Explain why it is important to classify cost in terms of behaviours, and how cost can be classified by different behaviours. Question 1
Patel Ltd is a small start-up family-owned business that manufactures and sells a single product to customers in UK. The company has recently been approached by a UK university for an order of 75,000 office sets (easy desk & chair) for the opening of four new campuses, which is expected to be their total sales for the year. The CEO is currently reviewing the following information for this order:
Cost per unit £
Direct materials per chair 13
Direct labour per chair 9
Variable selling & distribution cost 5
Other variable production overhead 3
Total fixed cost 360,000
The CEO is evaluating the possibility of pricing £36 per office set.
As a team member of accounting department, you are required to provide the following information to the CEO:
(a) Explain why it is important to classify cost in terms of behaviours, and how cost can be classified by different behaviours.
(b) Calculate the break-even point and margin of safety if Patel Ltd prices their office set at £36 per unit. Draw the break-even chart that shows break-even point and margin of safety.
The CEO has noticed the following details on the actual total fixed costs for the year ended 30 June 2019 and is keen to know the impact on profit if product is valued at either marginal cost or full cost (absorption cost):
Factory Rent 46,000
Factory Power Consumption 40,000
Factory Wages 120,000
Storeroom Wages 36,000
Depreciation of factory equipment 28,000
Advertising Expenses 38,000
Administrative Expenses 32,000
Fixed selling & distribution cost 20,000
The budgeted and actual production units for the year are as follow, with no opening
(c) Calculate the anticipated profit for the order of 75,000 chairs by using marginal costing.
(Note that a full statement of profit or loss is not required)
(d) Briefly describe all the steps required to calculate a full cost using absorption costing.
(e) Prepare a statement of profit or loss for Patel Ltd for the year ended 30 June 2019 using absorption costing, assuming budgeted fixed overheads are equal to the actual fixed overhead. Explain how net profit figures are different under marginal and absorption
costing. All workings must be clearly shown.
The senior management team is considering adopting a cost-plus pricing approach to improve Patel’s financial performance, which is to calculate the price based on cost plus a mark-up of 30%. Yet the management team is uncertain whether price should be based on full cost or marginal cost. Your line manager asked you to:
(f) Explain the difference between mark-up and margin in cost-plus pricing.
(g) Calculate the price based on full-cost plus and marginal-cost plus, provided that
budgeted sales and production units, costs and expenditures remain constant.
(h) State THREE advantages and THREE disadvantages of the company’s intended pricing
SunPower Ltd manufactures, sells, and installs solar panels that are sold to domestic customers. The industry is highly competitive, and the management team reviews the company’s performance on a monthly basis. The trainee Management Accountant has
therefore produced a comparison of budgeted and actual performance for April and this is shown below:
Comparison of budgeted and actual performance for April
Sales volume (units) 1,300 1,180
Sales revenue 383,500 348,100
Direct material 104,000 91,450
Direct labour 71,500 70,800
Production overheads 55,750 55,100
Selling & installation costs 109,750 95,280
Administration costs 26,500 26,800
Profit 16,000 8,670
Production overheads and administration costs are believed to be fixed, whereas selling and installation costs are semi-variable. The selling and installation cost budget was set by taking appropriate information from the results for the last three months of 2019, which are shown below:
Selling and installation costs
Sales (units) Total cost (£)
October 1,250 106,000
November 1,550 128,500
December 1,400 118,500
The Finance Director is concerned that the selling and installation costs budget may have been padded, but the Installation Manager complained that the budget includes costs that she does not control.
a) Explain what a budget is and state THREE reasons why companies produce budgets.
b) Calculate the selling and installation costs by using high-low method, with brief
explanations of the method you use.
c) Produce a performance statement for April using flexible budgeting principles. All
calculations must be clearly shown.
d) Explain what “padding the budget” involves and why it might occur.
e) Discuss whether managers should be evaluated based only on costs and revenues that
‘Accounting is a practice that underlies and enables organizational action and much of human activity. In this way, accounting is fundamentally a social practice, which guides and influences the behaviour of people in organizations and society, thereby impacting our lives.’ – Eva Tsahuridu & Garry Carnegie, IFAC, 2018.
Use your lecture and seminar materials, explain the phrase “accounting as a social practice”.
Note the following:
1. Discuss the difference between seeing accounting as technical practice and seeing it as a
2. Illustrate your answers with supporting examples e.g. academic literature.
3. Present your arguments in form of essay. Reference should be included.
4. Do not copy from your lecture slides and seminar materials.
5. The word limit is 1000 words.
Section two: Financial Accounting & Accountability
Please complete ALL three questions.
