, insurance and computing facilities have risen in price noticeably.

The financial results for September to December are shown below.

Operating Statement for S Limited for September to December

September October November December 4 months

Standard cost of
actual output 1,276,000 1,276,000 1,102,000 1,044,000 4,698,000
Variances
Materials
Price 5,505F 3,354F 9,520A 10,340A 11,001A
Usage 400A 7,200A 800A 16,000A 24,400A

Labour
Rate 4,200A 5,500A 23,100A 24,000A 56,800A
Efficiency 16,000F 0 32,000A 32,000A 48,000A

Variable overheads
Expenditure 7,000A 2,000A 2,000F 0 7,000A
Efficiency 7,000F 0 14,000A 14,000A 21,000A

Fixed overheads
Expenditure 5,000A 10,000A 20,000A 20,000A 55,000A
Volume 30,000F 30,000F 15,000A 30,000A 15,000F

Actual costs 1,234,095 1,267,346 1,214,420 1,190,340 4,906,201

A = adverse variance F = favourable variance
May 2005 15 P1

Required:

(a) Prepare a report to the operations manager of S Limited commenting on the
performance of the company for the four months to 31 December. State probable
causes for the key issues you have included in your report and state the further
information that would be helpful in assessing the performance of the company.

(15 marks)

(b) Prepare a short report to the operations manager of S Limited suggesting ways that
the budgeting system could be used to increase motivation and improve
performance.

(5 marks)

(Total for Question Four = 20 marks)

(Total for Section C = 20 marks)


Maths Tables and Formulae are on pages 17 to 21

TURN OVER
P1 16 May 2005

[this page is blank]
May 2005 17 P1

P1 18 May 2005

PRESENT VALUE TABLE

Present value of $1, that is ( )
n
r

+ 1

where r = interest rate; n = number of periods until
payment or receipt.

Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

May 2005 19 P1

Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n
years
r
r
n
+ ) (1 1

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

P1 20 May 2005

Formulae
PROBABILITY

Rules of Addition

If A and B are not independent: P(A B) = P(A) * P(B | A)


Quadratic Equations
If aX
2
by:
a
ac b b
X
2
4
2

=

Arithmetic Mean
n
x
x

=
f
fx
x

Standard Deviation
n
x x
SD
2
) (
=
2
2
x
f
fx
SD

INDEX NUMBERS
1
/P
0
1
/Q
0

Price: 100 x
1
w
P
p
w
o
|
|
.
|
\
|

Quantity: 100 x
1
w
Q
Q
w
o
|
|
.
|
\
|

TIME SERIES
Additive Model

May 2005 21 P1

The linear regression equation of y on x is given by:

Y = a + bX or Y - Y = b(X X)

where
b =
2 2
) (
) )( (
) ( Variance
) ( Covariance
x x n
y x XY n
X
XY

=

and a = Y bX

or solve
Y = na + b x
XY = a x + b x
2


} ) ( }{ ) ( {
) )( (
) ( ). (
) ( Covariance
2 2 2 2
y y n x x n
Y X XY n
Y Var X Var
XY
r

= =

R(rank) = 1 -
) 1 (
6
2
2
n n
d


Future Value of S, of a sum of X, invested for n periods, compounded at r% interest
S = X[1 + r]
n

Annuity

PV =
(
(
n
r
r
] 1 [
1
1
1

Perpetuity
PV =
r
1

P1 22 May 2005

May 2005 23 P1

P1 24 May 2005

Managerial Level
May 2005
Tuesday Morning Session
Paper P1 Management Accounting Performance Evaluation
Post Exam Guide
May 2005 Exam

The Chartered Institute of Management Accountants Page 1

General Comments

The revised syllabus and assessment methodology appear to have successfully discriminated
candidates performance. A full range of marks was recorded and it was felt that the standard
achieved and the pass rate were appropriate.

Generally candidates coped quite well with the short questions in section A. As this section
represented half of the marks available on the paper it was inevitable that to be successful a
strong performance in section A was important.

Candidates seemed less comfortable with the compulsory question 2 which formed section B.
At times no attempt was made to answer some parts of this compulsory question; at others
the candidates expression was often poor or unclear.

In section C question 4 was slightly preferred by candidates but there were some good
attempts at both questions 3 and 4. However a number of poor or incomplete answers were
submitted in this section. Candidates must manage the time they spend on questions in
accordance with the marks available.

In both sections B and C candidates would be advised to work on their ability to apply
management accounting principles to the particular circumstances mentioned in the question
rather than providing answers which basically regurgitate the theory.
Post Exam Guide
May 2005 Exam


Section A 50 marks


Summary financial statements are given below for one division of a large divisionalised
company.

Summary Divisional Financial Statements for the year to 31 December

Balance sheet Income statement
000 000
Non-current assets 1,500 Revenue 4,000
Current assets 600 Operating costs 3,600
Total assets 2,100 Operating profit 400
Interest paid 70
Divisional equity 1,000 Profit before tax 330
Long-term borrowings 700
Total equity and liabilities 2,100

The cost of capital for the division is estimated at 12% each year.
Annual rate of interest on the long term loans is 10%.
All decisions concerning the divisions capital structure are taken by central management.

Question 1.1

The divisional Return on Investment (ROI) for the year ended 31 December is

A 190%
B 194%
C 235%
D 330%
(2 marks)

The answer is C

Workings

400 / 1700 = 235%

Post Exam Guide
May 2005 Exam


Question 1.2

The divisional Residual Income (RI) for the year ended 31 December is

A 160,000
B 196,000
C 230,000
D 330,000
(2 marks)

The answer is B

Workings

400 - [1,700 x 12%] = 196,000


X40 is one of many items produced by the manufacturing division. Its standard cost is based
on estimated production of 10,000 units per month. The standard cost schedule for one unit
of X40 shows that 2 hours of direct labour are required at 15 per labour hour. The variable
overhead rate is 6 per direct labour hour. During April, 11,000 units were produced; 24,000
direct labour hours were worked and charged; 336,000 was spent on direct labour; and
180,000 was spent on variable overheads.

Question 1.3

The direct labour rate variance for April is

A 20,000 Favourable
B 22,000 Favourable
C 24,000 Adverse
D 24,000 Favourable
(2 marks)

The answer is D

Workings

Actual rate is 336,000 / 24,000 = 14 per hour
24,000 x [15-14] = 24,000 Fav

Post Exam Guide
May 2005 Exam


Question 1.4

The variable overhead efficiency variance for April is

A 12,000 Adverse
B 12,000 Favourable
C 15,000 Adverse
D 15,000 Favourable
(2 marks)

The answer is A

Workings

[(11,000 x 2) - 24,000] x 6 = 12,000 Adv

Question 1.5

The fixed overhead volume variance is defined as

A the difference between the budgeted value of the fixed overheads and the standard fixed overheads
absorbed by actual production.
B the difference between the standard fixed overhead cost specified for the production achieved, and
the actual fixed overhead cost incurred.
D the difference between the standard fixed overhead cost specified in the original budget and the
same volume of fixed overheads, but at the actual prices incurred.
(2 marks)

The answer is A

Question 1.6

Summary results for Y Limited for March are shown below.

000 Units
Sales revenue 820
Variable production costs 300
Variable selling costs 105
Fixed production costs 180
Fixed selling costs 110
Production in March 1,000
Opening inventory 0

Post Exam Guide
May 2005 Exam


Using marginal costing, the profit for March was

A 170,000
B 185,750
C 197,000
D 229,250
(2 marks)

The answer is A

Workings

Closing inventory would be valued at 300,000 / 1,000 = 300 per unit.

Turnover 820,000
Production costs [300,000 (150 x 300)] 255,000
Other costs 395,000
Profit 170,000

Question 1.7

The CIMA definition of zero-based budgeting is set out below, with two blank sections.

Zero-based budgeting: A method of budgeting which requires each cost element ___________, as
though the activities to which the budget relates _______________.

Which combination of two phrases correctly completes the definition?

Blank 1

Blank 2
A to be specifically justified could be out-sourced to an external supplier
B to be set at zero could be out-sourced to an external supplier
C to be specifi cally justified were being undertaken for the first time
D to be set at zero were being undertaken for the first time
(2 marks)

The answer is C

Post Exam Guide
May 2005 Exam


Question 1.8

Definition A: A technique where the primary goal is to maximise throughput while simultaneously
maintaining or decreasing inventory and operating costs.

Definition B: A system whose objective is to produce or procure products or components as they are
required by a customer or for use, rather than for inventory.

Which of the following pairs of terms correctly matches the definitions A and B above?

Definition A

Definition B
A Manufacturing resource planning Just-in-time
B Enterprise resource planning Material requirements planning
C Optimised production technology Enterprise resource planning
D Optimised production technology Just-in-time
(2 marks)

The answer is D

Question 1.9

Division P produces plastic mouldings, all of which are used as components by Division Q. The cost
schedule for one type of moulding item 103 is shown below.

Direct material cost per unit 300
Direct labour cost per unit 400
Variable overhead cost per unit 200
Fixed production overhead costs each year 120,000
Annual demand from Division Q is expected to be 20,000 units

Two methods of transfer pricing are being considered:
(i) Full production cost plus 40%
(ii) A two-part tariff with a fixed fee of 200,000 each year

The transfer price per unit of item 103 transferred to Division Q using both of the transfer pricing methods
listed above is

(i) Full production cost plus 40% (ii) Two-part tariff
A 2100 9
B 2100 15
C 1500 19
D 1260 9
(2 marks)

The answer is A

Post Exam Guide
May 2005 Exam


Workings

Full cost

Variable cost 9
Fixed cost = 120,000 /20,000 = 6
Full cost 15
plus 40% 6
Total cost plus 21

Two-part tariff requires only variable cost of 9 for additional transfers

Question 1.10

Which of the following statements is/are true?

(i) Computer-integrated manufacturing (CIM) brings together advanced manufacturing technology
and modern quality control into a single computerised coherent system.
(ii) Flexible manufacturing systems (FMS) are simple systems with low levels of automation that offer
great flexibility through a skilled workforce working in teams.
(iii) Electronic data interchange (EDI) is primarily designed to allow the operating units in an
organisation to communicate immediately and automatically with the sales and purchasing
functions within the organisation.

A (i) only
B (i) and (ii) only
(2 marks)

The answer is A

Question 1.11

D Limited manufactures and sells musical instruments, and uses a standard cost system. The budget for
production and sale of one particular drum for April was 600 units at a selling price of 72 each. When the
sales director reviewed the results for April in the light of the market conditions that had been experienced
during the month, she believed that D Limited should have sold 600 units of this drum at a price of 82
each. The actual sales achieved were 600 units at 86 per unit.

Calculate the following variances for this particular drum for April:

(a) Selling price planning variance
(b) Selling price operating variance
(4 marks)

Post Exam Guide
May 2005 Exam


Workings

A - Original plan

600 x 72 = 43,200

B - Revised ex post plan 600 x 82 = 49,200
C - Actual results 600 x 86 = 51,600

Selling price planning variance is B A = 6,000 Fav
Selling price operating variance is C B = 2,400 Fav
(Total variance is C A = 8,400 Fav to check)

Question 1.12

A plastics company operates a process in which all materials are added at the beginning of the process.
At the beginning of March, the work-i n-process in a plastic moulding machine was 200 units, which were
25% complete with respect to conversion costs. During March, 1,400 units were completed and
transferred to the next process. Also during March, 50 units were scrapped due to an operator error at the
end of the process, although it is unusual for this to occur. At the end of March, there were 200 units in
process, which were 50% complete with respect to conversion costs.

Using the First-in-First-out (FIFO) method, calculate the equivalent units of production for the month of
March that would be used in the computation of the cost per equivalent unit for

(a) Material costs
(b) Conversion costs
(4 marks)

Workings

Units Material Conversion
Opening stock (200) (200) (50)
Completed and transferred 1,400 1,400 1,400
Abnormal loss 50 50 50
Closing stock 200 200 100
Equivalent Units 1,450 1,450 1,500

Post Exam Guide
May 2005 Exam


Question 1.13

A company has a process in which the standard mix for producing 9 litres of output is as follows:

$
40 litres of D at $9 per litre 3600
35 litres of E at $5 per litre 1750
25 litres of F at $2 per litre 500
5850

A standard loss of 10% of inputs is expected to occur. The actual inputs for the latest period
were:
$
4,300 litres of D at $900 per litre 38,700
3,600 litres of E at $550 per litre 19,800
2,100 litres of F at $220 per litre 4,620
63,120

Actual output for this period was 9,100 litres.

You are required to calculate

(a) the total materials mix variance
(b) the total materials yield variance
(4 marks)

Workings

Mix variance
Actual usage in standard proportions $
D = 4,000 litres at $9 per litre 36,000
E = 3,500 litres at $5 per litre 17,500
F = 2,500 litres at $2 per litre 5,000
10,000 58,500 (1)

Actual usage in actual proportions
D = 4,300 litres at $9 per litre 38,700
E = 3,600 litres at $5 per litre 18,000
F = 2,100 litres at $2 per litre 4,200
10,000 60,900 (2)

Mix variance is (1) (2) = $2,400 Adverse

Yield variance

Standard cost of 1 litre is $58.50 / 9 = $650
Expected output is 10,000 x 90% = 9,000 litres
Actual output = 9,100 litres
Yield variance is (9,100 9,000) x $6.50 = $650 Fav

Post Exam Guide
May 2005 Exam



SM makes two products, Z1 and Z2. Its machines can only work on one product at a time.
The two products are worked on in two departments by differing grades of labour. The labour
requirements for the two products are as follows:

Minutes per unit of product
Z1 Z2
Department 1 12 16
Department 2 20 15

There is currently a shortage of labour and the maximum times available each day in
Departments 1 and 2 are 480 minutes and 840 minutes, respectively.

The current selling prices and costs for the two products are shown below:

Z1 Z2
per unit per unit
Direct materials 1000 1500
Direct labour 1040 620
Variable overheads 640 920
Fixed overheads 1280 1840
Profit per unit 1040 1620

As part of the budget-setting process, SM needs to know the optimum output levels. All
output is sold.

Question 1.14

Calculate the maximum number of each product that could be produced each day, and identify the limiting
factor/bottleneck.
(3 marks)

Workings

Maximum no of units of Z1 Maximum no of units of Z2
Dept 1 480 / 12 = 40 480 / 16 = 30
Dept 2 840 / 20 = 42 840 / 15 = 56

Dept 2 has more capacity than Dept 1 for both products, therefore Dept 1 is the limiting factor or
bottleneck.

Post Exam Guide
May 2005 Exam


Question 1.15

Using traditional contribution analysis, calculate the profit-maximising output each day, and the
contribution at this level of output.
(3 marks)

Workings

Z1 Z2
Variable cost 2680 3040
Sales price 5000 6500
Contribution 2320 3460

Calculate contribution per limiting factor (Dept 1 time)
Z1 = 23.20 / 12 = 1.933 per minute
Z2 = 34.60 / 16 = 2.1625 per minute
So maximum contribution would be to make as many Z2 as possible, that is 30 units x 34.60 = 1,038

Question 1.16

Using a throughput approach, calculate the throughput -maximising output each day, and the throughput
contribution at this level of output.
(3 marks)

Workings

Throughput or throughput contribution is sales less direct materials, so
Z1 is 50 - 10 = 40
Z2 is 65 - 15 = 50

Throughput per bottleneck minute is:
Z1 40 / 12 = 3.333
Z2 50 / 16 = 3.125

Thus maximum throughput is by production of maximum number of Z1, that is, 40 units of Z1 giving
throughput contribution of 40 x 40 = 1,600

Post Exam Guide
May 2005 Exam


Question 1.17

A is a food processing company. The following data have been produced for one of its processes for
April. There were no inventories in the process at the beginning or end of the month.

Inputs: 2,400kg at 8 per kg 19,200
Process costs 4,800
Transferred to packing department: 2,060kg

22,889

There is usually a loss of 10% by weight of inputs during the process. The normal loss does not have a
sale value.

During April there was an abnormal loss that was sold for 400.

Prepare the Process Account and the Abnormal Loss Account to record the events that occurred in this
process during April.
(4 marks)

Workings

Process Account
Kg Kg
Input materials 2,400 19,200 Normal loss 240 -
Process costs 4,800 Abnormal loss 100 1,111
Transfer to packing 2,060 22,889
2,400 24,000 2,400 24,000

Abnormal Loss Account

Process Account 1,111 Cash sale 400
To Income Statement 711
1,111 1,111

Post Exam Guide
May 2005 Exam



The summarised financial statements for P Limited, a potential major supplier, are shown
below. Before a contract is signed, the financial performance of P Limited is to be
reviewed.

Summary Balance Sheets for P Limited at year end
2003 2002
000 000
Non-current assets 1,600 1,400
Inventories 300 280
Trade receivables 200 210
Cash 50 10
Trade payables (280) (290)
Long-term borrowings (900) (800)
Net assets 970 810

Share capital 600 600
Retained earnings 370 210
970 810

Summary Income Statements for the years
2003 2002
000 000
Sales 3,000 2,500
Cost of sales 1,600 1,300
Operating profit 600 450

Question 1.18

Calculate the following financial statistics for P Limited for 2003.

(a) Receivables days
(b) Payables days
(c) Inventory days
(3 marks)

Workings

Receivables days 200 / 3000 x 365 = 24 days
Payables days 280 / 1600 x 365 = 64 days
Inventory days 300 / 1600 x 365 = 68 days

Alternative answers for these calculations using average figures would be equally allowable.

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May 2005 Exam


Question 1.19

Calculate the following financial statistics for P Limited for 2003.

(a) Current ratio
(b) Acid test (quick) ratio
(2 marks)

Workings

Current ratio 550:280 196:1
Quick ratio 250:280 089:1

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May 2005 Exam


Section B 30 marks
ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5 MARKS

Question 2(a)

A general insurance company is about to implement a Balanced Scorecard. You are required to

(i) State the four perspectives of a Balanced Scorecard; and
(ii) Recommend one performance measure that would be appropriate for a general insurance
company, for each of the four perspectives, and give a reason to support each measure. (You must
recommend one measure only for each perspective.)
(5 marks)

Rationale

This part of the question covers learning outcome C(xii) Discuss the role of non-financial performance
indicators and compare and contrast traditional approaches to budgeting with recommendations based on
the balanced scorecard.

Suggested Approach

List the four perspectives.
For each perspective, recommend a different performance measure.
For each performance measure, provide a reason why this measure is appropriate.

Marking Guide

Marks

State four perspectives

1
Performance measure and reason 4 x 1 4

Examiners Comments

Candidates tended to know the perspectives of the balanced scorecard. However the performance
measures and particularly the reasons why each measure is appropriate were not always clearly indicated
in answers.

Common Errors
Not generating measures in all four perspectives.
Suggesting unusual, implausible or unclear measures.
Not providing reasons for the measures suggested.

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May 2005 Exam


Question 2(b)

(i) Briefly explain the main features of Economic Value Added (EVA
) as it would be used to assess the

performance of divisions.

(2 marks)

(ii) Briefly explain how the use of EVA
to assess divisional performance might affect the behaviour of

divisional senior executives.

(3 marks)

Rationale

This part of the question covers learning outcome D(v) Discuss the likely behavioural consequences of
the use of performance metrics in managing cost, profit and investment centres.

Suggested Approach

Explain the main features of EVA, including adjustments to profit and the charge for capital.
Discuss the fact that EVA is designed to create incentives for certain behaviour, in particular the
creation of long term decision making and relating income to the full amount of capital being used by
the division.

Marking Guide

Marks

Main features

2
Three ways that behaviour might be affected 3

Examiners Comments

Though there were a few good answers, it seemed that many candidates were not clear about the exact
nature of EVA and even more so about its impact on the behaviour of executives.

Common Errors
Providing brief answers to part (ii) that were restricted to generalities, thus giving an impression of
limited understanding.

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May 2005 Exam


Question 2(c)

Briefly discuss three different circumstances where participation in setting budgets is likely to contribute to
poor performance from managers.
(5 marks)

Rationale

This part of the question covers learning outcome C(xiii) Evaluate the impact of budgetary control
systems on human behaviour.

Suggested Approach

Discuss ways in which participation might produce POOR performance. Creation of budget slack is the
most obvious.

Marking Guide

Marks

Up to two marks for each of the three circumstances to a maximum of 5 marks

5

Examiners Comments

Candidates responded well to this part. They seemed to have prepared well for it and were often able to
develop focussed answers.

Common Errors
Failing to read the question carefully and thus not dealing with participation or poor performance but
instead producing a much broader answer in relation to budgets.

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May 2005 Exam


Question 2(d)

W Limited designs and sells computer games. There are many other firms in this industry. For the last
five years the senior management has required detailed budgets to be produced for each year with slightly
less detailed plans for the following two years. The managing director of W Limited has recently attended
a seminar on budgeting and heard the Beyond Budgeting arguments that have been advanced by Hope
and Fraser, among others.

You are required to

(i) Briefly describe the Beyond Budgeting approach; and
(2 marks)

(ii) Advise the management of W Limited whether or not it should change its current budgeting system
to a Beyond Budgeting approach.
(3 marks)

Rationale

This part of the question covers learning outcome C(xiv) Evaluate the criticisms of budgeting particularly
from the advocates of techniques that are beyond budgeting.

Suggested Approach

Describe the basics of the beyond budgeting approach.
Analyse the nature of the business and its environment.
Explain how this analysis relates to the beyond budgeting approach, in particular assess the extent to
which the key variables in the budget can be reliably forecast.

Marking Guide

Marks

Main features of beyond budgeting

2
Analysis and recommendation: guide is a mark for each relevant point that is well
explained

3

Examiners Comments

This part was not popular. Some candidates did not answer it at all and others seemed to guess at the
description of Beyond Budgeting.

Common Errors
Not relating answers clearly to the scenario provided.
Offering little reasoned advice.

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May 2005 Exam


The following information is to be used to answer sub-questions (e) and (f)

C plc is a large company that manufactures and sells wooden garden furniture. It has
three divisions:

The Wood Division (WD) purchases logs and produces finished timber as planks or
beams. Approximately two-thirds of its output is sold to the Products Division, with the
remainder sold on the open market.

The Products Division (PD) manufactures wooden garden furniture. The policy of C plc
is that the PD must buy all its timber from the WD and sell all its output to the Trading
Division.

The Trading Division (TD) sells wooden garden furniture to garden centres, large
supermarkets, and similar outlets. It only sells items purchased from PD.

The current position is that all three divisions are profit centres and C plc uses Return on
Investment (ROI) measures as the primary means to assess divisional performance.
Each division adopts a cost-plus pricing policy for external sales and for internal transfers
between divisions. The senior management of C plc has stated that the divisions should
consider themselves to be independent businesses as far as possible.

Question 2(e)

For each division suggest, with reasons, the behavioural consequences that might arise as a result of the
current policy for the structure and performance evaluation of the divisions.
(5 marks)

Rationale

This part of the question covers learning outcome D(vi) Explain the typical consequences of divisional
structure for performance measurement as divisions compete or trade with each other.

Suggested Approach

Briefly analyse the structure given in the data section, and analyse the methods of performance
evaluation.
Analyse the likely behavioural consequences from the analysis above.
Ensure that the scenario information is used in the answer.

Marking Guide

Marks

Many approaches are possible. Marking guide is up to one mark for each relevant point
well explained, but all three divisions must be discussed

5

Post Exam Guide
May 2005 Exam


Examiners Comments

Candidates need to practice responding to applied questions. They seemed to have difficulty interpreting
the behavioural consequences in the divisionalised structure indicated. Good answers were rare.

Common Errors
Repeating the principles of divisionalisation learned from a textbook rather than applying these
principles, with reasoning, to the circumstances described in the question.

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May 2005 Exam


Question 2(f)

The senior management of C plc has requested a review of the cost-plus transfer pricing policy that is
currently used.

Suggest with reasons, an appropriate transfer pricing policy that could be used for transfers from PD to
TD, indicating any problems that may arise as a consequence of the policy you suggest.
(5 marks)

Rationale

This part of the question covers learning outcome D(vii) Identify the likely consequences of different
approaches to transfer pricing.

Suggested Approach

Analyse the market position of the transfer between PD and TD; to what extent can external prices be
established.
Discuss the conditions where a cost-plus approach would be appropriate.
Suggest an alternative approach to transfer pricing and discuss the extent to which it might be
suitable.

Marking Guide

Marks

Many approaches are possible. Marking guide is up to one mark for each relevant point
well explained in the three aspects mentioned above.

5

Examiners Comments

Answers were often brief and limited to describing various transfer pricing approaches. In a somewhat
similar manner to part 2(e) answers relied upon text book theory.

Common Errors
Not justifying with reasons the transfer pricing policy suggested.
Failing to indicate potential problems.

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May 2005 Exam


Section C 20 marks

Question 3(a)

Calculate the charge for selling and distribution overheads for Order A and Order B using:

(i) the current system; and
(ii) the activity-based costing approach.
(10 marks)

Rationale

This part of the question covers learning outcome A(vi) Compare activity-based costing with traditional
absorption costing methods and evaluate its potential as a system of cost accounting.

Suggested Approach

Calculate the labour-based overhead rate and then apply it to calculate the overhead charge for each
order.
Calculate the cost driver rates.
Apply these rates to the activities undertaken for each order to obtain the total charge for overheads.

Marking Guide

Marks

Current system 2
Cost driver rates 3.5
ABC costs 4.5

Examiners Comments

Part (i) was often correctly computed though surprisingly there were a few miscalculations. In part (ii)
candidates were able to generate parts of the answer but the ability to follow all calculations through, to a
correct total charge for each order, was rare.

Common Errors
In part (ii) making errors in the calculation of some of the cost driver rates and extending these to the
respective orders.

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May 2005 Exam


Question 3(b)

Write a report to the management of F plc in which you

(i) assess the strengths and weaknesses of the proposed activity-based costing approach for F plc;
and
(5 marks)

(ii) recommend actions that the management of F plc might consider in the light of the data
produced using the activity-based costing approach.
(5 marks)

Rationale

This part of the question covers learning outcome C(vi) Evaluate and apply alternative approaches to
budgeting.

Suggested Approach

Start with report headings.
Separately provide strengths and weaknesses; this can be done in numbered list form.
State the actual management actions required, that is, decisions taken as a result of the ABC
information.

Marking Guide

Marks

Part (i) Up to one mark for each strength and weakness well explained

5
Part (ii) Up to one mark for each recommendation well explained 5

Examiners Comments

In part (i) the strengths and weaknesses were reasonably well understood. However in part (ii), which
required recommended action, candidates had fewer good ideas.

Common Errors
In part (i), failing to apply the strengths and weaknesses to F plc.
In part (ii), demonstrating a lack of ideas and/or failing to generate recommended action specific to F
plc.

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May 2005 Exam


Question 4(a)

Prepare a report to the operations manager of S Limited commenting on the performance of the
company for the four months to 31 December. State probable causes for the key issues you have
included in your report and state the further information that would be helpful in assessing the
performance of the company.
(15 marks)

Rationale

This part of the question covers learning outcome B(ii) Calculate and interpret material, labour, variable
overhead, fixed overhead and sales variances.

Suggested Approach

Review the overall performance of S Limited, highlighting both good features and apparent poor
performance.
Suggest probable causes for the main features described above, relating these to the data in the
question scenario.
For each of the probable causes state any additional information that would be needed to assess
performance.

Marking Guide

Marks

This style of question can be answered in many ways and thus a marking guide is not
binding

Up to one mark for comments on each of the eight rows of variances
Comment on volume changes
Comment on November/December change
Comment on inter-relationships between variances
Comments on further information needed

8
1
1
2
3

Examiners Comments

This question was quite popular. However the standard of answers was only reasonable. Too many
candidates did not write enough in their commentary and explanation of the variances and possible
causes.

Common Errors
Demonstrating an inability to link the variances reported to the possible causes, many of which were
alluded to in the scenario.
Not offering in the candidates discussion many of their own ideas.
Not developing the report comprehensively.

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May 2005 Exam


Question 4(b)

Prepare a short report to the operations manager of S Limited suggesting ways that the budgeting
system could be used to increase motivation and improve performance.
(5 marks)

Rationale

This part of the question covers learning outcome B(vi) Discuss the behavioural implications of setting
standard costs.

Suggested Approach

Describe at least five ways in which the budgeting system can be used to increase motivation.

Marking Guide

Marks

Up to one mark for each recommendation well explained 5

Examiners Comments

Answers here were brief and not of a good standard.

Common Errors
Demonstrating very limited ideas in any direction or at any level about how to increase motivation and
improve performance through enhancing the budgeting system.

Post Exam Guide
November 2005 Exam


General Comments

Overall candidates performance was disappointing and below that achieved in the first
examination of this paper.

Performance in the multiple choice questions in the first part of Section A, worth 20 marks,
was generally satisfactory. However, many candidates failed to attempt all of the short-form
questions in the remaining part of section A, worth 30 marks. Questions 1.14, 1.15 and 1.16
were generally attempted but all of the other questions were omitted on occasions, especially
questions 1.17 and 1.18.

Many candidates had difficulty with questions 1.12 to 1.16 which all covered mainstream
topics and techniques. Overall, the performance in these short-form questions was
disappointing, partly as a result of the failure to answer all parts.

Candidates performance in the largely narrative question 2 (Section B also a compulsory
question) was, apart from the answers to part (a), also disappointing. A common problem
was the failure of candidates to read carefully, and/or respond to, the specific questions
asked.

In Section C question 3 was much more popular than question 4. While some excellent
answers were submitted for both questions, many candidates provided poor or incomplete
answers.

Candidates must try to manage the time spent on questions according to the marks available.
In both Sections B and C candidates are advised to study more carefully what is being asked
and to improve their ability to apply management accounting principles to the particular
circumstances described in the questions.
Post Exam Guide
November 2005 Exam


Section A 50 marks


The following data relate to a manufacturing company. At the beginning of August there was
no inventory. During August 2,000 units of product X were produced, but only 1,750 units
were sold. The financial data for product X for August were as follow:

Materials 40,000
Labour 12,600
Variable production overheads 9,400
Fixed production overheads 22,500
Variable selling costs 6,000
Fixed selling costs 19,300
Total costs for X for August 109,800

Question 1.1

The value of inventory of X at 31 August using a marginal costing approach is

A 6,575

B 7,750
C 8,500
D 10,562
(2 marks)
The answer is B

Workings

Marginal cost of inventory is an approximation of variable production cost of 62,000.
1/8
th
production in inventory = 7,750

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November 2005 Exam


Question 1.2

The value of inventory of X at 31 August using a throughput accounting approach is

A 5,000

B 6,175

C 6,575

D 13,725
(2 marks)

The answer is A

Workings

Throughput approach values inventory at direct materials cost = 1/8
th
of 40,000 = 5,000

Question 1.3

1.3 A company has a budget to produce 5,000 units of product B in December. The budget for
December shows that for Product B the opening inventory will be 400 units and the closing
inventory will be 900 units. The monthly budgeted production cost data for product B for December
is as follows:

Variable direct costs per unit 600
Variable production overhead costs per unit 350
Total fixed production overhead costs 29,500

The company absorbs overheads on the basis of the budgeted number of units produced.

The budgeted profit for product B for December, using absorption costing, is

A 2,950 lower than it would be using marginal costing.

B 2,950 greater than it would be using marginal costing.

C 4,700 lower than it would be using marginal costing.
.
D 4,700 greater than it would be using marginal costing.

(2 marks)

The answer is B

Workings

Absorption costing overhead rate is 29,500 / 5,000 units = 590 per unit
Absorption costing profit greater by 590 x 500 units = 2,950

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November 2005 Exam


Question 1.4
Y has set the current budget for operating costs for its delivery vehicles, using the formula described
below. Analysis has shown that the relationship between miles driven and total monthly vehicle operating
costs is described in the following formula:

y = 800 + 00002x
2
where
y is the total monthly operating cost of the vehicles, and
x is the number of miles driven each month

The budget for vehicle operating costs needs to be adjusted for expected inflation in vehicle operating
costs of 3%, which is not included in the relationship shown above.
The delivery mileage for September was 4,100 miles, and the total actual vehicle operating costs for
September were 5,000.

The total vehicle operating cost variance for September was closest to

A 713 Adverse

B 737 Adverse

C 777 Adverse

D 838 Adverse

(2 marks)

The answer is A

Workings

y = 800 + (00002 x 4,100
2
) = 4,162
Total budgeted vehicle costs are 4,162 x 103 = 4,287
Variance is 4,287 - 5,000 = 713 adverse

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November 2005 Exam


Question 1.5

The CIMA official definition of the variable production overhead efficiency variance is set out below with
two blank sections.

Measures the difference between the variable overhead cost budget flexed on _____________
and the variable overhead cost absorbed by _______________ .

Which combination of phrases correctly completes the definition?

Blank 1

Blank 2
A actual labour hours budgeted output
B standard labour hours budgeted output
C actual labour hours

output produced
D standard labour hours output produced

(2 marks)

The answer is C

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November 2005 Exam


The following data are given for sub-questions 1.6 to 1.8 below.

The following data relate to Product Z and its raw material content for September.
Budget
Output 11,000 units of Z
Standard materials content

3 kg per unit at $400 per kg

Actual
Materials purchased and used

32,000 kg at $480 per kg
It has now been agreed that the standard price for the raw material purchased in September
should have been $5 per kg.

Question 1.6

1.6 The materials planning price variance for September was

A $6,000 Adverse
B $30,000 Adverse
C $32,000 Adverse
D $33,000 Adverse
(2 marks)

The answer is B

Workings

Planning price variance
30,000 x ($400 - $500) = $30,000 adverse

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November 2005 Exam


Question 1.7

The materials operational usage variance for September was

A $8,000 Adverse
B $9,600 Adverse
C $9,600 Favourable
D $10,000 Adverse
(2 marks)

The answer is D

Workings

Operational usage variance
[30,000 - 32,000] x $500 = $10,000 adverse

Question 1.8

The materials operational price variance for September was

A $6,000 Adverse
B $6,400 Favourable
C $30,000 Adverse
D $32,000 Adverse
(2 marks)

The answer is B
Workings
Operational price variance
32,000 x [$500 - $480] = $6,400 favourable

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November 2005 Exam


Question 1.9

A company operates a just-in-time purchasing and production system and uses a backflush accounting
system with a single trigger point at the point of sale. A summary of the transactions that took place in
June (valued at cost) is:

Conversion costs incurred 890,000
Finished goods produced 1,795,000
Finished goods sold 1,700,000
Conversion costs allocated 840,000

The two items debited to the cost of goods sold account in June would be

A

890,000 and 95,000
B

1,700,000 and 50,000
C

1,700,000 and 95,000
D

1,795,000 and 50,000
(2 marks)
The answer is B

Workings

Items debited to Cost of Goods Sold account will be:


Difference between conversion costs incurred and conversion costs allocated,
that is, 890,000 - 840,000 = 50,000

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November 2005 Exam


Question 1.10

Division Y has reported annual operating profits of 402 million. This was after charging 6 million for the
full cost of launching a new product that is expected to last three years. Division Y has a risk adjusted cost
of capital of 11% and is paying interest on a substantial bank loan at 8%. The historical cost of the assets
in Division Y, as shown on its balance sheet, is 100 million, and the replacement cost has been
estimated at 172 million.


The EVA

for Division Y is

A 2328 million
B 2528 million
C 2920 million
D 3044 million

(2 marks)

The answer is B

Workings

Adjustments needed are:

1. for launch costs spread over 3 years; and
2. need to use replacement cost of net assets.

So EVA = (402 million + 4 million) (172 million x 11%) = 2528 million.

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November 2005 Exam


Question 1.11

Z plc has found that it can estimate future sales using time-series analysis and regression techniques.
The following trend equation has been derived:

y = 25,000 + 6,500x

where y is the total sales units per quarter, and
x is the time period reference number.

Z has also derived the following set of seasonal variation index values for each quarter using a
multiplicative (proportional) model:

Quarter 1 70
Quarter 2 90
Quarter 3 150
Quarter 4 90

Using the above model, calculate the forecast for sales units for the third quarter of year 7, assuming that
the first quarter of year 1 is time period reference number 1.
(3 marks)

Workings

x = 27 so trend value is 25,000 + (6,500 x 27) = 200,500 units
Quarter 3 adjustment is 150%, so forecast is 300,750 units

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November 2005 Exam


Question 1.12

Three products P, Q and R are produced together in a common process. Products P and Q are sold
without further processing, but product R requires an additional process before it can be sold. No
inventories are held. There is no loss of volume in the additional process for product R.

The following data apply to March.

Output Product P 3,600 litres
Product Q 4,100 litres
Product R 2,800 litres

Selling prices Product P 460 per litre
Product Q 675 per litre
Product R 1050 per litre

Costs incurred in the common process 42,500
Costs incurred in the additional process for R 19,600

Calculate the value of the common process costs that would be allocated to product R using the sales
proxy method (notional sales value method).

(3 marks)

Workings

Post separation costs per unit are 19,600 / 2,800 = 7 per litre

Notional price at separation point is 1050 - 7 = 350 per litre

Weighted sales value is P 3,600 x 460 = 16,560
Q 4,100 x 675 = 27,675
R 2,800 x 350 = 9,800
54,035

Allocation of common process costs to R is 42,500 x (9,800 / 54,035) = 7,708

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November 2005 Exam


Question 1.13

A company is preparing its cash budget for February using the following data. One line in the cash budget
is for purchases of a raw material, J. The opening inventory of J in January is expected to be 1,075 units.
The price of J is expected to be 8 per unit. The company pays for purchases at the end of the month
following delivery.

One unit of J is required in the production of each unit of product 2, and J is only used in this product.
Monthly sales of product 2 are expected to be:

January 4,000 units
February 5,000 units
March 6,000 units

The opening inventory of product 2 in January is expected to be 1,200 units.

The company implements the following inventory policies. At the end of each month the following
amounts are held:

Raw materials: 25% of the requirement for the following months production
Finished goods: 30% of the following months sales

Calculate the value for purchases of J to be included in the cash budget for February.

(4 marks)

Workings

January February March
units units units
Sales 4,000 5,000 6,000
Closing inventory - 30% next month 1,500 1,800
less opening inventory (1,200) (1,500)
Production in month 4,300 5,300

Raw material requirement January
units
Monthly production 4,300
Closing inventory: 25% of next months
production
1,325
Less opening inventory (1,075)
Material purchases 4,550

Payments for purchases for the cash budget in February are the actual purchases delivered in January,
that is:

4,550 units at 8 per unit = 36,400

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November 2005 Exam



K makes many products, one of which is Product Z. K is considering adopting an activity-
based costing approach for setting its budget, in place of the current practice of absorbing
overheads using direct labour hours. The main budget categories and cost driver details for
the whole company for October are set out below, excluding direct material costs:

Budget category Cost driver details
Direct labour 128,000 8,000 direct labour hours
Set-up costs 22,000 88 set-ups each month
Quality testing costs* 34,000 40 tests each month
Other overhead costs 32,000 absorbed by direct labour hours

* A quality test is performed after every 75 units produced

The following data for Product Z is provided:

Direct materials budgeted cost of 2150 per unit
Direct labour budgeted at 03 hours per unit
Batch size 30 units
Set-ups 2 set-ups per batch
Budgeted volume for October 150 units

Question 1.14

Calculate the budgeted unit cost of product Z for October assuming that a direct labour-based absorption
method was used for all overheads.
(2 marks)

Workings

Total overhead cost 88,000
Direct labour hours 8,000
Absorption rate 11 per direct labour hour

Budgeted unit cost for product Z for October is:

Direct materials 2150
Direct labour 03 x 16 480
Overhead costs 03 x 11 330
Total unit cost 2960

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November 2005 Exam


Question 1.15

Calculate the budgeted unit cost of product Z for October using an activity-based costing approach.
(3 marks)

Workings

Cost driver rates are needed

Set-ups 22,000 / 88 = 250 per set-up
Quality tests 34,000 / 40 = 850 per test
Other overheads 32,000 / 8,000 = 4 per direct labour hour
(note this is not a true cost driver)

Activity-based cost of product Z

Direct labour 480
Set-up costs 2 x 250 / 30 1667
Quality tests 850 / 75 1133
Other overhead costs 03 x 4 120
Total activity-based costs for October 5550

An alternative approach to these calculations would be:

Set-up costs = [(150 / 30) x 2 x 250] / 150 = 1667
Quality costs = (2 x 850) / 150 = 1133

Question 1.16

Explain in less than 50 words, why the costs absorbed by a product using an activity-based costing
approach could be higher than those absorbed if a traditional labour-based absorption system were used,
and identify two implications of this for management.

(4 marks)

Workings

Costs under ABC could be higher where: there is production complexity not represented in direct labour
hours; small batch sizes; or high levels of non-manufacturing activity. This may lead management to:
increase batch sizes, simplify processes to reduce activities, or review pricing if this is not in line with ABC
costs.

Three implications are given, though only two are required.

Post Exam Guide
November 2005 Exam



The KL Company provides legal and secretarial services to small businesses. KL has two
divisions.

Secretarial Division
This division provides secretarial services to external clients and to the Legal Division. It
charges all its clients, including the Legal Division, at a rate of 40 per hour. The marginal
cost of 1 hour of secretarial services is 20.

