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AIB Final Written Exam

The document discusses a company's budgeted costs and variances from the flexed budget. It provides calculations for sales, materials costs, labor costs, maintenance costs, and other expenses. Variances are identified as favorable or adverse and explained.

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0% found this document useful (0 votes)
23 views13 pages

AIB Final Written Exam

The document discusses a company's budgeted costs and variances from the flexed budget. It provides calculations for sales, materials costs, labor costs, maintenance costs, and other expenses. Variances are identified as favorable or adverse and explained.

Uploaded by

Neeza Gautam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Section A

Question number 1

Sales price per unit= £20


Sales volume = Sales price per unit × Total sales
= £20 × £120,000
= £2400,000

Variable material and labor cost = Variable cost (a)


Variable cost (b) = variable material and labor cost per unit (vc/u) × sales
= £6.50 × £120,000
= £7,80,000

Selling and distribution cost = Variable cost (b)


Variable cost (b) = Selling and distribution costs per unit × sales
= £3.00 × £120,000
= £360,000
Given,
75% of production overhead = fixed.
So, 25% of production overhead is variable.

75% of the production overhead fixed = £960,000


25% of production overhead variable= £960,000* 25%
= £240,000
Required:
a) Total budgeted variable cost per unit- ?
b) Budgeted contribution per unit = ?
c) Break-even sales volume =?, Break-even sales revenue=?
For a,
Total budgeted Variable Cost = Variable cost (a) + Variable cost (b)+ production overhead
variable
= £7,80,000+£360,000+£240,000
= £ 13,80,000

Total budgetedVariable cost per unit = variable cost ÷ total sales


= £ 13,80,000 ÷ £120,000
= £11.5

For b,
Budgeted contribution per unit = sales price per unit - variable cost per unit
= £20 - £11.5
= £8.5
For c,
Total Fixed cost = Fixed selling and distribution cost + production overhead variable
cost( £960,000- £240,000 = £720,000
= £75,000+£720,000
= £795,000
3. Breakeven point sales volume = Total fixed cost ÷ contribution per unit
= £795,000 ÷ £8.5
= £93,530

Breakeven point sales revenue = Breakeven point (quantity) × sales price


= £93,530 × £20
= £1,870,600
Answer number 2:

All Direct costs,


1. Materials cost= £25

2. Since, Labour hours= 0.4 hours per unit & Labour hour cost = £ 18
So,
Labour= £18 * 0.4 = £7.2

3. Since, machine hours= 0.75 hours per unit % machine hour cost = £32
So,
Machine = £32 * 0.75 = £24
Therefore, Total prime cost = £56.2

Overhead costs,
1. Production setups= £160 *6 setups=
2. Production run time= £50 *4 hours = £200
3. Production inspection= £45*12 setups= £540
So, Overhead costs in unit = overhead costs/units
= £1700/125 = £13.6
Therefore, Total cost = £69.8

Given, sales have a profit margin of 20 %


Selling price (SP) = Total cost + profit
or, SP = £69.8+ 20% of selling price
or, SP - 20% of selling price = £69.8
or, 80% of SP = £69.8
or, 0.8* SP = £69.8
Therefore, Selling price = £87.25
Answer of number 3

Given that,
One unit of cat requires 5 kgs of kitten.
It takes 2 hours to produce each unit of cats.
Closing inventory on April = 4000 finished cats.
= 20,000 kgs of kitten.

Months May June July


Demand 7000 7500 7800

Opening inventory= 15600 kgs of kitten


Raw material inventory= 40% for monthly usage.
Finished goods inventory= 50% to meet estimated sales.

A. Production of cats in units.


In the month May,

Sales volume= 7000


Closing inventory= 3,750
Opening inventory= 4000
Therefore,
Production in units= Sales volume + closing inventory - opening inventory
= 6, 750

In month June,
Sales volume= 7,500
Closing inventory= 3,900
Opening inventory= 3,750
Therefore,
Production in units= Sales volume + closing inventory - opening inventory
= 7,650

B. Material usage of kitten


In month May,

Production in units = 6,750


Material in kilograms (kgs) = 5
Material usage of kitten = Production in units * Material in kgs
= 33,750
In month June,

Production in units = 7,650


Material in kilograms (kgs) = 5
Material usage of kitten = Production in units * Material in kgs
= 38,250

