Aat Specimen Section of Exam Paper 2003 Standards

Exam question paper

AAT Accounting Qualification Diploma pathway Diploma level Management Accounting (MAC) 2003 Standards

Monday 1 December 2008 (morning)

Time allowed - 3 hours plus 15 minutes’ reading time

Important:

This exam paper is in two sections. You should try to complete every task in both sections.

We recommend that you use the 15 minutes’ reading time to study the exam paper fully and carefully so that you understand what to do for each task. However, you may begin to write your answers within the reading time, if you wish.

We strongly recommend that you use a pen rather than a pencil.

You may not use programmable calculators or dictionaries in the exam.

Do NOT open this paper until instructed to do so by the Supervisor. 2 This exam paper is in TWO sections.

You must show competence in BOTH sections. So try to complete EVERY task in BOTH sections.

Section 1 contains 4 tasks and Section 2 contains 3 tasks.

You should spend about 75 minutes on Section 1 and about 105 minutes on Section 2.

You should include all your workings and essential calculations in your answers.

Both sections are based on the information below about Razzors Ltd.

Section 1

You should spend about 75 minutes on this section.

You are employed as an Accounting Technician at Razzors Limited, a company that manufactures razors. The business operates as several divisions. One manufacturing division, Kwikshave, produces a disposable razor called the Kwik.

The division uses a budgetary control system and has provided the following information in order to prepare the budget for the next 3 months.

Forecast sales  Month 1: 5,000,000 Kwiks  Sales will increase by 10% each month.  The sales price will be £2 per unit for the whole period.

Stocks of finished goods  The company operates on a just in time manufacturing process and manufactures for sales, delivering the product on a daily basis.  The company keeps no stocks of finished goods.

Materials  Each Kwik requires 10 grams of plastic which costs £40 per kilogram and 6 blades which cost £0.10 per blade. The cost of materials is fixed for the next 3 months.  The company has a contract with its suppliers to deliver materials on the day they are required (just in time) and therefore there are never any stocks of raw materials.

Labour  Kwikshave Limited employs 35 people in production who each work a standard 8 hour day 5 day week.  Each month has exactly 20 working days.  Each employee can produce 1,000 kwiks per hour using one machine.  All staff are paid a minimum of 160 hours per month at basic rate.  The basic labour rate is £10 per hour and overtime is paid at a premium of 50%.  Budgeted overtime premium is included as part of the direct labour cost.

Overheads  Fixed production overheads are budgeted to be £12,000,000 per year and absorbed on the basis of 60,000,000 units of production per year. The budgeted overhead absorption rate is calculated at the start of the year and is not changed on a monthly basis.

3 Task 1.1

Prepare the following information for each of the months 1 to 3. Each month has exactly 20 working days.

Note: Calculations should be given to 2 decimal places where necessary.

(a) production budget for Kwiks

(b) material purchases budget in kilograms and £ for plastic and blades

(c) direct labour hours budget in hours and £

(d) budgeted overhead absorption rate and the budgeted overheads absorbed each month

Additional data

During Month 1 the company had a problem with several machines resulting in only 4,000,000 Kwiks being produced. Customers were sympathetic and agreed to the 1,000,000 units ordered in month 1 being delivered in month 2. The company also decided to produce sufficient additional production to hold stock levels at 10% of the following month’s sales commencing with the closing stock at the end of month 2. The company will not have any work in progress at the end of any month.

Task 1.2

Redraft the following budgeted information for months 2 and 3:

(a) the production budget in Kwiks

(b) the direct labour budget showing the number and cost of hours at basic rate and at overtime rate

Task 1.3

The company is involved in product development and is in the process of engineering several new products. The company applies the principles of target costing and wishes to make a profit margin on total production cost of 20%.

(a) Briefly explain target costing.

(b) One product has an estimated sales price of £10 per unit. Calculate the total production cost per unit that the company will need to achieve in order to make a 20% profit margin.

(c) The company expects the demand to be 15,000 units per month and the fixed production overheads are expected to be £75,000 per month. Calculate the target total variable costs per unit to achieve the desired profit margin.

4 Additional data

The company maintains records of the average cost of plastic per week and compares this to the Plastic Producers’ Index in order to monitor the performance of the purchasing department. The Purchasing Director has claimed that his department has performed well by negotiating price increases less than the index. You have been given the following data:

Average Plastic monthly plastic Producers’ cost Index

June £36.00 172.9 July £36.50 175.7 August £37.00 180.2 September £37.50 183.2 October £39.00 194.2 November £40.00 198

Task 1.4

(a) Using the data for June and November only, calculate the percentage increase in the cost of plastic to the company.