Legal Division
The Legal Division provides legal services. One service, called L&S, involves a combination
of legal and secretarial services. Each hour of L&S charged to clients involves one hour of
legal services and one hour of secretarial services. The secretarial element of this service is
purchased from the Secretarial Division. The likely demand for L&S at different prices is as
follows:
Demand
(hours)
Price per
hour ()
0 100
1,000 90
2,000 80
3,000 70
4,000 60
5,000 50

The marginal cost of one hour of legal services is 25.

Question 1.17

Calculate the level of sales (hours) and total contribution of L&S that would maximise the profit from this
service for the Legal Division. Assume the Legal Division pays the Secretarial Division at a rate of 40 per
hour for secretarial services.
(3 marks)

Workings

LD view (VC = 25+40) KL view (VC = 25 + 20)
Hours sold Price per
hour
Contribution
per hour
Contribution Contribution
per hour
Contribution

0 100
1,000 90 25 25,000 45 45,000
2,000 80 15 *30,000 35 70,000
3,000 70 5 15,000 25 *75,000
4,000 60 -5 -20,000 15 60,000
5,000 50 -15 -75,000 5 25,000

The level of sales for the Legal division that will maximise the profit in the Legal Division is 2,000 hours,
giving contribution to the division of 30,000.

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November 2005 Exam


Question 1.18
Calculate the level of sales (hours) and total contribution that would maximise the profit from L&S for the
KL Company as a whole.

(3 marks)

Workings

LD view (VC = 25+40) KL view (VC = 25 + 20)
Hours sold Price per
hour
Contribution
per hour
Contribution Contribution
per hour
Contribution

0 100
1,000 90 25 25,000 45 45,000
2,000 80 15 *30,000 35 70,000
3,000 70 5 15,000 25 *75,000
4,000 60 -5 -20,000 15 60,000
5,000 50 -15 -75,000 5 25,000

The level of sales for the KL company that will maximise the profit in KL company is 3,000 hours giving a
contribution of 75,000.

Post Exam Guide
November 2005 Exam



T is a large pharmaceutical manufacturing company that is implementing a Kaplan and
Norton style Balanced Scorecard for its research and development division. The goals and
measures for the customer perspective and the financial perspective have been set.

Question 1.19

For each of the two perspectives given in the question data, state an appropriate performance measure.

(2 marks)

Workings

Customer perspective performance measure could be the percentage of new product developments
delivered to the manufacturing division on time.

Financial perspective performance measure could be number of projects completed within 5% of the
budgeted cost.

Question 1.20

List the other two perspectives in the Balanced Scorecard for Ts research and development division, and
state for each of the perspectives a relevant goal and performance measure.

(3 marks)

Workings

Two perspectives required are Internal Business perspective and Innovation and Learning perspective.

Appropriate objectives or goals could be:

The Internal Business perspective captures the processes at which the division must excel, so a goal
might be a continuous stream of new products to the market. A suitable measure could be measuring the
trend in the average time it takes to bring new drugs to market.

The Innovation and Learning perspective emphasises how the division can continuously improve and
create value. Thus the divisions goal might be to maintain its reputation for innovating new products and
treatments. A suitable measure might be the number of new patents registered.

Post Exam Guide
November 2005 Exam


Section B 30 marks

Question 2(a)

J Limited has recently been taken over by a much larger company. For many years the budgets in J have
been set by adding an inflation adjustment to the previous years budget. The new owners of J are
insisting on a zero-base approach when the next budget is set, as they believe many of the indirect costs
in J are much higher than in other companies under their control.

(i) Explain the main features of zero-based budgeting.

(2 marks)

(ii) Discuss the problems that might arise when implementing this approach in J Limited.

(3 marks)

Rationale
Covers learning outcome C(vi) Evaluate and apply alternative approaches to budgeting

Suggested Approach
(i) outline the main features
(ii) discuss problems of implementation

Marking Guide

Marks
(i) 4 points with half mark for each 2
(ii) 3 problems to be discussed with up to 1 mark for each 3

Examiners Comments
This was generally fairly well-answered although frequently not covered in sufficient depth.

Common Errors
In (i) failing to appreciate the need for prioritisation with ZBB and how elements of cost may be justified.
In (ii) demonstrating lack of awareness of the difficulties of undertaking such a process and the
experience required.

Post Exam Guide
November 2005 Exam


Question 2(b)

An analysis of past output has shown that batches have a mean weight of 90 kg and that the weights
conform to the normal distribution with a standard deviation of 10 kg. The company has a policy to
investigate variances that fall outside the range that includes 95% of outcomes. In September one sample
batch weighed 110 kg.

(i) Calculate whether the material usage variance for this batch should be investigated
according to the company policy described above.
(3 marks)

(ii) Discuss two other important factors that should be taken into account when deciding
whether to investigate this variance.
(2 marks)

Rationale
Covers learning outcome B(ii) Calculate and interpret material, labour, variable overhead, fixed
overhead and sales variances

Suggested Approach
(i) use basic statistical test for significance for a normal distribution
(ii) discuss two factors relating to whether a variance should be investigated

Marking Guide

Marks
(i) 2 marks for the statistical calculation and 1 for its interpretation
(ii) up to 1 mark for each additional factor discussed
3
2

Examiners Comments
Very few candidates scored many marks on either part of this sub-question.

Common Errors
In (i) nearly all candidates were unable to use the normal distribution to evaluate the statistical
significance of the sample batch deviation from the mean.
In (ii) candidates frequently focused on possible reasons for the variance which often would not be
known without investigation. Reasons suggested for the variance were in any case frequently
unrelated to the specific situation.

Post Exam Guide
November 2005 Exam


Question 2(c)

UV Limited is a catering company that provides meals for large events. It has a range of standard meals
at fixed prices. It also provides meals to meet the exact requirements of a customer and prices for this
service are negotiated individually with each customer.

Discuss how a McDonaldisation approach to service delivery would impact on budget preparation and
control within UV Limited.
(5 marks)

Rationale
Covers learning outcome B(i) Explain why and how standards are set in manufacturing and in service
industries with particular reference to the maximisation of efficiency and minimisation of waste.

Suggested Approach
After a brief comment on the nature of McDonaldisation, discuss how this approach would affect
budget preparation and control in UV Limited. It is important to distinguish the standardised products
where McDonaldisation may be important, from the non-standard meals where this approach could be
harmful.

Marking Guide

Marks
1 mark for comment on nature of McDonaldisation 1
Up to 1 mark for four points relating to budget preparation and control in UV 4

Examiners Comments
Many candidates wrote a lot about McDonaldisation, describing fully each of the four dimensions as they
relate to McDonalds, but invariably failed to apply it to either the scenario presented or the question asked.

Common Errors
Failing to discuss McDonaldisation in relation to its impact on budget preparation and control.
Failing to discuss the implications for budget preparation and control in the two separate parts of UV
Limiteds business.

Post Exam Guide
November 2005 Exam


Question 2(d)

A management consulting company had budgeted the staff requirements for a particular job as follows:

40 hours of senior consultant at 100 per hour 4,000
60 hours of junior consultant at 60 per hour 3,600
Budgeted staff cost for job 7,600

The actual hours recorded were:

Actual staff cost for job 8,300

The junior consultant reported that for 10 hours of the 55 hours recorded there was no work that she could
do.

Calculate the following variances:

Idle time variance
Labour mix variance
Labour efficiency variance
(5 marks)

Rationale
overhead and sales variances

Suggested Approach
Calculate the three variances in the order given this is deliberately the easiest way to approach the
question

Marking Guide

Marks
1 mark for idle time variance
2 marks for mix variance
2 marks for efficiency variance
1
2
2

Examiners Comments
Most candidates were able to calculate the idle time variance but performed less well on mix and
efficiency.

Common Errors
Failing to exclude idle time from the mix variance calculations.
Confusing labour efficiency with labour yield.
Calculating the total labour variance as the efficiency variance.

Post Exam Guide
November 2005 Exam


Question 2(e)
ST plc is a medium-sized engineering company using advanced technology. It has just implemented an
integrated enterprise resource planning (ERP) system in place of an old MRP (manufacturing resource
planning) system.

Discuss the changes that are likely to be seen after the implementation of the ERP system in
(i) the budget-setting process; and
(ii) the budgetary control process
(5 marks)

Rationale
Covers learning outcome A(vii) explain the role of MRP and ERP systems in supporting standard costing
systems, calculating variances and facilitating the posting of ledger entries.

Suggested Approach
Demonstrate how the new ERPS will have direct consequences for budget setting and for budgetary
control.

Marking Guide

Marks
(i) Up to 1 mark for 3 points
(ii) Up to 1 mark for 3 points
Up to 3
Up to 3
Max of 5

Examiners Comments
Candidates had a general awareness of ERP in comparison to MRP but were often unable to identify the
consequences for budget setting and for budgetary control.

Common Errors
Discussing generic aspects of budgetary planning and control rather than the impact of an ERP
system.

Post Exam Guide
November 2005 Exam


Question 2(f)

W Limited has conducted a review of its budget-setting procedures. The review coordinator frequently
heard the following comment from staff interviewed:

Its impossible to make this system work because senior managers want budgets to be a challenging
target whereas the finance department require an accurate forecast.

Discuss the issues raised in this comment, and advise the review coordinator on practical action that could
be taken to alleviate the situation described.
(5 marks)

Rationale
Covers learning outcome C(xii) evaluate the impact of budgetary control systems on human behaviour.

Suggested Approach
The main issue in this comment is the difference between a budget as a target and as an estimate of
expected performance. Discuss this and other issues first and then recommend two or three practical
steps to alleviate any problems identified.

Marking Guide

Marks
Up to 1 mark for each of 5 points 5

Examiners Comments
Candidates failed to appreciate the main issue but were awarded marks for sensible interpretation of the
situation described and for suggesting practical action that could be taken.

Common Errors
Demonstrating lack of appreciation of the use of a budget both as a target and as an estimate of
expected performance.
Discussing irrelevant aspects of budgeting such as flexible budgets and rolling budgets.

Post Exam Guide
November 2005 Exam


Section C 20 marks

Question 3(a)

Using the FIFO method, prepare the process account for October.
(12 marks)

Rationale
(a) and (b) cover learning outcome A(ii) Apply marginal and absorption costing approaches in job, batch
and process environments.

Suggested Approach
1. Calculate the cost per equivalent unit for each cost element
2. Use these unit costs to evaluate each part of the output, such as inventory, finished goods,
losses
3. Prepare the actual process account

Marking Guide

Marks
1. above 5
2. above 4
3. above 3
12

Examiners Comments
Correct answers were rare but many candidates made a reasonable attempt at each of the three stages of
process account preparation. This question was much more popular than question 4.

Common Errors
Identifying only one or two, rather than three, separate cost elements.
Miscalculating the equivalent units for each cost element.
Treating the loss as normal or valuing the abnormal loss at $200.
Including the cost of opening WIP with the period costs in the calculation of cost per equivalent unit,
applying the AVCO method to the apportionment of costs.

Post Exam Guide
November 2005 Exam


Question 3(b)

Explain to the Managing Director any errors in the comment he had made, and discuss whether
the data from the process account indicate that there has been production inefficiency.
(8 marks)

Rationale

As above

Suggested Approach
Analyse and discuss the comments made by the Managing Director

Marking Guide

Marks
1 or 2 marks for each good point made 8

Examiners Comments
Most candidates appreciated the need to value the partly processed product. However they rarely
appreciated that the major impact would be due to the differential between the opening and the closing
work in progress (WIP) both in terms of units and also in terms of stage of completion.

Common Errors
Limiting the discussion to WIP only.
Not appreciating the effect of differences in WIP.

Post Exam Guide
November 2005 Exam


Question 4(a)

Calculate the annualised Return on Investment (ROI) for divisions Y and Z, and discuss the relative
performance of the two divisions using the ROI data and other information given above.
(9 marks)

Rationale
The three parts of this question cover learning outcomes:
D(iv) Calculate and apply measures of performance for investment centres (often strategic business
units or divisions of larger groups), and
D(v) Discuss the likely behavioural consequences of the use of performance metrics in managing cost,
profit and investment centres.

Suggested Approach
Calculate the ROI using annualised data and comment on the results

Marking Guide

Marks
Calculation of ROIs 4
Comparison of performance at 1 mark per point 5

Examiners Comments
This was a very unpopular question but it should have been straightforward for candidates who had
studied investment centre performance measures. Many of the candidates who did choose to answer this
question did not answer it particularly well, although the fact that it was generally the last question
attempted may have been a factor.

Common Errors
Failing to annualise the income figures for the two divisions despite this aspect being clearly indicated
in the requirements of the question.
Using controllable income, or even contribution, to calculate ROI, without justification.
Failing to use the other information provided in the question.
Providing a limited discussion of performance.

Post Exam Guide
November 2005 Exam


Question 4(b)
Calculate the annualised Residual Income (RI) for divisions Y and Z, and explain the implications of
this information for the evaluation of the divisions performance.

(6 marks)

Rationale
As above

Suggested Approach
Calculate the RI using annualised data and comment on the performance of the divisions

Marking Guide

Marks
Calculation 3
Comment at 1 mark per point 3

Examiners Comments
Many candidates were able to calculate RI, using their income figures from part (a), but interpretation of
the results was often lacking.

Common Errors
Demonstrating lack of appreciation of what the RI measure indicates.
Providing a limited discussion of performance.

Post Exam Guide
November 2005 Exam


Question 4(c)
Briefly discuss the strengths and weaknesses of ROI and RI as methods of assessing the
performance of divisions. Explain two further methods of assessment of divisional performance that
could be used in addition to ROI or RI.

(5 marks)

Rationale
As above

Suggested Approach
Comment on the strengths and weaknesses of ROI and RI and explain two alternative methods

Marking Guide

Marks
Comments on strengths and weaknesses at 1 mark per point made 3
State and brief comment on two alternatives 2

Examiners Comments
Reasonable discussion of strengths and weaknesses was often provided but suggestions for further
assessment methods were limited.

Common Errors
Limiting discussion to one or two points only.
Failing to suggest further measures for the assessment of divisional performance, or suggesting
inappropriate measures


22 November 2005 Tuesday Morning Session
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is, all parts and/or sub-
questions). The requirements for the questions in Section C are contained in
a dotted box.
Answer ONE of the two questions in Section C on pages 14 and 15.

P
1

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TURN OVER
P1 2 November 2005

SECTION A 50 MARKS
ANSWER ALL TWENTY SUB-QUESTIONS

Question One


The following data relate to a manufacturing company. At the beginning of August there was no
inventory. During August 2,000 units of product X were produced, but only 1,750 units were
sold. The financial data for product X for August were as follow:

Materials 40,000
Labour 12,600
Total costs for X for August 109,800

1.1 The value of inventory of X at 31 August using a marginal costing approach is

A 6,575

B 7,750
C 8,500
D 10,562
(2 marks)


The answers to the twenty sub-questions in Section A should ALL be written in
your answer book.

off, so that the markers know which sub-question you are answering. For multiple
choice questions, you need only write the sub-question number and the letter of the
answers option you have chosen. You do not need to start a new page for each
sub-question.

For sub-questions 1.11, 1.12, 1.13, 1.15, 1.17 and 1.18 you should show your
workings as marks are available for the method you use to answer these sub-
questions.

November 2005 3 P1

1.2 The value of inventory of X at 31 August using a throughput accounting approach is

A 5,000

B 6,175

C 6,575

D 13,725
(2 marks)

1.3 A company has a budget to produce 5,000 units of product B in December. The budget
for December shows that for Product B the opening inventory will be 400 units and the
closing inventory will be 900 units. The monthly budgeted production cost data for
product B for December is as follows:

Variable direct costs per unit 600
Variable production overhead costs per unit 350
Total fixed production overhead costs 29,500

The company absorbs overheads on the basis of the budgeted number of units produced.

The budgeted profit for product B for December, using absorption costing, is

A 2,950 lower than it would be using marginal costing.

B 2,950 greater than it would be using marginal costing.

C 4,700 lower than it would be using marginal costing.
.
D 4,700 greater than it would be using marginal costing.
(2 marks)


TURN OVER
P1 4 November 2005

1.4 Y has set the current budget for operating costs for its delivery vehicles, using the formula
described below. Analysis has shown that the relationship between miles driven and total
monthly vehicle operating costs is described in the following formula:

y = 800 + 00002x
2
where
y is the total monthly operating cost of the vehicles, and
x is the number of miles driven each month

The budget for vehicle operating costs needs to be adjusted for expected inflation in vehicle
operating costs of 3%, which is not included in the relationship shown above.

The delivery mileage for September was 4,100 miles, and the total actual vehicle operating
costs for September were 5,000.

The total vehicle operating cost variance for September was closest to

A 713 Adverse

B 737 Adverse

C 777 Adverse

D 838 Adverse

(2 marks)

1.5 The CIMA official definition of the variable production overhead efficiency variance is set
out below with two blank sections.

Measures the difference between the variable overhead cost budget flexed on
_____________ and the variable overhead cost absorbed by _______________ .

Which combination of phrases correctly completes the definition?

Blank 1

Blank 2
A actual labour hours budgeted output
B standard labour hours budgeted output
C actual labour hours

output produced
D standard labour hours output produced

(2 marks)

November 2005 5 P1

The following data are given for sub-questions 1.6 to 1.8 below.

The following data relate to Product Z and its raw material content for September.
Budget
Standard materials content

3 kg per unit at $400 per kg

Actual
Materials purchased and used

32,000 kg at $480 per kg
It has now been agreed that the standard price for the raw material purchased in September
should have been $5 per kg.

1.6 The materials planning price variance for September was

A $6,000 Adverse
B $30,000 Adverse
C $32,000 Adverse
D $33,000 Adverse
(2 marks)

1.7 The materials operational usage variance for September was

A $8,000 Adverse
B $9,600 Adverse
C $9,600 Favourable
D $10,000 Adverse
(2 marks)

1.8 The materials operational price variance for September was

A $6,000 Adverse
B $6,400 Favourable
C $30,000 Adverse
D $32,000 Adverse
(2 marks)


TURN OVER
P1 6 November 2005

1.9 A company operates a just-in-time purchasing and production system and uses a
backflush accounting system with a single trigger point at the point of sale. A summary of
the transactions that took place in June (valued at cost) is:

Conversion costs incurred 890,000
Finished goods produced 1,795,000
Conversion costs allocated 840,000

The two items debited to the cost of goods sold account in June would be

A

890,000 and 95,000
B

1,700,000 and 50,000
C

1,700,000 and 95,000
D

1,795,000 and 50,000

(2 marks)

1.10 Division Y has reported annual operating profits of 402 million. This was after charging
6 million for the full cost of launching a new product that is expected to last three years.
Division Y has a risk adjusted cost of capital of 11% and is paying interest on a
substantial bank loan at 8%. The historical cost of the assets in Division Y, as shown on
its balance sheet, is 100 million, and the replacement cost has been estimated at
172 million.


The EVA

for Division Y is

A 2328 million
B 2528 million
C 2920 million
D 3044 million
(2 marks)

November 2005 7 P1

1.11 Z plc has found that it can estimate future sales using time-series analysis and regression
techniques. The following trend equation has been derived:

y = 25,000 + 6,500x

where y is the total sales units per quarter, and
x is the time period reference number.

Z has also derived the following set of seasonal variation index values for each quarter using a
multiplicative (proportional) model:

Quarter 1 70
Quarter 2 90
Quarter 3 150
Quarter 4 90

Using the above model, calculate the forecast for sales units for the third quarter of year 7,
assuming that the first quarter of year 1 is time period reference number 1.
(3 marks)

1.12 Three products P, Q and R are produced together in a common process. Products P and
Q are sold without further processing, but product R requires an additional process before
it can be sold. No inventories are held. There is no loss of volume in the additional
process for product R.

The following data apply to March.

Output Product P 3,600 litres
Product Q 4,100 litres
Product R 2,800 litres

Selling prices Product P 460 per litre
Product Q 675 per litre
Product R 1050 per litre

Costs incurred in the common process 42,500
Costs incurred in the additional process for R 19,600

Calculate the value of the common process costs that would be allocated to product R using the
sales proxy method (notional sales value method).

(3 marks)


TURN OVER

P1 8 November 2005

1.13 A company is preparing its cash budget for February using the following data. One line in
the cash budget is for purchases of a raw material, J. The opening inventory of J in
January is expected to be 1,075 units. The price of J is expected to be 8 per unit. The
company pays for purchases at the end of the month following delivery.

One unit of J is required in the production of each unit of product 2, and J is only used in this
product. Monthly sales of product 2 are expected to be:

January 4,000 units
February 5,000 units
March 6,000 units

The opening inventory of product 2 in January is expected to be 1,200 units.

The company implements the following inventory policies. At the end of each month the
following amounts are held:

Raw materials: 25% of the requirement for the following months production
Finished goods: 30% of the following months sales

Calculate the value for purchases of J to be included in the cash budget for February.

(4 marks)

Section A continues on the opposite page
November 2005 9 P1


K makes many products, one of which is Product Z. K is considering adopting an activity-based
costing approach for setting its budget, in place of the current practice of absorbing overheads
using direct labour hours. The main budget categories and cost driver details for the whole
company for October are set out below, excluding direct material costs:

Budget category Cost driver details
Direct labour 128,000 8,000 direct labour hours
Set-up costs 22,000 88 set-ups each month
Quality testing costs* 34,000 40 tests each month
Other overhead costs 32,000 absorbed by direct labour hours

* A quality test is performed after every 75 units produced

The following data for Product Z is provided:

Direct materials budgeted cost of 2150 per unit
Direct labour budgeted at 03 hours per unit
Batch size 30 units
Set-ups 2 set-ups per batch
Budgeted volume for October 150 units

1.14 Calculate the budgeted unit cost of product Z for October assuming that a direct labour-
based absorption method was used for all overheads.
(2 marks)

1.15 Calculate the budgeted unit cost of product Z for October using an activity-based costing
approach.
(3 marks)

1.16 Explain in less than 50 words, why the costs absorbed by a product using an activity-
based costing approach could be higher than those absorbed if a traditional labour-based
absorption system were used, and identify two implications of this for management.

(4 marks)


TURN OVER

P1 10 November 2005


The KL Company provides legal and secretarial services to small businesses. KL has two
divisions.

Secretarial Division
This division provides secretarial services to external clients and to the Legal Division. It
charges all its clients, including the Legal Division, at a rate of 40 per hour. The marginal cost
of 1 hour of secretarial services is 20.

Legal Division
The Legal Division provides legal services. One service, called L&S, involves a combination of
legal and secretarial services. Each hour of L&S charged to clients involves one hour of legal
services and one hour of secretarial services. The secretarial element of this service is
purchased from the Secretarial Division. The likely demand for L&S at different prices is as
follows:
Demand
(hours)
Price per
hour ()
0 100
1,000 90
2,000 80
3,000 70
4,000 60
5,000 50

The marginal cost of one hour of legal services is 25.

1.17 Calculate the level of sales (hours) and total contribution of L&S that would maximise the
profit from this service for the Legal Division. Assume the Legal Division pays the
Secretarial Division at a rate of 40 per hour for secretarial services.
(3 marks)

1.18 Calculate the level of sales (hours) and total contribution that would maximise the profit
from L&S for the KL Company as a whole.

(3 marks)

November 2005 11 P1


T is a large pharmaceutical manufacturing company that is implementing a Kaplan and Norton
style Balanced Scorecard for its research and development division. The goals and measures
for the customer perspective and the financial perspective have been set.

1.19 For each of the two perspectives given in the question data, state an appropriate
performance measure.

(2 marks)

1.20 List the other two perspectives in the Balanced Scorecard for Ts research and
development division, and state for each of the perspectives a relevant goal and
performance measure.

(3 marks)


End of Section A


TURN OVER
P1 12 November 2005

SECTION B 30 MARKS
MARKS

Question Two

(a) J Limited has recently been taken over by a much larger company. For many years the
budgets in J have been set by adding an inflation adjustment to the previous years
budget. The new owners of J are insisting on a zero-base approach when the next
budget is set, as they believe many of the indirect costs in J are much higher than in other
companies under their control.

(i) Explain the main features of zero-based budgeting.

(2 marks)

(ii) Discuss the problems that might arise when implementing this approach in J
Limited.
(3 marks)

(b) An analysis of past output has shown that batches have a mean weight of 90 kg and that
the weights conform to the normal distribution with a standard deviation of 10 kg. The
company has a policy to investigate variances that fall outside the range that includes
95% of outcomes. In September one sample batch weighed 110 kg.

(i) Calculate whether the material usage variance for this batch should be
investigated according to the company policy described above.
(3 marks)

(ii) Discuss two other important factors that should be taken into account when
deciding whether to investigate this variance.
(2 marks)

(c) UV Limited is a catering company that provides meals for large events. It has a range of
standard meals at fixed prices. It also provides meals to meet the exact requirements of a
customer and prices for this service are negotiated individually with each customer.

Discuss how a McDonaldisation approach to service delivery would impact on budget
preparation and control within UV Limited.
(5 marks)

November 2005 13 P1

(d) A management consulting company had budgeted the staff requirements for a particular
job as follows:

Budgeted staff cost for job 7,600

The actual hours recorded were:

Actual staff cost for job 8,300

The junior consultant reported that for 10 hours of the 55 hours recorded there was no work that
she could do.

Calculate the following variances:

Idle time variance
Labour mix variance
Labour efficiency variance
(5 marks)

(e) ST plc is a medium-sized engineering company using advanced technology. It has just
implemented an integrated enterprise resource planning (ERP) system in place of an old
MRP (manufacturing resource planning) system.

Discuss the changes that are likely to be seen after the implementation of the ERP system in

(i) the budget-setting process; and
(ii) the budgetary control process
(5 marks)

(f) W Limited has conducted a review of its budget-setting procedures. The review
coordinator frequently heard the following comment from staff interviewed:

Its impossible to make this system work because senior managers want budgets to be a
challenging target whereas the finance department require an accurate forecast.

Discuss the issues raised in this comment, and advise the review coordinator on practical action
that could be taken to alleviate the situation described.
(5 marks)


Section C is on the next page

TURN OVER
P1 14 November 2005

SECTION C 20 MARKS

Question Three

(a) M Pty produces Biotinct in a lengthy distillation and cooling process. Base materials are
introduced at the start of this process, and further chemicals are added when it is 80%
complete. Each kilogram of base materials produces 1 kilogram of Biotinct.

Data for October are:

Opening work in process: 40 kg of base materials, 25% processed
Cost of opening work in process Base materials $1,550
Processing $720

Costs incurred in October: Base materials (80 kg) $3,400
Conversion costs $6,864
Further chemicals $7,200

Closing work in process: 50kg of base materials, 90% processed

Finished output: 65 kg of Biotinct

Under normal conditions there are no losses of base materials in this process. However, in
October 5kg of partially complete Biotinct were spoiled immediately after the further chemicals
had been added. The 5kg of spoiled Biotinct were not processed to finished goods stage and
were sold for a total of $200.

Required:

Using the FIFO method, prepare the process account for October.
(12 marks)

(b) One of the companys management accountants overheard the Managing Director
arguing as follows, These process accounts are complicated to produce, and often
conceal the true position. As I see it, the value of partly processed Biotinct is zero.
In October we spent $17,464 and the output was 65 kg. So the average cost was
$26868 per kilogram, while the target cost is $170 ($40 for base materials, $70 for
processing and $60 for further chemicals). These figures make me concerned about
production efficiency.

Required:

Explain to the Managing Director any errors in the comment he had made, and discuss
whether the data from the process account indicate that there has been production
inefficiency.
(8 marks)


November 2005 15 P1

Question Four

Y and Z are two divisions of a large company that operate in similar markets. The divisions are
treated as investment centres and every month they each prepare an operating statement to be
submitted to the parent company. Operating statements for these two divisions for October are
shown below:

Operating Statements for October

Y
000
Z
000
Sales revenue 900 555
Less variable costs 345 312
Contribution 555 243
Less controllable fixed costs 95 42
(includes depreciation on divisional assets)
Controllable income 460 201
Less apportioned central costs 338 180
Net income before tax 122 21

Total divisional net assets 976m 126m

The company currently has a target return on capital of 12% per annum. However, the
company believes its cost of capital is likely to rise and is considering increasing the target
return on capital. At present the performance of each division and the divisional management
are assessed primarily on the basis of Return on Investment (ROI).

Required:

(a) Calculate the annualised Return on Investment (ROI) for divisions Y and Z, and
discuss the relative performance of the two divisions using the ROI data and other
information given above.
(9 marks)

(b) Calculate the annualised Residual Income (RI) for divisions Y and Z, and explain
the implications of this information for the evaluation of the divisions performance.

(6 marks)

(c) Briefly discuss the strengths and weaknesses of ROI and RI as methods of
assessing the performance of divisions. Explain two further methods of
assessment of divisional performance that could be used in addition to ROI or RI.

(5 marks)




TURN OVER
P1 16 November 2005

November 2005 17 P1

P1 18 November 2005

PRESENT VALUE TABLE

n
r

+ 1

payment or receipt.

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

November 2005 19 P1

years
r
r
n
+ ) (1 1

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

P1 20 November 2005

Formulae
PROBABILITY

Rules of Addition



Quadratic Equations
If aX
2
by:
a
ac b b
X
2
4
2

=

Arithmetic Mean
n
x
x

=
f
fx
x

Standard Deviation
n
x x
SD
2
) (
=
2
2
x
f
fx
SD

INDEX NUMBERS
1
/P
0
1
/Q
0

Price: 100 x
w
P
P
w
o
1
|
|
.
|
\
|

Quantity: 100 x
1
w
Q
Q
w
o
|
|
.
|
\
|

TIME SERIES
Additive Model

November 2005 21 P1

The linear regression equation of Y on X is given by:

Y = a + bX or Y - Y = b(X X)

where
b =
2 2
) X ( X n
) yY )( X ( XY n
) X ( Variance
) XY ( Covariance

=

and a = Y bX

or solve
Y = na + b X
XY = a X + bX
2


} ) Y ( Y n }{ ) X ( X n {
) Y )( X ( XY n
) Y ( Var ). X ( Var
) XY ( Covariance
r
2 2 2 2

= =

R(rank) = 1 -
) 1 (
6
2
2
n n
d


Future Value S, of a sum of X, invested for n periods, compounded at r% interest
S = X[1 + r]
n

Annuity

PV =
(
(
n
r
r
] 1 [
1
1
1

Perpetuity
PV =
r
1

P1 22 November 2005

November 2005 23 P1

P1 24 November 2005

Managerial Level
November 2005

a dotted box.

P
1

P
e
r
f
o
r
m
a
n
c
e

E
v
a
l
u
a
t
i
o
n

TURN OVER
P1 2 May 2006

SECTION A 50 MARKS
ANSWER ALL TWENTY ONE SUB-QUESTIONS

Question One

1.1

Definition 1: A system that converts a production schedule into a listing of materials and
components required to meet the schedule so that items are available when needed.

Definition 2: An accounting system that focuses on ways by which the maximum return per unit
of bottleneck activity can be achieved.

Which of the following pairs of terms correctly matches definitions 1 and 2 above?

Definition 1

Definition 2
A Manufacturing resources planning (MRP2) Backflush accounting
B Material requirements planning (MRP1) Throughput accounting
C Material requirements planning (MRP1) Theory of constraints
D Supply chain management Throughput accounting
(2 marks)


The answers to the twenty one sub-questions in Section A should ALL be written in
your answer book.

choice questions, you need only write the sub-question number and the letter
of the answer option you have chosen. You do not need to start a new page for
each sub-question.


May 2006 3 P1

1.2 Which of the following statements is/are true?

(i) Enterprise Resource Planning (ERP) systems use complex computer systems,
usually comprehensive databases, to provide plans for every aspect of a business.

(ii) Flexible Manufacturing Systems (FMS) are simple systems with low levels of
automation that offer great flexibility through a skilled workforce working in teams.

(iii) Just-in-time (JIT) purchasing requires the purchasing of large quantities of
inventory items so that they are available immediately when they are needed in the
production process.

A (i) only

B (i) and (ii) only


(2 marks)

1.3 Which of the following statements apply to feedforward control?

(i) It is the measurement of differences between planned outputs and actual outputs.
(ii) It is the measurement of differences between planned outputs and forecast outputs.
(iii) Target costing is an example.
(iv) Variance analysis is an example.

A (i) and (iii)

B (i) and (iv)

C (ii) and (iii)
.
D (ii) and (iv)
(2 marks)


TURN OVER
P1 4 May 2006

1.4 The final stage of production adds Material Z to units that have been transferred into
Process D and converts them to the finished product. There are no losses in Process D.
Data for Process D in the latest period are shown below:

Units
Opening work in progress 225
Material Z: 80% complete
Conversion costs: 80% complete
Units transferred in 500
Units transferred out 575
Closing work in progress 150

The equivalent units to be used in the calculations of the cost per equivalent unit for Material Z
and Conversion Costs, assuming first-in-first-out (FIFO) costing are:

Material Z

Conversion costs
A 485 455
B 485 500
C 575 455
D 575 500

(2 marks)

1.5 If the budgeted fixed costs increase, the gradient of the line plotted on the budgeted
Profit/Volume (P/V) chart will

A increase.

B decrease.

C not change.

D become curvi-linear.

(2 marks)

May 2006 5 P1

1.6 A company operates a standard costing system and prepares monthly financial
statements. All materials purchased during February were used during that month. After
all transactions for February were posted, the general ledger contained the following
balances:

The standard cost of the goods produced during February was 128,500.

The actual cost of the goods produced during February was

A 96,998
B 124,448
C 132,552
D 160,002
(2 marks)

1.7 Overheads will always be over-absorbed when

A actual output is higher than budgeted output.
B actual overheads incurred are higher than the amount absorbed.
C actual overheads incurred are lower than the amount absorbed.
D budgeted overheads are lower than the overheads absorbed.
(2 marks)


TURN OVER
Debit Credit

Finished goods control 27,450
Materials price variance 2,400
Materials usage variance 8,400
Labour rate variance 5,600
Labour efficiency variance 3,140
Variable production overhead variance 2,680
Fixed production overhead variance 3,192
P1 6 May 2006

1.8 The following extract is taken from the production cost budget of L plc:

Output 2,000 units 3,500 units
Total cost 12,000 16,200

The budget cost allowance for an output of 4,000 units would be:

A 17,600
B 18,514
C 20,400
D 24,000
(2 marks)

1.9 A company uses time series and regression techniques to forecast future sales. It has
derived a seasonal variation index to use with the multiplicative (proportional) seasonal
variation model. The index values for the first three quarters are as follows:

Quarter Index value
Q1 80
Q2 80
Q3 110

The index value for the fourth quarter (Q4) is:

A -270
B -269
C 110
D 130
(2 marks)

May 2006 7 P1

1.10 The budgeted profit statement for a company, with all figures expressed as percentages
of revenue, is as follows:

%
Revenue 100
Variable costs 30
Fixed costs 22
Profit 48

After the formulation of the above budget it has now been realised that the sales volume will
only be 60% of that originally forecast.

The revised profit, expressed as a percentage of the revised revenue will be:

A 20%
B 333%
C 60%
D 80%
(2 marks)


A company has a process in which three inputs are mixed together to produce Product S. The
standard mix of inputs to produce 90 kg of Product S is shown below:

$
50 kg of ingredient P at $75 per kg 3,750
30 kg of ingredient Q at $100 per kg 3,000
20 kg of ingredient R at $125 per kg 2,500
9,250

During March 2,000 kg of ingredients were used to produce 1,910 kg of Product S. Details of the
inputs are as follows:

$
1,030 kg of ingredient P at $70 per kg 72,100
186,810

1.11 Calculate the materials mix variance for March.
(3 marks)

1.12 Calculate the materials yield variance for March.
(2 marks)


TURN OVER
P1 8 May 2006

1.13 Division L has reported a net profit after tax of 86m for the year ended 30 April 2006.
Included in the costs used to calculate this profit are the following items:

interest payable of 23m;
development costs of 63m for a new product that was launched in May 2005, and
is expected to have a life of three years;
advertising expenses of 16m that relate to the re-launch of a product in June
2006.

The net assets invested in Division L are 30m.

The cost of capital for Division L is 13% per year.

Calculate the Economic Value Added
for Division L for the year ended 30 April 2006.

(3 marks)

1.14 The following details have been taken from the debtor collection records of W plc:

Invoices paid in the month after sale 60%
Invoices paid in the second month after sale 20%
Invoices paid in the third month after sale 15%
Bad debts 5%

Customers paying in the month after the sale are allowed a 10% discount.

Invoices for sales are issued on the last day of the month in which the sales are made.

The budgeted credit sales for the final five months of this year are:

Month August September October November December
Credit sales $80,000 $100,000 $120,000 $130,000 $160,000

Calculate the total amount budgeted to be received in December from credit sales.

(2 marks)

1.15 State four aims of a transfer pricing system.
(3 marks)

May 2006 9 P1

1.16 Process 2 takes transfers from Process 1 and converts them to finished goods. Additional
materials are added during the process. An abnormal loss occurred part way through the
process in April. Output data for April are shown below:

Equivalent units (Kg)
Kg From P1 Materials Conversion
Transferred to finished goods 2,800 2,800 2,800 2,800
Normal loss 200
Abnormal loss 100 100 100 50
Closing work in progress 700 700 700 150

The losses cannot be sold.

Costs incurred during April were:

Transfer from Process 1 34,200
Materials added 16,200

There was no opening work in progress at the beginning of the month.

Calculate the value of the abnormal loss that will be debited to the abnormal loss account.

(3 marks)

1.17 D plc operates a retail business. Purchases are sold at cost plus 25%. The management
team are preparing the cash budget and have gathered the following data:

1. The budgeted sales are as follows:

Month 000
July 100
August 90
September 125
October 140

2. It is management policy to hold inventory at the end of each month which is sufficient to
meet sales demand in the next half month. Sales are budgeted to occur evenly during
each month.

3. Creditors are paid one month after the purchase has been made.

Calculate the entries for purchases that will be shown in the cash budget for

(i) August
(ii) September
(iii) October

(3 marks)


TURN OVER
P1 10 May 2006

1.18 ZY is an airline operator. It is implementing a balanced scorecard to measure the success
of its strategy to expand its operations. It has identified two perspectives and two
associated objectives. They are:

Perspective Objective
Growth Fly to new destinations
Internal capabilities Reduce time between touch down and take off

(i) For the growth perspective of ZY, recommend a performance measure and briefly
justify your choice of the measure by explaining how it will reflect the success of the
strategy.

(2 marks)

(ii) For the internal capabilities perspective of ZY, state data that you would gather and
explain how this could be used to ensure the objective is met.

(2 marks)


Q plc uses standard costing. The details for April were as follows:

Budgeted output 15,000 units
Budgeted labour hours 60,000 hours
Budgeted labour cost 540,000

Actual output 14,650 units
Actual labour hours paid 61,500 hours
Productive labour hours 56,000 hours
Actual labour cost 522,750

1.19 Calculate the idle time variance for April.

(2 marks)

1.20 Calculate the labour efficiency variance for April.
(2 marks)

May 2006 11 P1

1.21 S plc produces and sells three products, X, Y and Z. It has contracts to supply products X
and Y, which will utilise all of the specific materials that are available to make these two
products during the next period. The revenue these contracts will generate and the
contribution to sales (c/s) ratios of products X and Y are as follows:

Product X Product Y
Revenue 10 million 20 million
C/S ratio 15% 10%

Product Z has a c/s ratio of 25%.

The total fixed costs of S plc are 55 million during the next period and management have
budgeted to earn a profit of 1 million.

Calculate the revenue that needs to be generated by Product Z for S plc to achieve the
budgeted profit.
(3 marks)


End of Section A


TURN OVER
P1 12 May 2006

SECTION B 30 MARKS
MARKS

Question Two

(a) A manufacturing company uses a standard costing system. Extracts from the budget for
April are shown below:

Sales 1,400 units
Production 2,000 units
$
Direct costs 15 per unit
Variable overhead 4 per unit

The budgeted fixed production overhead costs for April were $12,800.

The budgeted profit using marginal costing for April was $5,700.

(i) Calculate the budgeted profit for April using absorption costing.
(3 marks)

(ii) Briefly explain two situations where marginal costing is more useful to management
than absorption costing.
(2 marks)

(Total for sub-question (a) = 5 Marks)

(b) The standard cost schedule for hospital care for a minor surgical procedure is shown
below.

Standard Cost of hospital care for a minor surgical procedure

Staff: patient ratio is 075:1

Nursing costs: 2 days x 075 x 320 per day 480
Space and food costs: 2 days x 175 per day 350
Drugs and specific materials 115
Hospital overheads: 2 days x 110 per day 220

The actual data for the hospital care for one patient having the minor surgical procedure showed
that the patient stayed in hospital for three days. The cost of the drugs and specific materials for
this patient was 320. There were 09 nurses per patient on duty during the time that the patient
was in hospital. The daily rates for nursing pay, space and food, and hospital overheads were
as expected.

Prepare a statement that reconciles the standard cost with the actual costs of hospital care for
this patient. The statement should contain five variances that will give useful information to the
manager who is reviewing the cost of hospital care for minor surgical procedures.

