PCR Exam Paper

Accounting Qualification

Question paper

Technician level Contributing to the planning and control of resources (PCR)

Thursday 2 December 2010 (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. You must use permanent ink, preferably black, to write your answers. Correcting fluid may not be used.

You must not, during the exam, communicate with any other candidate or be in possession of unauthorised materials, such as pre-prepared notes, books, programmable calculators and dictionaries. Any of these actions will constitute malpractice and will result in disciplinary action. If you are in possession of unauthorised materials you must give them to the Supervisor before the start of the exam.

Do NOT open this paper until instructed to do so by the Supervisor. 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 105 minutes on Section 1 and about 75 minutes on Section 2. Please use the answer booklet provided.

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

Section 1

You should spend about 105 minutes on this section.

Against each task is the recommended time for that task, but please note that these times are guidelines only.

SaltSeller UK imports coarse rock salt and grinds it into granules, which it sells to public authorities around the country. The authorities spread it on roads to remove ice and snow in the winter.

You are employed as the Budget Accountant.

The Marketing Manager has carried out a review of pricing strategy. In his view, the total market for road salt is neither expanding nor contracting. However, market share is very dependent on price. He has proposed making a price reduction of £10 per tonne to gain market share. He estimates this would increase turnover by 12,000 tonnes per year.

You have been asked to make a recommendation about the proposed price reduction.

The Operating Statement for the year to 30 November 2010 and some delivery data is shown on page 3.

Task 1.1 (20 minutes)

(a) Calculate each of the following, per tonne of salt sold, for the year to 30 November 2010:

(i) Salt sales price (ii) Delivery charge (iii) Total income (iv) Total variable cost (v) Contribution

(b) The operating statement for the year to 30 November 2010 shows a contribution of £2,040,000. Calculate what this would have been if the selling price had been reduced by £10 per tonne and the turnover had increased by 12,000 tonnes.

(c) Based on your calculation in 1.1(b) recommend whether the Marketing Manager’s proposal should be accepted.

2 SaltSeller UK

Operating Statement for year to 30 November 2010

Income £ Salt sales 40,000 tonnes 8,000,000 Delivery charges 160,000 kilometres 1,600,000 Total 9,600,000

Variable production and delivery costs

Coarse salt Tonnes £ Opening stock 3,200 464,000 Purchases 45,000 6,748,000 48,200 7,212,000 Closing stock 6,095 914,000 Used 42,105 6,298,000

Production labour and overhead Hours £ Basic 20,800 199,680 Overtime 253 3,036 21,053 202,716 Variable overhead 88,751 291,467

Variable transport costs £ Fuel and servicing 386,002 Vehicle running 584,531 970,533

Total variable costs 7,560,000

Contribution 2,040,000

Fixed overheads Production 555,555 Transport 148,300 Administration and marketing 280,280 Total 984,135

Operating profit 1,055,865

Delivery data Vehicles 7 Number of deliveries 1,000 Average delivery distance 160 kilometres Deliveries per vehicle 143

3 Data

The management board have approved the following assumptions for the preparation of a budget for the year to 30 November 2011.

Turnover  Sales volume and price is dependent on your recommendation in task 1.1(c). If you recommended acceptance of the Marketing Director’s proposal, you should include it in the budget. If you did NOT recommend acceptance of the Marketing Director’s proposal, you should assume that sales price and volume will be the same as in the year ended 30 November 2010.  The salt granules will be sold and delivered in 40 tonne loads. Customers will be charged £10.00 per kilometre for each delivery.

Production  SaltSeller UK operates from a depot in the docks. The coarse rock salt is purchased in shipments of 5,000 tonnes. The company plans to keep a buffer stock of 2,500 tonnes. The stock level should never fall below 2,500 tonnes and will rise to 7,500 tonnes when a shipment is received.  There is no finished (saleable) stock. The salt is ground into granules and loaded into the delivery vehicles in a continuous process.  The material process loss is due to spillage and atmospheric conditions. The loss will be 5%.  It takes 20 production labour hours to grind and load the salt for each customer delivery.  There are 12 production staff each working 1,600 direct hours at basic rate, and 4 additional production staff will be employed if the proposal to reduce the selling price is accepted.  Any additional direct hours required will be worked in overtime.

Delivery  As stated above, each delivery load will be 40 tonnes.  The average delivery distance will be 150 kilometres.  Each vehicle can be used to make 175 deliveries.

