LCCI International Qualifications

Management Accounting Level 3

Model Answers
Series 2 2009 (3024)

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Management Accounting Level 3
Series 2 2009

How to use this booklet Model Answers have been developed by EDI to offer additional information and guidance to Centres, teachers and candidates as they prepare for LCCI International Qualifications. The contents of this booklet are divided into 3 elements: (1) (2) Questions Model Answers – reproduced from the printed examination paper – summary of the main points that the Chief Examiner expected to see in the answers to each question in the examination paper, plus a fully worked example or sample answer (where applicable) – where appropriate, additional guidance relating to individual questions or to examination technique

(3)

Helpful Hints

Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success. EDI provides Model Answers to help candidates gain a general understanding of the standard required. The general standard of model answers is one that would achieve a Distinction grade. EDI accepts that candidates may offer other answers that could be equally valid.

© Education Development International plc 2009 All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior written permission of the Publisher. The book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover, other than that in which it is published, without the prior consent of the Publisher.

Page 1 of 14

QUESTION 1 A company manufactures and sells a single product at a selling price of £120 per unit. The variable production costs and variable selling costs of the product are £82.50 and £7.50 per unit respectively. In the next period, fixed costs are budgeted at £225,000 and the budgeted production and sales are 12,000 units. REQUIRED (a) Calculate, for the next period, the: (i) (ii) budgeted break-even point (in sales revenue) budgeted margin of safety (expressed as a percentage) (3 marks) (2 marks)

(iii) selling price required to maintain the current contribution/sales ratio if the variable production costs and the variable selling costs increase by 8% and 12% per unit respectively. (5 marks) The company, which has sufficient unused production capacity, is considering reducing the selling price by 4% in the next period in order to generate a forecast of 15% increase in sales units. This would be expected to result in the following cost increases: Variable production costs Variable selling costs Fixed costs REQUIRED (b) Assuming that the selling price is reduced by 4% for the next period, calculate the revised budgeted: (i) (ii) break-even point (in sales revenue) net profit. (6 marks) (4 marks) (Total 20 marks) 6% per unit £0.09 per unit £14,400

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Page 2 of 14

MODEL ANSWER TO QUESTION 1 (a) (i) £ per unit Selling price Less: Variable costs Production Selling Contribution Contribution/sales ratio (C/S) = 120.00 82.50 7.50 (90.00) 30.00

 30   = 0.25   120 
= FC C/S = £225,000 0.25 = £900,000

Break-even point (in sales revenue)

(ii)

Budgeted sales value = 12,000 x £120 = £1,440,000
Margin of safety

=

 1,440,000 − 900,000    x 100% 1,440,000  

=

37.5%

(iii) New selling price with current contribution/sales ratio
Existing unit cost £ Variable production 82.50 x Variable selling 7.50 x Total variable cost 90.00 Revised unit cost £ 89.10 8.40 97.50

(1.08) (1.12) = 1 - 0.25

Variable cost ratio

=

1 - C/S

=

0.75

In order to maintain the current C/S ratio of 0.25, the revised variable cost per unit must equal 0.75 of selling price per unit.
New selling price =

£97.50 0.75

=

£130 per unit

(b) (i)
£ per unit

Selling price Less: Variable costs Production Selling Contribution C/S

(£120 x 0.96) (£82.50 x 1.06) (£7.50 + £0.09) 87.45 7.59

£ per unit 115.20

95.04 20.16

= 

 20.16   = 0.175  115.20 
(£225,000 + £14,400) 0.175 = £1,368,000

Break-even point (in sales revenue) = FC = C/S

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Page 3 of 14

MODEL ANSWER TO QUESTION 1 CONTINUED

(ii) Sales – 13,800 (12,000 x 1.15) units @ £115.20 Less: Variable costs of sales Production (13,800 @ £87.45 per unit) Selling (13,800 @ £7.59 per unit) Contribution Less: Fixed cost (£225,000 + 14,400) Net profit* *Alternative calculation: Contribution (13,800 units x £20.16) Less: Fixed cost (£225,000 + £14,400) Net profit
£ 278,208 (239,400) 38,808 £ 1,589,760