C. Material purchase in kgs


In month May,

Usage = 33, 750


Closing inventory (+) = 15,300
Opening inventory (-) = 20,000
Therefore,
Total purchase (kgs) = Usage + Closing inventory- Opening inventory
= 28,050

In month June,
Usage = 33, 250
Closing inventory (+) = 15,600
Opening inventory (-) = 15,300
Therefore,
Total purchase (kgs) = Usage + Closing inventory- Opening inventory
= 38,550

D. Direct labor in hours


In month May,

Production in units= 6,750


Labor hours of cat = 2
Therefore,
Total labor budget (in hours) = Production in units * Labor hours of cat
= 13, 500

In month June,

Production in units= 7,650


Labor hours of cat = 2
Therefore,
Total labor budget (in hours) = Production in units * Labor hours of cat
= 15,300

Particulars May June


Production in units 6,750 7,650
Labor hours of cat 2 2
Total labor budget (in hours) 13,500 15,300

Answer of number 4
Given,
Topsoil= £900
Wooden Decking = £3,500
Plants = £3,500
Water Feature = £4,500
Labour = £2,100
Equipment = £500
Total cost = £15,900
Labour cost = £35 per hour
Total Labour hour = 30 hours

Particulars Calculations of the cost Cost (£) Relevant (R) or Non-


relevant cost (NR)
Stock of £ 900* 5% + 900 £945 Incremental cost (R)
Topsoil
Wooden 100 % £0 Sunk cost(NR)
decking A
Wooden Sold to local timber £1500 Incremental cost (R)
decking B merchants
Plant A 50% plants remained £0 Sunk cost (NR)
from the previous job
Plant B 3500 * 50% £1750 Incremental cost (R)
Water feature £4500 General specific fixed
cost (R)
Labor £35 * 30hours * 2 £2100 Incremental cost (R)
builders
Equipment 1 Depreciation cost £0 Non- cash expense(NR)
Equipment 2 Equipment can be £300 Opportunity cost (R)
loaned out
Overheads Standard charge £0 Fixed cost (R)
TOTAL COST £11,095

Answer of number 5:
Solution,
Here, Favourable is denoted as F & Adverse is denoted as A

Particulars Flexed budget Actual Variance category


Sales quantity in £36,000 £36,000 £0
units
sales £720,000 £684,000 £36,000 F
Variable and fixed
cost
Materials cost £ 144,000 £142,000 £2,000 F
Labor cost £ 288,000 £296,000 £8,000 A
Maintenance cost £158,000 £ 167,000 £9,000 A
Equipment hire £12,000 £12,000 £0
cost
Cost of £20,000 £22,000 £2,000 A
depreciation
Rates of insurance £30,000 £34,000 £4,000 A
cost
Profit £68,000 £11,000 £57,000 A

Required Calculations:
1. Sales = (£80,000 ÷ £40,000) × £36,000
= £720,000
2. Material expense= (£160,000 ÷ £40,000) × £36,000
= £144,000
3. Labor expense= (£320,000 ÷ £40,000) × £36,000
=£ 288,000
4. Since, Maintenance cost= semi variable cost
= variable cost + fixed cost

Where , variable cost per unit = (High cost - Low cost) ÷ (High quantity- Low
Quantity)
= £170,000 – £140,000 ÷ £40,000-£30,000
= £3 per unit

And Fixed cost,


Selling variable cost= (variable cost × quantity) + fixed cost
£170,000= (£3 × £40,000) + fixed cost
Fixed cost= £170,000 - £120,000
Fixed cost= £50,000

For stepped fixed cost,

Formula of budget is required,


Budget = number of steps × cost per step

Calculating number of steps:


Number of steps= 36,000 ÷ 7000
= 5.14(roundoff)
= 6 steps

Calculating cost per step:


