OSBORNE BOOKS TUTOR ZONE Financial performance

Practice assessment 2 answers

© Osborne Books Limited, 2011

2 financial performance tutor zone

SECTION 1 Task 1.1 (a) 1 unit of Aye

Quantity

Cost per unit £

Total cost £

Material

0.4

20.00

8.00

Labour

0.1

20.00

2.00

Fixed costs

0.1

50.00

5.00

Total (b)

15.00

The standard quantity of material for each unit is 0.06kg.

Task 1.2 1.

(c)

£805 Adverse

2.

(e)

£500 Adverse

3.

(a)

£78,400

4.

(b)

£600 Adverse

Task 1.3 (a)

The fixed overhead volume variance is £40,000 favourable. The fixed overhead expenditure variance is £2,000 favourable.

(b)

The fixed overhead efficiency variance is £16,640 favourable. The fixed overhead capacity variance is £20,800 favourable.

Task 1.4 Budgeted cost for actual production

Variances:

98,490

Favourable

Adverse

Direct materials (chocolate spread) price

125

Direct materials (chocolate spread) usage

75

Direct materials (jars) price

605

Direct materials (jars) usage

5

Direct labour rate

105

Direct labour efficiency

0

Fixed overhead expenditure

600

Fixed overhead volume

1,200

Total variances

1,805

Actual cost of actual production

910

(895) 97,595

practice assessment 2 answers

3

Task 1.5 1. August

September

October

Trend was £47.50 Seasonal variation was +£4.20 Seasonal variation was +£2.90 Seasonal variation was +£9.50 £51.70

£49.65

£55.50

2. The cost index for March based on January having an index of 500 is: (a) 514 The percentage increase in quantity purchased from January to February is: (c) 42.86% Task 1.6

Que

Ese

Selling price per unit

10.00

9.90

Material cost per unit

1.60

1.29

Labour cost per unit

1.17

1.35

Fixed production overheads per unit

1.67

2.81

55.67

51.40

Net profit margin

9.50

5.40

Advertising cost as % of turnover

4.00

11.00

Return on net assets

7.13

4.50

Gross profit margin

Task 1.7 (a)

Units

Price/cost £

Total £

Savings on materials

800,000

0.10

80,000

Savings on packaging costs

800,000

0.05

40,000

Reduction in selling and distribution costs

20,000

Additional depreciation

(100,000)

Additional annual profit

40,000

(b) Existing product Return on additional investment (%) Total fixed costs

New product 4.00%

£2,380,000

£2,460,000

£4.75

£4.90

Break even sales volume in units

501,053

502,041

Margin of safety (%)

37.37%

37.24%

Contribution per unit

4 financial performance tutor zone

Task 1.8 (a)

£ Sales price per unit

80.00

Profit margin

28.00

Total costs

52.00

Fixed cost per unit

16.00

Material cost per unit

31.25

Maximum labour cost per unit

Target labour time per unit (to nearest minute) (b)

16 minutes

4.75

18 minutes

practice assessment 2 answers

Section 2 Task 2.1 email to: Production Director from: Accounting technician date: xx/xx/xxxx subject: Report on Fixed Overhead Variances for January Volume Variance The volume variance shows the amount of fixed overhead that is under absorbed due to the lower than expected output. The actual output was 2,500 units lower than expected which is equivalent to 625 standard machine hours (based on a standard time of 15 minutes per unit). The absorption rate is £80 per standard machine hour (calculated as £200,000 divided by 2,500 standard machine hours). This gives the volume variance of 625 x £80 = £50,000. The variance is adverse since the output is lower than budgeted. The reasons for this variance are best explained when we analyse the volume variance into the capacity variance and the efficiency variance. Capacity Variance The capacity variance is the part of the volume variance caused by having less machine hours used than budgeted. The budgeted machine hours equates to 2,500 / 20 = 125 machine hours per day. In this case the production lines only ran for 2,000 hours instead of the budgeted 2,500 hours. This is consistent with the factory closure for three days (losing 375 machine hours) together with only half the lines running for two other days (losing another 125 hours). The capacity variance represents the shortfall between actual and budgeted hours of 500 machine hours multiplied by the absorption rate of £80 per machine hour = £40,000. In this case it forms the major part of the volume variance. Efficiency Variance The efficiency variance represents the under absorption due to the actual machine hours producing less than expected output. In this case it is due to the difference between the expected output in the 2,000 hours that the lines ran (which would be 2,000 x 4 units per hour = 8,000 units) and the actual output of 7,500 units. This will be partly due to the slow running of the production lines during the period when the factory was operating during the snow, although other periods of slow running must also have occurred due to the size of the shortfall. Expenditure Variance The expenditure variance shows the additional cost that was charged to fixed overheads in January compared to the budgeted £200,000. A cost of £8,000 was incurred due to non-productive labour costs. This is calculated as 2 days for half the staff at half normal cost plus 3 days for all the staff at half normal cost. Since the variance totals £6,500 there must be some savings which offset this labour cost, for example the savings of heat and light during the shutdown. Impact on Income Statement

The total fixed overhead variances of £56,500 will be charged to the income statement for January along with any direct variances.

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6 financial performance tutor zone

Task 2.2

email To: Finance Director

Subject: Scenarios 1 & 2

From: Accounting technician

Date:

(a)

Why are the operating profit amounts different?

•

Cost behaviour Direct material behaves as a variable cost and therefore increases in proportion to volume. Direct labour, production overheads and administration costs all behave as fixed costs at the volumes illustrated. This means that the higher the volume, the lower the cost per unit, as is illustrated in the data. Selling and distribution costs appear to be semi-variable and contain both fixed and variable elements. Therefore the only costs which will not reduce per unit as volumes increase are direct materials, as can be seen from the figures.

•

Volumes and contributions Using the high-low method we can analyse the selling and distribution costs, which results in variable cost of £2 per unit and fixed costs of £50,000. We can then calculate the overall contributions per unit as £30.00 when selling at £40 per unit, and £28.00 when selling at £38 per unit. The total contribution generated by 60,000 units at £28 is £1,680,000. This is greater than the total contribution generated at the lower volume of 50,000 x £30 = £1,500,000. It is this difference that accounts for the additional operating profit of £180,000 that is forecast for scenario 2.

(b)

Further implications of following scenario 2 Before a decision is made to follow scenario 2, other implications should be considered. One implication is the increased working capital that will be required to finance the additional volume. Inventory will increase by 20% if kept in line with the increased volume. Receivables will also increase, although the reduced selling price will reduce the impact of the volume increase. Set against this, the amount of payables will increase in line with the volume change. A further consideration is whether the higher volumes are achievable. If the planned volume for scenario 2 is not achieved despite the lower selling price then the profit may be considerably lower than for scenario 1. Full market research should be employed to validate any forecast figures that are to be relied upon.