Pev Dec 07 - Questions

Exam question paper

NVQ/SVQ Level 4 in Accounting Contributing to the Management of Performance and the Enhancement of Value (PEV) 2003 Standards Monday 3 December 2007 (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.

SA7554

PEV

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 3 tasks and Section 2 contains 3 tasks. You should spend about 80 minutes on Section 1 and 100 minutes on Section 2. You should include all your workings and essential calculations in your answers. Both Sections 1 and 2 are based on the business described below.

Section 1 You should spend about 80 minutes on this section.

Data TeesRus Ltd makes and packs tea bags. You work as an Accounting Technician reporting to the Finance Director. The company has two production divisions. In the bagging division tea is put into bags. In the packing division bags are put into boxes. The packing division operates a standard costing system in which: • • • •

purchases of packing materials (cardboard) are recorded at standard cost direct material costs and direct labour costs are variable production overheads are fixed tea bags are transferred from the bagging division at standard cost.

The packing division takes tea bags from the bagging division and packs them into boxes of 100 tea bags. The standard cost card for each pack of 100 tea bags is shown below. Product: Box of 100 tea bags

Quantity

Unit price £

Total cost £

100 tea bags

0.033 per tea bag

3.30

Direct packing materials (cardboard)

50 grams

2.00 per kilogram

0.10

Direct labour

0.02 hours

10.00 per hour

0.20

Fixed overheads

0.02 hours

50.00 per hour

1.00

Direct materials (tea bags)

Standard cost

4.60

2

Actual and budgeted data for the packing division for November 2007 are shown below: • • • • • • • •

Budgeted production for the month was 80,000 boxes of 100 tea bags. Actual production for the month was 84,000 boxes of 100 tea bags. Opening stock of tea bags was nil. 8,500,000 tea bags were transferred to the packing division from the bagging division at a cost of £280,500 or £0.033 per tea bag. Closing stock consisted of 50,000 tea bags. 1,800 direct labour hours were worked at a cost of £9.50 per hour. 4,200 kilograms of packing material (cardboard) was purchased and used at a cost of £8,800. Fixed production overheads incurred in the period were £85,000.

A colleague has correctly calculated the following variances: • • • • •

Direct material (tea bag) price variance as nil. Direct packing materials (cardboard) usage variance as nil. Direct labour rate variance as £900 favourable. Direct labour efficiency variance as £1,200 adverse. Fixed overhead efficiency variance as £6,000 adverse.

Task 1.1 (a)

(b)

(c)

(d)

Calculate the following information for November: (i)

budgeted production overheads

(ii)

actual number of tea bags used in production

(iii)

standard usage of tea bags for actual production.

Calculate the following variances for November: (i)

direct materials (tea bag) usage variance

(ii)

direct packing materials (cardboard) price variance

(iii)

fixed overhead expenditure variance

(iv)

fixed overhead capacity variance.

Calculate the following: (i)

the total standard cost of actual production

(ii)

the total actual cost of actual production.

Using your calculations in 1.1 (b) and 1.1 (c), and the variances calculated by your colleague, prepare an operating statement for November which reconciles the total standard cost of actual production with the total actual cost of actual production.

3

Task 1.1, continued Additional data The production director has reviewed the variances and has given you the following information. • • •

A pay rise for staff is still outstanding. 2 new operators are still being trained. 3 machines are reaching the end of their operational life.

(e)

Draft a report for the Finance Director giving one reason for each of the following variances: (i)

direct materials (tea bag) usage variance

(ii)

direct labour rate variance

(iii)

direct labour efficiency variance.

Additional data The bagging division operates a standard costing system in which: • • •

purchases of materials are recorded at standard cost direct material costs and direct labour costs are variable production overheads are fixed

The standard cost card for the coming months is being prepared and you have been provided with the following information. • • • • • • • •

Loose tea is expected to cost £5 per kilogram 1,000 tea bags require 3 kilograms of loose tea Tea bags cost 0.6 pence per bag One machine can package 5,000 bags per hour and requires one operator who costs £10 per hour Budgeted labour hours are 4,000 per month Fixed production overheads are £200,000 per month Budgeted production is 20,000 batches of 1,000 tea bags per month Fixed production overheads are absorbed on the basis of direct labour hours

Task 1.2 Prepare a standard cost card for the production of 1,000 tea bags.

4

Data The tea is imported from India and the historical cost per kilogram is shown below.

Cost per kg of tea

June 07 £

July 07 £

Aug 07 £

Sept 07 £

Oct 07 £

Nov 07 £

4.95

4.97

4.99

5.05

5.08

5.10

Task 1.3 (a)

Convert the costs per kilogram for June and November to index numbers using January 2007 as the base month. The price per kilogram at January 2007 was £4.80.

