An original Thinka practice paper modelled on the structure and difficulty of the Nov 2024 (V2) Cambridge International A Level Accounting (9706) paper. Not affiliated with or reproduced from Cambridge.
Paper 12 (Multiple Choice)
Answer all 30 questions. Choose the correct option A, B, C or D and record your choice in pencil on the answer sheet.
30 Question · 30 marks
Question 1 · multiple choice
1 marks
A company manufactures two products, X and Y. The following details are available per unit: Product X: Selling price $50, Variable cost $30, Direct material required 2 kg. Product Y: Selling price $60, Variable cost $36, Direct material required 3 kg. The company is facing a shortage of direct material. What is the order of priority for manufacturing the products, and what is the contribution per kg of the limiting factor for the highest priority product?
A.First priority: Product X; Contribution per kg: $10
B.First priority: Product X; Contribution per kg: $20
C.First priority: Product Y; Contribution per kg: $8
D.First priority: Product Y; Contribution per kg: $24
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Worked solution
First, calculate the contribution per unit for each product: Product X = $50 - $30 = $20; Product Y = $60 - $36 = $24. Next, calculate the contribution per unit of the limiting factor (direct material): Product X = $20 / 2 kg = $10 per kg; Product Y = $24 / 3 kg = $8 per kg. Since Product X has a higher contribution per kg ($10) than Product Y ($8), Product X should be manufactured first.
Marking scheme
1 mark for the correct option. Award 1 mark for identifying Product X as the first priority with a contribution of $10 per kg.
Question 2 · multiple choice
1 marks
A sole trader received rent of $18,400 during the financial year ended 31 December 2023. The following information is available: Rent in arrears at 1 January 2023: $1,200; Rent received in advance at 1 January 2023: $900; Rent in arrears at 31 December 2023: $1,500; Rent received in advance at 31 December 2023: $1,100. What is the amount of rent to be credited to the income statement for the year ended 31 December 2023?
A.$17,900
B.$18,300
C.$18,500
D.$18,900
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Worked solution
Rent to be credited to the income statement is calculated as: Rent received ($18,400) + Rent in arrears at 31 December 2023 ($1,500) - Rent in arrears at 1 January 2023 ($1,200) + Rent received in advance at 1 January 2023 ($900) - Rent received in advance at 31 December 2023 ($1,100) = $18,500.
Marking scheme
1 mark for the correct option. Award 1 mark for calculating the rent income for the period as $18,500.
Question 3 · multiple choice
1 marks
A manufacturing company provides the following information for the year ended 30 June 2024: Purchases of raw materials $125,000; Carriage inwards on raw materials $4,500; Carriage outwards $6,000; Direct wages $84,000; Indirect factory wages $22,000; Royalties paid for production $7,500; Inventory of raw materials at 1 July 2023 $12,000; Inventory of raw materials at 30 June 2024 $14,500. What is the prime cost for the year ended 30 June 2024?
A.$211,000
B.$218,500
C.$224,500
D.$240,500
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Worked solution
First, calculate raw materials consumed: Opening inventory ($12,000) + Purchases ($125,000) + Carriage inwards ($4,500) - Closing inventory ($14,500) = $127,000. Next, calculate Prime Cost by adding direct costs: Raw materials consumed ($127,000) + Direct wages ($84,000) + Royalties ($7,500) = $218,500. Note that carriage outwards and indirect factory wages are factory overheads and are excluded.
Marking scheme
1 mark for the correct option. Award 1 mark for the correct prime cost of $218,500.
Question 4 · multiple choice
1 marks
P and Q are partners sharing profits and losses in the ratio of 3:2. The partnership agreement provides for: Annual salary to Q of $15,000; Interest on capital: P $6,000, Q $4,000; Interest on drawings charged: P $1,200, Q $800. The profit for the year before any of these adjustments was $92,000. What was Q's share of the residual profit?
A.$26,000
B.$26,800
C.$27,600
D.$46,600
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Worked solution
First, calculate the residual profit: Profit for the year ($92,000) + Total interest on drawings ($1,200 + $800 = $2,000) - Salary to Q ($15,000) - Total interest on capital ($6,000 + $4,000 = $10,000) = $69,000. Q's share of the residual profit = 2/5 * $69,000 = $27,600.
Marking scheme
1 mark for the correct option. Award 1 mark for calculating Q's share of residual profit as $27,600.
Question 5 · multiple choice
1 marks
A business has the following details for its financial year: Revenue (all on credit) $360,000; Cost of sales $240,000; Average trade receivables $40,000; Average trade payables $30,000; Average inventory $20,000. Assume 360 days in a year and that credit purchases equal cost of sales. What is the length of the working capital cycle?
A.25 days
B.30 days
C.45 days
D.115 days
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Worked solution
Calculate the three periods: 1) Inventory holding period = ($20,000 / $240,000) * 360 days = 30 days. 2) Trade receivables collection period = ($40,000 / $360,000) * 360 days = 40 days. 3) Trade payables payment period = ($30,000 / $240,000) * 360 days = 45 days. Working capital cycle = Inventory days + Receivables days - Payables days = 30 + 40 - 45 = 25 days.
Marking scheme
1 mark for the correct option. Award 1 mark for the correct working capital cycle calculation of 25 days.
Question 6 · multiple choice
1 marks
A company uses standard costing. The standard details for one unit of product are: Material: 4 kg at $3.00 per kg. During May, the company produced 1,200 units. The actual material used was 5,000 kg at a total cost of $14,500. What are the material price and material usage variances?
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Worked solution
Material Price Variance (MPV) = (Standard Price - Actual Price) * Actual Quantity. Actual Price = $14,500 / 5,000 kg = $2.90. MPV = ($3.00 - $2.90) * 5,000 = $500 Favourable (as actual cost is lower than standard). Material Usage Variance (MUV) = (Standard Quantity for actual output - Actual Quantity) * Standard Price. Standard Quantity = 1,200 units * 4 kg = 4,800 kg. MUV = (4,800 - 5,000) * $3.00 = 200 kg * $3.00 = $600 Adverse (as actual quantity is higher than standard).
Marking scheme
1 mark for the correct option. Award 1 mark for calculating the price variance of $500 F and usage variance of $600 A.
Question 7 · multiple choice
1 marks
A company is considering purchasing a machine costing $80,000. The machine has a useful life of 3 years and a residual scrap value of $10,000 at the end of Year 3. The net cash inflows from operations are: Year 1: $30,000; Year 2: $35,000; Year 3: $25,000. The company's cost of capital is 10%. Discount factors at 10% are: Year 1: 0.909; Year 2: 0.826; Year 3: 0.751. What is the Net Present Value (NPV) of the project?
A.-$5,045
B.$2,465
C.$4,955
D.$12,465
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Worked solution
Calculate the Present Value (PV) of each year's cash flows: Year 1 PV = $30,000 * 0.909 = $27,270. Year 2 PV = $35,000 * 0.826 = $28,910. Year 3 cash flow is operational cash inflow + scrap value = $25,000 + $10,000 = $35,000. Year 3 PV = $35,000 * 0.751 = $26,285. Total PV of inflows = $27,270 + $28,910 + $26,285 = $82,465. NPV = Total PV of inflows - Initial cost = $82,465 - $80,000 = $2,465.
Marking scheme
1 mark for the correct option. Award 1 mark for calculating the correct NPV of $2,465.
Question 8 · multiple choice
1 marks
A company has the following equity structure: Ordinary shares of $0.50 each $200,000; Share premium $50,000; Retained earnings $120,000. The directors decide to make a bonus issue of 1 ordinary share for every 4 shares held. They wish to maintain the most liquid reserves possible. What are the balances of the share premium account and retained earnings after the bonus issue?
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Worked solution
Current number of ordinary shares = $200,000 / $0.50 = 400,000 shares. Bonus issue = 400,000 / 4 = 100,000 shares. Nominal value of bonus issue = 100,000 shares * $0.50 = $50,000. To preserve the most liquid reserves (retained earnings, which are distributable), the company must utilize the share premium account (non-distributable) first. Since the share premium balance is exactly $50,000, it is fully used to fund the bonus issue. New Share Premium = $0. Retained Earnings remains unchanged at $120,000.
Marking scheme
1 mark for the correct option. Award 1 mark for identifying that the bonus issue is financed entirely from the share premium reserve, leaving retained earnings intact.
Question 9 · multiple_choice
1 marks
A company manufactures and sells a single product. The following information is available: - Selling price per unit: \( \$40 \) - Variable cost per unit: \( \$24 \) - Total fixed costs: \( \$90,000 \) per annum. The variable cost per unit is expected to increase by \( 12.5\% \) and total fixed costs are expected to increase by \( 10\% \). The company wishes to maintain its original break-even point in units. What will be the new selling price per unit?
A.\( \$41.60 \)
B.\( \$44.00 \)
C.\( \$44.60 \)
D.\( \$47.00 \)
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Worked solution
1. Calculate the original break-even point (BEP) in units: \( \text{Original BEP} = \frac{\text{Fixed Costs}}{\text{Selling Price} - \text{Variable Cost}} = \frac{\$90,000}{\$40 - \$24} = 5,625 \text{ units} \). 2. Calculate the new fixed costs and new variable cost per unit: \( \text{New Fixed Costs} = \$90,000 \times 1.10 = \$99,000 \) and \( \text{New Variable Cost} = \$24 \times 1.125 = \$27.00 \). 3. Calculate the new selling price (P) needed to maintain the same BEP: \( 5,625 = \frac{\$99,000}{P - \$27} \), which gives \( P - \$27 = \frac{\$99,000}{5,625} \), so \( P - \$27 = \$17.60 \), resulting in \( P = \$44.60 \).
Marking scheme
1 mark for the correct answer. Option C is correct. Option A is incorrect because it ignores the change in fixed costs. Option B is incorrect due to an error in calculating the new variable cost. Option D is incorrect as it applies percentage changes incorrectly.
Question 10 · multiple_choice
1 marks
A sole trader operates with a standard gross profit margin of \( 25\% \). The following information is available for the year ended 31 December 2022: - Inventory at 1 January 2022: \( \$34,000 \) - Purchases during the year: \( \$185,000 \) - Sales during the year: \( \$240,000 \). A fire in the warehouse on 31 December 2022 destroyed part of the inventory. Undamaged inventory was valued at \( \$12,500 \). What was the cost of the inventory destroyed by the fire?
