2. Cost and management accounting (AS Level)
A section of Accounting, 9706
Listing 10 of 903 questions
H Limited is a service company providing administrative support to businesses. The company operates two separate departments, Payroll services and Accountancy services. The directors are currently preparing budgets for the year ending 31 December 2025. The company’s fixed overheads include the salaries of the employees. Each department has five employees working 48 weeks each year, 40 hours per week. The Payroll services department employees earn $18 per hour whilst the Accountancy services department employees earn $21 per hour. The company’s other fixed overheads of $68 000 are apportioned $35 000 to the Payroll services department and $33 000 to the Accountancy services department. Each department also incurs variable overheads of $7 per hour. The company charges its clients $35 per hour for all services supplied. Calculate for the Payroll services department only: the total number of chargeable hours available for the year ending 31 December 2025 the break-even point in hours the number of chargeable hours required to produce a profit of $45 000 for the year ending 31 December 2025. Additional information Due to poor motivation, the Payroll services department is expected to work at 85% capacity during the year ending 31 December 2025. Prepare a budgeted marginal cost statement to show the Payroll services department profit for the year ending 31 December 2025. H Limited Payroll services department Budgeted marginal cost statement for the year ending 31 December 2025 Additional information The directors of H Limited are of the opinion that the performance of the Payroll services department must be improved. Two opportunities for further development have arisen. Option 1 The company has been approached by a competitor business wishing to dispose of all of its payroll work. The extra work would require an additional 4 180 chargeable hours in the department over and above the total number of chargeable hours available. In order to take over this work, H Limited would have to employ two new employees and would result in the department’s capacity being over 100%. Overtime is paid at a premium of 50%. In order to increase motivation and to retain their current and new staff, the directors feel that they would have to increase the fixed salaries to $21 per hour, the same rate earned by the Accountancy services department staff. Option 2 The company has also been approached by a large overseas company offering to process all of the payroll work for a fixed fee of $390 000 per annum. If the directors choose this option, the Payroll services department would be closed down. H Limited would continue to charge its clients an annual fee for providing the data. This would be based on a 22% mark up on the cost of the annual fixed fee charged. Calculate the number of overtime hours required for the Payroll services department for the year ending 31 December 2025 if the directors choose Option 1. Prepare a budgeted marginal cost statement to show the Payroll services department profit for the year ending 31 December 2025 if the directors choose Option 1. Calculate the Payroll services department contribution for the year ending 31 December 2025 if the directors choose Option 2. Additional information The directors require each department to make a profit of $45 000 for the year ending 31 December 2025. The Accountancy services department is budgeted to make a profit of $49 800 for the year. Advise the directors which option they should choose. Justify your answer by considering both financial and non-financial factors. Additional information The directors make use of cost–volume–profit analysis in the decision-making process. State three limitations of cost–volume–profit analysis.
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THEORY
2024
Paper 2, Variant 3
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Martina produces and sells a single type of product. The following budgeted information is available for the year ending 30 November 2025. $ Sales revenue (3500 units) 542 500 Direct materials 87 500 Direct labour 105 000 Production overheads 126 000 Selling overheads 157 500 Profit for the year 66 500 Variable production overheads are budgeted to be $4 per unit. Selling overheads include 5% sales commission. All remaining selling expenses are fixed. Calculate: the budgeted contribution per unit the budgeted fixed overheads for the year the budgeted margin of safety in units. Additional information Martina feels that production and sales could be increased by 20% by improving the quality of the product. She plans to make the following changes. Purchase new machinery at a cost of $60 000. The machinery will have an estimated useful life of five years and a residual value of $10 000 at the end of its lifetime. Undertake an advertising campaign at a cost of $1250 per month. Reduce the selling price by $6 per unit. Purchase higher quality materials that will increase the direct material cost by $3 per unit. Direct labour hours per unit will reduce by 5%. Use of the new machinery will reduce the unit variable production overhead by 20%. Sales commission will remain at 5%, but commission on all units sold in excess of 3500 will be paid at 10%. Prepare a marginal cost statement for the year ending 30 November 2025 to show the revised contribution and revised profit for the year if Martina decides to go ahead with the plan. Martina Budgeted marginal cost statement for the year ending 30 November 2025 Workings: Advise Martina whether or not she should go ahead with the plan. Justify your answer by considering both financial and non-financial factors. Explain one advantage of cost–volume–profit analysis. Explain one reason why marginal costing is considered to be more useful for short-term decision making than absorption costing. Explain the effect on profit of using marginal costing rather than using absorption costing.
9706_w24_qp_22
THEORY
2024
Paper 2, Variant 2
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Questions Discovered
903