Accounting Qualification

Question paper

Intermediate level
Recording and evaluating
costs and revenues (ECR) / Level 3 Diploma for Accounting Technicians (QCF)
Recording and analysing costs and revenues (ECR)

Monday 29 November 2010 (afternoon)

Time allowed - 3 hours plus 15 minutes’ reading time

Please complete the following information in BLOCK CAPITALS:

Student member number / Desk number
Venue code / Date
Venue name

Important:

This exam paper is in two sections. You should try to complete every task in both sections.

We recommend that you use the 15 minutes’ reading time to study the exam paper fully and carefully so that you understand what to do for each task. However, you may begin to write your answers within the reading time, if you wish. You must use permanent ink, preferably black, to write your answers. Correcting fluid may not be used.

You must not, during the exam, communicate with any other candidate or be in possession of unauthorised materials, such as pre-prepared notes, books, programmable calculators and dictionaries. Any of these actions will constitute malpractice and will result in disciplinary action. If you are in possession of unauthorised materials you must give them to the Supervisor before the start of the exam.

Do NOT open this paper until instructed to do so by the Supervisor.

Note:
You may use this page for your workings.


This exam paper is in TWO sections.

You must show competence in BOTH sections. So, try to complete EVERY task in BOTH sections.

Section 1 contains 6 tasks and Section 2 contains 5 tasks.

You should spend about 90 minutes on each section.

There is blank space for your workings on page 2, 7 and 10, but you should include all essential workings and calculations in your answers.

Both Sections 1 and 2 are based on the information below about Turner Paints Ltd (TPL).

Data

For the past two years you have been employed as an accounting technician with Turner Paints Ltd (TPL).

TPL is a medium sized paint manufacturing company that makes a full range of paints for domestic, commercial and industrial customers.

You report to the Financial Controller.

TPL has two manufacturing profit centres and three support cost centres that relate to its manufacturing operations.

Manufacturing profit centres:

·  Paint mixing

Chemicals and colourings are mixed in solvents to produce the range of paints.

·  Canning

The paint produced by the Paint mixing profit centre is placed into tin cans.

Support cost centres:

·  Equipment maintenance and repairs

·  Raw materials store

·  Production planning and control

TPL operates a process costing system.

The company’s year end is 30 November.

The data and tasks cover activities during November and December 2010.


Section 1

You should spend about 90 minutes on this section.

Against each task is a recommended time for that task, but please note that these times are guidelines only.

Task 1.1 (20 minutes)

The stock record card, shown below, for solvent SB3 has been partially written up to 28 November.

(a) Identify the stock issue method being used for costing issues of solvent SB3 in the stock record card below.

(b) Complete the stock record card for the remaining two entries in November using this method.

Receipts / Issues / Balance
Date / Quantity / Cost per litre / Total cost / Quantity / Cost per litre / Total cost / Quantity / Total
cost
litres / £ / £ / litres / £ / £ / litres / £
Balance as at
22 November / 400,000 / 162,000
24 November / 200,000 / 0.4200 / 84,000 / 600,000 / 246,000
25 November / 420,000 / 0.4100 / 172,200 / 180,000 / 73,800
27 November / 200,000 / 89,600
28 November / 240,000

(c) Which alternative stock issue method would give the LOWEST figure for the value of the stock balance on 28 November?


Task 1.1, continued

(d) Briefly explain why this method gives the lowest figure for the value of the stock balance in this situation.

(e) Which alternative stock issue method would give the HIGHEST figure for the stock balance cost on the 28 November?

(f) What would the entries on 28 November be if issues were made on the basis identified in (e)?

Receipts / Issues / Balance
Date / Quantity / Cost per litre / Total cost / Quantity / Cost per litre / Total cost / Quantity / Total
cost
litres / £ / £ / litres / £ / £ / litres / £
28 November

Note:

You will need to rework the calculations for the issues made earlier in the month.


Data

The issue of solvent SB3 on 25 November was used to make paint IP36, whilst that issued on 28 November was used to make paint DP89. The solvent was purchased on credit.