(5 Marks)

May 2006 13 P1

(c) C plc uses a justintime (JIT) purchasing and production process to manufacture
Product P. Data for the output of Product P, and the material usage and material price
variances for February, March and April are shown below:

Month Output (units) Material usage variance Material price variance
February 11,000 15,970 Adverse 12,300 Favourable
March 5,100 5,950 Adverse 4,500 Favourable
April 9,100 8,400 Adverse 6,200 Favourable

The standard material cost per unit of Product P is 12.

Prepare a sketch (not on graph paper) of a percentage variance chart for material usage and for
material price for Product P for the three month period. (Note: your workings must show the co-
ordinates of the points that would be plotted if the chart was drawn accurately.)
(5 Marks)

(d) Briefly discuss three reasons why standard costing may not be appropriate in a modern
business environment.
(5 Marks)

(e) Compare and contrast marginal costing and throughput accounting.
(5 Marks)

(f) T plc is a large insurance company. The Claims Department deals with claims from policy
holders who have suffered a loss that is covered by their insurance policy. Policy holders
could claim, for example, for damage to property, or for household items stolen in a
burglary. The Claims Department staff investigate each claim and determine what, if any,
payment should be made to the claimant.

The manager of the Claims Department has decided to benchmark the performance of the
department and has chosen two areas to benchmark:

the detection of false claims
the speed of processing claims

For each of the above two areas:

(i) state and justify a performance measure
(ii) explain how relevant benchmarking data could be gathered.

(5 marks)


End of Section B

TURN OVER
P1 14 May 2006

SECTION C 20 MARKS

Question Three

M plc designs, manufactures and assembles furniture. The furniture is for home use and
therefore varies considerably in size, complexity and value. One of the departments in the
company is the Assembly Department. This department is labour intensive; the workers travel to
various locations to assemble and fit the furniture using the packs of finished timbers that have
been sent to them.

Budgets are set centrally and they are then given to the managers of the various departments
who then have the responsibility of achieving their respective targets. Actual costs are compared
against the budgets and the managers are then asked to comment on the budgetary control
statement. The statement for April for the Assembly Department is shown below.

Budget Actual Variance
Assembly labour hours 6,400 7,140
$ $ $
Assembly labour 51,970 58,227 6,257 Adverse
Furniture packs 224,000 205,000 19,000 Favourable
Other materials 23,040 24,100 1,060 Adverse
Overheads 62,060 112,340 50,280 Adverse
Total 361,070 399,667 38,597 Adverse

Note: the costs shown are for assembling and fitting the furniture (they do not include time spent
travelling to jobs and the related costs). The hours worked by the Manager are not included in
the figure given for the assembly labour hours.

The Manager of the Assembly Department is new to the job and has very little previous
experience of working with budgets but he does have many years experience as a supervisor in
assembly departments. Based on that experience he was sure that the department had
performed well. He has asked for your help in replying to a memo he has just received asking
him to explain the serious overspending in his department. He has sent you some additional
information about the budget:

1. The budgeted and actual assembly labour costs include the fixed salary of $2,050 for the
Manager of the Assembly Department. All of the other labour is paid for the hours they
work.

2. The cost of furniture packs and other materials is assumed by the central finance office of
M plc to vary in proportion to the number of assembly labour hours worked.

3. The budgeted overhead costs are made up of three elements: a fixed cost of $9,000 for
services from central headquarters, a stepped fixed cost which changes when the
assembly hours exceed 7,000 hours, and some variable overheads. The variable
overheads are assumed to vary in proportion to the number of assembly labour hours.
Working papers for the budget showed the impact on the overhead costs of differing
amounts of assembly labour hours:

Assembly labour hours 5,000 7,500 10,000
Overhead costs $54,500 $76,500 $90,000

The actual fixed costs for April were as budgeted.
May 2006 15 P1

Required:

(a) Prepare, using the additional information that the Manager of the Assembly
Department has given you, a budgetary control statement that would be more
helpful to him.
(7 marks)

(b)

(i) Discuss the differences between the format of the statement that you have
produced and that supplied by M plc.
(4 marks)

(ii) Discuss the assumption made by the central office of M plc that costs vary in
proportion to assembly labour hours.

(3 marks)

(c) Discuss whether M plc should change to a system of participative budgeting.

(6 marks)



TURN OVER
P1 16 May 2006

Question Four

FP sells and repairs photocopiers. The company has operated for many years with two
departments, the Sales Department and the Service Department, but the departments had no
autonomy. The company is now thinking of restructuring so that the two departments will
become profit centres.

The Sales Department

This department sells new photocopiers. The department sells 2,000 copiers per year. Included
in the selling price is 60 for a one year guarantee. All customers pay this fee. This means that
during the first year of ownership if the photocopier needs to be repaired then the repair costs
are not charged to the customer. On average 500 photocopiers per year need to be repaired
under the guarantee. The repair work is carried out by the Service Department who, under the
proposed changes, would charge the Sales Department for doing the repairs. It is estimated that
on average the repairs will take 3 hours each and that the charge by the Service Department will
be 136,500 for the 500 repairs.

The Service Department

This department has two sources of work: the work needed to satisfy the guarantees for the
Sales Department and repair work for external customers. Customers are charged at full cost
plus 40%. The details of the budget for the next year for the Service Department revealed
standard costs of:

Parts at cost
Labour 15 per hour
Variable overheads 10 per labour hour
Fixed overheads 22 per labour hour

The calculation of these standards is based on the estimated maximum market demand and
includes the expected 500 repairs for the Sales Department. The average cost of the parts
needed for a repair is 54. This means that the charge to the Sales Department for the repair
work, including the 40% mark-up, will be 136,500.

Proposed Change

It has now been suggested that FP should be structured so that the two departments become
profit centres and that the managers of the Departments are given autonomy. The individual
salaries of the managers would be linked to the profits of their respective departments.

Budgets have been produced for each department on the assumption that the Service
Department will repair 500 photocopiers for the Sales Department and that the transfer price for
this work will be calculated in the same way as the price charged to external customers.

However the manager of the Sales Department has now stated that he intends to have the
repairs done by another company, RS, because they have offered to carry out the work for a
fixed fee of 180 per repair and this is less than the price that the Sales Department would
charge.

May 2006 17 P1

Required:

(a) Calculate the individual profits of the Sales Department and the Service
Department, and of FP as a whole from the guarantee scheme if:

(i) The repairs are carried out by the Service Department and are charged at full
cost plus 40%;
(ii) The repairs are carried out by the Service department and are charged at
marginal cost;
(iii) The repairs are carried out by RS.
(8 marks)
(b)

(i) Explain, with reasons, why a full cost plus transfer pricing model may not be
appropriate for FP.
(3 marks)

(ii) Comment on other issues that the managers of FP should consider if they decide to
allow RS to carry out the repairs.
(4 marks)

(c) Briefly explain the advantages and disadvantages of structuring the departments as
profit centres.
(5 marks)




TURN OVER
P1 18 May 2006

May 2006 19 P1

P1 20 May 2006

PRESENT VALUE TABLE

n
r

+ 1

payment or receipt.

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

May 2006 21 P1

years
r
r
n
+ ) (1 1

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

P1 22 May 2006

Formulae
PROBABILITY

Rules of Addition



Quadratic Equations
If aX
2
by:
a
ac b b
X
2
4
2

=

Arithmetic Mean
n
x
x

=
f
fx
x

Standard Deviation
n
x x
SD
2
) (
=
2
2
x
f
fx
SD

INDEX NUMBERS
1
/P
0
1
/Q
0

Price: 100 x
w
P
P
w
o
1
|
|
.
|
\
|

Quantity: 100 x
1
w
Q
Q
w
o
|
|
.
|
\
|

TIME SERIES
Additive Model

May 2006 23 P1


Y = a + bX or Y - Y = b(X X)

where
b =
2 2
) X ( X n
) yY )( X ( XY n
) X ( Variance
) XY ( Covariance

=

and a = Y bX

or solve
Y = na + b X
XY = a X + bX
2


} ) Y ( Y n }{ ) X ( X n {
) Y )( X ( XY n
) XY ( Covariance
r
2 2 2 2

= =

R(rank) = 1 -
) 1 (
6
2
2
n n
d


S = X[1 + r]
n

Annuity

PV =
(
(
n
r
r
] 1 [
1
1
1

Perpetuity
PV =
r
1

P1 24 May 2006

May 2006 25 P1

P1 26 May 2006

May 2006 27 P1

P1 28 May 2006

Managerial Level
May 2006
Post Exam Guide
May 2006 Exam


General Comments

Performance on this paper was an improvement on the previous examinations. This was
especially due to better performance in both parts of question 1, the multiple-choice questions
(1.1 to 1.10) and particularly the short-form questions (1.11 to 1.21). Question 1 overall gave
candidates every opportunity for success in this paper but this was too often not achieved due
to poor performance in question 2 and, especially, questions 3 or 4.

Generally, candidates attempted question 1 first (compulsory Section A) and were able to
complete most parts. Performance in the multiple-choice questions, in the first part of the
question, was on average good although a number of candidates surprisingly failed to attempt
all ten questions.

In the second part of question 1 (1.11 to 1.21) most candidates attempted all of the short-form
sub-questions, although a common omission was 1.21. This contrasts with the November
2005 examination when several of the short-form questions were frequently not attempted.
Reasonable average marks were gained on nearly all of these questions in this examination.
Candidates seemed generally to be more comfortable with the numerical questions where
they were able to apply learned techniques. In dealing with the short narrative questions,
candidates tended to score less well because they seemed to have a less than adequate
understanding and did not construct good, clear and concise answers.

Improved performance was also achieved in question 2 (compulsory Section B) but from a
fairly low base. Part (c), however, presented candidates with special problems and was
frequently omitted. Narrative answers too often indicated a failure to read questions carefully
and a failure to focus on the specifics of the scenario presented or the questions asked.

The choice from the two questions in Section C (questions 3 and 4) was usually made last.
While some excellent answers were submitted for both questions, many candidates provided
poor or incomplete answers and performance overall was not good. There was clear
indication that most candidates found these questions more problematic, or they were running
out of time because on many occasions the numerical part (a) was not attempted. This very
much repeated the disappointing performance seen in this section of the paper in the two
previous sittings.

Candidates must try to manage the time they spend on questions in accordance with the
marks available. They must also come to the paper with a good knowledge of all topic areas
and must read questions carefully. They must then respond to the specifics of the question
instead of simply writing generally about a topic. They must try to understand the practical
implications of applying what they have learned and offer recommendations in their answers
that adequately reflect question scenarios where this is required.
Post Exam Guide
May 2006 Exam


Section A 50 marks

Question 1.1

Definition 1: A system that converts a production schedule into a listing of materials and components
required to meet the schedule so that items are available when needed.

Definition 2: An accounting system that focuses on ways by which the maximum return per unit of
bottleneck activity can be achieved.

Which of the following pairs of terms correctly matches definitions 1 and 2 above?

Definition 1

Definition 2
A Manufacturing resources planning (MRP2) Backflush accounting
B Material requirements planning (MRP1) Throughput accounting
C Material requirements planning (MRP1) Theory of constraints
D Supply chain management Throughput accounting
(2 marks)
The answer is B

Question 1.2

Which of the following statements is/are true?

(i) Enterprise Resource Planning (ERP) systems use complex computer systems, usually
comprehensive databases, to provide plans for every aspect of a business.

(ii) Flexible Manufacturing Systems (FMS) are simple systems with low levels of automation that
offer great flexibility through a skilled workforce working in teams.

(iii) Just-in-time (JIT) purchasing requires the purchasing of large quantities of inventory items so
that they are available immediately when they are needed in the production process.

A (i) only

B (i) and (ii) only


(2 marks)

The answer is A

Post Exam Guide
May 2006 Exam


Question 1.3

Which of the following statements apply to feedforward control?

(i) It is the measurement of differences between planned outputs and actual outputs.
(ii) It is the measurement of differences between planned outputs and forecast outputs.
(iii) Target costing is an example.
(iv) Variance analysis is an example.

A (i) and (iii)

B (i) and (iv)

C (ii) and (iii)
.
D (ii) and (iv)
(2 marks)

The answer is C

Question 1.4

The final stage of production adds Material Z to units that have been transferred into Process D and
converts them to the finished product. There are no losses in Process D. Data for Process D in the latest
period are shown below:

Units
Opening work in progress 225
Units transferred in 500
Units transferred out 575
Closing work in progress 150

The equivalent units to be used in the calculations of the cost per equivalent unit for Material Z and
Conversion Costs, assuming first-in-first-out (FIFO) costing are:

Material Z

Conversion costs
A 485 455
B 485 500
C 575 455
D 575 500

(2 marks)
The answer is A
Post Exam Guide
May 2006 Exam


Workings

Equivalent Units
Units Material Z Conversion cost
225 To complete opening wip 45 45
350 Started and finished 350 350
150 Closing wip 90 60
Total E. U. 485 455

Question 1.5

If the budgeted fixed costs increase, the gradient of the line plotted on the budgeted Profit/Volume (P/V)
chart will

A increase.

B decrease.

C not change.

D become curvi-linear.
(2 marks)

The answer is C
Post Exam Guide
May 2006 Exam


Question 1.6

A company operates a standard costing system and prepares monthly financial statements. All materials
purchased during February were used during that month. After all transactions for February were
posted, the general ledger contained the following balances:

The standard cost of the goods produced during February was 128,500.

The actual cost of the goods produced during February was

A 96,998
B 124,448
C 132,552
D 160,002
(2 marks)
Debit Credit

Finished goods control 27,450
Materials price variance 2,400
Materials usage variance 8,400
Labour rate variance 5,600
Labour efficiency variance 3,140
Variable production overhead variance 2,680
Fixed production overhead variance 3,192
The answer is B

Workings

Std cost of goods produced 128,500
Plus adverse variances
Materials price 2,400
Labour rate 5,600
Variable overheads 2,680 10,680
Less favourable variances
Material usage 8,400
Labour efficiency 3,140
Fixed overheads 3,192 (14,732)
Actual cost of goods produced 124,448

Post Exam Guide
May 2006 Exam


Question 1.7

Overheads will always be over-absorbed when

(2 marks)

The answer is C

Question 1.8

The following extract is taken from the production cost budget of L plc:

Total cost 12,000 16,200

The budget cost allowance for an output of 4,000 units would be:

A 17,600
B 18,514
C 20,400
D 24,000
(2 marks)

The answer is A
Workings

Difference
Output 2,000 units 3,500 units 1,500 units
Total cost 12,000 16,200 4,200

Variable cost per unit = 4,200/1,500 = 280.

Fixed cost = 12,000 (2,000 * 280) = 6,400 (Note: Alternatively you could have used the figures for
3,500 units).

Therefore the budget cost allowance for 4,000 units = 6,400 + (4,000 * 280) = 17,600.

Post Exam Guide
May 2006 Exam


Question 1.9
A company uses time series and regression techniques to forecast future sales. It has derived a seasonal
variation index to use with the multiplicative (proportional) seasonal variation model. The index values for
the first three quarters are as follows:

Quarter Index value
Q1 80
Q2 80
Q3 110

The index value for the fourth quarter (Q4) is:

A -270
B -269
C 110
D 130
(2 marks)
The answer is D

Workings

The index values for a multiplicative model with four seasons add to 400.

Post Exam Guide
May 2006 Exam


Question 1.10

The budgeted profit statement for a company, with all figures expressed as percentages of revenue, is as
follows:

%
Revenue 100
Variable costs 30
Fixed costs 22
Profit 48

After the formulation of the above budget it has now been realised that the sales volume will only be 60%
of that originally forecast.

The revised profit, expressed as a percentage of the revised revenue will be:

A 20%
B 333%
C 60%
D 80%
(2 marks)

The answer is B

Workings

Assuming the revenue was $100 will lead to the following revised figures:

Original Revised
Revenue 100 60
Variable costs 30 18
Fixed costs 22 22
Profit 48 20

Post Exam Guide
May 2006 Exam



A company has a process in which three inputs are mixed together to produce Product S. The
standard mix of inputs to produce 90 kg of Product S is shown below:

$
50 kg of ingredient P at $75 per kg 3,750
9,250

During March 2,000 kg of ingredients were used to produce 1,910 kg of Product S. Details of
the inputs are as follows:

$
1,030 kg of ingredient P at $70 per kg 72,100
186,810

Question 1.11

Calculate the materials mix variance for March.
(3 marks)

Workings

Mix variance = $500 favourable

Actual Mix Standard Mix
Kg $ $ Kg $ $
P 1,030 75 77,250 1,000 75 75,000
Q 560 100 56,000 600 100 60,000
R 410 125 51,250 400 125 50,000
2,000 184,500 2,000 185,000

Post Exam Guide
May 2006 Exam


Question 1.12

Calculate the materials yield variance for March.
(2 marks)

Workings

Yield variance = $196,305 $185,000 = $11,305 favourable
Output was 1,910kg. The standard input for this should be 1,910/90% = 2,12222kg

Standard mix
of input
Standard mix
for output
Kg $ $ Kg $ $
P 1,000 75 75,000 1,06111 75 79,583
Q 600 100 60,000 63667 100 63,667
R 400 125 50,000 42444 125 53,055
2,000 185,000 2,12222 196,305

Alternative method:

Standard cost of 1 kg of output is $9,250/90 = $10278

Expected output was 2,000 * 09 = 1,800 kg.
Actual output was 1,910 kg

There is a favourable yield of 110 kg.
Therefore the yield variance is 110 * $10278 = $11,306 favourable

Post Exam Guide
May 2006 Exam


Question 1.13

Division L has reported a net profit after tax of 86m for the year ended 30 April 2006. Included in the
costs used to calculate this profit are the following items:

interest payable of 23m;
development costs of 63m for a new product that was launched in May 2005, and is
expected to have a life of three years;
advertising expenses of 16m that relate to the re-launch of a product in June 2006.

The net assets invested in Division L are 30m.

The cost of capital for Division L is 13% per year.

Calculate the Economic Value Added
for Division L for the year ended 30 April 2006.

(3 marks)

Workings

m m
Net profit after tax 86
Add
Interest 23
Development costs 63
Advertising 16 102
188
Less 1/3 development costs 21
167
Less capital charge: 30*13% 39
EVA 128

Post Exam Guide
May 2006 Exam


Question 1.14
The following details have been taken from the debtor collection records of W plc:

Invoices paid in the month after sale 60%
Invoices paid in the second month after sale 20%
Invoices paid in the third month after sale 15%
Bad debts 5%

Customers paying in the month after the sale are allowed a 10% discount.

Invoices for sales are issued on the last day of the month in which the sales are made.

The budgeted credit sales for the final five months of this year are:

Month August September October November December
Credit sales $80,000 $100,000 $120,000 $130,000 $160,000

Calculate the total amount budgeted to be received in December from credit sales.

(2 marks)

Workings

Month of sale Factor Receive December
$
November 60% * 90% 70,200
October 20% 24,000
September 15% 15,000
Total 109,200

Question 1.15
State four aims of a transfer pricing system.

Workings

1.15 Any four relevant aims. For example:

Ensure optimal allocation of resources;
Promote goal congruence;
Motivate divisional managers;
Facilitate performance measurement;
Not stifle autonomy.

Post Exam Guide
May 2006 Exam


Question 1.16

Process 2 takes transfers from Process 1 and converts them to finished goods. Additional materials are
added during the process. An abnormal loss occurred part way through the process in April. Output data
for April are shown below:

Normal loss 200

The losses cannot be sold.

Costs incurred during April were:

Transfer from Process 1 34,200
Materials added 16,200

There was no opening work in progress at the beginning of the month.

Calculate the value of the abnormal loss that will be debited to the abnormal loss account.

(3 marks)

Workings

Normal loss 200
3,800 3,600 3,600 3,000
Costs () 34,200 16,200 26,700
Cost per E.U. () 950 450 890

Abnormal loss = (100*950) + (100*450) + (50*890) = 1,845

Post Exam Guide
May 2006 Exam


Question 1.17

D plc operates a retail business. Purchases are sold at cost plus 25%. The management team are
preparing the cash budget and have gathered the following data:

1. The budgeted sales are as follows:

Month 000
July 100
August 90
September 125
October 140

2. It is management policy to hold inventory at the end of each month which is sufficient to meet sales
demand in the next half month. Sales are budgeted to occur evenly during each month.

3. Creditors are paid one month after the purchase has been made.

Calculate the entries for purchases that will be shown in the cash budget for

(i) August
(ii) September
(iii) October

(3 marks)

Workings

All figures are 000

Month Sales Cost of
sales
Opening
inventory
Closing
inventory
Purchase Paid
July 100 80 40 36 76
August 90 72 36 50 86 76
September 125 100 50 56 106 86
October 140 112 56 106

Post Exam Guide
May 2006 Exam


Question 1.18

ZY is an airline operator. It is implementing a balanced scorecard to measure the success of its strategy to
expand its operations. It has identified two perspectives and two associated objectives. They are:

Perspective Objective
Growth Fly to new destinations
Internal capabilities Reduce time between touch down and take off

(i) For the growth perspective of ZY, recommend a performance measure and briefly justify your
choice of the measure by explaining how it will reflect the success of the strategy.

(2 marks)

(ii) For the internal capabilities perspective of ZY, state data that you would gather and explain
how this could be used to ensure the objective is met.

(2 marks)

Workings

Fly to new destinations: percentage occupancy on flights to new destinations. This will show how popular
the routes are.

Reduce ground time: measure baggage unloading/loading times, cleaning times, re-stocking meals and
duty free, staff availability etc. This will identify the key factor.

Post Exam Guide
May 2006 Exam



Q plc uses standard costing. The details for April were as follows:

Budgeted labour hours 60,000 hours
Budgeted labour cost 540,000

Actual output 14,650 units
Actual labour hours paid 61,500 hours
Productive labour hours 56,000 hours
Actual labour cost 522,750

Question 1.19
Calculate the idle time variance for April.
(2 marks)

Workings

Labour standard for 1 unit is 4 hours * 9 per hour

Idle time variance = (61,500 56,000) * 9
= 5,500 * 9
=49,500 adverse

Question 1.20

Calculate the labour efficiency variance for April.
(2 marks)

Workings

Efficiency variance = (std hours for actual output actual hours) * std rate
= [(14,650 * 4) 56,000] * 9
= (58,600 56,000) * 9
= 23,400 favourable

Post Exam Guide
May 2006 Exam


Question 1.21

S plc produces and sells three products, X, Y and Z. It has contracts to supply products X and Y, which
will utilise all of the specific materials that are available to make these two products during the next period.
The revenue these contracts will generate and the contribution to sales (c/s) ratios of products X and Y
are as follows:

Product X Product Y
Revenue 10 million 20 million
C/S ratio 15% 10%

Product Z has a c/s ratio of 25%.

The total fixed costs of S plc are 55 million during the next period and management have budgeted to
earn a profit of 1 million.

Calculate the revenue that needs to be generated by Product Z for S plc to achieve the budgeted profit.

(3 marks)

Workings

Budgeted profit = 1m. Therefore total contribution = 65m and contribution from Z must be 3m.

Product X Product Y Product Z Total
Revenue 10 million 20 million 12 million
C/S ratio 15% 10% 25%
Contribution (m) 15 20 30 65
Fixed costs (m) 55
Profit (m) 10

Post Exam Guide
May 2006 Exam


Section B 30 marks

Question 2(a)

A manufacturing company uses a standard costing system. Extracts from the budget for April are shown
below:

Sales 1,400 units
$
Direct costs 15 per unit
Variable overhead 4 per unit

The budgeted fixed production overhead costs for April were $12,800.

The budgeted profit using marginal costing for April was $5,700.

(i) Calculate the budgeted profit for April using absorption costing.
(3 marks)
(ii) Briefly explain two situations where marginal costing is more useful to management than
absorption costing.
(2 marks)
(Total for sub-question (a) = 5 Marks)

Rationale
Covers learning outcome A(i) Compare and contrast marginal and absorption costing methods in
respect of profit reporting and stock valuation.

Suggested Approach
(i) The difference between profits calculated using absorption costing and marginal costing is due to fixed
production overheads being absorbed when absorption costing is used. The first thing to do is to calculate
the fixed production overhead absorption rate (OAR): given the data in the question the only way to do this
is to base it on a rate per unit (this gives an OAR of $6.40 per unit). Inventory has increased during the
period by 600 units because production exceeds sales by that amount. Each unit of closing inventory,
using absorption costing, will carry the absorbed fixed production overhead with it into the next period and
therefore profit will be higher with absorption costing (because the fixed overhead absorbed in the closing
inventory will not be charged against the profit for this period).

(ii) The question asks more useful to management. Consequently the approach should be to think about
what management do (e.g. forecast, plan, control and make decisions) and then give examples of how
marginal costing can be useful in those situations.

Marking Guide

Marks
Calculation of OAR 1
Calculation of profit 2
Two explanations 2

Post Exam Guide
May 2006 Exam


Examiners Comments
Relatively easy marks were available here for a reasonably prepared candidate, however success was
mixed. Part (i) was generally fairly well answered but part (ii) was not well answered.

Common Errors
Part (i)
deducting, rather than adding, the stock change;
including all costs, not just fixed production overhead, in the adjustment.
Part (ii)
focussing on the stock valuation issue, or on whether stock building is encouraged, rather than upon
the usefulness for management.

Post Exam Guide
May 2006 Exam


Question 2(b)

The standard cost schedule for hospital care for a minor surgical procedure is shown below.

Standard Cost of hospital care for a minor surgical procedure

Staff: patient ratio is 075:1

Nursing costs: 2 days x 075 x 320 per day 480
Space and food costs: 2 days x 175 per day 350
Drugs and specific materials 115
Hospital overheads: 2 days x 110 per day 220

The actual data for the hospital care for one patient having the minor surgical procedure showed that the
patient stayed in hospital for three days. The cost of the drugs and specific materials for this patient was
320. There were 09 nurses per patient on duty during the time that the patient was in hospital. The
daily rates for nursing pay, space and food, and hospital overheads were as expected.

Prepare a statement that reconciles the standard cost with the actual costs of hospital care for this patient.
The statement should contain five variances that will give useful information to the manager who is
reviewing the cost of hospital care for minor surgical procedures.
(5 Marks)

Rationale
Covers learning outcome A(v) Apply standard costing methods within costing systems and demonstrate
the reconciliation of budgeted and actual profit margins.

Suggested Approach
The question asks for a reconciliation. Therefore candidates need to prepare a statement that starts with
the standard (i.e. expected) cost for the two day procedure and then moves through to the actual cost of
the three day stay.
The obvious difference is that there was an extra day. Therefore the first thing to do is to flex the cost to
show what would be expected for a three day stay and then calculate the operational variances.

Marking Guide

Marks
Variances
Standard and actual costs
Format and follow through
2.5
1.5
1

Examiners Comments
Candidates generally scored well here, invariably with a list of variances rather than with the layout
presented in the Examiners answer.

Common Errors
not separating the total nursing cost variance;
calculating the actual costs incorrectly;
calculating variances but making no attempt at standard and actual cost reconciliation.

Post Exam Guide
May 2006 Exam


Question 2(c)

C plc uses a justintime (JIT) purchasing and production process to manufacture Product P. Data for the
output of Product P, and the material usage and material price variances for February, March and April
are shown below:

Month Output (units) Material usage variance Material price variance
February 11,000 15,970 Adverse 12,300 Favourable
March 5,100 5,950 Adverse 4,500 Favourable
April 9,100 8,400 Adverse 6,200 Favourable

The standard material cost per unit of Product P is 12.

Prepare a sketch (not on graph paper) of a percentage variance chart for material usage and for material
price for Product P for the three month period. (Note: your workings must show the co-ordinates of the
points that would be plotted if the chart was drawn accurately.)
(5 Marks)

Rationale
overhead and sales variances.

Suggested Approach
A variance chart plots variances as percentages of the standards. The variances for usage and price, and
the actual output are given. Therefore it is necessary to calculate the standard usage for the actual output
and the standard price for the actual quantity purchased.

Marking Guide

Marks
Variances as percentages 3
Plotting on graph 2

Examiners Comments
This part was poorly answered with relatively few candidates appreciating what was required. Candidates
who understood the meaning of a % variance invariably had more success with the calculation of the
usage % than with the price %.

Common Errors
demonstrating an inability to calculate a % variance;
failing to base the % on an appropriate cost value of material: for example, the price variance was
frequently compared with the standard cost of output rather than with the standard cost of purchases;
using inappropriate axes on the chart.

Post Exam Guide
May 2006 Exam


Question 2(d)

Briefly discuss three reasons why standard costing may not be appropriate in a modern business
environment.
(5 Marks)

Rationale
Covers learning outcome B(i) Explain why and how standards are set in manufacturing and in service
industries with particular reference to the maximisation of efficiency and minimisation of waste.

Suggested Approach
The question states in a modern business environment . Therefore answers must be in the context of the
modern business environment. Answers should state changes that have occurred in the business
environment and then explain why those changes may lead to standard costing being inappropriate.

Marking Guide

Marks
Two marks per valid explanation (maximum 5) 5

Examiners Comments
There were some very good answers but many candidates failed to focus on the specific question asked.

Common Errors
writing about standard costing generally with little or no mention of the modern business environment;
discussing the implications of JIT for stock holding (with seemingly an implied impact on standard
costing);
focussing on service industries where standard costing has never been easily applied;
discussing the implications for overhead apportionment and absorption of a change from labour
intensity to capital intensity;
mentioning TQM without explanation of the implications for standard costing.

Post Exam Guide
May 2006 Exam


Question 2(e)
Compare and contrast marginal costing and throughput accounting.
(5 Marks)

Rationale
Covers learning outcome A(iv) Explain the origins of throughput accounting as super variable costing
and its application as a variant of marginal or variable cost accounting.

Suggested Approach
Define and explain the uses of marginal costing and throughput accounting and then compare and
contrast them.

Marking Guide

Marks
One mark for each valid comment (maximum 5) 5

Examiners Comments
Comparison and contrast were very rarely made clear in answers although there was a reasonable
knowledge of how the 'contribution' was calculated in each case.

Common Errors
demonstrating a lack of appreciation of how the two methods are used;
failing to provide a clear contrast and comparison between the two methods

Post Exam Guide
May 2006 Exam


Question 2(f)

T plc is a large insurance company. The Claims Department deals with claims from policy holders who
have suffered a loss that is covered by their insurance policy. Policy holders could claim, for example, for
damage to property, or for household items stolen in a burglary. The Claims Department staff investigate
each claim and determine what, if any, payment should be made to the claimant.

The manager of the Claims Department has decided to benchmark the performance of the department
and has chosen two areas to benchmark:

the detection of false claims
the speed of processing claims

For each of the above two areas:

(i) state and justify a performance measure
(ii) explain how relevant benchmarking data could be gathered.

(5 marks)

Rationale
Covers learning outcome B(v) Prepare reports using a range of internal and external benchmarks and
interpret the results.

Suggested Approach
The question is in a specified context (the Claims Department of an insurance company). Therefore
answers must focus on the stated context.

Marking Guide

Marks
One mark for each performance measure 2
One mark for each valid explanation of data gathering (maximum 3) 3

Examiners Comments
Many candidates scored reasonable marks but rarely focused their answers sufficiently to the specifics of
the question.

Common Errors
failing to identify any performance measures;
describing how measures fit into the balanced scorecard which was not required;
suggesting unrealistic/inappropriate sources of benchmark data;
providing a generic listing of sources of benchmark data without reference to the specific scenario;
believing that current actual data for the Claims Department is benchmarking data.

Post Exam Guide
May 2006 Exam


Section C 20 marks

Question 3(a)

Prepare, using the additional information that the Manager of the Assembly Department has given you,
a budgetary control statement that would be more helpful to him.
(7 marks)

Rationale
Covers learning outcome C(xi) Evaluate performance using fixed and flexible budget reports.

Suggested Approach
The starting point for this answer is to think What is wrong with the current control statement? The major
problems are that it does not compare like with like (the budget is based on 6,400 hours but the actual
results are for 7,140 hours), and that fixed and variable costs are not shown separately. It is therefore
necessary to identify and separate the fixed and variable costs and then prepare a flexed budget.
Variances should then be based on the flexed statement.

Marking Guide

Marks
Flexed costs 3.5
Variances 2
Format 1.5

Examiners Comments
Candidates did not find this part of the question easy. Sometimes they simply repeated the budget
statement given in the question, rather than making any adjustments to it, or made no attempt at this part.

Common Errors
demonstrating no understanding cost behaviour patterns;
carrying out a simple application of the high/low method without any recognition of the step increase in
fixed costs;
failing to separate fixed from variable costs or controllable from uncontrollable costs in the statement.

Post Exam Guide
May 2006 Exam


Question 3(b)

(i) Discuss the differences between the format of the statement that you have produced and
that supplied by M plc.
(4 marks)

(ii) Discuss the assumption made by the central office of M plc that costs vary in proportion to
assembly labour hours.

(3 marks)

Rationale
(b)(i) covers learning outcome D(ii) - Prepare cost information in appropriate formats for cost centre
managers, taking due account of controllable/uncontrollable costs and the importance of budget
flexing.
(b)(ii) covers learning outcome C(vi) Evaluate and apply alternative approaches to budgeting.

Suggested Approach
(i) In Part (a) you did the thinking and then prepared the revised statement. Now you are required to
explain why you did it!
(ii) Think, will costs vary with labour hours? Is there any indication in the scenario that labour hours
might not be the most appropriate base to use for flexing the budget?

Marking Guide

Marks
(i) Explain the need to flex the budget
One mark per other valid comment
2
2
(ii) State and explain relevant evidence form the scenario 3

Examiners Comments
Many candidates appreciated the difference, in answer to part (i), resulting in a comparison of like with
like, but generally provided little else that was relevant.

Common Errors
failing to appreciate that it was only the cost of furniture packs and the other materials that were
assumed in the question to vary in proportion to the number of assembly hours worked;
failing to provide evidence from the question scenario to support the views expressed.

Post Exam Guide
May 2006 Exam


Question 3(c)

Discuss whether M plc should change to a system of participative budgeting.

(6 marks)

Rationale
Covers learning outcome C(xiii) - Evaluate the impact of budgetary control systems on human behaviour.

Suggested Approach
The question states whether M plc should change. Consequently candidates should think about issues
that would arise in M plc if participative budgeting was introduced. A major theme throughout the scenario
is that the Manager of the Assembly Department is new to the job but he does have many years
experience as a supervisor and will therefore have considerable knowledge about assembling furniture.

Marking Guide

Marks
One mark for each valid point 6

Examiners Comments
This part was fairly well answered providing opportunity for candidates to summarise what they knew
about participation in budget setting.

Common Errors
describing, often at some length, what participation/bottom-up and top-down budgets are, rather than
discussing the pros and cons of a change;
failing to relate answers to the scenario described.

Post Exam Guide
May 2006 Exam


Question 4(a)

Calculate the individual profits of the Sales Department and the Service Department, and of FP as a
whole from the guarantee scheme if:

(i) The repairs are carried out by the Service Department and are charged at full cost plus
40%;
(ii) The repairs are carried out by the Service Department and are charged at marginal cost;
(iii) The repairs are carried out by RS.
(8 marks)

Rationale
Covers learning outcome D(vii) Identify the likely consequences of different approaches to transfer
pricing for divisional decision making, divisional and group profitability, the motivation of divisional
management and the autonomy of individual divisions.

Suggested Approach
The answer requires the profits of the two departments and the company as a whole to be calculated
using three different bases of charging for the repairs. To help with this it is first necessary to calculate the
cost of the repairs under each of the three stated methods.

Marking Guide

Marks
Profit statements 8

Examiners Comments
Some candidates gained full marks but most who attempted this part did not score well. A significant
number, having chosen the question, made little or no attempt at this part.

Common Errors
misunderstanding of the implications, for the two departments and for the company, of the three
different scenarios;
treating the fixed costs inconsistently in the analysis of the three scenarios;
not realising that the profits/losses of FP are the sum of the profits/losses of the two departments.

Post Exam Guide
May 2006 Exam


Question 4(b)

(i) Explain, with reasons, why a full cost plus transfer pricing model may not be appropriate for
FP.
(3 marks)

(ii) Comment on other issues that the managers of FP should consider if they decide to allow RS
to carry out the repairs.
(4 marks)

Rationale
Covers learning outcome D(vi) - Explain the typical consequences of a divisional structure for performance
measurement as divisions compete or trade with each other.

Suggested Approach
(i) The question states for FP. Consequently candidates should use evidence from the scenario
to validate their answers.
(ii) Answers need to be about the issues for the managers of FP.

Marking Guide

Marks
One mark for each relevant comment 7

Examiners Comments
This part was often answered briefly and candidates did not score highly. Part (ii) was generally much
better answered than part (i).

Common Errors
in part (i) failing to identify the two key issues motivation and goal congruence;
not developing an answer that applied to the case scenario given.

Post Exam Guide
May 2006 Exam


Question 4(c)
Briefly explain the advantages and disadvantages of structuring the departments as profit centres.

(5 marks)

Rationale
Covers learning outcome D(i) - Discuss the use of cost, revenue, profit and investment centres in devising
organisation structure and in management control.

Suggested Approach
Again candidates need to think about the information given in the scenario and then use it to answer the
question.

Marking Guide

Marks
One mark for each valid comment 5

Examiners Comments
Candidates did have some idea here based on their general study of the subject area. This was generally
the strongest part of answers to this question.

Common Errors
explaining an insufficient number of advantages and disadvantages;
discussing cost control.


a dotted box.
Answer the ONE compulsory question in Section A. This has 18 sub-
questions and is on pages 2 to 10.
Answer ALL SIX compulsory sub-questions in Section B on pages 12 and 13.

P
1

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TURN OVER
P1 2 November 2006

SECTION A 50 MARKS
ANSWER ALL EIGHTEEN SUB-QUESTIONS

Question One


A company uses standard absorption costing. The following information was recorded by the
company for October:

Budget Actual
Output and sales (units) 8,700 8,200
Selling price per unit 26 31
Variable cost per unit 10 10
Total fixed overheads 34,800 37,000

1.1 The sales price variance for October was

A 38,500 favourable

B 41,000 favourable

C 41,000 adverse

D 65,600 adverse

(2 marks)


The answers to the eighteen sub-questions in Section A should ALL be written in
your answer book.

each sub-question.


November 2006 3 P1

1.2 The sales volume profit variance for October was

A 6,000 adverse

B 6,000 favourable

C 8,000 adverse

D 8,000 favourable
(2 marks)

1.3 The fixed overhead volume variance for October was

A 2,000 adverse

B 2,200 adverse

C 2,200 favourable

D 4,200 adverse
(2 marks)

1.4 A master budget comprises the

A budgeted income statement and budgeted cash flow only.

B budgeted income statement and budgeted balance sheet only.

C budgeted income statement and budgeted capital expenditure only.

D budgeted income statement, budgeted balance sheet and budgeted cash flow only.

(2 marks)


TURN OVER
P1 4 November 2006


The annual operating statement for a company is shown below:

000
Sales revenue 800
Less variable costs 390
Contribution 410
Less fixed costs 90
Less depreciation 20
Net income 300

Assets 675m

The cost of capital is 13% per annum.

1.5 The return on investment (ROI) for the company is closest to

A 444%

B 474%

C 577%

D 607%
(2 marks)

1.6 The residual income (RI) for the company is closest to

000

A

(467)
B

(487)
C

(557)
D

(577)
(2 marks)

November 2006 5 P1

1.7 A company has reported annual operating profits for the year of 892m after charging
96m for the full development costs of a new product that is expected to last for the
current year and two further years. The cost of capital is 13% per annum. The balance
sheet for the company shows fixed assets with a historical cost of 120m. A note to the
balance sheet estimates that the replacement cost of these fixed assets at the beginning
of the year is 168m. The assets have been depreciated at 20% per year.

The company has a working capital of 272m.


The Economic Value Added
(EVA) of the company is closest to

A 6416m
B 7056m
C 8336m
D 10096m
(2 marks)

1.8 Which of the following definitions are correct?

(i) Just-in-time (JIT) systems are designed to produce or procure products or
components as they are required for a customer or for use, rather than for
inventory;

(ii) Flexible manufacturing systems (FMS) are integrated, computer-controlled
production systems, capable of producing any of a range of parts and of switching
quickly and economically between them;

(iii) Material requirements planning (MRP) systems are computer based systems that
integrate all aspects of a business so that the planning and scheduling of
production ensures components are available when needed.

A (i) only
B (i) and (ii) only
(2 marks)


TURN OVER
P1 6 November 2006

1.9 RJD Ltd operates a standard absorption costing system. The following fixed production
overhead data is available for one month:

Budgeted fixed production overhead 1,000,000
Actual fixed production overhead 1,300,000
Total fixed production overhead variance 100,000 Adverse

The actual level of production was

A 180,000 units.
B 240,000 units.
C 270,000 units.
D 280,000 units.
(2 marks)

1.10 WTD Ltd produces a single product. The management currently uses marginal costing
but is considering using absorption costing in the future.

The budgeted fixed production overheads for the period are 500,000. The budgeted
output for the period is 2,000 units. There were 800 units of opening inventory at the
beginning of the period and 500 units of closing inventory at the end of the period.

If absorption costing principles were applied, the profit for the period compared to the
marginal costing profit would be

A 75,000 higher.
B 75,000 lower.
C 125,000 higher.
D 125,000 lower.
(2 marks)


November 2006 7 P1

1.11 JJ Ltd manufactures three products: W, X and Y. The products use a series of different
machines but there is a common machine that is a bottleneck.

