Advanced GCE

ACCOUNTING Unit F014: Management Accounting Specimen Paper

F014 QP

Time: 2 hours
Additional Materials: Answer Booklet (12 pages)

INSTRUCTIONS TO CANDIDATES Answer all the questions.

INFORMATION FOR CANDIDATES The number of marks for each question is given in brackets [ ] at the end of each question or part of question. The total number of marks for this paper is 120.

ADVICE TO CANDIDATES Read each question carefully and make sure you know what you have to do before starting your answer.

*In these two questions/sub-questions, you will be assessed on the quality of your written communication. In one of these questions, the focus will be on your ability to present numerical information legibly and in an appropriate accounting format. In the other, you will be assessed on the legibility and style of writing, the clarity and coherence of your arguments and the accuracy of your spelling, punctuation and grammar.

This document consists of 6 printed pages and 2 blank pages.

SP (SLM) T12103 OCR 2007 [QAN 500/2187/4] OCR is an exempt Charity

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2 Answer all questions. 1* The following is a summary of the Balance Sheet for Jade plc as at 31 December 2006. Fixed Assets at cost Less depreciation to date Current Assets Stock Trade Debtors Bank Current Liabilities Trade Creditors 30,000 79,300 130,300 Capital and Reserves 130,000 60,000 35,000 14,300 109,300 65,000 14,000 51,000

The company is in the process of preparing budgets for the three months ending 31 March 2007, and the following information is available. (i) Budgeted sales (which provide a gross profit of 25% on cost) are: December 2006 January 2007 February 2007 March 2007 April 2007 70,000 75,000 65,000 100,000 90,000

Half the sales are paid for in the month in which the sales are made and attract a 2% cash discount. The remainder are paid net the following month. (ii) It has been company policy since January 2006 to arrange purchases such that stock at the end of each month exactly covers sales for the following month. Half of the purchases are paid in the month received and the company have negotiated a 2.5% discount for prompt payment. The remainder are paid net the following month. (iii) Expenses (excluding depreciation) are 8,400 per month, payable in the month they are incurred. (iv) The company will be purchasing additional fixed assets costing 17,000 on 1 January 2007, with 50% payable in February 2007 and the balance in May 2007. Depreciation on all fixed assets is at the rate of 10% per annum on cost (rates being charged from the date of purchase). REQUIRED The Cash Budget for the three months ending 31 March 2007, and the Budgeted Trading and Profit and Loss Account for the three months ending 31 March 2007. Total marks [27]

SPECIMEN

3 2 Clearwater Construction plc is the contractor for the building of a replacement high technology factory for a multinational company. The total value of the contract is 8,500,000 over a three year period. The contract commenced on 1 January 2006, and the following details are available as at 31 December 2006. Material purchased Materials transferred out to another site Materials on site not yet used Direct labour Direct labour accrued Indirect labour Indirect labour accrued Plant delivered to site Head office charges Cost of work not yet certified 848,200 8,000 38,000 448,000 19,500 63,000 2,400 120,000 48,000 86,000

Clearwater Construction plc has received payment of 1,555,500 which represents work certified as completed by the architects as at 31 December 2006, less a 15% retention. The plant is estimated to last the life of the contract, and no residual value is expected. The company uses the straight line method of depreciation. The attributable profit formula used by the company is: apparent (notional) profit x 2 3 REQUIRED (a) The Contract Account for the year ended 31 December 2006. [16] x cash received work certified

(b) State and briefly explain the accounting concept involved in the calculation of profit to be credited to the accounts for the year ended 31 December 2006. [3] (c) It is intended that the new factory be fully automated with the consequence of a number of redundancies amongst existing employees. From the social responsibility viewpoint, what factors should the business consider, and what assistance could it give to employees who will eventually be made redundant at the site (the majority of whom it is anticipated will be taking early retirement)? [9] Total marks [28]

4 3 Sandstone Limited manufactures three products A, B and C. Budgeted costs and selling prices for its next financial year are as follows: Product Selling price per unit Variable costs per unit: Direct wages: Machinists (8 per hour) Packers (6 per hour) Direct materials Variable overheads Expected sales (units) The total annual fixed costs are 600,000. Owing to a high demand in the local area for machinists, the directors of Sandstone Limited have forecast that only 100,000 machinists hours will be available for its production for the next financial year. This will lead to a shortage of machinists hours and the company is considering the following options. Option 1 To utilise the existing machinists to produce the maximum profit available. Option 2 To increase the hourly rate for machinists to 9 per hour. This would attract additional machinists and Sandstone Limited would be able to increase production to meet the expected sales. The rate would be payable to all machinists for the full financial year. No other changes would be made. REQUIRED (a) A statement to show the maximum profit Sandstone Limited could make in its next financial year under Option 1. Show the contribution per unit for each product, and the ranking of each product in your calculations. [13] (b) A statement to show the maximum profit Sandstone Limited could make in its next financial year under Option 2. Show the contribution per unit for each product in your calculations. [9] (c)* Evaluate the options being considered by Sandstone Limited. [14] Total marks [36] 24 6 12 5 12,000 16 6 10 8 16,000 32 9 15 6 18,000 A 65 B 64 C 82

5 4 Monarch plc had estimated the following factory indirect costs for its financial year ended 31 December 2006. Indirect wages Repairs and maintenance Canteen Insurance of machinery Insurance of premises Heating and lighting Consumables 610,000 95,600 35,200 27,000 24,000 32,500 4,900 829,200 The company calculated a suitable overhead absorption rate for each of the two production departments using the following information. Production Departments Machining Machine cost () Direct machine hours Direct labour hours Premises area (square metres) Number of employees Consumables () 375,000 270,000 75,000 7,200 48 821 Assembly 125,000 30,000 303,000 6,400 81 1,382 Service Departments Maintenance 1,600 15 1,330 Canteen 800 6 1,367

The proportion of work done by each service department was: Machining Maintenance (%) Canteen (%) 75 30 Assembly 25 55 Maintenance 15 Canteen -

The actual results for the year ended 31 December 2006 were as follows: Machining Factory indirect costs () Direct machine hours Direct labour hours 397,100 275,000 78,000 Assembly 412,600 29,500 290,000

6 REQUIRED (a) (b) (c) Calculate, using appropriate bases, the overhead absorption rate for each of the production departments. [19] Calculate the amount of overhead that would be over or under absorbed by each production department, using the actual results provided. [4] Discuss the problems associated with using predetermined overhead absorption rates, indicating how an inaccurate rate of overhead absorption can adversely affect the profits of a business. [6] Total marks [29] Paper Total [120]

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Copyright Acknowledgements:
Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (OCR) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest opportunity. OCR is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge. OCR 2007

SPECIMEN

OXFORD CAMBRIDGE AND RSA EXAMINATIONS Advanced GCE

ACCOUNTING
Unit F014: Management Accounting Specimen Mark Scheme The maximum mark for this paper is 120.

F014 MS

This document consists of 9 printed pages.

SP (SLM) T12103 OCR 2007 [QAN 500/2187/4] OCR is an exempt Charity

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2 INSTRUCTIONS TO EXAMINERS Own Figure Rule (of) Where of is indicated, a figure which is incorrect solely because of an error in an earlier part of the question may be awarded the appropriate marks as if it were correct. Quality of Written Communication The rubric states: *In these two questions/sub-questions, you will be assessed on the quality of your written communication. In one of these questions, the focus will be on your ability to present numerical information legibly and in an appropriate accounting format. In the other, you will be assessed on the legibility and style of writing, the clarity and coherence of your arguments and the accuracy of your spelling, punctuation and grammar. 4% of the paper marks are available for rewarding Quality of Written Communication, as follows: Levels of Response for Numerical Questions Level 3 Mark 3 Description All account headings, terms and balances are included appropriately and in line with accounting conventions. All figures are legible with effective use made of columns and sub-totals. Al, accounts are ruled off as appropriate. Almost all account headings, terms and balances are included appropriately and in line with accounting conventions. Figures are legible with effective use made of columns and sub-totals. Accounts are ruled off as appropriate. Some account headings, terms and balances are included though not always adhering to accounting conventions. Most figures are legible. Some appropriate use is made of columns and sub-totals. Some accounts are ruled off as appropriate. Responses which fail to achieve the standard required for Level 1.

1 0

Levels of Response for Narrative Questions Level Mark Description Ideas, some complex, are expressed clearly and quite fluently, using an appropriate style of writing. Arguments made are generally relevant and are constructed in a logical and coherent manner. There are few errors of spelling, punctuation and grammar, and those that are made are not intrusive and do not obscure meaning. Relatively straightforward or simple ideas are expressed in a generally appropriate style of writing which sometimes lacks clarity or fluency. Arguments have some limited coherence and structure, occasionally showing relevance to the main focus of the question. There are errors of spelling, punctuation and grammar which are noticeable and sometimes intrusive but do not totally obscure meaning. Responses which fail to achieve the standard required for Level 1.

