Business Accounting Exam - 119LON - Business Development Module

This document presents a detailed solution to a Business Accounting exam, comprising two sections, A and B. Section A encompasses multiple-choice questions covering fundamental accounting concepts like prime cost, marginal costing, and overheads. Section B delves into problem-solving, including cost analysis using the high-low method, inventory valuation with FIFO, and the allocation of overhead costs. The solution also addresses cash receipts forecasting and profit calculations, providing step-by-step workings and explanations for each question. The exam assesses the candidate's understanding of cost accounting, financial analysis, and the application of accounting principles in a business context.

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Business Accounting
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Instructions to candidates:
This paper has 2 sections A and B. Please answer all questions from sections A and
B
This is an open book examination.
Please download this exam paper and type all your answers under each
question. You can also insert pictures of your answers and workings in the
file. You must make sure all pictures inserted in the file are clearly readable.
Please ensure that your submission is uploaded to Moodle before the end of
the examination.
NOTE:
1. The exam must be taken completely alone. Showing it or discussing it with
anyone would be breaching the regulations.
2. Questions are provided with suggested word limits where applicable.
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Section A: Answer all of the questions
Q1. The total of direct labour, direct material and direct expenses is known as:
a) Overheads.
b) Prime cost.
c) Secondary cost
d) Semi-variable cost.
e) Budgeted cost.
(1 mark)
Prime cost (b)
Q2. In marginal costing the contribution per unit
a) Increases with the volume of the production
b) Decreases with the volume of the production
c) Decreases as the fixed costs increase
d) Remains the same
(1 mark)
d) Remains the same
Q3. If expenses exceed revenues in a department, then it would be termed a cost
centre.
a) True
b) False
(1 mark)
False (b)
Q4. Which of the following types of information are used in management
accounting?
a) Financial information.
b) Non-financial information evaluation.
c) Information that focuses on the long term.
d) All of the above.
e) None of the above.
(1 mark)
d) All of the above
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Q5. Conventionally, within a pre-defined range of production volume, if the level of
activity doubles, the variable costs per unit will:
a) Treble.
b) Halve.
c) Remain constant.
d) Quadruple.
(1 mark)
c) Remain constant
Q6. Management accounting is:
a) A branch of financial accounting.
b) Accounting done by managers.
c) Concerned with the provision of information to help managers make
decisions.
d) The process whereby managers account for their actions.
e) Accounting done by tax collectors.
(1 mark)
Concerned with the provision of information to help managers make
decisions. (c)
Q7. The process of absorption costing involves
a) Allocation and apportionment
b) Reapportionment of service (non- production) cost centre overheads
c) Absorption of overheads into the product
d) All of the above
(1 mark)
d) All of the above
Q8. Explain the term “standard cost”. (20 words) (3
marks)
Answer: The term standard cost is defined as an estimation of actual cost of a firm’s
manufacturing process. It contributes in preparation of budgets.
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Total marks: 10
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Section B – answer all questions in this section
Q1.
The following costs and output relate to a manufacturer for the last 4 months period.
Costs (£) Units
April 358,000 80,000
May 330,250 75,000
June 345,100 78,000
July 290,000 63,000
a) Using high and low method compute:
i) the variable cost per unit (4 marks)
ii) the level of fixed costs for the period? (3 marks)
iii) the expected total cost if the company produces 90,000 units
in July. (3 marks)
b) Explain the main assumption in forecasting future costs, when the high and
low method is used. (40 words) (5 marks)
Total marks: 15
a) High and low method
i) Variable cost per unit:
VC / unit = Highest activity cost – Lowest activity cost / Highest activity units -
Lowest activity units
= (358,000 - 290,000) / (80,000 - 63,000)
= 68,000 / 17000
= 4
Variable cost per unit is 4
ii) The level of fixed costs for the period
Fixed cost = Highest activity cost – (Variable cost per unit x Highest activity units)
= 358,000 – (4 * 80,000)
= 358,000 – 320,000
= 38000
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Fixed costs for the period are 38000
iii) The expected total cost of July
Produced units = 90000
Variable cost per unit = 4
Fixed costs = 38000
Total cost = Variable cost + Fixed costs
= (90000 * 4) + 38000
= 360,000 + 38000
= 398,000
b)
High and low method assumes that the level of activity will remain same in every
period due to which fixed costs will also remain same at every point of activity.
Q2.
Johnson Ltd produces garden furniture and sells them through a major wholesaler.
As part of inventory valuation and profit measurement, the company needs to
determine the cost of each unit of its products.
a) The following information relates to the receipts and issue of a material used in
making garden tables during July 2020.
Date Receipts into stockroom Issue to production
Quantity (kg) Price per kg Quantity (kg)
01.07.2020 200 £10
12.07.2020 240 £12
18.07.2020 220
Compute
i) the charge for the 220 kg issued to the production using FIFO method. (5
marks)
ii)the value of the inventory remaining in the stockroom (3 marks)
a)
i) The charge for the 220 kg issued to the production using FIFO method
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= (200 kg * £10) + (20 kg * £12)
= £2000 + £240
= £2240
ii) The value of the inventory remaining in the stockroom
= 220 kg * £12
= £2,640
b) Indicate whether each of the following costs incurred is direct or indirect and fixed
or variable. (6 marks)
Cost Direct or Indirect Fixed or Variable
The cushions provided with each garden
chair
Indirect Variable
Transporting the finished good to the
wholesaler
Direct Fixed
Monthly salaries of the factory
supervisors
Direct Fixed
c)
The estimated costs for the production of one handmade garden bench is provided
below:
Each bench requires:
 10 metres of special netting material at a cost of £3.50 per metre, as well as
0.5 litre of weather-proof polish at a cost of £20.00 per litre.
