2006 Accounting Higher Solutions Finalised Marking Instructions The Scottish Qualifications Authority 2006 The information in this publication may be reproduced to support SQA qualifications only on a non-commercial basis. If it is to be used for any other purposes written permission must be obtained from the Assessment Materials Team, Dalkeith. Where the publication includes materials from sources other than SQA (secondary copyright), this material should only be reproduced for the purposes of examination or assessment. If it needs to be reproduced for any other purpose it is the centre's responsibility to obtain the necessary copyright clearance. SQA's Assessment Materials Team at Dalkeith may be able to direct you to the secondary sources. These Marking Instructions have been prepared by Examination Teams for use by SQA Appointed Markers when marking External Course Assessments. This publication must not be reproduced for commercial or trade purposes.
2006 Accounting Higher Solutions Question Manufacturing A/C FYE 3 March 2006 Stock of RM at start 24 Add Purchases of RM 40 64 Less Stock of RM at end 20. COST OF RAW MATERIALS CONSUMED 44 0 Add Direct Wages (70%) 40 Royalties 90 2. PRIME COST OF PRODUCTION 374 0 5 Add: Factory Overheads Indirect Wages (0%) 20 Indirect Expenses 70 Rent (3/4) (36 + 4) 30 Insurance (4/5) (50 5) 36 Dep Factory Machinery (0% on cost) 35 9 0 565 0 Add WIP at start Less WIP and end 6-5 3. FACTORY COST OF PRODUCTION 560 0 8 Wholesale Value of Finished Goods 500 4. LOSS ON MANUFACTURE 60 2 2 Trading and Profit and Loss A/S FYE 3 March 2006 Sales 840 5 Less Cost of Sales Stock of FG at start 42 Add Market Value 500 2 542 Less Stock of FG at end 34 508 0 + Warehouse Wages (5%) 0 58 0 5. GROSS PROFIT 322 0 6 Less: Loss on Manufacture 60 2 262 Add: Decrease in Provision 2 + 264 Less: Expenses Wages (5%) 30 Bad Debt 4 Rent (/4) 0 Insurance (/5) 9 Office/Selling 67 Debenture Interest 8 Depreciation Vehicles (20% on reduced balance) 6 44 0 6. NET PROFIT 20 0 Less Corporation Tax @ 25% 30 90 Add Profit and Loss Account 4 94 Less: Proposed Ord. Dividend (5%) 30 7. UNAPPROPRIATED PROFIT C/F 64 0 3 20 Page 2
Question (continued) Balance Sheet as at 3 March 2006 Cost Dep NBV FIXED ASSETS Machinery 350 85 265 Vehicles 00 36 64 329 0 2 CURRENT ASSETS Stocks 70 Debtors 60 Less: Provision 3 57 0 Bank 46 Prepaid 5 78 0 5 Less: CURRENT LIABILITIES Proposed Dividend 30 Creditors 70 VAT 29 Corporation Tax 30 Accruals 4 63 0 5 0 5 NET ASSETS 344 REPRESENTED BY: 200,000 Ordinary Shares of each 200 Profit and Loss Account Balance 64 264 0 Debentures 80 3 344 5 Page 3
Question 2 (a) Current Account Bacall Debit Credit Bal Interest on Capital 3,000 3,000 Partnership Salary 8,000,000 Drawings 7,500 4 3,500 Interest on Drawings,500 2,000 Share of Profit 4,000 2 6,000 Working: Interest on Capital = 3000 = 0% of Capital = 30000 NB: each figure correctly entered in Current A/c receives mark + the award for its calculation (if any) Drawings = 25% of Capital = 25% x 30000 = 7500 0 (b) Bogart: Capital invested = 2: = 30000 x 2 = 60000 Drawings = 25% of Capital = 25% x 60000 = 5000 Share of Profit = 3:2 = 4000/2x3 = 6000 (c) Net Profit Year : Share of Profit Bogart 6,000 Bacall 4,000 0,000 Add: Salary Bacall 8,000 Add: Interest on C Bogart 6,000 Bacall 3,000 9,000 27,000 Less: Interest on D Bogart,500 Bacall 3,000 4,500 Net Profit Year 22,500 8 3 (d) Bacall: Original Capital Balance 30,000 Add: Share of Premium 6,000 36,000 Less: Share of Deficit 8,000 Share of profit = 2/5 x ¾ = 6/20 or = 3/0 or = 30% New Capital Balance 28,000 5 2 (e) Profit Statement Year 2: Sales 225,000 2 Less: Cost of Sales 80,000 Gross Profit 45,000 2 Less: Expenses 27,000 3 Net Profit Year 2 8,000 9 Working: Net Profit Year = 5% of Sales = 22500/5*00 = 50,000 = Sales Year Sales Year 2 = 50,000 + 50% = 75,000 = 225,000 Gross Profit Ratio Year = 25% - 5% = 20% = Gross Profit Ratio Year 2 Exps. Ratio Year = GP Ratio NP Ratio = 25% - 5% = 0% + 2% = 2% = Exps. Ratio Year 2 x sales (f) Year 2 Ratios: Mark-up = Gross Profit/Cost of Sales = 25% Net Profit = Net Profit/Sales = 8% 3 Stock Turnover = COGS/Average Stock = 80,000/ 2,000 = 5 times 5 2 Working: Average Stock Year = 6,000 25% = 4,000 = 2,000 = Average Stock Year 2 40 Page 4
Question 3 Trading and Profit and Loss A/c for Refreshments FYE 3 December 2005 Sales 6000 Less: Cost of Sales Opening Stock 600 Add: Purchases 7500 3 800 Less: Closing Stock 800 7300 0 Gross Profit 8700 0 Less: Staff Wages (9000 x /3) 3000 Net Profit 5700 7 Profit on Dances: Sales 2000 Purchases of Refreshments Expenses 800 Payments 7900 Profit 200 less Opening Creditors -900 7000 Loss on Raffles Sales 360 add Closing creditors 500 Tickets 40 Purchases 7500 Prizes 350 390 Loss -30 Depreciation 20% x 2000 = 400 Profit on Machines Takings 6000 20% x 800 Rent 500 = 36/2 = 80 2 Profit 4500 Total Dep 580 Income and Expenditure Account for Year ended 3 December 2005 Income Subscriptions 2000 Add: Arrears 500 2500 2 Profit on Refreshments 5700 Profit on Dances 200 2 Profit on Machines 4500 2 23900 7 Expenditure Electricity 200 Staff Wages 9000 x 2/3 6000 Rent Premises 0,000 Stationery (90-20) 70 2 Loss on Raffles 30 2 Depreciation Fittings 580 3 7880 Surplus for Year 6020 0 Page 5
Question 3 (continued) Accumulated Fund Jan Fittings 2000 Balance Sheet as at 3 December 2005 Stock 600 Bank 3000 Assets Arrears 300 Fittings (net book value) 3220 5900 Stock of Refreshments 800 Less Creditors 900 Stock of Stationery 20 = Accumulated Fund 5000 Subs in Arrears 500 Cash at Bank (=3000 + 36760 32680) 7080 2 620 Liabilities Accumulated Fund at January 2005 5000 3 Add: Surplus for year 6020 020 Creditors 500 Subs in Advance (2006) 00 620 2 29 Error No Effect Amount Increase 9 2 Decrease 20 3 Nil 0 4 Decrease 300 4 40 Page 6
Question 4 Ordinary Shares are bought by investors who wish to own part of a company and in return receive an annual dividend the payment of which is not obligatory. () They have voting rights () but are last to receive any funds due to them on the liquidation of the company () This makes ordinary shares a more risky form of investment. () 2 marks max Debentures are bought by investors who wish to lend to a company and in return receive annual interest the payment of which is obligatory. () They have no voting rights () and are first to receive the repayment of their loan in the event of liquidation as it is usually secured on a fixed asset. () This makes debentures a safe form of investment. () 2 marks max Articles of Association One of the two main legal documents to be lodged with the Registrar of Companies when wishing to incorporate a limited company.() Deals with internal regulations for the management of the proposed company.() Subordinate to, and controlled by the Memorandum of Association.() Will state the way in which the company is to be administered with particular reference to: 3 marks max matters relating to the raising of capital (), eg borrowing powers or share allotment () directors remuneration and powers () dividends and reserves () holding of meetings () the rights of shareholders () Where the company does not have Articles of its own, the provisions of Table A of the Companies Act become the Articles.() Capital Expenditure Capital and Revenue expenditure must be differentiated for the calculation of profit.() Capital Expenditure is expenditure on the acquisition of assets which are for long term use () (ie more than a year) in the business rather than purchased for resale.() Items of Capital Expenditure are shown in the Balance Sheet, () net of any Depreciation which is written off in the Profit/Loss A/c.() 3 marks max Capital Expenditure can also be expenditure which improves, ie increases the value of an existing asset, () eg building an extension or upgrading existing fittings. () There can be doubt as to whether expenditure is to be treated as capital or revenue, () eg fitting new tyres to a vehicle.() In such cases of doubt it is prudent to write off the expenditure as revenue in the Profit/Loss A/c.() Page 7
Question 4 (continued) Convention of Consistency To enable accounting statements to be used for the purpose of comparison and decisionmaking, () they must always be prepared using the same bases.() Given the uncertainty of economic events and the need to choose from alternative methods of valuation and allocation, accounting insists that, whatever method or interpretation is chosen, it should be retained from year to year, () eg stock valuation using FIFO or LIFO.() If a change is made to a method that provides more accurate or more useful information, () then the effect of that change of method on the profits in that year must be clearly stated.() 3 marks max Rights Issue Method of raising finance by issuing shares to existing shareholders in proportion to existing shareholding eg for every 4 held. () Shareholders have to pay for the shares ie not a bonus issue. () It is a cheap method of raising finance. () Usually done at a discount below the current market price to encourage shareholders to buy. () Appropriate method when company is successful and thus present shareholders will be prepared to invest more. () Shareholders who do not take up the offer to buy may be able to sell the rights to others. () 3 marks max Page 8
Question 5 Advantages of a Partnership More capital is available for expansion () Greater expertise in different areas () Workload is shared () (once) Disadvantages of a Partnership Need for partners to consult before any decision is made () Non-agreement in decision-making can cause serious dispute () Clash of personalities between partners can create poor working atmosphere () Profits have to be shared () Greater potential for success () Potential liability for debts caused by the actions of other partners () Partners can gain limited liability by forming a limited partnership under the Partnership Act of 2000. () However, limited liability partnerships require disclosure of information in a similar way to limited companies () eg notification of changes in membership, filing annual accounts, change of registered address etc mark max for example. Limited liability is not available to sole traders () Page 9
Question 6 (a) Machining Polishing Packaging Cleaning TOTALS No. of Workers 8 2 7 5 32 0 4 Working: Supervision Rate per worker 600/32 = 50 400/ 50 = 8 600/ 50 = 2 350/ 50 = 7 250/ 50 = 5 Percentage Depreciation 5,000/ 50,000 = 8,000/00 2,000 x 0 0% 20,000/0 = 2000 = 800 = 200 Rate per Machine hour 4200/6000 = 70p 3600 x 70p = 2520 2000 x 70p = 400 400 x 70p = 280 Rate per sq. metre (Rent) 3200/8000 = 40p 3500 x 40p = 400 2500 x 40p = 000 500 x 40p = 600 500 x 40p = 200 Rate per sq metre (Cleaning) 750/7500 = 0p 3500 x 0p = 350 2500 x 0p = 250 500 x 0p = 50 OVERHEAD APPOINTMENT TABLE OVERHEAD BASIS OF APPORTIONMENT TOTAL AMOUNT MACHINING DEPT POLISHING DEBT PACKAGING DEPT CLEANING DEPT Supervision Allocated,600 400 600 350 250 Line Rent Area 3,200,400,000 600 200 Depreciation Value of Machinery 5,000 2,000,800,200 - Power Machine Hours 4,200 2,520,400 280 - Indirect Labour Allocated 2,00 830 800 420 50 Line Indirect Material Allocated,820 420 50,000 250 Line Dept. Totals 7,920 7,570 5,750 3,850 750 0 Share of Cleaning Area 350 250 50 PRODUCTION DEPT. Totals 7,920 7,920 6,000 4,000 0 6 RECOVERY RATES MACHINING (machine hrs) POLISHING (labour hrs) PACKAGING (materials) 7,920 6,000 4,000 x 00 3600 2000,000 2.20 2 3.00 2 400% 2 6 26 Page 0
Question 6 (continued) (b) (i) STOCK LEDGER CARD - LIFO DATE RECEIPTS ISSUES BALANCE Q P V Q P V Q P V Apr-0 75 5.00 375 75 5.00 375 Apr-08 60 5.85 35 75 5.00 375 60 5.85 35 Apr-0 40 5.85 234 75 5.00 375 20 5.85 7 Apr-8 20 5.70 684 75 5.00 375 20 5.85 7 20 5.70 684 Apr-25 20 5.70 684 20 5.85 7 40 5.00 200 35 5.00 75 0 7 (ii) Process 2 Account IN Details Quantity Price Value OUT Details Quantity Price Value 4 From Ps 40 9.60 384 To Stores 200 25.00 5,000 Materials 20 5.70 684 Normal loss 4 5.00 60 20 5.85 7 Abnormal loss 6 25.00 400 40 5.00 200 Labour 2,400 Var O/Head 775 Fixed 900 220 5,460 220 5,460 Abnormal Loss Account 5460 Unit Cost = 5460-60 = 25.00 26 2 4 From Ps 2 6 25 400 Sales 6 5.00 240 Loss to P/L 60 400 400 3 24 Page
Question 7 WORKING: Average No. of Customers Working Hours: 25 x 2 x 4 = 200 = Mon Fri Mon Fri = 5 hours x 5 days = 25 8 x 3 x 4 = 96 = Sat Saturday = 8 296 = Weekly Weekly Hours = 33 48 5 No. of Assistants = 4 No of Customers 4208 Total Weekly = 32 No. of Weeks = 48 Annual Working Hours = 6336 Depreciation Charges: Labour Cost: DEP Chairs NBV 2,880 288 Basic Wage = 6 x 25 hours = 50 Depreciation 0% Overtime = 9 x 8 hours = 72 Weekly Wage 222 Dryers NBV 800 80 No. of Assistants x 4 Depreciation 0% Weekly Total 888 No. of Weeks x 48 Basins NBV 580 58 42,624 Depreciation 0% Holiday Hours 3 = 33 x 4 x 4 x 6 3,68 4 Fittings 2000 x 25% 3,000 Total Labour Cost = 45,792 Equipment 200 x 25% 50 Total Depreciation Charge 3,476 Total Annual Operating Costs: Labour 45,792.00 9 Shampoo Cost Bonus = 4208 x 2 28,46.00 2 5 x 4 = 20 bottle per week x 48 = 960/2 = 80 cases Shampoo 2,84.60 4 80 x 35.52 = 284.60 4 Refreshments = 4208 x 40p 5,683.20 2 Disposables = 4208 x 0p,420.80 2 Operating Cost Per Customer 3 Electricity = 6336 x 40p 2,534.40 4 Administration 4,000.00 Total Annual Cost 3,664 Rent 0,000.00 No. of Customers 4208 Insurance,500.00 Cost per Customer 8 Repairs and Cleaning 3,000.00 Laundry 2,500.00 Charge per Customer Advertising 500.00 Depreciation 3,476.00 5 Cost per Customer 8 Loan Interest 20000 x 0% 2,000.00 2 Profit Margin 20% 2 3 Total Annual Cost 3,664.00 Charge per Customer 0 3 3 40 Page 2
Question 8 (a) Dept A Dept B Totals Selling Price 50 62 less: Material 6 20 Labour 30 24 Variable O/H 0 46 8 52 Contributions per unit 4 0 Units sold 2000 3750 (i) Total Contribution 8,000 37,500 45,500 for line less:(ii) Share of Fixed O/H 0,000 5,000 25,000 0 (iii) Profit (Loss) - 2,000 22,500 20,500 for line 4 (b) Dept B Break Even = Fixed O/H 5,000 = 500 Units Units Contribution p u 0 Break Even Value = 62 x 500 = 93,000 Margin of Safety = 3750-500 2250 Units Units M o S Value = 232,500-93,000 = 39,500 Profit on 4000 units = 4000 500 = 2500 x 0 = 25,000 8 (c) P/V Ratio: 4 x 00 = 8.0% 2 Dept A 50 (d) Closure of Dept A: Dept B only: Total contribution = 37,500 Reduction in Fixed O/H Less New Fixed O/H 20000 = 20% x 25000 = 5,000 New Total Profit 7,500 4 Advice: Do NOT close dept A = reduction in profits of 3,000 (e) Current Usage Kgs Order of Production Dept A Dept B A = 2000 x 3 = 6000 B = 3750 x 0 = 37500 Contribution per Unit 4 0 43500 kgs of material 3 0 2 20% Reduction 8700 Available for use 34800 Contribution per kg.33.00 Units to be produced: Dept A has priority with higher cont. per kg. Total Kgs Available for use 34800 (must state reason is higher cont. per kg) Less: Dept A usage 6000 (2000 units) Available for Dept B 28800 Kgs per unit x 0 No of units Dept B usage 2880 3 7 Dept B loses 3750 2880 = 870 units x 0 = 8,700 Reduction in Profit (must show amount of reduction) 40 3 Page 3