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3 Question Number 1* Calculations Dec Sales 50%-2% 50% 2% Sales Jan Feb Mar Apr 75,000 65,000 100,000 90,000 Dec Purchases 50%-2.5% 50% 2.5% 60,000 29,250 70,000 34,300 Jan 75,000 36,750 35,000 71,750 750 Feb 65,000 31,850 37,500 69,350 650 Mar 100,000 49,000 32,500 81,500 1,000 Answer Max Mark

Purchases (Sales x 4/5) Dec Jan Feb Mar Jan 52,000 25,350 30,000 55,350 650 60,000 52,000 80,000 72,000 Feb 80,000 39,000 26,000 65,000 1,000 Mar 72,000 35,100 40,000 75,100 900

Depreciation 65,000 + 17,000 = 82,000 x 10% x 0.25 = 2,050 Jade plc Cash Budget for the three months ending 31 March 2007 Jan Receipts Sales Payments Purchases Expenses Fixed asset 63,750 Net receipts/(payments) Opening balance Closing balance 8,000 14,300 22,300 [1] 71,750 [2] 69,350 [2] 81,500 [2] Feb Mar

55,350 8,400

[2]

65,000 8,400 8,500 81,900 (12,550) 22,300 9,750

[2] [1]

75,100 8,400 83,500 (2,000) 9,750 7,750

[2] [1]

[1]

4 Question Number 1 contd Answer Max Mark

Budgeted Trading and Profit and Loss Account for the three months ending 31 March 2007 Sales Opening stock Purchases Closing stock Cost of sales Gross Profit Discount received Expenses Discount allowed Depreciation Net Profit 25,200 2,400 2,050 [1] [1] [2] 29,650 20,900 60,000 204,000 264,000 72,000 [1] 192,000 48,000 2,550 50,550 [1] [1] 240,000 [1]

NB Up to an additional three marks can be awarded for the candidates quality of written communication (numerical responses) Total marks 2(a) Materials Purchased Direct lab Dir lab c/d Indirect lab Ind lab c/d Plant Head office charges Cost to date b/d Notional profit c/d Profit and loss Profit provision c/d Materials b/d Plant b/d Work not cert b/d 448,000 19,500 63,000 2,400 65,400 120,000 48,000 1,549,100 1,423,100 492,900 1,916,000 279,310 213,590 492,900 38,000 80,000 86,000 [1] [1] Profit provision b/d Direct lab b/d Indirect lab b/d 492,900 213,590 19,500 2,400 [1] [2] Notional profit b/d [1] Work certified Work not certified c/d [1] [1] [1] 1,549,100 1,830,000 86,000 1,916,000 492,900 [1] [1] 467,500 [1] Contract Account 848,200 [1] Materials trfs out Materials c/d Plant c/d Cost to date c/d 8,000 38,000 80,000 1,423,100 [1] [1] [1] [27]

Work cert: 1,555,500 x 100 = 1,830,000 85 P&L: 492,900 x 2 x 1,555,500 = 279,310 3 1,830,000

[16]

5 Question Number 2(b) Answer Max Mark

Prudence. Reduction of profit by 2/3 multiplier. Reduction of profit by cash received multiplier. work certified (3 x 1 mark) (1 for concept, 1 reduction of profit, 1 for either multiplier) Replacing labour by automation could lead to conflict with unions. A consultation process should take place to ensure any grievances are discussed, and if not resolved the consequences are considered. Redundancies could lead to industrial action and adverse publicity. Customers could purchase from other sources and there could be a general loss of goodwill in the company. If the company is part of a larger group or has other departments, it could consider retraining or redeploying employees. Redundant employees in an area of high unemployment could lead to a consequent loss of purchasing power in the community. This in turn could lead to additional adverse publicity for the company. The company could consider redundancy compensation and enhanced pensions for employees. Education for social and cultural activities during retirement could be provided and social events arranged for retired employees. (3 x 3 marks) (1 for point plus up to 2 for development) Total marks

[3]

2(c)

[9] [28]

3(a) Selling price Variable cost Contribution/unit Contribution Limiting factor Ranking[1]

A 65 47 18 18 3 6 (2nd) [1]