A.\( \$12,500 \)
B.\( \$26,500 \)
C.\( \$39,000 \)
D.\( \$47,500 \)
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Worked solution
1. Calculate the Cost of Sales using the gross profit margin of \( 25\% \) (meaning Cost of Sales is \( 75\% \) of Sales): \( \text{Cost of Sales} = \$240,000 \times (1 - 0.25) = \$180,000 \). 2. Calculate the expected cost of closing inventory before the fire: \( \text{Expected Closing Inventory} = \text{Opening Inventory} + \text{Purchases} - \text{Cost of Sales} = \$34,000 + \$185,000 - \$180,000 = \$39,000 \). 3. Calculate the cost of the destroyed inventory: \( \text{Destroyed Inventory} = \text{Expected Closing Inventory} - \text{Undamaged Inventory} = \$39,000 - \$12,500 = \$26,500 \).
Marking scheme
1 mark for the correct answer. Option B is correct. Option A is the value of undamaged inventory. Option C is the total expected closing inventory before the fire. Option D is incorrect.
Question 11 · multiple_choice
1 marks
A manufacturing business transfers finished goods from the factory to the warehouse at cost plus a factory profit of \( 20\% \). The following details are available for the year ended 31 December 2022: - Opening inventory of finished goods (at transfer price): \( \$36,000 \) - Closing inventory of finished goods (at transfer price): \( \$48,000 \) - Opening balance on provision for unrealised profit account: \( \$6,000 \). What is the charge to the income statement for the year ended 31 December 2022 in respect of the provision for unrealised profit?
A.\( \$2,000 \text{ credit} \)
B.\( \$2,000 \text{ debit} \)
C.\( \$8,000 \text{ credit} \)
D.\( \$8,000 \text{ debit} \)
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Worked solution
1. Calculate the closing provision for unrealised profit: \( \text{Closing Provision} = \$48,000 \times \frac{20}{120} = \$8,000 \). 2. Determine the change in the provision: \( \text{Increase in Provision} = \$8,000 - \$6,000 = \$2,000 \). An increase in the provision for unrealised profit must be debited to the Income Statement as an expense. Therefore, the correct answer is \( \$2,000 \text{ debit} \).
Marking scheme
1 mark for the correct answer. Option B is correct. Option A is incorrect because the increase represents an expense and should be a debit, not a credit. Options C and D use the absolute closing balance instead of the increase.
Question 12 · multiple_choice
1 marks
X and Y are in partnership sharing profits and losses in the ratio of 3:2. Their capital account balances are \( \$80,000 \) and \( \$50,000 \) respectively. They agree to admit Z into partnership. Z is to bring in \( \$40,000 \) cash as capital and will be entitled to a \( \frac{1}{5} \) share of the profits. The new profit sharing ratio between X, Y, and Z will be 2:2:1. Goodwill is valued at \( \$50,000 \) but is not to be retained in the books of account. What will be the balances on the capital accounts of X and Y after the admission of Z?
A.X: \( \$80,000 \); Y: \( \$50,000 \)
B.X: \( \$90,000 \); Y: \( \$50,000 \)
C.X: \( \$110,000 \); Y: \( \$70,000 \)
D.X: \( \$100,000 \); Y: \( \$60,000 \)
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Worked solution
1. Credit the old partners with goodwill in their old profit sharing ratio (3:2): X's Capital: \( \$80,000 + (\$50,000 \times \frac{3}{5}) = \$110,000 \); Y's Capital: \( \$50,000 + (\$50,000 \times \frac{2}{5}) = \$70,000 \). 2. Debit all partners with goodwill in their new profit sharing ratio (2:2:1): X's share of write-off: \( \$50,000 \times \frac{2}{5} = \$20,000 \); Y's share of write-off: \( \$50,000 \times \frac{2}{5} = \$20,000 \). 3. Calculate final capital balances: X: \( \$110,000 - \$20,000 = \$90,000 \); Y: \( \$70,000 - \$20,000 = \$50,000 \).
Marking scheme
1 mark for the correct answer. Option B is correct. Option A is incorrect as it completely ignores goodwill. Option C represents the capital balances before writing off the goodwill. Option D is incorrect.
Question 13 · multiple_choice
1 marks
A company has the following details: - Number of ordinary shares in issue: 1,000,000 shares (nominal value \( \$0.50 \) each) - Market value per ordinary share: \( \$2.40 \) - Profit after tax for the year: \( \$300,000 \) - Total ordinary dividend paid: \( \$120,000 \). What are the dividend cover and the dividend yield for the year?
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Worked solution
1. Calculate Dividend Cover: \( \text{Dividend Cover} = \frac{\text{Profit after Tax}}{\text{Total Ordinary Dividend}} = \frac{\$300,000}{\$120,000} = 2.5 \text{ times} \). 2. Calculate Dividend per Share (DPS) and Dividend Yield: \( \text{DPS} = \frac{\$120,000}{1,000,000 \text{ shares}} = \$0.12 \). \( \text{Dividend Yield} = \frac{\text{DPS}}{\text{Market Value per Share}} \times 100\% = \frac{\$0.12}{\$2.40} \times 100\% = 5.0\% \). Therefore, Dividend Cover is 2.5 times and Dividend Yield is 5.0%.
Marking scheme
1 mark for the correct answer. Option B is correct. Option C is incorrect because it uses the nominal value of shares instead of market value to calculate dividend yield. Options A and D are incorrect.
Question 14 · multiple_choice
1 marks
A company operates a standard costing system. The standard labor specification for the production of one unit of its product is: - 4 hours at \( \$12.00 \) per hour. During a period, 800 units of the product were produced. The actual labor cost was \( \$41,250 \) for 3,300 hours worked. What were the labor rate and labor efficiency variances for the period?
1 mark for the correct answer. Option C is correct. Options A and B are incorrect due to incorrect variance directions. Option D is incorrect due to calculation errors.
Question 15 · multiple_choice
1 marks
A company is considering investing in a new machine costing \( \$120,000 \). The machine has a useful life of 4 years, after which it will be sold for a scrap value of \( \$20,000 \). The annual cash inflows generated by the machine are expected to be \( \$45,000 \). The cost of capital is \( 10\% \). Discount factors at \( 10\% \) are: - Year 1: 0.909 - Year 2: 0.826 - Year 3: 0.751 - Year 4: 0.683. What is the Net Present Value (NPV) of the investment project (to the nearest dollar)?
A.\( \$22,605 \)
B.\( \$36,265 \)
C.\( \$42,605 \)
D.\( \$49,925 \)
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Worked solution
1. Identify cash flows: Year 0: \( -\$120,000 \). Years 1-3: \( \$45,000 \) each year. Year 4: \( \$45,000 + \$20,000 \text{ (scrap value)} = \$65,000 \). 2. Calculate PV: Year 1: \( \$45,000 \times 0.909 = \$40,905 \). Year 2: \( \$45,000 \times 0.826 = \$37,170 \). Year 3: \( \$45,000 \times 0.751 = \$33,795 \). Year 4: \( \$65,000 \times 0.683 = \$44,395 \). Total PV of Inflows = \( \$156,265 \). 3. NPV = \( \$156,265 - \$120,000 = \$36,265 \).
Marking scheme
1 mark for the correct answer. Option B is correct. Option A is incorrect because it forgets the scrap value of $20,000. Option C is incorrect because it adds non-discounted scrap value to NPV. Option D is incorrect.
Question 16 · multiple_choice
1 marks
The equity section of a company's statement of financial position shows the following: - Ordinary shares of \( \$0.50 \) each: \( \$200,000 \) - Share premium: \( \$80,000 \) - Retained earnings: \( \$150,000 \). The company carries out the following transactions in order: 1. A bonus issue of 1 share for every 4 shares held, utilizing the share premium account first to the maximum extent. 2. A rights issue of 1 share for every 5 shares held (including the bonus shares) at an issue price of \( \$0.80 \) per share. What is the balance of the share premium account after both transactions have been completed?
A.\( \$30,000 \)
B.\( \$54,000 \)
C.\( \$60,000 \)
D.\( \$110,000 \)
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Worked solution
1. Calculate original shares: \( 400,000 \text{ shares} \). 2. Calculate bonus issue: \( 100,000 \text{ shares} \) with nominal value of \( \$50,000 \). This reduces share premium to \( \$30,000 \). Shares now = \( 500,000 \). 3. Calculate rights issue: \( 100,000 \text{ shares} \) issued at \( \$0.80 \) each. The premium is \( \$0.30 \) per share, adding \( \$30,000 \) to the share premium. 4. Final Share Premium balance = \( \$30,000 + \$30,000 = \$60,000 \).
Marking scheme
1 mark for the correct answer. Option C is correct. Option A is incorrect because it omits the premium from the rights issue. Option B is incorrect because the rights issue was calculated on the original shares instead of including bonus shares. Option D is incorrect because it did not reduce the share premium for the bonus issue.
Question 17 · multiple
1 marks
A and B are in partnership sharing profits and losses in the ratio 3:1. Their capital account balances are $60,000 and $30,000 respectively. They agree to admit C into partnership. The new profit sharing ratio will be 5:3:2. Goodwill is valued at $40,000 but is not to be retained in the books of account. C brings in $20,000 cash as capital. What is the balance on B's capital account immediately after the admission of C?
A.$28,000
B.$30,000
C.$38,000
D.$40,000 Gold option (credit only)
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Worked solution
To calculate the new capital balance of B: 1. Initial capital balance of B = $30,000. 2. Goodwill is shared in the old ratio (3:1): B's share of goodwill credit = \(\$40,000 \times \frac{1}{4} = \$10,000\). 3. Goodwill is written off in the new ratio (5:3:2): B's share of goodwill debit = \(\$40,000 \times \frac{3}{10} = \$12,000\). 4. Net effect on B's capital = \(\$10,000\) (credit) - \(\$12,000\) (debit) = -\(\$2,000\). 5. B's capital account balance after C's admission = \(\$30,000 - \$2,000 = \$28,000\).
Marking scheme
1 mark for the correct option A.
Question 18 · multiple
1 marks
A company makes a single product. The following information is available: Selling price per unit $40; Variable cost per unit $25; Budgeted fixed costs $120,000 per year. The company is considering buying a new machine which will increase annual fixed costs by $30,000 but will reduce the variable cost per unit by 20%. What will be the new break-even point in units if the new machine is purchased?
A.6,000 units
B.7,500 units
C.8,000 units
D.10,000 units
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Worked solution
1. Calculate new variable cost per unit: \(\$25 \times (1 - 0.20) = \$20\). 2. Calculate new contribution per unit: \(\$40 - \$20 = \$20\). 3. Calculate new annual fixed costs: \(\$120,000 + \$30,000 = \$150,000\). 4. Calculate new break-even point in units: \(\frac{\$150,000}{\$20} = 7,500\text{ units}\).
