©
[C001/SQP152]
Advanced Higher T i m e : 3 h o u r s
Accounting and FinanceSpecimen Question Paper
NATIONALQUALIFICATIONS
[C001/SQP152] 1
Candidates should attempt six questions in total, as follows:
Section A
Question 1
and Question 2 or 3
and Question 4 or 5
Section B
Question 6
and Question 7 or 8
and Question 9 or 10
Answers must be in ink. Answers in pencil will not be accepted, though incidental working maybe in pencil.
All working should be shown fully and clearly labelled. Any incorrect figure not supported byadequate working will receive no marks. Candidates using calculators should pay particular heed.
Begin your answer to each question on a fresh page.
Marks will be deducted for untidy and badly arranged work.
Page two
SECTION A
You should attempt 3 questions from this section:
Question 1, AND Question 2 OR 3, AND Question 4 OR 5.
1. The following list of balances was taken from the books of Ridley plc on
31 December.
£000s
Sales .. .. .. .. .. .. .. .. 11,500
Cash .. .. .. .. .. .. .. .. 10
Trade creditors .. .. .. .. .. .. .. 310
Audit fees .. .. .. .. .. .. .. .. 78
Stock at 1 January .. .. .. .. .. .. .. 1,653
Issued Ordinary Share Capital fully paid .. .. .. 3,000
Profit and loss account at 1 January .. .. .. .. 460
Other creditors .. .. .. .. .. .. .. 66
Bank overdraft .. .. .. .. .. .. .. 261
Prepayments .. .. .. .. .. .. .. .. 50
Share premium .. .. .. .. .. .. .. 270
Distribution costs .. .. .. .. .. .. .. 80
Investments at cost (Market value £150,000) .. .. 125
Land at cost .. .. .. .. .. .. .. .. 300
Dividends received .. .. .. .. .. .. .. 12
Bank interest .. .. .. .. .. .. .. .. 7
Accruals .. .. .. .. .. .. .. .. 80
Purchases .. .. .. .. .. .. .. .. 7,000
Debtors .. .. .. .. .. .. .. .. .. 870
Wages and salaries .. .. .. .. .. .. .. 1,696
Buildings (at cost) .. .. .. .. .. .. .. 3,200
Motor vehicles (at cost) .. .. .. .. .. .. 750
Plant and machinery (at cost) .. .. .. .. .. 900
Interim dividend .. .. .. .. .. .. .. 100
Administration expenses .. .. .. .. .. .. 1,470
General Reserve .. .. .. .. .. .. .. 280
Provision for depreciation:
Buildings .. .. .. .. .. .. .. 1,100
Motor vehicles .. .. .. .. .. .. 450
Plant and machinery .. .. .. .. .. .. 550
Goodwill .. .. .. .. .. .. .. .. 50
[C001/SQP152] 2
1. (continued)
Notes
(1) Stocks at 31 December were £1,510,000.
(2) Provide for depreciation on fixed assets as follows.
Buildings 2% per annum using straight line method
Motor vehicles 25% per annum using reducing balance method
Plant and machinery 15% per annum using straight line method
(3) Depreciation for the year should be allocated as follows.
Buildings Cost of sales 75%
Distribution costs 25%
Motor vehicles Distribution costs 100%
Plant and machinery Cost of sales 80%
Distribution costs 20%
(4) Wages and salaries should be allocated as follows.
Cost of sales £1,080,000
Administration expenses £220,000
Distribution costs £396,000
(5) Corporation tax on the profit for the year is estimated to be £120,000.
(6) The directors propose that:
(a) £15,000 be transferred to the General reserve.
(b) a dividend of 5p per share be paid to the Ordinary Shareholders.
(7) The Authorised Share Capital of the company consists of:
8,000,000 Ordinary Shares of 50p each
1,000,000 8% Preference Shares of £1 each.
You are required to prepare:
(a) the draft Trading and Profit and Loss Account for the year ended
31 December for presentation to the directors of Ridley plc;
(b) the draft Profit and Loss Account and Balance Sheet for the year ended
31 December for presentation to the shareholders.
These accounts should conform to the requirements of the Companies Acts.
