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1. **Direct Labor Rate Variance**:
\text{Rate Variance} = (\text{Standard Rate} - \text{Actual Rate}) \times \text{Actual Hours}
\text{Actual Rate} = \frac{$24,150}{2,100 \text{ hours}} = $11.50 \text{ per hour}
\text{Rate Variance} = ($12.00 - $11.50) \times 2,100 = $1,050 \text{ Favorable (F)}

2. **Direct Labor Efficiency Variance**:
\text{Efficiency Variance} = (\text{Standard Hours Allowed} - \text{Actual Hours}) \times \text{Standard Rate}
\text{Standard Hours Allowed} = 800 \text{ units} \times 2.5 \text{ hours} = 2,000 \text{ hours}
\text{Efficiency Variance} = (2,000 - 2,100) \times $12 = $1,200 \text{ Adverse (A)}

1 mark for the correct combination of direct labor rate variance ($1,050 Favorable) and direct labor efficiency variance ($1,200 Adverse).

1. **Traditional Costing (OAR based on Labor Hours)**:
Total Labor Hours = (2,000 units \times 2 hours) + (8,000 units \times 1 hour) = 4,000 + 8,000 = 12,000 hours.
OAR = $60,000 / 12,000 hours = $5 per hour.
Overhead per unit of X = 2 hours \times $5 = $10.

2. **Activity-Based Costing (ABC)**:
Number of setups for X = 2,000 / 100 = 20 setups.
Number of setups for Y = 8,000 / 400 = 20 setups.
Total setups = 40.
Cost per setup = $60,000 / 40 = $1,500.
Overhead allocated to X = 20 setups \times $1,500 = $30,000.
Overhead per unit of X = $30,000 / 2,000 units = $15.

3. **Difference**:
$15 (ABC) - $10 (Traditional) = $5.00 increase.

1 mark for calculating the correct change of $5.00 increase per unit of Product X.

Profit for the year: $90,000
Add: Interest on drawings (for 6 months from 1 July to 31 December):
- P: $20,000 \times 5\% \times 6/12 = $500
- Q: $10,000 \times 5\% \times 6/12 = $250
Total Interest on Drawings = $750
Total available: $90,000 + $750 = $90,750

Less: Interest on capital:
- P: $100,000 \times 6\% = $6,000
- Q: $80,000 \times 6\% = $4,800
Total Interest on Capital = $10,800

Less: Q's salary = $15,000

Residual Profit = $90,750 - $10,800 - $15,000 = $64,950
P's share (3/5) = $64,950 \times 0.6 = $38,970

1 mark for the correct calculation of P's share of residual profit of $38,970.

A's Capital account changes:
1. Opening Balance: $120,000
2. Share of Revaluation Surplus: $40,000 \times 3/5 = +$24,000
3. Goodwill Adjustment (No Goodwill account is retained):
- Credited in old ratio (3:2): $50,000 \times 3/5 = +$30,000
- Debited in new ratio (2:2:1): $50,000 \times 2/5 = -$20,000
- Net Goodwill adjustment = +$10,000
Total Capital Balance for A = $120,000 + $24,000 + $10,000 = $154,000.

1 mark for the correct capital account balance for A of $154,000.

1. **Bonus Issue**:
Existing shares = $400,000 / $0.50 = 800,000 shares.
Bonus shares = 800,000 / 4 = 200,000 shares.
Nominal value of bonus shares = 200,000 \times $0.50 = $100,000.
This is fully funded by the Share Premium account (reducing it to $20,000). Retained earnings are unaffected.

2. **Dividend**:
Total shares after bonus issue = 1,000,000 shares.
Dividend paid = 1,000,000 \times $0.05 = $50,000. This is paid out of Retained Earnings.

3. **Retained Earnings Balance**:
Opening balance: $350,000
Less: Dividend paid: -$50,000
Add: Profit for the year: +$140,000
Closing balance: $350,000 - $50,000 + $140,000 = $440,000.

1 mark for correct calculation of Retained Earnings of $440,000.

1. **Prime Cost**:
Direct materials ($180,000) + Direct labor ($120,000) = $300,000.

2. **Factory Overheads**:
Factory supervisor's salary ($45,000) + Depreciation of factory machinery ($25,000) + Factory rent and rates ($30,000) = $100,000.
*(Note: Depreciation of office equipment and office rent are administrative overheads and excluded.)*

3. **Cost of Production**:
$300,000 (Prime Cost) + $100,000 (Overheads) = $400,000.

4. **Transfer Value (with 20% Markup)**:
$400,000 \times 1.20 = $480,000.

1 mark for the correct transfer value of $480,000.

1. **Correction of Sales/Purchases Returns**:
- Decreasing purchases returns to remove the incorrect credit: -$1,200
- Recording the omitted sales returns debit: -$1,200
Total effect of Error 1: -$2,400

2. **Correction of Motor Vehicle Repair**:
- Charging repairs as an expense: -$3,000
- Removing the incorrect 20% depreciation on the capitalised repair ($3,000 \times 20%): +$600
Total effect of Error 2: -$2,400

3. **Corrected Profit**:
$85,000 - $2,400 - $2,400 = $80,200.

1 mark for the correct adjusted profit of $80,200.

1. **Debenture Interest**:
- Interest on original $200,000 debentures for full year: $200,000 \times 6\% = $12,000.
- Interest on new $100,000 debentures for 6 months (1 July to 31 December): $100,000 \times 6\% \times 6/12 = $3,000.
- Total debenture interest = $12,000 + $3,000 = $15,000.

2. **Preference Shares Dividend**:
- Irredeemable preference shares are classified as equity under IAS 32, so their dividend ($5,000) is recognized as an appropriation in the statement of changes in equity, not as a finance cost in the income statement.

3. **Total Finance Cost** = $15,000.

1 mark for identifying that only debenture interest is a finance cost and calculating the total as $15,000.

1. Goodwill is shared in the old profit-sharing ratio (3:2):
- Y's share of Goodwill = $50,000 \times \frac{2}{5} = $20,000 (Credit)

2. Goodwill is written off in the new profit-sharing ratio (5:3:2):
- Y's share of Goodwill written off = $50,000 \times \frac{3}{10} = $15,000 (Debit)

3. Calculate the new balance on Y's capital account:
- Opening Balance: $40,000 (Cr)
- Add: Goodwill share: $20,000 (Cr)
- Less: Goodwill written off: $15,000 (Dr)
- Closing Balance: $40,000 + $20,000 - $15,000 = $45,000.