(b) Calculate the total percentage increase in the Plastic Producers’ Index between June and November.

(c) Comment on the Purchasing Director’s claim using your answers from parts (a) and (b).

5 Section 2

You should spend about 105 minutes on this section.

The Gel Division produces a shaving gel for distribution to a range of retailers. The gel is a medium quality product sold at a mid range price when compared to other shaving gels. The market leader Gizzet has 70% market share and benefits from economies of scale in production and a powerful brand image and premium price tag. Gizzet also sponsors several world famous sportsmen.

The following information has been gathered on the performance of the Gel Division and Gizzet.

Gel Division Gizzet Sales in units 5,000,000 70,000,000 £ £ Sales revenue 7,500,000 122,500,000 Cost of sales Direct materials 1,250,000 14,000,000 Direct labour 1,000,000 10,500,000 Fixed overhead 2,500,000 25,000,000 Total cost of sales 4,750,000 49,500,000 Gross profit 2,750,000 73,000,000 Selling and distribution costs 1,000,000 7,000,000 Administration costs 500,000 10,000,000 Advertising costs 400,000 35,000,000 Net profit 850,000 21,000,000

Net assets 15,000,000 100,000,000

Task 2.1

(a) Calculate the following performance indicators for the Gel Division and Gizzet, giving each answer to 2 decimal places:

(i) sales price per unit (ii) direct material cost per unit of sales (iii) direct labour cost per unit of sales (iv) fixed production overheads cost per unit of sales (v) advertising cost as a percentage of turnover (vi) net profit margin (vii) return on net assets

(b) Draft a report for the Finance Director, using your answers to task 2.1 (a) (i) to (vi), which briefly explains the reasons for the difference between the net profit margins of Gel Division and Gizzet.

6 Task 2.2

Gel Division is considering purchasing a new machine in order to reduce the labour time taken to produce the shaving gel. The following information has been gathered.

 The machine would cost £1,500,000 and have a life of 4 years.  Annual machine maintenance costs will be £250,000 per year.  The scrap value of the machine will be £300,000.  The labour productivity will increase from 50 units per hour to 200 units per hour.  The hourly cost of labour is £10 per hour.  The annual production will be 5 million units.  Ignore the time value of money.

(a) Calculate the reduction in labour costs per year.

(b) Calculate the lifecycle cost of the machine over the 4 year period.

(c) Recommend whether, based purely on financial grounds, the machine should be purchased.

7 Additional data

Another division, ARH, produces an aftershave. The division operates a standard cost system in which:

 purchases of materials are recorded at standard cost  direct material costs are variable  the process has been designed to ensure that there is no loss of aftershave due to evaporation  the process is completely automated and the only labour cost incurred is indirect labour which is fixed and included within the fixed production overheads  production overheads are fixed and absorbed per unit

The standard cost card for the month of November 2008 is produced below.

Product: Quantities Cost per Total cost Bottle of aftershave per bottle unit per bottle

Direct materials 0.10 £50 £5 (aftershave) in litres Direct materials (bottles) 1 £1 £1 Fixed production £6 £6 overheads Total £12

Actual and budgeted data for November 2008 are as follows.

 Budgeted production for the month was 20,000 bottles.  Actual production for the month was 23,000 bottles.  23,500 bottles were purchased at a cost of £24,000 and 23,000 bottles were used.  2,200 litres of aftershave were used at a cost of £114,400.  There were no stocks of direct materials (aftershave).  Fixed production overheads incurred in the period were £110,000.

Task 2.3

(a) Calculate the following information for November 2008:

(i) standard usage of direct materials (aftershave) for actual production (ii) actual price per litre of aftershave (iii) direct materials (bottles) price variance (iv) fixed production overheads absorbed into production (v) fixed overhead expenditure variance (vi) fixed overhead volume variance (vii) direct materials (aftershave) price variance (viii) direct materials (aftershave) usage variance

(b) A junior colleague has commented that the increased cost of aftershave has resulted in the favourable usage variance which offsets the adverse price variance. Draft a note to your colleague explaining why his observations are incorrect.

(c) The company is considering adopting a marginal costing system. Explain the differences between the variances under an absorption costing system and those of a marginal costing system.

8 AAT Accounting Qualification (Diploma pathway)

Technician (2003 standards) - 100/2942/4 / G794 24 Unit number (MAC) – D/103/6451