 2 hours of labour is required to make each bench and 0.5 hour to complete
the polishing. The cost of direct labour for making the bench is £15.50 per
hour, and £18.00 per hour for polishing work.
 The company pays £10.00 per bench to the original bench designer
The company also incurs the following indirect expenses:
Production overheads 2.5 times the total direct labour hours at a cost of £12.00 per
hour
Administration and transportation costs are to be 20% of total production cost.
Profit is to be charged at 25% of total costs
Required:
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Prepare a detailed cost card showing prime cost, overheads, profit and selling price
of the bench. Show your full workings. (11 marks)
Total marks: 25
Quantity Cost per unit Total cost
Direct expenses
Direct material (a):
special netting material 10 3.5 35
weather-proof polish 0.5 20 10
Direct labour (b):
labour for each bench 2 15.5 31
labour for polishing work 0.5 18 9
Direct Overhead (c):
original bench designer 10
Prime cost (a + b + c) 95
Indirect expenses
Production overheads 75
Administration and transportation costs 15
Total costs 185
Profit 46.25
Selling price 231.25
Q3
a) Using relevant examples, explain the difference between allocation and
apportionment of overhead costs. (100 words) (10 marks)
b) The following information relates to the overhead costs provided by JJ Ltd.
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Insurance of machinery £540
Maintenance of machinery £18,000
Depreciation of machinery £21,000
Dept A Dept B
Value of machinery £20,000 £40,000
Area (square metres) 50 100
No of employees 10 20
i) Identify the most suitable basis of apportioning the overheads (2 marks)
ii) Apportion the 3 overheads between the 3 departments, and compute the total
overheads apportioned to each department. (13 marks)
Total marks: 25
Difference between allocation of overheads and apportionment of overheads:
Basis Allocation of overheads Apportionment of overheads
Meaning It is defined allocation of
expenses to cost centers
and units. For example,
direct labor cost is allocated
to specific cost center.
It is defined allocation of expenses
in accordance of proportions cost
centers and units. For example,
allocation of rent, rates,
depreciation etc. is done as per
various departments.
Applies It is applied if overhead cost
is linked to a particular
department. For example,
salary of employees is
allocated to HR department.
It is applied when overhead cost is
linked to different department. For
instance, expenses of rent, power
etc. are apportioned between
manufacture and service
departments.
(b)
(I) Suitable basis for overheads:
Overhead Basis
Insurance of machinery Value of machinery
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Maintenance of machinery Value of machinery
Depreciation of machinery Value of machinery
(ii) Apportion the 3 overheads
Overhead apportionment summary:
Department
Item
Basis of
apportionment
Total
amount (In
£) A (In £) B (In £)
Insurance of machinery Value of machinery 540 180 360
Maintenance of
machinery Value of machinery 18000 6000 12000
Depreciation of
machinery Value of machinery 21000 7000 14000
Total cost of each department: 13180 26360
Working Note:
Department A (In £) Department B (In £)
Value of machinery: 20000 40000
Ratio 1 2
Allocation:
Department A (In £) Department B (In £)
Insurance of machinery 540*1/3= 180 540*2/3= 360
Maintenance of
machinery
18000*1/3= 6000 18000*2/3= 12000
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Depreciation of machinery 21000*1/3= 7000 21000*2/3= 14000
Q4.
a)
Williams Ltd has provided the following information:
(Figures are in £000’s)
Nov Dec Jan Feb Mar Apr May Jun
Sales Revenue 720 800 1,440 2,160 2,880 1,640 1,400 360
Customers pay 25% of the sales amount in the month of sale and 75% in the month
after the sale.
Required:
Prepare a statement showing the budgeted cash receipts for the SIX MONTHS
FROM JANUARY TO JUNE for Williams Ltd. The statement should also include the
total cash receipts for each month.
(15 marks)
b) MM Ltd produces TV stands. The company produced and sold 7,000 TV stands in
the last quarter. The variable costs per stand were £45 and the selling price was
£62. Last month the company made a loss of £5,000. The company charges its
fixed costs per quarter. It has no opening or closing stock.
Required:
To make a profit of £14,000 next quarter, how many stands does MM Ltd need to
produce and sell?
(10 marks)
Total marks: 25
(a) Statement of cash receipts of 6 months:
All data in
£000’s
Januar
y
Februar
y March April May June
Cash receipts 960 1620 2340 2570 1580 1140
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Working Note:
January 800*75%+1440*25%= 960
February 1440*75%+2160*25%= 1620
March 2160*75%+2880*25%= 2340
April 2880*75%+1640*25%= 2570
May 1640*75%+1400*25%= 1580
June 1400*75%+360*25%= 1140
(b)
Sales
43400
0
Less: variable
cost
31500
0
Contribution
11900
0
Less: Fixed
cost
12400
0
Loss -5000
Number of units to get desired profit: Fixed cost + desired profit/contribution per unit
= 124000+14000/17
= 8118 Units
END OF EXAM PAPER
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