ECR June 2010 Questions

8/2/2019 ECR June 2010 Questions

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Accounting Qualification

Question paper

Intermediate levelRecording and evaluatingcosts and revenues (ECR)

Level 3 Diploma for AccountingTechnicians (QCF)

Recording and analysing costsand revenues (ECR)

Monday 14 June 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 bothsections.

We recommend that you use the 15 minutes’ reading time to study the exam paper fullyand carefully so that you understand what to do for each task. However, you may beginto 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 inpossession of unauthorised materials, such as pre-prepared notes, books,programmable calculators and dictionaries. Any of these actions will constitutemalpractice and will result in disciplinary action. If you are in possession of unauthorisedmaterials 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.

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This exam paper is in TWO sections.

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

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

You should spend about 90 minutes on Section 1 and about 90 minutes on Section 2.

There is blank space for your workings on pages 2, 12, 13 and 19, but you should include allessential calculations in your answers.

Both Sections 1 and 2 are based on the business described below.

Data

You are employed as an accounting technician with Total Recall Ltd (TRL), a company that

manufactures computer memory sticks. Its customers are mainly large computer and electronicsretailers.

You report to the Management Accountant.

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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 areguidelines only.

Task 1.1 (18 minutes)

The stock record card shown below for plastic part BP6 for May 2010 has only been partially completed.

(a) Identify the stock issue method being used for valuing issues to production.

(b) Complete the remaining entries in the stock record card using this method.Round the costs per kg to 2 decimal places.

Stock record card for plastic part BP6

Receipts Issues Balance

Date Quantity Cost per kg

Totalcost

Quantity Cost per kg

Totalcost

Quantity Totalcost

kg £ £ kg £ £ kg £

Balanceas at1 May

15,000 48,000

4 May 10,000 3.25 32,500 25,000 80,500

11 May 14,000 3.20 44,800

17 May 16,000 3.30

31 May

18,000

(c) Identify ONE other stock issue method that could, in principle, be used for valuingissues to production.

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Write a brief email to the Management Accountant.

(a) Explain what has happened to the cost of buying part BP6 over the past month.

Note:You should refer to your figures in task 1.1 to support your explanation.

(b) Briefly describe the effect of using the stock issue method that you identified in task1.1 (c) on :

(i) May’s internally reported profit, as per the monthly managementaccounts

(ii) the closing stock value.

Note:You do not need to do any calculations in part (b).

From:To:Date:Subject:

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Data

The following information relates to the direct labour costs incurred in producing 29,160 size 4gbmemory sticks during May 2010:

Normal time hours worked 300 hours

Overtime hours worked (paid at time and a half) 60 hoursOvertime hours worked (paid at double time) 48 hoursTotal hours worked 408 hours

Normal time hourly rate £9 per hour

Overtime premiums paid are included as part of direct labour cost.


(a) Calculate (to the nearest £) the total cost of direct labour used to produce the size 4gbmemory sticks during May 2010.

(b) Calculate (to the nearest penny) the direct labour cost of each size 4gb memory stick.

(c) Rather than overtime premiums being treated as part of direct labour cost, in whatalternative way could they be accounted for?

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Note:This page is perforated. You may remove it for easy reference.

Data

TRL has two production departments involved in producing memory sticks:• Electronics Assembly

• Plastics AssemblyIt also has two service departments that support the production departments:

• Stores

• Equipment Maintenance

The budgeted overheads relating to these departments for the next period are shown below, together with their behaviour and how they are apportioned to departments.

Budgeted cost Cost behaviour £ Comments

Heat and lightingSemi-variable(25% fixed75% variable)

134,400 Apportion fixed element equally between allfour departments. Apportion variable elementaccording to floor area.

Power for machinery Variable 120,400 Apportion 60% to Electronics Assembly, and40% to Plastics Assembly.

Supervision Fixed 36,700£26,016 relates to the Electronics Assemblydepartment and the remainder to the Plastics Assembly department.

Stores wages Fixed 45,800

Equipment Maintenancewages

Fixed 64,200

Depreciation of fixed assets Fixed 204,000 Apportion according to net book value of fixedassets.