(1,206,810) (104,742) 278,208 (239,400) 38,808

3024/2/09/MA

Page 4 of 14

QUESTION 2

A company manufactures and sells two products – Product A and Product B. The company is preparing its budgets for the coming period and has provided the following information: (1) Production and sales of each of the two products are in batches of 100 units. (2) 1,200,000 units of Product A and 800,000 units of Product B are expected to be sold at selling prices of £65 and £115 per batch of 100 units respectively. (3) Both products use the same type of raw material (Material X) and direct labour with the following requirements per batch of 100 units: Product A Product B Material X @ £6.25 per kg 5 kg 8 kg Direct labour @ £13.75 per hour 1¾ hours 2½ hours (4) The stocks of Material X and of the two products at the beginning of the budget period are estimated as follows: Material X Product A Product B 18,000 kg 140,000 units 120,000 units

(5) The company plans to increase the stock levels of Product A and Product B by 10% and 12½%, respectively, by the end of the period. However, the estimated opening stock level of Material X is considered to be too high and a reduction of 15% is planned by the end of the period. There is no stock of work-in-progress.
REQUIRED

(a) Prepare the following budgets for the coming period: (i) (ii) sales (value of each product and total value) production (units of each product) (2 marks) (3 marks) (4 marks) (3 marks)

(iii) purchases (quantity in kg and cost for Material X) (iv) direct labour (quantity in hours and cost). (b) Explain each of the following approaches to budgeting: (i) (ii) rolling/continuous budgets zero-based budgets.

(4 marks) (4 marks)
(Total 20 marks)

3024/2/09/MA

Page 5 of 14

MODEL ANSWER TO QUESTION 2

(a) (i)

Sales budget (value)
Product A ‘000’ Product B ‘000’ Total ‘000’

Budgeted sales units Selling price per unit* Budgeted sales value * Selling price per unit

1,200 x £0.65 £780 = £65 ÷ 100 = £0.65 per unit

800 x £1.15 £920 = £115 ÷ 100 = £1.15 per unit

£1,700 = £1,700,000

(ii)

Production budget (units)
Product A ‘000’ units Product B ‘000’ units

Budgeted sales units Add Closing stock (140 x 1.1) Less: Opening stock Budgeted production units

1,200 154 1,354 140 1,214

(120 x 1.125)

800 135 935 120 815

(iii) Purchases budget (quantity in kg and cost for Material X)
Product A Product B Total

Budgeted production units Material required per unit** Required for production Add Closing stock

‘000’ 1,214 x 0.05 60.7

kg

‘000’ 815 x 0.08 65.2

‘000’ kg (18 × 0.85) 125.9 15.3 141.2 18.0 123.2 x £6.25 £770 kg kg kg kg kg

Less Opening stock Budgeted purchases (quantity) x Cost of material per kg Budgeted purchases (cost)

= £ 770,000 ** Material required per unit = 5 kg ÷ 100 = 0.05 per unit = 8 kg ÷ 100 = 0.08 per unit

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Page 6 of 14

QUESTION 2 CONTINUED

(iv) Direct labour budget (quantity in hours and cost)
Product A ‘000’ Product B ‘000’ Total ‘000’

Budgeted production units Hours required per unit*** Budgeted labour hours × Cost of labour per hour Budgeted labour (cost)

1,214 x 0.0175 21.245

x

815 0.025 20.375

41.62 x £13.75 £572.275 = £572,275

*** Hours required per unit

= 1.75 hours ÷ 100 = 0.0175 per unit

= 2.5 hours ÷ 100 = 0.025 per unit

(b) A rolling/continuous budget is a 12-month budget which involves continuous amendment and updating by adding, for example, a further quarter (or month) and deducting the earliest quarter (or month) from the current budget. Rolling budgets allow management to update budgets as more definitive information becomes available. They are particularly useful where demand for a service or costs cannot be accurately forecast at the time of preparing the budgets. A zero-based budget (ZBB) is a method of budgeting, commonly used in non-profit-making organisations, whereby managers are required to justify all costs as if the spending programs were being proposed for the first time. ZBB requires a fundamental review of all items to be included in a budget on the assumption that all services start at a zero cost level. This is in contrast with the usual incremental approach which accepts the previous year’s budget figures and concentrates on marginal changes.

