Accounting Qualification

Answers

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

December 2010

Section 1

Task 1.1
(a) The method used for valuing issues is AVCO (deduced from the 25 November issue).

(b)

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 / 0.4480 / 89,600 / 380,000 / 163,400
28 November / 240,000 / 0.4300 / 103,200 / 140,000 / 60,200

(c) LIFO

(d) As the cost of buying the stock is increasing, the issues will be at a higher price, therefore minimising the closing stock balance.

(e) FIFO

(f)

Receipts / Issues / Balance
Date / Quantity / Cost per litre / Total cost / Quantity / Cost per litre / Total cost / Quantity / Total
cost
litres / £ / £ / litres / £ / £ / litres / £
28 November / 180,000
60,000
240,000 / 0.4200
0.4480 / 75,600
26,880
102,480 / 140,000 / 62,720
Task 1.2
Date / Code / Dr (£) / Cr (£)
24 November / 1889 / 84,000
24 November / 8055 / 84,000
25 November / 6211 / 172,200
25 November / 1889 / 172,200
27 November / 1889 / 89,600
27 November / 8055 / 89,600
28 November / 6278 / 103,200
28 November / 1889 / 103,200

Task 1.3

(a) The total cost of direct labour.

Cost at normal rate: 4,800 hours at £12 = £57,600

Cost at time and a half: 800 hours at £18 = £14,400

Cost at double time: 400 hours at £24 = £9,600

Total direct labour cost £81,600

(b) The direct labour cost per litre of the equivalent finished production.

Equivalent units produced:

Output to next process 52,000 litres

Closing work in progress 8,000 litres

(20,000 litres at 40%)

Total equivalent production 60,000 litres

Direct labour cost per equivalent litre £81,600 = £1.36

60,000 litres

Task 1.4

Basis of apportionment / Paint mixing / Canning / Equipment
maintenance and repairs / Raw materials store / Production planning and control / Totals
£000 / £000 / £000 / £000 / £000 / £000
Depreciation of machinery / NBV of machinery / 29,120 / 21,840 / 10,920 / 10,920 / 72,800
Electric power / Kwh of machinery / 90,100 / 72,080 / 9,010 / 9,010 / 180,200
Insurance of stock / Allocated / 15,193 / 14,709 / 29,902
Rent and rates / Floor space / 112,240 / 112,240 / 14,030 / 28,060 / 14,030 / 280,600
Indirect labour / Allocated / 42,600 / 38,198 / 58,800 / 139,598
Totals / 246,653 / 220,869 / 76,560 / 86,188 / 72,830 / 703,100
Reapportion Equipment maintenance and repairs / 30,624 / 30,624 / (76,560) / 15,312
Reapportion Raw materials store / 55,825 / 45,675 / (101,500)
Reapportion Production planning and control / 43,698 / 29,132 / (72,830)
Total overheads to profit centres / 376,800 / 326,300 / 703,100


Task 1.5

(a)

Paint mixing

Rate per machine hour: £376,800,000/628,000 = £600

Canning

Rate per machine hour: £326,300,000/652,600 = £500

(b)

Overhead absorption rates would decrease by:

Paint mixing

£29,120,000/628,000 = £46.37 (to £553.63)

Canning

£21,840,000/652,600 = £33.47 (to £466.53)

Task 1.6

(a) The overhead absorbed = actual machine hours x BOAR

= 49,500 x £500 = £24,750,000

(b) Overhead OVER absorbed = Actual overhead incurred £24,000,000

- Overhead absorbed £24,750,000

= £750,000

Over absorbed

(c) The £750,000 will be credited to the profit and loss account

so as to reduce expenses and increase profit.

Section 2

Task 2.1

(a)

Selling price/can £15

Prime cost/can £3

Variable production cost/can £4

Marginal cost (MC)/can £7

= Contribution/can £8

(b)

Selling price/can £15

Marginal cost/can £7

Fixed production cost/can £5 (£100,000/20,000 units)

FAC cost/can £12

= Profit/can £3

(c)

FAC would give the higher reported profit in the month.

Task 2.2

(a)

Paint type / DP18 / DP20
Fixed costs (£) / 168,000 / 252,000
Unit contribution (£) / 7.00 / 5.00
Break-even sales (cans) / 24,000 / 50,400
Forecast sales (cans) / 45,000 / 55,000
Margin of safety (cans) / 21,000 / 4,600
Margin of safety (%) / 46.67% / 8.36%
Sales to achieve target profit (cans) / 42,000 / 69,600

(b) Type DP20 is in danger of making a loss, because its sales only need to fall by 8.36% before it reaches its break-even point, when it starts to lose money. Type DP18’s sales would need to fall by as much as 46.67% before it starts to lose money.

(c) Type DP18 will achieve its target profit, because its forecast sales (45,000 cans) are greater than the target sales (42,000 cans). Type DP20, on the other, hand will not achieve its target profit, because its forecast sales (55,000 cans) are less than its target sales (69,600 cans).


Task 2.3

Paint type / IP46 / IP52 / Total
Contribution per thousand litres (£) / 800 / 840
Kgs of pigment required per thousand litres / 8 / 7
Contribution per kg of pigment (£) / 100 / 120
Ranking / 2 / 1
Kgs of pigment allocated to IP46 to fulfil contracts (25 x 8) / 200 / 200
Kgs of pigment remaining after fulfilling contracts / 2,100
Kgs of pigment allocated to each paint type per ranking / 0 / 2,100
Thousand litres of paint to make / 25 / 300
Total contribution earned (£) / 20,000 / 252,000 / 272,000
Less: fixed costs (£) / (72,000)
Profit made (£) / 200,000


Task 2.4

(a) The cost per litre of normal production:

Workings:

Litres

Input 4,000

- Normal loss (160)

Expected output 3,840

Actual output 3,900

Abnormal gain (difference) 60

Input costs: £

Direct materials (4,000 litres at £0.80) 3,200

Direct labour (120 hours at £14) 1,680

Overheads (200 hours at £59.52) 11,904

16,784

Normal loss waste proceeds = 160 litres at £0.50 per litre = £80

Cost per litre of normal production = £(16,784 – 80) / 3,840 litres = £4.35

(b) The process account:

Description / Litres / Unit cost £ / Total cost £ / Description / Litres / Unit cost £ / Total cost £
Direct materials / 4,000 / 0.80 / 3,200 / Normal loss / 160 / 0.50 / 80
Direct labour / 1,680 / Output / 3,900 / 4.35 / 16,965
Overheads / 11,904
Abnormal gain / 60 / 4.35 / 261
Total / 4,060 / 17,045 / 4,060 / 17,045


Task 2.5

Net present value of machinery A

Year 0
£million / Year 1
£million / Year 2
£million / Year 3
£million
Capital expenditure / (125)
Revenue / 245 / 280 / 305
Operating costs / (95) / (105) / (115)
Net cash flows / (125) / 150 / 175 / 190
PV factors / 1.00000 / 0.86207 / 0.74316 / 0.64066
Discounted cash flows / (125) / 129 / 130 / 122
Net present value / 256

Net present value of machinery B

Year 0
£million / Year 1
£million / Year 2
£million / Year 3
£million
Capital expenditure / (120)
Revenue / 225 / 250 / 285
Operating costs / (80) / (95) / (110)
Net cash flows / (120) / 145 / 155 / 175
PV factors / 1.00000 / 0.86207 / 0.74316 / 0.64066
Discounted cash flows / (120) / 125 / 115 / 112
Net present value / 232