The following cost accounting codes are used:

Code Description

1889 Stocks of solvent SB3

6211 Work in progress – paint IP36

6278 Work in progress – paint DP89

8020 Debtors Control account

8055 Creditors Control account

Task 1.2 (10 minutes)

Complete the Journal below to record separately the FOUR cost accounting entries for the two receipts and two issues during November on the stock issue basis used in task 1.1 (b).

Date / Code / Dr. (£) / Cr. (£)
24 November
24 November
25 November
25 November
27 November
27 November
28 November
28 November
Note:
You may use this page for your workings.


Data

The following data relates to direct labour costs incurred in producing commercial paint CP9 during November:

Normal time hours worked / 4,800 hours
Overtime at time and a half worked / 800 hours
Overtime at double time worked / 400 hours
Total hours worked / 6,000 hours
Normal time hourly rate / £12 per hour

Overtime premiums paid are included in the direct labour cost.

Task 1.3 (15 minutes)

(a) Calculate the total cost of direct labour for producing commercial paint CP9 for November.


Additional data

The following information relates to work in progress stocks of commercial paint CP9 during November:

Opening work in progress / Nil
Finished output to next process / 52,000 litres
Closing work in progress / 20,000 litres
Degree of completion – direct materials / 100%
Degree of completion – direct labour / 40%

Task 1.3, continued

(b) Using the additional data above and your answer to 1.3(a), calculate the direct labour cost per litre of commercial paint CP9 of the equivalent finished production (to the nearest penny).

Note:
You may use this page for your workings.
Note:
This page is perforated. You may remove it for easy reference.

Data

TPL has budgeted for the following overheads for Quarter 1 of the next financial year:

£000 / £000
Depreciation of machinery / 72,800
Electric power / 180,200
Insurance of stock:
Paint mixing / 15,193
Canning / 14,709
Total insurance of stock / 29,902
Rent and rates / 280,600
Indirect labour costs:
Equipment maintenance and repairs / 42,600
Raw materials store / 38,198
Production planning and control / 58,800
Total indirect labour cost / 139,598

The following information is also available:

Profit/cost centre / Net book value of machinery (£000) / Kwh (power usage) of machinery / Floor space
(square metres)
Paint mixing / 36,000 / 210,000 / 72,000
Canning / 27,000 / 168,000 / 72,000
Equipment maintenance and repairs / 13,500 / 21,000 / 9,000
Raw materials store / 13,500 / 21,000 / 18,000
Production planning and control / 9,000
Total / 90,000 / 420,000 / 180,000

Primary allocations or apportionments are made on the most appropriate basis, using the information given above. The support cost centres are then reapportioned using the step down method.

The Equipment maintenance and repairs cost centre services the Raw materials store cost centre as well as the two manufacturing profit centres. The other two service cost centres only service the two manufacturing cost centres. The following information is also available:

Usage of service cost centres / Paint mixing / Canning / Equipment maintenance and repairs / Raw materials store / Production planning and control
Equipment maintenance and repairs / 40% / 40% / 20%
Raw materials store / 55% / 45%
Production planning and control / 60% / 40%
Note:
This page is intentionally blank. You should NOT use this page for your workings.


Task 1.4 (20 minutes)
Use the following table to allocate or apportion the overheads between the profit/cost centres, using the most appropriate basis. / Totals
£000
Production planning and control
£000
Raw materials store
£000
Equipment maintenance and repairs £000
Canning
£000
Paint mixing
£000
Basis of apportionment
Depreciation of machinery / Electric power / Insurance of stock / Rent and rates / Indirect labour / Totals / Reapportion
Equipment maintenance and repairs / Reapportion
Raw materials store / Reapportion
Production planning and control / Total overheads to profit centres


Task 1.5 (10 minutes)

Both the Paint mixing and Canning profit centres absorb (recover) their overheads on a machine hour basis.

The budgeted number of machine hours for Quarter 1 of the next financial year is:

Paint mixing 628,000

Canning 652,600

Total 1,280,600

(a) Using your answers from task 1.4 and the information above, calculate the overhead absorption rate for each profit centre (to the nearest whole £).

Additional data

TPL is now considering fully writing off the net book value of the machinery in each profit centre BEFORE the start of the next financial year. (The machinery in the two support cost centres will not be affected).