Marking scheme
1 mark for the correct option B.
Question 19 · multiple
1 marks
A company uses standard costing. The standard details for one unit of product are: Direct material 4 kg at $6.00 per kg. During the month of May, 3,000 units were produced. The actual material used was 12,500 kg at a total cost of $72,500. Which option correctly shows the material price variance and material usage variance?
A.Material price variance $2,500 Favourable; Material usage variance $3,000 Adverse
B.Material price variance $2,500 Adverse; Material usage variance $3,000 Favourable
C.Material price variance $2,400 Favourable; Material usage variance $2,900 Adverse
D.Material price variance $3,000 Favourable; Material usage variance $2,500 Adverse
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Worked solution
1. Material Price Variance (MPV): Standard Price (SP) = $6.00 per kg. Actual Price (AP) = \(\frac{\$72,500}{12,500\text{ kg}} = \$5.80\) per kg. \(\text{MPV} = (\text{SP} - \text{AP}) \times \text{Actual Quantity (AQ)}\) which is \((\$6.00 - \$5.80) \times 12,500 = \$2,500\text{ Favourable}\). 2. Material Usage Variance (MUV): Standard Quantity (SQ) = \(3,000 \times 4\text{ kg} = 12,000\text{ kg}\). \(\text{MUV} = (\text{SQ} - \text{AQ}) \times \text{SP}\) which is \((12,000 - 12,500) \times \$6.00 = -\$3,000\text{ (Adverse)}\).
Marking scheme
1 mark for the correct option A.
Question 20 · multiple
1 marks
A company is considering investing in a machine costing $100,000. It has an expected life of 4 years and no residual value. Straight-line depreciation is used. Net cash inflows are expected as follows: Year 1: $40,000; Year 2: $45,000; Year 3: $35,000; Year 4: $30,000. What is the accounting rate of return (ARR) based on the average investment?
A.12.5%
B.25.0%
C.37.5%
D.75.0%
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The following details are extracted from the records of a manufacturing business: Inventory of raw materials at start: $18,000; Inventory of raw materials at end: $22,000; Purchases of raw materials: $145,000; Carriage inwards on raw materials: $5,000; Direct wages: $84,000; Factory overheads: $62,000; Work in progress at start: $11,000; Work in progress at end: $9,000. What is the prime cost of manufacturing?
A.$225,000
B.$230,000
C.$292,000
D.$294,000
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Worked solution
1. Raw materials consumed = \(\text{Opening inventory} + \text{Purchases} + \text{Carriage inwards} - \text{Closing inventory}\) = \(\$18,000 + \$145,000 + \$5,000 - \$22,000 = \$146,000\). 2. Prime cost = \(\text{Raw materials consumed} + \text{Direct wages}\) = \(\$146,000 + \$84,000 = \$230,000\). Note that factory overheads and work-in-progress adjustments are excluded when calculating prime cost.
Marking scheme
1 mark for the correct option B.
Question 22 · multiple
1 marks
The following information is available for a trading company: Gross profit margin: 20%; Revenue: $500,000; Opening inventory: $48,000; Closing inventory: $52,000. What is the rate of inventory turnover (in times)?
A.6 times
B.8 times
C.10 times
D.12 times
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A company's statement of financial position showed equity as follows: Ordinary shares of $0.25 each: $300,000; Share premium: $50,000; Retained earnings: $150,000. The directors decide to make a bonus issue of 1 share for every 5 shares held, using the share premium account first to fund the issue. What are the balances on the share premium account and retained earnings account after the bonus issue?
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Worked solution
1. The value of the bonus issue is 20% (1/5) of current share capital value: \(\$300,000 \times 20\% = \$60,000\). 2. Use the share premium account first: all \(\$50,000\) is used, leaving a balance of \(\$0\). 3. The remainder of \(\$10,000\) (\(\$60,000 - \$50,000\)) is funded from retained earnings: \(\$150,000 - \$10,000 = \$140,000\).
Marking scheme
1 mark for the correct option A.
Question 24 · multiple
1 marks
At 31 December 2022, a sole trader's trial balance before adjustments included: Trade receivables: $84,000; Allowance for doubtful debts (1 January 2022): $3,200. It was then discovered that a debt of $4,000 was irrecoverable and had to be written off. The allowance for doubtful debts is to be adjusted to 5% of trade receivables. What is the total charge to the income statement for irrecoverable debts and the allowance for doubtful debts for the year ended 31 December 2022?
A.$4,000
B.$4,800
C.$5,000
D.$8,000
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Worked solution
1. Debt written off = \(\$4,000\). 2. Remaining trade receivables = \(\$84,000 - \$4,000 = \$80,000\). 3. New allowance required = \(\$80,000 \times 5\% = \$4,000\). 4. Increase in allowance = \(\$4,000 - \$3,200 = \$800\). 5. Total charge to income statement = \(\text{Debt written off} + \text{Increase in allowance} = \$4,000 + \$800 = \$4,800\).
Marking scheme
1 mark for the correct option B.
Question 25 · multiple_choice
1 marks
A business manufactures three products: X, Y, and Z. The following information is available:
| | Product X | Product Y | Product Z | | :--- | :---: | :---: | :---: | | Contribution per unit | $15 | $24 | $16 | | Raw material required per unit | 3 kg | 4 kg | 2 kg | | Maximum monthly demand | 1,200 units | 1,500 units | 800 units |
The supply of raw material is limited to 7,000 kg per month.
What is the maximum monthly contribution the business can achieve?
A.$38,400
B.$41,600
C.$44,000
D.$45,200
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Worked solution
To maximise contribution, the products should be ranked based on contribution per kg of the limiting factor (raw material): - Product X: \(\$15 / 3 \text{ kg} = \$5 \text{ per kg}\) - Product Y: \(\$24 / 4 \text{ kg} = \$6 \text{ per kg}\) - Product Z: \(\$16 / 2 \text{ kg} = \$8 \text{ per kg}\)
Ranking: 1st: Product Z ($8 per kg) 2nd: Product Y ($6 per kg) 3rd: Product X ($5 per kg)
Allocation of limited raw material (7,000 kg): 1. Product Z (1st): Produce maximum demand of 800 units. Raw material used = \(800 \text{ units} \times 2 \text{ kg} = 1,600 \text{ kg}\). Contribution = \(800 \text{ units} \times \$16 = \$12,800\). Remaining material = \(7,000 \text{ kg} - 1,600 \text{ kg} = 5,400 \text{ kg}\).
2. Product Y (2nd): Maximum demand is 1,500 units, which requires \(1,500 \text{ units} \times 4 \text{ kg} = 6,000 \text{ kg}\). Since only 5,400 kg is remaining, produce as many units of Y as possible: Units of Y = \(5,400 \text{ kg} / 4 \text{ kg} = 1,350 \text{ units}\). Contribution = \(1,350 \text{ units} \times \$24 = \$32,400\). Remaining material = \(5,400 \text{ kg} - 5,400 \text{ kg} = 0 \text{ kg}\).
3. Product X (3rd): 0 units produced.
Total maximum contribution = \(\$12,800 + \$32,400 = \$45,200\).
Marking scheme
Award 1 mark for D. - If A is chosen: student incorrectly ranked X, Y, then Z. - If B is chosen: student incorrectly ranked Z, X, then Y. - If C is chosen: student incorrectly ranked Y, Z, then X.
Question 26 · multiple_choice
1 marks
A and B are partners sharing profits and losses in the ratio of 3:2. Their capital account balances are $60,000 and $40,000 respectively.
They admit C into partnership. C brings in $50,000 cash as capital. The new profit sharing ratio is A, B, and C in the ratio of 3:1:1 respectively. Goodwill is valued at $30,000 but is not to be retained in the books.
What is the balance on B's capital account after C's admission is completed?
A.$34,000
B.$40,000
C.$46,000
D.$52,000
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Worked solution
1. Credit old partners with goodwill in their old profit sharing ratio (3:2): - B's share = \(\$30,000 \times \frac{2}{5} = \$12,000\) (credit)
2. Debit all partners with goodwill in their new profit sharing ratio (3:1:1): - B's share = \(\$30,000 \times \frac{1}{5} = \$6,000\) (debit)
3. Update B's capital account balance: - Opening Balance: $40,000 - Add: Share of goodwill credited: +$12,000 - Less: Share of goodwill written off: -$6,000 - Closing Balance = \(\$40,000 + \$12,000 - \$6,000 = \$46,000\).
Marking scheme
Award 1 mark for C. - If A is chosen: goodwill credited and debited incorrectly. - If B is chosen: no adjustments made. - If D is chosen: goodwill credited but not written off.
Question 27 · multiple_choice
1 marks
A business uses a standard costing system. The standard details for direct labor are: - Standard labor rate: $12 per hour - Standard time per unit: 3 hours
During the month, 1,200 units were produced. The actual labor cost was $41,580 for 3,300 hours worked.
What are the direct labor rate and efficiency variances?
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Worked solution
1. Labor rate variance: Actual rate per hour = \(\$41,580 / 3,300 \text{ hours} = \$12.60\) Rate variance = \((\text{Standard Rate} - \text{Actual Rate}) \times \text{Actual Hours}\) = \((\$12.00 - \$12.60) \times 3,300 = \$1,980\) Adverse (since actual rate is higher than standard rate).
2. Labor efficiency variance: Standard hours for actual production = \(1,200 \text{ units} \times 3 \text{ hours/unit} = 3,600 \text{ hours}\) Efficiency variance = \((\text{Standard Hours} - \text{Actual Hours}) \times \text{Standard Rate}\) = \((3,600 - 3,300) \times \$12 = \$3,600\) Favourable (since actual hours are fewer than standard hours).
Marking scheme
Award 1 mark for A. - If B is chosen: variances have correct values but incorrect directions. - If C is chosen: rate variance was incorrectly calculated using standard hours instead of actual hours. - If D is chosen: efficiency variance was incorrectly calculated using actual rate instead of standard rate.
Question 28 · multiple_choice
1 marks
A company is considering investing $120,000 in a new project. The project is expected to generate net cash inflows of $45,000 per annum for three years. At the end of Year 3, the project's machinery will be sold for a scrap value of $15,000. The cost of capital is 10%.
Discount factors at 10% are: - Year 1: 0.909 - Year 2: 0.826 - Year 3: 0.751
What is the Net Present Value (NPV) of the project?