Other overhead costsDependant onspecific cost

108,000 Apportion 30% to each production departmentand 20% to each service department

The following information is also available:

DepartmentSquare metres

occupied

Net book value of fixed assets

£

Hours spent onequipment

maintenance

Number of material

re uisitions

Electronics Assembly 100,000 420,000 4,260 28,848

Plastics Assembly 60,000 280,000 2,130 25,171

Stores 20,000 40,000 710

Equipment Maintenance 20,000 60,000

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Note:This page is intentionally blank. You should NOT use it for your workings.

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Use the following table to allocate or apportion the overheads between the productiondepartments, using the most appropriate basis. Round to the nearest £ throughout.

Notes:• The Equipment Maintenance department’s total costs should be apportioned on the basis of the

hours spent on equipment maintenance for the other three departments.

• The total of the Stores department’s costs should then be apportioned according to the number of material requisitions.

OverheadBasis of

allocationElectronics

AssemblyPlastics

Assembly

StoresEquipment

MaintenanceTotal

£ £ £ £ £

Heat and lightingfixed cost

Heat and lightingvariable cost

Power for machinery

Supervision

Storeswages

EquipmentMaintenancewages

Depreciation of fixed assets

Other overheadcosts

Total of primaryapportionments

ReapportionEquipmentMaintenance

ReapportionStores

Total productiondepartment

overheads

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Data

Both the Electronics Assembly and Plastics Assembly departments are highly automated and machineintensive.

The following information relates to these two departments for the next period:

Electronics Assemblydepartment

Plastics Assemblydepartment Total

Budgeted machine hours14,200 12,500 26,700

Budgeted direct labour hours9,400 8,800 18,200


Using the above information and your calculations from task 1.4, calculate the budgetedoverhead recovery (absorption) rate, using the most appropriate basis (and rounding your

answer to the nearest whole £) for:

(a) the Electronics Assembly department

(b) the Plastics Assembly department

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Data

During the same period the Plastics Assembly department actually worked 13,250 machine hours, and9,300 labour hours. This incurred an overhead cost of £300,750.

Task 1.6 (14 minutes )

(a) Using the information above and your answers from task 1.5, calculate the actualoverhead absorbed in the period (to the nearest whole £).

(b) Calculate the under or over absorbed overheads for the period (to the nearest whole £).Clearly state whether the overheads were under or over absorbed.

(c) Identify TWO factors that could have caused the under or over absorption in (b).

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13




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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 areguidelines only.


TRL has produced three forecasts of activity levels for the next period for one size of its memory sticks.The original budget involved producing 30,000 memory sticks, but production levels of between 40,000and 50,000 memory sticks are now expected.

Notes:• TRL receives a discount of 15% on any extra direct materials purchases in excess of those

required for 40,000 memory sticks.

• Additional indirect labour is needed for production volumes greater than 30,000 memory sticks.This will increase indirect labour costs by 25%.

(a) Complete the table below to calculate the production cost per memory stick (in £,to 4 decimal places) at the different activity levels.

Memory sticks made 30,000 40,000 50,000

Costs: £ £ £

Variable/semi-variable costs:

Direct materials 6,000

Direct labour 9,600

Overheads 7,500

Fixed /semi-fixed costs:

Indirect labour 10,000

Overheads 15,200

Total cost 48,300

Cost per memory stick 1.6100

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(b) Briefly explain the difference between a ‘direct’ and an ‘indirect’ cost for TRL.

(c) As well as production costs, TRL incurs other costs, such as those for administrationand selling/distribution. Briefly explain how these non-production costs are treated inthe monthly management accounts.

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Data

The following forecast sales, cost and target profit information relates to size 6gb memory sticks andsize 8gb memory sticks for a period:

Product Size 6gb memory stick Size 8gb memory stick

Forecast sales (units) 60,000 80,000

Marginal cost of production (£) 30,000 40,000

Sales revenue (£) 165,000 240,000

Target profit (£) 67,500 100,000

Total fixed costs (£) 270,000

Fixed costs are apportioned: one third to the size 6gb memory stick and two thirds to the size 8gbmemory stick.