Correct option is C.
- 1 mark for the correct final capital account balance of $45,000.
- Reject option A (subtracting Goodwill adjustment instead of net addition).
- Reject option B (no adjustment made).
- Reject option D (X's opening balance).

1. **Direct Labour Rate Variance**:
- Actual hours worked \times Standard rate = 3,450 \times $12.00 = $41,400
- Actual cost incurred = $41,850
- Variance = $41,400 - $41,850 = $450 \text{ Adverse}

2. **Direct Labour Efficiency Variance**:
- Standard hours for actual production = 1,200 \times 3 \text{ hours} = 3,600 \text{ hours}
- Actual hours worked = 3,450 \text{ hours}
- Variance in hours = 3,600 - 3,450 = 150 \text{ hours Favourable}
- Variance in value = 150 \text{ hours} \times $12.00 = $1,800 \text{ Favourable}

Correct option is B.
- 1 mark for both rate variance of $450 Adverse and efficiency variance of $1,800 Favourable correctly calculated.

1. **Total number of setups** = 10 (P) + 40 (Q) = 50 setups.
2. **Setup cost per setup (Cost driver rate)** = $15,000 / 50 setups = $300 per setup.
3. **Total setup cost allocated to Product P** = 10 setups \times $300 = $3,000.
4. **Budgeted setup cost per unit of Product P** = $3,000 / 1,000 units = $3.00 per unit.

Correct option is B.
- 1 mark for the correct unit overhead allocation of $3.00.

1. **Calculate factory cost of production**:
\text{Prime cost} ($240,000) + \text{Factory overheads} ($80,000) + \text{Opening WIP} ($15,000) - \text{Closing WIP} ($11,000) = $324,000

2. **Calculate transfer price of completed goods (Cost + 20%)**:
$324,000 \times 1.20 = $388,800.

*Note*: Provision for unrealised profit and closing inventory of finished goods are adjustments for the Income Statement / Statement of Financial Position and do not affect the cost of production or transfer price of goods produced during the year.

Correct option is C.
- 1 mark for calculating correct cost of production ($324,000) and applying the 20% mark-up correctly to get $388,800.
- Reject option A (only cost of production without mark-up).
- Reject option B (omitting work in progress adjustments).

1. Nominal value of ordinary shares to be redeemed = 100,000 shares \times $0.50 = $50,000.
2. Nominal value of fresh issue of shares = 40,000 preference shares \times $1 = $40,000.
3. Transfer to Capital Redemption Reserve = Nominal value of shares redeemed - Nominal value of fresh issue = $50,000 - $40,000 = $10,000.

Correct option is A.
- 1 mark for the correct calculation of $10,000.
- Reject B (using total payment to redeem including the premium).
- Reject C (using total nominal value of redeemed shares without adjusting for the fresh issue).

1. **Budgeted Overhead Absorption Rate (OAR)** = $180,000 / 30,000 units = $6.00 per unit.
2. **Absorbed Overheads** = Actual Overheads + Over-absorption = $195,000 + $15,000 = $210,000.
3. **Actual Production** = Absorbed Overheads / OAR = $210,000 / $6.00 = 35,000 units.

Correct option is D.
- 1 mark for calculating the correct actual production of 35,000 units.

Calculate B's Current Account balance at 31 December 2023:
- Opening debit balance: ($3,200)
- Add: Interest on capital: +$1,500
- Add: Share of profit: +$12,800
- Less: Interest on drawings: -$600
- Less: Drawings: -$8,500
- Closing balance: -$3,200 + $1,500 + $12,800 - $600 - $8,500 = +$2,000 (Credit Balance)

Correct option is A.
- 1 mark for the correct balance of $2,000 credit.
- Reject B (identifying it as a debit balance).
- Reject C (treating opening balance as credit).

1. **Contribution to Sales (C/S) Ratio** = ($25 - $15) / $25 = 40% (or 0.40).

2. **Current Break-Even Sales Revenue** = $60,000 / 0.40 = $150,000.

3. **New Required Sales Revenue**:
- New Fixed Costs = $60,000 + $10,000 = $70,000
- New Target Profit = $30,000
- Required Contribution = $70,000 + $30,000 = $100,000
- New Required Revenue = $100,000 / 0.40 = $250,000

4. **Increase in Sales Revenue** = $250,000 - $150,000 = $100,000.

Correct option is C.
- 1 mark for the correct calculation of $100,000 required increase.

1. Calculate Z's share of the revaluation gain: \( \$18,000 \times \frac{1}{6} = \$3,000 \) (credited to Z's capital account). 2. Calculate Z's share of the goodwill: \( \$36,000 \times \frac{1}{6} = \$6,000 \) (credited to Z's capital account). 3. Since goodwill is not remaining in the books, the goodwill is written off in the new profit-sharing ratio among the remaining partners (X and Y). This does not affect Z's capital account balance upon departure. 4. Z's capital account balance prior to payment: \( \$25,000 \text{ (opening)} + \$3,000 \text{ (revaluation)} + \$6,000 \text{ (goodwill)} = \$34,000 \). 5. Deduct cash payment of \( \$10,000 \): \( \$34,000 - \$10,000 = \$24,000 \) transferred to Z's loan account.

Award 1 mark for the correct answer of C. Method: Z's Capital = $25,000 (opening) + $3,000 (revaluation share) + $6,000 (goodwill share) - $10,000 (cash paid) = $24,000.

1. Number of existing ordinary shares = \( \frac{\$400,000}{\$0.50} = 800,000 \text{ shares} \). 2. Rights issue: 1 for 4 shares = \( \frac{800,000}{4} = 200,000 \text{ shares} \). * Nominal value of rights shares = \( 200,000 \times \$0.50 = \$100,000 \). * Premium per share = \( \$1.20 - \$0.50 = \$0.70 \). * Share premium generated = \( 200,000 \times \$0.70 = \$140,000 \). * New share premium balance = \( \$150,000 + \$140,000 = \$290,000 \). * Total shares now held = \( 800,000 + 200,000 = 1,000,000 \text{ shares} \). 3. Bonus issue: 1 for 5 shares = \( \frac{1,000,000}{5} = 200,000 \text{ shares} \). * Nominal value of bonus shares = \( 200,000 \times \$0.50 = \$100,000 \). * To keep reserves in the most flexible form, the bonus issue must be funded from the non-distributable share premium account first. * Remaining share premium = \( \$290,000 - \$100,000 = \$190,000 \). * Retained earnings remain unchanged at \( \$280,000 \).

Award 1 mark for the correct answer of A. Method: Rights issue premium addition = $140,000 (Share premium becomes $290,000); Bonus issue of $100,000 funded entirely from Share premium, leaving a balance of $190,000; Retained earnings are preserved at $280,000.

1. Transfer price of goods produced = \( \text{Cost of production} \times 1.20 = \$240,000 \times 1.20 = \$288,000 \). 2. Calculate the provision for unrealised profit (PUP) in inventory: * Since markup is 20%, the profit element is \( \frac{20}{120} \) of the transfer price. * Opening PUP = \( \$36,000 \times \frac{20}{120} = \$6,000 \). * Closing PUP = \( \$45,000 \times \frac{20}{120} = \$7,500 \). 3. Net adjustment to the provision = \( \$7,500 - \$6,000 = \$1,500 \text{ increase} \). This is debited to the income statement.

Award 1 mark for the correct answer of A. Method: Transfer price = $240,000 * 1.20 = $288,000. Provision for unrealised profit adjustment = ($45,000 - $36,000) * 20/120 = $1,500 increase.

1. Calculate Standard Hours (SH) for actual production: \( \text{SH} = 2,000 \text{ units} \times 4 \text{ hours/unit} = 8,000 \text{ hours} \). 2. Use the Labor Efficiency Variance to find Actual Hours (AH): \( \text{Labor Efficiency Variance} = (\text{SH} - \text{AH}) \times \text{Standard Rate (SR)} \) \( \$3,000 \text{ Favorable} = (8,000 - \text{AH}) \times \$15.00 \) \( 8,000 - \text{AH} = 200 \text{ hours} \) \( \text{AH} = 7,800 \text{ hours} \). 3. Use the Labor Rate Variance to find Actual Rate (AR): \( \text{Labor Rate Variance} = (\text{SR} - \text{AR}) \times \text{AH} \) \( -\$1,560 \text{ (Adverse)} = (\$15.00 - \text{AR}) \times 7,800 \) \( \$15.00 - \text{AR} = -\$0.20 \) \( \text{AR} = \$15.20 \).

Award 1 mark for the correct answer of A. Method: Standard hours = 8,000; Actual hours = 8,000 - ($3,000 / $15) = 7,800; Actual rate = $15 + ($1,560 / 7,800) = $15.20.

1. Determine cost pool rates: * Setup cost per run: \( \frac{\$80,000}{15 + 5} = \$4,000 \text{ per run} \). * Inspection cost per inspection: \( \frac{\$40,000}{20 + 60} = \$500 \text{ per inspection} \). 2. Allocate costs to Product P: * Machine setup: \( 15 \text{ runs} \times \$4,000 = \$60,000 \). * Quality inspection: \( 20 \text{ inspections} \times \$500 = \$10,000 \). * Total overheads allocated to Product P: \( \$60,000 + \$10,000 = \$70,000 \). 3. Calculate overhead cost per unit of P: * Budgeted production of P = 1,000 units. * Cost per unit = \( \frac{\$70,000}{1,000} = \$70.00 \).

Award 1 mark for the correct answer of B. Method: Budgeted setup cost allocated to P = (15/20) * $80,000 = $60,000. Budgeted inspection cost allocated to P = (20/80) * $40,000 = $10,000. Total overhead for P = $70,000. Cost per unit of P = $70,000 / 1,000 = $70.

1. Calculate the new variable cost per unit: \( \$20 \times 1.10 = \$22 \). 2. Calculate the new contribution per unit: \( \text{Selling price} - \text{New variable cost} = \$40 - \$22 = \$18 \). 3. Calculate the new fixed costs: \( \$100,000 + \$8,000 = \$108,000 \). 4. Apply the formula for target sales volume in units: \( \text{Required Sales (units)} = \frac{\text{New Fixed Costs} + \text{Target Profit}}{\text{New Contribution per unit}} \) \( \text{Required Sales} = \frac{\$108,000 + \$36,000}{\$18} = \frac{\$144,000}{\$18} = 8,000 \text{ units} \).

Award 1 mark for the correct answer of C. Method: New contribution = $40 - $22 = $18. New fixed costs + target profit = $108,000 + $36,000 = $144,000. Required sales = $144,000 / $18 = 8,000 units.

PART (a): Traditional Costing. Total direct labor hours = \( (2,000 \text{ units} \times 2 \text{ hours}) + (5,000 \text{ units} \times 1 \text{ hour}) = 4,000 + 5,000 = 9,000 \text{ hours} \). Overhead Absorption Rate (OAR) = \( \$180,000 / 9,000 \text{ hours} = \$20 \text{ per direct labor hour} \). Unit Overhead Cost: Pendulum = \( 2 \text{ hours} \times \$20 = \$40 \); Digital = \( 1 \text{ hour} \times \$20 = \$20 \). Total Unit Cost: Pendulum = Direct Materials \( \$40 \) + Direct Labor \( \$30 \) (2 hours \( \times \$15 \)) + Overhead \( \$40 = \$110 \). Digital = Direct Materials \( \$25 \) + Direct Labor \( \$15 \) (1 hour \( \times \$15 \)) + Overhead \( \$20 = \$60 \). PART (b): Activity Based Costing. Cost Driver Rates: (1) Machine set-ups rate = \( \$80,000 / (120 + 80) = \$400 \text{ per set-up} \). (2) Quality inspections rate = \( \$60,000 / (150 + 250) = \$150 \text{ per inspection} \). (3) Material handling rate = \( \$40,000 / (60 + 140) = \$200 \text{ per order} \). Overhead allocated to Pendulum: Machine set-ups: \( 120 \times \$400 = \$48,000 \); Quality inspections: \( 150 \times \$150 = \$22,500 \); Material handling: \( 60 \times \$200 = \$12,000 \); Total overhead = \( \$82,500 \). Overhead per unit (Pendulum) = \( \$82,500 / 2,000 \text{ units} = \$41.25 \). Overhead allocated to Digital: Machine set-ups: \( 80 \times \$400 = \$32,000 \); Quality inspections: \( 250 \times \$150 = \$37,500 \); Material handling: \( 140 \times \$200 = \$28,000 \); Total overhead = \( \$97,500 \). Overhead per unit (Digital) = \( \$97,500 / 5,000 \text{ units} = \$19.50 \). Total Unit Cost under ABC: Pendulum = Direct Materials \( \$40 \) + Direct Labor \( \$30 \) + Overhead \( \$41.25 = \$111.25 \). Digital = Direct Materials \( \$25 \) + Direct Labor \( \$15 \) + Overhead \( \$19.50 = \$59.50 \). PART (c): Evaluation. ABC provides a more accurate unit costing method because it attributes overheads based on actual activities consumed rather than labor hours, which may not drive overheads. Pendulum clocks consume more setup and handling costs per unit than previously estimated, increasing its unit cost from \( \$110 \) to \( \$111.25 \), while Digital clocks decrease from \( \$60 \) to \( \$59.50 \). However, implementing ABC is costly, time-consuming, and complex. Zeta Ltd should adopt ABC if the pricing accuracy benefits outweigh the costs of implementation.

PART (a) (Total 7.5 marks): Calculation of total direct labor hours (1 mark); calculation of OAR (1.5 marks); unit overhead costs for Pendulum and Digital (2 marks, 1 mark each); total unit costs for Pendulum and Digital (3 marks, 1.5 marks each). PART (b) (Total 11 marks): Calculation of three cost driver rates (3 marks, 1 mark each); total overheads allocated to Pendulum and Digital (4 marks, 2 marks each); overhead cost per unit for Pendulum and Digital (2 marks, 1 mark each); total unit cost under ABC for Pendulum and Digital (2 marks, 1 mark each). PART (c) (Total 4 marks): Identification of advantages of ABC (2 marks); identification of disadvantages of ABC (1 mark); clear recommendation based on analysis (1 mark).

PART (a): Revaluation Account. Debit side: Profit on revaluation transferred to Capital Accounts: Aaron \( (3/5 \times \$30,000) = \$18,000 \); Brenda \( (2/5 \times \$30,000) = \$12,000 \). Total Debit = \( \$30,000 \). Credit side: Non-current assets = \( \$30,000 \). Total Credit = \( \$30,000 \). PART (b): Capital Accounts (Columnar Form: Aaron | Brenda | Carter). Credit Side: Balances b/d: Aaron \( \$140,000 \), Brenda \( \$100,000 \). Revaluation Profit: Aaron \( \$18,000 \), Brenda \( \$12,000 \). Goodwill (valued in old ratio 3:2): Aaron \( \$36,000 \), Brenda \( \$24,000 \). Cash introduced: Carter \( \$80,000 \). Debit Side: Goodwill written off (new ratio 5:3:2): Aaron \( \$30,000 \), Brenda \( \$18,000 \), Carter \( \$12,000 \). Balances c/d: Aaron \( \$164,000 \), Brenda \( \$118,000 \), Carter \( \$68,000 \). Check totals: Aaron \( \$194,000 \), Brenda \( \$136,000 \), Carter \( \$80,000 \). PART (c): Reasons to write off goodwill: (1) Under modern accounting practices (like IAS 38), internally generated goodwill must not be recognized as a non-current asset in the balance sheet. (2) It prevents inflating the total assets with a subjective and potentially volatile intangible asset valuation. (3) It simplifies future accounting adjustments and avoids disputes regarding goodwill valuations when other partners retire or join.

PART (a) (Total 4.5 marks): Credit entry for non-current assets revaluation (1.5 marks); profit share to Aaron (1.5 marks) and Brenda (1.5 marks). PART (b) (Total 12 marks): Correct opening balances (1.5 marks); revaluation profit split (2 marks); goodwill credited in old ratio (3 marks); goodwill debited in new ratio (3 marks); cash introduced by Carter (1 mark); correct closing balances (1.5 marks). PART (c) (Total 6 marks): 2 marks for each of three valid reasons why goodwill is written off from the partnership books immediately.

PART (a)(i): Material Price Variance = \( (\text{Standard Price} - \text{Actual Price}) \times \text{Actual Quantity} \). Actual Price = \( \$59,160 / 10,200 \text{ kg} = \$5.80 \text{ per kg} \). Variance = \( (\$6.00 - \$5.80) \times 10,200 = \$2,040 \text{ Favorable} \). (ii) Material Usage Variance = \( (\text{Standard Quantity} - \text{Actual Quantity}) \times \text{Standard Price} \). Standard Quantity = \( 2,500 \text{ units} \times 4 \text{ kg} = 10,000 \text{ kg} \). Variance = \( (10,000 - 10,200) \times \$6.00 = \$1,200 \text{ Adverse} \). (iii) Labor Rate Variance = \( (\text{Standard Rate} - \text{Actual Rate}) \times \text{Actual Hours} \). Actual Rate = \( \$44,280 / 3,600 \text{ hours} = \$12.30 \text{ per hour} \). Variance = \( (\$12.00 - \$12.30) \times 3,600 = \$1,080 \text{ Adverse} \). (iv) Labor Efficiency Variance = \( (\text{Standard Hours} - \text{Actual Hours}) \times \text{Standard Rate} \). Standard Hours = \( 2,500 \text{ units} \times 1.5 \text{ hours} = 3,750 \text{ hours} \). Variance = \( (3,750 - 3,600) \times \$12.00 = \$1,800 \text{ Favorable} \). PART (b): Reconciliation Statement. Standard cost of actual production: Materials (\( 2,500 \times \$24 = \$60,000 \)) + Labor (\( 2,500 \times \$18 = \$45,000 \)) = \( \$105,000 \). Adjust for Favorable Variances (deduct): Material Price Variance: \( (\$2,040) \), Labor Efficiency Variance: \( (\$1,800) \). Adjust for Adverse Variances (add): Material Usage Variance: \( \$1,200 \), Labor Rate Variance: \( \$1,080 \). Total Actual Cost = \( \$105,000 - \$2,040 - \$1,800 + \$1,200 + \$1,080 = \$103,440 \). Verification: Actual Materials \( \$59,160 \) + Actual Labor \( \$44,280 = \$103,440 \). PART (c): Discussion. (1) Purchasing cheaper, lower-grade materials (causing a favorable price variance) can lead to higher material defects or handling issues, which require additional labor hours to process, rectify, or sort, thereby leading to an adverse labor efficiency variance. (2) Substandard raw materials can cause machine breakdowns and disruptions on the production line, keeping workers idle or causing them to work slower, which leads to an adverse labor efficiency variance.

PART (a) (Total 12 marks): 3 marks for each of the four variances (1.5 marks for formula/workings, 1 mark for correct amount, 0.5 marks for correct F/A label). PART (b) (Total 6.5 marks): Standard cost of production calculation (1.5 marks); correct list of favorable variances deducted (1.5 marks); correct list of adverse variances added (1.5 marks); final reconciliation total matching actual cost with proper headings (2 marks). PART (c) (Total 4 marks): 2 marks for each of the two well-discussed points explaining how raw material quality differences affect direct labor productivity.

PART (a): Revised Profit. Draft Profit from operations = \( \$145,000 \). Less: Additional depreciation on revaluation = \( \$120,000 / 30 \text{ years} = (\$4,000) \). Revised Profit from operations = \( \$141,000 \). Less: Finance costs (Debenture interest) = \( 8\% \times \$150,000 = (\$12,000) \). Profit before taxation = \( \$129,000 \). Less: Taxation = \( (\$28,000) \). Profit for the year = \( \$101,000 \). PART (b): Statement of Changes in Equity. Columns: Share Capital | Share Premium | Revaluation Reserve | Retained Earnings | Total. (1) Opening Balances (1 Jan 2023): \( \$400,000 \) | \( \$80,000 \) | \( \$0 \) | \( \$112,000 \) | \( \$592,000 \). (2) Gain on Revaluation: \( \$0 \) | \( \$0 \) | \( \$120,000 \) | \( \$0 \) | \( \$120,000 \). (3) Profit for the Year: \( \$0 \) | \( \$0 \) | \( \$0 \) | \( \$101,000 \) | \( \$101,000 \). (4) Transfer of Excess Depreciation: \( \$0 \) | \( \$0 \) | \( (\$4,000) \) | \( \$4,000 \) | \( \$0 \). (5) Interim Dividend Paid: \( \$0 \) | \( \$0 \) | \( \$0 \) | \( (\$16,000) \) | \( (\$16,000) \). (6) Proposed Final Dividend: Not included in SOCE because proposed dividends are non-adjusting post-reporting events under IAS 10 (Note: Number of shares = \( \$400,000 / \$0.50 = 800,000 \text{ shares} \); Proposed Dividend = \( 800,000 \times \$0.05 = \$40,000 \)). (7) Closing Balances (31 Dec 2023): \( \$400,000 \) | \( \$80,000 \) | \( \$116,000 \) | \( \$201,000 \) | \( \$797,000 \). PART (c): Differences: (1) Ordinary shares represent equity ownership of the company, whereas debentures are long-term loans (debt). (2) Dividends on ordinary shares are discretionary and depend on profits, whereas debenture interest is a fixed, legally binding finance cost that must be paid regardless of profit levels. (3) Ordinary shareholders have voting rights at company meetings, whereas debenture holders do not have voting rights.

PART (a) (Total 9 marks): Calculation of extra depreciation (2 marks); revised profit from operations (1 mark); calculation and deduction of debenture interest (2 marks); deduction of tax (1 mark); final profit for the year (3 marks). PART (b) (Total 10.5 marks): Column format and opening balances (1 mark); gain on revaluation in revaluation reserve (2 marks); profit for the year in retained earnings (1.5 marks); transfer of excess depreciation from RR to RE (2 marks); deduction of interim dividend (1.5 marks); exclusion of proposed final dividend with explanation (1.5 marks); correct closing balances (1 mark). PART (c) (Total 3 marks): 1 mark for each of three valid differences between ordinary shares and debentures.

P and Q Partnership - Dissolution and Acquisition by Z Limited

(a) Calculation of Goodwill:
Agreed values of assets taken over:
- Premises: $150,000
- Equipment: $38,000
- Inventory: $16,500
- Trade receivables (\(22,000 \times 0.95\)): $20,900
Total assets taken over: $225,400
Less: Liabilities taken over (Trade payables): $15,000
Net assets taken over: $210,400
Purchase Consideration: $215,000
Goodwill = Purchase Consideration - Net assets taken over = \(215,000 - 210,400\) = $4,600

(b) Realisation Account:
Debit:
- Premises: $120,000
- Equipment: $45,000
- Inventory: $18,000
- Trade receivables: $22,000
Credit:
- Trade payables: $15,000
- Z Limited (Purchase Consideration): $215,000
Total Credits: $230,000
Total Debits: $205,000
Profit on Realisation: $25,000
Shared:
- P (3/5): $15,000
- Q (2/5): $10,000

(c) Partners' Capital Accounts:
P's Capital Account:
- Credit: Balance b/f $110,000, Realisation Profit $15,000. Total Credit: $125,000
- Debit: Shares in Z Ltd (\(100,000 \times 1.50 \times 3/5\)) $90,000, Cash received (\(32,500 + 2,500\)) $35,000. Total Debit: $125,000
Q's Capital Account:
- Credit: Balance b/f $85,000, Realisation Profit $10,000. Total Credit: $95,000
- Debit: Shares in Z Ltd (\(100,000 \times 1.50 \times 2/5\)) $60,000, Cash received (\(32,500 + 2,500\)) $35,000. Total Debit: $95,000

(d) Two benefits to Z Limited:
1. Acquiring an established business provides immediate revenue streams and cash flow from day one without development lag.
2. Z Limited gains an established customer base and eliminates a competitor in the market.

(a) Goodwill calculation [5 marks]:
- Formula or structure of calculation (1)
- Correct total assets taken over of $225,400 (1)
- Deduction of trade payables of $15,000 (1)
- Net assets of $210,400 (1)
- Correct goodwill of $4,600 (1)

(b) Realisation Account [9 marks]:
- Debit entries for assets transferred at book value: Premises, Equipment, Inventory, Receivables (2 marks for all four, 1 mark if 2 or 3 correct)
- Credit entry for Trade Payables of $15,000 (1 mark)
- Credit entry for Z Limited (Purchase Consideration) of $215,000 (1 mark)
- Calculation of total profit on realisation of $25,000 (2 marks)
- Share of profit to P: $15,000 (1 mark) and Q: $10,000 (2 marks)

(c) Capital Accounts [7 marks]:
- Opening balances credited: P $110,000, Q $85,000 (1 mark)
- Realisation profit credited: P $15,000, Q $10,000 (1 mark)
- Shares in Z Limited debited: P $90,000 (1 mark), Q $60,000 (1 mark)
- Cash/Bank settlement debited (including partnership bank of $5,000 and Z Ltd cash of $65,000 split equally): P $35,000 (1 mark), Q $35,000 (1 mark)
- Accounts balanced/closed correctly (1 mark)

(d) Two benefits of acquisition [4 marks]:
- 2 marks for each well-explained benefit (1 mark for identifying, 1 mark for explanation).