A.-$8,130
B.$3,135
C.$6,870
D.$30,000
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Worked solution
Present Value (PV) of Cash Inflows: - Year 1: \(\$45,000 \times 0.909 = \$40,905\) - Year 2: \(\$45,000 \times 0.826 = \$37,170\) - Year 3 (Operating): \(\$45,000 \times 0.751 = \$33,795\) - Year 3 (Scrap): \(\$15,000 \times 0.751 = \$11,265\)
Total PV of cash inflows = \(\$40,905 + \$37,170 + \$33,795 + \$11,265 = \$123,135\).
Net Present Value (NPV) = Total PV of Cash Inflows - Initial Investment = \(\$123,135 - \$120,000 = \$3,135\).
Marking scheme
Award 1 mark for B. - If A is chosen: scrap value was ignored. - If C is chosen: scrap value was added directly without discounting. - If D is chosen: non-discounted net cash flows were calculated.
Question 29 · multiple_choice
1 marks
A business has a current ratio of 1.5 : 1 and a liquid (acid test) ratio of 0.8 : 1. The business then purchases additional inventory on credit.
What is the immediate effect of this transaction on these two ratios?
A.Current ratio decreases; Liquid (acid test) ratio decreases
B.Current ratio decreases; Liquid (acid test) ratio increases
C.Current ratio increases; Liquid (acid test) ratio decreases
D.Current ratio increases; Liquid (acid test) ratio increases
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Worked solution
Let Current Assets (CA) = $150, Current Liabilities (CL) = $100. Current Ratio = \(\$150 / \$100 = 1.5 : 1\). If Inventory = $70, Liquid Assets (LA) = \(\$150 - \$70 = \$80\). Liquid Ratio = \(\$80 / \$100 = 0.8 : 1\).
If the business purchases inventory of $20 on credit: 1. Current Assets increase by $20 (due to inventory) to $170. 2. Current Liabilities increase by $20 (due to trade payables) to $120. 3. Liquid Assets remain unchanged at $80 (as inventory is excluded from liquid assets).
New Ratios: - New Current Ratio = \(\$170 / \$120 = 1.42 : 1\) (Decreases from 1.5 : 1). - New Liquid Ratio = \(\$80 / \$120 = 0.67 : 1\) (Decreases from 0.8 : 1).
Therefore, both ratios decrease.
Marking scheme
Award 1 mark for A. - If B, C, or D is chosen: misinterpretation of the mathematical effect on fractions when both numerator and denominator change, or incorrect assumption that liquid assets increase due to inventory purchase.
Question 30 · multiple_choice
1 marks
A company's records for the year ended 31 December show the following:
| | $ | | :--- | :---: | | Direct materials cost | 180,000 | | Direct wages | 120,000 | | Factory overheads | 90,000 | | Opening work in progress | 15,000 | | Closing work in progress | 18,000 | | Opening finished goods | 40,000 | | Closing finished goods | 35,000 |
Finished goods are transferred from the factory to the trading account at cost of production plus 20% manufacturing profit.
What is the manufacturing profit for the year?
A.$77,400
B.$78,000
C.$78,400
D.$96,750
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Worked solution
1. Calculate the Cost of Production: - Prime Cost = \(\text{Direct materials} + \text{Direct wages} = \$180,000 + \$120,000 = \$300,000\) - Factory Cost of Goods Produced = \(\text{Prime Cost} + \text{Factory overheads} + \text{Opening WIP} - \text{Closing WIP}\) - Cost of Production = \(\$300,000 + \$90,000 + \$15,000 - \$18,000 = \$387,000\)
2. Calculate the Manufacturing Profit: - Manufacturing Profit = \(20\% \times \text{Cost of Production} = 20\% \times \$387,000 = \$77,400\).
Note: Finished goods opening and closing balances are used in the Trading Account, not in the Manufacturing Account, so they do not affect the Cost of Production or the manufacturing profit.
Marking scheme
Award 1 mark for A. - If B is chosen: WIP adjustments were ignored in calculating cost of production. - If C is chosen: finished goods adjustments were incorrectly included in calculating cost of production. - If D is chosen: calculated markup of 25% (or 20/80 on cost) instead of 20%.
Paper 22 (Fundamentals of Accounting)
Answer all four questions. Show all working clearly and present accounting statements in good style.
5 Question · 120 marks
Question 1 · structured
30 marks
Tariq is a retail sole trader who does not maintain a full set of double-entry accounting records. The following information was available for the financial year ended 31 December 2022:
**Balances at 1 January 2022** * Equipment (carrying value): $24,000 * Inventory: $16,500 * Trade receivables: $11,200 * Trade payables: $8,400 * Bank overdraft: $2,100 * Prepaid rent: $1,200
**Balances at 31 December 2022** * Equipment (at cost/carrying value before depreciation): $24,000 * Inventory: $18,100 * Trade receivables (before writing off bad debts): $13,400 * Trade payables: $9,200 * Accrued electricity: $450
**Summary of Bank Transactions during the year ended 31 December 2022** * Receipts from credit customers: $84,500 * Cash sales deposited into bank: $15,800 * Payments to trade payables: $51,300 * Rent paid: $7,800 * Electricity paid: $3,200 * General expenses paid: $6,400 * Drawings paid by bank transfer: $9,000
**Additional Information** 1. During the year, Tariq paid helper's wages of $3,600 and took cash drawings of $4,000 directly from cash sales before depositing the remaining balance of $15,800 into the bank. 2. A credit customer who owed $800 has been declared bankrupt and is to be written off as a bad debt. This adjustment has not yet been made to the records. 3. Rent paid during the year includes $1,500 paid for the period up to 31 March 2023. 4. Tariq took goods costing $1,500 for his personal use. No entries have been made for this. 5. Depreciation on equipment is to be provided at 15% per annum on the carrying value at the start of the year.
**Required** (a) Calculate Tariq's total revenue (sales) for the year ended 31 December 2022. [6 marks] (b) Calculate Tariq's total purchases for the year ended 31 December 2022. [4 marks] (c) Prepare the Income Statement for the year ended 31 December 2022. [14 marks] (d) State three advantages to a sole trader of maintaining a full double-entry system of book-keeping rather than incomplete records. [6 marks]
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**(d) Three advantages of a full double-entry system:** 1. **Arithmetical Accuracy Check:** It enables the preparation of a Trial Balance, which checks the arithmetical accuracy of the postings. 2. **Prevention and Detection of Fraud:** Having cross-referencing ledger entries and performing bank reconciliations makes fraud, theft, and errors much easier to detect and prevent. 3. **Facilitates Financial Analysis and Planning:** Accurate financial statements (Income Statement and Statement of Financial Position) can be easily generated directly from the ledger balances, helping in decision making and applying for external finance.
Marking scheme
**(a) Total Revenue [6 Marks]** * Credit Sales calculation: Credit sales of $86,700 [3] (1 mark for including $800 bad debt in receivables reconciliation, 1 mark for correct use of receivables control formula, 1 mark for accuracy of final credit sales figure). * Cash Sales calculation: Cash sales of $23,400 [2] (1 mark for including cash wages of $3,600 and cash drawings of $4,000, 1 mark for correct total). * Total Sales = $110,100 [1].
**(b) Total Purchases [4 Marks]** * Payments to payables $51,300 + Closing payables $9,200 - Opening payables $8,400 = $52,100 [3] (1 mark for payment, 1 mark for correct adjustments of opening/closing payables, 1 mark for accuracy). * Adjustment for drawings of goods (reducing purchases/cost of sales by $1,500) [1].
**(c) Income Statement [14 Marks]** * Revenue: $110,100 [1] (OF from part a) * Opening inventory: $16,500 [1] * Purchases (net of drawings): $50,600 [2] (1 mark for purchases OF, 1 mark for subtracting $1,500 drawings of goods) * Closing inventory: $18,100 [1] * Cost of sales: $49,000 [1] * Gross Profit: $61,100 [1] (OF) * Wages: $3,600 [1] * Rent: $7,500 [2] (1 mark for adjustment $7,800 + $1,200 - $1,500, 1 mark for accuracy) * Electricity: $3,650 [1] * Bad debts: $800 [1] * General expenses: $6,400 [1] * Depreciation: $3,600 [1] * Profit for the year: $35,550 [1] (OF)
**(d) Advantages [6 Marks]** * State advantage + development/explanation (3 imes 2 marks) = [6 marks]. * Max 2 marks per point: * e.g., Preparing a Trial Balance [1] to check the arithmetical accuracy of the accounts [1]. * e.g., Reduces risk of fraud/theft [1] because accounts are reconciled systematically [1]. * e.g., Easier to secure bank loans/finance [1] as banks require audited/reliable double-entry accounts [1].
Question 2 · structured
15 marks
Zeta Limited is a retail business. The following information is available for the financial years ended 31 December Year 1 and 31 December Year 2:
(a) Calculate the following ratios for both Year 1 and Year 2. (Round your answers to two decimal places.) (i) Gross profit margin (%) (ii) Profit margin (%) (iii) Rate of inventory turnover (times) (iv) Trade receivables turnover (days) [8 marks]
(b) State three possible reasons for the change in the gross profit margin from Year 1 to Year 2. [3 marks]
(c) Suggest three actions Zeta Limited could take to improve its working capital cycle. [4 marks]
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**(ii) Profit margin (%)** Formula: \(\frac{\text{Profit for the year}}{\text{Revenue}} \times 100\) - Year 1: \(\frac{\$48,000}{\$320,000} \times 100 = 15.00\%\) - Year 2: \(\frac{\$32,000}{\$400,000} \times 100 = 8.00\%\)
**(iii) Rate of inventory turnover (times)** Formula: \(\frac{\text{Cost of sales}}{\text{Average inventory}}\) - Year 1: \(\frac{\$224,000}{\$24,000} = 9.33\) times - Year 2: \(\frac{\$300,000}{\$30,000} = 10.00\) times
**(iv) Trade receivables turnover (days)** Formula: \(\frac{\text{Trade receivables}}{\text{Credit sales}} \times 365\) - Year 1: \(\frac{\$36,000}{\$320,000} \times 365 = 41.06\) days - Year 2: \(\frac{\$48,000}{\$400,000} \times 365 = 43.80\) days
**(b) Possible reasons for the decrease in gross profit margin:** - Increase in the purchase cost of goods from suppliers that was not passed on to customers. - Offering trade discounts or promotional price reductions to increase sales volume. - Increase in direct costs such as carriage inwards. - A change in the sales mix towards lower-margin goods. - Inventory theft, damage, or write-downs of obsolete stock.
**(c) Actions to improve the working capital cycle:** - Offer cash discounts (settlement discounts) to credit customers to encourage prompt payment. - Implement stricter credit control policies, such as credit checks on new customers and sending regular reminders. - Negotiate longer payment periods with trade suppliers (without losing goodwill or critical supplier discounts). - Implement better inventory management systems (e.g., Just-In-Time) to reduce the level of average inventory held and speed up turnover. - Charge interest on overdue accounts to discourage late payments.