Page three
Marks
(25)
[C001/SQP152] 3
Page four
2. Harvey and Smith were in partnership sharing profits and losses in the ratio 4:1
respectively. They have decided to dissolve their partnership with effect from
31 December when their Balance Sheet was as follows.
Balance Sheet at 31 December
£ £ £
Fixed Assets
Land and buildings 16,100
Plant and machinery 1,900
Motor vehicles 4,200
22,200
Current Assets
Stock 5,700
Debtors 8,100
13,800
Current Liabilities
Creditors 7,800
Bank overdraft 9,500 17,300 (3,500)
18,700
Loan (Harvey) 3,000
15,700
Financed by
Capital Current
Harvey 9,000 2,000 11,000
Smith 5,000 (300) 4,700
14,000 1,700 15,700
On dissolution the following information became available.
(1) Harvey took over some of the Plant and machinery for £500 and one of the
vehicles for £1,600.
(2) Land and buildings were sold for £21,200.
(3) Smith took over the other vehicle for £1,200.
(4) Other assets were disposed of as follows:
the remaining Plant and machinery was sold for £1,100
the debtors realised £7,850
the stock was sold for £4,600.
(5) Bank interest of £300 has been charged by the bank and is not included in the
above figures.
(6) Realisation expenses to be paid are £200.
(7) Creditors were paid subject to a discount of £100.
(8) The loan was repaid to Harvey.
(9) Current Account balances were transferred to the Capital Accounts.
Marks
[C001/SQP152] 4
2. (continued)
You are required to prepare the following accounts to show the
dissolution of the partnership.
(a) Realisation Account
(b) Partners’ Capital Accounts
(c) Bank Account
Page five
Marks
(20)
[C001/SQP152] 5
Page six
3. D. Broom runs a small business but does not keep double entry records.
She provides you with the following summarised cash and bank records.
£ £
Balance at 1 January 2,000 Cash to creditors 54,000
Cash sales 65,000 Purchase of vehicle 5,000
Cash from debtors 10,000 Miscellaneous expenses 5,500
Sale of vehicle 1,200 Drawings 12,000
Balance at 31 December 800 Rent 2,500
79,000 79,000
Notes
(1) One of the vehicles was sold at a loss of £200.
(2) The cash sales figure above does not include £9,000, part of which was used
to pay wages of £6,000. The remainder was kept by Broom for her personal
use.
(3) Discounts allowed and received during the period were £1,800 and £2,700
respectively.
(4) Balances at the start and end of the year were:
1 Jan 31 Dec
£ £
Vehicles 6,000 9,100
Accrued miscellaneous expenses 500 600
Rent in advance 300 400
Creditors 5,300 5,600
Debtors 6,700 6,200
Stock 4,200 5,200
You are required to prepare the:
(a) Trading and Profit and Loss Account for the year ended 31 December;
(b) Balance Sheet at 31 December.
Marks
(20)
[C001/SQP152] 6
Page seven
4. (a) A Directors’ Report is a necessary and important part of a company’s
published Accounts. Explain, using examples, the role of this Report and
why it is important.
(b) Published Company Accounts must comply with Accounting Standards.
Explain, using examples, the purpose of Accounting Standards.
5. (a) (i) Explain the purpose of a Cash Flow Statement.
(ii) Which Accounting Standard governs Cash Flow Statements?
(iii) Describe, using examples, the items included in the prescribed layout of
the Standard named in (ii).
(b) (i) Why is liquidity important to a business?
(ii) Which accounting tools are used to measure liquidity?
Marks
8
7
(15)
3
1
5
4
2
(15)
[C001/SQP152] 7
SECTION B
You should attempt 3 questions from this section:
Question 6, AND Question 7 OR 8, AND Question 9 OR 10.
6. D. Stewart plc uses a standard costing system. The following information relates
to production for the month ended 31 December.
Budgeted Data Actual Data
Production 12,000 9,000
Sales 12,000 9,000
Selling price £15 £16
Direct Material
Quantity 1,200 kg 1,000 kg
Price £30 per kg £28 per kg
Direct Labour
Time 6,000 hours 4,000 hours
Rate £12 £15
Variable Overheads £24,000 £20,000
Overheads are recovered on a labour hour basis.