The standard selling price and standard cost per unit for each product for the forthcoming
period are as follows:

W X Y

Selling price 200 150 150

Cost
Direct materials 41 20 30
Labour 30 20 36
Overheads 60 40 50
Profit 69 70 34

Bottleneck machine
minutes per unit

9

10

7

40% of the overhead cost is classified as variable

Using a throughput accounting approach, what would be the ranking of the products for
best use of the bottleneck?
(3 marks)

1.12 X Ltd has two production departments, Assembly and Finishing, and two service
departments, Stores and Maintenance.

Stores provides the following service to the production departments: 60% to Assembly
and 40% to Finishing.

Maintenance provides the following service to the production and service departments:
40% to Assembly, 45% to Finishing and 15% to Stores.

The budgeted information for the year is as follows:

Budgeted fixed production overheads
Assembly 100,000
Finishing 150,000
Stores 50,000
Maintenance 40,000


At the end of the year after apportioning the service department overheads, the total fixed
production overheads debited to the Assembly departments fixed production overhead
control account were 180,000.

The actual output achieved was 120,000 units.

Calculate the under/over absorption of fixed production overheads for the Assembly
department.
(4 marks)


TURN OVER
P1 8 November 2006

1.13 A company simultaneously produces three products (X, Y and Z) from a single process.
X and Y are processed further before they can be sold; Z is a by-product that is sold
immediately for $6 per unit without incurring any further costs. The sales prices of X and
Y after further processing are $50 per unit and $60 per unit respectively.

Data for October are as follows:
$
Joint production costs that produced 2,500 units of X, 3,500 units of Y
and 3,000 units of Z
140,000
Further processing costs for 2,500 units of X 24,000
Further processing costs for 3,500 units of Y 46,000

Joint costs are apportioned using the final sales value method.

Calculate the total cost of the production of X for October.
(3 marks)

1.14 ZP Plc operates two subsidiaries, X and Y. X is a component manufacturing subsidiary
and Y is an assembly and final product subsidiary. Both subsidiaries produce one type
of output only. Subsidiary Y needs one component from subsidiary X for every unit of
Product W produced. Subsidiary X transfers to Subsidiary Y all of the components
needed to produce Product W. Subsidiary X also sells components on the external
market.

The following budgeted information is available for each subsidiary:

X Y
Market price per component $800
Market price per unit of W $1,200
Production costs per component $600
Assembly costs per unit of W $400
Non production fixed costs $15m $13m

External demand 10,000 units 12,000 units
Capacity 22,000 units

Taxation rates 25% 30%

The production cost per component is 60% variable. The fixed production costs are
absorbed based on budgeted output.

X sets a transfer price at marginal cost plus 70%.

Calculate the post tax profit generated by each subsidiary.
(4 marks)

November 2006 9 P1

1.15 PP Ltd operates a standard absorption costing system. The following information has
been extracted from the standard cost card for one of its products:

Budgeted production 1,500 units
Direct material cost: 7 kg x 410 2870 per unit

Actual results for the period were as follows:

Direct material (purchased and used): 12,000 kg 52,200

It has subsequently been noted that due to a change in economic conditions the best
price that the material could have been purchased for was 450 per kg during the
period.

(i) Calculate the material price planning variance.

(ii) Calculate the operational material usage variance.

(4 marks)

1.16 CJD Ltd manufactures plastic components for the car industry. The following budgeted
information is available for three of their key plastic components:

W X Y
per unit per unit per unit
Direct material 50 40 35
Direct labour 30 35 30

Units produced and sold 10,000 15,000 18,000

The total number of activities for each of the three products for the period is as follows:

Number of purchase requisitions 1,200 1,800 2,000
Number of set ups 240 260 300

Overhead costs have been analysed as follows:

Receiving/inspecting quality assurance 1,400,000
Production scheduling/machine set up 1,200,000

Calculate the budgeted profit per unit for each of the three products using activity based
budgeting.

(4 marks)

TURN OVER
P1 10 November 2006

1.17 CW Ltd makes one product in a single process. The details of the process for period 2
were as follows:

There were 800 units of opening work in progress valued as follows:

Material 98,000
Labour 46,000
Production overheads 7,600

During the period 1,800 units were added to the process and the following costs were
incurred:

Material 387,800
Labour 276,320

There were 500 units of closing work in progress, which were 100% complete for material,
90% complete for labour and 40% complete for production overheads.

A normal loss equal to 10% of new material input during the period was expected. The
actual loss amounted to 180 units. Each unit of loss was sold for 10 per unit.

CW Ltd uses weighted average costing.

Calculate the cost of the output for the period.
(4 marks)

1.18 SS Ltd operates a standard marginal costing system. An extract from the standard cost
card for the labour costs of one of its products is as follows:

Labour Cost
5 hours x 12 60


Labour rate variance 45,000 adverse
Labour efficiency variance 30,000 adverse

Calculate the actual rate paid per direct labour hour.

(4 marks)


End of Section A

Section B starts on page 12

November 2006 11 P1


TURN OVER
P1 12 November 2006

SECTION B 30 MARKS
MARKS

Question Two

The following scenario is given for sub-questions (a) to (f) opposite

X Plc manufactures specialist insulating products that are used in both residential and
commercial buildings. One of the products, Product W, is made using two different raw
materials and two types of labour. The company operates a standard absorption costing system
and is now preparing its budgets for the next four quarters. The following information has been
identified for Product W:

Sales
Selling price 220 per unit

Sales demand
Quarter 1 2,250 units

Costs
Materials
A 5 kgs per unit @ 4 per kg
B 3 kgs per unit @ 7 per kg

Labour
Skilled 4 hours per unit @ 15 per hour
Semi-skilled 6 hours per unit @ 9 per hour

Annual overheads 280,000
40% of these overheads are fixed and the
remainder varies with total labour hours. Fixed
overheads are absorbed on a unit basis.

Inventory holding policy
Closing inventory of finished goods 30% of the following quarters sales demand
Closing inventory of materials 45% of the following quarters materials usage

The management team are concerned that X Plc has recently faced increasing competition in
the market place for Product W. As a consequence there have been issues concerning the
availability and costs of the specialised materials and employees needed to manufacture
Product W, and there is concern that these might cause problems in the current budget setting
process.

November 2006 13 P1

(a) Prepare the following budgets for each quarter for X Plc:

(i) Production budget in units;

(ii) Raw material purchases budget in kgs and value for Material B.
(5 Marks)

(b) X Plc has just been informed that Material A may be in short supply during the year for
which it is preparing budgets. Discuss the impact this will have on budget preparation
and other areas of X Plc.
(5 Marks)

(c) Assuming that the budgeted production of Product W was 7,700 units and that the
following actual results were incurred for labour and overheads in the year:

Actual production 7,250 units
Actual overheads
Variable 185,000
Fixed 105,000
Actual labour costs
Skilled - 1625 per hour 568,750
Semi-skilled - 8 per hour 332,400

Prepare a flexible budget statement for X Plc showing the total variances that have
occurred for the above four costs only.
(5 Marks)

(d) X Plc currently uses incremental budgeting. Explain how Zero Based Budgeting could
overcome the problems that might be faced as a result of the continued use of the current
system.
(5 Marks)

(e) Explain how rolling budgets are used and why they would be suitable for X Plc.

(5 Marks)

(f) Briefly explain how linear regression analysis can be used to forecast sales and briefly
discuss whether it would be a suitable method for X Plc to use.
(5 marks)


End of Section B

Section C starts on page 15
TURN OVER
P1 14 November 2006


November 2006 15 P1

SECTION C 20 MARKS

Question Three

X Ltd uses an automated manufacturing process to produce an industrial chemical, Product P.
X Ltd operates a standard marginal costing system. The standard cost data for Product P is as
follows:
Standard cost per unit of Product P
Materials
A 10 kgs @ 15 per kilo 150
B 8 kgs @ 8 per kilo 64
C 5 kgs @ 4 per kilo 20
23 kgs

Total standard marginal cost 234

Budgeted fixed production overheads 350,000

In order to arrive at the budgeted selling price for Product P the company adds 80% mark-up to
the standard marginal cost. The company budgeted to produce and sell 5,000 units of Product
P in the period. There were no budgeted inventories of Product P.

The actual results for the period were as follows:

Actual production and sales 5,450 units
Actual sales price 445 per unit
Material usage and cost
A 43,000 kgs 688,000
B 37,000 kgs 277,500
C 23,500 kgs 99,875
103,500 kgs

Required:

(a) Prepare an operating statement which reconciles the budgeted profit to the actual
profit for the period. (The statement should include the material mix and material
yield variances).

(12 marks)

(b) The Production Manager of X Ltd is new to the job and has very little experience of
management information. Write a brief report to the Production Manager of X Ltd
that

(i) interprets the material price, mix and yield variances;
(ii) discusses the merits, or otherwise, of calculating the materials mix and
yield variances for X Ltd.

(8 marks)

TURN OVER
P1 16 November 2006

Question Four

The ZZ Group has two divisions, X and Y. Each division produces only one type of product: X
produces a component (C) and Y produces a finished product (FP). Each FP needs one C. It is
the current policy of the group for C to be transferred to Division Y at the marginal cost of 10
per component and that Y must buy all the components it needs from X.

The markets for the component and the finished product are competitive and price sensitive.
Component C is produced by many other companies but it is thought that the external demand
for the next year could increase to 1,000 units more than the sales volume shown in the current
budget for Division X.

Budgeted data, taken from the ZZ Group Internal Information System, for the divisions for the
next year is as follows:

Division X

Income statement
Sales 70,000
Cost of sales
Variable costs 50,000
Contribution 20,000
Fixed costs (controllable) 15,000
Profit 5,000

Production/Sales (units) 5,000 (3,000 of which are transferred to Division Y)
External demand (units) 3,000 (Only 2,000 of which can be currently satisfied)
Capacity (units) 5,000
External market price per unit 20

Balance sheet extract
Capital employed 60,000

Other information
Cost of capital charge 10%

Division Y

Income statement
Sales 270,000
Cost of sales
Variable costs 114,000
Contribution 156,000
Fixed costs (controllable) 100,000
Profit 56,000

Production/Sales (units) 3,000
Capacity (units) 7,000
Market price per unit 90

Balance sheet extract
Capital employed 110,000

Other information
Cost of capital charge 10%

November 2006 17 P1

Four measures are used to evaluate the performance of the Divisional Managers. Based on the
data above, the budgeted performance measures for the two divisions are as follows:

Division X Division Y
Residual income (1,000) 45,000
Return on capital employed 833% 5091%
Operating profit margin 714% 2074%
Asset turnover 117 246

Current policy
It is the current policy of the group for C to be transferred to Division Y at the marginal cost of
10 per component and that Y must buy all the components that it needs from X.

Proposed policy
ZZ Group is thinking of giving the Divisional Managers the freedom to set their own transfer
price and to buy the components from external suppliers but there are concerns about problems
that could arise by granting such autonomy.

Required:

(a) If the transfer price of the component is set by the Manager of Division X at the
current market price (20 per component), recalculate the budgeted
performance measures for each division.
(8 marks)

(b) Discuss the changes to the performance measures of the divisions that would
arise as a result of altering the transfer price to 20 per component.

(6 marks)

(c) (i) Explain the problems that could arise for each of the Divisional Managers
and for ZZ Group as a whole as a result of giving full autonomy to the
Divisional Managers.

(ii) Discuss how the problems you have explained could be resolved without
resorting to a policy of imposed transfer prices.
(6 marks)




TURN OVER
P1 18 November 2006

November 2006 19 P1

P1 20 November 2006

PRESENT VALUE TABLE

n
r

+ 1

payment or receipt.

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

November 2006 21 P1

years
r
r
n
+ ) (1 1

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

P1 22 November 2006

Formulae
PROBABILITY

Rules of Addition



Quadratic Equations
If aX
2
by:
a
ac b b
X
2
4
2

=

Arithmetic Mean
n
x
x

=
f
fx
x

Standard Deviation
n
x x
SD
2
) (
=
2
2
x
f
fx
SD

INDEX NUMBERS
1
/P
0
1
/Q
0

Price: 100 x
w
P
P
w
o
1
|
|
.
|
\
|

Quantity: 100 x
1
w
Q
Q
w
o
|
|
.
|
\
|

TIME SERIES
Additive Model

November 2006 23 P1


Y = a + bX or Y - Y = b(X X)

where
b =
2 2
) X ( X n
) Y )( X ( XY n
) X ( Variance
) XY ( Covariance

=

and a = Y bX

or solve
Y = na + b X
XY = a X + bX
2


} ) Y ( Y n }{ ) X ( X n {
) Y )( X ( XY n
) XY ( Covariance
r
2 2 2 2

= =

R(rank) = 1 -
) 1 (
6
2
2
n n
d


S = X[1 + r]
n

Annuity

PV =
(
(
n
r
r
] 1 [
1
1
1

Perpetuity
PV =
r
1

P1 24 November 2006

November 2006 25 P1

P1 26 November 2006

November 2006 27 P1

P1 28 November 2006

Managerial Level
November 2006
Post Exam Guide

November 2006 Exam

General Comments

Performance on this paper was broadly in line with that achieved at previous sittings.
Performance on the calculation questions, especially the shorter-form question 1, was
relatively strong and once again gave candidates every opportunity for success. However,
also once again, success was too often not achieved due to poor performance in the
remaining questions.

Poor time management seemed to be a factor for some candidates. Another problem was a
lack of preparation for the analysis and application required in the longer-form scenario based
questions which were also more narrative based. Candidates must recognise that narrative
answers, required in many of the questions in Sections B and C, form a significant part of the
paper (approximately 30%).

Question 1 (compulsory Section A) was invariably attempted first and most candidates were
able to complete all parts of the question. However it was surprising to find that a number of
candidates once again failed to attempt all ten multiple-choice questions. In the second part of
question 1 (1.11 to 1.18) reasonable marks were gained on average on all parts, which this
time all required calculations. Common errors to highlight were the comparison of budgeted
and actual overhead costs (in 1.12), the apportionment of a share of joint costs to a by-
product (in 1.13) and the inclusion of elements of the FIFO method (in 1.17).

The improved performance in question 2 (compulsory Section B), seen at the last
examination, was maintained. However, candidates performance remains disappointing.
Narrative answers too often indicated a failure to read questions carefully and a general
failure to answer the question with reference to the scenario presented.

The choice from the two questions in Section C was made last by the majority of candidates.
A very clear preference was demonstrated for question 3 despite the fact that the calculations
required in answer to part (a) of question 4, for eight marks, were straightforward. Reasonable
marks were gained for the numerical part (a) of questions 3 and 4 but narrative answers to
the remaining parts were very disappointing.

Candidates must try to manage the time they spend on each question in accordance with the
marks available. They must also prepare themselves with a good knowledge of topic areas
and read questions carefully. Reading time is provided in the examination for that purpose.
Candidates must then respond to the specifics of a question and relate their narrative
answers to the scenario presented, not simply write generally about a topic.

Post Exam Guide

November 2006 Exam

Section A 50 marks


A company uses standard absorption costing. The following information was recorded by the
company for October:

Budget Actual
Output and sales (units) 8,700 8,200
Total fixed overheads 34,800 37,000

Question 1.1

The sales price variance for October was

A 38,500 favourable

B 41,000 favourable

C 41,000 adverse

D 65,600 adverse

(2 marks)
The answer is B

Workings

Standard selling price 26
Actual selling price 31
5 x 8,200 =41,000 Favourable


Post Exam Guide

November 2006 Exam

Question 1.2

The sales volume profit variance for October was

A 6,000 adverse

B 6,000 favourable

C 8,000 adverse

D 8,000 favourable
(2 marks)

The answer is A

Workings
Sales profit volume variance
Units
Budgeted sales 8,700
Actual sales 8,200
500 x (26 - 10 - 4) =6,000 Adverse

Question 1.3

The fixed overhead volume variance for October was

A 2,000 adverse

B 2,200 adverse

C 2,200 favourable

D 4,200 adverse
(2 marks)

The answer is A
Workings
Fixed overhead volume variance
Units
Budgeted output 8,700
Actual output 8,200
500 x 4 =2,000 Adverse


Post Exam Guide

November 2006 Exam

Question 1.4

A master budget comprises the

A budgeted income statement and budgeted cash flow only.

B budgeted income statement and budgeted balance sheet only.

C budgeted income statement and budgeted capital expenditure only.

D budgeted income statement, budgeted balance sheet and budgeted cash flow only.
(2 marks)
The answer is D


The annual operating statement for a company is shown below:

000
Sales revenue 800
Less variable costs 390
Contribution 410
Less fixed costs 90
Less depreciation 20
Net income 300

Assets 675m

The cost of capital is 13% per annum.

Question 1.5

The return on investment (ROI) for the company is closest to

A 444%

B 474%

C 577%

D 607%
(2 marks)

The answer is A
Workings
ROI 300,000 / 6,750,000 x 100 =444%


Post Exam Guide

November 2006 Exam

Question 1.6
The residual income (RI) for the company is closest to

000

A

(467)
B

(487)
C

(557)
D

(577)
(2 marks)
The answer is D

Workings

RI 300K 8775K (13% x 675m) =-5775K


Post Exam Guide

November 2006 Exam

Question 1.7
A company has reported annual operating profits for the year of 892m after charging 96m for the full
development costs of a new product that is expected to last for the current year and two further years.
The cost of capital is 13% per annum. The balance sheet for the company shows fixed assets with a
historical cost of 120m. A note to the balance sheet estimates that the replacement cost of these fixed
assets at the beginning of the year is 168m. The assets have been depreciated at 20% per year.

The company has a working capital of 272m.


The Economic Value Added
(EVA) of the company is closest to

A 6416m
B 7056m
C 8336m
D 10096m
(2 marks)

The answer is A
Workings
m
Profit 8920
Add
Current depreciation (120 x 20%) 2400
Development costs (960 x 2/3) 640
Less
Replacement depreciation (168 x 20%) 3360
Adjusted profit 8600
Less cost of capital charge (Working 1) 2184
EVA 6416

Working 1
Cost of capital charge
Fixed assets (168 336) 1344
Working capital 272
Development costs 64
168.0 x 13% =2184


Post Exam Guide

November 2006 Exam

Question 1.8

Which of the following definitions are correct?

(i) J ust-in-time (J IT) systems are designed to produce or procure products or components as
they are required for a customer or for use, rather than for inventory;

(ii) Flexible manufacturing systems (FMS) are integrated, computer-controlled production
systems, capable of producing any of a range of parts and of switching quickly and
economically between them;

(iii) Material requirements planning (MRP) systems are computer based systems that integrate all
aspects of a business so that the planning and scheduling of production ensures components
are available when needed.

A (i) only
B (i) and (ii) only
(2 marks)

The answer is B


Post Exam Guide

November 2006 Exam

Question 1.9
RJ D Ltd operates a standard absorption costing system. The following fixed production overhead data is
available for one month:

Budgeted fixed production overhead 1,000,000
Actual fixed production overhead 1,300,000
Total fixed production overhead variance 100,000 Adverse

The actual level of production was

A 180,000 units.
B 240,000 units.
C 270,000 units.
D 280,000 units.
(2 marks)
The answer is B

Workings

OAR 1,000/200 =5 per unit

Total variance
Actual 1,300,000
Absorbed 1,200,000
100,000 adverse
1,200,000/5 = 240,000


Post Exam Guide

November 2006 Exam

Question 1.10

WTD Ltd produces a single product. The management currently uses marginal costing but is considering
using absorption costing in the future.

The budgeted fixed production overheads for the period are 500,000. The budgeted output for the period
is 2,000 units. There were 800 units of opening inventory at the beginning of the period and 500 units of
closing inventory at the end of the period.

If absorption costing principles were applied, the profit for the period compared to the marginal costing
profit would be

A 75,000 higher.
B 75,000 lower.
C 125,000 higher.
D 125,000 lower.
(2 marks)

The answer is B

Workings

Units
Opening inventory 800
Decrease 300 x (500,000/2,000) =75,000 lower


Post Exam Guide

November 2006 Exam

Question 1.11

J J Ltd manufactures three products: W, X and Y. The products use a series of different machines but
there is a common machine that is a bottleneck.

The standard selling price and standard cost per unit for each product for the forthcoming period are as
follows:

W X Y


Cost
Labour 30 20 36
Overheads 60 40 50
Profit 69 70 34

Bottleneck machine
minutes per unit

9 10

7

40% of the overhead cost is classified as variable

Using a throughput accounting approach, what would be the ranking of the products for best use of the
bottleneck?
(3 marks)

Workings

W X Y

Cost
Throughput contribution 159 130 120
TP/LF 159/9 130/10 120/7
1766 1300 1714
Ranking 1
st
3
rd
2
nd


Post Exam Guide

November 2006 Exam

Question 1.12
X Ltd has two production departments, Assembly and Finishing, and two service departments, Stores and
Maintenance.

Stores provides the following service to the production departments: 60% to Assembly and 40% to
Finishing.

Maintenance provides the following service to the production and service departments: 40% to Assembly,
45% to Finishing and 15% to Stores.

The budgeted information for the year is as follows:

Budgeted fixed production overheads
Assembly 100,000
Finishing 150,000
Stores 50,000
Maintenance 40,000


At the end of the year after apportioning the service department overheads, the total fixed production
overheads debited to the Assembly departments fixed production overhead control account were
180,000.

The actual output achieved was 120,000 units.

Calculate the under/over absorption of fixed production overheads for the Assembly department.

(4 marks)

Workings

Assembly
()
Finishing
()
Stores
()
Maintenance
()
Overheads 100,000 150,000 50,000 40,000
Reapportion
Maintenance 16,000 18,000 6,000 -40,000
Stores 33,600 22,400 -56,000
149,600 190,400 Nil Nil
OAR 149,600/100,000
1496 per unit

Assembly
Absorbed 120,000 x 1496 179,520
Incurred 180,000
Under absorbed 480


Post Exam Guide

November 2006 Exam

Question 1.13
A company simultaneously produces three products (X, Y and Z) from a single process. X and Y are
processed further before they can be sold; Z is a by-product that is sold immediately for $6 per unit without
incurring any further costs. The sales prices of X and Y after further processing are $50 per unit and $60
per unit respectively.

Data for October are as follows:
$
J oint production costs that produced 2,500 units of X, 3,500 units of Y and
3,000 units of Z
140,000
Further processing costs for 2,500 units of X 24,000
Further processing costs for 3,500 units of Y 46,000

J oint costs are apportioned using the final sales value method.

Calculate the total cost of the production of X for October.
(3 marks)

Workings

$140,000 - $18,000 (by product) $122,000
Sales revenue
X (2,500 x $50) $125,000
Y (3,500 x $60) $210,000
$335,000

Split between products
X [($125,000/$335,000) x $122,000] +$24,000 = $69,522
Y [($210,000/$335,000) x $122,000] +$46,000 = $122,475
$191,997 rounding


Post Exam Guide

November 2006 Exam

Question 1.14

ZP Plc operates two subsidiaries, X and Y. X is a component manufacturing subsidiary and Y is an
assembly and final product subsidiary. Both subsidiaries produce one type of output only. Subsidiary Y
needs one component from subsidiary X for every unit of Product W produced. Subsidiary X transfers to
Subsidiary Y all of the components needed to produce Product W. Subsidiary X also sells components
on the external market.

The following budgeted information is available for each subsidiary:

X Y
Market price per component $800
Market price per unit of W $1,200
Production costs per component $600
Assembly costs per unit of W $400
Non production fixed costs $15m $13m

External demand 10,000 units 12,000 units
Capacity 22,000 units

Taxation rates 25% 30%

The production cost per component is 60% variable. The fixed production costs are absorbed based on
budgeted output.

X sets a transfer price at marginal cost plus 70%.

Calculate the post tax profit generated by each subsidiary.
(4 marks)

Workings

1.14 X Y
($) ($)
Sales
10,000 x $800 8,000,000
12,000 x $612 7,344,000
12,000 x $1,200 14,400,000
Costs
22,000 x $360 -7,920,000
12,000 x $1,012 -12,144,000
Fixed costs
Production 22,000 x $240 -5,280,000
Non production -1,500,000 -1,300,000

Profit 644,000 956,000
Tax -161,000 -286,800
Profit after tax 483,000 669,200


Post Exam Guide

November 2006 Exam

Question 1.15
PP Ltd operates a standard absorption costing system. The following information has been extracted from
the standard cost card for one of its products:

Budgeted production 1,500 units
Direct material cost: 7 kg x 410 2870 per unit


Direct material (purchased and used): 12,000 kg 52,200

It has subsequently been noted that due to a change in economic conditions the best price that the
material could have been purchased for was 450 per kg during the period.

(i) Calculate the material price planning variance.

(ii) Calculate the operational material usage variance.

(4 marks)

Workings

Planning variance per kg
Ex-ante standard 410
Ex-post standard 450
040 x 11,200 =4,480 Adverse

Usage variance kg
Standard 7 x 1,600 11,200
Actual 12,000
800 x 450 =3,600 Adverse


Post Exam Guide

November 2006 Exam

Question 1.16

CJ D Ltd manufactures plastic components for the car industry. The following budgeted information is
available for three of their key plastic components:

W X Y

Units produced and sold 10,000 15,000 18,000

The total number of activities for each of the three products for the period is as follows:

Number of purchase requisitions 1,200 1,800 2,000
Number of set ups 240 260 300

Overhead costs have been analysed as follows:

Receiving/inspecting quality assurance 1,400,000
Production scheduling/machine set up 1,200,000

Calculate the budgeted profit per unit for each of the three products using activity based budgeting.

(4 marks)

Workings

W X Y
Selling price 20000 18300 17500
Overheads
Receiving/inspecting etc 3360 3360 3111
Production scheduling 3600 2600 2500
Profit per unit 5040 4840 5389

Cost driver rates
Receiving/inspecting quality assurance 1,400,000/5,000 =280 per requisition
Production scheduling/machine set up 1,200,000/800 =1,500 per set up


Post Exam Guide

November 2006 Exam

Question 1.17
CW Ltd makes one product in a single process. The details of the process for period 2 were as follows:

There were 800 units of opening work in progress valued as follows:

Material 98,000
Labour 46,000

During the period 1,800 units were added to the process and the following costs were incurred:

Material 387,800
Labour 276,320

There were 500 units of closing work in progress, which were 100% complete for material, 90% complete
for labour and 40% complete for production overheads.

A normal loss equal to 10% of new material input during the period was expected. The actual loss
amounted to 180 units. Each unit of loss was sold for 10 per unit.

CW Ltd uses weighted average costing.

Calculate the cost of the output for the period.
(4 marks)

Workings

Equivalent units table
Description Units Materials Labour Overheads
% EU % EU % EU
Output 1,920 100 1,920 100 1,920 100 1,920
CWIP 500 100 500 90 450 40 200
2,420 2,370 2,120

Costs
OWIP 98,000 46,000 7,600
Process 387,800 276,320 149,280
485,800 322,320 156,880
Less normal loss 180 x 10 1,800
484,000
EU cost 200 136 74

Value of Output 1,920 units x (200 +136 +74) =787,200


Post Exam Guide

November 2006 Exam

Question 1.18

SS Ltd operates a standard marginal costing system. An extract from the standard cost card for the
labour costs of one of its products is as follows:

Labour cost
5 hours x 12 60


Labour rate variance 45,000 adverse
Labour efficiency variance 30,000 adverse

Calculate the actual rate paid per direct labour hour.

(4 marks)

Workings

Efficiency variance
Standard hours 57,500
Actual hours 60,000
2,500 x 12 =30,000 Adverse

Rate variance
Standard rate 1200
Actual rate 1275
075 x 60,000 hours =45,000 Adverse


Post Exam Guide

November 2006 Exam

Section B 30 marks

Question 2(a)

Prepare the following budgets for each quarter for X Plc:

(i) Production budget in units;

(ii) Raw material purchases budget in kgs and value for Material B.
(5 Marks)

Rationale
Sub-question (a) covers learning outcome C(iii) Calculate projected revenues and costs based on
product/service volumes, pricing strategies and cost structures.

Suggested Approach
Draw up a pro-forma for each budget and insert the figures.

Marking Guide

Marks
Production budget 2
Raw material purchases budget 3

Examiners Comments
This was a relatively straightforward question, although a number of calculations were required. However
a number of common errors were made.

Common Errors
Adding opening inventory and deducting closing inventory i.e. reversing the required inventory
adjustment;
Ignoring either the opening or closing inventory in the adjustments;
Ignoring opening inventory at the start of Quarter 1;
Merging the two materials together;
Using sales quantities rather than production quantities in part (ii).


Post Exam Guide

November 2006 Exam

Question 2(b)

X Plc has just been informed that Material A may be in short supply during the year for which it is
preparing budgets. Discuss the impact this will have on budget preparation and other areas of X Plc.
(5 Marks)

Rationale
Sub-question (b) covers learning outcome C(iii) Calculate projected revenues and costs based on

Suggested Approach
Consider the question in the context of the scenario and focus on issues arising for X Plc as a result of a
shortage of material A key budget factor. Also broader answers considering other impacts on budget
preparation are just as valid.

Marking Guide

Marks
Reasonable impact on budget preparation and other areas 1 mark each point 5

Examiners Comments
A wide range of implications of a possible shortage of Material A, especially for other areas of X Plc, were
accepted in candidates' answers.

Common Errors
Failing to appreciate that Material A may be used in other products manufactured by X Plc and that,
as a consequence the allocation of Material A based on contribution per unit of the resource may be
required;
Not recognising that Material A becomes the key budget factor and/or the implications of this for
budget preparation.


Post Exam Guide

November 2006 Exam

Question 2(c)
Assuming that the budgeted production of Product W was 7,700 units and that the following actual results
were incurred for labour and overheads in the year:

Actual production 7,250 units
Actual overheads
Variable 185,000
Fixed 105,000
Actual labour costs
Skilled - 1625 per hour 568,750
Semi-skilled - 8 per hour 332,400

Prepare a flexible budget statement for X Plc showing the total variances that have occurred for the above
four costs only.
(5 Marks)

Rationale
Sub-question (c) covers learning outcome C(xi) Evaluate performance using fixed and flexible budget
reports.

Suggested Approach
Produce the operating statement pro-forma
Insert the fixed and actual figures
Calculate and insert the flexed budget figures use the high low method
Calculate the variances for each cost
Total the columns in the statement

Marking Guide

Marks
Format 1
Flexed budget
Variances
2
2

Examiners Comments
Full marks were gained by a reasonable number of candidates but there were also several common
errors.

Common Errors
Making no attempt to flex the budget and simply calculating the variances as the difference between
the actual costs and the fixed budget;
Basing the flexing on the actual cost figures (i.e. Actual 7,700/7,250) to produce a flexed budget;
Flexing the fixed overhead which was clearly stated in the question to be 40% of 280,000;
Making errors in variance signing (adverse/favourable).


Post Exam Guide

November 2006 Exam

Question 2(d)

X Plc currently uses incremental budgeting. Explain how Zero Based Budgeting could overcome the
problems that might be faced as a result of the continued use of the current system.
(5 Marks)

Rationale
Sub-question (d) covers learning outcome C(vi) Evaluate and apply alternative approaches to budgeting.

Suggested Approach
Explain the drawbacks of incremental budgeting
Explain the benefits of zero based budgeting
Ensure your answer is set in the context of the scenario

Marking Guide

Marks
Incremental budgeting
Zero based budgeting
2
3

Examiners Comments
Most candidates were able to describe the basic characteristics of both incremental and zero-based
budgeting but were often unable to develop this and/or apply it to the situation of X Plc.

Common Errors
Demonstrating a lack of appreciation of the implications of a changing business environment.


Post Exam Guide

November 2006 Exam

Question 2(e)
Explain how rolling budgets are used and why they would be suitable for X Plc.
(5 Marks)

Rationale
Sub-question (e) covers learning outcome C(vi) Evaluate and apply alternative approaches to budgeting.

Suggested Approach
Explain rolling budgets candidates could make up their own example by way of explanation.
Consider its appropriateness for X Plc, that is, the company is experiencing increasing competition and will
need to be able to react, hence the fixed budget may not be appropriate etc.

Marking Guide

Marks
Rolling budget system 3
Relate to X Plc 1 mark for each point 2

Examiners Comments
Candidates frequently seemed to confuse rolling budgets with revisions to budgets.

Common Errors
Failing to clearly explain and/or illustrate the key characteristics of, and rationale for, rolling budgets
as opposed to, for example, budget revisions/outturn forecasts;
Demonstrating a lack of awareness of why rolling budgets would be suitable for X Plc.


Post Exam Guide

November 2006 Exam

Question 2(f)
Briefly explain how linear regression analysis can be used to forecast sales and briefly discuss whether it
would be a suitable method for X Plc to use.
(5 marks)

Rationale
Sub-question (f) covers learning outcome C(ii) Calculate projected product/service volumes employing
appropriate forecasting techniques.

Suggested Approach
Explain linear regression candidates again could use their own examples to illustrate
Consider the suitability for X Plc. Candidates may have a positive or negative view but this must be
explained.

Marking Guide

Marks
Linear regression explanation 3
Suitability for X Plc 2

Examiners Comments
This part was generally answered poorly.

Common Errors
Confusing the analysis with linear regression applied to costs. Many candidates
discussed/illustrated equations containing fixed and variable costs;
Failing to appreciate the limitations of extrapolation and the problems caused by variations e.g.
cyclical, seasonal;
Failing to appreciate the implications of the changing business environment.


Post Exam Guide

November 2006 Exam

Section C 20 marks

Question 3(a)

(a) Prepare an operating statement which reconciles the budgeted profit to the actual profit for
the period. (The statement should include the material mix and material yield variances).

(12 marks)

Rationale
Part (a) covers learning outcome B(iii) Prepare and discuss a report which reconciles budget and actual
profit using absorption and/or marginal costing principles.

Suggested Approach
Produce the operating statement pro-forma
Insert the budgeted and actual profit figures
Calculate the variances
Reconcile the budgeted and actual profit figures

Marking Guide

Marks
Format 1
Sales volume contribution variance 1
Selling price variance 1
Material price variances A, B and C
Material mix variances A, B and C
Material yield variance
Fixed production overhead expenditure variance

3
3
2
1

Examiners Comments
Many candidates made a reasonable attempt at variance calculation and reconciliation.

Common Errors
Duplicating variances: in particular many candidates calculated the material usage variance and
included it in the reconciliation statement in addition to the material mix and yield variances;
Evaluating the sales volume variance at sales value rather than using the contribution rate;
Calculating the fixed overhead volume variance, which does not arise in marginal costing;
Making errors in variance signing (adverse/favourable).


Post Exam Guide

November 2006 Exam

Question 3(b)

(b) The Production Manager of X Ltd is new to the job and has very little experience of
management information. Write a brief report to the Production Manager of X Ltd that

(i) interprets the material price, mix and yield variances;
(ii) discusses the merits, or otherwise, of calculating the materials mix and yield
variances for X Ltd.

(8 marks)

Rationale
Part (b) covers learning outcome B(ii) - Calculate and interpret material, labour, variable overhead, fixed
overhead and sales variances.

Suggested Approach
Produce the report headings.
Interpret the material price, mix and yield variances that have been calculated in part a).
Discuss the merits or otherwise of these calculations for X Plc, that is, different aspects of the production
process are highlighted to allow the managers to attain the optimum combination of materials input and so
on.

Marking Guide

Marks
Report format 1
Interpretation of material price, mix and yield variances
Advantages of calculating mix and yield variances 1 mark for each point
4
3

Examiners Comments
Answers were often generic in nature, rather than related to the answers to part (a), and frequently merely
stated how the different variances are calculated. Other candidates believed wrongly that simply stating
the obvious was enough e.g. 'the material price variance is adverse'.

Common Errors
Producing incorrect interpretations of variances (based on the candidates own figures).


Post Exam Guide

November 2006 Exam

Question 4(a)

(a) If the transfer price of the component is set by the Manager of Division X at the current
market price (20 per component), recalculate the budgeted performance measures for
each division.
(8 marks)

Rationale
Part (a) covers learning outcome D(iv) Calculate and apply measures of performance for investment
centres.

Suggested Approach
Calculate each of the four performance measures as a result of setting the transfer price at market price.

Marking Guide

Marks
Income statement 3
Residual income 1
ROCE
Operating profit margin
Asset turnover
1
1.5
1.5

Examiners Comments
An extremely unpopular question but the calculations were often well done where attempted.

Common Errors
Not adjusting the sales value of Division X;
Not understanding the asset turnover calculation.


Post Exam Guide

November 2006 Exam

Question 4(b)

(b) Discuss the changes to the performance measures of the divisions that would arise as a
result of altering the transfer price to 20 per component.

(6 marks)

Rationale
Part (b) covers learning outcome D(vi) - Explain the typical consequences of a divisional structure for
performance measurement as divisions compete or trade with each other.

Suggested Approach
Produce a table that compares each of the four performance measures.
Discuss the differences for each performance measure.
Consider the overall impact on the group.

Marking Guide

Marks
Changes to the performance measures of the divisions 1 mark for each 4
Overall impact 2

Examiners Comments
Often only very brief and basic comments, if any, were made on the changed performance measures..


Post Exam Guide

November 2006 Exam

Question 4(c)

(c) (i) Explain the problems that could arise for each of the Divisional Managers and for
ZZ Group as a whole as a result of giving full autonomy to the Divisional Managers.

(ii) Discuss how the problems you have explained could be resolved without resorting
to a policy of imposed transfer prices.
(6 marks)

Rationale
Part (c) covers learning outcome D(vii) - Identify the likely consequences of different approaches to
transfer pricing for divisional decision making, divisional and group profitability, the motivation of divisional

Suggested Approach
Discuss the problems of giving full autonomy to the divisional managers.
Discuss how these problems could be overcome.
Ensure that the answer is within the context of the scenario.

Marking Guide

Marks
Problems that could arise as a result of full autonomy 1 mark for each point 3
Resolution of these problems 1 mark for each point 3

Examiners Comments
A flexible approach was taken to marking. For example, it was accepted that negotiation may be judged
not to be involved in part (i) but instead could be viewed as a solution in part (ii).

Common Errors
Failing to appreciate the potential problems and solutions arising from the scenario presented.



during which you should read the question paper and, if you wish, highlight
and/or make notes on the question paper. However, you will not be allowed,
under any circumstances, to open the answer book and start writing or use
your calculator during the reading time.
a dotted box.
ALL answers must be written in the answer book. Answers or notes written
on the question paper will not be submitted for marking.
The list of verbs as published in the syllabus is given for reference on the
inside back cover of this question paper.
Write your candidate number, the paper number and examination subject title
in the spaces provided on the front of the answer book. Also write your
contact ID and name in the space provided in the right hand margin and seal
to close.

P
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TURN OVER
P1 2 May 2007

SECTION A 40 MARKS
ANSWER ALL FIFTEEN SUB-QUESTIONS

Question One

1.1 Which of the following best describes an investment centre?

A A centre for which managers are accountable only for costs.

B A centre for which managers are accountable only for financial outputs in the form of
generating sales revenue.

C A centre for which managers are accountable for profit.

D A centre for which managers are accountable for profit and current and non-current
assets.

(2 marks)

1.2 A flexible budget is

A a budget which, by recognising different cost behaviour patterns, is designed to change
as volume of activity changes.

B a budget for a twelve month period which includes planned revenues, expenses, assets
and liabilities.

C a budget which is prepared for a rolling period which is reviewed monthly, and updated
accordingly.

D a budget for semi-variable overhead costs only.
(2 marks)


The answers to the fifteen sub-questions in Section A should ALL be written in your
answer book.

each sub-question.


May 2007 3 P1

1.3 The term budget slack refers to the

A lead time between the preparation of the master budget and the commencement of the
budget period.

B difference between the budgeted output and the actual output achieved.

C additional capacity available which is budgeted for even though it may not be used.

D deliberate overestimation of costs and/or underestimation of revenues in a budget.

(2 marks)

1.4 PP Ltd is preparing the production and material purchases budgets for one of their
products, the SUPERX, for the forthcoming year.

The following information is available:

SUPERX
Sales demand (units) 30,000
Material usage per unit 7 kgs
Estimated opening inventory 3,500 units
Required closing inventory 35% higher than opening inventory

How many units of the SUPERX will need to be produced?

A 28,775

B 30,000

C 31,225

D 38,225

(2 marks)


TURN OVER
P1 4 May 2007


X Ltd operates a standard costing system and absorbs fixed overheads on the basis of machine
hours. Details of budgeted and actual figures are as follows:

Budget Actual
Fixed overheads 2,500,000 2,010,000
Machine hours 1,000,000 hours 900,000 hours

1.5 The fixed overhead expenditure variance is

A 190,000 favourable

B 250,000 adverse

C 300,000 adverse

D 490,000 favourable
(2 marks)

1.6 The fixed overhead volume variance is


B 250,000 adverse

C 300,000 adverse


(2 marks)

1.7 A company operates a standard absorption costing system. The budgeted fixed
production overheads for the company for the latest year were 330,000 and budgeted
output was 220,000 units. At the end of the companys financial year the total of the fixed
production overheads debited to the Fixed Production Overhead Control Account was
260,000 and the actual output achieved was 200,000 units.