You are working as assistant to the financial director of Great Times Ltd. The financial director is in the process of finalising the accounts for the company at the year end. You are to assist the bookkeeper. The trial balance of Great Times Ltd is set out below and
the bookkeeper has prepared a list of the normal year-end adjustments and has gathered some further information which you may require to review in order to complete the task.
Great Times Ltd Draft Trial Balance for the period ending 31 December 2019
Salaries and wages 1,835,308
Sales team’s commission 603,681
Motor expenses 853,762
Light and heat 104,804
Carriage inwards 125,219
Trade receivables 3,656,391
Allowance for receivables 149,296
Cash in hand 2,935
Cash at bank 43,465
Trade payables 850,753
Land (cost) 800,000
Buildings (cost) 721,583
Fixtures and fittings (cost 387,054
Motor vehicles (cost) 920,726
Office equipment (cost) 138,967
Buildings (acc dep) 157,321
Fixtures and fittings (acc dep) 172,941
Office equipment (acc dep) 35,922
Motor vehicles (acc. dep) 408,528
Returns inwards 325,432
General expenses 86,514
Returns outwards 186,654
Discount allowed 74,187
Retained earnings at 1st January 2019 614,681
Ordinary share capital (£1 par) 800,000
12% Debenture 2,400,000
Share premium 231,563
Interim dividend paid 49,200
The following additional information is provided:
(a) Closing inventory was valued at £2,009,480
(b) Insurance of £6,225 was pre-paid at the end of the year and allowance
for receivable agreed at 5% of receivables at the end of the year.
(c) Audit fees of £136,573 relating to the audit of the year-end accounts have yet
to be provided for.
(d) Disposal during the year is yet to be accounted for
Cost (£) Accumulated
Motor vehicles 183,921 57,462 90,000
The depreciation policy is full in the year of acquisition and none in the year of disposal.
(e) After accounting for the above transaction, depreciation for the year is to be charged at the rate provided below.
Building – 2% on cost
Motor Vehicles – 30% (RBM)
Fixtures and fitting – 10% on cost
Office equipment – 20% (RBM)
Note: RBM = reducing balance method
(f) The authorised share capital of the company is as follows; 2000,000 ordinary
shares of £1 each
During the year, the company made a rights issue of 2 for every 5 shares at
£1.25 per share. This transaction has not yet been accounted for.
(g) An interim ordinary share dividend of 8.2p per share was paid during the year.
This was included in the trail balance.
(h) The debenture interest has not yet been paid or provided for in the trial
balance. The debentures are secured against the land and buildings and are
due for repayment in the year 2026.
(i) The corporation tax charge for the year has been calculated as £735,157.
Prepare the Statement of profit or loss and the Statement of financial position for
the year ended 31 December 2019
a) If you would like to set up a wholesale business to sell imported products to small
retailers in the UK, what type of business entity you would choose for your wholesale
business? Describe the type of business entity that you choose AND provide at least
two reasons why you would choose the particular type of business entity.
Max 800 words
b) Public and private limited companies are accountable to a wide range of users.
Discuss who the different users are and their different needs from the financial
Max 800 words
Explain why it is important to classify cost in terms of behaviours, and how cost can be classified by different behaviours
Coniston Convenience Store Ltd is a local convenience food store in South Birmingham. A new competitor,
Hedon Handy Foods Ltd, began trading in its local area just over a year ago. The owner of Coniston
Convenience Store Ltd, Mr Coniston, is concerned to know how well this new competitor is doing in
comparison to his own business. He has asked you to analyse the summary financial statements of the two
companies and then present him with a report comparing the financial performance of each.
The financial statements of Coniston and Hedon for the year ended 31st December 2019 are provided below:
Hedon Handy Store Ltd
£ £ £ £
Statement of Profit or Loss
Revenue 80,000 120,000
Cost of sales (60,000) (96,000)
Gross profit 20,000 24,000
Less Depreciation & other expenses (10,000) (9,000)
Profit before tax 10,000 15,000
Taxation (2,000) (3,000)
Net profit for the year 8,000 12,000
Statement of Financial Position
Equipment at carrying value 2,000 14,000
Inventory 15,000 17,500
Trade receivables 25,000 20,000
Cash & Cash equivalents 5,000 2,500
Total Assets 47,000 54,000
Share capital 10,000 15,000
Retained earnings 32,000 29,000
Total Equity 42,000 44,000
Trade payables 5,000 10,000
Total Equity and Liabilities 47,000 54,000
a Calculate ratios and consider the position of each business in the current year
b Based on your ratio analysis, explain which business is being managed more
efficiently and why. Make recommendations to Mr Coniston on any steps he
should take to improve Coniston’s financial performance