(b) Calculate the effect (to the nearest penny) this would have on the overhead absorption rates calculated in part (a) above.


Data

Assume that during the first week of December 2010 the actual number of machine hours worked in the Canning profit centre will be 49,500 hours.

Also, the actual overheads incurred will be £24,000,000.

Task 1.6 (15 minutes)

(a) Using the information above and your original answer from task 1.5 (a), calculate the actual overhead absorbed by the Canning profit centre in the first week of December 2010.

(b) Calculate the under or over absorbed overheads for the week. Clearly state whether the overheads are under or over absorbed.

(c) Explain how the under or over absorbed overheads, calculated in (b) above, will be recorded in the company’s profit and loss account in December, and what effect this will have on the reported profit.


Section 2

You should spend about 90 minutes on this section.

Against each task is a recommended time for that task, but please note that these times are guidelines only.

Data

TPL currently costs its products using full absorption costing (FAC) principles. It is considering what the effect would be of using marginal costing (MC) principles instead.

The following budgeted information relates to one of the company’s domestic paint products for December:

·  Selling price per can / £15
·  Prime cost per can / £3
·  Variable production cost per can / £4
·  Budgeted fixed production overhead / £100,000 per month
·  Budgeted production / 20,000 cans per month
·  Budgeted sales / 18,000 cans per month

Task 2.1 (15 minutes)

(a) Calculate the contribution per can manufactured (on a MC basis).

(b) Calculate the profit per can manufactured (on a FAC basis).


Task 2.1, continued

(c) State which costing principle would give the higher reported profit in the month.

(You are not required to make any calculations here.)

Data

The following forecast sales, cost and target profit information relates to type DP18 and type DP20 paints for a period:

Paint type / DP18 / DP20
Forecast sales (cans) / 45,000 / 55,000
Marginal cost of production (£) / 315,000 / 440,000
Sales revenue (£) / 630,000 / 715,000
Target profit (£) / 126,000 / 96,000
Total fixed costs (£) / 420,000

Fixed costs are apportioned: 40% to the type DP18 and 60% to the type DP20 paints.

Note:
Please turn over for task 2.2


Task 2.2 (20 minutes)

(a) Complete the table below to calculate:

·  the budgeted break-even sales, in number of cans, for each of the two types of paint

·  the margin of safety over the forecast sales (in cans) for each of the two types of paint

·  the margin of safety as a percentage (to 2 decimal places)

·  the sales, in cans, to achieve the target profit

Product / DP18 / DP20
Fixed costs (£)
Unit contribution (£)
Break-even sales (cans)
Forecast sales (cans)
Margin of safety (cans)
Margin of safety (%)
Sales to achieve target profit (cans)

(b) For each of the two types of paint, assess the risk of a loss arising if sales fall below forecast.

(c) Explain whether each of the two types of paint will achieve their target profit if actual sales are as forecast.


Data

TPL makes two industrial paints, IP46 and IP52 that use the same pigment - which is temporarily in short supply. The maximum amount of this pigment that can be obtained next quarter is 2,300 kgs.

The following forecast information is available about these two paints for next quarter:

Paint type / IP46 / IP52
Contribution per thousand litres (£) / 800 / 840
Demand (forecast sales in thousand litres) / 160 / 420
Kg of pigment required per thousand litres / 8 / 7
Total fixed costs for both paints / £72,000

Note:

The company has binding contracts to supply 25,000 litres of IP46 next quarter (included in the demand figure above). These contracts must be fulfilled regardless of their profitability.

Task 2.3 (20 minutes)

Complete the table below to recommend how many litres of each type of paint should be made to maximise profits during the quarter. (You will need to write in the descriptions, where these are not shown, as appropriate).

Paint type / IP46 / IP52 / Total
Contribution per thousand litres (£)
Kg of pigment required per thousand litres
Contribution per kg of pigment (£)
Ranking
Thousand litres of paint to make
Total contribution earned (£)
Less: fixed costs (£)
Profit/loss made (£)


Data

During the month of November, production of paint CP76 had the following inputs: