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Examiners commentaries 2016

AC1025 Principles of accounting
Important note
This commentary reflects the examination and assessment arrangements for this course in the
academic year 201516. The format and structure of the examination will change in 2017. Please see
page 3 of this document.
Information about the subject guide and the Essential reading

references
Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2015).
You should always attempt to use the most recent edition of any Essential reading textbook, even if
the commentary and/or online reading list and/or subject guide refer to an earlier edition. If
different editions of Essential reading are listed, please check the VLE for reading supplements if
none are available, please use the contents list and index of the new edition to find the relevant
section.
General remarks
Learning outcomes
At the end of this course and having completed the Essential reading and activities, you should be
able to:
distinguish between different uses of accounting information and relate these uses to the
needs of different groups of users
explain the limitations of such statements and their analysis
categorise cost behaviour, and prepare and contrast inventory valuations under different
costing methods
describe the budgeting process and discuss the use of budgets in planning and control
explain, discuss and apply relevant techniques to aid internal users in decision-making.
What the examiners are looking for
The examination paper covers a range of financial and management accounting topics, all of which
the well-prepared candidate will have studied. The questions are designed to encourage candidates
to think about the theories and principles of accounting and to demonstrate their ability to apply
relevant concepts in a variety of situations or to a given set of informatrion. Where appropriate,
questions are subdivided to help candidates answer in a logical manner. The examination will
always include questions designed to test candidates ability in interpretation and analysis of
financial information.
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The rubric of the examination paper is set out on the front cover and you should ensure that you
precisely follow these instructions. It is very important that you do not waste time and effort in
answering more questions than is required, as marks will only be awarded to the correct number of
questions. You are advised to read all of the questions before deciding which to answer in each
section. Time allocation is an important factor in accounting examinations. You should decide how
much time to spend on each question, based on the overall marks for the question and for each
section, and you should then adhere to these time allocations. The format of the examination
requires you to answer Question 1 of Section A, which is in four parts. It is important that you
allocate your time on this question so that you attempt all of the four parts. You are then required
to answer Question 2 of Section B, and two further questions, one from Section C and one from
either Section B or C. Please note that failure to comply with these requirements may result in some
of your work not being marked.
The rubric of the examination states that workings must be submitted for all questions requiring
calculations., The importance of this cannot be overstated, as in the absence of workings, simple
arithmatic errors cannot be distinguished from errors of principle and understanding. Thus the
absence of workings will very often lead to an over-penalisation of errors. Of course, arithmetic
errors may in some instances result in some loss of marks, and you should always be careful to check
your calculations. The rubric also states that any necessary assumptions introduced into answering a
question should be stated. If you do not understand what a question is asking (a circumstance the
examiners endeavour to avoid), then you must state any consequent assumptions that you have
made. Even if you do not answer in precisely the way the examiners had hoped, you may get a good
mark providing your assumptions are reasonable. The most frequent reason for failing to do well in
the examination, apart from lack of knowledge, is not answering the question actually set. You
should take time to read each question carefully, and then attempt to answer everything that the
examiner requires. Far too many candidates include every scrap of knowledge they have on a topic
without specifically addressing the question and this can have a disastrous effect on their marks.
Read the question carefully and tailor your answer to precisely what it asks and you should do well.
Accounting is a progressive subject where it is essential to understand a particular topic before you
go on to the next. Make sure that you understand the basic concepts and can apply them in an
appropriate manner so that there is a logical structure to your answers. Do not write something that
you do not understand for, if you do, you are likely to produce a muddled response. In answering
computational questions, think carefully about the layout and logical progression of your answer
before writing and set out your answer in a structured and easily readable format. You will be
rewarded for an appropriate, logical and sensible method even if the figures contain errors. The
subject guide and textbook contain numerous worked examples, which you should have studied
carefully, and practice questions with solutions which should form a key part of your study and
revision.
You will find 8-column accounting paper is incorporated into the answer booklet. It may be
particularly useful where tables of figures are required because it keeps answers neat and saves ruling
lines for different columns. You are strongly advised to practise using it while you are preparing
answers as part of your study of accounting. A sheet is available to download from the AC1025
Principles of accounting page of the VLE and you can print off as many sheets of the paper as
you need.
This subject does not require a lot of reading beyond the core text of Leiwy D. and R.E. Perks
Accounting: understanding and practice (Maidenhead: McGrawHill, 2013) fourth edition [ISBN
9780077139131], but it is essential that you adopt an approach of thorough study, plenty of practice
answering questions and an ability and willingness to think logically. All major topics are covered at
the appropriate level in the recommended text by Perks and Leiwy and others are covered in the
subject guide. References presented in the Comments on specific questions Zone A and Zone B
indicate where certain topics may be found in the current edition of the subject guide (2015), which
is an essential part of the study material for this course. You are also encouraged to read the
financial press including accounting journals and listen to, or watch, financial programmes and visit
appropriate websites. This will enable you to keep abreast of current issues and help you to develop
your ideas and opinions about them.
2
Announcement of changes of examination format
There will be a major change to the way we conduct the examination for AC1025 Principles of Accounting in
May 2017. There is no change to the underlying principles governing our expectations which are described in
the above section but there will be a change in method.
The objective of the changes is to make the coverage of the syllabus more extensive whilst enabling students to
more effectively and directly demonstrate their knowledge of the material. The purpose of the current
compulsory Section A Question 1 was to test basic material or the first level of knowledge. The longer
questions are devoted to the examination of the higher level of understanding: the command of the material.
This objective has not been altered but instead of having to answer three short questions which, naturally, do
not cover the entire syllabus, we will replace these questions with 20 multiple choice questions. Overall the
structure of the paper remains unchanged but there will be a change in the allocation of marks consequent to
the change in Section A.
Therefore, the new examination will have three sections. Section A will consist of 20 multiple choice questions
covering the entire syllabus in financial and management accounting. In Section A I you will need to answer
all the questions for which the maximum mark will be 30.
Section B consists of questions on financial accounting. Question 1 is compulsory and is worth 30 marks and
it will be similar to the the current Question 2 requiring preparation of financial statements from a trial
balance with adjustments, the question will include an additional section which will ask for a short essay
explaining financial accounting principles or concepts. In Section B there will be two further financial
accounting questions of the same kind as Questions 3 and 4 in the current format but will reflect the fact that
they are worth 20 marks.
Section C consists of the longer questions in management accounting. There will be three questions of the
same kind as Questions 6 to 8 in the current format and you will be asked to answer one question in this
section. Again the questions will reflect the fact the questions are now worth 20 marks.
You will then need to answer one further question from either Section B or C.
In summary the allocation of marks will be:
Section A (20 MCQs) 30 marks

Section B
Question 1 30 marks
Questions 2 and 3 20 marks each
Section C
Questions 4, 5 and 6 20 marks each.
Compared to the current scheme, Question 1 will be slightly longer (30 marks) and this will result in
an additional part of the question (5 marks) which will require discussion of principles or concepts.
Questions 2 through to 6 will be slightly shorter (20 marks) and this will result in questions with
fewer complications or sections of the question.
The rubric for Part 1 of the examination will read as follows:
Section A of the examination which consists of 20 Multiple Choice Questions. You should attempt to
answer ALL the questions. Each question has four possible answers (a-d). There is only one correct answer
to each of the questions. Please mark the correct answer on the special sheet provided. The maximum
mark for this part is 30.
Sections B and C. Please answer QUESTION 1 (30 marks) of Section B; ONE question from Section C and
ONE further question from either section B or C (except for Question 1 all questions are worth 20 marks).
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Examples of Multiple choice questions (MCQs)
Here are examples of what questions in Part I will look like.
Question 1
What are the correct Statement of Financial Position (Balance Sheet) categories for
the following?
Amounts due to suppliers, goodwill, reserves.
A Non-current Asset, Current Asset, Current Asset.

B Current Liability, Current Asset, Non-current Asset.
C Non-current Asset, Equity, Current Asset.
D Current Liability, Non-current Asset, Equity.
Question 2
The capital employed (non-current liabilities plus equity) of a company at the start
of a period are 600,000. During the period the following transactions occur:
Cash received from accounts receivable (debtors) of 55,000.

Sale of inventory (stock) for 90,000 on credit the inventory had cost 75,000.
A 5-year bank loan of 50,000 is arranged and the cash received.
An unexpected bad debt of 5,000 is written off.
The new figure for capital employed is:
A 735,000.
B 660,000.
C 610,000.
D 600,000.
Question 3
XD plc constructs its accounts at the end of December and charges depreciation on
a straight line basis at that date. It acquired a machine on 1st January, 2014 for
70,000 and the directors believe the machine will last until 31st December 2020
when it will be scrapped for 14,000. What will be the net book value (cost less
accumulated depreciation) of this machine on 31st December, 2018?
A 10,000.
B 20,000.
C 30,000.
D 32,000.
Question 4
A company sells its product at 80 per unit and the variable cost per unit sold is
30. It currently sells 2,000 units per month and obtains a net profit per month of
20,000. What profit will the company achieve next month if it decides to reduce its
fixed costs by 4,000 per month, increase its selling price to 85 per unit and
consequently only sell 1,800 units?
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A 27,500.
B 23,000.
C 19,000.
D 15,000.
Question 5
Which ONE of the following describes a cost centre?
A Function or location for which costs are ascertained and related to cost units.
B Amounts of expenditure attributable to various activities or products.
C Units of a product or service for which costs are ascertained.
D A section of an organisation for which budgets are prepared and costs
controlled.
Question 6
An investment project requires an initial cash investment of 600,000. The expected

cash inflows are as follows: Year 1 300,000; Year 2 200,000; Year 3 200,000; Year
4 100,000. If cash flows are expected to occur evenly throughout the project what
is the payback period?
A 2 years 3 months.
B 3 years.
C 2 years 6 months.
D 2 years 4 months.
Solutions to example multiple choice questions
Question 1
Amounts due to suppliers are a current liability; goodwill is a non-current asset; reserves are part of
equity.
Correct answer is D.
Question 2
Capital Employed at start = 600,000

Cash received from debtor no change in CE
Sale at a profit +15,000
Bank loan (non-current liability increase) +50,000
Bad debt write off (loss) 5,000
Capital employed at end = 660,000
Correct answer is B.
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Question 3
Depreciation = (70,000 14,000) 7 = 8,000 per annum.
NBV at 31/12/18 = 70,000 (5 8,000) = 30,000.
Correct answer is C.
Question 4
Current contribution = (85 30) 2,000 = 100,000.
Fixed costs = 100,000 20,000 = 80,000.
Proposed contribution = (85 30) 1,800 = 99,000.
Expected profit = 99,000 (80,000 4,000) = 23,000.
Correct answer is B.
Question 5
Correct answer is A.
Question 6
Accumulated cash flow after 2 years is 500,000, therefore payback is (100k/200k) half way through
year 3.
Correct answer is C.
Note: Workings will not be marked for MCQs the answers will be entered on a
pre-printed sheet supplied in the examination. There will not be negative marking
you will get marks for all correct answers without deduction for wrong answers.
Examination revision strategy
Many candidates are disappointed to find that their examination performance is poorer than they
expected. This may be due to a number of reasons. The Examiners commentaries suggest ways of
addressing common problems and improving your performance. One particular failing is question
spotting, that is, confining your examination preparation to a few questions and/or topics which
have come up in past papers for the course. This can have serious consequences.
We recognise that candidates may not cover all topics in the syllabus in the same depth, but you
need to be aware that the examiners are free to set questions on any aspect of the syllabus. This
means that you need to study enough of the syllabus to enable you to answer the required number of
examination questions.
The syllabus can be found in the Course information sheet in the section of the VLE dedicated to
each course. You should read the syllabus carefully and ensure that you cover sufficient material in
preparation for the examination. Examiners will vary the topics and questions from year to year and
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may well set questions that have not appeared in past papers. Examination papers may legitimately
include questions on any topic in the syllabus. So, although past papers can be helpful during your
revision, you cannot assume that topics or specific questions that have come up in past examinations
will occur again.
If you rely on a question-spotting strategy, it is likely you will find yourself in difficulties
when you sit the examination. We strongly advise you not to adopt this strategy.
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Important note
This commentary reflects the examination and assessment arrangements for this course in the

references
section.
Comments on specific questions Zone A
Candidates should answer FOUR of the following SEVEN questions: QUESTION 1 of Section
A, QUESTION 2 of Section B, ONE question from Section C and ONE further question from
either Section B or C. All questions carry equal marks.
Workings should be submitted for all questions requiring calculations. Any necessary assumptions
introduced in answering a question are to be stated.
Section A
Answer question 1 from this section.
Question 1
(a) Laertes Distributors Ltd began business on 1st July 2015 as distributors of a
single product.
The directors plan to publish the first set of accounts for a six month period in
order to establish the accounting year as 31st December each year.
The following data show the trading transactions for the six months to 31st
December 2015.
2015 Purchases Sales
July 20 units at 1,000 each
August 40 units at 900 each
September 25 units
October 20 units at 1,100 each
November 10 units at 700 each
December 10 units at 1,200 each 40 units
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The December sale occurred before the purchase in that month. The cost of a
sale is calculated whenever a sale is made.
Required:
Using only the data in the table above, calculate the cost of sales and closing
stock figures for inclusion in the accounts for the six months to 31st December
2015 under both the FIFO and LIFO assumptions.
(6 marks)
Reading for this question

Subject guide, Chapter 4.
Leiwy D. and R.E. Perks (2013), Chapter 16 pp. 38384 (hereafter referred to as L&P).
Approaching the question
This module requires an understanding of different stock valuation costing methods. This
question requires the application of common methods to a data set in order to calculate
both cost of sales and closing stock.
Laertes Distributors Ltd:
FIFO Cost of sales
September sale: 20 at 1,000 20,000 24,500
5 at 900 4,500
December sale: 35 at 900 31,500

5 at 1,100 5,500 37,000
Total 61,500
Closing stock 15 at 1,100= 16,500

10 at 700 = 7,000
10 at 1,200 = 12,000 35,500
LIFO Cost of sales

September sale: 25 at 900 = 22,500
December sale: 10 at 700 = 7,000

20 at 1,100 = 22,000
10 at 900 = 9,000 38,000
Total 60,500
Closing stock 20 at 1,000 = 20,000
5 at 900 = 4,500
10 at 1,200 = 12,000 36,500
(b) Explain the objective of published financial statements and identify the two
principal characteristics of financial statements which contribute to achieving
this objective.
(6 marks)

L&P (2013), Chapter 3 pp. 5861.
Understanding of the objectives and characteristics of financial statements is a fundamental
conceptual underpinning to this course. Answers which discuss the content of financial
statements (income, assets) or the format (Income Statement, Cash Flow Statements) did
not address the issue raised in the question.
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Objective answers should explain that financial statements should provide information
that users (investors, lenders and creditors) need in making decisions about the reporting
entity.
Qualitative characteristics relevance good answers will explain predictive and
confirmatory value.
Faithful; representation (or reliability) good answers will explain comparability and
understandability.
(c) In the context of cost-volume-profit analysis explain the meaning, and give an
example, of each of the following terms:
i. Non-linear variable costs
ii. Stepped fixed costs
iii. Relevant range
(6 marks)

L&P (2013), Chapter 17.
Candidates need to understand cost behaviour in relation to activity level changes and how
this impacts on CVP analysis. This question requires explanation of some related terms and
that an example be given for each. Many candidates were insufficiently careful in their
explanations and many failed to give examples.
i. Non-linear variable costs vary with volume of activity but with a cost per unit which is
different for different levels of activity.
Example: Direct material where there are discounts available for larger orders.
ii. Stepped fixed costs are those which do not vary with volume of activity between two
levels of activity but which at the higher level will require an extra resource.
Example: Rental of storage facility which has a maximum capacity after which a new
facility will have to be rented.
iii. The relevant range is the range of outputs over which the assumption that a cost-volume
relationship is a linear relationship is realistic.
Example: A firm may determine variable and fixed costs which will be realistic between
10,000 and 15,000 units, outside of this range these costs will no longer behave in the
assumed linear fashion.
(d) Gertrude operates a small hotel. The hotel has rooms for 30 guests over an
operating season of 40 weeks. The budgets for the year ended 30th June 2016
have been prepared using the following data:

Weekly income per guest 2,200
Variable weekly cost per guest 1,200
Fixed costs per annum 400,000
The company has in the past expected an average room occupancy over the
season of 60% of total capacity. Gertrude is concerned about future falls in
demand.
Required:
i. Calculate the total contribution and net profit for the year to 30th June 2016
if past occupancy rates are maintained.
ii. Calculate the break-even point in guest weeks and margin of safety based on
i. expressed in percentage terms.
(7 marks)
10
L&P (2013), Chapter 17.
A key learning outcome of this course is to apply decision-making techniques using a given set of
information. This question required calculation of contribution, net profit, break-even and
margin of safety for a small hotel. The information was straightforward and a well prepared
candidate should have found little difficulty if the data were used carefully. Note that the answer
was required in specific form, for example margin of safety in percentage terms.
i.
Total contribution 720 1,000 720,000
Fixed costs 400,000
Net profit 320,000
ii.
Break even point (400,000)/(1,000) 400 guest weeks
Margin of safety ((720 400)/720) 100 = 44%
Workings:
Contribution per guest week (2,200 1,200) 1000
Room occupancy (guest weeks) (30 40) 60% 720
Section B
Answer question 2 and not more than one further question from this section.
Question 2
Ophelia Ltds trial balance as at 31 October 2015 is shown below.
000 000
Share capital Ordinary shares of 1 20,000
Share premium 5,000
Trade payables 2,798
Land and buildings cost 35,152
Land and buildings accumulated depreciation at 1 November 2014 7,000
Plant and equipment cost 12,500
Plant and equipment accumulated depreciation at 1 November 2014 7,400
Trade receivables 5,436
Accruals, at 31 October 2015 436
8% bank loan repayable in 10 years 15,000
Cash at bank 9,774
Retained earnings 9,801
Interest paid 600
Sales 58,411
Purchases 41,620
Distribution costs 5,443
Administrative expenses 4,789
Inventories at 1 November 2014 9,032
Dividends paid 1,500
125,846 125,846
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Further information
1. The inventories at the close of business on 31 October 2015 were valued at

7,878,000.
2. Depreciation is to be provided for the year as follows:
Buildings 2% per annum straight line basis
Plant and equipment 20% per annum reducing balance basis
Depreciation is apportioned as follows:
%
Cost of sales 40
Distribution costs 40
Administrative expenses 20
Land, which is non-depreciable, is included in the trial balance at a cost of
15,152,000.
3. The company began a series of television adverts for the companys range of
products on 1 October 2015 at a cost of 45,000. The adverts were to run for
three months and were to be paid for in full at the end of December 2015.
Advertising expenses are to be included in distribution costs.
4. Interest on the bank loan for the last six months of the year has not been
included in the accounts in the trial balance.
5. Tax on profits for the year has been calculated as 970,000.
6. Management has decided that a provision for bad debts of 5% of trade
receivables should be set up and charged to administrative expenses.
7. Ophelia Ltd paid an insurance premium for annual cover up to 30 June 2016.
The cheque for 45,000 was incorrectly treated as a supplier payment.
Insurance is an administrative expense.
8. Ophelia Ltd proposed an ordinary dividend of 10p per ordinary share on 31
October 2015.
Required:
Prepare the following financial statements for Ophelia Ltd.
(a) Income statement for the year ended 31 October 2015.

(10 marks)
(b) Statement of changes in equity for the year ended 31 October 2015.
(3 marks)
(c) Statement of financial position as at 31 October 2015.
(12 marks)
Subject guide, Chapters 4, 5 and 6.
L&P (2013), Chapter 10.
The preparation of final accounts from structured information is a key learning outcome. A trial
balance with several adjusting items has been the format for the compulsory question over recent
years. In answering this type of question a methodical and organised approach is needed. It is
very important that detailed, legible workings are given in order that marks are awarded for all
work which is correct. If figures in the final accounts comprise a number of items, marks will be
awarded accordingly. Without workings one error may result in several marks being lost. The
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candidates should allow examiners to award all appropriate marks. The 8-column accounting
paper provided is particularly useful for presenting the financial statements. You should pay
attention to the presentation of your answer, taking care to use the appropriate descriptions of
line items in the income statement and statement of financial position. The format of the
statement of changes in equity should follow best practice.
(a) Ophelia Ltd.

Income Statement for the year ended 31 October 2015
000
Sales 58,411
Cost of Sales (W1) (43,342)
Gross Profit 15,069
Distribution costs (W2) (6,026)
Administrative expenses (W2) (5,360)
Profit before Interest and Tax 3,683

Finance costs (8% 15,000) (1,200)
Profit before tax 2,483
Tax (970)
Profit for year 1,513
(b) Statement of changes in equity for year ended 31 October 2015
Share Share Retained Total

Capital Premium Earnings
000 000 000 000
As at 1/11/2014 20,000 5,000 9,801 34,801
Profit for year 1,513 1,513
Dividends paid (1,500) (1,500)
As at 30/10/2015 20,000 5,000 9,814 34,814
(c) Statement of financial position at 31 October 2015
000
Assets
Non-current assets
Property, Plant and equipment (W3) 31,832
Current assets Inventories (W1) 7,878
Trade receivables (5,436 272) 5,164
Prepayments (45,000 8/12) 30
Cash and cash equivalents 9,774
22,846
Total assets 54,678
Equity Share capital 25,000
Total equity 34,814
Non-current liabilities Bank loan 15,000

Current liabilities
Trade payables (W4) 2,843
Accruals (W5) 1,051
Tax liabilities 970
4,864
Total liabilities 19,864
Total equity and liabilities 54,678
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Workings
1. Cost of Sales
000
Opening Inventories 9,032
Purchases 41,620
Depreciation (40% 1,420 (W3)) 568
Closing Inventories (7,878)
43,342
2. Allocation of costs
Administrative Distribution
expenses costs
000 000
Per TB 4,789 5,443
Accrual (45,000 1/3) 15
Depreciation (1,420 20%, 40% (W3)) 284 568
Insurance (45,000 4/12) 15
Bad debt provision (5,436 5%) 272
5,360 6,026
3. Property, plant and equipment
Land Buildings Plant and Total
equipment
000 000 000 000
Cost at 1 Nov 2015 15,152 20,000 12,500 47,652
Accumulated depn at 1 Nov 2015 (7,000) (7,400) (14,400)
Charge (20,000 2%)
(12,500 7400) 20%) (400) (1,020) (1,420)
Net Book Value 15,152 12,600 4,080 31,832
4. Payables
000
Per TB 2,798
Insurance cheque* 45
2,843
*Expenses = 15 : Prepayments = 30
5. Accruals
Per TB 436
Advertising 15
Interest 600
1,051
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Question 3
Yorick Ltd.
The following are the draft financial statements for Yorick Ltd for the year ended 31
December 2015.
Income Statement for the year ended 31 December 2015

beginning 6713500
disposal (560500)
Revenue 7,350,500
Depreciation(750600)
Cost of sales (4,560,600)
Gross profit 2,789,900 Addition 10000
Administrative expenses (1,060,800) Cash 1573000
Distribution costs (768,000)
Ending 6985400
Profit from operations 961,100 beginning6713
Finance charge (75,000) + 7000-5000 =$77000 disposal (5605
Profit before tax 886,100 depreciation (7
Income tax expense (350,000)
Profit for the period 536,100 ending 698540
Statements of Financial Position as at 31 December

2015 2014

ASSETS
Non-current assets
Property, plant and equipment 6,985,400 6,713,500
Intangible assets beginning 300500 350,700 300,500
add: 77500 7,336,100 7,014,000
Current assets
Inventories impairment (15000)560,500 765,100
Trade receivables Amortization (12300)
169,000 144,500
Investments ending 350700 25,000
35700
12,400 total 32600
Cash and cash equivalents 10,700 20,200
Share Premium 950000 765,200 942,200
Bonus (35000) Total assets 8,101,300 7,956,200
issue 285000 EQUITY AND LIABILITIES
Capital and reserves
ending 1200000 Ordinary share capital Captial 4,000,000 3,500,000
Share premium account beginning 3500000
1,200,000 950,000
Retained earnings 1,342,800 2,206,700
bonus 35000
6,542,800 6,656,700
issue 465000
Non-current liabilities ending 4000000
Preference share capital (redeemable) 1,000,000 800,000
increase 200000
Current liabilities
Trade payables 148,500 -5000-10000 139,500 -7000
Taxation 410,000 360,000
558,500 499,500
Total equity and liabilities 8,101,300 7,956,200
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Statement of changes in equity for the year ended 31 December 2015 (extract)
Retained earnings

Profit for the period 536,100
Dividends on ordinary shares (1,400,000)
Balance brought forward 2,206,700
Balance carried forward 1,342,800
The following additional information is relevant.
1. During the year Yorick Ltd issued redeemable preference shares at par.
2. The current asset investments are government bonds and management has
decided to class them as cash equivalents.
3. During the year Yorick Ltd sold plant and equipment with a carrying amount of
(39500) 560,500 for 600,000. Total depreciation charged for the year was 750,600.
4. Trade payables include accrued interest of 5,000 (2014 7,000).
5. Yorick Ltd acquired new intangible assets at a cost of 77,500 during the year.
6. An impairment review at 31 December 2015 identified a fall in the recoverable

amount of intangible assets. As a result, an impairment loss of 15,000 was
identified and written off to administrative expenses. Amortisation on
intangible assets is included in expenses.
7. Included in trade payables is 10,000 which relates to the purchase of

machinery. Other machinery had been purchased in cash.
8. During the year Yorick Ltd made a 1 for 100 bonus issue of its ordinary shares.
There was an issue of shares for cash after the bonus issue.
Required:
Prepare a statement of cash flows for Yorick Ltd for the year ended 31 December
2015.
(25 marks)
L&P (2013), Chapter 6.
This question requires preparation of a cash flow statement (CFS). You should adopt a
systematic approach which will enable you to extract the cash flows from the accruals based
income statement and statement of financial position. The resulting increase or decrease in cash
balances should be reconciled to the relevant figures in the statement of financial position. Good
answers will be well presented, correctly describing the component cash flows with well laid out
workings. It is important to show clear workings so that we can award any partially correct
answers with appropriate marks.
16
Statement of cash flows for the year ended 31 December 2015

Cash flows from operating activities
Finance costs /interest expense 75,000
Depreciation 750,600
Amortisation (W1) 12,300
Impairment charge (W1) 15,000
Gain on sales of property, plant and equipment (600,000 560,500) (39,500)
Movement in inventories (765,100 560,500) , 204,600
Movement in trade receivables (169,000 144,500) , (24,500)
Movement in trade payables (W2) opening 139500-7000 1,000 >
Cash generated from operationsClosing 148500-5000-10000)1,880,600
increase 1000
Tax paid ((350,000 + 360,000 410,000)) (300,000)
Interest paid (75,000 + 7,000 5,000)) (77,000)
Net cash from operating activities 1,503,600
Cash flows from investing activities

Purchase of property, plant and equipment (W3) (1,573,000)
Purchase of intangible assets (77,500)
Proceeds from sale of property, plant and equipment (W3) 600,000
Net cash used in investing activities (1,050,500)
Cash flows from financing activities

Proceeds from issue of shares (W4) 46500+28500 750,000
Movement in borrowings PREFERENCE SHARES 200,000
Dividends paid 1000000-800000 (1,400,000)
Net cash from/used in financing activities (450,000)
Net increase/decrease in cash and cash equivalents 3,100

Cash and cash equivalents at beginning of period 32,600
Cash and cash equivalents at end of period 35,700
Workings
W1 Intangible Assets

B/fwd 300,500
Additions 77,500
Impairment (15,000)
Amortisation (Bal. fig) (12,300)
C/fwd 350,700
W2 Movement in trade payables

Opening (139,500 7,000) 132,500
Closing (148,500 5,000 10,000) 133,500
Increase 1,000
17
W3 PPE

B/fwd 6,713,500
Disposal (560,500)
Depreciation (750,600)
Additions Payable 10,000
Cash (Bal. fig) 1,573,000
C/fwd 6,985,400
Profit on disposal (560,500 600,000) 39,500
W4 Share Capital
Capital Premium
B/fwd 3,500,000 950,000
Bonus 35,000 (35,000)
3,535,000 915,000
Issue (Bal. fig) 465,000 285,000
C/fwd 4,000,000 1,200,000
18
Question 4
Claudius plc is a manufactruring company. In recent years, the company has faced
severe competition from overseas businesses and its sales volume has hardly
changed. The company has recently applied for an increase in its bank overdraft
limit from 750,000 to 1,500,000. The bank manager has asked you, as the banks
credit analyst, to look at the companys application.
You have the following information:
Statements of financial position as at 31 December 2014 and 2015
2014 2015
000 000
Tangible non-current assets
Freehold land and buildings, at cost 1,800 1,800
Plant and equipment, at net book value 3,150 3,300
4,950 5,100
Current assets
Inventory 1,125 1,500
Trade receivables 825 1,125
Short-term investments 300
2,250 2,625
Total assets 7,200 7,725
Current liabilities
Bank overdraft 225 675
Trade payables 300 375
Taxation payable 375 300
Provisions 225 225
1,125 1,575
Non-current liability
8% debentures, 2017 1,500 1,500
Total liabilities 2,625 3,075
Equity
Ordinary shares of 1 each 2,250 2,250
Share premium account 750 750
Retained earnings 1,575 1,650
4,575 4,650
Total equity and liabilities 7,200 7,725
19
Statements of comprehensive income for the years ended 31 December 2014 and
2015
2014 2015
000 000 000 000
Turnover 6,300 6,600
Cost of sales : materials 1,500 1,575
: labour 2,160 2,280
: production overheads 750 825
4,410 4,680
Gross profit 1,890 1,920
Administrative expenses 1,020 1,125
Operating profit 870 795
Investment income 15
885 795
Interest payable : debentures 120 120
: bank overdraft 15 75
135 195
Profit before taxation 750 600
Taxation 375 300
Profit attributable to shareholders 375 300
You are also provided with the following information:
i. The general price level rose on average by 8% between 2014 and 2015. Average
wages rose by 10% during this period.
ii. The debenture stock is secured by a fixed charge over the freehold land and
buildings, which have recently been valued at 3,000,000. The bank overdraft is
unsecured.
Required:
(a) Calculate for the years ended 31st December 2014 and 2015 the return on
capital employed and two other ratios which provide insight into the
profitability and efficiency of Claudius plc. (Answer to 2 places of decimals.)
(6 marks)
(b) Calculate for the years ended 31st December 2014 and 2015 the gearing ratio
and three ratios which provide insight into the liquidity and working capital
control of Claudius plc. (Answer to 2 places of decimals.)
(8 marks)
(c) Based on the above calculations and the other information provided, draft a set
of notes for a discussion with the bank manager which highlight the key areas
she should consider when deciding upon the proposed increased overdraft limit.
Indicate any further information which would be useful in reaching the decision.
(11 marks)
L&P (2013), Chapters 4 and 5.
The learning outcomes of Chapter 7 of the subject guide include the ability to analyse, interpret
and communicate the information contained in financial statements. The most common
analytical method is the use of accounting ratios. This technique is often tested by a mini case
study of the type used in this question. It is important that answers go beyond simply stating
20
that a particular ratio has gone up or down, the interpretation should use the contextual
information given in the question and make links between different ratios. Good answers will
draw conclusions from the ratios and the background information, which provide insight into the
financial position and performance of the companies.
Excellent answers will use the analysis to draw appropriate conclusions which will be discussed
from the perspective of potential users.
You should carefully read the requirements of the questions which in this case specify the number
and nature of the ratios to be calculated. If you do not follow these instructions your work may
not be marked.
The answers to part (c) should use the ratios calculated and the background information given,
answers which simply state that one year is higher or lower than the other received no marks you
should use the analysis to provide insight into the companys financial position and performance
You should have in mind the recipient of your analysis and their specific needs. You were also
asked to identify other related and relevant information which would be useful but many
candidates failed to do so. There are no absolute answers to this type of question and you will be
rewarded for a logical and informed analytical approach to the case described in the question.
(a) Claudius
2014 2015
Return on capital employed (compulsory)
(885/(4575 + 1500)) 100 = 14.56%
(795/(4650 + 1500)) 100 = 12.93%
Net profit margin

(885/6300) 100 = 14.05%
(795/6600) 100 = 12.05%
Asset Turnover (based on cap. emp.)

6300/6075 = 1.04
6600/6150 = 1.07
Gross profit
(1890/6300) 100 = 30%
(1920/6600) 100 = 29.09%

Other profit related margins may be given.
21
(b)
2014 2015
Gearing liquidity and WCC
Debt to capital employed
(1500/6075) 100 = 24.69%
(1500/6150) 100 = 24.39%
Current ratio
2250 : 1125 2:1
2625 : 1575 1.67:1
Quick ratio
1125 : 1125 1:1
1125 : 1575 0.71:1
Stock turnover
4410/1125 = 3.92
4680/1500 = 3.12
Debtor Collection period

(825/6300) 365 = 48 days
(1125/6600) 365 = 62 days
Other working capital ratios may be given.

(c) Main points in the answer should cover the following.
Profitability
Significant fall in ROCE which is due to decreased margins (gross and net). The asset
turnover has increased but the question states that sales volume is unchanged.
Given unchanged sales volume (cannot tell from HC accounts without date on specific
price movements), price rises have been below the level of general inflation. Is this
deliberate policy or just poor management? If deliberate, it appears not to have
improved sales.
Cost of materials and labour also increased below the level of inflation (5% and 5.6%,
respectively).
Overheads increased by 10 per cent slightly above inflation (both production and
administrative) led to falling margins (gross and net). (Further information by product
might help see if one particular area is a problem or if it is right across the board.)
Increased interest has caused profit before tax to fall by 20 per cent although interest
cover still looks okay.
Gearing, liquidity and working capital
Gearing ratio is stable but the problem is one of liquidity at the moment.
Could argue that the overdraft appears to be a permanent feature of this firm. The
gearing ratio looks worse if the overdraft is included (+ an overdraft of 1,500,000 makes
it look even more unhealthy). (Gearing ratios calculated using book values may not be
too useful could recalculate using market values of debt and equity, where quoted.)
Working capital (current ratio lower) is falling even though inventories and receivables
are higher.
Reflected in worsening liquid ratio quite a large fall.
Inventory turnover is getting worse 3.85 months inventory on hand (3.06). Need more
information here slow-moving inventory? Or is it just poor management of working
capital?
22
Trade receivables turnover ratio has got worse. In their state they need to be collecting
more quickly. Is there one or a few debts causing this, or is it general sloppiness?
Flow of funds company is investing in new equipment, and so is presumably not
contracting operations. Need information as to the use the equipment is being put to,
and future capital expenditure plans.
Purchases of assets (+ payment of tax + dividend) have been partly paid for by selling
off short-term investments. This is a one-off instance a bad sign.
Could use previous 5 years funds flow statements trends quite important.
The increased overdraft is financing the increased stocks and debtors.
Gearing ratio is stable but the problem is one of liquidity at the moment.
General points
Why does the firm want to increase the overdraft? Seems to be finance working capital.
Could be risk for the bank if the firms profitability is in a long-term decline. (Does not
mean do not lend could charge more interest.)
Or could secure the overdraft market value of the land and buildings is well in excess of
the debentures.
How will the firm pay off the overdraft? Need to ask for cash forecasts for next few years
(firm should have if not, poor management). (Historical cost accounts are generally of
little help with respect to forward-looking data.)
More data on management. Old, young? Likely to let firm stagnate? Also need to see
strategic plans in what direction is the firm going? Do they know?
Section C
Answer one question and no more than one further question from this section.
Question 5
Osric Ltd manufactures components for the motor industry. A specialist luxury car
company has offered Osric a contract to supply a component identified as RSport.
The contract is for 400 RSports over the next 12 months. The initial price
suggested by the car company is 145 for each RSport.
The data relating to the production of each RSport is:
1. Material requirements:
3 kg material M1 see note (i) below.
2 kg material M2 see note (ii) below.
1 part P2 see note (iii) below.
Note (i) Material M1 is in continuous use by the company. 1,000 kg are
currently held in stock at a book value of 4.70 per kg but it is known that
future purchases will cost 5.50 per kg.
Note (ii) 1,200 kg of material M2 are held in stock. The original cost of this
material was 4.30 per kg but, as the material has not been required for the
last two years, it has been written down to 1.50 per kg scrap value. The
only foreseeable alternative use is as a substitute for material M4 (in current
use) but this would involve further processing costs of 1.60 per kg. The
current cost of material M4 is 3.60 per kg.
Note (iii) It is estimated that Part P2 could be bought for 50 each.
23
2. Labour requirements: Each RSport would require five hours of skilled labour
and five hours of semi-skilled. An employee possessing the necessary skills is
available and is currently paid 5 per hour. A replacement would, however,
have to be obtained at a rate of 4 per hour for the work which would otherwise
be done by the skilled employee. The current rate for semi-skilled work is 3
per hour and an additional employee could be appointed for this work.
3. Osric Ltd absorbs overhead by a machine hour rate, currently 20 per hour of
which 7 is for variable overhead and 13 for fixed overhead. If this contract is
undertaken it is estimated that fixed costs will increase for the duration of the
contract by 3,200. Spare machine capacity is available and each component
would require four machine hours.
Required:
(a) Prepare a statement showing the contribution from the contract to produce
RSport at the suggested price.
(12 marks)
(b) Explain each figure of cost included in the statement in (a).
(7 marks)
(c) Comment briefly on three factors which management should consider before
making a final decision on the contract.
(6 marks)
L&P (2013), Chapter 17.
Relevant and opportunity cost recognition are key techniques in short-term decision-making.
This question tests candidates ability to apply these techniques. It is important in answering
such questions that you keep in mind the basic contribution approach to the analysis and clearly
distinguish between those costs and revenues that are relevant to the decision and those that are
not. Good answers will set out the computations in a clear, logical and coherent manner.
Candidates should note that question (b) required a full explanation of the figures used in the
analysis and marks were awarded as appropriate. Part (c) required candidates to place the
calculations in the context of the wider business considerations by identifying three appropriate
factors.
(a) Osric
Notes
Materials
M1 (1,200 kg at 5.50 1 6,600
M2 (800 kg at 2 per kg) (1) 2 1,600
Part no.P2 (400 at 50) 3 20,000 28,200
Labour:
Skilled (2,000 hours at 4 per hour) 4 8,000
Semi-skilled (2,000 hours at 3 per hour) 5 6,000 14,000
Overheads:
Variable (1,600 machine hours at 7 per hour) 6 11,200
Fixed: Incremental fixed costs 3,200
Total relevant cost 56,600
Contract price (400 components at 145 per component) 58,000
Contribution 1,400
24
(b) 1. Material M1 Opportunity cost is replacement cost.

2. Material M2: If material M2 is not used on the contract it will be used as a substitute for
material M4. Using M2 as a substitute for M4 results in a saving of 2 (3.60 1.60)
per kg. Therefore, the relevant cost of M2 consists of the opportunity cost of 2 per kg.
3. Part No. P2 Actual impact cost.
4. Skilled labour Opportunity cost is replacement labour cost.
5. Semi-skilled cost of additional labour.
6. Overhead Variable overhead only is relevant. Additional fixed overhead is an
incremental cost.
7. Incremental fixed overheads included.
(c) Factors which should be considered are the following.

The incremental revenues exceed the incremental costs. Therefore, the contract should
be accepted below.
Can a price higher than 145 per component be negotiated? The contract only provides
a contribution of 1,400 to general fixed costs. If the company generates insufficient
contribution from its activities to cover general fixed costs then it will incur losses and
will not be able to survive in the long term. It is assumed that acceptance of the
contract will not lead to the rejection of other profitable work.
Will acceptance of the contract lead to repeat orders which are likely to provide a better
contribution to general fixed costs?
Acceptance of the contract will provide additional employment for 12 months and this
might have a significant effect on the morale of the workforce.
If there are few manufacturers then acceptance of the contract may be necessary to build
a client relationship.
Given market conditions should Osric be looking at strategies for entering new markets?
Question 6
Fortinbras Ltd manufactures a single product. The following information relates to

the actual selling price and actual cost of the product for March 2016.
000
Sales (50,000) units 2,250
Direct materials (240,000 litres) 528

Direct labour (250,000 hours) 1,375
Variable production overhead 245
Total variable costs 2,148
Fixed production overhead 650
Total costs 2,798
Loss (548)
The budgeted selling price and standard cost of each unit were as follows.

Selling price 55
Direct materials (5 litres) 10
Direct labour (4 hours) 20
Variable production overhead (recovered on direct labour hours) 5
Total variable standard cost 35
Standard contribution 20
25
The total budgeted sales for March were 40,000 units and the budgeted fixed
overheads for the month were 600,000.
Required:
(a) Prepare an operating statement for Fortinbras Ltd which reconciles budgeted
profit with the actual loss showing two variances for each cost including fixed
overheads.
(18 marks)
(b) Briefly comment on the method of calculating fixed overhead variances as
required in (a) and its usefulness for performance evaluation and identify an
alternative approach.
(7 marks)
L&P (2013), Chapter 18.
This is a question which tests candidates ability to apply standard costing, budgeting and
variance analysis to a given set of data. Your answer should set out clearly all of your workings
and cross-refer these to the final operating statement and relevant variances. It is important that
you identify variances as either favourable or adverse (unfavourable). These techniques are
clearly demonstrated by example in the subject guide and you should be prepared to apply them
in questions at this level. Part (b) tests your understanding of the different approaches that may
be taken to calculating variances for fixed overheads and many candidates were unable to provide
clearly reasoned explanations.
Operating statement for May 2015
Favourable Adverse 000

Budgeted profit 200
Sales price variance (500)
Sales margin volume variance 50
50 (500) (450)
Standard profit (250)
Cost variances
Materials : price (48)
: efficiency 20
Labour : price (125)
: efficiency (250)
Var OH : price 67.5
: efficiency (62.5)
Fixed OH : spend (50)
: volume 150
237.5 (535.5) (298)
Actual loss (548)
26
Question 7
Polonius Manufacturing makes components for the telecoms industry. The

development department has designed a new product and incurred development
costs of 30,000.
The following information is available.
1. The new product is expected to have an initial life span of four years and
demand has been estimated at 10,200 units in year 1 with sales increases of 10%
in each of years 2 and 3 and sales of 9,000 units in year 4. The unit selling price
will be 34. There will be no stocks of finished goods.
2. Since the production cycle is very short, both production and sales could start
immediately, should the production go ahead. Each unit of the new product will
require 2 hours of labour which will need to be hired. There will be no problem
hiring at 8.00 per hour.
3. Each unit of the new product will require one component, a capacitor. The
company has a stock of 15,000 capacitors which were purchased two years ago
for 4.00 each. These have no resale value or alternative use. Any capacitors to
be purchased from now on will cost 5.00 each.
4. Each unit produced will also require 8.00 of sundry raw materials such as wire
and a circuit board. The company holds no stock of the sundry raw materials.
5. The company already owns the machinery that could be used in the
manufacture of this product. If it is not used for this product it will be sold
immediately for 200,000. If it is used for this production, after four years it is
likely to have a residual value of 40,000.
6. Fixed production overheads allocated to this project will cost 40,000 per
annum. The cost of capital is 15% per annum. Assume all cash flows occur on
the last day of each year except for the immediate disposal of the existing
machinery.
Required:
(a) Calculate the Net Present Value (NPV) of this project.

(14 marks)
(b) Calculate the payback period of this project using both nominal and discounted
cash flow.
(4 marks)
(c) Advise Polonius Company on the project and outline two other factors that you
would take into account in your decision.
(7 marks)
Subject guide, Chapters 11 and 12.
L&P (2013), Chapter 14.
The application of capital investment techniques is an important element of the syllabus and
learning outcomes for this module. The most effective approach to part (a) is to construct a
column table in which relevant cash flows can be inserted. It is important to give workings of all
figures and to clearly explain treatment of all amounts, for example if a cost is to be treated as
sunk and therefore not included as a relevant cost this should be stated. Having determined the
net cash flow for each year these are discounted using the discount factors taken from the tables
27
provided. Therefore, a net present value can be arrived at and a decision recommended and
justified. This type of question requires use of a significant amount of data and it is very
important that your work is clearly presented and that all workings are legible and
understandable. The 8-column accounting paper can help in the respect. A suggested
presentation of the answer is given below.
Part (b) required calculation of payback based on nominal and discounted cash flows and
candidates who produced sound answers to (a) also did well on this section.
Part (c) required a reasoned recommendation to management based on the answers to (a) and
(b) and to give two other factors which should be taken into account. Answers which simply
repeated the assumptions given in the question received very few marks.
(a) Cash flows

0 1 2 3 4
Market survey (ignore)
Sales units 10200 11220 12342 9000
Sales 346,800 381,480 419,628 306,000
Costs
Machinery (200,000) 40,000
Labour cost (163,200) (179,520) (197,472) (144,000)
Material Cap (32,100) (61,710) (45,000)
Other (81,600) (89,760) (98,736) (72,000)
Fixed costs ignore

Net Cash Flow (200,000) 102,000 80,100 61,710 85,000
Discount Factor 0 0.870 0.756 0.658 0.572
Present Value (200,000) 88,740 60,556 40,605 48,620
Net Present Value = 38,521

(b) Payback period:
Nominal cash flow = 2 years 3 months.
Discounted cash flow = 3 years 2 months.
(c) Advise:
Accept project as gives positive NPV which increases shareholder wealth. Although the
NPV is not great.
Projects payback is quite long under both approaches.
Final acceptance depends on the companys risk strategy. This is a reasonably profitable
but fairly risky project.
Factors:
Other investment opportunities might be less risky.
Assumptions may be critical:
discount rate
opportunity costs.
Impact of new product on existing range.
Possible to extend life of project as still has demand in year 4.
28

Important note
This commentary reflects the examination and assessment arrangements f or this course in the

references
section.
Comments on specific questions Zone B
Candidates should answer FOUR of the following SEVEN questions: QUESTION 1 of Section
A, QUESTION 2 of Section B, ONE question from Section C and ONE further question from
either Section B or C. All questions carry equal marks.
Workings should be submitted for all questions requiring calculations. Any necessary assumptions
introduced in answering a question are to be stated.
Section A
Answer question 1 from this section.
Question 1
(a) Lysander Ltd is preparing its financial statements for the year ended 31
December 2015.
At 31 December 2014 it had computer equipment that cost 1,004,408, all of

which had been purchased on 1 January 2013, and had accumulated
depreciation at 31 December 2014 of 697,600. Computer equipment is
depreciated on a straight line basis with no residual value over four years and is
charged on a monthly basis. A computer system, costing 6,800, was sold on 1
January 2015 for 1,800. On 1st April 2015 Lysander part exchanged a
computer which had cost 24,000, for a new computer, costing 34,600, paying
a cheque in final settlement of 18,000.
29
Required:
Show how the computer equipment of Lysander Ltd will be shown in the:
i. Income statement for the year ended 31 December 2015, and
ii. Statement of financial position as at 31 December 2015.
(6 marks)

Leiwy, D. and R.E. Perks (2013), Chapter 3 (hereafter referred to as L&P).
The depreciation of non-current assets is a recurring topic in this course. The question
requires the application of the straight line method on a monthly basis to a dataset
including purchases and disposals. The resulting information needed to be shown as extracts
from the financial statements. It is important to follow these requirements and to show all
of your workings neatly and clearly.
Lysander Ltd
i. Income Statement
Depreciation on computers (251,390)
Profit on disposal (W3) 4,500
ii. Statement of financial position
Non-current assets
Computer equipment cost 1,008,208
Accumulated depreciation (930,590)
Workings
Cost Acc Depn
As at 1/1/2015 1,004,408 697,600
Sale (6,800) (3,400)
New computer 34,600
Part X(W1) (24,000) (13,500)
Depreciation(W2) 249,890
1,008,208 930,590
W1 27 months (24,000 48) = 13,500.
W2
Original 973,608 4 = 243,402
New (34,600/48) 9 = 6,488
Part X (24,000/48) 3 = 1,500
251,390
W3
Loss on sale 1,800 3,400 = (1,600)
Profit on PX is 16,600 10,500 = 6,100
4,500
(b) Explain the objective of published financial statements and identify the two
principal characteristics of financial statements which contribute to achieving
this objective.
(6 marks)

L&P (2013), Chapter 3 pp. 5861.
30

Understanding of the objectives and characteristics of financial statements is a fundamental
conceptual underpinning to this course. Answers which discuss the content of financial
statements (income, assets) or the format (Income Statement, Cash Flow Statements) did
not address the issue raised in the question.
Objective answers should explain that financial statements should provide information
that users (investors, lenders and creditors) need in making decisions about the reporting
entity.
Qualitative characteristics relevance good answers will explain predictive and
confirmatory value.
Faithful; representation (or reliability) good answers will explain comparability and
understandability.
(c) In the context of cost-volume-profit analysis explain the meaning, and give an
example, of each of the following terms:
i. Non-linear variable costs
ii. Stepped fixed costs
iii. Relevant range
(6 marks)

L&P (2013), Chapter 17.
Candidates need to understand cost behaviour in relation to activity level changes and how
this impacts on CVP analysis. This question requires explanation of some related terms and
that an example be given for each. Many candidates were insufficiently careful in their
explanations and many failed to give examples.
i. Non-linear variable costs vary with volume of activity but with a cost per unit which is
different for different levels of activity.
Example: Direct material where there are discounts available for larger orders.
ii. Stepped fixed costs are those which do not vary with volume of activity between two
levels of activity but which at the higher level will require an extra resource.
Example: Rental of storage facility which has a maximum capacity after which a new
facility will have to be rented.
iii. The relevant range is the range of outputs over which the assumption that a cost-volume
relationship is a linear relationship is realistic.
Example: A firm may determine variable and fixed costs which will be realistic between
10,000 and 15,000 units, outside of this range these costs will no longer behave in the
assumed linear fashion.
(d) A company makes three products to which the following budget information
relates:
B A T
per unit per unit per unit
Selling price 100 120 145
Labour at 20 per hour 40 40 60
Materials at 10 per kg 10 20 30
Fixed overheads 30 40 20
Profit 20 20 35
31
The marketing department says the maximum annual demand is for 1,000 units
of Product B, 1,200 units of product A and 1,500 units of product T, and the
factory has budgeted to produce that number of units. It has just been
discovered that next year materials will be limited to 5,000 kg and labour to
10,000 hours.
Required:
Compute the priority in which products should be made and sold and the
maximum contribution for the year.
(7 marks)

Subject guide, Chapter 10 (pp. 17577).
L&P (2013), Chapter 17.
A key learning outcome of this course is to explain and apply decision-making techniques
using accounting information. This question tests your understanding of contribution
analysis and limiting factors. It is important that answers calculated the contribution per
unit of limiting factor in reaching the optimum mix of products. Answers to part (ii) needed
to be specific in identifying non-financial factors.
This answer ranks the products by contribution per kg of material (the limiting factor).
B A T Total
Maximum sales (units) 1,000 1,200 1,500 N/A
Material kg needed 1,000 2,400 4,500 7,900
Labour hours needed 2,000 2,400 4,500 8,900
Therefore, labour is not a limiting factor but material is a limiting factor.
The products must be ranked according to their contribution per kg of material.
B A T
Contribution per unit () 50 60 55
Kg of material per unit 1 2 3
Contribution per kg of material () 50 30 18.33
Rank by contribution per kg of material 1 2 3
Maximum contribution Sales-units Material Kg Contribution

B 1,000 1,000 50,000
A 1,200 2,400 72,000
T 533 1,600 29,315
5,000 151,315
32
Section B
Answer question 2 and not more than one further question from this section.
Question 2
The following trial balance was extracted from the nominal ledger of Oberon Ltd on
31 March 2016:

Sales 1,150,000
Inventories at 1 April 2015 75,000
Purchases 465,000
Distribution costs 220,000
Administrative expenses 340,000
Bad debts written off 36,000
Loan interest paid 8,000
Land and buildings cost 600,000
Plant and equipment cost 340,000
Land and buildings accumulated depreciation at 1 April 2015 96,000
Plant and equipment accumulated depreciation at 1 April 2015 63,000
Provision for doubtful debts 5,000
Bank balance 24,000
Ordinary share capital (1 shares) 400,000
Share premium 100,000
Bank loan 200,000
Ordinary dividends paid 15,000
Trade payables 54,000
Advance deposits from customers 6,000
2,159,000 2,159,000
The following adjustments have yet to be accounted for:
1. Oberon Ltd has two items in inventory at 31 March 2016.