Mallory PLC - Statement of Cash Flows for the year ended 31 December 2023

(a) Calculation of Cash Generated from Operations:
- Profit before tax: \(42,600 \text{ (operating profit)} - 5,600 \text{ (interest)} = 37,000\)
- Adjustments for:
- Depreciation: +$55,000
- Finance costs: +$5,600
- Loss on disposal of equipment (\(18,000 - 14,000\)): +$4,000
- Operating profit before working capital changes: $101,600
- Increase in inventory (\(62,000 - 54,000\)): ($8,000)
- Increase in trade receivables (\(48,000 - 41,500\)): ($6,500)
- Increase in trade payables (\(41,000 - 34,500\)): +$6,500
- Cash generated from operations: $93,600

(b) Statement of Cash Flows:
Operating Activities:
- Cash generated from operations: $93,600
- Interest paid: ($5,600)
- Tax paid (\(15,000 \text{ (opening)} + 14,500 \text{ (charge)} - 16,000 \text{ (closing)}\)): ($13,500)
- Net cash from operating activities: $74,500

Investing Activities:
- Cash paid for purchase of PPE: ($128,000)
- Proceeds from sale of equipment: +$14,000
- Net cash used in investing activities: ($114,000)

Note on PPE Purchase:
Opening PPE $425,000 - Depreciation $55,000 - Disposal book value $18,000 + Additions = Closing PPE $480,000
Additions = \(480,000 - 352,000 = 128,000\)

Financing Activities:
- Proceeds from issue of ordinary shares (rights issue): +$65,000 (Note: Ordinary shares increased by $50,000, of which $10,000 was a non-cash bonus issue, so cash nominal = $40,000. Share premium increased by $25,000. Total cash = \(40,000 + 25,000 = 65,000\))
- Redemption of debentures (\(80,000 - 60,000\)): ($20,000)
- Dividends paid: ($10,000)
- Net cash from financing activities: $35,000

Net increase in cash and cash equivalents: \(74,500 - 114,000 + 35,000 = 10,500\)

(c) Reconciliation of cash and cash equivalents:
- Cash and cash equivalents at 1 January 2023: ($6,000)
- Net increase in cash and cash equivalents: $10,500
- Cash and cash equivalents at 31 December 2023: $4,500

(d) Two reasons for profit/cash discrepancy:
1. Profits are recognized on an accruals basis, which means credit sales increase profit but do not generate cash until trade receivables pay.
2. Large cash outflows for non-current asset investments (capital expenditure) or repayment of long-term finance do not reduce operating profit but cause significant cash deficits.

Total marks: 25
(a) Cash Generated from Operations [10 marks]:
- Profit before tax: $37,000 (2 marks)
- Depreciation adjustment: +$55,000 (1 mark)
- Finance cost adjustment: +$5,600 (1 mark)
- Loss on disposal adjustment: +$4,000 (1 mark)
- Operating profit before WC changes: $101,600 (1 mark)
- Increase in inventory: ($8,000) (1 mark)
- Increase in trade receivables: ($6,500) (1 mark)
- Increase in trade payables: +$6,500 (1 mark)
- Correct cash generated from operations: $93,600 (1 mark)

(b) Statement of Cash Flows [8 marks]:
- Operating Activities:
- Interest paid: ($5,600) (1 mark)
- Tax paid: ($13,500) (1 mark)
- Investing Activities:
- Purchase of PPE: ($128,000) (2 marks)
- Proceeds from sale of equipment: +$14,000 (1 mark)
- Financing Activities:
- Share issue proceeds: +$65,000 (1 mark)
- Redemption of debentures: ($20,000) (1 mark)
- Dividends paid: ($10,000) (1 mark)

(c) Reconciliation [3 marks]:
- Opening cash and cash equivalents: ($6,000) (1 mark)
- Net increase: $10,500 (1 mark)
- Closing cash and cash equivalents: $4,500 (1 mark)

(d) Explanation [4 marks]:
- 2 marks for each well-explained reason (1 mark for identification, 1 mark for explanation).

A, B and C Partnership - Retirement of C

(a) Revaluation Account:
Debit:
- Equipment (\(85,000 - 74,000\)): $11,000
- Inventory (\(44,000 - 40,500\)): $3,500
- Provision for doubtful debts (\(32,000 \times 0.05\)): $1,600
Credit:
- Premises (\(310,000 - 240,000\)): $70,000
Profit on Revaluation = \(70,000 - 11,000 - 3,500 - 1,600 = 53,900\)
Split in profit-sharing ratio (5:3:2):
- A (5/10): $26,950
- B (3/10): $16,170
- C (2/10): $10,780

(b) Partners' Capital Accounts:
A's Capital Account:
- Credit: Balance b/f $180,000, Revaluation Profit $26,950, Goodwill (old ratio) $30,000, Current account transfer $12,000. Total Credit: $248,950.
- Debit: Goodwill write-off (new ratio) $36,000, Balance c/f $212,950.
B's Capital Account:
- Credit: Balance b/f $120,000, Revaluation Profit $16,170, Goodwill (old ratio) $18,000, Current account transfer $8,000. Total Credit: $162,170.
- Debit: Goodwill write-off (new ratio) $24,000, Balance c/f $138,170.
C's Capital Account:
- Credit: Balance b/f $80,000, Revaluation Profit $10,780, Goodwill (old ratio) $12,000. Total Credit: $102,780.
- Debit: Current account transfer (debit balance) $4,000, Bank payment $30,000, 6% Loan account $68,780. Total Debit: $102,780.