The under / over absorption of overheads was

A 40,000 over absorbed
B 40,000 under absorbed
C 70,000 over absorbed
D 70,000 under absorbed
(2 marks)

May 2007 5 P1

1.8 A company operates a standard absorption costing system. The following fixed
production overhead data are available for the latest period:

Budgeted Output 300,000 units
Budgeted Fixed Production Overhead 1,500,000
Actual Fixed Production Overhead 1,950,000
Fixed Production Overhead Total Variance 150,000 adverse

The actual level of production for the period was nearest to

A 277,000 units
B 324,000 units
C 360,000 units
D 420,000 units
(2 marks)

1.9 Which of the following best describes a basic standard?

A A standard set at an ideal level, which makes no allowance for normal losses, waste and
machine downtime.

B A standard which assumes an efficient level of operation, but which includes allowances
for factors such as normal loss, waste and machine downtime.

C A standard which is kept unchanged over a period of time.

D A standard which is based on current price levels.
(2 marks)

1.10 XYZ Ltd is preparing the production budget for the next period. The total costs of
production are a semi-variable cost. The following cost information has been collected in
connection with production:

Volume (units) Cost
4,500 29,000
6,500 33,000

The estimated total production costs for a production volume of 5,750 units is nearest to

A 29,200
B 30,000
C 31,500
D 32,500
(2 marks)

TURN OVER
P1 6 May 2007

1.11 S Ltd manufactures three products, A, B and C. The products use a series of different
machines but there is a common machine, P, that is a bottleneck.

The selling price and standard cost for each product for the forthcoming year is as follows:

A B C
$ $ $
Conversion costs 55 40 66

Machine P - minutes 12 10 7

Calculate the return per hour for each of the products.
(4 marks)

1.12 The following data have been extracted from a companys year-end accounts:

Turnover 7,055,016
Gross profit 4,938,511
Operating profit 3,629,156
Non-current assets 4,582,000
Cash at bank 4,619,582
Short term borrowings 949,339
Trade receivables 442,443
Trade payables 464,692

Calculate the following four performance measures:

(i) Operating profit margin;
(ii) Return on capital employed;
(iii) Trade receivable days (debtors days);
(iv) Current (Liquidity) ratio.

(4 marks)

May 2007 7 P1

1.13 PQR Ltd operates a standard absorption costing system. Details of budgeted and actual
figures are as follows:

Budget Actual
Sales volume (units) 100,000 110,000
Total cost per unit 8 830

(i) Calculate the sales price variance.
(2 marks)

(ii) Calculate the sales volume profit variance.
(2 marks)

1.14 WX has two divisions, Y and Z. The following budgeted information is available.

Division Y manufactures motors and budgets to transfer 60,000 motors to Division Z and
to sell 40,000 motors to external customers.

Division Z assembles food mixers and uses one motor for each food mixer produced.

The standard cost information per motor for Division Y is as follows:

Direct materials 70
Direct labour 20
Variable production overhead 10
Fixed production overhead 40
Fixed selling and administration overhead 10

In order to set the external selling price the company uses a 3333% mark up on total standard
cost.

(i) Calculate the budgeted profit/(loss) for Division Y if the transfer price is set at
marginal cost.

(ii) Calculate the budgeted profit/(loss) for Division Y if the transfer price is set at
the total production cost.
(4 marks)


TURN OVER
P1 8 May 2007

1.15 RF Ltd is about to launch a new product in June 2007. The company has commissioned
some market research to assist in sales forecasting. The resulting research and analysis
established the following equation:

Y = Ax
06

Where Y is the cumulative sales units, A is the sales units in month 1, x is the month
number.
June 2007 is Month 1.
Sales in June 2007 will be 1,500 units.

Calculate the forecast sales volume for each of the months June, July and August 2007
and for that three month period in total.
(4 marks)


Reminder

All answers to Section A must be written in your answer book.

Answers to Section A written on the question paper will not be
submitted for marking.

End of Section A

Section B starts on page 10

May 2007 9 P1


P1 10 May 2007

SECTION B 30 MARKS
MARKS

Question Two

(a) A company uses variance analysis to monitor the performance of the team of workers
which assembles Product M. Details of the budgeted and actual performance of the team
for last period were as follows:

Budget Actual
Output of product M 600 units 680 units
Wage rate 30 per hour 32 per hour
Labour hours 900 hours 1,070 hours

It has now been established that the standard wage rate should have been 3120 per
hour.

(i) Calculate the labour rate planning variance and calculate the operational labour efficiency
variance.

(ii) Explain the major benefit of analysing variances into planning and operational
components.

(5 Marks)

(b) Briefly explain three limitations of standard costing in the modern business environment.

(5 Marks)

(c) Briefly explain three factors that should be considered before deciding to investigate a
variance.

(5 Marks)

(d) G Group consists of several autonomous divisions. Two of the divisions supply
components and services to other divisions within the group as well as to external clients.
The management of G Group is considering the introduction of a bonus scheme for
managers that will be based on the profit generated by each division.

Briefly explain the factors that should be considered by the management of G Group
when designing the bonus scheme for divisional managers.

(5 Marks)

May 2007 11 P1

(e) Briefly explain the role of a Manufacturing Resource Planning System in supporting a
standard costing system.

(5 Marks)

(f) Briefly explain the main differences between the traditional manufacturing environment
and a just-in-time manufacturing environment.
(5 marks)


End of Section B

Section C starts on page 12

TURN OVER
P1 12 May 2007

SECTION C 30 MARKS

Question Three

RJ produces and sells two high performance motor cars: Car X and Car Y. The company
operates a standard absorption costing system. The companys budgeted operating statement
for the year ending 30 June 2008 and supporting information is given below:

Operating statement year ending 30 June 2008

Car X Car Y Total
$000 $000 $000
Sales 52,500 105,000 157,500
Production cost of sales 40,000 82,250 122,250
Gross profit 12,500 22,750 35,250
Administration costs
Variable 6,300 12,600 18,900
Fixed 7,000 9,000 16,000
Profit/(loss) (800) 1,150 350

The production cost of sales for each car was calculated using the following values:

Car X Car Y
Units $000 Units $000
Opening inventory 200 8,000 250 11,750
Production 1,100 44,000 1,600 75,200
Closing inventory 300 12,000 100 4,700
Cost of sales 1,000 40,000 1,750 82,250

Production costs
The production costs are made up of direct materials, direct labour, and fixed production
overhead. The fixed production overhead is general production overhead (it is not product
specific). The total budgeted fixed production overhead is $35,000,000 and is absorbed using a
machine hour rate. It takes 200 machine hours to produce one Car X and 300 machine hours to
produce one Car Y.

The fixed administration costs include the costs of specific marketing campaigns: $2,000,000 for
Car X and $4,000,000 for Car Y.

Required:

(a) Produce the budgeted operating statement in a marginal costing format.

(7 marks)

(b) Reconcile the total budgeted absorption costing profit with the total budgeted
marginal costing profit as shown in the statement you produced in part (a).

(5 marks)

May 2007 13 P1

The company is considering changing to an activity based costing system. The company has
analysed the budgeted fixed production overheads and found that the costs for various activities
are as follows:

$000
Machining costs 7,000
Set up costs 12,000
Quality inspections 7,020
Stores receiving 3,480
Stores issues 5,500
35,000

The analysis also revealed the following information:

Car X Car Y
Budgeted production (number of cars) 1,100 1,600
Cars per production run 10 40
Inspections per production run 20 80
Number of component deliveries during the year 492 900
Number of issues from stores 4,000 7,000

Required:

(c) Calculate the budgeted production cost of one Car X and one Car Y using the
activity based costing information provided above.

(10 marks)

(d) Prepare a report to the Production Director of RJ which explains the potential
benefits of using activity based budgeting for performance evaluation.

(8 marks)


TURN OVER
P1 14 May 2007

Question Four

RF Ltd is a new company which plans to manufacture a specialist electrical component. The
company founders will invest 16,250 on the first day of operations, that is, Month 1. They will
also transfer fixed capital assets to the company.


Sales
The forecast sales for the first four months are as follows:

Month Number of
components
1 1,500
2 1,750
3 2,000
4 2,100

The selling price has been set at 10 per component in the first four months.

Sales receipts

Time of payment % of customers
Month of sale 20*
One month later 45
Two months later 25
Three months later 5

The balance represents anticipated bad debts.

*A 2% discount is given to customers for payment received in the month of sale.

Production
There will be no opening inventory of finished goods in Month 1 but after that it will be policy for
the closing inventory to be equal to 20% of the following months forecast sales.

Variable production cost
The variable production cost is expected to be 640 per component.

Direct wages 330
Variable production overheads 120
Total variable cost 640

May 2007 15 P1

Notes:
Direct materials: 100% of the materials required for production will be purchased in the month
of production. No inventory of materials will be held. Direct materials will be paid for in the
month following purchase.

Direct wages will be paid in the month in which production occurs.

Variable production overheads: 60% will be paid in the month in which production
occurs and the remainder will be paid one month later.

Fixed overhead costs
Fixed overhead costs are estimated at 75,000 per annum and are expected to be incurred in
equal amounts each month. 60% of the fixed overhead costs will be paid in the month in which
they are incurred and 30% in the following month. The balance represents depreciation of fixed
assets.

Calculations are to be made to the nearest 1.

Ignore VAT and Tax.

Required:

(a) Prepare a cash budget for each of the first three months and in total.
(15 marks)

(b) There is some uncertainty about the direct material cost. It is thought that the
direct material cost per component could range between 150 and 220.
Calculate the budgeted total net cash flow for the three month period if the cost
of the direct material is:

(i) 1.50 per component; or
(ii) 2.20 per component.
(6 marks)

(c) Using your answers to part (a) and (b) above, prepare a report to the
management of RF Ltd that discusses the benefits or otherwise of performing
what if analysis when preparing cash budgets.

(9 marks)




TURN OVER
P1 16 May 2007

May 2007 17 P1

P1 18 May 2007

PRESENT VALUE TABLE

n
r

+ 1

payment or receipt.

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

May 2007 19 P1

years
r
r
n
+ ) (1 1

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

P1 20 May 2007

Formulae
PROBABILITY

Rules of Addition



Quadratic Equations
If aX
2
by:
a
ac b b
X
2
4
2

=

Arithmetic Mean
n
x
x

=
f
fx
x

Standard Deviation
n
x x
SD
2
) (
=
2
2
x
f
fx
SD

INDEX NUMBERS
1
/P
0
1
/Q
0

Price: 100 x
w
P
P
w
o
1
|
|
.
|
\
|

Quantity: 100 x
1
w
Q
Q
w
o
|
|
.
|
\
|

TIME SERIES
Additive Model

May 2007 21 P1


Y = a + bX or Y - Y = b(X X)

where
b =
2 2
) X ( X n
) Y )( X ( XY n
) X ( Variance
) XY ( Covariance

=

and a = Y bX

or solve
Y = na + b X
XY = a X + bX
2


} ) Y ( Y n }{ ) X ( X n {
) Y )( X ( XY n
) XY ( Covariance
r
2 2 2 2

= =

R(rank) = 1 -
) 1 (
6
2
2
n n
d


S = X[1 + r]
n

Annuity

PV =
(
(
n
r
r
] 1 [
1
1
1

Perpetuity
PV =
r
1

P1 22 May 2007

May 2007 23 P1

LIST OF VERBS USED IN THE QUESTION REQUIREMENTS
A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.

It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION
1 KNOWLEDGE

What you are expected to know. List Make a list of
State Express, fully or clearly, the details of/facts of
Define Give the exact meaning of
2 COMPREHENSION

What you are expected to understand. Describe Communicate the key features
Distinguish Highlight the differences between
Explain Make clear or intelligible/State the meaning of
Identify Recognise, establish or select after
consideration
Illustrate Use an example to describe or explain
something
3 APPLICATION

How you are expected to apply your knowledge. Apply
Calculate/compute
To put to practical use
To ascertain or reckon mathematically
Demonstrate To prove with certainty or to exhibit by
practical means
Prepare To make or get ready for use
Reconcile To make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table
4 ANALYSIS

How are you expected to analyse the detail of
what you have learned.
Analyse
Categorise
Examine in detail the structure of
Place into a defined class or division
Compare and contrast Show the similarities and/or differences
between
Construct To build up or compile
Discuss To examine in detail by argument
Interpret To translate into intelligible or familiar terms
Produce To create or bring into existence
5 EVALUATION

How are you expected to use your learning to
evaluate, make decisions or recommendations.

Advise
Evaluate
Recommend
To counsel, inform or notify
To appraise or assess the value of
To advise on a course of action

P1 24 May 2007

Managerial Level
May 2007
Post Exam Guide

May 2007 Exam

General Comments

The results achieved on this paper were a very significant improvement on any previous
sitting. The improvement was seen in all sections of the paper although differences in
performance were demonstrated between questions 3 and 4 in Section C. Overall, the results
did not suffer from the change of question paper format, with a transfer of ten marks from the
shorter-form questions in section A to the longer-form questions in Section C.

Achievement on the ten multiple-choice questions and on the shorter-form calculation
questions in Section A was particularly good (although it was once again the case that some
candidates did not attempt all of the multiple-choice questions) and gave a large majority of
candidates every opportunity for success. This was not always achieved due to weaker
performance on the parts of questions requiring narrative answers in Sections B and C of the
paper and on the calculations and statements required in question 3.

Lack of preparation seemed once again to be a factor although there was much less evidence
of time pressures and poor time management at this sitting. Narrative sections, for example,
were invariably reasonably attempted, certainly in terms of length of answer. However the
answers were at times lacking in depth of content and/or in relevance to the question.
However, the improved performance in question 2 (compulsory Section B), seen over the last
couple of sittings, was certainly maintained.

The choice from the two questions in Section C of the examination paper was made last by
the vast majority of candidates and there was an even split between the questions. There
were some good attempts at both optional questions but there were also a worrying number
of candidates making fundamental errors, particularly in question 3. Candidate must
remember that, in order to gain maximum marks for Section C questions, they must relate
their answers to the given scenario.

Post Exam Guide

May 2007 Exam

Section A 40 marks

Question 1.1

Which of the following best describes an investment centre?

A A centre for which managers are accountable only for costs.

B A centre for which managers are accountable only for financial outputs in the form of generating
sales revenue.

C A centre for which managers are accountable for profit.

D A centre for which managers are accountable for profit and current and non-current assets.

(2 marks)
The answer is D

Question 1.2

A flexible budget is

A a budget which, by recognising different cost behaviour patterns, is designed to change as volume of
activity changes.

B a budget for a twelve month period which includes planned revenues, expenses, assets and
liabilities.

C a budget which is prepared for a rolling period which is reviewed monthly, and updated accordingly.

D a budget for semi-variable overhead costs only.

(2 marks)
The answer is A


Post Exam Guide

May 2007 Exam

Question 1.3

The term budget slack refers to the

A lead time between the preparation of the master budget and the commencement of the budget
period.

B difference between the budgeted output and the actual output achieved.

C additional capacity available which is budgeted for even though it may not be used.

D deliberate overestimation of costs and/or underestimation of revenues in a budget.

(2 marks)
The answer is D

Question 1.4

PP Ltd is preparing the production and material purchases budgets for one of their products, the SUPERX,
for the forthcoming year.


How many units of the SUPERX will need to be produced?
A 28,775

B 30,000

C 31,225

D 38,225
(2 marks)
The answer is C

Workings

SUPERX
Sales demand (units) 30,000
Material usage per unit 7 kgs
Estimated opening inventory 3,500 units
Required closing inventory 35% higher than opening inventory
Units
Sales 30,000
Req'd closing inventory 4,725
Less opening inventory (3,500)
Production
31 225

Post Exam Guide

May 2007 Exam


X Ltd operates a standard costing system and absorbs fixed overheads on the basis of
machine hours. Details of budgeted and actual figures are as follows:

Budget Actual
Fixed overheads 2,500,000 2,010,000
Machine hours 1,000,000 hours 900,000 hours

Question 1.5

The fixed overhead expenditure variance is


B 250,000 adverse

C 300,000 adverse

(2 marks)
The answer is D
Workings

Question 1.6
The fixed overhead volume variance is


B 250,000 adverse

C 300,000 adverse


(2 marks)
The answer is C

Budget 2,500,000
Actual 2,010,000
Variance 490,000 favourable

Post Exam Guide

May 2007 Exam

Workings
Budgeted volume 500,000 units
Actual volume 440,000units
60,000 units
OAR
2 hours x 250 x 5 per unit
Volume variance 300,000 adverse

Question 1.7

A company operates a standard absorption costing system. The budgeted fixed production overheads for
the company for the latest year were 330,000 and budgeted output was 220,000 units. At the end of the
companys financial year the total of the fixed production overheads debited to the Fixed Production
Overhead Control Account was 260,000 and the actual output achieved was 200,000 units.

The under / over absorption of overheads was

A 40,000 over absorbed
C 70,000 over absorbed
D 70,000 under absorbed
(2 marks)

The answer is A
Workings

Absorbed (200,000 units x 150) 300,000
Incurred 260,000
Over absorbed 40,000


Post Exam Guide

May 2007 Exam

Question 1.8

A company operates a standard absorption costing system. The following fixed production overhead data
are available for the latest period:

The actual level of production for the period was nearest to

A 277,000 units
B 324,000 units
C 360,000 units
D 420,000 units
(2 marks)
Budgeted Output 300,000 units
Budgeted Fixed Production Overhead 1,500,000
Actual Fixed Production Overhead 1,950,000
Fixed Production Overhead Total Variance 150,000 adverse
The answer is C

Workings

Actual fixed production
overhead cost 1,950,000
Total variance 150,000adverse
Absorbed 1,800,000
OAR per unit 5
360,000 units

Question 1.9

Which of the following best describes a basic standard?

A A standard set at an ideal level, which makes no allowance for normal losses, waste and machine
downtime.

B A standard which assumes an efficient level of operation, but which includes allowances for factors
such as normal loss, waste and machine downtime.

C A standard which is kept unchanged over a period of time.

D A standard which is based on current price levels.

(2 marks)
The answer is C


Post Exam Guide

May 2007 Exam

Question 1.10

XYZ Ltd is preparing the production budget for the next period. The total costs of production are a semi-
variable cost. The following cost information has been collected in connection with production:

The estimated total production costs for a production volume of 5,750 units is nearest to

A 29,200
B 30,000
C 31,500
D 32,500
(2 marks)
The answer is C

Workings

Question 1.11

S Ltd manufactures three products, A, B and C. The products use a series of different machines but there
is a common machine, P, that is a bottleneck.

The selling price and standard cost for each product for the forthcoming year is as follows:

Calculate the return per hour for each of the products.
(4 marks)
Volume (units) Cost
4,500 29,000
6,500 33,000
High Low Method Activity Cost
Highest 6,500 33,000
Lowest 4,500 29,000
Difference 2,000 4,000
Variable cost per unit 2
Substitute into
highest activity

6,500 33,000 Total cost
6,500 x 2 13,000 Variable cost
Difference 20,000 Fixed cost

Therefore 5,750 x 2 11,500 Variable cost
20,000 Fixed cost
31,500 Total cost
A B C
$ $ $
Conversion costs 55 40 66

Machine P - minutes 12 10 7

Post Exam Guide

May 2007 Exam

Workings

A B C
$ $ $
Throughput 159 130 120

Machine P minutes per unit 12 10 7

Return per factory hour
159/12 130/10 120/7
$1325 $13 $1714

x 60 minutes $795 $780 $1,028

Question 1.12
The following data have been extracted from a companys year-end accounts:

Calculate the following four performance measures:

(iv) Current (Liquidity) ratio.

(4 marks)

Turnover 7,055,016
Gross profit 4,938,511
Operating profit 3,629,156
Non-current assets 4,582,000
Cash at bank 4,619,582
Short term borrowings 949,339
Trade receivables 442,443
Trade payables 464,692

Workings

Operating profit margin (3,629,156/7,055,016) x 100 =5144%
Return on [3,629,156/(4,582,000 +4,619,582 +442,443 - 949,339 -
464,692)] x 100 =4410% capital employed
Trade receivable days (442,443/7,055,016) x 365 days =2289 days
Current/liquidity ratio (4,619,582 +442,443)/(949,339 +464,692) =358 times


Post Exam Guide

May 2007 Exam

Question 1.13

PQR Ltd operates a standard absorption costing system. Details of budgeted and actual figures are as
follows:

(i) Calculate the sales price variance.
(2 marks)
(ii) Calculate the sales volume profit variance.
(2 marks)
Budget Actual
Sales volume (units) 100,000 110,000
Total cost per unit 8 830

Workings

Sales price variance
Budgeted selling price 1000
Actual selling price 950
050 adverse
Actual sales volume (units) 110,000
55,000 adverse

Sales volume profit variance
Budgeted sales volume (units) 100,000
Actual sales volume (units) 110,000
10,000 favourable
Standard profit per unit 2
20,000 favourable


Post Exam Guide

May 2007 Exam

Question 1.14

WX has two divisions, Y and Z. The following budgeted information is available.

Division Y manufactures motors and budgets to transfer 60,000 motors to Division Z and to sell 40,000
motors to external customers.

Division Z assembles food mixers and uses one motor for each food mixer produced.

The standard cost information per motor for Division Y is as follows:

In order to set the external selling price the company uses a 3333% mark up on total standard cost.

(i) Calculate the budgeted profit/(loss) for Division Y if the transfer price is set at marginal cost.

(ii) Calculate the budgeted profit/(loss) for Division Y if the transfer price is set at the total production
cost.
(4 marks)

Workings

Direct materials 70
Direct labour 20
Variable production overhead 10
Fixed production overhead 40
Fixed selling and administration overhead 10
(i) Budgeted loss marginal cost transfer price

Sales 000
Internal 60,000 x 100 6,000
External 40,000 x (150 x 13333) 8,000
14,000
Variable cost 100,000 x 100 10,000
Contribution 4,000
Fixed costs
Production 100,000 x 40 4,000
Administration 100,000 x 10 1,000
Loss (1,000)
(ii) Budgeted profit absorption cost transfer price

Sales 000
Internal 60,000 x 140 8,400
External 40,000 x (150 x 13333) 8,000
16,400
Variable cost 100,000 x 100 10,000
Contribution 6,400
Fixed costs
Production 100,000 x 40 4,000
Administration 100,000 x 10 1,000
Profit 1,400

Post Exam Guide

May 2007 Exam

Question 1.15
RF Ltd is about to launch a new product in J une 2007. The company has commissioned some market
research to assist in sales forecasting. The resulting research and analysis established the following
equation:

Y =Ax
06
Where Y is the cumulative sales units, A is the sales units in month 1, x is the month number.
J une 2007 is Month 1.
Sales in J une 2007 will be 1,500 units.

Calculate the forecast sales volume for each of the months J une, J uly and August 2007 and for that three
month period in total.
(4 marks)

Workings

Forecast sales volume for J une, J uly and August is:

Month Cumulative sales Monthly sales
(units) (units)
J une 1,500 1,500
J uly 2,274 774
August 2,900 626


Post Exam Guide

May 2007 Exam

Section B 30 marks

Question 2(a)

A company uses variance analysis to monitor the performance of the team of workers which assembles
Product M. Details of the budgeted and actual performance of the team for last period were as follows:

It has now been established that the standard wage rate should have been 3120 per hour.

(i) Calculate the labour rate planning variance and calculate the operational labour efficiency variance.

(ii) Explain the major benefit of analysing variances into planning and operational components.

(5 Marks)

Rationale

Sub-question (a) covers learning outcome B(iv) - Calculate and interpret planning and operational
variances.

Suggested Approach
(i) Adjust the budget by multiplying the budgeted hours by the revised standard wage rate per hour.
Calculate the standard hours of actual output and compare with the actual hours worked.
(ii) Consider the benefit of further analysis of traditional variances.

Marking Guide

Marks
(i) Planning variance (labour rate) 1
Standard hours of actual output 1
Operational variance (labour efficiency)
(ii) Major benefit of planning and operational variance analysis
1
2

Examiners Comments
A large variety of calculations were performed in both parts of (i)

Budget Actual
Output of product M 600 units 680 units
Wage rate 30 per hour 32 per hour
Labour hours 900 hours 1,070 hours

Post Exam Guide

May 2007 Exam

Common Errors
Planning variance:
Using product units (both actual and budget) instead of labour hours
Using the difference between the revised standard wage rate and the actual labour rate rather than the
original standard rate
Using the difference between the actual wage rate and the original standard rate i.e. calculating the total
rate variance
Using the actual hours rather than the budgeted/standard hours
Operational variance:
Multiplying the difference in hours by the actual wage rate, or the original standard rate, rather than the
revised standard rate
Comparing the actual labour hours with the budgeted hours
Multiplying the difference between the budgeted and the actual product units by one or other wage rate
Major benefit of analysis:
Describing what the variances are
Discussing the benefits of variance analysis generally
With reference to the specific illustration, some candidates stated that the operational variance would
have been larger if not for the change in standard this was incorrect and not relevant to the answer
anyway

Question 2(b)

Briefly explain three limitations of standard costing in the modern business environment.

(5 Marks)

Rationale

Sub-question (b) covers learning outcome B (i) - Explain why and how standards are set in manufacturing
and in service industries with particular reference to the maximisation of efficiency and minimisation of
waste and B(ii) - Calculate and interpret material, labour, variable overhead, fixed overhead and sales
variances.

Suggested Approach
Consider the key features of modern business what has changed?
Relate the impact of those changes to the usefulness of standard costing

Marking Guide Marks
Up to 2 marks for each limitation 5

Examiners Comments
This part was generally reasonably well answered

Common Errors
Focussing on difficulties of applying standard costing generally without any reference to the modern
business environment
Discussing the use of different types of standard ideal, basic etc


Post Exam Guide

May 2007 Exam

Question 2(c)
Briefly explain three factors that should be considered before deciding to investigate a variance.
(5 Marks)

Rationale

Sub-question (c) covers learning outcome B(ii) - Calculate and interpret material, labour, variable
overhead, fixed overhead and sales variances.

Suggested Approach
Consider situations where variance investigation may not yield benefits and the cost of investigation

Marking Guide Marks
Up to 2 marks for each factor 5

Examiners Comments
Well answered by most candidates.

Common Errors
Focussing on the seasonality of business this is likely to be anticipated and is unlikely to affect
anything other than volume variances anyway
Providing a simple listing rather than a brief explanation

Question 2(d)

G Group consists of several autonomous divisions. Two of the divisions supply components and services
to other divisions within the group as well as to external clients. The management of G Group is
considering the introduction of a bonus scheme for managers that will be based on the profit generated by
each division.

Briefly explain the factors that should be considered by the management of G Group when designing the
bonus scheme for divisional managers.
(5 Marks)

Rationale

Sub-question (d) covers learning outcome D(v) - Discuss the likely behavioural consequences of the use of
performance metrics in managing cost, profit and investment centres.

Suggested Approach
Consider what factors may affect the fairness of the scheme and the motivation and decision-making of
managers


Post Exam Guide

May 2007 Exam

Marking Guide Marks
Transfer pricing aspects (up to 3)
Other aspects (up to 3) 5

Examiners Comments
There was a general failure to link answers to a bonus scheme and to appreciate that only two of the
divisions supply to other divisions

Common Errors
Discussing generic aspects of transfer pricing (e.g. impact on decision-making and goal congruence)
without relating them to the design of a bonus scheme
Failing to consider aspects other than transfer pricing

Question 2(e)

Briefly explain the role of a Manufacturing Resource Planning System in supporting a standard costing
system.
(5 Marks)

Rationale

Sub-question (e) covers learning outcome A(vii) - Explain the role of MRP and ERP systems in supporting
standard costing systems.

Suggested Approach
Explain what a manufacturing resource planning system is
Consider its link to a standard costing system

Marking Guide Marks
Manufacturing resource planning explained 3
Link to standard costing 2

Examiners Comments
This part of question 2 was generally not well answered.

Common Errors
Confusing the system with materials requirements planning
Demonstrating lack of knowledge of the features of a manufacturing resource planning system
Including non-manufacturing activities in the discussion
Failing to consider links to standard costing


Post Exam Guide

May 2007 Exam

Question 2(f)
Briefly explain the main differences between the traditional manufacturing environment and a just-in-time
manufacturing environment.
(5 marks)

Rationale

Sub-question (f) covers learning outcome A(viii) - Evaluate the impact of just-in-time manufacturing methods on
cost accounting.

Suggested Approach
Describe the distinguishing features of both environments
Explain the main differences between them

Marking Guide Marks
Traditional manufacturing push system/inventory 1
J ust-in-time manufacturing pull system/no inventory 1
Other differences (1 for each) 3

Examiners Comments
Reasonably well answered by many candidates.

Common Errors
Failing to consider features/differences other than push/pull


Post Exam Guide

May 2007 Exam

Section C 30 marks

Question 3(a)

Produce the budgeted operating statement in a marginal costing format.

(7 marks)

Rationale

Part (a) covers learning outcome A(i) - Compare and contrast marginal and absorption costing methods in

Suggested Approach
Calculate the fixed production overhead absorption rate
Deduct fixed production overhead costs from total production costs in order to calculate the variable
production costs per unit for each type of car
Calculate the variable production cost of sales
Calculate contribution and complete the marginal costing operating statement

Marking Guide Marks
Fixed production overhead per machine hour 1
Variable production cost per car 1
Variable production cost of sales 1
Variable contribution 1
Contribution to general fixed costs 1
General fixed costs 1
Profit 1

Examiners Comments
Part (a) of question 3 was not answered well by most candidates who chose this optional question. Both
the content and the format of the marginal costing operating statement caused problems. Many candidates
introduced inventory adjustments into their calculations/statements which were not necessary and caused
difficulty.

Common Errors
Apportioning the fixed production overheads to products on the basis of machine hours per car (i.e.
200:300)
Calculating the fixed production overhead absorption rate based on the number of cars produced (i.e.
the same amount of overhead for each type of car)
Calculating the fixed production overhead absorption rate based on the number of machine hours to
produce the sales volume
Deducting the fixed production overheads absorbed into production units from the production cost of
sales
Deducting the variable costs of production from sales
Failing to deduct variable administration costs to arrive at contribution
Failing to separate the specific fixed costs
Apportioning the general fixed costs to products


Post Exam Guide

May 2007 Exam

Question 3(b)

Reconcile the total budgeted absorption costing profit with the total budgeted marginal costing profit as
shown in the statement you produced in part (a).

(5 marks)

Rationale

Part (b) covers learning outcome A(i) - Compare and contrast marginal and absorption costing methods in

Suggested Approach
Calculate the fixed production overhead content of the opening and closing inventories (or of the
change in inventory) for each car
Reconcile the profits

Marking Guide Marks
Inventory differences ($) 2
Direction of adjustments 2
Reconciliation 1

Examiners Comments
Some candidates understood that inventory valuation was the reason for the profit difference but few could
provide the reconciliation.

Common Errors
Making errors both of principle and of application in the calculation of inventory values
Indicating the incorrect direction of the adjustment

Question 3(c)

Calculate the budgeted production cost of one Car X and one Car Y using the activity based costing
information provided above.

(10 marks)

Rationale

Part (c) covers learning outcome A(vi) - Compare activity-based costing with traditional marginal and
absorption costing methods and evaluate its potential as a system of cost accounting.


Post Exam Guide

May 2007 Exam

Suggested Approach
Calculate the cost per driver for each activity
Apply each cost driver rate to each type of car
Sum the fixed production overhead costs for each type of car
Include the direct production costs and calculate the total production cost for each type of car

Marking Guide Marks
Cost per driver (5 ) 2
Application to each type of car (5 2) 5
Inclusion of direct costs (2 ) 1
Calculation of unit costs 1

Examiners Comments
Many candidates were able to calculate the cost of stores receiving and of stores issues for each type of
car but few were able to correctly calculate costs of the other activities.

Common Errors
Failing to identify appropriate cost drivers (e.g. for machining the number of cars was frequently used)
Failing to calculate and apply cost driver rates
Not including direct costs
Not calculating the cost per unit

Question 3(d)

Prepare a report to the Production Director of RJ which explains the potential benefits of using activity
based budgeting for performance evaluation.

(8 marks)

Rationale

Part (d) covers learning outcome C(vi) Evaluate and apply alternative approaches to budgeting

Suggested Approach
Explain the activity-based approach
Assess the general benefits of an activity-based approach
Apply to budgeting and performance evaluation

Marking Guide Marks
Activity-based approach 2
General benefits of activity-based approach 2
Application to budgeting and performance evaluation 4


Post Exam Guide

May 2007 Exam

Examiners Comments
Most candidates demonstrated that they had a reasonable idea of the activity-based approach
(demonstrated in part (c)) and of some general benefits but were less able to apply this to budgeting and
performance evaluation

Common Errors
Providing little reference to budgeting and performance evaluation
Demonstrating lack of clarity about the activity-based costing process

Question 4(a)

Prepare a cash budget for each of the first three months and in total.
(15 marks)

Rationale

Part (a) covers learning outcome C(iii) - Calculate projected revenues and costs based on product/service
volumes, pricing strategies and cost structures.

Suggested Approach
Calculate the value of sales for each month and adjust to reflect the timing of receipts from customers
Calculate the production units and apply to each of the costs
Complete the cash budget

Marking Guide Marks
Budget format (total receipts & payments, net cash flow, balances) 2
Capital injection 1
Sales receipts 3
Production units 3
Materials costs and phasing 2
Other costs 4

Examiners Comments
Part (a) of this optional question was answered well by most candidates who chose it

Common Errors
Including bad debts as a cash flow
Making errors on the sales discount
Making no attempt to calculate production units, instead basing all costs on sales volumes
Making errors in calculating inventory movements in the determination of production volumes
Incorrect phasing of materials costs
Including depreciation in fixed overheads


Post Exam Guide

May 2007 Exam

Question 4(b)

There is some uncertainty about the direct material cost. It is thought that the direct material cost per
component could range between 150 and 220. Calculate the budgeted total net cash flow for the three
month period if the cost of the direct material is:

(i) 1.50 per component; or
(ii) 2.20 per component.
(6 marks)

Rationale

Part (b) covers learning outcome C(vii) - Calculate the consequences of what if scenarios and evaluate
their impact on master profit and loss account and balance sheet.

Suggested Approach
Calculate the change in materials cost for each month at each of the revised prices
Adjust for phasing of materials payments
Calculate the revised net cash flow for the three month period

Marking Guide Marks
Additional costs at 2.20 2
Cost savings at 1.50 2
Impact on cash budget 2

Examiners Comments
This part was also generally answered well.

Common Errors
Using inconsistent phasing compared with part (a)
Failing to calculate the cumulative effect when monthly adjustments were made to balances


Post Exam Guide

May 2007 Exam

Question 4(c)

Using your answers to part (a) and (b) above, prepare a report to the management of RF Ltd that
discusses the benefits or otherwise of performing what if analysis when preparing cash budgets.

(9 marks)

Rationale

Part (c) covers learning outcome C(vii)- Calculate the consequences of what if scenarios and evaluate

Suggested Approach
Describe 'what if' analysis
Relate 'what if' analysis to cash budgets and to the particular figures in this question

Marking Guide Marks
'What if' analysis 2
Usefulness in cash budgeting 4
Figures/analysis from the answers to parts (a) & (b) 3

Examiners Comments
Few candidates made a reasonable attempt at this part of the question. For example, it was quite common
to suggest that the company should choose to buy at 1.50. Where candidates had some idea about 'what
if' analysis very few related it to cash budgeting or to the situation in the question.

Common Errors
Failing to read the question carefully
Demonstrating inability to apply the discussion to the specific question/scenario



a dotted box.
to close.

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TURN OVER

SECTION A 40 MARKS
ANSWER ALL SIXTEEN SUB-QUESTIONS


The answers to the sixteen sub-questions in Section A should ALL be written in
your answer book.

each sub-question.


Question One

1.1 T Ltd uses a standard labour hour rate to charge its overheads to its clients work. During
the last annual reporting period production overheads were under-absorbed by 19,250.
The anticipated standard labour hours for the period were 38,000 hours while the
standard hours actually charged to clients were 38,500. The actual production overheads
incurred in the period were 481,250.

The budgeted production overheads for the period were

A 456,000

B 462,000

C 475,000

D None of the above.

(2 marks)


P1 2 November 2007

1.2 Operation B, in a factory, has a standard time of 15 minutes. The standard rate of pay for
operatives is 10 per hour. The budget for a period was based on carrying out the
operation 350 times. It was subsequently realised that the standard time for Operation B
included in the budget did not incorporate expected time savings from the use of new
machinery from the start of the period. The standard time should have been reduced to 12
minutes.

Operation B was actually carried out 370 times in the period in a total of 80 hours. The
operatives were paid 850.

The operational labour efficiency variance was

A 60 adverse

B 75 favourable

C 100 adverse

D 125 adverse

(2 marks)

1.3 J P manufactures two joint products X and Y, and a by-product Z, in a single continuous
process. The following information is available for period 3:

Raw materials input 20,000 litres
Raw material costs $52,000

Outputs 10,000 litres of X, selling price $8 per litre
8,000 litres of Y, selling price $6 per litre
2,000 litres of Z, selling price $1 per litre

Process costs are apportioned on a sales value basis. There was no opening and closing
inventory of raw materials. The revenue from the by-product is used to reduce the
process costs.

What was the cost per litre of joint product X?

A $5889

B $6523

C $6625

D $6646
(2 marks)


TURN OVER
November 2007 3 P1

1.4 A company has budgeted break-even sales revenue of 800,000 and fixed costs of
320,000 for the next period.

The sales revenue needed to achieve a profit of 50,000 in the period would be

A 850,000

B 925,000

C 1,120,000

D 1,200,000

(2 marks)

1.5 The production volume ratio in a period was 95%.

Which statement will always be true?

A Actual hours worked exceeded the budgeted hours.

B Actual hours worked exceeded the standard hours of output.

C Budgeted hours exceeded the standard hours of output.

D Budgeted output was less than the actual output.
(2 marks)

1.6 Two CIMA definitions follow:

1. A system that converts a production schedule into a listing of the materials and
components required to meet that schedule so that adequate stock levels are
maintained and items are available when needed.

2. An accounting oriented information system, generally software driven, which aids in
identifying and planning the enterprise-wide resources needed to resource, make,
account for and deliver customer orders.

Which of the following pairs of terms matches the definitions?

Definition 1 Definition 2
A Material requirements planning Enterprise resource planning
B Manufacturing resource planning Material requirements planning
C Material requirements planning Manufacturing resource planning
D Manufacturing resource planning Enterprise resource planning

(2 marks)

P1 4 November 2007

1.7 The fixed overhead volume variance is defined as

A the difference between the budgeted value of the fixed overheads and the standard fixed
overheads absorbed by actual production.

B the difference between the standard fixed overhead cost specified for the production
achieved, and the actual fixed overhead cost incurred.


D the difference between the standard fixed overhead cost specified in the original budget
and the same volume of fixed overheads, but at the actual prices incurred.
(2 marks)

1.8 Overheads will always be over-absorbed when

(2 marks)


TURN OVER
November 2007 5 P1

The following data are given for sub-questions 1.9 and1.10 below

A manufacturing company recorded the following costs in October for Product X:

$
Direct materials 20,000
Direct labour 6,300
Variable production overhead 4,700
Fixed production overhead 19,750
Fixed distribution costs 16,800
Total costs incurred for Product X 72,050

During October 4,000 units of Product X were produced but only 3,600 units were sold.
At the beginning of October there was no inventory.

1.9 The value of the inventory of Product X at the end of October using marginal costing was:

A $3,080
B $3,100
C $3,550
D $5,075
(2 marks)

1.10 The value of the inventory of Product X at the end of October using throughput accounting
was

A $630
B $1,080
C $1,100
D $2,000
(2 marks)

P1 6 November 2007

1.11 A company has the following budgeted sales figures:

Month 1 90,000
Month 2 105,000
Month 3 120,000
Month 4 108,000

80% of sales are on credit and the remainder are paid in cash. Credit customers paying
within one month are given a discount of 15%. Credit customers normally pay within the
following time frame:

Within 1 month 40% of credit sales
Within 2 months 70% of credit sales

There is an expectation that 2% of credit sales will become bad debts.

Outstanding receivables at the beginning of month 1 includes 6,000 expected to be
received in month 4.

Calculate the total receipts expected in month 4.
(4 marks)

1.12 The budgeted total costs for two levels of output are as shown below:

Total cost 143,500 194,000

Within this range of output it is known that the variable cost per unit is constant but fixed
costs rise by 10,000 when output exceeds 35,000 units.

Calculate for a budgeted output of 36,000 units:

(i) the variable cost per unit;
(ii) the total fixed costs.
(3 marks)

1.13 A company can produce many types of product but is currently restricted by the number
of labour hours available on a particular machine. At present this limitation is set at
12,000 hours per annum. One type of product requires materials costing $5 which are
then converted to a final product which sells for $12. Each unit of this product takes 45
minutes to produce on the machine. The conversion costs for the factory are estimated to
be $144,000 per annum.