Details are as follows:
Item Puck Flute

Total cost 16,200 76,000
Selling price 15,000 83,000
2. Oberon Ltd paid an annual insurance premium of 16,800 for the year 1
September 2015 to 31 August 2016. This payment is included in administrative
expenses.
3. The companys depreciation policy is as follows:
Buildings Straight-line over 50 years
Plant and equipment 10% straight-line
The cost of the land was 200,000, and all non-current assets are assumed to
have zero residual values.
There were no additions to, or disposals of, non-current assets during the year
ended 31 March 2016.
Depreciation on buildings is charged to administrative expenses and
depreciation on plant and equipment is charged to cost of sales.
4. At the year end, trade receivables include a balance of 4,800 which is
considered irrecoverable. Provision for doubtful debts requires adjusting to 5%
of remaining receivables. The company includes bad, and changes in provision
for doubtful, debts as other operating expenses in the income statement.
33
5. The bank loan was received on 1 July 2015 and is repayable in full in five years.
Interest is charged at a fixed rate of 8% per annum.
6. Tax on the profits for the year ended 31 March 2016 is estimated at 10,000.
7. The bank reconciliation performed at 31 March 2016 revealed that Oberon Ltd
had accounted for a cheque for 4,500 sent to a credit supplier as 5,400.
8. Oberon Ltd propose a dividend of 5p per share for the year ended 31 March
2016.
9. Oberon Ltd paid rent of 25,000 on 27th March 2016 which covers the period 1
April 2016 to 30 June 2016. This amount has been included in administrative
expenses.
Required:
Prepare the following financial statements for Oberon Ltd:
(a) Income statement for the year ended 31 March 2016.

(11 marks)
(b) Statement of changes in equity for the year ended 31 March 2016.
(2 marks)
(c) Statement of financial position as at 31 March 2016.
(12 marks)
Subject guide, Chapters 4, 5 and 6.
L&P (2013), Chapter 10.
The preparation of final accounts from structured information is a key learning outcome. A trial
balance with several adjusting items has been the format for the compulsory question over recent
years. In answering this type of question a methodical and organised approach is needed. It is
very important that detailed, legible workings are given in order that marks are awarded for all
work which is correct. If figures in the final accounts comprise a number of items, marks will be
awarded accordingly. Without workings one error may result in several marks being lost. The
candidates should allow examiners to award all appropriate marks. The 8-column accounting
paper provided is particularly useful for presenting the financial statements. You should pay
attention to the presentation of your answer, taking care to use the appropriate descriptions of
line items in the income statement and statement of financial position. The format of the
statement of changes in equity should follow best practice.
(a) Oberon Ltd

Income Statement for the year ended 31 March 2016

Revenue 1,150,000
Cost of Sales (W1) (483,000)
Gross Profit 667,000
Distribution costs (220,000)
Admin expenses (W2) (316,000)
Other operating expenses (W3) (38,560)
Profit before Interest and Tax 92,440
Finance costs (W4) (12,000)
Income tax (10,000)
Profit/Loss for year 70,440
34
(b) Statement of changes in equity for year ended 31 March 2016
Share Share Retained Total

capital premium earnings

As at 1/4/2015 400,000 100,000 61,000 561,000
Profit for year 70,440 70,440
Dividends (15,000) (15,000)
400,000 100,000 116,440 616,440
(c) Statement of financial position at 31 March 2016

Non-current assets
Land and buildings (W5) 496,000
Plant and equipment (W5) 243,000
Current assets 739,000
Inventories (W1) 91,000
Prepayments (W2) 32,000
175,440
Total assets 914,440
Equity
Equity share capital 400,000
Share premium 100,000
616,440
Non-current liabilities
Borrowings 200,000
Current liabilities
Bank overdraft (24,000 900) 23,100
Trade payables (54,000 + 900) 54,900
Accruals (W4) 4,000
Deferred income (Advances) 6,000
Tax payable 10,000
98,000
Total equity and liabilities 914,440
Workings
W1 Cost of Sales
Opening Inventory 75,000

Purchases 465,000
Depreciation 34,000
Closing Inventory * (91,000)
483,000
*(15,000 + 76,000)
W2 Admin Expenses
Per TB 340,000
Depreciation 8,000
Insurance prepaid (16,800 5/12) (7,000)
Rent prepaid (25,000)
316,000
35
W3 Other operating expenses (Bad and D. Debts)

Per TB 36,000
Bad debt w/off 4,800
Decrease in provision (60,000 4,800) 5% = 2,760
As at 1/4/2015 (5,000)
(2,240)
38,560
W4 Finance costs
Loan interest paid per TB 8,000
Accrued interest 4,000
Current period interest expense
(9 months: 9/12 8% 200,000) 12,000
W5 Property, plant and equipment

Land Buildings Plant and Total
equipment

Cost or valuation 200,000 400,000 340,000
Accumulated depn (96,000) (63,000)
Carrying amount per TB 200,000 304,000 277,000
Depreciation charge (8,000) (34,000)
Carrying amount 31 March 200,000 296,000 243,000 739,000
Question 3
Extracts from the financial statements for Titania Ltd for the year ended 31 March
2016 are as follows:
Statement of profit or loss for the year ended 31 March 2016

Profit from operations 819,640
Finance costs (89,600)
Income tax (245,700)
36
Statements of financial position at 31 March
2016 2015

Non-current assets
Property, plant and equipment 982,600 797,500
Intangible assets 580,040 386,900
Current assets
Inventories 430,040 285,550
Trade receivables 342,700 224,150
Government bonds 40,000 10,000
Cash 37,470 3,800
Total assets 2,412,850 1,707,900
Equity share capital (1 shares) 312,400 232,800

Share premium 398,200 351,000
Retained earnings 534,800 282,100
Borrowings 567,400 423,000
Preference shares 75,000
Current liabilities
Borrowings 115,600 51,000
Bank overdraft 51,200 27,230
Tax payable 201,800 192,520
Trade payables 146,700 135,900
Accrued interest 9,750 12,350
Total equity and liabilities 2,412,850 1,707,900
Additional Information
1. Included in profit from operations is a loss of 84,810 in respect of the disposal

of machinery in the year. This machinery had a net book value of 127,800 at
the disposal date. All additions were paid for in cash.
2. The depreciation charge on property, plant and equipment for the year was
232,900.
3. Intangible assets costing 251,340 were purchased for cash during the year.
Intangible assets with a carrying amount of 17,000 were sold for 24,000
during the year. The profit on disposal has been offset against operating costs.
An impairment review at 31 March 2016 identified a fall in the recoverable
amount of intangible assets. As a result, an impairment loss of 20,000 was
identified and written off to administrative expenses. Amortisation has been
charged against profit from operations.
4. On 1 April 2015 Titania Ltd made a one for ten bonus issue from share
premium. A further share issue took place in December 2015 for cash.
5. Titania Ltd declared and paid a dividend during the year.
6. Redeemable preference shares in the amount of 75,000 were issued for cash
during the year.
7. The government bonds are highly liquid and management has decided to class
them as cash equivalents.
Required:
Prepare a Statement of Cash Flows for Titania for the year ended 31 March 2016
showing operating cash flows using the indirect method.
(25 marks)
37
L&P (2013), Chapter 6.
This question requires preparation of a cash flow statement (CFS). You should adopt a
systematic approach which will enable you to extract the cash flows from the accruals based
income statement and statement of financial position. The resulting increase or decrease in cash
balances should be reconciled to the relevant figures in the statement of financial position. Good
answers will be well presented, correctly describing the component cash flows with well laid out
workings. It is important to show clear workings so that we can award any partially correct
answers with appropriate marks.
Statement of cash flows for the year ended 31 May 2016

Cash flows from operating activities
Finance costs 89,600
Profit from operations 819,640
Depreciation 232,900
Amortisation (W1) 21,200
Impairment charge (W1) 20,000
Gain/loss on sales of property, plant and equipment 84,810
Gain/loss on sales of intangible assets (17,000 24,000) (7,000)
Movement in inventories (285,550 430,040) (144,490)
Movement in trade receivables (224,150 342,700) (118,550)
Movement in trade payables (146,700 135,900) 10,800
Cash generated from operations 919,310
Tax paid (192,520 + 245,700 201,800) (236,420)

Interest paid (12,350 + 89,600 9,750) (92,200)
Net cash from/used in operating activities 590,690
Cash flows from investing activities Purchase of property, plant and equipment (W2) (545,800)
Purchase of intangible assets (W1) (251,340)
Proceeds from sale of property, plant and equipment (127,800 84,810) 42,990
Proceeds from sale of intangible assets 24,000
Net cash from/used in investing activities (730,150)
Cash flows from financing activities

Proceeds from issue of shares (W3) 126,800
Movement in borrowings (W4) 284,000
Dividends paid (W5) (231,640)
Net cash from/used in financing activities 179,160
Net increase/decrease in cash and cash equivalents 39,700

Cash and cash equivalents at beginning of period (3,800+10,000 27,230) (13,430)
Cash and cash equivalents at end of period (37,470 + 40,000 51,200) 26,270
38
Workings
W1 Intangibles

As at 1/4/2015 386,900
Purchases 251,340
Disposals (17,000)
Impairment (20,000)
Amortisation (Bal. fig) (21,200)
As at 31/3/2016 580,040
W2 PPE

As at 1/4/2015 797,500
Purchases (Bal. fig) 545,800
Disposals (127,800)
Depreciation (232,900)
982,600
W3 Issue of shares