(b)

It is expected that the index number for tea for January 2008 will be 108.25. Calculate the expected cost per kilogram for January 2008.

(c)

Calculate the percentage increase in the price of tea from January 2007 to January 2008.

5

Section 2 You should spend about 100 minutes on this section.

Data A division of TeesRus Ltd operates a tea plantation in Kenya. The plantation produces tea for sale to the tea bagging division and other wholesalers. The tea crop has been lower than expected due to bad weather. The actual and budgeted information is produced below. You have also been given the following information: • • •

The poor tea crop has meant that harvesting took longer as the pickers could not pick as quickly. The tea pickers and tea processor operators are employed as and when needed on temporary contracts. The seeds and fertilizers are used at the start of the growing season. Actual £

Budgeted £

787,500

1,125,000

132,000

150,000

tea processor operators

35,000

50,000

depreciation of tea machines

60,000

60,000

seeds and fertilizer

75,000

75,000

Total cost of sales

302,000

335,000

Gross profit

485,500

790,000

Administration costs

150,000

150,000

Distribution costs

300,000

350,000

Operating profit

35,500

290,000

1,750,000

2,500,000

Number of harvest days

100

100

Number of tea pickers

440

500

£3

£3

£935,500

£1,190,000

Turnover Cost of sales: tea pickers

Amount of tea in kilograms harvested and sold

Daily cost of a tea picker Net assets

6

Task 2.1 (a)

(b)

Calculate the following performance indicators for the actual and budgeted information. (i)

Cost of tea pickers as a percentage of turnover.

(ii)

Cost of tea processor operators as a percentage of turnover.

(iii)

Cost of seeds and fertilizers as a percentage of turnover.

(iv)

Gross profit margin.

(v)

Operating profit margin.

(vi)

Return on net assets.

(vii)

Net asset turnover.

Draft a report for the Finance Director giving an explanation of why the following ratios have changed. (i)

Gross profit margin.

(ii)

Operating profit margin.

Note: Your answer should include comments on all elements of the profit and loss account.

7

Additional data The company currently has eight Pickmaster machines, which are coming to the end of their useful life. The company is considering replacing all eight machines with either new Pickmaster machines or new Pickmaster2 machines. Each new Pickmaster machine costs £20,000 and requires 10 operators per day for the 100 days of the harvest. The machine will have a life of 10 years and a depreciation charge of £2,000 per year. A new Pickmaster2 machine requires only 1 operator per day for the 100 days. This machine costs £90,000 to purchase and will have a life of 10 years. The depreciation charge will be £9,000 per year. Other budgeted information for 2008 is as follows: • • • • • • • • • • •

The forecast harvest will last 100 days and produce 2.5 million kilograms of tea. The selling price of tea will be 45 pence per kilogram. Budgeted turnover is £1,125,000. Tea picker costs will be £150,000. Tea processor operators currently earn £6 per day. Seed and fertilizer costs will be £75,000. Administration costs will be £150,000 if the Pickmaster machines are purchased. Administration costs will be £135,000 if the Pickmaster2 machines are purchased. Distribution costs will be £350,000. The net assets at the end of the period will be £935,500 plus the budgeted operating profit. Disposing of the old machines will incur no profit, loss or any depreciation charge during 2008.

Task 2.2 (a)

Prepare TWO budgeted profit and loss accounts and net asset workings assuming that the business purchases either 8 Pickmaster or 8 Pickmaster2 machines.

(b)

Recalculate the following indicators for each option:

(c)

(i)

gross profit margin

(ii)

operating profit margin

(iii)

return on net assets

Prepare a report for the Managing Director to include the following: (i)

comments on the indicators calculated in part (b) above

(ii)

two other considerations

(iii)

a recommendation whether to purchase the Pickmaster or Pickmaster2 machines

Task 2.3 (a)

Briefly explain the term lifecycle costing.

(b)

Briefly explain why discounted cash flow techniques should be used in a lifecycle costing analysis.

8

Note: This page is intentionally blank.

9

Note: This page is intentionally blank.

10

Note: This page is intentionally blank.

11

NVQ/SVQ qualification codes

527554

Technician (2003 standards) – 100/2942/4 / G794 24 Unit number (PEV) – J/101/8106

© Association of Accounting Technicians (AAT) 12.07 140 Aldersgate Street, London EC1A 4HY, UK t: 0845 863 0800 (UK) +44 (0)20 7397 3000 (non-UK) e: [email protected] w: aat.org.uk