(a) You are required to calculate the following variances:
(i) Total Sales Revenue Variance;
(ii) Sales Price Variance;
(iii) Sales Volume Variance;
(iv) Total Material Cost Variance;
(v) Material Price Variance;
(vi) Material Usage Variance;
(vii) Total Labour Cost Variance;
(viii) Labour Rate Variance;
(ix) Labour Efficiency Variance;
(x) Variable Overhead Cost Variance;
(xi) Variable Overhead Expenditure Variance;
(xii) Variable Overhead Efficiency Variance.
Page eight
Marks
16
[C001/SQP152] 8
Page nine
6. (continued)
(b) (i) Based on your answers to (a), state one reason why each of the
following variances has arisen:
(1) Labour Efficiency Variance;
(2) Variable Overhead Expenditure Variance;
(3) Sales Volume Variance.
(ii) Explain what is meant by the following terms used in standard costing:
(1) basic standard cost;
(2) ideal standard cost;
(3) currently attainable standard cost.
Marks
9
(25)
[C001/SQP152] 9
7. The Frozen Food Company plc processes vegetables for sale to supermarkets.
There are 4 processes. Details of Process 1 are shown below for the month of
November.
Process 1
Direct materials 9,000 tonnes at £12 per tonne
Direct labour £162,000 at £15 per hour
Variable overheads £7.50 per labour hour
Fixed overheads £86,400
Normal loss 10% of Input weight (sold for £18 per tonne)
Good output 8,400 tonnes
(a) You are required to:
(i) prepare the ledger account for Process 1;
(ii) prepare the Abnormal Gain Account.
Process 3
Transfer from Process 2 10,500 tonnes at £60 per tonne
Direct material 1,500 tonnes at £20 per tonne
Direct labour 6,000 hours at £14.25 per hour
Variable overheads £44,400
Transferred to warehouse 10,800 tonnes
Work in progress 1,200 tonnes
Work in Progress is 100% complete as to material, 50% complete as to labour and
25% complete as to overheads.
Page ten
Marks
10
[C001/SQP152] 10
Page eleven
7. (continued)
(b) From the information given opposite for Process 3 you are required
to:
(i) write out and complete the equivalent completed units table below for
Process 3;
(ii) prepare the ledger account for Process 3.
Marks
5
5
(20)
EQUIVALENT UNITS TABLE
Material Labour Overheads
Warehouse
Work in Progress
TOTAL
Cost per equivalent unit
[C001/SQP152] 11
Page twelve
8. Desmond plc is considering investing in a new project. The following
information has been received from the Company’s project consultants.
Cost of Project on 1 January 2001—£25m
Project life: 4 years to December 2004
Year Estimated Profit Estimated Net Cash Flows
excluding initial investment
£m £m
2001 3 8
2002 4 9
2003 4 9
2004 2 6
The company’s required rate of return is 10%.
(a) You are required to show the results of applying the following methods of
investment appraisal to the project. An abbreviated Discount Table is
provided below.
(i) Accounting rate of return
(ii) Payback
(iii) Net present value
(iv) Internal rate of return
(b) State one advantage and one disadvantage of each of the methods used in
(a) above.
Marks
12
8
(20)
DISCOUNT TABLE (from 10% to 20% only)
Present value of £1 received after n years discounted at i%
n
1 .909 .901 .893 .885 .877 .870 .862 .855 .848 .840 .833
2 .826 .812 .793 .783 .770 .756 .743 .731 .718 .706 .694
3 .751 .731 .712 .693 .675 .658 .641 .624 .609 .593 .579
4 .683 .659 .636 .613 .592 .572 .552 .534 .516 .499 .482
5 .621 .594 .567 .543 .519 .497 .476 .456 .437 .419 .402
i 10 11 12 13 14 15 16 17 18 19 20
[C001/SQP152] 12
Page thirteen
9. (a) Explain the meaning and significance of the following terms used in contract
costing.
(i) Establishment expenses
(ii) Subcontracting costs
(iii) Work completed but not yet certified
(iv) Work certified complete
(v) Profit recognised
(b) Outline the main differences between contract costing and job costing.
10. (a) Explain clearly, using examples, the difference between controllable and
non-controllable costs.
(b) Explain the benefits of preparing functional (departmental) budgets and
describe the relationship between these budgets.