As at 1/4/2015 583,800
(SP + SC)
Bonus
Issue for cash (Bal. fig) 126,800
As at 31/3/2016 710,600
W4 Borrowings

Issue of preference shares 75,000
Increase in borrowings (NCL) 144,400
(CL) 64,600
284,000
W5 Dividends

Retained Earnings at 1/4/2015 282,100
Dividend paid (Bal. fig) (231,640)

Retained Earnings at 31/3/2016 534,800
39
Question 4
Helena Products plc is a manufacturer of office furniture. In January 2015 the

company had carried out a strategic review and had decided to target people
working from home. In order to achieve this strategy the company had acquired a
building with a showroom and a warehouse and had invested in new delivery
vehicles. This expansion has been financed by loans and the bank overdraft facility
has been fully utilised.
Financial information concerning the business is given below.
Income statements for the year ended 30 November
2014 2015
000 000
Revenue 10,482 11,365
Operating profit 914 1,042
Interest charges (22) (81)
Profit before taxation 892 961
Taxation (358) (386)
Profit for the year 534 575
Statements of Financial Position

2014 2015
000 000
Non-current assets
Property, plant and equipment (cost less depreciation)
Premises 5,240 7,360
Plant and equipment 2,375 4,057
7,615 11,417
Current assets
Inventories 2,386 5,420
Trade receivables 2,540 2,280
4,926 7,700
Total assets 12,541 19,117
Equity
Share capital 2,000 2,000
Retained Earnings 7,813 8,268
9,813 10,268
Borrowing loans 1,220 3,675
Current liabilities
Trade payables 1,157 2,245
Taxation 179 193
Short-term borrowing (all bank overdraft) 172 2,736
1,508 5,174
Total equity and liabilities 12,541 19,117
Required:
(a) Calculate for Helena Products Ltd for both years the following ratios using the
available information (to two places of decimals):
i. Operating profit margin
ii. Net profit margin (after taxation)
iii. Asset Turnover ratio
40
iv. Return on capital employed

v. Current ratio
vi. Quick Asset ratio
vii. Receivables Collection period
viii. Inventory holding period
ix. Gearing ratio (debt to capital employed)
(15 marks)
(b) Using the above ratios, and any other ratios or information you consider
relevant, comment on the results of the company and on the new strategy.
(10 marks)
L&P (2013), Chapters 4 and 5.
The learning outcomes of Chapter 7 of the subject guide include the ability to analyse, interpret
and communicate the information contained in financial statements. The most common
analytical method is the use of accounting ratios. This technique is often tested by a mini case
study of the type used in this question. It is important that answers go beyond simply stating
that a particular ratio has gone up or down, the interpretation should use the contextual
information given in the question and make links between different ratios. Good answers will
draw conclusions from the ratios and the background information, which provide insight into the
financial position and performance of the companies.
Excellent answers will use the analysis to draw appropriate conclusions which will be discussed
from the perspective of potential users.
You should carefully read the requirements of the questions which in this case specify the number
and nature of the ratios to be calculated. If you do not follow these instructions your work may
not be marked.
The answers to part (c) should use the ratios calculated and the background information given,
answers which simply state that one year is higher or lower than the other received no marks.
You should use the analysis to provide insight into the companys financial position and
performance. You should have in mind the recipient of your analysis and their specific needs.
You were also asked to identify other related and relevant information which would be useful but
many candidates failed to do so. There are no absolute answers to this type of question and you
will be rewarded for a logical and informed analytical approach to the case described in the
question.
41
(a) Helena Products plc

2014 2015
1. Operating Profit margin
(914/10482) 100 8.72%
(1042/11365) 100 9.17%
2. Net Profit margin

(534/10482) 100 5.09%
(575/11365) 100 5.06%
3. Asset Turnover
10482/(12541 1508) 0.95
11365/(19117 5174) 0.82
4. ROCE
(914/11033) 100 8.28%
(1042/13943) 100 7.47%
5. Current ratio
4926/1508 3.27:1
7700/5174 1.49:1
6. Quick Assets
(4926 2386)/1508 1.68:1
(7700 5420)/5174 0.44:1
7. Receivables collection period

(2540/10482) 365 88 days
(2280/11365) 365 73 days
8. Inventory holding period

(2386/(10482 914)) 365 91 days
(5420/(11365 1042)) 365 192 days
9. Gearing (excluding overdraft)

(1220/11033) 100 11.1%
(3675/13943) 100 26.4%
OR:
9. Gearing (including overdraft)

(1220 + 172)/(11033 + 172) 12.42%
(3675 + 2736)/(13943 + 2736) 38.4%
(b) Operating profit margin is higher and this may be due to an increased margin from the
new customers or cost savings from the new strategy.
Net profit margin has fallen slightly due to the increased finance charges. This is due to
the significant increase in borrowings to finance the expansion.
Asset turnover is significantly lower. This may reflect the lower activity generated by the
new business model with a large increase in non-current assets. It may be that the new
strategy will take more time to generate the increase in revenues which was hoped for.
The impact of falling profit margin and lower asset turnover has been a significant
decrease in ROCE.
The working capital ratio shows that the company has reduced its level of working
capital. The quick assets ratio of less than 1:1 may be of concern particularly as the
bank overdraft is now at its maximum.
42
The receivables period shows that the new customers are paying more quickly than
before but this is still a significant credit period.
The inventory holding period has increased. This may be due to the strategy of having
products in the showroom and warehouse. It may be that in the past lower stock levels
were held as the customer base did not order from stock but in advance.
The gearing levels, both including cost excluding the bank overdraft, are now significantly
higher and the company may have borrowed too much to finance the expansion.
Overall the change in strategy has not yet generated an increase in return on capital
employed. There is an increase in profitability but there has been a significant increase in
capital expenditure funded by debt.
The company will probably only see the full effects of the new strategy over the next two
to three years. If the company can service the debt levels and increase revenues then it
may yet be successful.
Section C
Answer one question and no more than one further question from this section.
Question 5
The Hermia Company is considering the production of a new product to add to its
range of electrical components.
The following information is available.
1. A market survey has been undertaken but not yet paid for. It will cost 30,000.
The survey suggests that the life cycle of this product will last for four years
and demand is likely to be 10,200 units in the first year rising by 10% per
annum in each of years 2 and 3 and falling to 9,000 units in year 4. The unit
selling price will be 34. There will be no stocks of finished goods.
2. The company already owns the machinery that would be used in the
manufacture of this product. If it is not used for this product, it will be sold
immediately for 200,000. If it is used for this product, after four years it is
likely to have a residual value of 40,000.
3. Since the production cycle is very short, both production and sales could start
immediately, should the production go ahead. Each unit of the new product will
require 2 hours of labour which will need to be hired. There will be no problem
hiring at 8.00 per hour.
4. Each unit of the new product will require one component, a capacitor. The
company has a stock of 15,000 capacitors which were purchased two year ago for
4.00 each. These have no resale value or alternative use. Any capacitors to be
purchased from now on will cost 5.00 each.
5. Each unit produced will also require 8.00 of sundry raw materials such as wire
and a circuit board. The company holds no stock of the sundry raw materials.
6. Fixed production overheads allocated to this project will cost 40,000 per
annum.
7. The cost of capital is 15% per annum.
8. Assume all cash flows occur on the last day of each year except for the
immediate disposal of the existing machinery.
Required:
(a) Calculate the Net Present Value (NPV) of this project.

(14 marks)
43
(b) Calculate the payback period of this project using both nominal and discounted
cash flow.
(4 marks)
(c) Advise Hermia Company on the project and outline two other factors that you
would take into account in your decision.
(7 marks)
Subject guide, Chapters 11 and 12.
L&P (2013), Chapter 14.
The application of capital investment techniques is an important element of the syllabus and
learning outcomes for this module. The most effective approach to part (a) is to construct a
column table in which relevant cash flows can be inserted. It is important to give workings of all
figures and to clearly explain treatment of all amounts, for example if a cost is to be treated as
sunk and therefore not included as a relevant cost this should be stated. Having determined the
net cash flow for each year these are discounted using the discount factors taken from the tables
provided. Therefore, a net present value can be arrived at and a decision recommended and
justified. This type of question requires use of a significant amount of data and it is very
important that your work is clearly presented and that all workings are legible and
understandable. The 8-column accounting paper can help in the respect. A suggested
presentation of the answer is given below.
Part (b) required calculation of payback based on nominal and discounted cash flows and
candidates who produced sound answers to (a) also did well on this question.
Part (c) required a reasoned recommendation to management based on the answers to (a) and
(b) and to give two other factors which should be taken into account. Answers which simply
repeated the assumptions given in the question received very few marks.
(a) Hermia Co. Cash flows:

0 1 2 3 4
Market survey (ignore)
Sales units 10200 11220 12342 9000
Sales 346,800 381,480 419,628 306,000
Costs
Machinery (200,000) 40,000
Labour cost (163,200) (179,520) (197,472) (144,000)
Material Cap (32,100) (61,710) (45,000)
Other (81,600) (89,760) (98,736) (72,000)
Fixed costs ignore
Net Cash Flow (200,000) 102,000 80,100 61,710 85,000
Discount Factor 0 0.870 0.756 0.658 0.572
Present Value (200,000) 88,740 60,556 40,605 48,620
Net Present Value = 38,521
44
(b) Payback period.