This is for the original budget
Number of steps= 40,000 ÷ 7000
= 5.71(roundoff)
= 6 steps
From the above calculations:
6 steps cost= £12,000
1 step= £12,000 ÷ 6
= £ 2000
Therefore, budget for equipment hire,
= 6 steps × 2000
= £ 12,000
b) The advantage of a flexible budget over a fixed budget is that it allows for flexibility. The
corporate world is complex in nature, necessitating continuous improvement and changes in
for it to sustain its position . In contrast to a flexible budget, the essence of a fixed budget is
to remain unchanged regardless of level of output or turnaround reached, since it is only
incorporated in a particular aspect of the operation and does not recognize cost
fluctuations. The flexible budget, however shifts in response to increases in demand,
attrition, or other external factors such as the number of employees by considering the
difference in behavior between overheads and unit-level cost.In this manner, the company
addresses the realities of the industry with a flexible budget and better positions itself to
deal with the market fluctuations as a whole.
Furthermore, by careful consideration of the past data at the beginning of the year, flexible
budgets establish operating costs and product profit margins. For example, if material costs
for a product suddenly rise over the course of the year, rendering the commodity
unprofitable, then it would consider cutting off the amount spent through proper analysis.
This means that variations in expense and profit margin are taken into account in a flexible
budget period.
However, a fixed budget focuses on existing statistics, and business activities are carried out
using the existing evidence and does not bother with the changing dynamics. For example,
changes made in the law, however, can have an effect on taxation or budgets over the
years, which a fixed budget turns a blind eye on. A flexible budget adjusts as new research
becomes accessible, allowing businesses to change levels of spending rather than depending
on historical statistics.

c) Three of the major benefits that benefits provides the company is stated below:
1. Budget helps in increasing motivation amongst managers:
- The budgeting phase necessitates the involvement of managers from various
departments for the decision-making, improving their engagement. This type of
decision-making and problem-solving engagement boosts a manager's innate
morale, resulting in increased efficiency and improved performance. It also serves as
a valuable tool for communication between employees of all levels which makes
everyone aware of each other’s positions and challenges improving empathy and
support between them. This ultimately strengthens their relationship, increasing
work determination and overall satisfaction. All in all, increased motivation assists an
organisation in achieving higher levels of output, strengthening its market place
ultimately, retaining a competitive advantage.

2. Budget helps in identification of short term problems and necessary strategy:


- During budgeting different types of problems that need to be eradicated for the
smooth functioning of the business is identified. For instance, different management
decisions including promotion or incentives and various other decisions which would
create negative outcomes such as dismissal would be determined and dealt with
accordingly. Moreover, problems that would impact the profitability of the firm such
as, whether or not loans would be required or there is a need for it reduction is also
identified.

3. helps in critical evaluation of individual department’s performance:


- During the budgeting process, information regarding the total amount of products
manufactured or service provided through each department, as well as the total
hours of labor and supplies required for each job done is accessed with the help of
which a certain amount of money is allocated. After the completion of the job, the
budgeted value is compared to the real consumption, with the help of which the
department’s progress or lack is tracked.
Section B

Answer of number 6
A.

Particulars Performance Indicators


1. Financial perspective 1. Return on capital employed.
2. Operating profit as percentage of
revenue

2. Customer perspective 1. Customer support as a percentage of


revenue.
2. Percentage of business from existing
customers.

3. Internal Growth and process 1. Quality assurance as a percentage of


revenue
2. Admin and distribution cost as a
percentage of revenue

4. Learning and growth 1. Percentage of business from existing


customers.
2. Training costs as a percentage of total
costs

B. The following are eight performance metrics for Pearl Limited in (£):

1. Return on capital employed (ROCE),

ROCE= (Operating profit ÷ capital employed) × 100%


= 0.37 ÷ 2.40 × 100%
= 15.41%

2. Admin and distribution cost as percentage of revenue,

= Admin and distribution cost ÷ cost of sales × 100%


= 0.15 ÷ 1.35 × 100%
= 11.11%

3. Customer service as percentage of revenue,


= Customer support cost ÷ cost of sales × 100%
= 0.04 ÷ 1.35 × 100%
= 2.96%

4. Percentage of business from existing customers,


=Sales to existing customers ÷ cost of sales × 100%
= 0.82/1.35 × 100%
= 60.74%

5. Training cost (percentage of total cost)


Firstly,
Calculating the total cost = 0.08+0.14+0.04+0.03+0.69
=£0.98 million

= (training cost ÷ total cost) ×100%


= (0.14 ÷ 0.98) ×100%
= 14.28%

6. Percentage of revenue acquired from new products,


(New products ÷ cost of sales) × 100%
= (0.32 ÷ 1.35) × 100%
= 23.70%

7. Operating profit as percentage,


=(Operating profit ÷ cost of sales) × 100%
= (0.37 ÷ 1.35) × 100%
= 27.40%
8. Quality assurance in percentage
= (Quality assurance ÷ cost of sales) × 100%
= (0.03 ÷ 1.35) × 100%
= 2.22%

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