3024/2/09/MA

Page 7 of 14

QUESTION 3

Apex Limited manufactures and sells a single product. The company had budgeted to produce and sell 2,500 units at a selling price of £240 per unit in the period just ended. Details of the standard cost per unit are as follows: £ Direct material 7½ kg @ £13.80 per kg 103.50 Direct labour 5 hours @ £10.50 per hour 52.50 Fixed production overhead 5 hours @ £5.60 per hour 28.00 The following is a reconciliation of the budgeted gross profit with the actual gross profit for the period just ended: £ £ £ Budgeted gross profit 140,000
Sales variances: Sales price variance Sales volume gross profit variance Direct material cost variances: Material price variance Material usage variance Direct labour cost variances: Labour rate variance Labour efficiency variance Fixed production overhead variances: Fixed overhead expenditure variance Fixed overhead volume variance

15,700 ADV 10,080 FAV 5,620 ADV 9,660 ADV 12,120 FAV 2,460 FAV 7,520 FAV 13,400 ADV 5,880 ADV 4,290 FAV 5,040 FAV 9,330 FAV 290 FAV 140,290

Actual gross profit ADV = Adverse variance FAV = Favourable variance

There were no stocks of raw materials, work-in-progress or finished units.
REQUIRED

(a) Calculate the following actual figures for the period just ended: (i) (ii) production and sales units sales revenue (2 marks) (3 marks) (3 marks) (2 marks) (3 marks) (7 marks)
(Total 20 marks)

(iii) direct material cost (iv) direct labour cost (v) fixed production overhead. (b) Explain the differences between planning variances and operational variances.

3024/2/09/MA

Page 8 of 14

MODEL ANSWER TO QUESTION 3

(a) (i)

Actual production and sales units Budgeted production and sales units Add Sales volume profit variance = £10,080 Budgeted gross profit per unit £56*
Actual production and sales units units 2,500

=

180 2,680

* Budgeted gross profit per unit = £240 – (£103.50 + £52.50 + £28.00) = £56 (ii) Actual sales revenue Budgeted sales revenue 2,500 units x £240 Add Increased sales revenue 180 units x £240 Actual sales @ standard price Less: Sales price variance Actual sales revenue (iii) Actual direct material cost Standard cost of actual units 2,680 units x £103.50 Add Material price variance Less: Material usage variance Actual direct material cost (iv) Actual direct labour cost Standard cost of actual units 2,680 units x £52.50 Add Labour efficiency variance Less Labour rate variance Actual direct labour cost (v) Actual fixed production overhead Fixed overhead absorbed 2,680 units x £28 Less Fixed overhead volume variance Budgeted fixed overhead Less Fixed overhead expenditure variance Actual fixed production overhead
£ 75,040 5,040 70,000 4,290 65,710 £ 140,700 + 13,400 – 7,520 146,580 £ 277,380 + 9,660 – 12,120 274,920 £ 600,000 43,200 643,200 – 15,700 627,500

(b) Planning variances seek to explain the extent to which the original standard needs to be adjusted in order to reflect changes in operating conditions between the current situation and the one envisaged when the standard was originally calculated. In effect, it means that the original standard is brought up to date in order for it to be a realistic attainable target in current conditions.
Operational variances indicate the extent to which attainable targets (i.e., the adjusted standards) have been achieved. Operational variances would be calculated after the planning variances have been established and are, thus, a realistic way of assessing performance.

3024/2/09/MA

Page 9 of 14

QUESTION 4

A company manufactures and sells four products. The following details regarding the products are available for the coming period:
Product P Product Q £ per unit 840 Product R £ per unit 780 Product S £ per unit 525

Selling price
Deduct: Direct material costs (Note 1) Direct labour costs (Note 2) Variable overhead costs Fixed overhead costs

£ per unit 480

120 100 80 120 420 60

200 200 160 240 800 40 1,800 units

255 150 120 180 705 75 2,500 units

100 125 100 150 475 50 3,160 units

Profit per unit

Production and sales (Note 3)1,150 units
Notes

(1) All products are made from the same direct material. (2) Direct labour is paid £20 per hour and the same grade of direct labour is used in the production of the four products. (3) The production and sales figures include the following units which the company is contracted to supply one of its major customers in the coming period: Product P Product Q Product S
REQUIRED

250 units 150 units 400 units.

Prepare a schedule of the optimum production mix for the coming period in each of the following situations: (a) the supply of direct material is limited to £500,000 (b) the availability of direct labour is limited to 35,000 hours. (11 marks) (9 marks)
(Total 20 marks)

3024/2/09/MA

Page 10 of 14

MODEL ANSWER TO QUESTION 4

(a) Production schedule – supply of direct materials limited to £500,000
Product P £ per unit Product Q £ per unit Product R £ per unit Product S £ per unit

Selling price Deduct Variable costs Direct material Direct labour Variable overheads Contribution per unit Direct material cost per unit Contr. per £ of material cost Ranking