Nominal cash Flow = 2 years 3.5 months (or 2.29 years or 3 years).
Discounted cash flow = 3 years 2.5 months (or 3.21 years or 4 years).
(c) Advice:
Accept project as gives positive NPV which increases shareholder wealth.
Comment on payback period.
Factors:
Other investment opportunities.
Assumptions may be critical:
discount rate
opportunity costs.
Impact of new product on existing range.
Risk.
Possible to extend life of project as still has demand in year 4.
Question 6
Horatio operates a small company which services mowers for local parks
departments. Each service uses a special machine that requires a skilled operator
and is finished using unskilled labour. Horatio has produced a standard cost
schedule as all mowers go through the same process. Overheads are absorbed using
standard labour hours. The materials come in packs; each mower serviced should
use one pack of materials. Horatio budgets to service 288 mowers per month.
Standard cost for servicing a mower

Skilled labour: 2 hours at 8 per hour 16
Unskilled labour: 1 hour at 5 per hour 5
Materials: 1 pack at 3 per pack 3
Variable overheads: 3 hours at 2 per hour 6
Fixed overheads: 3 hours at 10 per hour 30
Total standard cost 60
Profit mark-up at 30% of cost 18
Price charged 78
Actual results for May 2016

Sales: 330 mowers serviced 26,400
Less costs
Skilled labour: 594 hours 5,049
Unskilled labour: 396 hours 1,881
Materials: 350 packs 1,190
Variable overheads 1,815
Fixed overheads 8,500
Total costs for May 18,435
Profit for May 7,965
Required:
(a) Prepare an operating statement, reconciling budgeted and actual profit for
Horatio for May 2016, showing two variances both for sales and for each of the
five cost categories (twelve variances in total).
(17 marks)
45
(b) Prepare a brief report to the owner of Horatio Ltd commenting on the
performance in May 2016, suggesting possible reasons for any unexpected
results.
(8 marks)
L&P (2013), Chapter 18.
This is a question which tests candidates ability to apply standard costing, budgeting and
variance analysis to a given set of data. Your answer should set out clearly all of your workings
and cross-refer these to the final operating statement and relevant variances. It is important that
you identify variances as either favourable or adverse (unfavourable). These techniques are
clearly demonstrated by example in the subject guide and you should be prepared to apply them
in questions at this level. Part (b) required a report on the results in (a), good answers would
make connections between variances in this analysis to provide sensible informed insight into the
results rather than memorised textbook answers.
(a) Operating Statement for May 2016

Budgeted profit for month (288 18) 5,184
Sales margin volume variance 756
Standard profit for actual sales 5,940
Sales price variance 660
6,600
Cost variances Fav Adv

Material
Price variance 140
Efficiency variance 60
Skilled labour
Price variance 297
Unskilled labour
Price variance 99
Variable overheads
Spending variance 165
Efficiency variance
Fixed overheads
Spending variance 140
Volume variance 1,260
2,192 827 1,365
Actual profit for month 7,965
(b) Report on performance in May 2016

The most significant feature in May is the level of activity that is 14.6% above budget.
Furthermore the increase in sales has occurred at a time when the sales price had also
increased. Horatio should establish whether the increase has been caused by special
circumstances that are unlikely to be repeated (such as unusual weather), or whether there
has been a general increase in sales volume and price that will persist.
Materials have not been used efficiently: 20 more packs have been used than should
have been. It should be established whether this is a result of poor quality in the
46
material packs, lack of care in the use of materials or pilferage. The price has also
been higher than expected by 13.3%. This is a substantial percentage rise, although
not large in absolute terms, and Horatio may wish to explore alternative suppliers or
renegotiate terms.
Skilled labour has been used very efficiently with 10% less hours than standard; this has
resulted in a substantial favourable variance. However, the unskilled labour is a similar
amount over budget (66 hours), thus producing an unfavourable variance. It appears
that Horatio is short of skilled labour and may have substituted unskilled. This has
led to a cost saving of 198 (66 [8 5]). As long as there has been no loss in quality
this is satisfactory, although Horatio should establish whether the use of unskilled labour
has been the cause of the over-use of materials. The shortage of skilled labour may
also be the cause of the skilled labour price variance labour may be short and those
workers may work overtime or be paid more than budget. The unskilled labour is being
paid below budget by 5% which again suggests there is no shortage.
The split between the two categories of variable overheads has limited meaning (the
efficiency variance is an exact parallel with labour efficiency but costed at the variable
overhead rate). In total variable overhead expenditure is just over 8% below budget. This
will be considered satisfactory and will not merit further investigation.
The fixed overhead spending variance also indicates a slight underspend (1.6%) which does
not warrant further inquiry. The volume variance is purely arithmetic, i.e. automatically
caused by operating at a high level of activity. In fact this variance should be combined with
the sales variances to give the true flexible budget for profit at this months level of activity.
Workings
Sales margin volume variance
(AQ SM) (SQ SM)
(330 18) (288 18) = 756F
Sales price variance

(AQ AP) (AQ SP)
(330 80) (330 78) = 660F
Materials price variance

(AQ AP) (AQ SP)
(350 3) (350 3.40) = 140A
Materials efficiency variance

(AQ SP) (SQ SP)
(350 3) (330 3) = 60A
Skilled labour price variance

(AQ AP) (AQ SP)
(594 8.5) (594 8) = 297A
Skilled labour efficiency variance

(AQ SP) (SQ SP)
(594 8) (660 8) = 528F
Unskilled labour price variance

(AQ AP) (AQ SP)
(396 4.75) (396 5) = 99F
Unskilled labour efficiency variance

(AQ SP) (SQ SP)
(396 5) (330 5) = 330A
47
Variable overhead price variance

(AQ AP) (AQ SP)
(990 1815/990) (990 2) = 165F
Fixed overhead spending variance

= AC SC
= 8,500 8,640 = 140F
Fixed overhead volume variance

= SC (AQ SP)
= 8,640 (330 30) = 1260F
Question 7
Theseus Ltd is a newly formed business making a single product. You are given the
following information, extracted from the budget, for quarter 3 of the current
accounting year:
Production and sales volume 150,000 units

Selling price 10 per unit
Variable manufacturing cost
(including direct labour and material) 6 per unit
Fixed manufacturing overhead 300,000
Fixed selling and administration overhead 150,000
Variable selling and administration overhead 1 per unit sold.
You are further informed that actual results were:

Sales volume 120,000 units
Production volume 180,000 units
Selling price and costs were as budgeted.
Required:
(a) Determine the break-even volume for quarter 3.

(4 marks)
(b) Prepare a summary of the budgeted results for quarter 3 based on the budgeted
sales and production volume.
(5 marks)
(c) Assuming there is no opening stock, prepare a summary of the results for
quarter 3 based on the actual sales and production volume. You should adopt
an absorption costing approach where stock is valued at full manufacturing cost
and any under or over absorbed overhead is written off in the period.
(9 marks)
(d) In light of your answers to (a) and (b) comment on your results in (c).
(7 marks)
Subject guide, Chapter 9 pp. 15262.
L&P (2013), Chapter 16 pp. 6465.
48
The learning outcomes of this module refer to the ability to apply costing methods including
absorption costing. This question requires the allocation of overheads and their application to
cost units. The question requires calculation of break-even which will be based on variable costs
only and a budgeted statement for full cost absorption. Part (c) requires a statement of actual
results and the calculation of over absorbed overhead. Part (d) asks for comment on the previous
answers and in particular answers should have commented on the differences revealed using
marginal and absorption costing.
(a) Theseus Ltd.
Fixed cost
BEP =
Contribution per unit
(150,000 2) + 150,000
=
10 (6 + 1)
450,000
=
3
= 150,000.
(b)
Budget for Q3 000 000
Sales 150,000 10 1,500

Manufacturing costs:
Variable 150,000 6 900
Fixed 150,000 2 300
1,200
Manufacturing profit 300
Selling and administration costs:
Variable 150,000 1 150
Fixed 150
300
Profit/(loss) Nil
This confirms the calculation in (a).
(c) Summary of results for Q3

000 000
Sales 120,000 10 1,200
Manufacturing costs:
Variable 180,000 6 1,080
Fixed 180,000 2 360
1,440
Less: Closing stock 60,000 8 480
960
Manufacturing gross profit 240
Add: Over-absorption gross profit 60
300
Selling and administration costs:

Variable 120,000 1 120
Fixed 150
270
Profit/(loss) 30
49
(d) The break-even volume is 150,000 units. This is confirmed in part (b) by the profit
statement. The sales manager will be surprised and maybe relieved to see a profit of
30,000 for period 3 (part (c)) when sales are only 120,000. He would have predicted a loss,
which would be 90,000 being the loss of contribution through a fall in sales of 30,000 units
(30,000 3).
The reason for the profit is the use of the absorption costing approach in the profit
statement and the valuation of stock. Under 4 costing, profits vary with both production
and sales levels.
The manufacturing fixed costs have been applied to all production with a consequent over
absorption, which is adjusted with other period costs in arriving at the net profit.
One third of the production is held in stock and hence one third of the absorbed
manufacturing overhead is carried forward to the next accounting period.
50

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Examiners commentaries 2016

Examiners commentaries 2016

Information about the subject guide and the Essential reading

What the examiners are looking for

Announcement of changes of examination format

In summary the allocation of marks will be:

Section A (20 MCQs) 30 marks

The rubric for Part 1 of the examination will read as follows:

Examples of Multiple choice questions (MCQs)

Here are examples of what questions in Part I will look like.

Amounts due to suppliers, goodwill, reserves.

A Non-current Asset, Current Asset, Current Asset.

Cash received from accounts receivable (debtors) of 55,000.

The new figure for capital employed is:

Which ONE of the following describes a cost centre?

An investment project requires an initial cash investment of 600,000. The expected

Solutions to example multiple choice questions

Capital Employed at start = 600,000

Depreciation = (70,000 14,000) 7 = 8,000 per annum.

NBV at 31/12/18 = 70,000 (5 8,000) = 30,000.

Current contribution = (85 30) 2,000 = 100,000.

Fixed costs = 100,000 20,000 = 80,000.

Proposed contribution = (85 30) 1,800 = 99,000.

Expected profit = 99,000 (80,000 4,000) = 23,000.

Examination revision strategy

Examiners commentaries 2016

Information about the subject guide and the Essential reading

Comments on specific questions Zone A

Answer question 1 from this section.

Reading for this question

December sale: 35 at 900 31,500

Closing stock 15 at 1,100= 16,500

LIFO Cost of sales

December sale: 10 at 700 = 7,000

Reading for this question

Reading for this question

Reading for this question

Subject guide, Chapter 10.

L&P (2013), Chapter 17.

Approaching the question

Ophelia Ltds trial balance as at 31 October 2015 is shown below.

1. The inventories at the close of business on 31 October 2015 were valued at

Prepare the following financial statements for Ophelia Ltd.

(a) Income statement for the year ended 31 October 2015.

Reading for this question

Subject guide, Chapters 4, 5 and 6.

L&P (2013), Chapter 10.

Approaching the question

(a) Ophelia Ltd.

Profit before Interest and Tax 3,683

(b) Statement of changes in equity for year ended 31 October 2015

Share Share Retained Total

(c) Statement of financial position at 31 October 2015

Non-current liabilities Bank loan 15,000

Income Statement for the year ended 31 December 2015

Statements of Financial Position as at 31 December

The following additional information is relevant.

4. Trade payables include accrued interest of 5,000 (2014 7,000).

6. An impairment review at 31 December 2015 identified a fall in the recoverable

7. Included in trade payables is 10,000 which relates to the purchase of

Reading for this question

Subject guide, Chapter 6.

L&P (2013), Chapter 6.