Marking scheme
**Part (a) [8 marks total]** - (i) Gross profit margin: 1 mark for Year 1 (30.00%) and 1 mark for Year 2 (25.00%). [2 marks] - (ii) Profit margin: 1 mark for Year 1 (15.00%) and 1 mark for Year 2 (8.00%). [2 marks] - (iii) Rate of inventory turnover: 1 mark for Year 1 (9.33 times) and 1 mark for Year 2 (10.00 times). [2 marks] - (iv) Trade receivables turnover: 1 mark for Year 1 (41.06 days, accept 41 days or 41.1 days) and 1 mark for Year 2 (43.80 days, accept 44 days or 43.8 days). [2 marks]
**Part (b) [3 marks total]** - 1 mark for each valid reason stated up to a maximum of 3 marks. - Acceptable points include: cost of sales increasing faster than selling price, price reductions to boost turnover, changes in sales mix, changes in supplier terms, inventory wastage.
**Part (c) [4 marks total]** - 1 mark for each valid action suggested with development/explanation (up to a maximum of 4 marks). - Acceptable points: credit control improvements, customer payment incentives, inventory control systems, negotiation of credit terms with suppliers.
Question 3 · Structured Question
15 marks
Apex plc
At 1 April 2022, the equity balances of Apex plc were as follows:
Ordinary shares of $0.50 each: $300,000
Share premium: $80,000
General reserve: $40,000
Retained earnings: $115,000
The following transactions took place during the year ended 31 March 2023:
1 June 2022: Paid a final dividend for the year ended 31 March 2022 of $0.05 per share.
1 September 2022: Made a rights issue of 1 share for every 4 held at a price of $0.80 per share. The issue was fully subscribed.
1 December 2022: Made a bonus issue of 1 share for every 5 held. The directors decided to maintain reserves in their most flexible form.
1 February 2023: Paid an interim dividend of $0.02 per share on all shares in issue at that date.
31 March 2023: The profit for the year was $95,000.
31 March 2023: Transferred $25,000 to the general reserve.
Required:
(a) Prepare the Statement of Changes in Equity for Apex plc for the year ended 31 March 2023. [10 marks]
(b) State three differences between ordinary shares and preference shares. [3 marks]
(c) State two reasons why a company might make a bonus issue rather than pay a cash dividend. [2 marks]
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Worked solution
Part (a)
Statement of Changes in Equity for Apex plc for the year ended 31 March 2023:
DetailsOrdinary Share Capital ($)Share Premium ($)General Reserve ($)Retained Earnings ($)Total ($)Balances at 1 April 2022300,00080,00040,000115,000535,000Final dividend (600,000 shares * $0.05)---(30,000)(30,000)Rights issue (150,000 shares)75,00045,000--120,000Bonus issue (150,000 shares)75,000(75,000)---Interim dividend (900,000 shares * $0.02)---(18,000)(18,000)Profit for the year---95,00095,000Transfer to general reserve--25,000(25,000)-Balances at 31 March 2023450,00050,00065,000137,000702,000
Workings:
Rights issue: \(600,000 / 4 = 150,000\) shares. Share capital = \(150,000 * $0.50 = $75,000\). Share premium = \(150,000 * ($0.80 - $0.50) = $45,000\). Total = \($120,000\).
Bonus issue: Shares held = \(600,000 + 150,000 = 750,000\) shares. Bonus shares = \(750,000 / 5 = 150,000\) shares. Nominal value = \(150,000 * $0.50 = $75,000\). Fully funded from share premium to keep reserves in the most flexible form.
Differences between ordinary shares and preference shares (any three):
Ordinary dividends are variable and not guaranteed, whereas preference dividends are usually at a fixed rate.
Ordinary shareholders usually have voting rights at general meetings, whereas preference shareholders do not.
In the event of liquidation, preference shareholders have priority over ordinary shareholders for repayment of capital.
Preference dividends may be cumulative, whereas ordinary dividends are never cumulative.
Part (c)
Reasons for making a bonus issue instead of paying a cash dividend (any two):
To conserve cash/liquidity within the company for future expansion or working capital.
To capitalise reserves, converting non-distributable or distributable reserves into permanent share capital.
To reduce the market price per share, making the shares more affordable and marketable to smaller investors.
To reassure shareholders of the company's financial strength and growth potential when cash is not currently distributable.
Marking scheme
Part (a) [Total: 10 marks]
Final dividend: $30,000 in Retained Earnings (1 mark)
Rights issue: $75,000 in Share Capital and $45,000 in Share Premium (1 mark), $120,000 in Total (1 mark)
Bonus issue: $75,000 in Share Capital and ($75,000) in Share Premium (2 marks)
Interim dividend: $18,000 in Retained Earnings (1 mark)
Profit for the year: $95,000 in Retained Earnings (1 mark)
Transfer to general reserve: $25,000 in General Reserve and ($25,000) in Retained Earnings (1 mark)
Closing balances: Share capital $450,000, Share premium $50,000, General reserve $65,000, Retained earnings $137,000 (2 marks - 1 mark for any two correct, 2 marks for all four correct)
Part (b) [Total: 3 marks]
1 mark for each valid difference between ordinary shares and preference shares, up to a maximum of 3 marks. (e.g., dividend variability, voting rights, priority in winding up, cumulative nature).
Part (c) [Total: 2 marks]
1 mark for each valid reason for a bonus issue over a cash dividend, up to a maximum of 2 marks. (e.g., conserving cash, capitalising reserves, lowering market price per share to improve liquidity, signal of strength).
Question 4 · Structured
30 marks
Venture Limited manufactures three products: Alpha, Beta, and Gamma.
The following budgeted information is available for next month:
| | Alpha | Beta | Gamma | | :--- | :---: | :---: | :---: | | Selling price per unit | $50 | $65 | $80 | | Direct materials ($5 per kg) | $15 | $20 | $30 | | Direct labor ($12 per hour) | $18 | $24 | $24 | | Variable overheads per unit | $5 | $6 | $8 | | Maximum monthly demand (units) | 1,500 | 2,000 | 1,200 |
Monthly fixed overheads are budgeted at $31,500.
Due to temporary supply chain disruptions, the availability of direct materials next month is expected to be restricted to 14,000 kg.
**Required**
(a) Calculate the unit contribution for each of the three products: Alpha, Beta, and Gamma. [3]
(b) Explain why direct materials are a limiting factor for the next month, supporting your answer with calculations. [4]
(c) Determine the optimal production mix for next month and calculate the maximum profit that Venture Limited can achieve. [11]
(d) Venture Limited has received an export order for 300 units of Gamma at a special selling price of $70 per unit. Direct materials would have to be purchased from a special overseas supplier at a premium price of $6 per kg (instead of $5) to fulfill this order. No other domestic production would be affected as the supplier will provide these materials specifically for this order. There would be no additional fixed costs.
Advise the directors whether they should accept this export order. Support your answer with calculations. [6]
(e) State three limitations of using marginal costing for decision-making. [6]
[Total: 30 marks]
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Since the total direct materials required (19,700 kg) exceeds the maximum availability of direct materials (14,000 kg), direct materials are a limiting factor.
**(c) Optimal production mix and maximum profit:**
Calculate the contribution per kg of the limiting factor (direct materials): * **Alpha:** \( \frac{\$12 \text{ contribution}}{3 \text{ kg}} = \$4.00 \text{ per kg} \) * **Beta:** \( \frac{\$15 \text{ contribution}}{4 \text{ kg}} = \$3.75 \text{ per kg} \) * **Gamma:** \( \frac{\$18 \text{ contribution}}{6 \text{ kg}} = \$3.00 \text{ per kg} \)
**Ranking:** 1. Alpha ($4.00 per kg) 2. Beta ($3.75 per kg) 3. Gamma ($3.00 per kg)
**Allocation of materials (14,000 kg available):** 1. **Alpha (1st):** Meet full demand of 1,500 units. * Material used: \( 1,500 \times 3 \text{ kg} = 4,500 \text{ kg} \) * Remaining material: \( 14,000 - 4,500 = 9,500 \text{ kg} \) 2. **Beta (2nd):** Meet full demand of 2,000 units. * Material used: \( 2,000 \times 4 \text{ kg} = 8,000 \text{ kg} \) * Remaining material: \( 9,500 - 8,000 = 1,500 \text{ kg} \) 3. **Gamma (3rd):** Use remaining material. * Units produced: \( \frac{1,500 \text{ kg}}{6 \text{ kg per unit}} = 250 \text{ units} \)
**Optimal Production Mix:** * Alpha: 1,500 units * Beta: 2,000 units * Gamma: 250 units
* **Special Selling Price:** $70 per unit * **Direct Material Cost:** \( 6 \text{ kg} \times \$6 \text{ per kg} = \$36 \text{ per unit} \) * **Direct Labor:** $24 per unit * **Variable Overheads:** $8 per unit * **Total Variable Cost per unit:** \( \$36 + \$24 + \$8 = \$68 \text{ per unit} \) * **Contribution per unit:** \( \$70 - \$68 = \$2 \text{ per unit} \) * **Total Contribution from export order:** \( 300 \text{ units} \times \$2 = \$600 \)
**Advice:** The directors should accept the export order. It yields a positive contribution of $2 per unit, increasing the company's total contribution and overall net profit by $600. Since this order uses specialized external supply, it does not cannibalize or restrict existing profitable domestic production.
**Other considerations:** * Will this lead to long-term profitable export relationships? * Is there sufficient labor capacity to produce these extra 300 units? * Will domestic buyers discover the lower price ($70 vs $80) and demand discounts?
**(e) Three limitations of marginal costing:**
1. **Fixed Costs Assumptions:** It assumes fixed costs remain completely unchanged across all levels of activity. In reality, fixed costs often increase in steps as capacity thresholds are reached. 2. **Linear Variable Costs:** It assumes variable costs per unit are constant. This ignores potential discounts for bulk material purchases or premium overtime rates for labor. 3. **Constant Selling Price:** It assumes selling price remains constant regardless of volume. In practice, a firm may need to lower prices to sell higher volumes (price elasticity). 4. **Short-term Focus:** It focuses primarily on contribution and short-term decisions, which can lead to underpricing in the long term if products fail to recover total fixed overheads.
