Answers

Part 1 Examination – Paper 1.2

FInancial Information for Management December 2002 Answers

Section A
11 C
12 D
13 C
14 D
15 B
16 B
17 B
18 A
19 C
10 C
11 B
12 C
13 B
14 D
15 C
16 D
17 B
18 A
19 B
20 A
21 C
22 A
23 D
24 A
25 A

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Section B
1 (a)

60

Sales
Revenue
£’000
£000
50
x
x x
x
40

30 x

20
x

10

1 2 3 4 5 6 Advertising
£’000
expenditure
£000
(b) Regression line: y = a + bx
n ∑ xy – ∑ x ∑ y
b = –––––––––––––––
n ∑ x2 – (∑ x)2
∑y b∑x
a = ––– – –––
n n
In this example the advertising expenditure is the independent variable (x) and the sales revenue the dependent variable (y).
(8 × 1,055·875) – (26·35 × 289·5) 818·675
b = –––––––––––––––––––––––––––––– = –––––––– = 7·07
(8 × 101·2625) – 26·35 2
115·7775
289·5 26·35
a = ––––– – 7·07 × ––––– = 12·9
8 8
regression line: y = 12·9 + 7·07x where x and y are in £000
Line drawn on above graph.

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2 Hi
0·95 1,500,000
Large
Premises F
E
600,000
Good (550,000) Lo
0·8 0·05

B
Abandon project
Bad
0·2
Survey
(50,000)
Hi
(550,000) 0·75
A C 1,500,000
Large
Premises Lo
0·25
(300,000)
600,000
Small Hi
Premises 0·6
D 1,500,000

Lo 600,000
0·4

EV(F) = 0·95 × 1,500 + 0·05 × 600 = 1,455

Cost at E = EV(F) – 550 = 1,455 – 550 = 905
EV(B) = 0·8 × cost at (E) + 0·2 × 0
= 0·8 × 905 + 0·2 × 0
= 724
EV(C) = 0·75 × 1,500 + 0·25 × 600
= 1,275
EV(D) = 0·6 × 1,500 + 0·4 × 600
=1,140
Decision at A:
Survey = EV(B) – survey costs
= 724 – 50
= 674
Build large premises with no survey = EV(C) – large premises costs
= 1,275 – 550
= 725
Build small premises with no survey = EV(D) – small premises
= 1,140 – 300
= 840
Better to build small premises without a survey.

Conclusion: It would be better to build the small premises without any survey as this gives the largest expected value.

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3 (a)
Absorption costing £000 £000
Sales (£50 × 100,000) 5,000
Cost of sales:
Opening stock –
Production costs
Variable (£19 × 120,000) 2,280
Fixed (£3(w) × 120,000) 360
––––––
2,640
Closing stock (£22 × 20,000) (440)
Under/over absorption (60)
(2,140)
––––––
Gross profit 2,860
Selling costs
Fixed (150)
Variable (£2 × 100,000) (200)
––––––
Net profit 2,510
––––––
––––––
Working
Overhead absorption rate = £300,000/100,000 = £3 per unit

(b)
Marginal costing £000 £000
Sales (£50 × 100,000) 5,000
Cost of sales:
Opening stock –
Production costs
Variable (£19 × 120,000) 2,280
––––––
2,280
Closing stock (£19 × 20,000) (380)
Variable selling costs 200
(2,100)
––––––
Contribution 2,900
Fixed costs
Production (300)
Selling (150)
––––––
Net profit 2,450
––––––
––––––

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4 Report
To: Ms Swainsthorpe
From: AN Accountant
Re: Computerised accounts and stock control
Date: December 2002
The following report addresses the advantages and disadvantages of implementing a computer system. It also explains what a
management information system is and how it can be used. Finally it addresses your current stock control procedures.
Computer system
The advantages of a computer system is that it will be quicker to input entries to the accounting system and easier to extract
management information. Another advantage is that fewer errors are likely to occur as the computer can check that all the debits
equal the credits.
The disadvantages are the expense of the new system. Also the training costs involved may be high and you may also experience
some resistance from the employees to this new way of working. Finally you would not be able to switch over immediately as you
would have a cost of running two parallel systems for a short time to check that everything is working correctly.
Management Information System (MIS)
A MIS is an accounting system that will provide management with appropriate information both routine and non-routine as required
by the organisation. It is expected that management will be able to effectively utilise the output from the system to make efficient
use of the resources of the business.
The MIS will help you run the business as it will provide you with relevant information. This information will help with decision-
making, planning and control and coordination of the organisation. The type of information extracted will depend on the needs of
you, the user.
Stock
The current stock-take procedures seem onerous as they require the business to be closed once a month. This results in a loss of
a day’s production and so will eventually impact on profit.
If the bin card system is working effectively then an entire stock-take should only be necessary once or twice a year. Instead of a
complete stock-take spot checks could be carried out comparing actual stock to the bin card value and any errors noted and the
system updated. High value or high usage items could be checked more often than slower moving stock. In this way the business
need not close so often.

5 (a) Return on investment

Division A £
Profit 35,000
Net assets 150,000
Return on investment = 35,000/150,000% = 23·3%
Division B £
Profit 70,000
Net assets 325,000
Return on investment = 70,000/325,000% = 21·5%
Using this method Divisions A’s project is better.
Residual Income
Division A = 35,000 – 150,000 × 0·15 = 12,500
Division B = 70,000 – 325,000 × 0·15 = 21,250
Using this method Division B’s project is better.
(b) Return on investment would be the better measure when comparing divisions as it is a relative measure (i.e. a % figure).
(c) Service industry performance measures, in general terms, could include any of the following:
Competitiveness
Financial performance
Quality of service
Innovation
Effective and efficient utilisation of resources

23
Part 1 Examination – Part 1.2
Financial Information for Management December 2002 Marking Scheme

Section A

Each question is worth 2 marks each total 50.

Section B

1 (a) points plotted correctly 21/2

labelled axes 1/
2
presentation 1/
2
explanation of axes used 11/2
— 5

(b) calculation of b 2
calculation of a 11/2
stating the regression line 1/
2
putting the regression line on the graph from (a) 1
— 5
—
10
—

2 correct formulation of the small premises branch 2

correct formulation of the large premises branch 2
correct formulation of the survey branch 2
calculation of expected value at F 1/
2
calculation of cost at E 1/
2
calculation of expected value at B 1/
2
calculation of expected value at C 1/
2
calculation of expected value at D 1/
2
correct decision at A 1
stating a conclusion 1/ 10
2
—

3 (a) correct sales figure 1/

2
variable production cost figure 1/
2
fixed overhead absorption rate 1/
2
fixed production cost figure 1/
2
calculation of closing stock units 1/
2
calculation of closing stock value 1/
2
variable and fixed selling costs 1
under/over absorption 1
including the term gross profit 1/
2
layout/presentation 1/
2
— 6

(b) including variable production costs only 1/

2
closing stock valuation 1
including variable selling costs before contribution 1/
2
including the term contribution 1/
2
correct fixed costs 1
layout/presentation 1/
2
— 4
—
10
—

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 Marks
4 report format 1/
2
introduction to report 1/
2
three advantages of computer system (1/2 each point) 11/2
three disadvantages of computer system (1/2 each point) 11/2
definition of an MIS 2
how it could be useful 1
critical comment on current stock control methods 11/2
suggestion for improvement 11/2 10
—

5 (a) calculation of ROI for A and B 11/2

comment 1
calculation of RI for A and B 11/2
comment 1
— 5

(b) stating the preferred performance measure 1

reason for choice 1
— 2

(c) three examples of general performance measures

1 mark each measure 3
—
10
—

25