ACCA Certified Accounting Technician Examination Paper T7. Section A. 2 C ($200,000 ($200, x 0 15)) = $50,000

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2 ACCA Certified Accounting Technician Examination Paper T7 Planning, Control and Financial Management December 2009 Answers Section A 1 A 2 C ($200,000 ($200, x 0 15)) = $50,000 3 D 4 B $3,600 (200 units x $3) = $3,000 5 C (200 x x 21) (200 x x 20) x 100 = B 7 C 8 C 9 C 10 D $15 x x = $

3 Section B 1 (a) Flexed budget Output Budget 35,000 units $ Sales revenue (w1) 700,000 Less: Direct materials (w2) 420,000 Direct labour (w3) 87,500 Indirect labour (w4) 22,500 Indirect materials (w5) 6,000 Profit 164,000 Workings W1 $400,000 20,000 units x 35,000 units = $700,000 W2 A variable cost: $240,000 20,000 units x 35,000 units = $420,000 W3 A variable cost: $50,000 20,000 units x 35,000 units = $87,500 W4 A semi-variable cost: Variable cost per unit = change in cost $25,000 $15,000 = change in volume 40,000 units 20,000 units = $0 50 per unit Fixed cost per month Total cost = fixed cost + variable cost At 40,000 units: $25,000 = fixed cost per month + $0 5 x 40,000 units $25,000 = fixed cost per month + $20,000 Fixed cost per month = $5,000 Indirect labour cost at 35,000 units = $5,000 + (35,000 units x $0 5 per unit) = $22,500 W5 Indirect materials are a fixed cost that does not change with volume. (b) Flexed budget variances November 2009 Budget Actual Variance Output units 35,000 35,000 $ Sales revenue (w1) 700, ,000 35,000 favourable Less: Direct materials (w2) 420, ,000 10,000 adverse Direct labour (w3) 87,500 80,000 7,500 favourable Indirect labour (w4) 22,500 31,000 8,500 adverse Indirect materials (w5) 6,000 6, adverse Profit 164, ,500 23,500 favourable (c) Meaning of terms A fixed budget A fixed budget is a financial expression of a plan of action based upon a single activity level. A flexible budget A flexible budget is a financial expression of a plan of action, which by recognising cost behaviour patterns, is designed to change as the volume of activity changes. Importance of calculating variances from flexible budgets Variances show the difference (adverse or favourable) between actual results and budgets and are used in measuring and controlling performance. In calculating variances it is important that like is compared with like. This is particularly true in the case of variable costs. If output level is, for example, higher than originally forecast, we would expect variable costs such as direct materials to be higher than we originally anticipated, simply because we have produced more output. By flexing the budget we can allow for changes in costs caused by changes in volume. A variance calculated against the flexed budget will therefore exclude changes caused by changes in volume, leaving only variances due to efficiency and price effects. 12

4 2 (a) Ratios and statistics (i) Return on capital employed Operating profit capital employed x 100 $600,000 $4,000,000 x 100 = 15% (ii) Return on sales (net profit percentage) Operating profit Sales revenue x 100 $600,000 $3,600,000 x % (iii) Asset turnover Sales revenue capital employed $3,600,000 $4,000, times (iv) Average maximum bus capacity Total number of passenger seats available number of buses 1,920 seats 40 buses 48 seats per bus (v) Average bus occupancy Total number of passenger km travelled (Total km travelled x Average maximum bus capacity) 39,000,000 km (3,250,000 x 48 seats) x 100% 25% of maximum capacity (vi) Average km travelled per litre of fuel Total km travelled Total fuel consumed 3,250,000 kilometre 764,705 litres 4 25 km/litre (vii) Average fuel consumption per passenger kilometre Total fuel consumed Total number of passenger kilometres travelled 764,705 litres 39,000,000 passenger kilometres litres per passenger km (viii) Average number of fatal accidents per million passenger kilometres Fatalities Total number of passenger km travelled 1 39 m passenger kilometres fatalities per million passenger km (b) (c) Reasons why Vin Co s fuel consumption per passenger kilometre is higher than the industry average. Vin Co s buses operate at only 25% capacity, this means that the fuel cost per bus km is spread over fewer passengers Vin Co s kilometres travelled per litre of fuel is lower than the industry average. This could be due to it operating a city service. Even if it operated at industry average levels of bus occupancy its fuel consumption per passenger kilometre would still be higher. Meaning of terms Internal benchmarking refers to comparisons being made between divisions of the same company. If Vin Co operated bus services in other cities it could compare their performances. Functional benchmarking (also known as operational or generic benchmarking) involves comparisons with the performance of external practitioners of similar functions. These practitioners need not be in the same industry. Vin Co could, for example, compare the fuel consumption of its vehicles with those of a road haulage company. Competitive benchmarking involves comparisons with the performance of a direct competitor. In the case of Vin Co, a comparison could be made with the performance of another operator in the same city. This may prove difficult as the information required is often commercially sensitive and may be difficult to acquire. Strategic benchmarking takes place at the highest levels of performance measurement (such as company-wide return on capital employed, market share etc) and is aimed at prompting strategic change. Strategic benchmarking seeks to compare the strategies of the originator with those of competitors, in order to more closely identify where competitive threats and opportunities may lie in the longer term. 3 (a) Standard cost variances Direct materials Actual kg at actual price $41,000 Price variance > $1,000 fav Actual kg at standard price 4,200 kg x $10 per kg $42,000 Usage variance > $2,000 adverse Standard usage at standard price 2,000 units x 2 kg per unit x $10 per kg $40,000 13