**(b)** [Total: 4 marks] * Calculate kg/unit for all products (Alpha = 3 kg, Beta = 4 kg, Gamma = 6 kg) (1) * Calculate total material required: Alpha (4,500 kg) and Beta (8,000 kg) (1) * Calculate Gamma required (7,200 kg) (1) * State that total requirement (19,700 kg) exceeds availability (14,000 kg), hence it is a limiting factor (1)
**(c)** [Total: 11 marks] * Calculate contribution per kg: Alpha = $4.00, Beta = $3.75, Gamma = $3.00 (3 marks - 1 mark for each) * Establish ranking: 1st Alpha, 2nd Beta, 3rd Gamma (1) * Allocate materials to Alpha: 1,500 units / 4,500 kg (1) * Allocate materials to Beta: 2,000 units / 8,000 kg (1) * Allocate remaining materials to Gamma: 250 units / 1,500 kg (1) * Calculate Alpha contribution ($18,000) (1) * Calculate Beta contribution ($30,000) (1) * Calculate Gamma contribution ($4,500) (1) * Calculate Net Profit ($21,000) (1)
**(d)** [Total: 6 marks] * Calculate revised material cost: 6 kg * $6 = $36 (1) * Calculate total variable cost: $68 (1) * Calculate unit contribution: $2 (1) * Calculate total contribution: $600 (1) * Provide clear recommendation based on positive contribution (1) * Provide at least one non-financial factor / qualitative consideration (1)
**(e)** [Total: 6 marks] * Award 2 marks for each well-explained limitation (up to a maximum of 3 limitations): * Fixed costs are not always constant / step costs exist (2) * Variable costs per unit can change due to economies of scale (2) * Selling prices may fluctuate with volume (2) * Over-reliance on short-term analysis may lead to long-term failure to cover fixed costs (2) * (Accept other valid limitations of marginal costing)
Question 5 · Structured
30 marks
Venture Limited manufactures three products: Alpha, Beta, and Gamma.
The following budgeted information is available for next month:
| | Alpha | Beta | Gamma | | :--- | :---: | :---: | :---: | | Selling price per unit | $50 | $65 | $80 | | Direct materials ($5 per kg) | $15 | $20 | $30 | | Direct labor ($12 per hour) | $18 | $24 | $24 | | Variable overheads per unit | $5 | $6 | $8 | | Maximum monthly demand (units) | 1,500 | 2,000 | 1,200 |
Monthly fixed overheads are budgeted at $31,500.
Due to temporary supply chain disruptions, the availability of direct materials next month is expected to be restricted to 14,000 kg.
**Required**
(a) Calculate the unit contribution for each of the three products: Alpha, Beta, and Gamma. [3]
(b) Explain why direct materials are a limiting factor for the next month, supporting your answer with calculations. [4]
(c) Determine the optimal production mix for next month and calculate the maximum profit that Venture Limited can achieve. [11]
(d) Venture Limited has received an export order for 300 units of Gamma at a special selling price of $70 per unit. Direct materials would have to be purchased from a special overseas supplier at a premium price of $6 per kg (instead of $5) to fulfill this order. No other domestic production would be affected as the supplier will provide these materials specifically for this order. There would be no additional fixed costs.
Advise the directors whether they should accept this export order. Support your answer with calculations. [6]
(e) State three limitations of using marginal costing for decision-making. [6]
[Total: 30 marks]
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Since the total direct materials required (19,700 kg) exceeds the maximum availability of direct materials (14,000 kg), direct materials are a limiting factor.
**(c) Optimal production mix and maximum profit:**
Calculate the contribution per kg of the limiting factor (direct materials): * **Alpha:** \( \frac{\$12 \text{ contribution}}{3 \text{ kg}} = \$4.00 \text{ per kg} \) * **Beta:** \( \frac{\$15 \text{ contribution}}{4 \text{ kg}} = \$3.75 \text{ per kg} \) * **Gamma:** \( \frac{\$18 \text{ contribution}}{6 \text{ kg}} = \$3.00 \text{ per kg} \)
**Ranking:** 1. Alpha ($4.00 per kg) 2. Beta ($3.75 per kg) 3. Gamma ($3.00 per kg)
**Allocation of materials (14,000 kg available):** 1. **Alpha (1st):** Meet full demand of 1,500 units. * Material used: \( 1,500 \times 3 \text{ kg} = 4,500 \text{ kg} \) * Remaining material: \( 14,000 - 4,500 = 9,500 \text{ kg} \) 2. **Beta (2nd):** Meet full demand of 2,000 units. * Material used: \( 2,000 \times 4 \text{ kg} = 8,000 \text{ kg} \) * Remaining material: \( 9,500 - 8,000 = 1,500 \text{ kg} \) 3. **Gamma (3rd):** Use remaining material. * Units produced: \( \frac{1,500 \text{ kg}}{6 \text{ kg per unit}} = 250 \text{ units} \)
**Optimal Production Mix:** * Alpha: 1,500 units * Beta: 2,000 units * Gamma: 250 units
* **Special Selling Price:** $70 per unit * **Direct Material Cost:** \( 6 \text{ kg} \times \$6 \text{ per kg} = \$36 \text{ per unit} \) * **Direct Labor:** $24 per unit * **Variable Overheads:** $8 per unit * **Total Variable Cost per unit:** \( \$36 + \$24 + \$8 = \$68 \text{ per unit} \) * **Contribution per unit:** \( \$70 - \$68 = \$2 \text{ per unit} \) * **Total Contribution from export order:** \( 300 \text{ units} \times \$2 = \$600 \)
**Advice:** The directors should accept the export order. It yields a positive contribution of $2 per unit, increasing the company's total contribution and overall net profit by $600. Since this order uses specialized external supply, it does not cannibalize or restrict existing profitable domestic production.
**Other considerations:** * Will this lead to long-term profitable export relationships? * Is there sufficient labor capacity to produce these extra 300 units? * Will domestic buyers discover the lower price ($70 vs $80) and demand discounts?
**(e) Three limitations of marginal costing:**
1. **Fixed Costs Assumptions:** It assumes fixed costs remain completely unchanged across all levels of activity. In reality, fixed costs often increase in steps as capacity thresholds are reached. 2. **Linear Variable Costs:** It assumes variable costs per unit are constant. This ignores potential discounts for bulk material purchases or premium overtime rates for labor. 3. **Constant Selling Price:** It assumes selling price remains constant regardless of volume. In practice, a firm may need to lower prices to sell higher volumes (price elasticity). 4. **Short-term Focus:** It focuses primarily on contribution and short-term decisions, which can lead to underpricing in the long term if products fail to recover total fixed overheads.
**(b)** [Total: 4 marks] * Calculate kg/unit for all products (Alpha = 3 kg, Beta = 4 kg, Gamma = 6 kg) (1) * Calculate total material required: Alpha (4,500 kg) and Beta (8,000 kg) (1) * Calculate Gamma required (7,200 kg) (1) * State that total requirement (19,700 kg) exceeds availability (14,000 kg), hence it is a limiting factor (1)
**(c)** [Total: 11 marks] * Calculate contribution per kg: Alpha = $4.00, Beta = $3.75, Gamma = $3.00 (3 marks - 1 mark for each) * Establish ranking: 1st Alpha, 2nd Beta, 3rd Gamma (1) * Allocate materials to Alpha: 1,500 units / 4,500 kg (1) * Allocate materials to Beta: 2,000 units / 8,000 kg (1) * Allocate remaining materials to Gamma: 250 units / 1,500 kg (1) * Calculate Alpha contribution ($18,000) (1) * Calculate Beta contribution ($30,000) (1) * Calculate Gamma contribution ($4,500) (1) * Calculate Net Profit ($21,000) (1)
**(d)** [Total: 6 marks] * Calculate revised material cost: 6 kg * $6 = $36 (1) * Calculate total variable cost: $68 (1) * Calculate unit contribution: $2 (1) * Calculate total contribution: $600 (1) * Provide clear recommendation based on positive contribution (1) * Provide at least one non-financial factor / qualitative consideration (1)
**(e)** [Total: 6 marks] * Award 2 marks for each well-explained limitation (up to a maximum of 3 limitations): * Fixed costs are not always constant / step costs exist (2) * Variable costs per unit can change due to economies of scale (2) * Selling prices may fluctuate with volume (2) * Over-reliance on short-term analysis may lead to long-term failure to cover fixed costs (2) * (Accept other valid limitations of marginal costing)
Paper 32 (Financial Accounting)
Answer all three questions. Refer to the corresponding sources in the insert. Show calculations to two decimal places where relevant.
3 Question · 75 marks
Question 1 · structured
25 marks
Vandermeer Ltd
Vandermeer Ltd is a manufacturing business. The following trial balance information is available at 30 April 2023:
Account TitleDebit ($)Credit ($)Inventory at 1 May 2022:- Raw materials45000- Work in progress28000- Finished goods (at transfer price)78000Purchases of raw materials245000Carriage inwards on raw materials8500Direct factory wages184000Indirect factory wages62000Factory supervision salaries35000Factory power and heating54000Administrative expenses112000Distribution costs86000Revenue920000Factory machinery at cost240000Provision for depreciation on factory machinery (1 May 2022)72000
The following additional information is available at 30 April 2023:
Inventories at 30 April 2023 were valued as follows: Raw materials $48,500; Work in progress $31,200.
Finished goods are transferred from the factory to the warehouse at a transfer price including a mark-up of 30% on factory cost. Finished goods inventory on 30 April 2023 was valued at transfer price of $91,000.
Direct factory wages of $6,000 were accrued at 30 April 2023.
Factory power and heating includes a prepaid expense of $4,000.
Depreciation is to be provided on factory machinery at 15% per annum on cost.
Required:
(a) Prepare the Manufacturing Account for Vandermeer Ltd for the year ended 30 April 2023, showing clearly the prime cost, cost of production, and transfer price of finished goods. [14 marks]
(b) Prepare the Statement of Profit or Loss (up to Gross Profit) for Vandermeer Ltd for the year ended 30 April 2023, showing clearly the manufacturing profit and any adjustment for unrealised profit. [7 marks]
(c) State four reasons why a manufacturing business transfers finished goods to the warehouse at a transfer price including a mark-up. [4 marks]
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Worked solution
(a) Manufacturing Account of Vandermeer Ltd for the year ended 30 April 2023
Opening inventory of raw materials$45,000Purchases of raw materials$245,000Carriage inwards$8,500$253,500Less: Closing inventory of raw materials($48,500)Cost of raw materials consumed$250,000Direct factory wages ($184,000 + $6,000 accrued)$190,000PRIME COST$440,000Factory Overheads:Indirect factory wages$62,000Factory supervision salaries$35,000Factory power and heating ($54,000 - $4,000 prepaid)$50,000Depreciation on factory machinery (15% * $240,000)$36,000$183,000$623,000Add: Opening work in progress$28,000Less: Closing work in progress($31,200)COST OF PRODUCTION$619,800Manufacturing profit (30% mark-up)$185,940TRANSFER PRICE OF FINISHED GOODS$805,740
(b) Statement of Profit or Loss (up to Gross Profit) for the year ended 30 April 2023
Revenue$920,000Cost of Sales:Opening inventory of finished goods$78,000Transfer price of finished goods$805,740$883,740Less: Closing inventory of finished goods($91,000)($792,740)Gross Profit on Trading$127,260Add: Manufacturing profit$185,940Less: Increase in Provision for Unrealised Profit (W1)($3,000)Adjusted Gross Profit$310,200
(c) Reasons for transferring finished goods at a mark-up:
Allows the manufacturing department to be treated as a profit centre, enabling its performance and efficiency to be evaluated.