Question 9 (a) Variable Costs: are costs which vary, in proportion, with the amount of production that takes place, () eg material and labour. () They are treated as direct costs in calculating the cost of production. () Max marks 2 Semi-variable Costs: are costs which have a fixed element which does not change with the level of activity and a variable element which is affected by the level of activity, () eg telephone charges have a fixed cost: line rental and thereafter the amount of calls made will determine the variable cost. () They are treated as indirect costs when calculating the cost of production. () Max marks 2 (b) Piece Rates are a method of paying workers according to the amount (pieces) of work which they produce, () with higher rates being paid for higher levels of output. () The method is suitable for the production of large quantities of identical products () and it is sometimes used to supplement a low basic pay. () Main advantage: gives workers an incentive to work harder as higher output = higher wages. () Main disadvantage: quality of work may decline with workers trying to maximise their wages. () Max marks 3 Bin cards are used in warehouses and stores to control stock levels. () They show the following details: stock code number, description of item, supplier, maximum/ minimum and re-order stock levels, re-order quantities, delivery time, quantities received, issued and current balance.() Amendments to the bin card are made by the shopkeeper in charge of stores. () Max marks 3 Job Costing is used to determine the cost price of a single job or unit or one-off piece of work () which is produced according to the customer s specifications, () eg building and installing kitchen units. () Material, Labour, and Overhead Costs are estimated and charged to each job in advance of the work being done. () A percentage for profit is added to the total cost of the job and the final selling price is quoted for the customer to accept or reject. () Max marks 3 Opportunity Cost usually arises when a firm is working at full capacity () and the introduction of a new product involves a reduction in the amount that can be made of an existing product, () eg in the case of a firm deciding whether to make or continue to buy a component part. () The actual cost of the new product will include an extra or opportunity cost equal to the contribution that is lost by making less of the existing product. () Once the opportunity cost is added, the firm may find that the total cost of the new product makes it less profitable to produce than the existing product.() Max marks 3 Page 4
Question 0 Benefits of Budgeting: aids decision-making, eg capital expenditure anticipates possible shortages, eg cash enables target setting, eg to achieve objectives allows for comparisons, eg actual results with expected results facilitates corrective action, eg when differences occur Max marks 4 Factors to consider: Production Budget: Material cost, labour cost, factory overhead costs Shortage of raw materials, shortage of labour, machinery breakdowns Lack of storage space, strikes, etc. Max marks 3 Cash Budget: Receipts from cash sales and debtors Payments: Capital Expenditure and Revenue Expenditure Reduction in cash sale, slow payment by debtors Inability to borrow money (loan or overdraft), overspending, etc. Max marks 3 [END OF MARKING INSTRUCTIONS] Page 5