B 64 40 24 24 2 12 (1 )
st

C 82 62 [1] 20 20 4 5 (3rd) [1]

6 Question Number Machinist hours available 3(a) contd Product B x 16,000 Product A x 12,000 Product C x 8,000 Contribution B 16,000 x 24 Contribution A 12,000 x 18 Contribution C 8,000 x 20 Total contribution Fixed costs Profit 3(b) Selling price Variable cost Contribution/unit x Qty A 65 50 15 12,000 180,000 Total contribution Fixed costs Profit [1 of] [1] 100,000 (32,000) 68,000 (36,000) 32,000 (32,000) 384,000 216,000 160,000 760,000 600,000 160,000 [1] [1] B 64 42 22 16,000 352,000 [1 of] [1] C 82 66 16 18,000 288,000 820,000 600,000 220,000 [1 of] [1] [1] [1] [9] [1] [13] [2] [1] [1] [1] [1] [1] Answer Max Mark

Question Number 3(c)*

Answer

Max Mark

Option 1 Limits production of product C, which may lead to packers being laid off. Unable to make full production and less profit generated. Unable to meet customer demand for product C, which may lead to losing customers to competitors. Impact of fewer employees and multiplier effect on local economy. Reputation of business may suffer if it is not able to attract sufficient machinists. Option 2 Employing additional machinists at higher rate will lead to increased production and profit. Motivation issue and packers may also demand wage increases and reduce profit. The company needs to consider long term demand before taking on permanent staff. All figures are estimates and may not materialise. Rather than take on extra machinists could packers be retrained to work as machinists. Comparison and recommendation Increasing the hourly rate for labour will lead to an increase in profit of 60,000. This is a 33.5% increase compared to maintaining the current labour rate. Under option 2, the company is able to achieve full production, however under option 1, production of product C is reduced by 10,000 units. This is a 55.6% reduction on expected sales. Customer confidence may fall and have a multiplier impact on products A and B. Whilst option 2 may lead to an adverse reaction from packers, it does lead to full production, maintaining employment and increasing profit. On this basis, option 2 would be preferred. (Up to 4 marks for advantages and disadvantages of Option 1) (Up to 4 marks for advantages and disadvantages of Option 2) (Up to 4 marks for a comparison and recommendation) NB Up to an additional two marks can be awarded for the candidates quality of written communication (narrative responses) Total marks

[14] [36]

4(a)

Cost Ind wages Rep/maint Canteen Ins mach Ins prem Heat/light Consum

Basis Employers Mach hrs Employees Mach cost Area Area Allocated

Mach 195,200 86,040 11,264 20,250 10,800 14,625 821 [1] [1] [1] [1] [1] [1] [1]

Assy 329,400 9,560 19,008 6,750 9,600 13,000 1,382

Maint 61,000 3,520 2,400 3,250 1,330

Canteen 24,400 1,408 1,200 1,625 1,367 30,000 (30,000) [1]

Reapportion

Canteen Maint

9,000 57,000 405,000 405,000 270,000 1.50 DMH

[1] [1] [1] [1of] [1] [1]

16,500 19,000 424,200 424,000 303,000 [1] [1of] [1] [1]

4,500 76,000 (76,000) Nil [1]

Nil

1.40 DLH Mach

[19]

4(b) Actual overhead Absorbed overhead (1.50 x 275,000) over Actual overhead Absorbed overhead (1.40 x 290,000) under 4(c)

397,100 412,500 15,400 Assy 412,600 406,000 6,600 [2][1 of] [4] [2][1 of]

Use of estimated data, which could be inaccurate, leading to under/over absorption. Over absorption, too much overhead charged to production, overpriced and uncompetitive, fall in demand and subsequent loss of revenue/reduction in profit. Under absorption, insufficient overhead charged to production, lower price to customer, costs not covered and subsequent reduction in profits. (3 x 2 marks) (1 for point plus 1 for development) Total marks Paper Total

[6] [29] [120]

Assessment Objectives Grid Question 1* 2(a) 2(b) 2(c) 3(a) 3(b) 3(c)* 4(a) 4(b) 4(c) Totals *includes QWC AO1 14 5 0 0 3 3 0 5 0 0 30 AO2 13 9 1 0 9 6 0 12 4 0 54 AO3 0 2 2 9 1 0 14 2 0 6 36 Total 27 16 3 9 13 9 14 19 4 6 120