[END OF QUESTION PAPER]
Marks
10
5
(15)
3
12
(15)
[C001/SQP152] 13
[C001/SQP152] 14
©
Advanced HigherAccounting and FinanceSpecimen Marking Instructions
NATIONALQUALIFICATIONS
[C001/SQP152]
[C001/SQP152] 15
Suggested Solutions
1. (a)
Ridley plc
Trading and Profit and Loss account for year ended 31 December
£000s £000s £000s
Sales 11,500
Less Cost of Sales
Opening stock 1,653
Purchases 7,000
8,653
Less Closing stock 1,510
Cost of goods sold 7,143
Wages and salaries 1,080
Depreciation: Buildings (75% × 2% × 3200) 48
Depreciation: Plant and machinery (80% × 15% × 900) 108 8,379
Gross Profit 3,121
Administrative expenses
Administrative expenses 1,470
Wages and salaries 220
Audit fees 78 1768
Distribution costs
Distribution costs 80
Wages and salaries 396
Depreciation: Buildings (25% × 2% × 3200) 16
Depreciation: Motor vehicles (25% × (750 – 450)) 75
Depreciation: Plant and mach (20% × 15% × 900) 27 594 2,362
759
Income from investments 12
771
Bank interest 7
Net profit before tax 764
Corporation tax 120
Net profit after tax 644
Interim dividend 100
Proposed dividend 300 400
244
Transfer to General Reserve 15
Retained profit for year 229
Retained profits from last year 460
Retained profits carried forward to next year £ 689
Page two[C001/SQP152] 16
Page three[C001/SQP152] 17
1. (continued)
(b)
Ridley plc
Balance Sheet at 31 December
Cost Agg Dep NBV
Fixed Assets £000s £000s £000s
Intangible Assets
Goodwill 50
Tangible Assets
Land 300 300
Buildings 3,200 1,164 2,036
Motor Vehicles 750 525 225
Plant and Machinery 900 685 215
5,150 2,374 2,826
Investments (Market value £150,000) 125
Current Assets
Stock 1,510
Debtors 870
Prepayments 50
Cash 10
2,440
Creditors: amounts due within one year
Bank overdraft 261
Trade creditors 310
Other creditors 66
Accruals 80
Corporation tax due 120
Proposed dividend 300 1,137
Net Current Assets 1,303
Total Assets less Current Liabilities £4,254
Capital and Reserves
Ordinary Share Capital in 50p shares 3,000
Share Premium 270
General Reserve 280
Add: transfer 15 295
Profit and Loss a/c 460
Add: retained profit for year 229 689
£4,254
Authorised Share Capital
8,000,000 50p Ordinary shares 4,000
1,000,000 8% £1 Preference shares 1,000
£5,000
Issued Share Capital
6,000,000 50p Ordinary shares 3,000
1. (b) (continued)
Ridley plc
Profit and Loss account for year ended 31 December
£000s £000s
Turnover 11,500
Cost of Sales 8,379
Gross Profit 3,121
Distribution costs 594
Administration expenses 1,768 2,362
759
Income from investments 12
771
Bank interest 7
Profit on ordinary activites before taxation 764
Tax on profit on ordinary activities 120
Profit on ordinary activities after taxation 644
Transfer to General Reserve 15
Dividends 400 415
Retained profit for year £ 229
Page four[C001/SQP152] 18
2.
BANK ACCOUNT
9,500
300
200
7,700
3,000
10,220
3,830
34,750
9,000
2,000
1,320
12,320
Realisation—Land and buildings
Realisation—Plant and machinery
Realisation—Debtors
Realisation—Stock
Balance c/f
Realisation—Bank interest
Realisation—Expenses
Creditors
Loan—Harvey
Capital—Harvey
Capital—Smith
500
1,600
21,200
1,200
1,100
7,850
4,600
100
38,150
Page five[C001/SQP152] 19
REALISATION ACCOUNT
16,100
1,900
4,200
5,700
8,100
300
200
1,320
330
38,150
21,200
1,100
7,850
4,600
34,750
Realisation—Plant and machinery
Realisation—Vehicle
Bank
Balance b/f
Current Account
Profit on Realisation
CAPITAL ACCOUNT—HARVEY
500
1,600
10,220
12,320
5,000
330
5,330
Realisation—Vehicle
Current Account
Bank
Balance b/f
Profit on Realisation
1,200
300
3,830
5,330
Dr Cr
£Capital Harvey—Plant and machinery
Capital Harvey—Vehicle
Bank—Land and buildings
Capital Smith—Vehicle
Bank—Plant and machinery
Bank—Debtors
Bank—Stock
Discount on Creditors
Land and buildings
Plant and machinery
Motor vehicles
Stock
Debtors
Bank— interest
Bank—Realisation Expenses
Profit on Realisation—Harvey
Profit on Realisation—Smith
CAPITAL ACCOUNT—SMITH
£
£ £
£ £
£ £
3. (a)
D. Broom
Trading and Profit and Loss Account
for year ended 31 December
£ £
Sales: Cash (65,000 + 9,000) 74,000
Credit (10,000 – 6,700 + 6,200 + 1,800) 11,300 85,300
Cost of Sales:
Opening Stock 4,200
add Purchases (54,000 – 5,300 + 5,600 + 2,700) 57,000
Goods available for sale 61,200
less Closing stock 5,200
56,000
Gross Profit 29,300
add Discount received 2,700
32,000
less Expenses:
Discount allowed 1,800
Wages 6,000
Loss on sale of vehicle 200
Depreciation – Vehicles (9,100 – (6,000 – 1,400) + 5,000) 500
Miscellaneous expenses (5,500 – 500 + 600) 5,600
Rent (2,500 + 300 – 400) 2,400
16,500
Net Profit £ 15,500
(b)
D. Broom
Balance Sheet
at 31 December 2000
£ £ £
Fixed Assets
Vehicles 9,100
Net Current Assets
Current Assets
Stock 5,200
Debtors 6,200
Prepaid rent 400
11,800
Current Liabilities
Bank overdraft 800
Creditors 5,600
Accrued miscellaneous expenses 600
7,000
4,800
£13,900
FINANCED BY
Capital (2,000 + 6,000 + 300 + 6,700 + 4,200) – (500 + 5,300) 13,400
add Net Profit 15,500
28,900
less Drawings (12,000 +3,000) 15,000
£13,900
Page six[C001/SQP152] 20
3. (continued)
Working Notes
Statement of Affairs 1 January
£ £
Assets
Cash 2,000
Debtors 6,700
Vehicles 6,000
Stock 4,200
Rent prepaid 300 19,200
Less Liabilities
Creditors 5,300
Accrual 500 5,800
Capital (start) £19,200
Credit Sales Credit Purchases £
Cash received 10,000 Cash paid 54,000
Discount allowed 1,800 Discount received 2,700
Closing balance 6,200 Closing balance 5,600
18,000 62,300
less: Opening balance 6,700 less: Opening balance 5,300
Credit sales £11,300 Credit purchases £57,000
Depreciation
Vehicles at start 6,000
less: Sale at book value 1,400
4,600
add: Purchase 5,000
9,600
Less: Vehicles at end 9,100
Depreciation £ 500
Page seven[C001/SQP152] 21
Page eight[C001/SQP152] 22
4. (a) Role of Directors’ Report is to provide a more detailed review of the activities of
the Company for shareholders, lenders, investors, potential investors, employees,
trade unions, suppliers, etc.
The Directors’ Report is important because the information it contains will allow
those parties interested in the Company to make decisions on:
• Continuing with their investment in the Company
• Allowing credit or lending money to the Company
• Deciding to invest in the Company
• Wage negotiations
• Agreeing contracts with the Company.
The Directors’ Report is provided in addition to the Notes attached to the Annual
Accounts.
The content of the Directors’ Report is laid down in the Companies Acts but no
formal layout is given.
The Directors’ Report will contain statements on:
Business Review of the Company—a fair review of:
• Principal activities of the Company
• Development of the Company and any subsidiaries during the year.
Financial Activities of the Company
• Financial position at end of year
• Dividends proposed
• Details of any significant changes in Fixed Assets of the Company
• Post Balance Sheet events—details of any events affecting the company since
the end of the financial year
• Political and charitable contributions.
Future Activities of the Company
• Likely future developments of the Company
• Details of research and development projects.
Directors’ Information
• Names of all persons who had been Directors during any part of the financial
year
• Details of Directors’ shareholding/debenture holding at start and end of year
• Directors’ interests in contracts.
8 marks
4. (b) Accounting Standards are authoritative statements of how particular types of
transaction and other events should be reflected in financial statements.
Accordingly, compliance with Accounting Standards will normally be necessary
for financial statements to give a true and fair view.
Accounting Standards are produced by the Accounting Standards Board (ASB).
This is an independent body, which produces statements called Financial
Reporting Standards (FRS). The ASB does not need the approval of any other
body for these statments. These statements will gradually replace the Statements
of Standard Accounting Practices.
There is no general law compelling accountants to use these standards, however
compliance is ensured through the accounting professional bodies using their own
disciplinary procedures on their members.
Purpose of an Accounting Standard is to:
Give a true and fair view of the financial position of the company
Give guidance to accountants in detailed matters of accounting principles:
• Ensuring the same accounting base is used in the preparation of the accounts
from year to year; eg depreciation, value of work in progress, recognition of
profits on long term contracts
• Ensuring consistency in accounting principles used, eg treatment of
accruals/prepayments
• Ensuring reliability of methods used to calculate profits.
Clarify the concepts which underlie the preparation and presentation of accounts
• Concept of prudence
• Going concern concept
Reduce the range of options open to accountants when dealing with difficult areas:
• Allow accountants to choose one method to deal with an accounting situation
• Accountant must disclose method chosen
Allow users of accounts to make proper reliable comparisons between different
Companies or successive years’ results within a company.
7 marks
Page nine[C001/SQP152] 23
5. (a) (i) Purpose of Cash Flow Statement:
• Shows how cash flows have been generated
• Shows how cash has been spent
• Indicates the relationship between profitability and cash-generating
ability
• Provides additional analysis of balance sheet and profit and loss accounts
• Explains the situation where a firm has a net profit but less cash than it
began the financial year with or where it has more cash due to selling off
assets
• May be used for projecting what will happen to the cash balances next
year, if the present year is repeated
• Fulfil the legal requirements for certain companies
3 marks
(ii) Financial Reporting Standard 1 (FRS1)
1 mark
(iii) An entity’s cash flow statement should list its cash flows for the period
classified under the following standard headings:
Operating activities—adjustments to the operating profit for non cash flow
items eg provisions for depreciation, profit/loss on sale of fixed assets,
adjustments to working capital figures etc to bring the actual operating profit
in line with the actual cash flow from operating activities.
Returns on investments and servicing of finance—preference dividend paid,
debenture interest paid, loan interest paid.
Taxation—corporation tax
Capital expenditure and financial investment purchase of tangible fixed
assets, proceeds from disposals of investments, sales of fixed assets—property,
plant equipment etc.
Equity dividends paid—ordinary share dividend
Management of liquid resources
Financing—issue of shares or debentures, repayment of debentures, Share
issue expenses.
5 marks
(b) (i) Liquidity is important to a firm because it shows the ability of the firm to pay
its short-term debts—
To pay creditors promptly for goods received and to continue to obtain credit
and therefore to continue trading.
To pay shareholders dividends due promptly and thus maintain their
investment in the firm.
To indicate to prospective lenders that the firm can meet its loan repayments.
To indicate that liquid capital is the capital tied up in the current assets of the
entity and can be defined as near cash items—cash, bank, debtors, readily
marketable investments.
4 marks
Page ten[C001/SQP152] 24
5. (b) (continued)
(ii) Accounting tools used to measure liquidity are the following liquidity ratios:
The 2 main measures of liquidity are:
Current Ratio/Working Capital Ratio
Liquid Ratio/Acid Test Ratio
Current Ratio =
Compares assets which will become liquid in approximately 12 months with
the liabilities that will fall due in that same period.
Acid Test Ratio =
Shows whether the firm will have sufficient liquid resources available to meet
its current committments.
2 marks
Current Assets
Current Liabilities
Current Assets Stock
Current Liabilities
−
Page eleven[C001/SQP152] 25
6. (a) (i) Total Sales Revenue Variance = (AP × AQ) – (BP × BQ)
= (16 × 9,000) – (15 × 12,000)
= 144,000 – 180,000
= 36,000 (A)
(ii) Sales Price Variance = (AP – BP) × AQ
= (16 – 15) × 9,000
= 9,000 (F)
(iii) Sales Volume Variance = (AQ – BQ) × BP
= (9,000 – 12,000) × 15
= 45,000 (A)
(iv) Total Material Cost Variance = (SQ × SP) – (AQ × AP)
= (900 × 30) – (1000 × 28)
= 27,000 – 28,000
= 1,000 (A)
(v) Material Price Variance = (SP – AP) × AQ
= (30 – 28) × 1,000
= 2,000 (F)
(vi) Material Usage Variance = (SQ – AQ) × SP
= (900 – 1,000) × 30
= 3,000 (A)
(vii) Total Labour Cost Variance = (SR × SH) – (AR × AH)
= (12 × 4,500) – (15 × 4,000)
= 54,000 – 60,000
= 6,000 (A)
(viii) Labour Rate Variance = (SR – AR) × AH
= (12 –15) × 4,000
= 12,000 (A)
(ix) Labour Efficiency Variance = (SH – AH) × SR
= (4,500 – 4,000) × 12
= 6,000 (F)
(x) Variable Overhead Cost Variance = AVO – (SH × AR)
= 20,000 – (4,500 × 4)
= 2,000 (A)
(xi) Variable Overhead Expenditure Variance = AVO – (AH × AR)
= 20,000 – (4,000 × 4)
= 4,000 (A)
(xii) Variable Overhead Efficiency Variance = (AH – SH) × AR
= (4,000 – 4,500) × 4= 2,000 (F)
16 marks
Page twelve[C001/SQP152] 26
6. (continued)
(b) (i) Labour Efficiency Variance —Higher grade of worker employed
Improved raw material allowing
work to be done quicker
Variable Overhead Expenditure Variance — Increased costs passed on by
suppliers not accounted for in
preparation of estimates
Sales Volume Variance —Increased competition reducing unit sales
Insufficient expenditure on advertising
3 marks—one for each valid reason
(ii) Basic standard costs are unchanging standards. They provide the base for
comparing actual costs through the years with the same standard. These are
seldom used because frequent changes in products and methods necessitate
changes in standards.
Ideal standard costs are the minimum costs that are possible under the best
conceivable operating conditions. They can be used where the management
feels that they provide achievable targets to improve motivation.
Currently attainable standard costs are the costs that should be incurred
under normal efficient operating circumstances. They are not as tight as ideal
standards because of allowances for normal spoilage and machine
breakdowns.
6 marks—one for each valid point
Page thirteen[C001/SQP152] 27
7. (a) (i)
Process Account 1
Cost per tonne = 437,400 – 16,200/8,100 = £52
(ii)
Abnormal Gain Account
10 marks
(b) (i)
Equivalent Units Table
5 marks
Work in progress = (1,200 × 55) + (600 × 7.50) + (300 × 4)
= 66,000 + 4,500 + 1,200
= 71,700
Tonnes CPT £ Tonnes CPT £
Direct material 9,000 12 108,000 Normal loss 900 18 16,200
Direct labour 162,000 Transfer to
Process 2Variable overheads
Fixed overheads
Abnormal gain
81,0008,400 52 436,800
86,400
300 52 15,600
9,300 453,000 9,300 453,000
Tonnes CPT £ Tonnes CPT £
5,400 Process 1 15,600
10,200
15,600 15,600
Page fourteen[C001/SQP152] 28
Loss of Scrap Value
Transfer to
Profit and Loss
Account
Material Labour Overheads
Warehouse 10,800 10,800 10,800
Work in Progress 1,200 600 300
12,000 11,400 11,100
Cost per EU660,000/12,000
£55
85,800/11,400
£7.50
44,400/11,100
£4
TOTAL
7. (continued)
(b) (ii)
Process Account 3
5 marks
Tonnes CPT £ Tonnes CPT £
From Process 2 10,500 60 630,000 Work in
Progress
1,200 71,700
Direct material 1,500 20 30,000 Transfer to
WarehouseDirect labour 85,500
10,800 718,200
44,400
12,000 789,900 12,000 789,900
Page fifteen[C001/SQP152] 29
Variable overheads
8. (a) (i) Accounting rate of return =
=
= 52%
(ii) Payback
Payback occurs in just under 3 years.