Allows the business to compare the internal cost of manufacturing with the cost of purchasing finished goods from external suppliers (make-or-buy decisions).
Ensures that finished goods inventory in the Statement of Financial Position is valued closer to its realistic market value (before adjustment for unrealised profit).
Maintains confidentiality of actual manufacturing costs and profit margins from sales department personnel or external competitors.
Marking scheme
Part (a): Manufacturing Account [Total: 14 marks] - Raw materials consumed calculation: [1] mark for adding opening, purchases and carriage, [1] mark for subtracting closing raw materials. - Direct wages adjustment ($184,000 + $6,000): [1] mark. - Prime Cost correctly labeled and calculated ($440,000): [1] mark (Own Figure - OF). - Indirect wages and supervision salaries ($62,000 & $35,000): [1] mark. - Factory power & heating adjustment ($54,000 - $4,000): [1] mark. - Depreciation calculation ($240,000 * 15% = $36,000): [1] mark. - Total factory overheads correct total ($183,000): [1] mark (OF). - Work in progress adjustments (both opening and closing correctly applied): [2] marks (1 mark for opening WIP, 1 mark for closing WIP). - Cost of production correctly labeled and calculated ($619,800): [1] mark (OF). - Manufacturing profit calculation (30% * Cost of Production): [2] marks (1 mark for rate, 1 mark for application to Cost of Production). - Transfer price total ($805,740): [1] mark (OF).
Part (b): Statement of Profit or Loss [Total: 7 marks] - Revenue ($920,000): [1] mark. - Opening & Closing finished goods inventory: [1] mark. - Transfer price of finished goods (from part a): [1] mark (OF). - Cost of sales correctly calculated ($792,740) and subtracted to get Gross Profit on Trading ($127,260): [1] mark. - Manufacturing profit added ($185,940): [1] mark (OF). - Calculation of increase in Provision for Unrealised Profit ($3,000) and deducted: [1] mark. - Adjusted Gross Profit correct total ($310,200): [1] mark (OF).
Part (c): Reasons for Transfer Mark-up [Total: 4 marks] - [1] mark for each valid reason stated, up to a maximum of 4 marks. - Reject vague answers like 'to make more profit'.
Question 2 · Structured
25 marks
Ahmed and Bashir have been in partnership for several years sharing profits and losses in the ratio 3:2 respectively. They decided to dissolve their partnership on 31 December 2023 and sell the business to a newly formed limited company, AB Limited.
The statement of financial position of the partnership at 31 December 2023 was as follows:
**Current assets** - Inventory: $24,000 - Trade receivables: $18,500 - Bank: $3,500 Total Current assets = $46,000
**Total assets** = $211,000
**Capital and Liabilities** **Capital accounts** - Ahmed: $100,000 - Bashir: $60,000 **Current accounts** - Ahmed: $8,500 - Bashir: ($4,200) **Non-current liabilities** - Loan from Ahmed: $30,000 **Current liabilities** - Trade payables: $16,700 **Total capital and liabilities** = $211,000
**Additional information:** 1. AB Limited took over all of the assets (excluding bank) and assumed all the liabilities (except the loan from Ahmed). 2. The purchase consideration was agreed at $200,000. 3. The purchase consideration was settled by: - The issue of 120,000 ordinary shares of $1.00 each in AB Limited at a premium of $0.25 per share, distributed to the partners in their profit-sharing ratio. - The balance paid in cash. 4. Dissolution expenses amounted to $2,400 and were paid from the partnership bank account. 5. The loan from Ahmed was repaid in full along with outstanding interest of $600. 6. Any remaining bank balance was settled between the partners to close their accounts.
**Required:** (a) Prepare the Realization Account of the partnership. (8 marks) (b) Prepare the Partners' Capital Accounts (in columnar format) to show the final closure of the partnership. (10 marks) (c) State three reasons why partners might decide to convert their partnership into a limited company. (3 marks) (d) Explain the accounting treatment of a partner's loan and any outstanding loan interest upon the dissolution of a partnership. (4 marks)
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*Calculations:* - Total value of shares = \(120,000 \times $1.25 = $150,000\) - Ahmed's share of shares: \(150,000 \times 3/5 = $90,000\) - Bashir's share of shares: \(150,000 \times 2/5 = $60,000\) - Ahmed final bank cash: \(100,000 + 8,500 + 3,720 - 90,000 = $22,220\) (Cash paid to Ahmed) - Bashir final bank cash: \(60,000 + 2,480 - 4,200 - 60,000 = -$1,720\) (Cash received from Bashir to clear deficit)
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**(c) Reasons to convert to a limited company:** 1. Owners gain limited liability status, protecting their personal assets. 2. Access to a wider source of capital by issuing shares to the public or private investors. 3. The company has perpetual succession, continuing to exist even if shareholders or directors change.
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**(d) Accounting treatment of loan and interest:** - A partner's loan is a liability but is treated internally. It is not transferred to the Realization Account but is settled by a direct payment from the Bank Account after paying outside creditors and before capital accounts are closed. - Outstanding loan interest is a partnership expense. It is debited to the Realization Account (or Income Statement) and credited to the partner's loan account (or current account) before being repaid from the bank account.
Marking scheme
**(a) Realization Account (8 marks)** - Transfer of Assets (Premises, Equipment, Inventory, Trade Receivables) to debit side: [2] marks (0.5 marks each) - Trade Payables transferred to credit side: [1] mark - Dissolution Expenses ($2,400) debited: [1] mark - Loan Interest ($600) debited: [1] mark - AB Limited Purchase Consideration ($200,000) credited: [1] mark - Distribution of profit (Ahmed: $3,720, Bashir: $2,480): [2] marks (1 mark each)
**(b) Partners' Capital Accounts (10 marks)** - Correct opening balances: [1] mark - Transfer of Current Accounts (Ahmed Cr, Bashir Dr): [2] marks (1 mark each) - Realization profit correctly credited (O/F from (a)): [1] mark - Ordinary shares in AB Ltd distributed ($90,000 to Ahmed, $60,000 to Bashir): [2] marks (1 mark each) - Cash paid to Ahmed ($22,220) correctly calculated and debited: [2] marks - Cash received from Bashir ($1,720) correctly calculated and credited: [2] marks
**(c) Reasons for conversion (3 marks)** - 1 mark for each valid reason (e.g., limited liability, easier expansion, perpetual succession) up to a maximum of 3 marks.
**(d) Accounting treatment of loan and interest (4 marks)** - Partner's loan not transferred to realization / repaid directly from bank: [1] mark - Repaid after external liabilities but before capital: [1] mark - Outstanding interest is a partnership expense / debited to Realization: [1] mark - Interest paid alongside the loan principal from the bank account: [1] mark
Question 3 · Structured Question
25 marks
The directors of Vanguard plc have provided the following information from the financial statements for the years ended 31 December 2022 and 31 December 2023:
**Income Statement Summaries:**
| | Year ended 31 December 2022 ($) | Year ended 31 December 2023 ($) | |---|---|---| | Revenue | 950,000 | 1,200,000 | | Profit from operations | 185,000 | 230,000 | | Finance costs | (25,000) | (20,000) | | Profit before tax | 160,000 | 210,000 | | Taxation | (40,000) | (50,000) | | Profit for the year | 120,000 | 160,000 |
**Extract from Statement of Financial Position at 31 December:**
**Additional information:** 1. On 1 January 2023, the company made an issue of 200,000 ordinary shares. There were no other changes to the share capital during the two years. 2. The total ordinary dividend paid and proposed was: - Year ended 31 December 2022: $48,000 - Year ended 31 December 2023: $72,000 3. The market price of one ordinary share was: - At 31 December 2022: $1.80 - At 31 December 2023: $2.40
**Required:**
(a) Calculate the following investment ratios for Vanguard plc for both 2022 and 2023. Show your workings and state your answers to two decimal places. (i) Earnings per share (EPS) (ii) Price-earnings (P/E) ratio (iii) Dividend yield (iv) Dividend cover [16 marks]
(b) An existing shareholder is considering buying more shares in Vanguard plc. Evaluate the performance and investment potential of the company based on the ratios calculated in part (a) and other information. Recommend whether or not the shareholder should buy more shares. [6 marks]
(c) Explain three limitations of using accounting ratios to assess a company's investment potential. [3 marks]
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Worked solution
**(a) Calculations of Investment Ratios**
**(i) Earnings per share (EPS)** $$\text{Formula: } \frac{\text{Profit for the year}}{\text{Number of ordinary shares in issue}}$$
- **2022** - Number of shares = $\frac{$400,000}{$0.50} = 800,000$ shares - $\text{EPS} = \frac{$120,000}{800,000\text{ shares}} = $0.15\text{ or } 15.00\text{ cents}$ (2 marks) - **2023** - Number of shares = $\frac{$500,000}{$0.50} = 1,000,000$ shares - $\text{EPS} = \frac{$160,000}{1,000,000\text{ shares}} = $0.16\text{ or } 16.00\text{ cents}$ (2 marks)
**(ii) Price-earnings (P/E) ratio** $$\text{Formula: } \frac{\text{Market price per share}}{\text{Earnings per share (EPS)}}$$
**(b) Evaluation and Recommendation** - **Earnings per share (EPS)** increased from 15.00 cents to 16.00 cents (an increase of 6.67%). This is a positive sign for shareholders because despite a 25% increase in the number of shares (from 800,000 to 1,000,000), profits grew even faster, indicating strong profitability. - **P/E ratio** increased from 12.00 times to 15.00 times. This reflects increased investor confidence in the future earnings potential and growth prospects of Vanguard plc. Investors are now willing to pay 15 times earnings to acquire a share. - **Dividend yield** has fallen slightly from 3.33% to 3.00% despite the fact that Dividend per share rose from 6.00 cents to 7.20 cents (a 20% increase). This drop is due to the rapid rise in market share price (+33.33%, from $1.80 to $2.40) which outstripped the dividend increase. - **Dividend cover** fell from 2.50 times to 2.22 times, showing that the company is distributing a higher proportion of its earnings as dividends. While this is positive for immediate cash payouts, it means fewer funds are retained in the business, which might reduce future growth and make the dividend slightly more vulnerable in down years. - **Overall Recommendation**: The shareholder should buy more shares if they seek long-term capital appreciation and are encouraged by the positive market sentiment and rising earnings. However, if they are primarily looking for immediate high-income yields with maximum dividend safety, they may want to exercise caution, given the falling dividend yield and cover. (Max 6 marks)
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**(c) Limitations of accounting ratios** - **Historical focus**: Ratios are based on historical accounting records, which reflect past performance and may not accurately indicate future potential or prospects. - **Non-financial factors ignored**: Ratio analysis does not capture qualitative factors such as quality of management, employee morale, brand reputation, or changes in customer preferences. - **Inflation effects**: Financial statements are prepared on a historical cost basis; inflation can distort asset values and profitability figures, reducing comparability over time. - **Accounting policy differences**: Companies can employ different accounting policies (e.g., depreciation methods or inventory valuation), which makes comparison with external competitors difficult. (1 mark for each of three explained limitations, Max 3 marks)