(c) Statement of Financial Position of A and B as at 30 June 2024:
Non-current assets:
- Premises: $310,000
- Equipment: $74,000
Total non-current assets: $384,000

Current assets:
- Inventory: $40,500
- Trade receivables (net of provision): \(32,000 - 1,600 = 30,400\)
Total current assets: $70,900
Total Assets: \(384,000 + 70,900 = 454,900\)

Capital and Liabilities:
Capital accounts:
- A: $212,950
- B: $138,170
Total Capital: $351,120

Non-current liabilities:
- 6% Loan from C: $68,780

Current liabilities:
- Trade payables: $23,000
- Bank overdraft (\(18,000 \text{ (opening)} - 30,000 \text{ (paid to C)}\)): $12,000
Total current liabilities: $35,000
Total Capital & Liabilities: \(351,120 + 68,780 + 35,000 = 454,900\)

(d) Reasons not to retain goodwill in books:
1. Prudence and IAS 38 suggest that internally generated goodwill should not be recognized as an asset in financial statements.
2. Goodwill value is highly subjective and fluctuates over time; keeping it on the statement of financial position might give an unrealistic view of the firm's tangible assets.

Total marks: 25
(a) Revaluation Account [6 marks]:
- Credit Premises: $70,000 (1 mark)
- Debit Equipment: $11,000 (1 mark)
- Debit Inventory: $3,500 (1 mark)
- Debit Provision for doubtful debts: $1,600 (1 mark)
- Distribution of revaluation profit to A, B, and C (2 marks, all or nothing)

(b) Capital Accounts [11 marks]:
- Opening balances (1 mark)
- Current account transfers (2 marks, 1 for A/B, 1 for C)
- Revaluation profit share (1 mark)
- Goodwill credit in old ratio (2 marks)
- Goodwill debit in new ratio (2 marks)
- Settlement of C: Cash $30,000 (1 mark), 6% Loan $68,780 (1 mark)
- Closing balances of A and B (1 mark)

(c) Statement of Financial Position [5 marks]:
- Non-current assets at revalued amounts: $384,000 (1 mark)
- Current assets (Inventory and net Trade receivables): $70,900 (1 mark)
- Capital accounts: $351,120 (1 mark)
- Non-current liability (6% Loan from C): $68,780 (1 mark)
- Current liabilities (including $12,000 bank overdraft and $23,000 trade payables): $35,000 (1 mark)

(d) Discussion/Explanation [3 marks]:
- 1 mark per valid point up to 3 marks (e.g., Internally generated vs purchased goodwill, prudence, subjective valuation).

### (a) Traditional Costing Calculations

1. **Total Direct Labour Hours:**
- Standard: \(10,000 \text{ units} \times 1.2 \text{ hours} = 12,000 \text{ hours}\)
- Premium: \(2,000 \text{ units} \times 4.0 \text{ hours} = 8,000 \text{ hours}\)
- Total Direct Labour Hours = \(12,000 + 8,000 = 20,000 \text{ hours}\)

2. **Overhead Absorption Rate (OAR):**
- \(\text{OAR} = \frac{\$240,000}{20,000 \text{ hours}} = \$12.00 \text{ per direct labour hour}\)

3. **Unit cost under Traditional Costing:**

| Cost element | Standard ($) | Premium ($) |
| :--- | :--- | :--- |
| Direct Materials | 25.00 | 45.00 |
| Direct Labour | 19.20 (1.2 hours \(\times \$16\)) | 64.00 (4.0 hours \(\times \$16\)) |
| Overheads absorbed | 14.40 (1.2 hours \(\times \$12\)) | 48.00 (4.0 hours \(\times \$12\)) |
| **Total unit cost** | **58.60** | **157.00** |

---

### (b) Activity-Based Costing (ABC) Calculations

1. **Calculate Cost Driver Rates:**
- **Machine setups:** \(\frac{\$96,000}{30 + 50} = \frac{\$96,000}{80} = \$1,200 \text{ per setup}\)
- **Quality inspections:** \(\frac{\$84,000}{40 + 80} = \frac{\$84,000}{120} = \$700 \text{ per inspection}\)
- **Material handling:** \(\frac{\$60,000}{50 + 70} = \frac{\$60,000}{120} = \$500 \text{ per order}\)

2. **Allocation of Overheads:**

*Standard Model Overheads:*
- Machine setups: \(30 \times \$1,200 = \$36,000\)
- Quality inspections: \(40 \times \$700 = \$28,000\)
- Material handling: \(50 \times \$500 = \$25,000\)
- Total Overheads = $89,000
- Overhead per unit = \(\frac{\$89,000}{10,000 \text{ units}} = \$8.90\)

*Premium Model Overheads:*
- Machine setups: \(50 \times \$1,200 = \$60,000\)
- Quality inspections: \(80 \times \$700 = \$56,000\)
- Material handling: \(70 \times \$500 = \$35,000\)
- Total Overheads = $151,000
- Overhead per unit = \(\frac{\$151,000}{2,000 \text{ units}} = \$75.50\)

3. **Unit cost under ABC:**

| Cost element | Standard ($) | Premium ($) |
| :--- | :--- | :--- |
| Direct Materials | 25.00 | 45.00 |
| Direct Labour | 19.20 | 64.00 |
| Overheads absorbed | 8.90 | 75.50 |
| **Total unit cost** | **53.10** | **184.50** |

---

### (c) Evaluation

- **Analysis of results:** Under traditional absorption costing, the "Standard" model is overcosted ($58.60 vs $53.10) while the "Premium" model is severely undercosted ($157.00 vs $184.50). This occurs because traditional costing allocates overheads based on labour hours, which doesn't reflect the complex drivers (setups, inspections) heavily consumed by the low-volume Premium model.
- **Benefits of ABC:**
- Provides more accurate product costs, avoiding cross-subsidisation.
- Enables better pricing strategies, which is critical for the underpriced Premium product.
- Identifies non-value-adding activities and supports cost reduction/management.
- **Limitations of ABC:**
- High cost and complexity to design, implement, and maintain.
- Difficulty in selecting appropriate cost drivers.
- Still requires some arbitrary allocation of facility-level costs.
- **Conclusion:** Orion Ltd should switch to ABC as the product range is diverse, and traditional costing provides misleading information for decision-making.