(iii) NPV at 10%
8 × 0.909 = 7.272
9 × 0.826 = 7.434
9 × 0.751 = 6.759
6 × 0.683 = 4.098
Total 25.563
NPV = 25.563 – 25 = £563,000
(iv) Internal rate of return
NPV at 12%
8 × 0.893 = 7.144
9 × 0.793 = 7.137
9 × 0.712 = 6.408
6 × 0.636 = 3.816
Total 24.505
NPV = 24.505 – 25 = –£495,000
IRR = Positive Rate = [positive npv/(positive npv + negative npv) × range]
= 10% + [566/(566 + 495) × 2]
= 10% + 1.07
= 11.07%
OR
Negative Rate – [negative npv/(negative npv + positive npv) × range]
= 12 – [495/1061 × 2]
= 11.07%
12 marks
Year Inflow Cumulative
2001 8 8
2002 9 17
2003 9 26
2004 6 32
Page sixteen[C001/SQP152] 30
×Av Profit 100
Av Capital3 25
1006 25
⋅ ×⋅
8. (continued)
8 marks
9. (a) (i) Establishment expenses—These are the initial costs in any contract. It could
be the clearing of land, or building access roads, and the legal costs of setting
up the contract.
(ii) Most contracts will involve different levels of expertise. If the main
contractor does not have the required expertise they sub-contract some
aspects of the work.
(iii) Work completed but not yet certified is work in progress. The architect
attached to the project has not given a certificate to say that the work has been
done.
(iv) Long term contracts require to be broken down into stages.
This prevents cash flow difficulties for contractor.
At completion of each stage architect issues a certificate to state work has been
done.
Payments can then be made.
(v) Profit is recognised using a formula that builds in a reduction because of the
large scale nature of the project. It is an example of prudence used in the
accounts. It allows for things going wrong.
10 marks
Method Advantage Disadvantage
Accounting rate of return Simple to calculateIgnores timing of cash
flows
PaybackIndicates length of time
capital outlay is at risk
Biased in favour of short
term contracts
Net present valueConsiders the time value
of moneyManagers find it difficult
Internal rate of return Considers all cash flows
Cannot be used to
compare projects of
different time scales
Page seventeen[C001/SQP152] 31
9. (continued)
(b) JOB COSTING
A form of specific order costing where the work will be completed in a relatively
short time.
Used when “one-off” jobs are produced to a customer’s own requirements eg car
repairs, joinery work, specific engineering work, etc.
Used for small-scale work either in a factory or the customer’s premises.
All costs incurred are charged to the job using a Job Card.
Profit is added to total cost and the customer is charged the cost plus the profit
element.
CONTRACT COSTING
Similar to Job Costing but on a much larger scale.
Relatively long duration—exceeding one year—engineering contracts—building
dams, airports, road contracts, etc.
All costs for the contract are charged directly to the contract including a
proportion of indirect costs for head office costs.
Stage payments are made throughout the life of the contract. This occurs after
the work is inspected by the supervisory engineer and the value of the work
agreed.
Profits are taken into the final accounts of the firm throughout the life of the
contract and not only on completion.
Not all profit on the work completed is taken to the profit and loss account at the
end of the financial year.
Contractee will normally retain a proportion of the contract cost for a specific
length of time. This is to cover the cost of replacement of any sub-standard
work which emerges with time. Retention amounts are usually paid to
contractor after an agreed period of time.
5 marks
Page eighteen[C001/SQP152] 32
10. (a) Controllable costs are those costs that are directly influenced by a particular
manager over a particular time period.
Over short-term few costs are fully controllable—it is difficult to hire or fire
workers to meet short term targets.
Over long term almost all costs are controllable—the business could be closed
down reducing all costs to zero.
3 marks
(b) (i) Sales Budget is prepared to set targets for sales team. It will contain:
target quantity for each product;
detailed sales prices;
target quantities for different geographical areas;
target quantities for different sales representatives;
provide a basis for other budgets.
(ii) Production budget is prepared to meet sales targets and allows managers to
plan production over a definite period.
Purchasing of raw material can be planned to make best use of discounts.
Allows detailed planning of labour needs.
Allows detailed planning of machine time.
(iii) Cash budgets encourage managers to anticipate problems before they arise.
Indicates timing of cash inflows and outflows.
Is based on sales and production budgets.
Builds in “time lags” due to credit transactions.
Includes purchases of fixed assets, payment of dividends and taxation.
(iv) Master budgets encourage managers to consider how their actions will affect
other departments in the business.
Involves preparing an estimated trading, profit and loss account and Balance
Sheet.
Based on sales and production budgets.
Helps calculate expected return on capital.
Indicates trends in activity and liquidity.
12 marks
[END OF SPECIMEN MARKING INSTRUCTIONS]
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