Calculate the throughput accounting ratio for this product and state the significance of the
result.
(3 marks)

TURN OVER
November 2007 7 P1

1.14 A company manufactures three joint products in a continuous single process. Normal
losses are 10% of inputs and do not have any value. Budget data is available for the
month of J anuary as follows:

Opening and closing work in progress NIL
Direct materials input 20,000 kg at a cost of 36,000
Direct labour costs 3,000 hours @ 6 per hour
Variable production overheads 3,000 hours @ 1 per hour

Fixed production overheads are absorbed at a rate of 8 per direct labour hour.

Expected outputs Selling price per kg
J oint product A 9,000 kg 8
J oint product B 6,000 kg 6
J oint product C 3,000 kg 4

J oint costs are apportioned on a physical unit basis.

Calculate the gross profit margin for each of the joint products.
(3 marks)

1.15 A company has the following balance sheet totals at the end of its most recent financial
year:

million
Non-current assets 364
Current assets 042
Share capital and reserves* 269
Long term debt 100

* Includes retained profit for the year of 320,000 after deducting:

Ordinary share dividends 200,000
Interest on long term debt 100,000
Taxation 70,000

Calculate the Return on Investment (ROI) of the company for the year (using end year
balance sheet values for investment).
(3 marks)

1.16 A division is considering the purchase of a new machine which costs $1,500,000 and is
expected to generate cost savings of $450,000 a year. The asset is expected to have a
useful life of five years with no residual value. Depreciation is charged on a straight line
basis. Divisional performance is evaluated on Residual Income (RI). The divisions cost
of capital is 10%.

Calculate for this machine for each of the five years:

(i) the Residual Income (RI);
(ii) the Return on Investment (ROI).

Note: When calculating performance measures the division always uses capital values as
at the start of the year.
(4 marks)

P1 8 November 2007


Reminder




TURN OVER
November 2007 9 P1

SECTION B 30 MARKS
MARKS

Question Two

The following data are given for sub-questions 2(a) and 2(b) below

QBQ produces one type of product. Details of the budgeted sales and production are given
below.

Selling Price and Costs per unit

Selling price 40
Material FX: 15kg @ 6 per kg 9
Conversion costs (variable) 8
Fixed production overheads 15

The fixed production overhead absorption rate is based on annual production overheads of
720,000 and budgeted annual output of 48,000 units. The fixed overheads will be incurred
evenly throughout the year.

The company also incurs fixed costs for administration of 200,000 per year.

Budgeted Sales

Quarter Units
1 10,000
2 12,000
3 14,000
4 12,000

Inventory

It has been decided that inventory levels are to be reduced. Details are as follows:

Finished goods: 5,500 units are currently held but it has been decided that the closing
inventories for Quarters 1, 2 and 3 will be 45%, 40% and 35% of the following
quarters sales respectively.

Raw materials: 4,500 kg are currently held but it has been decided that the closing
inventories for Quarters 1 and 2 will be 25% and 20% of the following
quarters production requirements respectively.

(a) Prepare a materials purchase budget for Quarter 1.

(5 Marks)

P1 10 November 2007

(b) In Quarter 3 the opening and closing inventories of finished goods will be 5,600 units and
4,200 units respectively. QBQ adjusts for any under- or over-absorption of overheads at
the end of each quarter.

Assume that production and sales volumes were as budgeted and that inventory levels
were as planned. Also assume that all costs and revenues were as budgeted.

(i) Calculate using marginal costing the profit for Quarter 3;
(ii) Calculate using absorption costing the profit for Quarter 3;
(iii) Explain the difference, if any, in the profits you have calculated.

(5 Marks)

(c) Explain, giving examples, how budgets can be used for feedback control and feed-
forward control.
(5 Marks)

(d) Briefly explain three reasons why budgetary planning and control might be inappropriate
in a rapidly changing business environment.
(5 Marks)

(e) Briefly explain J ust-in-Time (J IT) and two major requirements for the successful operation
of a J IT system.
(5 Marks)

(f) A nursing home uses incremental budgeting. The previous periods budget is adjusted by
reference to a set of indices. It is adjusted firstly for volume changes and then for
changes in the cost of resources. The indices are referenced to the previous periods
budget by using that budget as the base index number of 100. The index numbers to be
used to prepare Period 3s budget from that of Period 2 are as follows:

Index
Patient days
costs
90
House-keeping 106
Nursing costs
105
104

The budget for Period 2 was:

riable)

House-keeping costs (all va 125,000
Nursing costs (see below)
Administration costs (all fixed)
324,000
100,000

Nursing costs are semi-variable. The nursing costs for Period 2 were adjusted from the
total nursing costs of 280,000 for Period 1 by using a Patient days index of 125 and a
Nursing costs index of 108.

Prepare the budget for Period 3.
(5 marks)


TURN OVER
November 2007 11 P1

SECTION C 30 MARKS

Question Three

WC is a company that installs kitchens and bathrooms for customers who are renovating their
houses. The installations are either pre-designed off the shelf packages or highly customised
designs for specific jobs.

The company operates with three divisions: Kitchens, Bathrooms and Central Services. The
Kitchens and Bathrooms divisions are profit centres but the Central Services division is a cost
centre. The costs of the Central Services division, which are thought to be predominantly fixed,
include those incurred by the design, administration and finance departments. The Central
Services costs are charged to the other divisions based on the budgeted Central Services costs
and the budgeted number of jobs to be undertaken by the other two divisions.

The budgeting and reporting system of WC is not very sophisticated and does not provide much
detail for the Directors of the company.

Budget details

The budgeted details for last year were:

Kitchens Bathrooms
Number of jobs 4,000 2,000
$ $
Average price per job 10,000 7,000
Average direct costs per job 5,500 3,000
Central Services recharge per job 2,500 2,500
Average profit per job 2,000 1,500

Actual details

The actual results were as follows:

Kitchens Bathrooms
Number of jobs 2,600 2,500
$ $
Average price per job 13,000 6,100
Average direct costs per job 8,000 2,700
Central Services recharge per job 2,500 2,500
Average profit per job 2,500 900

The actual costs for the Central Services division were $175 million.

The requirements for Question Three are on the opposite page
P1 12 November 2007


Required:

(a) Calculate the budgeted and actual profits for each of the profit centres and for the
whole company for the year.
(4 marks)

(b) Calculate the sales price variances and the sales mix profit and sales quantity profit
variances.

(6 marks)

(c) Prepare a statement that reconciles the budgeted and actual profits and shows
appropriate variances in as much detail as possible.

(10 marks)

(d) Using the statement that you prepared in part (c) above, discuss

(i) the performance of the company for the year; and
(ii) potential changes to the budgeting and reporting system that would
improve performance evaluation within the company.

(10 marks)



TURN OVER
November 2007 13 P1

Question Four

A multinational computer manufacturer has a number of autonomous subsidiaries throughout
the world. Two of the groups subsidiaries are in America and Europe. The American subsidiary
assembles computers using chips that it purchases from local companies. The European
subsidiary manufactures exactly the same chips that are used by the American subsidiary but
currently only sells them to numerous external companies throughout Europe. Details of the two
subsidiaries are given below.

America

The American subsidiary buys the chips that it needs from a local supplier. It has negotiated a
price of $90 per chip. The production budget shows that 300,000 chips will be needed next year.

Europe

The chip production subsidiary in Europe has a capacity of 800,000 chips per year. Details of
the budget for the forthcoming year are as follows:

Sales 600,000 chips

$ per chip
Selling price 105
Variable costs 60

The fixed costs of the subsidiary at the budgeted output of 600,000 chips are $20 million per
year but they would rise to $26 million if output exceeds 625,000 chips.

Note: The maximum external demand is 600,000 chips per year and the subsidiary has no other
uses for the current spare capacity.

Group Directive

The Managing Director of the group has reviewed the budgets of the subsidiaries and has
decided that in order to improve the profitability of the group the European subsidiary should
supply chips to the American subsidiary. She is also thinking of linking the salaries of the
subsidiary managers to the performance of their subsidiaries but is unsure which performance
measure to use. Two measures that she is considering are profit and the return on assets
consumed (where the annual fixed costs would be used as the assets consumed).

The Manager of the European subsidiary has offered to supply the chips at a price of $95 each.
He has offered this price because it would earn the same contribution per chip that would be
earned on external sales (this is after adjusting for increased distribution costs and reduced
customer servicing costs).

The requirements for Question Four are on the opposite page
P1 14 November 2007


Required:

(a) Assume that the 300,000 chips are supplied by the European subsidiary at a
transfer price of $95 per chip. Calculate the impact of the profits on each of the
subsidiaries and the group.
(5 marks)

(b) Calculate the minimum unit price at which the European subsidiary would be willing
to transfer the 300,000 chips to the American subsidiary if the performance and
salary of the Manager of the subsidiary is to be based on

(i) the profit of the subsidiary (currently $7 million)
(ii) the return on assets consumed by the subsidiary (currently 35%).

(9 marks)

(c) Write a report to the Managing Director of the group that discusses issues raised by
the directive and the introduction of performance measures. (You should use your
answers to parts (a) and (b), where appropriate, to illustrate points in your report).

(10 marks)

(d) Briefly explain how multi-national companies can use transfer pricing to reduce
their overall tax charge and the steps that national tax authorities have taken to
discourage the manipulation of transfer prices.

(6 marks)



TURN OVER
November 2007 15 P1


P1 16 November 2007

November 2007 17 P1

PRESENT VALUE TABLE

Present value of $1, that is (

where r =interest rate; n =number of periods until
payment or receipt.
)
n
r

+ 1

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

P1 18 November 2007

years
r
r
n
+ ) (1 1

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

November 2007 19 P1

Formulae
PROBABILITY
P(B A) =probability of B, given A.

Rules of Addition



Quadratic Equations
If aX
2
by:
a
ac b b
X
2
4
2

=

Arithmetic Mean
n
x
x

=
f
fx
x

Standard Deviation
n
x x
SD
2
) (
=
2
2
x
f
fx
SD

INDEX NUMBERS
Price relative =100 * P
1
/P
0
Quantity relative =100 * Q
1
/Q
0

Price: 100 x
w
P
P
w
o
1

Quantity: 100 x
1
w
Q
Q
w
o

TIME SERIES
Additive Model
Series =Trend +Seasonal +Random

Series =Trend * Seasonal * Random
P1 20 November 2007


Y =a +bX or Y - Y =b(X X)

where
b =
2 2
) X ( X n
) Y )( X ( XY n
) X ( Variance
) XY ( Covariance

=

and a =Y bX

or solve
Y =na + b X
XY =a X + bX
2


} ) Y ( Y n }{ ) X ( X n {
) Y )( X ( XY n
) XY ( Covariance
r
2 2 2 2

= =

R(rank) =1 -
) 1 (
6
2
2
n n
d


S =X[1 +r]
n

Annuity

PV =
n
r
r
] 1 [
1
1
1

Perpetuity
PV =
r
1

November 2007 21 P1


P1 22 November 2007



1 KNOWLEDGE

2 COMPREHENSION

consideration
something
3 APPLICATION

Calculate/compute
practical means
4 ANALYSIS

How you are expected to analyse the detail of
Analyse
Categorise
between
5 EVALUATION

How you are expected to use your learning to

Advise
Evaluate
Recommend

November 2007 23 P1

Managerial Level
November 2007
P1 24 November 2007

Post Exam Guide

November 2007 Exam

General Comments

Performance was very disappointing across the whole paper resulting in a pass rate that was
not only much lower than that achieved in the May 2007 examination, but also lower than
achieved in previous sittings of this paper.

The results were disappointing on the ten multiple-choice questions in Section A, where a
number of candidates still fail to answer all ten questions, and on the shorter-form
computational questions in the remainder of that section, which have often been a
springboard for success in previous examinations. Candidates then frequently showed
themselves to be insufficiently prepared for the analysis and application required in the
longer-form scenario based questions. The choice from the two questions in Section C of the
examination paper was made last by the vast majority of candidates and question 3 was the
most popular choice.

Poor time management also seemed to adversely affect performance. A factor here was the
often unnecessarily lengthy, detailed and at times repetitive workings that were provided in
answer to the computational elements of all questions. Adequate workings are of course
required for computational questions (apart from multiple-choice), for the benefit both of
candidates and markers. However, time spent planning answers is time well spent if it
reduces overall writing time. Candidates must also try to manage the time spent on each
question in accordance with the marks available.

The overriding impression was that candidates were simply poorly prepared for the
examination. Those candidates who were well prepared gained high marks. Candidates who
failed this examination must try to prepare themselves for future examinations with a good
knowledge of topic areas. In the examination they must read questions carefully, take time to
establish the specifics of what is required and plan their answers. Reading time is provided in
the examination for that purpose. Where required, narrative answers should be related to the
question scenario.

Post Exam Guide

November 2007 Exam

Section A 40 marks

Question 1.1

T Ltd uses a standard labour hour rate to charge its overheads to its clients work. During the last annual
reporting period production overheads were under-absorbed by 19,250. The anticipated standard labour
hours for the period were 38,000 hours while the standard hours actually charged to clients were 38,500.
The actual production overheads incurred in the period were 481,250.

The budgeted production overheads for the period were

A 456,000

B 462,000

C 475,000

D None of the above.
(2 marks)
The answer is A
Workings

Underabsorbed -19,250
Actual 481,250
Charged to clients 462,000

Overhead rate 462,000/38,500 =12 per hour

Budgeted overheads =38,000 x 12 =456,000

Question 1.2

Operation B, in a factory, has a standard time of 15 minutes. The standard rate of pay for operatives is
10 per hour. The budget for a period was based on carrying out the operation 350 times. It was
subsequently realised that the standard time for Operation B included in the budget did not incorporate
expected time savings from the use of new machinery from the start of the period. The standard time
should have been reduced to 12 minutes.

Operation B was actually carried out 370 times in the period in a total of 80 hours. The operatives were
paid 850.

The operational labour efficiency variance was

A 60 adverse

B 75 favourable

C 100 adverse

D 125 adverse
(2 marks)


Post Exam Guide

November 2007 Exam

The answer is A
Workings

Actual time for 370 operations was 80 hours
Revised standard time per operation =12 minutes =02 hours
Revised expected time for actual operations =370 x 02 =74 hours
Operational labour efficiency variance =(80 - 74) x 10 =60 adverse

Question 1.3

J P manufactures two joint products X and Y, and a by-product Z, in a single continuous process. The
following information is available for period 3:

Raw materials input 20,000 litres
Raw material costs $52,000

Outputs 10,000 litres of X, selling price $8 per litre
8,000 litres of Y, selling price $6 per litre
2,000 litres of Z, selling price $1 per litre

Process costs are apportioned on a sales value basis. There was no opening and closing inventory of raw
materials. The revenue from the by-product is used to reduce the process costs.

What was the cost per litre of joint product X?

A $5889

B $6523

C $6625

D $6646

(2 marks)

The answer is C
Workings
$52,000 +$56,000 - $2,000 =$106,000

Sales Value Costs
X $80,000 625% $ 66,250
Y $48,000 375% $ 39,750
$128,000 $106,000

$66,250 / 10,000 =$6625

Post Exam Guide

November 2007 Exam

Question 1.4

A company has budgeted break-even sales revenue of 800,000 and fixed costs of 320,000 for the next
period.

The sales revenue needed to achieve a profit of 50,000 in the period would be

A 850,000

B 925,000

C 1,120,000

D 1,200,000
(2 marks)
The answer is B

Workings

At breakeven total contribution equals fixed costs which equal 320,000.
C/S ratio =320,000 800,000 =04
Revenue needed to earn 50,000 profit =(320,000 +50,000) 0.4 =925,000

Question 1.5

The production volume ratio in a period was 95%.

Which statement will always be true?

A Actual hours worked exceeded the budgeted hours.

B Actual hours worked exceeded the standard hours of output.

C Budgeted hours exceeded the standard hours of output.

D Budgeted output was less than the actual output.

(2 marks)

The answer is C


Post Exam Guide

November 2007 Exam

Question 1.6

Two CIMA definitions follow:

1. A system that converts a production schedule into a listing of the materials and components
required to meet that schedule so that adequate stock levels are maintained and items are
available when needed.

2. An accounting oriented information system, generally software driven, which aids in identifying
and planning the enterprise-wide resources needed to resource, make, account for and deliver
customer orders.

Which of the following pairs of terms matches the definitions?

Definition 1 Definition 2
A Material requirements planning Enterprise resource planning
B Manufacturing resource planning Material requirements planning
C Material requirements planning Manufacturing resource planning
D Manufacturing resource planning Enterprise resource planning

(2 marks)
The answer is A

Question 1.7
The fixed overhead volume variance is defined as

A the difference between the budgeted value of the fixed overheads and the standard fixed overheads
absorbed by actual production.
B the difference between the standard fixed overhead cost specified for the production achieved, and
the actual fixed overhead cost incurred.


D the difference between the standard fixed overhead cost specified in the original budget and the
same volume of fixed overheads, but at the actual prices incurred.
(2 marks)

The answer is A


Post Exam Guide

November 2007 Exam

Question 1.8
Overheads will always be over-absorbed when

(2 marks)

The answer is C


A manufacturing company recorded the following costs in October for Product X:

$
Direct labour 6,300
Variable production overhead 4,700
Fixed production overhead 19,750
Fixed distribution costs 16,800
Total costs incurred for Product X 72,050

During October 4,000 units of Product X were produced but only 3,600 units were sold.
At the beginning of October there was no inventory.

Question 1.9
The value of the inventory of Product X at the end of October using marginal costing was:

A $3,080
B $3,100
C $3,550
D $5,075
(2 marks)
The answer is B


Post Exam Guide

November 2007 Exam

Workings

Marginal cost is the total of variable production costs. One tenth of the production is inventory at the end
of the month and therefore the valuation is:

$(20,000 +6,300 +4,700)/10 =$3,100

Question 1.10

The value of the inventory of Product X at the end of October using throughput accounting was

A $630
B $1,080
C $1,100
D $2,000
(2 marks)

The answer is D

Workings
Throughput accounting values inventory at direct materials cost only:

$20,000/10 =$2,000

Question 1.11

A company has the following budgeted sales figures:

Month 1 90,000
Month 2 105,000
Month 3 120,000
Month 4 108,000
80% of sales are on credit and the remainder are paid in cash. Credit customers paying within one month
are given a discount of 15%. Credit customers normally pay within the following time frame:

Within 1 month 40% of credit sales

There is an expectation that 2% of credit sales will become bad debts.

Outstanding receivables at the beginning of month 1 includes 6,000 expected to be received in month 4.

Calculate the total receipts expected in month 4.
(4 marks)


Post Exam Guide

November 2007 Exam

Workings

Month 4

Cash sales (108,000 x 02)
21,600

From month 3 (120,000 x 08 x 04 x 0985)
37,824

From month 2 (105,000 x 08 x 03)
25,200

From month 1 (90,000 x 08 x 028)
20,160

From previous budget period
6,000

110,784

Question 1.12

The budgeted total costs for two levels of output are as shown below:

Total cost 143,500 194,000

Within this range of output it is known that the variable cost per unit is constant but fixed costs rise by
10,000 when output exceeds 35,000 units.

Calculate for a budgeted output of 36,000 units:

(i) the variable cost per unit;
(ii) the total fixed costs.
(3 marks)

Workings

(i) Variable cost per unit

[(194,000 10,000 143,500) (40,000 25,000 units)] =270 per unit

(ii) Total fixed costs

[194,000 (40,000 units 2.70 per unit)] =86,000


Post Exam Guide

November 2007 Exam

Question 1.13
A company can produce many types of product but is currently restricted by the number of labour hours
available on a particular machine. At present this limitation is set at 12,000 hours per annum. One type of
product requires materials costing $5 which are then converted to a final product which sells for $12.
Each unit of this product takes 45 minutes to produce on the machine. The conversion costs for the
factory are estimated to be $144,000 per annum.

Calculate the throughput accounting ratio for this product and state the significance of the result.

(3 marks)

Workings

Where: Return per factory hour = Sales price - Material cost
Total time on key resource

=(12-5)/075 =$933 per hour

And: Cost per factory hour = Total factory cost
Total time on the key resource

=144,000/12,000 =$12 per hour

Throughput accounting (TA) ratio = Return per factory hour
Cost per factory hour

933/12 =078

As the throughput accounting ratio is less than 1, the product should not be produced.

Question 1.14
A company manufactures three joint products in a continuous single process. Normal losses are 10% of
inputs and do not have any value. Budget data is available for the month of J anuary as follows:

Opening and closing work in progress NIL
Direct materials input 20,000 kg at a cost of 36,000
Direct labour costs 3,000 hours @ 6 per hour
Variable production overheads 3,000 hours @ 1 per hour

Fixed production overheads are absorbed at a rate of 8 per direct labour hour.

Expected outputs Selling price per kg
J oint product A 9,000 kg 8
J oint product B 6,000 kg 6
J oint product C 3,000 kg 4

J oint costs are apportioned on a physical unit basis.

Calculate the gross profit margin for each of the joint products.
(3 marks)

Post Exam Guide

November 2007 Exam

Workings

Total production costs:

Direct labour 18,000
81,000

Cost per unit of output 81,000 / 18,000 =450

Product A Product B Product C
Selling price 8 6 4
Production cost 450 450 450
Gross profit 350 150 (050)
Gross profit % 4375% 25% (125%)

Question 1.15

A company has the following balance sheet totals at the end of its most recent financial year:

million
Non-current assets 364
Current assets 042
Share capital and reserves* 269
Long term debt 100

* Includes retained profit for the year of 320,000 after deducting:

Ordinary share dividends 200,000
Interest on long term debt 100,000
Taxation 70,000

Calculate the Return on Investment (ROI) of the company for the year (using end year balance sheet
values for investment).
(3 marks)

Workings

Return =320,000 +200,000 +100,000 +70,000 =690,000
Investment =364 million +042 million - 037 million =369 million
[(690,000 3,690,000) 100] =187%


Post Exam Guide

November 2007 Exam

Question 1.16

A division is considering the purchase of a new machine which costs $1,500,000 and is expected to
generate cost savings of $450,000 a year. The asset is expected to have a useful life of five years with no
residual value. Depreciation is charged on a straight line basis. Divisional performance is evaluated on
Residual Income (RI). The divisions cost of capital is 10%.

Calculate for this machine for each of the five years:

(i) the Residual Income (RI);
(ii) the Return on Investment (ROI).

Note: When calculating performance measures the division always uses capital values as at the start of
the year.
(4 marks)

Workings

Year 1($) Year 2 ($) Year 3 ($) Year 4($) Year 5 ($)
Cost savings 450,000 450,000 450,000 450,000 450,000
Depreciation 300,000 300,000 300,000 300,000 300,000
Profit 150,000 150,000 150,000 150,000 150,000
Cost of capital 150,000 120,000 90,000 60,000 30,000
RI nil 30,000 60,000 90,000 120,000

ROI 10% 125% 167% 25% 50%

Capital value ($m)

15

12

09

06

03


Post Exam Guide

November 2007 Exam

Section B 30 marks
MARKS

Question 2(a)

Prepare a materials purchase budget for Quarter 1.

(5 Marks)

Rationale

Question 2(a) covers learning outcome C(iii) - Calculate projected revenues and costs based on

Suggested Approach

Calculate the closing inventory of finished goods both in Q1 and Q2
Calculate the production units for both periods based on these inventory requirements
Calculate the closing inventory of raw materials in Q1 based on the production units in Q2
Calculate the budgeted raw material usage (kg) and the budgeted raw material purchases (kg & )

Marking Guide

Marks

Inventory calculations
Inventory adjustments
Raw materials required for production
Purchase value

2
2

Examiners Comments

Most candidates scored fairly well on this part

Common Errors
Failing to value the purchases or using 9 per kg
Reversing the inventory adjustments
Miscalculating the inventory requirements, especially raw materials


Post Exam Guide

November 2007 Exam

Question 2(b)

In Quarter 3 the opening and closing inventories of finished goods will be 5,600 units and 4,200 units
respectively. QBQ adjusts for any under- or over-absorption of overheads at the end of each quarter.

Assume that production and sales volumes were as budgeted and that inventory levels were as planned.
Also assume that all costs and revenues were as budgeted.

(i) Calculate using marginal costing the profit for Quarter 3;
(ii) Calculate using absorption costing the profit for Quarter 3;
(iii) Explain the difference, if any, in the profits you have calculated.

(5 Marks)

Rationale

Question 2(b) covers learning outcome A(i) - Compare and contrast marginal and absorption costing
methods in respect of profit reporting and stock valuation.

Suggested Approach

(i) Calculate unit contribution, total contribution and fixed costs
(ii) Calculate gross profit, fixed administration costs and over-absorbed fixed production overhead
(iii) Identify the reasons why absorption costing would report a lower profit

Marking Guide

Marks

(i) Marginal costing profit
(ii) Absorption costing profit (before adjustment)
Over-absorbed fixed production overhead
(iii) Inventory change
Fixed production overheads in inventory

1
1
1
1
1

Examiners Comments

Very few candidates successfully calculated the marginal and absorption costing profits. In answer to (ii),
a number of candidates calculated the absorption costing profit from the marginal costing profit by means
of the inventory difference. This gained full marks if the inventory difference was correct and if the profit
was adjusted in the right direction i.e. this part of the answer was marked on the basis of the candidates
own figure for marginal costing profit

Common Errors
Basing the cost of sales on production units
Calculating the fixed costs incorrectly
Omitting or miscalculating the over-absorbed fixed production overhead in (ii)
Providing an erroneous or unclear explanation in (iii): for example, many candidates seemed to think
that fixed overheads are included in the calculation of absorption costing profit but not in the calculation
of marginal costing profit


Post Exam Guide

November 2007 Exam

Question 2(c)

Explain, giving examples, how budgets can be used for feedback control and feed-forward control.

(5 Marks)

Rationale

Question 2(c) covers learning outcome C(x) - Explain the ideas of feedback and feed-forward control and
their application in the use of budgets for control.

Suggested Approach

Describe feedback control
Identify an example of feedback control
Describe feedforward control
Identify an example of feedforward control

Marking Guide

Marks

Descriptions (up to 2 each)
Examples

4
2
5 max

Examiners Comments

There were many very lengthy answers particularly from candidates who did not know what feedback and
feedforward controls are.

Common Errors
Not knowing what feedback and feedforward controls are
Failing to distinguish clearly between feedback and feedforward
In particular, demonstrating a lack of understanding as to how feedforward control might operate, often
thinking that it was simply action taken as a consequence of feedback control


Post Exam Guide

November 2007 Exam

Question 2(d)

Briefly explain three reasons why budgetary planning and control might be inappropriate in a rapidly
changing business environment.
(5 Marks)

Rationale

Question 2(d) covers learning outcome C(xiv) Evaluate the criticisms of budgeting particularly from the
advocates of techniques that are beyond budgeting

Suggested Approach

Consider the key aspects of budgetary planning and control
Consider the features of a rapidly changing business environment
Explain three reasons why rapid change may adversely affect key aspects of budgetary planning and
control

Marking Guide

Marks

Up to 2 marks for each justified reason

5 max

Examiners Comments

A lot of repetition was evidenced in candidates answers.

Common Errors
Failing to link answers to a rapidly changing business environment
Focussing on standard costing alone (the subject of Q2(b) May 2007) or simply on features of
budgetary planning and control


Post Exam Guide

November 2007 Exam

Question 2(e)

Briefly explain J ust-in-Time (J IT) and two major requirements for the successful operation of a J IT system.

(5 Marks)

Rationale

Question 2(e) covers learning outcome A(viii) - Evaluate the impact of just-in-time manufacturing methods
on cost accounting and the use of back-flush accounting when work-in-progress stock is minimal.

Suggested Approach

Explain what J IT is
Describe two key operational features of a successful J IT system

Marking Guide

Marks

J IT
Major requirements for successful operation (up to 2 for each)

2 max
4
5 max

Examiners Comments

This part was generally answered well. There were no common errors.


Post Exam Guide

November 2007 Exam

Question 2(f)

A nursing home uses incremental budgeting. The previous periods budget is adjusted by reference to a
set of indices. It is adjusted firstly for volume changes and then for changes in the cost of resources. The
indices are referenced to the previous periods budget by using that budget as the base index number of
100. The index numbers to be used to prepare Period 3s budget from that of Period 2 are as follows:

Index
Patient days 90
House-keeping costs 106
Nursing costs 105
Administration costs 104

The budget for Period 2 was:

House-keeping costs (all variable) 125,000
Nursing costs (see below) 324,000
Administration costs (all fixed) 100,000

Nursing costs are semi-variable. The nursing costs for Period 2 were adjusted from the total nursing costs
of 280,000 for Period 1 by using a Patient days index of 125 and a Nursing costs index of 108.

Prepare the budget for Period 3.
(5 marks)

Rationale
Question 2(f) covers learning outcome C(ii) - Calculate projected product/service volumes employing
appropriate forecasting techniques.

Suggested Approach
Apply relevant indices to P2 house-keeping and administration costs in order to calculate the P3
budget
Analyse the nursing costs into variable and fixed elements for P1
Use the indices provided for P2 & P3 to calculate separately the budgeted variable and the budgeted
fixed nursing costs in P3

Marking Guide

Marks
House-keeping costs
Variable nursing costs
Fixed nursing costs
1
2.5
1
0.5

Examiners Comments

This part was answered poorly, especially the calculation of nursing costs.
Common Errors
Failing to adjust costs using the indices provided in the question
Failing to analyse the nursing costs correctly, if at all, into variable and fixed elements


Post Exam Guide

November 2007 Exam

Section C 30 marks

Question 3(a)

Calculate the budgeted and actual profits for each of the profit centres and for the whole company for
the year.
(4 marks)

Rationale

Question 3(a) covers learning outcome A(v) - Apply standard costing methods within costing systems and
demonstrate the reconciliation of budgeted and actual profit margins.

Suggested Approach

Use budgeted average profit per job and budgeted number of jobs to calculate the budgeted profit
Use actual average profit per job and actual number of jobs to calculate the actual profit (before
adjustment for under-absorption of central services costs)
Calculate and adjust for the under-absorbed central services costs

Marking Guide

Marks

Budgeted profit
Actual profit (before central services cost adjustment)
Central services cost adjustment

1
1
2

Examiners Comments

This was a straightforward question that led to the award of between two and four marks for most
candidates. A variety of treatments were accepted for the under-absorbed Central Services Division costs.

Common Errors
Not appreciating that the actual costs of the Central Services Division were not fully recovered in the
recharge per job and as a result calculating the actual profit as $8.75m
Failing to provide totals for the company as well as totals for each profit centre


Post Exam Guide

November 2007 Exam

Question 3(b)

Calculate the sales price variances and the sales mix profit and sales quantity profit variances.

(6 marks)

Rationale

Question 3(b) covers learning outcome B(ii) - Calculate and interpret material, labour, variable overhead,
fixed overhead and sales variances.

Suggested Approach

Calculate the sales price variance for each profit centre by comparing the actual sales revenue with
the sales revenue that would have been received at budgeted selling prices
Split the actual total number of jobs for WC between the two profit centres in budgeted proportions
Calculate the sales mix profit variance for each profit centre based on the differences between actual
and budgeted mix of jobs at the budgeted profit per job
Calculate the sales quantity profit variance based on the difference between the budgeted and actual
number of jobs, valued at the budgeted average profit per job for the budgeted sales mix

Marking Guide

Marks

Sales price variances
Sales mix profit variances
Sales quantity profit variances

2
2
2

Examiners Comments

The sales price variances were frequently correct but candidates were generally unable to calculate mix
and quantity variances correctly (if attempted).

Common Errors
Calculating the average sales price variances per job only
Valuing sales mix and quantity variances at standard sales value rather than at standard profit
Demonstrating inability to calculate mix quantities
Attempting to calculate the sales volume profit variance (not asked for and often not labelled as such)
either instead of, or as well as, attempting to calculate the mix and quantity variances
Making errors with the signage of the variances (adverse or favourable)


Post Exam Guide

November 2007 Exam

Question 3(c)

Prepare a statement that reconciles the budgeted and actual profits and shows appropriate variances
in as much detail as possible.

(10 marks)

Rationale

Question 3(c) covers learning outcome B(iii) - Prepare and discuss a report which reconciles budget and
actual profit using absorption and/or marginal costing principles.

Suggested Approach

Calculate the cost variances (not required in answer to part (b))
Consider the format of the required reconciliation statement
Set out a statement containing the results of the calculations in parts (a) and (b), as well as the cost
variances

Marking Guide

Marks

Actual and budgeted profit
Expected profit on actual sales
Direct cost variances calculation
Central services expenditure variance calculation
Central services volume variance calculation
Variances in statement
Format/layout of statement

1
1
2
2
2
1
1

Examiners Comments

Most candidates were able to construct a reconciliation statement of the correct general form.

Common Errors
Not calculating, and/or labelling, the expected profit on actual sales
Making no attempt to calculate, or include in the statement, the cost variances
Calculating direct cost volume variances (already taken account of in the sales profit variances) as
well as the variances arising from differences between budget and actual average costs
Failing to deal with the Central Services Division costs
Poor labelling of cost variances
Making errors with the signage of the variances (adverse and favourable)
Using a poor layout for the statement


Post Exam Guide

November 2007 Exam

Question 3(d)

Using the statement that you prepared in part (c) above, discuss

(i) the performance of the company for the year; and
(ii) potential changes to the budgeting and reporting system that would improve
performance evaluation within the company.

(10 marks)


Rationale

Question 3(d) covers learning outcome C(ix) Identify controllable and uncontrollable costs in the context
of responsibility accounting and explain why 'uncontrollable' costs may or may not be allocated to
responsibility centres.

Suggested Approach

Assess the overall performance of WC
Discuss the likely causes/implications of each of the variances
Consider deficiencies in the current reporting/performance evaluation system indicated by the question
scenario
Suggest changes and explain why they would improve the system

Marking Guide

Marks

1 mark available per relevant point

10 max

Examiners Comments

Most candidates were able to put into words the figures calculated in parts (a), (b) and (c) but answers
were often limited in terms of further analysis and suggestions for improved performance evaluation.

Common Errors
Failing generally to apply the analysis to the particular scenario: highly customised designs and
different off-the-shelf packages will have implications for average sales prices and average costs. The
sales mix (both between types of jobs within each profit centre and between profit centres) will be a
significant factor influencing both sales price and costs
Failing generally to appreciate the limitations of high level average data
Making reference to ABC but frequently failing to develop further its possible application


Post Exam Guide

November 2007 Exam

Question 4(a)

Assume that the 300,000 chips are supplied by the European subsidiary at a transfer price of $95
per chip. Calculate the impact on the profits of each of the subsidiaries and the group.

(5 marks)

Rationale

Question 4(a) covers learning outcome D(iii) - Prepare revenue and cost information in appropriate
formats for profit and investment centre managers, taking due account of cost variability, attributable
costs, controllable costs and identification of appropriate measures of profit centre 'contribution'.

Suggested Approach

Calculate the incremental impact on Europe (increased volume, contribution and fixed costs) or
calculate revised total sales, costs and profit to compare with the current situation
Calculate the extra cost, and thus reduced profit, in America
Calculate the effect on the Group profit

Marking Guide

Marks

Europe:
Increased volume
Increased contribution
Increased fixed costs
America:
Profit reduction
Group:
Profit increase

1
1
1

1

1

Examiners Comments

Reasonable attempts were made by the candidates who chose to answer this question.

Common Errors
Missing the fact that the variable costs would reduce to $50 per chip on transfers from the European
subsidiary to the American subsidiary
Not appreciating that the effect on the group profit would be the sum of the effects on the two
subsidiaries profits


Post Exam Guide

November 2007 Exam

Question 4(b)

Calculate the minimum unit price at which the European subsidiary would be willing to transfer the
300,000 chips to the American subsidiary if the performance and salary of the Manager of the
subsidiary is to be based on

(i) the profit of the subsidiary (currently $7 million)
(ii) the return on assets consumed by the subsidiary (currently 35%).

(9 marks)

Rationale

Question 4(b) covers learning outcome D(iv) - Calculate and apply measures of performance for
investment centres (often 'strategic business units' or divisions of larger groups).

Suggested Approach

Various approaches were possible for both sub-parts. The most direct approaches were to:
(i) Calculate the reduction in transfer price per unit that would negate the incremental profit for Europe
calculated in part (a)
(ii) Calculate the reduction in transfer price per unit that would result in a reduction in the incremental
profit from (a) to a level representing a return of 35% on assets consumed

Marking Guide

Marks
(i)
Profit required
Reduction in transfer price
Revised transfer price
(ii)
Profit required
Reduction in transfer price
Revised transfer price

1
2
2

1
2
1

Examiners Comments

The calculations in answer to part (i) were very straightforward for those candidates who had identified no
profit change for the European subsidiary in answer to part (a). This resulted from a failure, in part (a), to
include the reduction in variable costs to $50 per chip on the transfers to America. This was nevertheless
awarded full marks in (b)(i) where appropriate on an own figure basis. However, there was a general
failure by candidates to appreciate what was required, especially in answer to (b)(ii), although a variety of
valid approaches to each of the calculations were possible, and accepted where used correctly.


Post Exam Guide

November 2007 Exam

Question 4(c)

Write a report to the Managing Director of the group that discusses issues raised by the directive and
the introduction of performance measures. (You should use your answers to parts (a) and (b), where
appropriate, to illustrate points in your report).

(10 marks)

Rationale

Question 4(c) covers learning outcome D(v)- Discuss the likely behavioural consequences of the use of
performance metrics in managing cost, profit and investment centres.

Suggested Approach

Identify potential issues arising from the directive and from the introduction of performance measures
Consider their implications for each subsidiary in the light of the answers to parts (a) and (b)

Marking Guide

Marks

1 mark available per relevant point

10 max

Examiners Comments

The general failure by candidates to answer part (b) impacted on the answers to part (c) which were
frequently very brief. There were no common errors in this part.

Common Errors
Failing to appreciate the implications of the directive for subsidiary autonomy
Failing to appreciate the implications of the possible transfer prices for performance and motivation of
subsidiaries, especially in the context of the proposed new performance measures


Post Exam Guide

November 2007 Exam

Question 4(d)

Briefly explain how multi-national companies can use transfer pricing to reduce their overall tax charge
and the steps that national tax authorities have taken to discourage the manipulation of transfer prices.

(6 marks)


Rationale

Question 4(d) covers learning outcome D(vii) -Identify the likely consequences of different approaches to
transfer pricing for divisional decision making, divisional and group profitability, the motivation of divisional

Suggested Approach

Discuss the implications for transfer pricing of different tax rates applying in different countries
Identify the need for high transfer prices for goods and services provided from low tax countries and
vice versa
Identify steps taken by authorities to prevent abuse/manipulation

Marking Guide

Marks

1 mark available for each relevant point

6 max

Examiners Comments

The candidates who answered question 4 generally handled this part fairly well. They were able to
describe and demonstrate the potential implications for transfer pricing where taxation rates differ between
countries, and to show some appreciation of the steps taken by authorities to prevent abuse. There were
no common errors in this part.



a dotted box.
Maths Tables and Formulae are provided on pages 17 to 21.
to close.
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TURN OVER
SECTION A 40 MARKS
ANSWER ALL SEVENTEEN SUB-QUESTIONS


The answers to the seventeen sub-questions in Section A should ALL be written in
your answer book.

each sub-question.


Question One

1.1 If inventory levels have increased during the period, the profit calculated using marginal
costing when compared with that calculated using absorption costing will be

A higher.
B lower.
C equal.
D impossible to answer without further information.
(2 marks)

1.2 Fixed production overheads will always be under-absorbed when

A actual output is lower than budgeted output.
B actual overheads incurred are lower than budgeted overheads.
C overheads absorbed are lower than those budgeted.
D overheads absorbed are lower than those incurred.

(2 marks)

P1 2 May 2008

The following scenario is to be used for questions 1.3 and 1.4

A company manufactures three products: W, X and Y. The products use a series of different
machines, but there is a common machine that is a bottleneck.

The standard selling price and standard cost per unit for each product for the next period are as
follows:
W

X

Y


Cost:
Variable production overheads 24 16 20
Fixed production overheads 36 24 30
Profit 49 70 20
Time (minutes) on bottleneck machine 7 10 7

The company is trying to plan the best use of its resources.

1.3 Using a traditional limiting factor approach, the rank order (best first) of the products
would be
A W, X, Y
B W, Y, X
C X, W, Y
D Y, X, W
(2 marks)

1.4 Using a throughput accounting approach, the rank order (best first) of the products would
be
A W, X, Y
B W, Y, X
C X, W, Y
D Y, X, W

(2 marks)


TURN OVER
May 2008 3 P1

1.5 A companys summary budgeted operating statement is as follows:

$000
Revenue 400
Variable costs 240
Fixed costs 100
Profit 60

Assuming that the sales mix does not change, the percentage increase in sales volume that
would be needed to increase the profit to $100,000 is

A 10%
B 15%
C 25%
D 40%
(2 marks)

1.6 Which of the following statements are true?

(i) Enterprise Resource Planning (ERP) systems are accounting oriented information
systems which aid in identifying and planning the enterprise wide resources needed
to resource, make, account for and deliver customer orders.
(ii) Flexible Manufacturing Systems (FMS) are integrated, computer-controlled
production systems, capable of producing any of a range of parts and of switching
quickly and economically between them.
(iii) J ust-In-Time (J IT) is a system whose objective is to produce, or to procure,
products or components as they are required.