Task 2.2 (18 minutes )

(a) Complete the table below to calculate:

• the budgeted break-even sales, in units, for each of the two sizes of memory stick

• the margin of safety (in units) for each of the two sizes of memory stick

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

• the sales, in units, to achieve the target profit

Product Size 6gb memory stick Size 8gb memory stick

Fixed costs (£)

Unit contribution (£)

Break-even sales (units)

Forecast sales (units)

Margin of safety (units)

Margin of safety (%)

Target profit sales (units)

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Task 2.2 (continued)

(b) Explain which of the two sizes of memory stick has the better margin of safety and why.

(c) Explain whether each of the two sizes of memory stick will achieve their target profit.

Data

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The following information has been produced for three of the company’s sizes of memory sticks:

ProductSize 10gb

memory stickSize 12gb


memory stick

Forecast sales (number of memory sticks) 90,000 80,000 70,000

Total contribution (£) 247,500 320,000 227,500

Total machine hours required 16,500 20,000 18,200

Total labour hours required 11,000 12,800 10,000

The company may have a short-term limitation on:

• the number of memory sticks it can sell, or on

• the number of machine hours it has available, or on

• the number of labour hours it has available. Only one of these three short-term limitations may exist at once.


For EACH of these limitations:

• calculate the contribution per unit of the limiting factor

• rank each product (as first, second or third) in order of its ability to maximise profits for each limitation.

(a) If sales are the limiting factor:

ProductSize 10gb



memory stick

Contribution per unit of the limiting factor

Ranking

(b) If machine hours are the limiting factor:

Product

Size 10gb

memory stick

Size 12gb

memory stick

Size 14gb

memory stick


Ranking

(c) If labour hours are the limiting factor:

ProductSize 10gb



memory stick


Ranking

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Note:Please turn over for task 2.4

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Data

TRL is considering manufacturing a new type of memory stick that will incur capital expenditure of £400,000. The expected life of this product is three years, and at the end of this the capital equipmentwill be sold for £80,000.

The following estimates of capital expenditure, sales and costs have been produced:

Year 0£000

Year 1£000

Year 2£000

Year 3£000

Capital expenditure (400)

Disposal 80

Other cash flows:

Sales income 300 450 250

Operating costs 120 160 90

The company’s cost of capital is 15%.

Present value (PV) factors for a 15% discount rate are:

Year 0 Year 1 Year 2 Year 3

PV factor 1.0000 0.8696 0.7561 0.6575


Calculate the net present value (to 3 decimal places) and the payback period for the proposednew capital investment.

(a) The net present value

Year 0£000

Year 1£000

Year 2£000

Year 3£000

Capital expenditure

Disposal

Sales income

Operating costs

Net cash flows

PV factors

Discounted cash flows

Net present value

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(b) The payback period

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Note:Please turn over for task 2.5

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Company policy is that all investments must pay back within two years.

Using the data given in task 2.4 and your calculations for this task, write a brief report to theManagement Accountant in which you:

(a) recommend whether the proposed new capital investment should be made (based on your

calculations of the net present value and the payback period)

(b)identify TWO commercial factors that are also relevant to this decision

(c) identify and explain ONE other discounted cash flow technique that could be used to

appraise this investment

(d)explain what effect increasing the payback period policy to three years would have on the

viability of this investment.

Report

To: From:

Subject: Date:

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Note:This page is for the continuation of your report. You may not need all of it.

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NVQ/SVQ qualification codes

Intermediate level – 100/2941/2 / G793 23Unit number (ECR) – A/101/8104

QCF qualification codes

Level 3 Diploma – 50041150Unit number (ECR) – Y/103/6447

© Association of Accounting Technicians (AAT) 06.10140 Aldersgate Street, London EC1A 4HY, UK



t: 0845 863 0800 (UK) +44 (0)20 7397 3000 (non-UK)e: [email protected] w: aat.org.uk

mailto:[email protected]

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ECR June 2010 Questions

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