Prices and rates  Each shipment of rock salt purchased will cost £750,000.  The basic production labour rate will be £10.00 per hour.  Overtime will be paid at time and a quarter (25% more than the basic rate).  Variable production overhead will be £4.25 per direct labour hour.  Fuel and servicing costs will be £2.40 per kilometre.  Vehicle running costs will be £84,000 per vehicle.

Overhead  Fixed production overhead will be £555,000.  Fixed transport overheads will be £160,000.  Fixed administration and marketing overheads will be £270,000.

4 Task 1.2 (55 minutes)

Prepare a draft operating budget for the year to 30 November 2011 in the following steps:

(a) Quantity of coarse salt required to meet the sales budget, in tonnes, allowing for process loss (round up to whole number of tonnes) (b) Number of deliveries to be made and total delivery distance (c) Quantity of raw salt to be purchased, in tonnes (d) Production labour hours required (basic, overtime and total) (e) Number of vehicles required (f) Operating budget

Note: The layout of the operating budget in part (f) of this task should be identical to the operating statement for the year to 30 November 2010. It should include the delivery data and any additional workings must be clearly shown.

Write an email to Jack Tarr, the Managing Director, comparing the budgeted operating profit for the year to November 2011 with the actual operating profit for the year to 30 November 2010 and explaining the main reasons for the difference.

At 30 November 2010 the business owned 7 vehicles. Two of these are now 5 years old and due for replacement. They have a book value of £8,000 each but it is expected that they can be sold for £10,000 each.

New vehicles can be purchased for £120,000 each.

Prepare the capital budget for delivery vehicles for the year ended 30 November 2011 showing:

(a) the number of vehicles to be purchased and their cost (b) the net cash expenditure, allowing for the proceeds of disposal.

5 Section 2

You should spend about 75 minutes on this section.

Against each task is the recommended time for that task, but please note that these times are guidelines only.

You have been asked to review the transport costs of SaltSeller UK for the year to 30 November 2010.

The following statement has been printed from the computerised accounting system.

Statement of transport costs for the year to 30 November 2010

Budget Actual Cost type Deliveries 940 1,000 Kilometres 135,000 160,000 Vehicles 6 7

Costs £ £ Fuel and consumables 188,000 236,302 Variable Driver and assistant wages 225,000 277,020 Stepped Administration staff 49,400 49,535 Fixed Meals and accommodation 28,800 37,100 Stepped Training and safety 27,000 25,050 Stepped Servicing and repairs 105,280 133,400 Variable Tolls and parking 13,160 16,300 Variable Insurances 13,200 18,250 Stepped Taxes and licences 16,800 17,111 Stepped Depreciation 180,000 210,000 Stepped Depot overheads 95,800 98,765 Fixed Total 942,440 1,118,833

The cost type column indicates the behaviour of each cost. The budget has been prepared on the assumption that variable costs vary according to the number of deliveries. Stepped costs vary according to the number of vehicles. Each vehicle can make up to 175 deliveries. Fixed costs are not influenced by activity.

The Transport Manager, Jane Peebles, is concerned that her actual costs were above budget but thinks this may be because more deliveries were required than had been allowed for in the budget. She has asked you to analyse the figures to help her explain the variances.

6 Task 2.1 (20 minutes)

Calculate the following:

(a) for both the budget and for the actual results (round up to whole numbers):

(i) the number of deliveries per vehicle (ii) the number of kilometres per vehicle (iii) the average kilometres per delivery

(b) for the budget only:

(i) the cost per delivery of each of the variable costs (ii) the cost per vehicle of each of the stepped costs

(c) the number of vehicles that should be required for the actual deliveries, if each vehicle can complete 175 deliveries.

Revise the Statement of transport costs for the year to 30 November 2010, flexing the budget to 1,000 deliveries. You should:

 show the variable, stepped and fixed costs in separate sections with totals for each and an overall total

 calculate the variances from the flexed budget and indicate whether each variance is favourable or adverse.

Write an email to Jane Peebles in which you:

(a) Explain why you have flexed the budget

(b) Identify the major cost variances from the flexed budget

(c) Use your calculations from task 2.1(a) to explain how the variances have occurred

(d) Suggest the actions that she needs to take to avoid a similar problem in future.

7 NVQ/SVQ qualification codes

Technician – 100/2942/4 / G794 24 Unit number (PCR) – L/101/8107

140 Aldersgate Street, London EC1A 4HY, UK t: 0845 863 0800 (UK) +44 (0)20 7397 3000 (non-UK)

8 e: [email protected] w: aat.org.uk