A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
(2 marks)

1.7 Flexed budgets for the cost of medical supplies in a hospital, based on a percentage of
maximum bed occupancy, are shown below:

Bed occupancy 82% 94%
Medical supplies cost $410,000 $429,200

During the period, the actual bed occupancy was 87% and the total cost of the medical
supplies was $430,000.

The medical supplies expenditure variance was

A $5,000 adverse
B $12,000 adverse
C $5,000 favourable
D $12,000 favourable

(2 marks)

P1 4 May 2008

1.8 A company uses a standard absorption costing system. The fixed overhead absorption
rate is based on labour hours.

Extracts from the companys records for last year were as follows:

Budget Actual
Fixed production overhead $450,000 $475,000
Labour hours 900,000 930,000

The under- or over-absorbed fixed production overheads for the year were

A $10,000 under-absorbed
B $10,000 over-absorbed
C $15,000 over-absorbed
D $65,000 over-absorbed

(2 marks)

1.9 A flexible budget is a budget that

A is changed during the budget period according to changed circumstances.
B is continuously updated by adding a further accounting period when the earliest
accounting period has expired.
C results from the participation of budget holders.
D recognises different cost behaviour patterns and is designed to change as the volume of
activity changes.
(2 marks)

1.10 A company will forecast its quarterly sales units for a new product by using a formula to
predict the base sales units and then adjusting the figure by a seasonal index.
The formula is BU =4000 +80Q
Where BU =Base sales units and Q is the quarterly period number
The seasonal index values are:

Quarter 1 105%
Quarter 2 80%
Quarter 3 95%
Quarter 4 120%

The forecast increase in sales units from Quarter 3 to Quarter 4 is

A 25%
B 80 units
C 100 units
D 1,156 units
(2 marks)


TURN OVER
May 2008 5 P1

1.11 Product XYZ is made by mixing three materials (X, Y and Z). There is an expected loss
of 20% of the total input.

The budgeted and actual results for Period 1 are shown below. There were no opening or
closing inventories of any materials or of the finished product.

Budget Actual
Output of XYZ 800 kg 960 kg
Material
X 500 kg @ $500 per kg 600 kg @ $470 per kg
Y 300 kg @ $600 per kg 380 kg @ $650 per kg
Z 200 kg @ $700 per kg 300 kg @ $710 per kg
Total input 1,000 kg 1,280 kg

Calculate for Period 1:

(i) the total materials mix variance;
(2 marks)
(ii) the total materials yield variance.
(2 marks)

(Total for sub-question 1.11 = 4 marks)

1.12 Extracts from a companys year-end accounts are shown below:

$000
Revenue 9,456
Gross profit 5,872
Operating profit 2,981
Non-current assets 17,850
Inventory 950
Cash at bank 1,750
Short-term borrowings 1,225
Trade receivables 731
Trade payables 813

Calculate the following performance measures:

(iv) Current ratio.
(4 marks)

P1 6 May 2008

The following data are given for sub questions 1.13, 1.14 and 1.15

Premier Cycles has two divisions: the Frame Division and the Assembly Division. The Frame
Division produces bike frames. The frames can be sold directly to external customers as frame
only or the frames can be transferred to the Assembly Division where they are built up into
complete bikes by adding other components, such as wheels and handlebars.

Frame Division
Budgeted details for the forthcoming year for the Frame Division are:

Selling price per frame $852
Variable cost per frame $420
Annual fixed cost $4,000,000
Annual capacity 12,000 frames

The Division has orders for 5,000 frames from external customers for the forthcoming year.

Assembly Division
The Manager of the Assembly Division has just signed a contract to supply 8,000 bikes to a
sporting goods retailer next year. This will mean that the Division will be operating at full
capacity. Budgeted details are as follows:

Selling price per bike $1,600
Variable cost of assembly and components $500 (excluding frame)
Annual capacity 8,000 bikes

Company Policy
It has been announced that Premier Cycles will be introducing a new performance appraisal
system. The Divisional Managers bonuses will only be payable if they earn a minimum annual
contribution of 108% of fixed costs.

1.13 Calculate the minimum number of frames the Frame Division must sell next year in order
for the Divisional Manager to earn a bonus if frames are sold for $852 each.
(2 marks)

1.14 Calculate the maximum price per frame that the Manager of the Assembly Division could
pay and still earn a bonus next year.
(2 marks)

1.15 Ignoring Premier Cycles performance appraisal system, explain how the Manager of the
Frame Division should calculate the transfer price of frames it supplies to the Assembly
division in order to maximise profits for Premier Cycles.

Note: NO calculations are required.
(2 marks)


TURN OVER
May 2008 7 P1

1.16 State FOUR aims of a transfer-pricing system.
(2 marks)

1.17 Product GH passes through two consecutive processes: the output from Process 1 is
transferred to Process 2. Details of Process 1 for Period 3 were as follows:

There were 5,000 units of opening work-in-progress, which were valued as follows:

Materials $77,080
Labour $33,480
Production overheads $8,825

During the period, 14,000 units were added to the process and the following costs were
incurred:
Materials $230,000
Labour $101,000

At the end of Period 3, there were 6,000 units of closing work-in-progress. The degree of
completion for these units was:

Materials 100%
Labour 80%
Production overheads 65%

The expected normal loss is 10% of new units added to the process during the period.
These units and any other losses can be sold for $5 per unit.

11,000 units were transferred to Process 2 and there were losses of 2,000 units.

All losses occur at the end of the process.

Weighted average costing is used.

Calculate the total cost of the 11,000 units that were transferred to Process 2.
(4 marks)


Reminder


P1 8 May 2008



TURN OVER
May 2008 9 P1

SECTION B 30 MARKS
MARKS

Question Two

(a) Describe THREE key features that are present in any organisation that is successfully
focused on Total Quality Management (TQM).
(5 marks)

(b) Explain THREE behavioural consequences that may result after the introduction of
participative budgeting.
(5 marks)

(c) Discuss the advantages and disadvantages of rolling budgets.
(5 marks)

P1 10 May 2008

The following data relate to sub-questions (d), (e) and (f)

A multi-national company manufactures and sells a wide range of digital equipment. The
company is structured into three Divisions: Computers, Audio-visual and Photographic. The
Divisions operate as investment centres and the performance of the Divisional Managers is
evaluated by using Return on Investment (ROI).

The Manager of the Photographic Division was concerned that the Division was falling behind its
competitors in terms of financial returns and market share, and has implemented strategies to
improve the situation. An external benchmarking exercise was undertaken to try to establish the
position of the Division in relation to its competitors in a number of key areas. It has now been
suggested that the Division should also carry out an internal benchmarking exercise.

(d) The manager of the Photographic Division is considering introducing a Balanced
Scorecard to measure the success of the strategies. He has identified two perspectives
and two associated goals. They are:

Perspective Goal
Innovation Technology Leadership
Customer Support

(i) For the Innovation Perspective of the Division, recommend a performance measure and
briefly explain how the measure will reflect the achievement of the stated goal.
(3 marks)

(ii) For the Customer Perspective of the Division, state which data should be collected and
explain how this could be used to ensure the goal of support is met.
(2 marks)

(Total for (d) = 5 marks)

(e) Explain THREE reasons why internal benchmarking may provide information that is more
useful to the Manager of the Photographic Division, in terms of monitoring and improving
performance, than that provided by external benchmarking.
(5 marks)

(f) Explain THREE reasons why ROI may not be a good performance measure.
(5 marks)



End of Section B


TURN OVER
May 2008 11 P1

SECTION C 30 MARKS

Question Three

The newly-appointed Managing Director of FX has received the variance report for Month 6,
which is shown below:

Month 6 Variance Report

Output and Sales for Month 6. Budget: 1,000 units. Actual: 1,200 units.

Budgeted contribution 90,000
Budgeted fixed costs 70,000
Budgeted profit 20,000
Volume variance 18,000
Expected profit on actual sales 38,000
Sales price variance 12,000
Production variances Favourable Adverse
Materials price 6,300
Materials usage 6,000
Labour rate 5,040
Labour efficiency 2,400
Variable overhead expenditure - -
Variable overhead efficiency 1,200
Fixed overhead _____ 4,000
5,040 19,900 14,860
Actual profit 11,140

Background information (not seen by the Managing Director)

The report did not include any other information. Details relating to the company and the
product that it makes are given below:

FX produces one type of product. It operates a standard marginal costing system.

The standard unit cost and price of the product is as follows:

Selling price 250
Direct material (5 kg at 20) 100
Direct labour (4 hours at 10) 40
Variable overheads (4 hours at 5) 20 160
Contribution 90

The variable overhead absorption rate is based on direct labour hours.

The company has budgeted fixed overheads of 70,000 per month.

Budgeted sales and production levels are 1,000 units per month.
P1 12 May 2008

Month 6
The company has just completed Month 6 of its operations. Extracts from its records show:

1. 1,200 units were produced and sold.
2. The actual direct materials purchased and used was 6,300 kg costing 132,300
3. The actual direct labour hours worked were 5,040 hours.

Required:

(a) Prepare a report for the Managing Director of FX that explains and interprets the
Month 6 variance report. The Managing Director has recently joined the company
and has very little previous financial experience.
(17 marks)

The Managing Director was concerned about the Material Price variance and its cause.
He discovered that a shortage of materials had caused the market price to rise to 23 per
kg.

Required:

(b) In view of this additional information, calculate for Direct Materials:

The total variance;
The planning variance;
The two operational variances.
(7 marks)

(c) Discuss the advantages and disadvantages of reporting planning and operational
variances. Your answer should refer, where appropriate, to the variances you
calculated in (b) above.
(6 marks)



TURN OVER
May 2008 13 P1

Question Four

Q, a new company, is being established to manufacture and sell an electronic tracking device:
the Trackit. The owners are excited about the future profits that the business will generate.
They have forecast that sales will grow to 2,600 Trackits per month within five months and will
be at that level for the remainder of the first year.

The owners will invest a total of $250,000 in cash on the first day of operations (that is the first
day of Month 1). They will also transfer non-current assets into the company.

Extracts from the companys business plan are shown below.

Sales
The forecast sales for the first five months are:

Month Trackits
(units)
1 1,000
2 1,500
3 2,000
4 2,400
5 2,600

The selling price has been set at $140 per Trackit.

Sales receipts
Sales will be mainly through large retail outlets. The pattern for the receipt of payment is
expected to be as follows:

Time of payment % of sales value
Immediately 15 *
One month later 25
Two months later 40
Three months later 15

The balance represents anticipated bad debts.

* A 4% discount will be given for immediate payment.

Production
The budget production volumes in units are:

Month 1 Month 2 Month 3 Month 4
1,450 1,650 2,120 2,460

Variable production cost
The budgeted variable production cost is $90 per unit, comprising:

$
Direct materials 60
Direct wages 10
Variable production overheads 20
Total variable cost 90

Direct materials: Payment for purchases will be made in the month following receipt. There will
be no opening inventory of materials in Month 1. It will be company policy to hold inventory at
the end of each month equal to 20% at of the following months production requirements. The
direct materials cost includes the cost of an essential component that will be bought in from a
specialist manufacturer.

P1 14 May 2008

Direct wages will be paid in the month in which the production occurs.

Variable production overheads: 65% will be paid in the month in which production occurs and
the remainder will be paid one month later.

Fixed overhead costs
Fixed overheads are estimated at $840,000 per annum and are expected to be incurred in equal
amounts each month. 60% of the fixed overhead costs will be paid in the month in which they
are incurred and 15% in the following month. The balance represents depreciation of non-
current assets.

Ignore VAT and Tax

Required

(a) Prepare a cash budget for each of the first three months and for that three-month
period in total.
(14 marks)

(b) There is some uncertainty about the cost of the specialist component (this is
included in the direct material cost). It is thought that the cost of the component
could range between $32 and $50 per Trackit. It is currently included in the cost
estimates at $40 per Trackit.

Calculate the budgeted total net cash flow for the three-month period in total if the
cost of the component was
(i) $32
(ii) $50
(6 marks)

(c) Prepare a report for the owners of Q that offers advice about the profitability of their
business and the situation revealed by the extracts from the business plan and
your answers to (a) and (b) above.
(10 marks)

Total for Question Four = 30 marks



May 2008 15 P1


[This page is blank]
P1 16 May 2008


May 2008 17 P1

PRESENT VALUE TABLE

Present value of $1, that is

( )
n
r

+ 1 where r =interest rate; n =number of periods until
payment or receipt.

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

P1 18 May 2008

years
r
r
n
+ ) (1 1

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

May 2008 19 P1

Formulae
PROBABILITY

Rules of Addition



Quadratic Equations
If aX
2
by:
a
ac b b
X
2
4
2

=

Arithmetic Mean
n
x
x

=
f
fx
x

Standard Deviation
n
x x
SD
2
) (
=
2
2
x
f
fx
SD

INDEX NUMBERS
1
/P
0
1
/Q
0

Price: 100 x
w
P
P
w
o
1

Quantity: 100 x
1
w
Q
Q
w
o

TIME SERIES
Additive Model

P1 20 May 2008



where
b =
2 2
) X ( X n
) Y )( X ( XY n
) X ( Variance
) XY ( Covariance

=

and a =Y bX

or solve
Y =na + b X
XY =a X + bX
2


} ) Y ( Y n }{ ) X ( X n {
) Y )( X ( XY n
) XY ( Covariance
r
2 2 2 2

= =

R(rank) =1 -
) 1 (
6
2
2
n n
d


S =X[1 +r]
n

Annuity

PV =
n
r
r
] 1 [
1
1
1

Perpetuity
PV =
r
1

May 2008 21 P1


P1 22 May 2008



1 KNOWLEDGE

2 COMPREHENSION

consideration
something
3 APPLICATION

Calculate/compute
practical means
4 ANALYSIS

Analyse
Categorise
between
5 EVALUATION


Advise
Evaluate
Recommend

May 2008 23 P1

Managerial Level
May 2008
P1 24 May 2008

Post Exam Guide

May 2008 Exam

General Comments

The results achieved on this paper were a significant improvement on those seen in the
November 2007 examination. The improvement was seen in all sections of the paper
although differences in performance were demonstrated between the optional questions 3
and 4 in Section C. Question 4 on the subject of cash budgeting, and with a greater weighting
of marks available for calculations, was more popular and was better answered.

Marks gained on the ten multiple-choice questions and on the shorter-form calculations in
question 1 (Section A) were particularly good thus providing a good foundation for success in
this examination. However, it is still the case that a number of candidates fail to attempt all of
the multiple-choice questions. Some candidates were unable to build sufficiently upon their
achievements in question 1. This was due to weaker performance in Sections B and C of the
paper where the focus was much more on narrative especially if question 3 was chosen in
Section C.

There was little evidence, in this P1 examination, of time pressures and of poor time
management. However, workings in answer to calculation questions were often unnecessarily
lengthy, detailed and at times repetitive. Adequate workings are always required to
computational questions (apart from multiple-choice), for the benefit both of candidates and of
markers, but time spent planning answers is time well spent if it reduces overall writing time.

Lack of preparation seemed to be the primary reason for candidate failure. Candidates who
failed this exam must try to prepare themselves for future exams with a good knowledge of
topic areas. In the exam they must read questions carefully and then answer the specific
question asked rather than write all they know on a broader topic. Candidates must be
prepared to apply their knowledge to particular practical situations.

Post Exam Guide

May 2008 Exam

Section A 50 marks

Question 1.1

If inventory levels have increased during the period, the profit calculated using marginal costing when
compared with that calculated using absorption costing will be

A higher.
B lower.
C equal.
D impossible to answer without further information.
(2 marks)
The answer is B

Question 1.2

Fixed production overheads will always be under-absorbed when

A actual output is lower than budgeted output.
B actual overheads incurred are lower than budgeted overheads.
C overheads absorbed are lower than those budgeted.
D overheads absorbed are lower than those incurred.

(2 marks)

The answer is D

The following scenario is to be used for questions 1.3 and 1.4

A company manufactures three products: W, X and Y. The products use a series of different
machines, but there is a common machine that is a bottleneck.

The standard selling price and standard cost per unit for each product for the next period are
as follows:
W

X

Y


Cost:
Variable production overheads 24 16 20
Fixed production overheads 36 24 30
Profit 49 70 20
Time (minutes) on bottleneck machine 7 10 7

The company is trying to plan the best use of its resources.

Post Exam Guide

May 2008 Exam

Question 1.3

Using a traditional limiting factor approach, the rank order (best first) of the products would be
A W, X, Y
B W, Y, X
C X, W, Y
D Y, X, W
(2 marks)

The answer is A
Workings
The traditional limiting factor approach would view contribution per unit as the selling price minus all
variable costs.

W X Y
Bottleneck minutes 7 10 7
Contribution per minute 121 94 71
Rank 1 2 3


Post Exam Guide

May 2008 Exam

Question 1.4
Using a throughput accounting approach, the rank order (best first) of the products would be
A W, X, Y
B W, Y, X
C X, W, Y
D Y, X, W

(2 marks)
The answer is B

Workings
A throughput accounting approach assumes that materials are the only variable costs. Consequently the
contribution is different from that calculated using the traditional method.

W X Y
Bottleneck minutes 7 10 7
Contribution per minute 199 13 171
Rank 1 3 2


Post Exam Guide

May 2008 Exam

Question 1.5
A companys summary budgeted operating statement is as follows:

$000
Revenue 400
Variable costs 240
Fixed costs 100
Profit 60

Assuming that the sales mix does not change, the percentage increase in sales volume that would be
needed to increase the profit to $100,000 is

A 10%
B 15%
C 25%
D 40%
(2 marks)

The answer is C

Workings

Contribution to sales ratio =160/400 =40%

Extra profit required =$40,000. Fixed costs are constant and therefore extra contribution will generate
extra profit.

The revenue needed to generate contribution of $40,000 is $40,000/40% =$100,000.

The current revenue is $400,000 and therefore $100,000 is 25% of this.


Post Exam Guide

May 2008 Exam

Question 1.6
Which of the following statements are true?

(i) Enterprise Resource Planning (ERP) systems are accounting oriented information systems
which aid in identifying and planning the enterprise wide resources needed to resource,
make, account for and deliver customer orders.
(ii) Flexible Manufacturing Systems (FMS) are integrated, computer-controlled production
systems, capable of producing any of a range of parts and of switching quickly and
economically between them.
(iii) J ust-In-Time (J IT) is a system whose objective is to produce, or to procure, products or
components as they are required.

A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
(2 marks)
The answer is D


Post Exam Guide

May 2008 Exam

Question 1.7
Flexed budgets for the cost of medical supplies in a hospital, based on a percentage of maximum bed
occupancy, are shown below:

Bed occupancy 82% 94%
Medical supplies cost $410,000 $429,200

During the period, the actual bed occupancy was 87% and the total cost of the medical supplies was
$430,000.

The medical supplies expenditure variance was

A $5,000 adverse
B $12,000 adverse
C $5,000 favourable
D $12,000 favourable

(2 marks)

The answer is B
Workings

% $
High 94 429,200
Low 82 410,000
Difference 12 19,200

Variable cost per % =$19,200/12 =$1,600

87% is 5% more than 82% and therefore the total cost for the flexed budget for a bed occupancy of 87% is
$410,000 +(1,600 * 5) =$418,000

The expenditure variance is $418,000 - $430,000 =$12,000 adverse


Post Exam Guide

May 2008 Exam

Question 1.8
A company uses a standard absorption costing system. The fixed overhead absorption rate is based on
labour hours.

Extracts from the companys records for last year were as follows:

Budget Actual
Fixed production overhead $450,000 $475,000
Labour hours 900,000 930,000

The under- or over-absorbed fixed production overheads for the year were

A $10,000 under-absorbed
B $10,000 over-absorbed
C $15,000 over-absorbed
D $65,000 over-absorbed

(2 marks)

The answer is D

Workings
The under or over absorbed overhead is the difference between the actual overhead spent and the
overheads absorbed. Overheads are absorbed based on the standard content of the actual output. Here
we are told that the absorption rate is based on labour hours.

The overhead absorption rate is $450,000/900,000 hours =$050 per labour hour

Standard labour hours per unit =900,000/50,000 =18 hours per unit

The output was 60,000 units. This is 60,000 * 18 =1,080,000 standard hours.

Overhead absorbed =1,080,000 * $050 =$540,000

The actual overheads were $475,000 and therefore overheads were over absorbed by $65,000.


Post Exam Guide

May 2008 Exam

Question 1.9
A flexible budget is a budget that

A is changed during the budget period according to changed circumstances.
B is continuously updated by adding a further accounting period when the earliest
accounting period has expired.
C results from the participation of budget holders.
D recognises different cost behaviour patterns and is designed to change as the volume of
activity changes.
(2 marks)
The answer is D

Question 1.10
A company will forecast its quarterly sales units for a new product by using a formula to predict the base
sales units and then adjusting the figure by a seasonal index.
The formula is BU =4000 +80Q
Where BU =Base sales units and Q is the quarterly period number
The seasonal index values are:

Quarter 1 105%
Quarter 2 80%
Quarter 3 95%
Quarter 4 120%

The forecast increase in sales units from Quarter 3 to Quarter 4 is

A 25%
B 80 units
C 100 units
D 1,156 units
(2 marks)

The answer is D

Workings
Forecast for Q3 ={4,000 +(80 * 3)}* 95% = 4,028
Forecast for Q4 ={4,000 +(80 * 4)}* 120% =5,184

This is an increase of 1,156 units.


Post Exam Guide

May 2008 Exam

Question 1.11
Product XYZ is made by mixing three materials (X, Y and Z). There is an expected loss of 20% of the
total input.

The budgeted and actual results for Period 1 are shown below. There were no opening or closing
inventories of any materials or of the finished product.

Budget Actual
Output of XYZ 800 kg 960 kg
Material
X 500 kg @ $500 per kg 600 kg @ $470 per kg
Y 300 kg @ $600 per kg 380 kg @ $650 per kg
Z 200 kg @ $700 per kg 300 kg @ $710 per kg
Total input 1,000 kg 1,280 kg

Calculate for Period 1:

(i) the total materials mix variance;
(2 marks)
(ii) the total materials yield variance.
(2 marks)
(Total for sub-question 1.11 = 4 marks)

Workings

(i) Mix variance =(actual inputs in the actual mix at standard prices) v (actual inputs in standardised
mix at standard prices)

Actual mix Standard mix
kg $ per kg $ kg $ per kg $
X 600 5 3,000 640 5 3,200
Y 380 6 2,280 384 6 2,304
Z 300 7 2,100 256 7 1,792
1,280 7,380 1,280 7,296

Mix variance =$7,380 v $7,296 =$84 adverse

(ii) Yield variance =(actual inputs in standardised mix at standard prices) v (standard input in
standardised mix at standard prices for the actual output).

The actual output of XYZ was 960 kg. The input required to achieve an output of 960 kg is 1,200 kg
(there is a 20% loss, therefore the input =960/08).

Standardised input Standard input needed
kg $ per kg $ kg $ per kg $
X 640 5 3,200 600 5 3,000
Y 384 6 2,304 360 6 2,160
Z 256 7 1,792 240 7 1,680
1,280 7,296 1,200 6,840

Yield variance =$7,296 v $6,840 =$456 adverse


Post Exam Guide

May 2008 Exam

Question 1.12
Extracts from a companys year-end accounts are shown below:

$000
Revenue 9,456
Gross profit 5,872
Operating profit 2,981
Non-current assets 17,850
Inventory 950
Cash at bank 1,750
Short-term borrowings 1,225
Trade receivables 731
Trade payables 813

Calculate the following performance measures:

(iv) Current ratio.
(4 marks)

Workings

(i) Operating profit margin =2,981,000/9,456,000 =3153%
(ii) Return on capital employed =2,981 /(17,850 +950 +1,750 1,225 +731 813) =1549%
(iii) Trade receivable days =(731,000/9,456,000) x 365 =2822 days
(iv) Current ratio =(950 +1,750 +731)/(1,225 +813) =168


Post Exam Guide

May 2008 Exam

The following data are given for sub questions 1.13, 1.14 and 1.15

Premier Cycles has two divisions: the Frame Division and the Assembly Division. The Frame
Division produces bike frames. The frames can be sold directly to external customers as
frame only or the frames can be transferred to the Assembly Division where they are built up
into complete bikes by adding other components, such as wheels and handlebars.
Frame Division
Budgeted details for the forthcoming year for the Frame Division are:
Selling price per frame $852
Variable cost per frame $420
Annual capacity 12,000 frames

The Division has orders for 5,000 frames from external customers for the forthcoming year.

Assembly Division

The Manager of the Assembly Division has just signed a contract to supply 8,000 bikes to a
sporting goods retailer next year. This will mean that the Division will be operating at full
capacity. Budgeted details are as follows:

Selling price per bike $1,600
Variable cost of assembly and components $500 (excluding frame)
Annual capacity 8,000 bikes

Company Policy
It has been announced that Premier Cycles will be introducing a new performance appraisal
system. The Divisional Managers bonuses will only be payable if they earn a minimum
annual contribution of 108% of fixed costs.

Question 1.13
Calculate the minimum number of frames the Frame Division must sell next year in order for the Divisional
Manager to earn a bonus if frames are sold for $852 each.
(2 marks)

Workings

Contribution per frame =$432
Return required =$4m x 108 =$432m
Minimum number of frames =$432m/$432 =10,000 frames


Post Exam Guide

May 2008 Exam

Question 1.14
Calculate the maximum price per frame that the Manager of the Assembly Division could pay and still earn
a bonus next year.
(2 marks)

Workings

Return required =$24m x 108 =$2592m
Minimum contribution per frame =$2.592m/8,000 =$324
Contribution before charging for frame =$1,600 - $500 =$1,100
Therefore the maximum payment would be $1,100 - $324 =$776

Question 1.15
Ignoring Premier Cycles performance appraisal system, explain how the Manager of the Frame Division
should calculate the transfer price of frames it supplies to the Assembly division in order to maximise
profits for Premier Cycles.

Note: NO calculations are required.
(2 marks)

Workings
The transfer price should be based on opportunity cost. If there is an external market for the frames then
the market price should be used. If there is not an external market, the transfer price should be the
marginal cost incurred.


Post Exam Guide

May 2008 Exam

Question 1.16
State FOUR aims of a transfer-pricing system.
(2 marks)

Workings

The aims of a transfer-pricing system include:

Promote goal congruence;
Motivate managers;
Facilitate performance evaluation;
Retain divisional autonomy;
Ensure optimal allocation of resources.

(Candidates only needed to state four aims)

Question 1.17
Product GH passes through two consecutive processes: the output from Process 1 is transferred to
Process 2. Details of Process 1 for Period 3 were as follows:

There were 5,000 units of opening work-in-progress, which were valued as follows:

Materials $77,080
Labour $33,480

During the period, 14,000 units were added to the process and the following costs were incurred:
Materials $230,000
Labour $101,000

At the end of Period 3, there were 6,000 units of closing work-in-progress. The degree of
completion for these units was:

Materials 100%
Labour 80%
Production overheads 65%

The expected normal loss is 10% of new units added to the process during the period. These units
and any other losses can be sold for $5 per unit.

11,000 units were transferred to Process 2 and there were losses of 2,000 units.

All losses occur at the end of the process.

Weighted average costing is used.

Calculate the total cost of the 11,000 units that were transferred to Process 2.
(4 marks)


Post Exam Guide

May 2008 Exam

Workings

Units Units
Opening W-i-P 5,000 Closing W-i-P 6,000
Input 14,000 Output 11,000
19,000 Normal loss 1,400
Abnormal loss 600
Total 19,000

The income from the sale of the normal loss (1,400 x $5) is used to reduce the cost of materials.

Costs Equivalent units
Opening
W-i-P
$
Period

$
Total

$
Output

Closing
W-i-P

Abn
Loss

Total

Cost per
EU
$
Materials 77,080 223,000 300,080 11,000 6,000 600 17,600 1705
Labour 33,480 101,000 134,480 11,000 4,800 600 16,400 820
Prod o/h 8,825 40,000 48,825 11,000 3,900 600 15,500 315
2840

Value of output =11,000 units x $2840 =$312,400


Post Exam Guide

May 2008 Exam

Section B 30 marks
MARKS

Question 2(a)
Describe THREE key features that are present in any organisation that is successfully focused on Total
Quality Management (TQM).
(5 marks)

Rationale
Question 2(a) covers learning outcome A(vii) - Explain the role of MRP and ERP systems in supporting standard
costing systems, calculating variances and facilitating the posting of ledger entries.

Suggested Approach
consider what TQM is
describe three key features of TQM

Marking Guide

Marks
up to 2 marks for each feature max 5

Examiners Comments
This part was generally well answered.

Common Errors
lack of focus on customers, people and organisation structure


Post Exam Guide

May 2008 Exam

Question 2(b)
Explain THREE behavioural consequences that may result after the introduction of participative budgeting.

(5 Marks)

Rationale
Question 2(b) covers learning outcome C(xiii) - Evaluate the impact of budgetary control systems on human
behaviour.

Suggested Approach
briefly describe what participative budgeting is
explain three behavioural consequences of participative budgeting

Marking Guide

Marks
up to 2 marks for each behavioural consequence max 5

Examiners Comments
This part was generally reasonably well answered

Common Errors
inclusion of aspects of participative budgeting that are non-behavioural e.g. time and cost, accuracy of
figures
inclusion of aspects of budgeting generally
failure to recognise the possibility, and behavioural implications, of pseudo-participation


Post Exam Guide

May 2008 Exam

Question 2(c)
Discuss the advantages and disadvantages of rolling budgets.

(5 Marks)

Rationale
Question 2(c) covers learning outcome C(vi) - Evaluate and apply alternative approaches to budgeting.

Suggested Approach
briefly describe what rolling budgets are
discuss the advantages of rolling budgets
discuss the disadvantages of rolling budgets

Marking Guide

Marks
1 mark for each advantage or disadvantage max 5

Examiners Comments
Performance was mixed with a significant number of candidates not knowing what rolling budgets are.

Common Errors
believing that rolling budgets are easy, quick and low cost
believing that rolling budgets are budgets that are retained, with minimal adjustment, for a subsequent
period
believing that rolling budgets are for more than a year ahead (e.g. capital expenditure budgets) and/or
are useful for strategic planning


Post Exam Guide

May 2008 Exam

Question 2(d)
The manager of the Photographic Division is considering introducing a Balanced Scorecard to measure
the success of the strategies. He has identified two perspectives and two associated goals. They are:

Perspective Goal
Innovation Technology Leadership
Customer Support

(i) For the Innovation Perspective of the Division, recommend a performance measure and briefly
explain how the measure will reflect the achievement of the stated goal.
(3 marks)

(ii) For the Customer Perspective of the Division, state which data should be collected and explain
how this could be used to ensure the goal of support is met.
(2 marks)
(Total for (d) = 5 marks)

Rationale
Question 2(d) covers learning outcome B(v) Prepare reports using a range of internal and external benchmarks
and interpret the results.

Suggested Approach
identify an appropriate performance measure for the Innovation Perspective in the situation
described
explain how the measure will reflect achievement of the goal of technology leadership
identify data relevant to the goal of customer support
explain how the customer support data could be used

Marking Guide

Marks
innovation perspective measure
explanation of how measure will reflect goal achievement
relevant data relating to customer support
how data used
1
2
1
1

Examiners Comments
Performance on this part was mixed.

Common Errors
in (i), recommending financial measures, especially sales
in (ii), focusing on customer complaints and product faults rather than on customer support


Post Exam Guide

May 2008 Exam

Question 2(e)

Explain THREE reasons why internal benchmarking may provide information that is more useful to the
Manager of the Photographic Division, in terms of monitoring and improving performance, than that
provided by external benchmarking.

(5 Marks)

Rationale
Question 2(e) covers learning outcome D(iv) - Calculate and apply measures of performance for investment
centres (often strategic business units or divisions of larger groups).

Suggested Approach
briefly explain internal and external benchmarking
identify three benefits of internal rather than external benchmarking

Marking Guide

Marks
up to 2 marks for each relative benefit max 5

Examiners Comments
This part was generally not well answered with a significant number of candidates not understanding what
internal benchmarking is.

Common Errors
considering benefits of internal benchmarking per se rather than in comparison with external
benchmarking
focusing solely on reviewing operations within the photographic division without reference to other
divisions
believing that benchmarking was simply about setting standards/targets and/or measuring efficiency
within the photographic division


Post Exam Guide

May 2008 Exam

Question 2(f)

Explain THREE reasons why ROI may not be a good performance measure.

Rationale
Question 2(f) covers learning outcome D(iv) - Calculate and apply measures of performance for investment
centres (often strategic business units or divisions of larger groups).

Suggested Approach
briefly explain ROI
explain three problems with the use of ROI as a performance measure

Marking Guide

Marks
up to 2 marks for each problem max 5

Examiners Comments
Many candidates recognised the potential for dysfunctional behaviour arising from the use of a relative
measure, from the measure itself and/or from the focus on the short term.

Common Errors
irrelevant discussion resulting from a lack of knowledge of how ROI is calculated
failure to appreciate the benefits of using a portfolio of measures
not recognising the problems relating to asset valuation over time
not fully explaining what the dysfunctional behaviour may be


Post Exam Guide

May 2008 Exam

Section C 20 marks

Question 3(a)

Prepare a report for the Managing Director of FX that explains and interprets the Month 6 variance report.
The Managing Director has recently joined the company and has very little previous financial experience.

(17 marks)

Rationale
Question 3(a) covers learning outcome B(iii) - Prepare and discuss a report which reconciles budget and
actual profit using absorption and/or marginal costing principles

Suggested Approach
taking each variance in turn (sales as well as production):
- identify the direction of the variance
- describe, for the benefit of the MD, how it has been calculated
- set the variance in context e.g. resources consumed per unit versus standard
- explain what may have caused the variance
considering relevant variances together, explain possible relationships between them
provide a summary of, and draw conclusions about, the month 6 performance

Marking Guide

Marks
layout, summary and conclusions 3
up to 2 marks for each variance max 14

Examiners Comments
Candidates should have realised that, with 17 marks available for part (a) and in a situation where the MD
had very little previous financial experience, extensive explanation and interpretation of the variance report
was required,. Many candidates unfortunately, provided answers that lacked depth and interpretation and
often did little more than put into words the figures in the variance report.

Common Errors
failing to include sales variances and thus concentrating only on the cost variances in the report
not explaining the general basis for each variance
not explaining each specific variance in terms of its relative size e.g. unit price/cost, resource usage
per unit of output
failing to suggest possible causes of variances and how variances may be interrelated as a
consequence
suggesting that the sales price variance was favourable with an above standard price
not understanding causes of the overhead variances


Post Exam Guide

May 2008 Exam

Question 3(b)
The Managing Director was concerned about the Material Price variance and its cause. He
discovered that a shortage of materials had caused the market price to rise to 23 per kg.

Required:

In view of this additional information, calculate for Direct Materials:

The total variance;
The planning variance;
The two operational variances.
(7 marks)

Rationale
Question 3(b) covers learning outcome B(iv) - Calculate and explain planning and operational variances.

Suggested Approach
calculate the standard direct materials cost of actual output using both the original and the revised
standard raw material prices
calculate the planning variance for direct materials as the difference between the above two figures
calculate the total direct materials variance as the difference between the actual cost and the
original standard cost of actual output
calculate the operational variances (direct materials price and usage) using the revised standard
price

Marking Guide

Marks
total variance
planning variance
operational price variance
operational usage variance
1
2
2
2

Examiners Comments
A reasonable number of candidates were able to calculate some of the variances correctly but relatively
few candidates were able to calculate them all. For the planning variance, a figure of 15,000 adverse
(calculated before the volume variance) as well as 18,000 adverse (calculated after the volume variance)
was accepted for the 2 marks.

Common Errors
not understanding what planning and operational variances are
calculating only the price variances (planning and operational) rather than all of the direct materials
variances
calculating a planning variance of 18,900 adverse, based on actual purchases
calculating the operational usage variance based on the original standard price i.e. the same variance
as was given in the question
not indicating whether operational variances were 'price' or 'usage'
providing incorrect variance signs or no signs


Post Exam Guide

May 2008 Exam

Question 3(c)
Discuss the advantages and disadvantages of reporting planning and operational variances. Your
answer should refer, where appropriate, to the variances you calculated in (b) above.
(6 marks)

Rationale
Question 3(c) covers learning outcome B(iv) - Calculate and explain planning and operational variances.

Suggested Approach
discuss the advantages of reporting planning and operational variances
discuss the disadvantages of reporting planning and operational variances

Marking Guide

Marks
1 mark for each advantage or disadvantage
linkage to variances in part (b)
max 4
2

Examiners Comments
Many candidates did not know what planning and operational variances are, or in the event that they did,
were unable to discuss advantages and disadvantages of reporting them.

Common Errors
providing little reference to any variances calculated in part (b)
discussing advantages and disadvantages of variance analysis generally rather than with specific
reference to planning and operational variances


Post Exam Guide

May 2008 Exam

Question 4(a)
Prepare a cash budget for each of the first three months and for that three-month period in total.

(14 marks)

Rationale
Question 4(a) covers learning outcome C(iii) - Calculate projected revenues and costs based on product/service
volumes, pricing strategies and cost structures.

Suggested Approach
calculate the value of sales for each month and adjust to reflect the timing of customer payments and
the cash discount
calculate the materials required for production and adjust for the changes in inventory and for the
timing of payments
calculate the remaining variable production costs using the production volumes and costs per unit
given in the question scenario and adjust (variable overheads only) for payment timing
calculate the monthly fixed overhead costs, before depreciation, and adjust for payment timing
complete the cash budget for each month, and in total, by calculating receipts and payments totals,
net cash flows and cash balances

Marking Guide

Marks
budget format (total monthly receipts/payments & net cash flows, balances, total column)
sales receipts
payments for
materials
wages
variable production overheads
fixed overheads
3
3

3
1
2
2

Examiners Comments
Candidates generally scored well on the preparation of the cash budget. Receipts from sales were
invariably correct.

Common Errors
calculating, and using, production volumes other than those already provided in the question
scenario
failing to adjust direct materials usage for inventory changes in the calculation of purchases
failing to phase the direct material payments
including depreciation as a cash outflow
not calculating the net cash flow for each month in addition to the balances remaining
not including, or at least not completing, a total column as well as a column for each month


Post Exam Guide

May 2008 Exam

Question 4(b)
There is some uncertainty about the cost of the specialist component (this is included in the direct
material cost). It is thought that the cost of the component could range between $32 and $50 per
Trackit. It is currently included in the cost estimates at $40 per Trackit.

Calculate the budgeted total net cash flow for the three-month period in total if the cost of the
component was
(i) $32
(ii) $50
(6 marks)

Rationale
Question 4(b) covers learning outcome C(vii) - Calculate the consequences of what if scenarios and evaluate

Suggested Approach
calculate the change in the total cash flow for the three-month period at each of the revised direct
materials costs
calculate the revised total net cash flow for the three-month period

Marking Guide

Marks
change in total cash flow @ $32 for the component
change in total cash flow @ $50 for the component
revised total net cash flow for the three months
2
2
2

Examiners Comments

Common Errors
calculating the direct materials costs as being $32 & $50 per Trackit rather than $52 & $70. It should
have been obvious to candidates that this was wrong when the revised total costs at the increased
price for the specialist component turned out to be less than the total direct materials costs in part
(a)
calculating the change in costs using production/purchase quantities that were different from those
used in answer to part (a)
using inconsistent phasing of payments for purchases between parts (a) & (b)
not calculating the revised total net cash flow for the whole three-month period


Post Exam Guide

May 2008 Exam

Question 4(c)
Prepare a report for the owners of Q that offers advice about the profitability of their business and the
situation revealed by the extracts from the business plan and your answers to (a) and (b) above.

(10 marks)

Rationale
Question 4(c) covers learning outcome C(iv)- Evaluate projected performance by calculating key metrics
including profitability, liquidity and asset turnover ratios.

Suggested Approach
calculate the estimated profitability based on the sales projections for the first year of business
comment on the profitability
comment on the shorter-term cash position
comment on the uncertainty regarding the component cost

Marking Guide

Marks
contribution, profit, break-even, margin of safety
comments:
profitability
cash flow
component cost uncertainty
4

2
2
2

Examiners Comments
The answers to this part were disappointing with many candidates only making reference to the cash flows
revealed by their answers to parts (a) & (b). In many cases this was confined to the cash budget figures
from part (a).

Common Errors
undertaking no calculations and providing no reference to the aspect of the business that required
advice about its profitability
believing that short-term cash flow (months 1 to 3) was equal to profit



a dotted box.
Maths Tables and Formulae are provided on pages 15 to 19.
to close.
P
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TURN OVER
SECTION A 40 MARKS
ANSWER ALL FIFTEEN SUB-QUESTIONS


The answers to the fifteen sub-questions in Section A should ALL be written in your
answer book.

choice questions, you need only write the sub-question number and the letter of
the answer option you have chosen. You do not need to start a new page for each
sub-question.

For sub-questions 1.11 to 1.14 you should show your workings as marks are available
for the method you use to answer these sub-questions.

Question One

1.1 What is the name given to a budget that has been prepared by re-evaluating activities and
comparing the incremental costs of those activities with their incremental benefits?

