©

[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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[C001/SQP152] 34