480 120 100 80 300 £180 £120 1.5 2
nd

840 200 200 160 560 £280 £200 1.4 3
Units
rd

780 255 150 120 525 £255 £255 1.0 4
th

525 100 125 100 325 £200 £100 2.0 1
st

Material cost £

Product S Production units on contract Balance 3,160 – 400 Product P Production units on contract Balance 1,150 – 250 Product Q Production units on contract Balance of material (£16,000 ÷ £200)

400 2,760 3,160 250 900 1,150 150 80 230

x £100 x £100

40,000 276,000

x £120 x £120

30,000 108,000

x £200 x £200

30,000 16,000 £500,000

(b) Production schedule – availability of direct labour limited to 35,000 hours
Product P £ per unit Product Q £ per unit Product R £ per unit Product S £ per unit

Contribution per unit Direct labour hour per unit* Contribution per labour hour Ranking *Direct labour cost per unit Direct labour rate per hour

£180 5 £36 1
st

£280 10 £28 4
th

£255 7.5 £34 2
nd

£200 6.25 £32 3
rd

£100 = 5 £20

£200 = 10 £20

£150 = 7.5 £20

£125 = 6.25 £20

3024/2/09/MA

Page 11 of 14

MODEL ANSWER TO QUESTION 4 CONTINUED Units Product P Production units on contract Balance (1,150 – 250) Product R Labour hours

250 900 1,150 2,500

x 5 hours x 5 hours x 7.5 hours x 6.25 hours x 6.25 hours

1,250 4,500 18,750 2,500 6,500

Product S Production units on contract 400 Balance of labour hours (6,500 ÷ 6.25) 1,040 1,440 Product Q Production units on contract

150

x

10 hours

1,500 35,000

3024/2/09/MA

Page 12 of 14

QUESTION 5

A company is considering investing in a new capital project for which the following estimates have been prepared: Initial project cost Duration of project Cost of capital Annual sales Variable costs Incremental fixed costs (excluding depreciation) £400,000 5 years 12% per annum 6,000 units of a product at a selling price of £144 per unit £86 per unit £210,000 per annum

It is assumed that net cash flows occur at the end of the years to which they relate. Discount factors:
Year 1 2 3 4 5 12% 0.893 0.797 0.712 0.636 0.567 3.605 15% 0.870 0.756 0.658 0.572 0.497 3.353 20% 0.833 0.694 0.579 0.482 0.402 2.990 25% 0.800 0.640 0.512 0.410 0.328 2.690

REQUIRED

(a) Calculate the following: (i) (ii) net present value of the project internal rate of return for the project. (5 marks) (5 marks)

(b) Calculate (in percentages to 2 decimal places) the sensitivity of the NPV figure calculated in part (a) (i) to the following estimates: (i) (ii) initial project cost annual sales units (2 marks) (2 marks) (2 marks) (2 marks) (2 marks)
(Total 20 marks)

(iii) selling price per unit (iv) variable costs per unit (v) fixed costs per annum.

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Page 13 of 14

MODEL ANSWER TO QUESTION 5

(a) (i)

NPV of project Annual contribution: (£144 – £86) = £58 x 6,000 units Less Annual fixed costs Net annual cash inflows x Annuity factor (AF) @ 12% discount rate x Present value – Less Initial project cost Net present value
£ 348,000 210,000 138,000 3.605 497,490 400,000 97,490

(ii)

IRR of project Net annual cash inflows 138,000 x Annuity factor (AF) @ 25% discount rate x 2.690 Present value 371,220 – 400,000 Less Initial project cost – 28,780 NPV
IRR

=

12% + {13% x [97,490 ÷ (97,490 + 28,780)]}

= 22.04%

(b) (i)

Sensitivity of NPV to initial project cost =

x 100% NPV Initial cost £97,490 x 100% £400,000 = 24.37%

(ii)

Sensitivity of NPV to annual sales =

NPV Sales units x (SP – VC) x AF £97,490 6,000 x (£144 – £86) x 3.605

x 100% x 100% = 7.77%

(iii) Sensitivity of NPV to selling price per unit =

NPV x 100% Sales units x SP x AF x 100% £97,490 6,000 x £144 x 3.605 NPV Sales units x VC x AF x 100% = 5.24% = 3.13%

(iv) Sensitivity of NPV to variable costs per unit = (v) Sensitivity of NPV to annual fixed costs =

x 100% £97,490 6,000 × £86 x 3.605 x 100% NPV Fixed costs x AF x 100% £97,490 £210,000 x £3.605

=

12.88%

3024/2/09/MA

Page 14 of 14

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