**(a) Traditional Absorption Costing [8 Marks]**
- Total labour hours calculation (20,000 hrs) [1 mark]
- Overhead absorption rate (OAR) calculation ($12.00/hr) [1 mark]
- Direct labour cost per unit (both models correct) [2 marks]
- Overhead cost per unit (Standard: $14.40 [1 mark]; Premium: $48.00 [1 mark]) [2 marks]
- Total unit cost (Standard: $58.60 [1 mark]; Premium: $157.00 [1 mark]) [2 marks]

**(b) Activity-Based Costing (ABC) [11 Marks]**
- Cost driver rates (Setups: $1,200 [1 mark]; Inspections: $700 [1 mark]; Handling: $500 [1 mark]) [3 marks]
- Standard overhead allocation calculations [2 marks]
- Premium overhead allocation calculations [2 marks]
- Overhead per unit (Standard: $8.90 [1 mark]; Premium: $75.50 [1 mark]) [2 marks]
- Total unit cost (Standard: $53.10 [1 mark]; Premium: $184.50 [1 mark]) [2 marks]

**(c) Evaluation [6 Marks]**
- Explanation of cross-subsidisation/overcosting of Standard and undercosting of Premium with reference to figures [2 marks]
- Analysis of benefits of ABC [2 marks]
- Analysis of limitations of ABC [1 mark]
- Clear, reasoned final recommendation [1 mark]

### (a) Variance Calculations

**(i) Selling price variance**
- Actual Revenue: \(\$412,800\)
- Standard Revenue for actual sales: \(4,800 \text{ units} \times \$85.00 = \$408,000\)
- Variance: \(\$412,800 - \$408,000 = \$4,800 \text{ (Favorable)}\)

**(ii) Direct materials price variance**
- Actual Price (AP): \(\frac{\$113,100}{19,500 \text{ kg}} = \$5.80 \text{ per kg}\)
- Variance: \(19,500 \text{ kg} \times (\$6.00 - \$5.80) = \$3,900 \text{ (Favorable)}\)

**(iii) Direct materials usage variance**
- Standard Quantity (SQ) for actual production: \(4,800 \text{ units} \times 4 \text{ kg} = 19,200 \text{ kg}\)
- Actual Quantity (AQ): \(19,500 \text{ kg}\)
- Variance: \((19,200 - 19,500) \times \$6.00 = \$1,800 \text{ (Adverse)}\)

**(iv) Direct labour rate variance**
- Actual Rate (AR): \(\frac{\$146,320}{11,800 \text{ hours}} = \$12.40 \text{ per hour}\)
- Variance: \(11,800 \text{ hours} \times (\$12.00 - \$12.40) = \$4,720 \text{ (Adverse)}\)

**(v) Direct labour efficiency variance**
- Standard Hours (SH) for actual production: \(4,800 \text{ units} \times 2.5 \text{ hours} = 12,000 \text{ hours}\)
- Actual Hours (AH): \(11,800 \text{ hours}\)
- Variance: \((12,000 - 11,800) \times \$12.00 = \$2,400 \text{ (Favorable)}\)

**(vi) Fixed overhead expenditure variance**
- Budgeted Fixed Overheads: \(\$50,000\)
- Actual Fixed Overheads: \(\$52,000\)
- Variance: \(\$50,000 - \$52,000 = \$2,000 \text{ (Adverse)}\)

**(vii) Fixed overhead volume variance**
- \(\text{FO Volume Variance} = (\text{Actual Production} - \text{Budgeted Production}) \times \text{Standard FO rate per unit}\)
- \((4,800 - 5,000) \times \$10.00 = \$2,000 \text{ (Adverse)}\)

---

### (b) Operating Statement (Reconciliation Statement)

| Reconciliation Element | | Amount ($) | Amount ($) |
| :--- | :--- | :--- | :--- |
| **Budgeted Profit** (\(5,000 \times \$21\)) | | | **105,000** |
| Sales Volume Variance | (\(200 \text{ units} \times \$21\)) | | 4,200 (A) |
| **Standard Profit on Actual Sales** | | | **100,800** |
| | | | |
| **Variances:** | **Favorable ($)** | **Adverse ($)** | |
| Selling price variance | 4,800 | | |
| Direct materials price variance | 3,900 | | |
| Direct materials usage variance | | 1,800 | |
| Direct labour rate variance | | 4,720 | |
| Direct labour efficiency variance | 2,400 | | |
| Fixed overhead expenditure variance | | 2,000 | |
| Fixed overhead volume variance | | 2,000 | |
| **Total Variances** | **11,100** | **10,520** | |
| Net Variance | | 580 (F) | 580 (F) |
| **Actual Profit** | | | **101,380** |

*Proof:*
Actual revenue ($412,800) - Actual materials ($113,100) - Actual labour ($146,320) - Actual fixed overheads ($52,000) = $101,380. (Reconciliation matches perfectly).

---

### (c) Discussion/Possible Reasons

**(i) Direct materials variances:**
- **Reason:** Vanguard Ltd purchased cheaper or lower-quality raw materials (resulting in a favorable price variance). This cheaper material may have led to more waste, defective goods, or breakage, resulting in an adverse usage variance.

**(ii) Direct labour variances:**
- **Reason:** The company employed more highly skilled/experienced workforce than budgeted, which required paying higher hourly rates (resulting in an adverse rate variance). However, because they were more skilled, they worked faster and more efficiently, saving production hours (resulting in a favorable efficiency variance).

**(a) Variance Calculations [14 Marks]**
- (i) Selling price variance: $4,800 F [2 marks] (1 mark for formula/working, 1 mark for correct variance & direction)
- (ii) DM price variance: $3,900 F [2 marks] (1 mark for working, 1 mark for correct variance & direction)
- (iii) DM usage variance: $1,800 A [2 marks] (1 mark for working, 1 mark for correct variance & direction)
- (iv) DL rate variance: $4,720 A [2 marks] (1 mark for working, 1 mark for correct variance & direction)
- (v) DL efficiency variance: $2,400 F [2 marks] (1 mark for working, 1 mark for correct variance & direction)
- (vi) FO expenditure variance: $2,000 A [2 marks] (1 mark for working, 1 mark for correct variance & direction)
- (vii) FO volume variance: $2,000 A [2 marks] (1 mark for working, 1 mark for correct variance & direction)

**(b) Operating Statement [7 Marks]**
- Correct budgeted profit ($105,000) [1 mark]
- Sales volume profit variance ($4,200 A) [1 mark]
- Standard profit on actual sales ($100,800) [1 mark]
- Favorable variances listed correctly [1 mark]
- Adverse variances listed correctly [2 marks]
- Correct actual profit ($101,380) with clear reconciliation [1 mark]

**(c) Variance Interrelationships [4 Marks]**
- (i) Materials explanation: Explaining that cheaper material (F price) caused more wastage (A usage) [2 marks]
- (ii) Labour explanation: Explaining that higher-paid/skilled labour (A rate) worked faster (F efficiency) [2 marks]