A Incremental budget
B Rolling budget
C Zero base budget
D Flexible budget

(2 marks)

1.2 Which ONE of the following would NOT explain a favourable direct materials usage
variance?

A Using a higher quality of materials than that specified in the standard.
B A reduction in materials wastage rates.
C An increase in suppliers quality control checks.
D Achieving a lower output volume than budgeted.
(2 marks)

P1 2 November 2008

1.3 A manufacturing company pays its employees a constant salary for working 35 hours
each week. The production process is highly specialised and the quality of output is a
critical factor. All completed units are inspected. Currently about 10% of output fails to
meet the expected specification.

The Managing Director has forecast increasing sales and is keen to reduce the labour
cost per unit of production. He has suggested three possible ways of achieving this:

1. Improve direct labour productivity
2. Increase the number of hours worked
3. Reduce the rate of rejections

Which of the above suggestions would enable the company to reduce the labour cost per unit?

A Suggestion 2 only
B Suggestions 1 and 2 only
C Suggestions 1 and 3 only
D Suggestions 2 and 3 only
(2 marks)

1.4 The following table shows the number of patients treated and the total costs for a hospital
for each of the past four months:

Patients Total Cost
Month $
1 5,000 37,500
2 8,400 45,660
3 8,300 45,050
4 5,900 39,420

Applying the high low method to the above information, an equation that could be used to
forecast total cost ($) from the number of patients to be treated (where x =number of patients to
be treated) is:

A 22,900 +240x
B 24,300 +250x
C 25,000 +250x
D 25,500 +240x

(2 marks)


TURN OVER
November 2008 3 P1

1.5 Which of the following is the best description of management by exception?

A Using management reports to highlight exceptionally good performance, so that
favourable results can be built upon to improve future outcomes.
B Sending management reports only to those managers who are able to act on the
information contained within the reports.
C Focusing management reports on areas which require attention and ignoring those which
appear to be performing within acceptable limits.
D Appointing and promoting only exceptional managers to areas of responsibility within the
organisation.
(2 marks)

1.6 Which of the following would be the most appropriate measure to monitor the
performance of the manager of a profit centre?

A Gross profit margin
B Revenue minus all costs
C Revenue minus controllable costs
D Return on capital employed
(2 marks)

1.7 The sales volume profit variance is defined as the difference between the

A actual and budgeted sales volumes valued at the actual profit per unit.
B actual and budgeted sales volumes valued at the standard profit per unit.
C actual and budgeted sales volumes valued at the difference between the actual and
standard profit margins.
D actual and standard profit per unit multiplied by the budgeted sales volume.

(2 marks)

1.8 A company operates a standard absorption costing system and absorbs fixed production
overheads based on machine hours. The budgeted fixed production overheads for the
company for the previous year were 660,000 and budgeted output was 220,000 units
using 44,000 machine hours. During that year, the total of the fixed production overheads
debited to the Fixed Production Overhead Control Account was 590,000, and the actual
output of 200,000 units used 38,000 machine hours.

Fixed production overheads for that year were:

A 90,000 under absorbed
C 20,000 under absorbed
D 10,000 over absorbed
(2 marks)

P1 4 November 2008

The following information is for sub-questions 1.9 and 1.10

A company manufactures a fruit flavoured drink concentrate by mixing two liquids (X and Y).
The standard cost card for ten litres of the drink concentrate is:

$
Liquid X 5 litres @ $16 per litre 80
Liquid Y 6 litres @ $25 per litre 150
11 litres 230

The company does not hold any inventory. During the last period the company produced 4,800
litres of the drink concentrate. This was 200 litres below the budgeted output. The company
purchased 2,200 litres of X for $18 per litre and 2,750 litres of Y for $21 per litre.

1.9 The materials mix variance for the period was:

A $150 adverse
B $450 adverse
C $6,480 favourable
D $6,900 favourable

(2 marks)

1.10 The materials yield variance for the period was:

A $150 adverse
B $450 adverse
C $6,480 favourable
D $6,900 favourable
(2 marks)

1.11 A company has the following total cost data available for two levels of production of one
type of product:

4,000 units 8,000 units
Purchasing costs 112,000 140,000
Supervision 25,000 41,000
Power 12,000 15,500

The current supervisor can cover production levels up to and including 5,000 units. For
higher levels of production, an assistant supervisor costing 16,000 is also required.

For power, a flat fee is payable that will cover all power costs sufficient to produce up to
and including 6,000 units. For production above this level there is an additional variable
charge per unit.

Calculate the total flexed budget cost allowance for the production of 7,500 units.

(4 marks)

TURN OVER
November 2008 5 P1


1.12 Extracts from the draft budgets of a company are listed below:

$m
Operating profit 437
Sales revenue 9104
Share capital and reserves 1823
Long-term borrowing 779
Inventory 462
Receivables 978
Payables 513

Calculate the following:

(i) Return on Capital Employed
(ii) Asset turnover
(iii) Current ratio
(iv) Acid test (quick) ratio
(4 marks)

1.13 A company manufactures paint from two sequential processes (P1 and P2). Details for P1
for a period were as follows:

Input materials 20,000 litres costing 114,000
Opening work in progress nil
Transferred to P2 15,000 litres
Normal loss 5% of input
Abnormal loss 500 litres
Closing work in progress 3,500 litres (complete in respect of materials, 60%
converted)

The company uses the weighted average method of process costing. All losses occur at
the end of the process.

Prepare the P1 Process Account for the period.
(4 marks)

P1 6 November 2008

1.14 A company produces and sells one type of product. The details for last year were as
follows:

Production and Sales
Budget Actual
Production (units) 25,000 22,000
Sales (units) 23,000 20,000

There was no inventory at the start of the year.

Selling price and costs
Budget Actual
$ $
Variable costs per unit 55 55
Fixed production overhead 130,000 118,000
Fixed selling costs 75,000 75,000

Calculate the actual profit for the year that would be reported using:

(i) marginal costing;
(ii) absorption costing.

(4 marks)

1.15 State four factors that should be considered before the cause of a variance is
investigated.
(4 marks)


Reminder




TURN OVER
November 2008 7 P1

SECTION B 30 MARKS
MARKS

Question Two

(a) The following information relates to the budget for the year ahead.

Production overhead cost budget

Machinery costs 285,000
Set-up costs 235,000
Purchasing costs 300,000
Total production overheads 820,000

The following table shows the total budgeted activities of the company (it manufactures
many different types of products) and the details relating to the manufacture of two
product lines: S and T.

Data Total Product S Product T
Machine hours 95,000 2 per unit 1 per unit
Number of production runs 235 20 5
Purchase orders 5,000 100 100
Production quantities of S & T 5,000 units 20,000 units

Calculate, using activity based costing, the production overhead costs that would be attributed to
one unit of Product S and one unit of Product T.
(5 marks)

(b) Explain how backflush accounting differs from a traditional absorption costing system.

(5 marks)

(c) Not for profit organisations do not have the objective of profit as a means of measuring
performance and therefore many choose to pursue value for money by managing
efficiency and effectiveness.

Explain, using an example of your choice, how Not for profit organisations may have difficulties
in managing efficiency and effectiveness.
(5 marks)

(d) Compare and contrast Economic Value Added
and Residual Income, and briefly

discuss their merits as divisional performance measures.
(5 marks)

P1 8 November 2008

The following information is for sub-questions (e) and (f)

Two of the products that are manufactured by a company use the same machines. The products
(P1 and P2) are manufactured using two machines (M1 and M2). During the next period the
time available on the machines are 126 hours for M1 and 195 hours for M2.

The company uses throughput accounting.

Unit details of the two products are:
P1 P2
$ $
Materials 1420 1675
Labour 600 750
Variable production overheads 100 125
Fixed production overheads 200 250
Profit 1280 1100

Any mix of output can be sold at the above prices and there is unlimited demand for each of the
products.

The machine time needed to make one unit of the products is:

P1 P2
M1 035 hours 040 hours

(e)

(i) Calculate the maximum production that is possible from each machine for each of
the two products and state the bottleneck.

(ii) Calculate the throughput accounting ratio for each product.

(5 marks)

(f) Identify, using a throughput approach, the production plan for the next period that would
result in the most profitable use of the machines. (All workings must be shown).
(5 marks)



End of Section B


TURN OVER

November 2008 9 P1

SECTION C 30 MARKS

Question Three

The G Group has a divisionalised structure. One of the divisions manufactures engines and one
of the other divisions assembles motor cycles. The performance of the Divisional Managers,
and consequently their bonuses, is based on the return on capital employed (ROCE) of their
individual divisions. Both of these divisions operate in highly competitive markets.

Motor Cycle Division
A key component in a motor cycle is the engine. Engines are readily available on the open
market but the division currently buys 3,600 engines each year internally from the Engines
Division for 1,375 per engine. The Manager has just received the following message from the
Manager of the Engines Division.

Engine Prices: due to recent cost increases the price per engine will now be 1,600.

On receiving the message the Manager of the Motor Cycle division contacted several external
manufacturers and found one that would supply the required engines at 1,375 per engine.
However she has since received a directive from the Managing Director of the Group that states
that she must buy the engines internally.

Engines Division
Following the recent cost increases, the full absorption cost of a motor cycle engine is 1,450.
This includes 400 for fixed production overheads. This type of motor cycle engine is one of
many different engines produced by the division.

The Manager of the Engines Division is aware of the competitive external market that he faces
and knows that it will be difficult for him to charge external customers more than 1,375 per
engine. However, he is also aware that the rising costs will have an impact on his bonus. He is
trying to protect his bonus by passing these costs on to the Motor Cycle Division. He is keen to
make as much profit as he can from these internal sales because the division is currently
working below capacity.

Required:

(a) Calculate the impact on the annual profits of each of the two divisions and the G
Group as a whole, of the directive that the engines must be purchased internally
for 1,600 per engine instead of from the external supplier.

(6 marks)

(b) Write a report to the Managing Director of the Group that explains the
disadvantages and behavioural implications of using ROCE as a divisional
performance measure. Your answer must be based on the above scenario and
include an explanation of responsibility accounting.

(12 marks)
P1 10 November 2008


(c) The Engines Division has now developed a new lean burn car engine that is
sold exclusively to external customers. The production of this engine will utilise
the spare capacity of the division and will earn the division a contribution of 40
per machine hour. The demand is so high for the car engines that their
production could also use 9,000 machine hours that are currently used to make
1,000 of the motor cycle engines that are transferred to the Motor Cycle
Division.

Required:

Explain, with supporting calculations, the minimum and maximum transfer prices that
could now be charged for the motor cycle engines.
(7 marks)

(d) Briefly explain three aims of a transfer pricing system.
(5 marks)



TURN OVER
November 2008 11 P1

Question Four

A company manufactures two types of fertilizer (FA and FB). The company uses a standard
costing system for planning and control purposes. Standards are set annually but budgets and
variance reports are prepared each period.

Chemicals

Three chemicals (C1, C2 and C3) are used to make the fertilizers. C2 and C3 can be input
directly to the manufacturing process but C1 has to be treated before it can be used. The
treatment results in a loss of 30% of the chemicals treated. There are no further losses in the
manufacturing process.

Details of the standards for the chemicals are as follows:

C1 C2 C3
Price per kg $8 $15 $12
Treatment loss 30%
Content of finished product:
per unit of FA 020kg 015kg Nil
per unit of FB 020kg Nil 025kg

Inventory Policies

Chemicals: end of period holdings must be equal to 50% of the following periods requirements.

Treated C1 is used immediately. There are never any inventories of treated C1 at the start or
end of any period.

Fertilizers: no finished products are to be held.

Period 1 Output and Sales

Budget Actual
FA 40,000 units 38,000 units
FB 24,000 units 25,000 units

Periods 2 and 3 Sales Budgets

Period 2 Period 3
FA 40,000 units 44,000 units
FB 24,000 units 33,000 units
P1 12 November 2008


Required

(a) During Period 1, the quantity of C1 used was 17,740 kg. Calculate for Period 1
for C1:

(i) the materials usage variance for the whole process
(ii) the treatment loss percentage

(6 marks)

(b) In Period 1, the company purchased and used 6,450 kg of C3. The cost of this
purchase was $94,000. It has now been realised that the standard price of C3
should have been $1450 per kg for Period 1.

(i) Calculate the planning variance, and the operational price and usage
variances for C3 for Period 1.
(7 marks)

(ii) Explain two problems associated with the reporting of planning variances.

(3 marks)

(c) Prepare the Purchases Budget for C2 for Period 2.
(5 marks)

(d) Variance analysis presents results after the actual events have taken place and
therefore it is of little use to management for planning and control purposes,
particularly in a modern manufacturing environment.

Discuss the above statement.
(9 marks)




November 2008 13 P1


P1 14 November 2008


November 2008 15 P1

November 2008 15 P1

PRESENT VALUE TABLE

Present value of $1, that is

( )
n
r

+ 1 where r =interest rate; n =number of periods until
payment or receipt.

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

P1 16 November 2008

years
r
r
n
+ ) (1 1

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

November 2008 17 P1

Formulae
PROBABILITY

Rules of Addition



Quadratic Equations
If aX
2
by:
a
ac b b
X
2
4
2

=

Arithmetic Mean
n
x
x

=
f
fx
x

Standard Deviation
n
x x
SD
2
) (
=
2
2
x
f
fx
SD

INDEX NUMBERS
1
/P
0
1
/Q
0

Price: 100 x
w
P
P
w
o
1

Quantity: 100 x
1
w
Q
Q
w
o

TIME SERIES
Additive Model

P1 18 November 2008




where
b =
2 2
) X ( X n
) Y )( X ( XY n
) X ( Variance
) XY ( Covariance

=

and a =Y bX

or solve
Y =na + b X
XY =a X + bX
2


} ) Y ( Y n }{ ) X ( X n {
) Y )( X ( XY n
) XY ( Covariance
r
2 2 2 2

= =

R(rank) =1 -
) 1 (
6
2
2
n n
d


S =X[1 +r]
n

Annuity

PV =
n
r
r
] 1 [
1
1
1

Perpetuity
PV =
r
1

November 2008 19 P1


P1 20 November 2008


November 2008 21 P1


P1 22 November 2008



1 KNOWLEDGE

2 COMPREHENSION

consideration
something
3 APPLICATION

Calculate/compute
practical means
4 ANALYSIS

Analyse
Categorise
between
5 EVALUATION


Advise
Evaluate
Recommend

November 2008 23 P1

Managerial Level
November 2008
P1 24 November 2008

Post Exam Guide

November 2008 Exam

General Comments

The overall result on this paper was reasonable and, while performance was well below the
level seen in May 2008, there was a small improvement on the previous November sitting.

Marks gained in Section A were once again particularly good. This provided a firm foundation
for many candidates to go on and achieve a pass on this paper. However, a number of
candidates still do not attempt all of the multiple-choice questions.

Some candidates were unable to build sufficiently upon their performance in Section A. This
was frequently due to relatively weaker performance in both Section B and Section C where
the focus was more on narrative answers, especially if candidates chose question 3 in
Section C. This may have been a factor in the relative unpopularity of question 3. Candidates
often demonstrated some difficulty in focusing on the specific requirements in those questions
requiring narrative answers.

There was little evidence of time pressures or poor time management. However, workings in
answer to calculation questions were at times unnecessarily lengthy, detailed and/or
repetitive. Adequate workings to calculation questions are always required (apart from the
multiple-choice questions), for the benefit of markers and candidates alike Also time spent
planning answers is time well spent if it reduces the overall time taken to answer the question.

Lack of preparation once again seemed to be the primary reason for candidate failure.
Candidates who failed this exam must try to prepare themselves for future exams with a good
knowledge of all topic areas. In the exam they must read questions carefully and then answer
the specific question asked rather than write all they know on a broader topic. They must be
prepared to apply their knowledge to particular practical scenarios.

Post Exam Guide

November 2008 Exam

Section A 40 marks

Question 1.1

What is the name given to a budget that has been prepared by re-evaluating activities and comparing the
incremental costs of those activities with their incremental benefits?

A Incremental budget
B Rolling budget
C Zero base budget
D Flexible budget

(2 marks)
The answer is C

Question 1.2

Which ONE of the following would NOT explain a favourable direct materials usage variance?

A Using a higher quality of materials than that specified in the standard.
B A reduction in materials wastage rates.
C An increase in suppliers quality control checks.
D Achieving a lower output volume than budgeted.

(2 marks)

The answer is D

Post Exam Guide

November 2008 Exam

Question 1.3

A manufacturing company pays its employees a constant salary for working 35 hours each week. The
production process is highly specialised and the quality of output is a critical factor. All completed units are
inspected. Currently about 10% of output fails to meet the expected specification.

The Managing Director has forecast increasing sales and is keen to reduce the labour cost per unit of
production. He has suggested three possible ways of achieving this:

1. Improve direct labour productivity
2. Increase the number of hours worked
3. Reduce the rate of rejections

Which of the above suggestions would enable the company to reduce the labour cost per unit?

A Suggestion 2 only
B Suggestions 1 and 2 only
C Suggestions 1 and 3 only
D Suggestions 2 and 3 only

(2 marks)

The answer is C

Post Exam Guide

November 2008 Exam

Question 1.4

The following table shows the number of patients treated and the total costs for a hospital for each of the
past four months:

Applying the high low method to the above information, an equation that could be used to forecast total
cost ($) from the number of patients to be treated (where x =number of patients to be treated) is:

A 22,900 +240x
B 24,300 +250x
C 25,000 +250x
D 25,500 +240x
(2 marks)
The answer is D

Workings

($45,660 - $37,500)/(8,400 - 5,000) =$240 variable cost

Fixed cost: $45,660 - (8,400 x $240) =$25,500

25,500 + 240x

Patients Total Cost
Month $
1 5,000 37,500
2 8,400 45,660
3 8,300 45,050
4 5,900 39,420

Post Exam Guide

November 2008 Exam

Question 1.5
Which of the following is the best description of management by exception?

A Using management reports to highlight exceptionally good performance, so that favourable results
can be built upon to improve future outcomes.
B Sending management reports only to those managers who are able to act on the information
contained within the reports.
C Focusing management reports on areas which require attention and ignoring those which appear to
be performing within acceptable limits.
D Appointing and promoting only exceptional managers to areas of responsibility within the
organisation.
(2 marks)

The answer is C

Question 1.6
Which of the following would be the most appropriate measure to monitor the performance of the manager
of a profit centre?

A Gross profit margin
B Revenue minus all costs
C Revenue minus controllable costs
D Return on capital employed
(2 marks)
The answer is C

Question 1.7
The sales volume profit variance is defined as the difference between the

A actual and budgeted sales volumes valued at the actual profit per unit.
B actual and budgeted sales volumes valued at the standard profit per unit.
C actual and budgeted sales volumes valued at the difference between the actual and standard profit
margins.
D actual and standard profit per unit multiplied by the budgeted sales volume.

(2 marks)

The answer is B

Post Exam Guide

November 2008 Exam

Question 1.8
A company operates a standard absorption costing system and absorbs fixed production overheads based
on machine hours. The budgeted fixed production overheads for the company for the previous year were
660,000 and budgeted output was 220,000 units using 44,000 machine hours. During that year, the total
of the fixed production overheads debited to the Fixed Production Overhead Control Account was
590,000, and the actual output of 200,000 units used 38,000 machine hours.

Fixed production overheads for that year were:

A 90,000 under absorbed
C 20,000 under absorbed
D 10,000 over absorbed
(2 marks)
The answer is D

Workings
Overheads are absorbed by the standard content of the actual production.

Overhead absorption rate =660,000/44,000 =15 per machine hour.

The standard is 02 hours per unit.

Overheads absorbed =200,000 x 02 x 15 =600,000

The actual overheads were 590,000 and therefore were over-absorbed by 10,000

The following information is for sub-questions 1.9 and 1.10

A company manufactures a fruit flavoured drink concentrate by mixing two liquids (X and Y).
The standard cost card for ten litres of the drink concentrate is:

$
Liquid X 5 litres @ $16 per litre 80
Liquid Y 6 litres @ $25 per litre 150
11 litres 230

The company does not hold any inventory. During the last period the company produced
4,800 litres of the drink concentrate. This was 200 litres below the budgeted output. The
company purchased 2,200 litres of X for $18 per litre and 2,750 litres of Y for $21 per litre.

Post Exam Guide

November 2008 Exam

Workings for 1.9 and 1.10

litres $
2,200 @$16 35,200
2,750 @$25 68,750
Actual quantity input at the actual mix 4,950 103,950

2,250 @$16 36,000
2,700 @$25 67,500
Actual quantity input in standard proportion 4,950 103,500

2,400 @$16 38,400
2,880 @$25 72,000
Standard mix needed for the actual output 5,280 110,400

Question 1.9
The materials mix variance for the period was:

A $150 adverse
B $450 adverse
C $6,480 favourable
D $6,900 favourable
(2 marks)
The answer is B

Workings

Mix variance =$103,500 - $103,950 =$450 adverse

Question 1.10
The materials yield variance for the period was:
A $150 adverse
B $450 adverse
C $6,480 favourable
D $6,900 favourable
(2 marks)

The answer is D

Workings

Yield variance =$110,400 - $103,500 =$6,900 favourable


Post Exam Guide

November 2008 Exam

Question 1.11
A company has the following total cost data available for two levels of production of one type of product:

The current supervisor can cover production levels up to and including 5,000 units. For higher levels of
production, an assistant supervisor costing 16,000 is also required.

For power, a flat fee is payable that will cover all power costs sufficient to produce up to and including
6,000 units. For production above this level there is an additional variable charge per unit.

Calculate the total flexed budget cost allowance for the production of 7,500 units.

(4 marks)

Workings

4,000 units 8,000 units
Purchasing costs 112,000 140,000
Power 12,000 15,500
Fixed Variable Total

Purchasing costs 84,000 (7,500 x 7) 136,500
Power 12,000 (1,500 x 175) 14,625
Total 192,125

Post Exam Guide

November 2008 Exam

Question 1.12
Extracts from the draft budgets of a company are listed below:

Calculate the following:

(i) Return on Capital Employed
(ii) Asset turnover
(iii) Current ratio
(iv) Acid test (quick) ratio
(4 marks)
$m
Operating profit 437
Sales revenue 9104
Share capital and reserves 1823
Long-term borrowing 779
Inventory 462
Receivables 978
Payables 513

Workings

(i) Return on capital employed 168% [(437 100) (1823 +779)]
(ii) Asset turnover 35 times [9104 (1823 +779)]
(iii) Current ratio 28 : 1 [(462 +978) 513]
(iv) Acid test 19 : 1 (978 513)

Post Exam Guide

November 2008 Exam

Question 1.13
A company manufactures paint from two sequential processes (P1 and P2). Details for P1 for a period
were as follows:

The company uses the weighted average method of process costing. All losses occur at the end of the
process.

Prepare the P1 Process Account for the period.
(4 marks)
Input materials 20,000 litres costing 114,000
Opening work in progress nil
Transferred to P2 15,000 litres
Normal loss 5% of input
Abnormal loss 500 litres
Closing work in progress 3,500 litres (complete in respect of materials, 60%
converted)

Workings

Units
Cost element Transfer
out
Closing
WIP
Abnormal
loss
Total
E.U.
Cost per
E.U.
Input
materials
114,000 15,000 3,500 500 19,000 6.00
Conversion 176,000 15,000 2,100 500 17,600 10.00

Process 1

Litres Litres
Input materials 20,000 114,000 Process 2 15,000 240,000
Conversion costs 176,000 Normal loss 1,000
Abnormal loss 500 8,000
WIP 3,500 42,000
20,000 290,000 20,000 290,000


Post Exam Guide

November 2008 Exam

Question 1.14
A company produces and sells one type of product. The details for last year were as follows:

Production and Sales

There was no inventory at the start of the year.

Selling price and costs

Calculate the actual profit for the year that would be reported using:

(i) marginal costing;
(ii) absorption costing.

(4 marks)

Workings
Marginal costing
Contribution per unit =$70 - $55 =$15

Inventory has increased during the period and therefore the profit calculated using absorption costing will
be higher than the marginal costing profit by the amount of overheads absorbed by the closing inventory.

Fixed production overhead absorption rate =$130,000/25,000 =$520 per unit
Additional fixed production overhead absorbed by increased inventory =2,000 x $520 =$10,400

Absorption costing profit =$107,000 +$10,400 =$117,400

Budget Actual
Production (units) 25,000 22,000
Sales (units) 23,000 20,000
Budget Actual
$ $
Variable costs per unit 55 55
Fixed production overhead 130,000 118,000
Fixed selling costs 75,000 75,000
$
Total contribution 20,000 x $15 300,000
Profit (using marginal costing) 107,000

Post Exam Guide

November 2008 Exam

Question 1.15

State four factors that should be considered before the cause of a variance is investigated.
(4 marks)

Workings
Factors to be considered include:

Size;
The possibility of the variance being uncontrollable;
The cost of the investigation;
The interrelationship with other variances;
The relevance of the standard used.

(Note: Candidates were required to state four factors)


Post Exam Guide

November 2008 Exam

Section B 30 marks
MARKS

Question 2(a)
The following information relates to the budget for the year ahead.

The following table shows the total budgeted activities of the company (it manufactures many different
types of products) and the details relating to the manufacture of two product lines: S and T.

Calculate, using activity based costing, the production overhead costs that would be attributed to one unit
of Product S and one unit of Product T.
(5 marks)

Rationale
2(a) covers learning outcome A(vi): Compare activity-based costing with traditional marginal and absorption
costing methods and evaluate its potential as a system of cost accounting.

Suggested Approach
Calculate each cost driver rate using the cost and activity data for the company as a whole
Apply the cost driver rates to the data relating to each of the two products to calculate overhead
costs per unit of product

Marking Guide

Marks
Cost driver rates ( for each) 1
Machinery costs per unit
Set-up costs per unit
Purchasing costs per unit

1
1

Examiners Comments
This part was generally well answered with many candidates gaining full marks.

Common Errors
apportioning all of the overheads i.e. assuming that there were only two products in the business
calculating the total overheads apportioned to each product rather than the overhead cost per unit

Production overhead cost budget

Machinery costs 285,000
Set-up costs 235,000
Purchasing costs 300,000
Total production overheads 820,000
Data Total Product S Product T
Machine hours 95,000 2 per unit 1 per unit
Number of production runs 235 20 5
Purchase orders 5,000 100 100
Production quantities of S & T 5,000 units 20,000 units

Post Exam Guide

November 2008 Exam

Question 2(b)
Explain how backflush accounting differs from a traditional absorption costing system.
(5 Marks)

Rationale
2(b) covers learning outcome A(viii): Evaluate the impact of just-in-time manufacturing methods on cost
accounting and the use of back-flush accounting when work-in-progress stock is minimal.

Suggested Approach
Describe backflush accounting
Contrast backflush accounting with traditional absorption costing

Marking Guide Marks
Description of backflush accounting 2
Differences between the two systems (1 for each) 3

Examiners Comments
Most candidates had some idea about backflush accounting but often failed to explain it adequately.

Common Errors
lack of clarity in explaining how costs are backflushed
confusing backflush accounting with either marginal, throughput, target or activity-based costing
not explaining the main differences between backflush accounting and traditional absorption costing


Post Exam Guide

November 2008 Exam

Question 2(c)
Not for profit organisations do not have the objective of profit as a means of measuring performance and
therefore many choose to pursue value for money by managing efficiency and effectiveness.

Explain, using an example of your choice, how Not for profit organisations may have difficulties in
managing efficiency and effectiveness.
(5 Marks)

Rationale
2(c) covers learning outcome D(iv): Calculate and apply measures of performance for investment centres (often
strategic business units or divisions of larger groups).

Suggested Approach
Define efficiency and effectiveness
Give an example of a suitable measure of each in a not for profit organisation
Explain why difficult to manage

Marking Guide Marks
Efficiency and effectiveness definitions (1 for each) 2
Examples of measures (1 for each) 2
Difficulty of managing (1 for each) 2
max 5

Examiners Comments
This part was not well answered.

Common Errors
focusing on managing not for profit organisations generally
focusing on why not for profit organisations may be less efficient and/or less effective
failing to define and deal with each of efficiency and effectiveness separately
suggesting that not for profit organisations would not spend time managing efficiency or effectiveness


Post Exam Guide

November 2008 Exam

Question 2(d)
Compare and contrast Economic Value Added and Residual Income, and briefly discuss their merits
as divisional performance measures.
(5 marks)

Rationale
2 (d) covers learning outcome D(iv): Calculate and apply measures of performance for investment centres (often
strategic business units or divisions of larger groups).

Suggested Approach
Define economic value added and residual income
Compare and contrast the two measures
Discuss the merits of the two measures

Marking Guide Marks
Definitions of economic value added and residual income 1
Similarities and differences (1 for each) 2
Merits of the two measures (1 for each) 2

Examiners Comments
This part was reasonably well answered. Most candidates had a fair idea of the general basis for the
measures and that they were expressed in absolute terms.

Common Errors
failing to discuss the merits of the two measures and instead focusing entirely on their similarities
and differences
identifying only part of the adjustments required to determine economic profit (often only what to add
back)
demonstrating an inability to clearly distinguish between the two measures
focusing on the use of the measures for making capital investment decisions


Post Exam Guide

November 2008 Exam

The following information is for sub-questions (e) and (f)

Two of the products that are manufactured by a company use the same machines. The
products (P1 and P2) are manufactured using two machines (M1 and M2). During the next
period the time available on the machines are 126 hours for M1 and 195 hours for M2.

The company uses throughput accounting.

Unit details of the two products are:
P1 P2
$ $
Materials 1420 1675
Labour 600 750
Variable production overheads 100 125
Fixed production overheads 200 250
Profit 1280 1100

Any mix of output can be sold at the above prices and there is unlimited demand for each of
the products.

The machine time needed to make one unit of the products is:

P1 P2

Post Exam Guide

November 2008 Exam

Question 2(e)

(i) Calculate the maximum production that is possible from each machine for each of the two
products and state the bottleneck.

(ii) Calculate the throughput accounting ratio for each product.

(5 Marks)

Rationale
2(e) covers learning outcome A(iv): Explain the origins of throughput accounting as super variable costing and
its application as a variant of marginal or variable cost accounting.

Suggested Approach
Calculate the production possibilities for each product on each machine
Identify the bottleneck machine
Calculate the throughput accounting ratio for each product by dividing the throughput contribution
per unit by the conversion cost per unit.

Marking Guide Marks
(i) Production possibilities on each machine ( for each) 2
(ii) Bottleneck machine 1
(iii) Throughput accounting ratios (1 for each) 2

Examiners Comments
Part (i) was reasonably well answered but part (ii) much less so because relatively few candidates
calculated the throughput accounting ratios correctly.

Common Errors
in (i) calculating the total units from each machine (P1 +P2) or for each product (M1 +M2)
in (i) believing that the limiting factor was product P2 on machine M2 rather than machine M2 overall
in (ii) calculating the numerator correctly but having different combinations of less than full conversion
cost in the denominator
in (ii) calculating the throughput contributions per machine hour instead of per unit
in (ii) attempting to calculate the required ratios using contribution and costs per hour but using
different hours in the numerator and denominator


Post Exam Guide

November 2008 Exam

Question 2(f)
Identify, using a throughput approach, the production plan for the next period that would result in the most
profitable use of the machines. (All workings must be shown).
(5 marks)

Rationale
2(f) covers learning outcome A(iv): Explain the origins of throughput accounting as super variable costing and
its application as a variant of marginal or variable cost accounting.

Suggested Approach
Calculate the throughput contribution per hour for each product on the bottleneck machine
Identify the priority for production
Determine the production plan

Marking Guide Marks
Throughput contributions per unit of product ( for each) 1
Time on bottleneck machine ( for each) 1
Throughput contributions per bottleneck hour (1 for each) 2
Production plan 1

Examiners Comments
This part was not well answered. Many candidates made little or no attempt at this part or suggested a
variety of incorrect approaches.

Common Errors
calculating throughput contributions per hour for both machines and not just for the machine
previously identified as the bottleneck
using the throughput accounting ratios
basing the calculations and ranking on marginal costing contribution or on gross profit
ranking on the basis of throughput contributions per unit
failing to specify units in the production plan or proposing a plan to produce P2 as well as P1


Post Exam Guide

November 2008 Exam

Section C 30 marks

Question 3(a)

Calculate the impact on the annual profits of each of the two divisions and the G Group as a whole, of the
directive that the engines must be purchased internally for 1,600 per engine instead of from the external
supplier.
(6 marks)

Rationale
3(a) covers learning outcome C(iii): Calculate projected revenues and costs based on product/service volumes,
pricing strategies and cost structures.

Suggested Approach
Calculate the contribution for the Engines Division from the sale of engines to the Motor Cycle
Division
Calculate the extra cost to the Motor Cycle Division resulting from a purchase price of 1,600 per
engine rather than 1,375
Calculate the group profit impact of the Engines Division supplying the 3,600 engines rather than
the Motor Cycle Division buying from the external supplier

Marking Guide Marks
Engines Division contribution 3
Motor Cycle Division extra cost 2
Impact on group profit 1

Examiners Comments
Most candidates gained some marks but frequently answered a different question from that asked.

Common Errors
calculating the difference between using a transfer price of 1,600 per engine and a transfer price of
1,375 per engine (i.e. with no impact on group profit) rather than answering the question asked
treating the Engines Division fixed costs as variable costs


Post Exam Guide

November 2008 Exam

Question 3(b)
Write a report to the Managing Director of the Group that explains the disadvantages and behavioural
implications of using ROCE as a divisional performance measure. Your answer must be based on the
above scenario and include an explanation of responsibility accounting.
(12 marks)

Rationale
3(b) covers learning outcome C(viii): Explain the concept of responsibility accounting and its importance in the
construction of functional budgets that support the overall master budget.

Suggested Approach
Explain responsibility accounting and define the ROCE performance measure used in investment
centres
Identify the performance measurement issues in the question scenario
Explain/discuss the disadvantages and behavioural implications of using ROCE with particular
reference to the question scenario

Marking Guide Marks
Report format 1
Definition of ROCE 1
Definition of responsibility accounting 2
Deficiencies of ROCE and behavioural implications (up to 2 marks for each point made) 8

Examiners Comments
This part was reasonably well answered with candidates often demonstrating awareness of potential
problems of using ROCE as a divisional performance measure.

Common Errors
failing to apply knowledge to the specific scenario
failing to explain responsibility accounting despite the clear instruction in the question to do so
confusing responsibility accounting with goal congruence
believing that the imposed transfer price would affect goal congruence rather than autonomy and
motivation


Post Exam Guide

November 2008 Exam

Question 3(c)
Explain, with supporting calculations, the minimum and maximum transfer prices that could
now be charged for the motor cycle engines.
(7 marks)

Rationale
3(c) covers learning outcome D(vii): Identify the likely consequences of different approaches to transfer pricing
for divisional decision making, divisional and group profitability, the motivation of divisional management and
the autonomy of individual divisions.

Suggested Approach
Explain the basis for establishing a minimum transfer price
Establish the minimum transfer price for the first 2,600 engines
Establish the minimum transfer price for the remaining 1,000 engines
Establish the maximum transfer price

Marking Guide Marks
Basis for minimum transfer price 1
Minimum transfer price for 2,600 engines 2
Minimum transfer price for 1,000 engines 3
Maximum transfer price 1

Examiners Comments
This part was not well answered; answers featured a general lack of explanation.

Common Errors
failing to differentiate between the first 2,600 engines and the remaining 1,000 engines
believing that the opportunity cost of the lean burn car engine was 40 per motor cycle engine rather
than 360
failing to use marginal costs


Post Exam Guide

November 2008 Exam

Question 3(d)
Briefly explain three aims of a transfer pricing system.
(5 marks)

Rationale
3(d) covers learning outcome D(vii): Identify the likely consequences of different approaches to transfer pricing for
divisional decision making, divisional and group profitability, the motivation of divisional management and the
autonomy of individual divisions.

Suggested Approach
List three aims of a transfer pricing system
Explain each of the aims

Marking Guide Marks
Aims (1 for each) 3
Explanation of aims (1 for each) 3
max 5

Examiners Comments
This part was answered fairly well.

Common Errors
demonstrating ability to list three aims but failing to explain the aims adequately.


Post Exam Guide

November 2008 Exam

Question 4(a)

During Period 1, the quantity of C1 used was 17,740 kg. Calculate for Period 1 for C1:

(i) the materials usage variance for the whole process
(ii) the treatment loss percentage

(6 marks)

Rationale
4(a) covers learning outcome B(ii): Calculate and interpret material, labour, variable overhead, fixed overhead
and sales variances.

Suggested Approach
Calculate the standard usage of C1 for the actual output in Period 1
Compare the standard and actual usage of C1 to determine the usage variance and evaluate it at
standard price
Calculate the treatment loss percentage

Marking Guide Marks
(i) Standard content before treatment loss 1
Standard input after allowing for treatment loss 1
Usage variance 2
(ii) Treatment loss percentage 2

Examiners Comments
This part, especially (i), was reasonably well answered. Many candidates were awarded marks in (i) for the
correct use of their own figures due to an inability to deal correctly with the treatment loss.

Common Errors
calculating the standard usage by multiplying by 1.3 rather than dividing by 0.7 to account for the
treatment loss
failing to allow for the treatment loss at all
calculating the budgeted quantity rather than the standard quantity for the actual output
multiplying the actual output by 0.4 rather than by 0.2 kg per unit
not knowing how to calculate the treatment loss percentage in (ii)


Post Exam Guide

November 2008 Exam

Question 4(b)
In Period 1, the company purchased and used 6,450 kg of C3. The cost of this purchase was $94,000.
It has now been realised that the standard price of C3 should have been $1450 per kg for Period 1.

(i) Calculate the planning variance, and the operational price and usage variances for
C3 for Period 1.
(7 marks)

(ii) Explain two problems associated with the reporting of planning variances.

(3 marks)

Rationale
4(b) covers learning outcome B(iv): Calculate and explain planning and operational variances.

Suggested Approach
Calculate the planning variance in Period 1 as the difference between the two standard prices per
kg of C3 (original and revised) multiplied by the standard usage for the actual output
Calculate the operational price variance as the difference between the revised standard price and
the actual price per kg of C3 multiplied by the actual usage
Calculate the operational usage variance as the difference between the actual usage of C3 and the
standard usage for the actual output multiplied by the revised standard price per kg
Explain two problems associated with the reporting of planning variances

Marking Guide Marks
(i) Planning variance 3
Operational price variance 2
Operational usage variance 2
(ii) Problems of reporting planning variances (up to 2 for each) max 3

Examiners Comments
Part (i) was generally well answered but part (ii) much less so.

Common Errors
calculating the planning price variance based on the budgeted or actual quantity
calculating a planning usage variance as well as a planning price variance
failing to value the operational usage variance
valuing the operational usage variance at $12.00 per kg
providing incorrect variance signs
demonstrating a lack of understanding of the nature of planning variances in (ii)


Post Exam Guide

November 2008 Exam

Question 4(c)

Prepare the Purchases Budget for C2 for Period 2.
(5 marks)

Rationale
4(c) covers learning outcome C(vi): Evaluate and apply alternative approaches to budgeting.

Suggested Approach
Calculate the amount of C2 required for production in Period 2
Calculate the increase in inventory of C2 required for the following period
Calculate the purchase quantity and value of C2 in Period 2 by adding the production quantity and
the increase in inventory and multiplying by the standard cost per kg.

Marking Guide Marks
Production requirement 1
Inventory requirement 1
Add requirements for production and inventory to determine purchase quantity 2
Value of purchases 1

Examiners Comments
This part was reasonably well answered with many candidates gaining full marks.

Common Errors
failing to adjust, or adjusting incorrectly, for opening and closing inventories
failing to calculate value, as well as quantity, for the purchases budget


Post Exam Guide

November 2008 Exam

Question 4(d)
Variance analysis presents results after the actual events have taken place and therefore it is of little
use to management for planning and control purposes, particularly in a modern manufacturing
environment.

Discuss the above statement.
(9 marks)

Rationale
4(d) covers learning outcome B(v): Prepare reports using a range of internal and external benchmarks
and interpret the results.

Suggested Approach
Describe the concepts of planning and control in the context of standard setting and variance
analysis
Describe the features of modern manufacturing environments
Discuss the relevance of variance analysis in relation to the above concepts and environment

Marking Guide Marks
Planning and control concepts 2
Features of modern manufacturing environments 2
Relevance of variance analysis (up to 1 for each) max 6
max 9

Examiners Comments
This part was often not answered well because many candidates made little or no reference to a modern
manufacturing environment.

Common Errors
taking the view that the statement was incorrect and simply describing the advantages of variance
analysis for planning and control purposes
referring only to a rapidly changing environment and standards becoming rapidly out of date



CIMA P1 Management Accounting Performance Evaluation Solved Past Papers

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The Chartered institute of Management Accountants 2004 1

Re-issued May 2004

Materials 2 sets @ 20 per set 40

XP1 5,000 litres 15,679

Cost of goods sold 100,000

Budgeted cost/purchase orders

Budgeted processing cost per minute:

to assess divisional performance might affect

) as it would be used to assess the

to assess divisional performance might affect the behaviour of

for Division L for the year ended 30 April 2006.

for Division L for the year ended 30 April 2006.

(EVA) of the company is closest to

(EVA) of the company is closest to

and Residual Income, and briefly

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