5 Direct labour Actual hours at actual rate $130,000 Rate variance > $10,000 adverse Actual hours at standard rate 10,000 hours x $12 per hour $120,000 Efficiency variance > $24,000 adverse Standard hours at standard rate 2,000 units x 4 hours per unit x $12 per hour $96,000 Tutorial Note Variance calculations can be presented in alternative ways. For example the direct materials price variance could be calculated as (Standard price actual price) x actual usage. This is equally acceptable and would get full credit. (b) (i) Idle time and revised efficiency variances Actual hours paid at standard rate 10,000 hours x $12 per hour $120,000 Idle time variance > $26,400 Adverse Actual hours worked at standard rate 7,800 hours x $12 per hour $93,600 Revised efficiency variance >$2,400 fav Standard hours at standard rate 2,000 units x 4 hours per unit x $12 per hour $96,000 (ii) Meaning of variance Idle time variances are caused by workers being paid while they are not working. In this situation hours paid exceed hours worked and the idle time variance is the difference between these two figures evaluated at the standard wage rate per hour. (iii) Eliminating idle time variances Idle time variances are caused by paying workers whilst they are not working. This is commonly due to late delivery of materials or machine breakdowns. They can be eliminated in several ways. If the company employed its workers on a piecework basis, then no wage cost would be incurred whilst workers were idle. As idle time is usually outside the control of the workforce and this could be considered ethically unacceptable. Secondly management could take steps to prevent idle time occurring. These could include: Carrying high levels of raw material and work in progress inventory to protect against late deliveries or machine breakdowns. Including clauses in supplier contracts whereby the supplier bears any costs which may be caused to the company due to late deliveries. Taking steps to avoid machine breakdowns, such as regular maintenance programmes etc. Thirdly an allowance for idle time could be built into the standard labour cost. (only two actions were required) 4 (a) (i) Full production cost of one unit of finished goods $ per unit Direct labour (W1) 20 hours x $12 per hour 240 Direct material (W2) 10 kg x $80 per kg 800 Production overhead Drilling 2 drill operations x $150 per operation 300 Parts administration 4 parts used x $50 per part 200 Full production cost 1,540 Working 1: 120,000 hours 6,000 units = 20 hours per unit Working 2: 60,000 kg 6,000 units = 10 kg per unit (ii) Valuation of closing finished goods inventory 1,000 units x $1,540 per unit = $1,540,000 14

6 (b) (c) (d) Budgeted income statement Budgeted income statement for the year ending 31 December $000 $000 Sales (5,000 units at $2,000 per unit) 10,000 Less: Opening inventory of finished goods nil Variable production costs (6,000 units produced): Direct labour 120,000 hours at $12 per hour 1,440 Direct material 60,000 kg at $80 per kg 4,800 Fixed production overheads 3,000 Closing inventory of finished goods (1,000 units) (1,540) Full production cost of sales 7,700 Profit 2,300 Explanation of the differences in profit. Under marginal costing principles, finished goods inventory is valued at variable production cost. This results in $1,040,000 of the year s variable production cost being accrued until next year. Under activity based costing (ABC) principles finished goods inventory is valued at variable production cost plus an element of fixed overhead. This results in $1,540,000 of the year s production cost being accrued until next year. The higher closing inventory value under ABC, coupled with the lack of opening inventory, results in a lower cost of sales and a higher profit. Benefits of activity based costing. For multi-product companies ABC can give more accurate product costs by more accurately reflecting the activities performed in producing the products. The improved product costing should allow the identification of unprofitable products and services. ABC cost driver rates can be useful in product design. If designers are aware of the activities that cause overhead costs they can attempt to design these features out of products. It gives a better understanding of the causation of overheads which should help in the control of costs. By controlling the activities that cause cost, managers can control overheads. ABC cost driver rates are useful in budgeting. By forecasting driver activity, managers are then able to forecast overhead expenditure. (only three benefits were required) 15

7 ACCA Certified Accounting Technician Examination Paper T7 Planning, Control and Financial Management 1 (a) Sales revenue 1 Direct materials 1 Direct labour 1 Indirect labour Approach 2 Variable cost per unit 2 Fixed cost per month 2 Indirect materials 1 Marks 10 December 2009 Marking Scheme (b) 0 5 mark per variance 3 (c) fixed budget 2 flexed budget 2 importance of flexed (a) ROCE 1 ROS 1 Asset turnover 1 Average bus capacity 1 Average bus occupancy 2 Average km per litre of fuel 1 5 Average fuel per passenger kilometre 1 5 Fatalities per passenger kilometre 1 10 (b) 1 mark per reason 2 (c) 2 marks per explanation (a) 2 5 marks per variance 10 (b) (i) 2 5 marks per variance 5 (ii) 2 per explanation 2 (iii) 1 5 per action

8 Marks 4 (a) (i) labour cost 1 5 material cost 1 5 drilling cost 1 5 parts cost (ii) units 1 (b) correct profit 1 layout 2 (c) different stock valuations 2 different cost of sales (d) 2 marks per point, max