Marking scheme
**Part (a) [16 marks total - 2 marks per ratio per year]** - (i) EPS 2022: 1 mark for correct working, 1 mark for correct answer (15.00c or $0.15) - (i) EPS 2023: 1 mark for correct working, 1 mark for correct answer (16.00c or $0.16) - (ii) P/E ratio 2022: 1 mark for correct working/formula, 1 mark for correct answer (12.00 times) - (ii) P/E ratio 2023: 1 mark for correct working, 1 mark for correct answer (15.00 times) - (iii) Dividend yield 2022: 1 mark for correct DPS calculation, 1 mark for correct yield (3.33%) - (iii) Dividend yield 2023: 1 mark for correct DPS calculation, 1 mark for correct yield (3.00%) - (iv) Dividend cover 2022: 1 mark for correct working/formula, 1 mark for correct answer (2.50 times) - (iv) Dividend cover 2023: 1 mark for correct working, 1 mark for correct answer (2.22 times) *(Note: Accept rounded figures to 2 decimal places. Own Figure (OF) rules apply throughout.)*
**Part (b) [6 marks total]** - 1 mark for analyzing EPS increase (positive earnings growth despite dilution). - 1 mark for analyzing P/E ratio increase (increased investor confidence/market optimism). - 1 mark for analyzing Dividend yield decrease (due to rapid increase in share price outstripping dividend increase). - 1 mark for analyzing Dividend cover decrease (higher dividend payout, lower reserve retention). - 1 mark for analyzing capital growth/share price appreciation (+33.33%). - 1 mark for a clear, reasoned recommendation matching the analysis. *(Accept alternate reasonable interpretations if well-argued.)*
**Part (c) [3 marks total]** - 1 mark for each clearly explained limitation of using accounting ratios for investment appraisal (Max 3 marks). - Accepted points: historical nature of financial statements, impact of inflation, variation in accounting policies across companies, lack of qualitative/non-financial details, or seasonal distortions (window dressing).
Paper 42 (Cost and Management Accounting)
Answer all questions. Show your workings and present analytical structures carefully.
2 Question · 50 marks
Question 1 · structured
25 marks
Vanguard Plastics Ltd manufactures a specialized industrial component, the 'Zeta'. The company operates a standard costing system. The standard cost card for one unit of Zeta is as follows:
- Direct materials: 4 kg @ $6.00 per kg = $24.00 - Direct labor: 2 hours @ $12.00 per hour = $24.00
Fixed overheads are budgeted at $40,000 per month and are absorbed on the basis of direct labor hours. The budgeted monthly production is 5,000 units.
During Month 1, the actual results recorded were as follows: - Production: 4,800 units - Direct materials purchased and used: 19,500 kg costing $115,050 - Direct labor: 9,400 hours worked costing $115,620 - Actual fixed overheads incurred: $39,000
Required:
(a) Calculate the following variances for Month 1, indicating whether each variance is Favourable (F) or Adverse (A): (i) Material price variance (3 marks) (ii) Material usage variance (3 marks) (iii) Labor rate variance (3 marks) (iv) Labor efficiency variance (3 marks) (v) Fixed overhead expenditure variance (2 marks) (vi) Fixed overhead volume variance (2 marks)
(b) Prepare a statement reconciling the standard cost of actual production with the actual cost of production for Month 1. (5 marks)
(c) Advise the directors of Vanguard Plastics Ltd on the possible interrelationships between the material and labor variances calculated in part (a). (4 marks)
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### Part (c) Advice on Variance Interrelationships
- **Material Price and Material Usage Interrelationship:** The company achieved a Favourable material price variance ($1,950 F) but suffered an Adverse material usage variance ($1,800 A). This strongly suggests that purchasing bought lower-grade/cheaper materials (saving $0.10/kg), which likely resulted in higher wastage, defects, or scrap during the manufacturing process, requiring more material than the standard (using 300 kg extra). - **Labor Rate and Labor Efficiency Interrelationship:** The company suffered an Adverse labor rate variance ($2,820 A) but gained a Favourable labor efficiency variance ($2,400 F). This suggests that the production department utilized more highly skilled or experienced workers who command a higher hourly rate (paying $12.30 instead of $12.00), but their superior skills enabled them to work faster than standard, saving 200 hours. - **Combined Interrelationship:** Alternatively, the lower-quality materials purchased might have required more experienced operators to process them without high levels of reject, which links the usage of higher-paid labor to the cheap material purchases.
Marking scheme
### Part (a) [Total: 16 marks] - **(i) Material price variance:** Formula/working (1 mark), Correct calculation of $1,950 (1 mark), Correct direction 'Favourable' or 'F' (1 mark). [3 marks] - **(ii) Material usage variance:** Standard quantity calculation of 19,200 kg (1 mark), Correct calculation of $1,800 (1 mark), Correct direction 'Adverse' or 'A' (1 mark). [3 marks] - **(iii) Labor rate variance:** Formula/working (1 mark), Correct calculation of $2,820 (1 mark), Correct direction 'Adverse' or 'A' (1 mark). [3 marks] - **(iv) Labor efficiency variance:** Standard hours calculation of 9,600 hours (1 mark), Correct calculation of $2,400 (1 mark), Correct direction 'Favourable' or 'F' (1 mark). [3 marks] - **(v) Fixed overhead expenditure variance:** Correct calculation of $1,000 (1 mark), Correct direction 'Favourable' or 'F' (1 mark). [2 marks] - **(vi) Fixed overhead volume variance:** Correct calculation of $1,600 (1 mark), Correct direction 'Adverse' or 'A' (1 mark). [2 marks]
### Part (b) [Total: 5 marks] - Correctly stating the Standard Cost of Actual Production of $268,800 (1 mark). - Correct listing and addition of adverse variances (1 mark). - Correct listing and deduction of favourable variances (1 mark). - Arriving at the correct Actual Cost of Production of $269,670 (1 mark). - Presentation and clear layout of the statement (1 mark).
### Part (c) [Total: 4 marks] - Identifies the link between Favourable Material Price and Adverse Material Usage (1 mark) and explains the trade-off (cheaper materials lead to higher wastage/lower quality) (1 mark). - Identifies the link between Adverse Labor Rate and Favourable Labor Efficiency (1 mark) and explains the trade-off (more expensive/skilled staff work faster/more efficiently) (1 mark). - Maximum of 4 marks for a well-reasoned discussion linking these aspects together.
Question 2 · Structured Question
25 marks
Vandervelde Ltd is considering investing in a new automated packing machine to improve production efficiency. The details of the investment are as follows:
* Initial cost of machine: $300,000 * Estimated useful life: 4 years * Residual value at the end of Year 4: $30,000
(a) Calculate the Net Present Value (NPV) of the proposed project at the cost of capital of 10%. [7 marks]
(b) Calculate the Accounting Rate of Return (ARR) for the project based on average investment. [6 marks]
(c) Calculate the Internal Rate of Return (IRR) of the project using the 10% and 15% discount rates. [6 marks]
(d) Advise the directors of Vandervelde Ltd whether they should proceed with the purchase of the packing machine. Support your answer with reference to both financial and non-financial factors. [6 marks]
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Worked solution
**(a) Calculation of Net Present Value (NPV) at 10%:**
**(d) Recommendation Advice:** * **Financial Factors:** * The NPV is positive at \( \$17,650 \), indicating the project increases shareholder wealth. * The IRR of \( 12.84\% \) is above the firm's required cost of capital of \( 10\% \). * The ARR is \( 15.15\% \), which may exceed the company's internal target rate of return. * **Non-Financial / Qualitative Factors:** * Automation might lead to improved consistency and packing quality, leading to higher customer satisfaction. * Potential staff redundancies or retraining costs for workers operating the new machine. * Risk of machine obsolescence or technical breakdowns. * **Conclusion/Recommendation:** * The directors should proceed with the project because it is financially viable and aligns with modernization efforts, provided that staff transition and training are well-managed.
Marking scheme
**(a) Net Present Value (NPV)** * Correct cash flows for years 1-3 ($100k, $110k, $90k) [1 mark for all three] * Correct cash flow for year 4 ($100k including residual) [1 mark] * Correct discount factors applied [1 mark] * Correct present values calculated for each year [2 marks (minus 1 for each error)] * Net Present Value of $17,650 calculated [2 marks (1 method mark + 1 accuracy mark)] *(Max 7 marks)*
**(b) Accounting Rate of Return (ARR)** * Total operating cash flow of $370,000 [1 mark] * Calculation of total depreciation of $270,000 [1 mark] * Average annual profit of $25,000 [1 mark] * Average investment of $165,000 [1 mark] * Final ARR calculation of 15.15% (or 15.2%) [2 marks (1 method mark + 1 accuracy mark)] *(Max 6 marks)*
**(c) Internal Rate of Return (IRR)** * Discount factors correctly applied at 15% [1 mark] * Correct Year 4 cash flow PV at 15% ($57,200) [1 mark] * Correct NPV at 15% of -$13,420 [1 mark] * Correct application of IRR interpolation formula [1 mark] * Final calculated IRR of 12.84% (or 12.8%) [2 marks (1 method mark + 1 accuracy mark)] *(Max 6 marks)*
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