F2 MOCK ANSWERS 2

1. Correct Answer
Project A should be accepted because it has the higher NPV
At a cost of capital of 17% project B would have a zero NPV

The NPV method is superior to all other criteria for investment appraisal. Therefore
statement about accepting project A for its higher NPV is true and the statement about
accepting project B for its higher IRR is false.

Moreover IRR is the cost of capital which gives a zero NPV and so the statement about
cost of capital is 17% is also true.

A discounted payback period of 3.6 years is more favourable than 4.1 years because a
shorter payback is considered to be less risky.

2. Correct Answer
Scatter diagrams are graphs which show equations False
The x axis on a scatter diagram is used to represent the independent variable True

Scatter diagrams are graphs which are used to exhibit data (rather than equations).
They compare the way that two variables vary with each other. There may not be any
correlation between the two variables. If there is no correlation then there is no
equation.

The x axis on a scatter diagram represents the independent variable and the y axis
represents the dependent variable

3. Correct Answer
$46,500

Actual contribution = Actual sales revenue - Actual variable cost

The $50,000 already reflects actual sales revenue so there is no need to adjust for the
sales volume contribution variance. The total fixed cost variance is not relevant to a
calculation of contribution.

We do need to adjust the standard contribution to reflect the variable cost variance.

Actual contribution = $46,500 (50,000 - 3,500)

4. Correct Answer
$208.12

This year:
Standard labour hours = 2,100 (2,200 - (8,600 / 86))
Standard labour hours per unit = 2.1 (180.60 / 86)
Standard number of units produced = 1,000 (2,100 / 2.1)

Next year:
Standard labour hours = 2,200
Standard number of units produced = 1,000
Standard labour hours per unit = 2.2 (2,200 / 1,000)

Standard cost per unit = $208.12 ((86 + 10%) x 2.2)

5. Correct Answer
Controllable operating profit

Controllable operating profit should be used because it includes the total of all costs and
revenues that can be attributable to the performance of a manager of an investment
centre.

Contribution is not suitable as it does not reflect controllable fixed costs. Traceable
divisional profit and divisional net profit are not suitable as they include costs that are
outside the control of the investment centre manager.

6. Correct Answer
Managers of cost centres should be accountable for controllable costs only
A cost which is not controllable by a junior manager may be controllable by a
senior manager

There are more than two types of responsibility centres, namely, cost, profit, revenue
and investment.

It is important both from a motivational point of view and a control point of view that
managers are only judged on areas over which they have control.

A profit centre's performance is usually based on profit, rather than its return on capital.
An investment centre is measured by its return on capital.

Costs that are not controllable by a junior manager may be controllable by a senior
manager. For example high direct labour costs in a department may be caused by
excessive overtime. A junior manager may be obliged to continue meeting production
schedules but senior managers may be able to reduce costs by deciding to hire extra
full-time staff.

7. Correct Answer
$112,500

The company produces 60,000 units at 75% capacity. Therefore it would produce
80,000 units at 100% capacity (60,000 / 0.75).

Rent per unit of output at 100% capacity = $1.125 (90,000 / 80,000)

Total rent cost at 100,000 units of output = $112,500 (1.125 x 100,000)

8. Correct Answer
A method that sets a target cost by subtracting a desired profit margin from a
competitive market price

Target costing involves deciding on a competitive price for a product and then deducting
a desired profit margin from it. The balance is the target cost.

9. Correct Answer
Both statements are true

Statement 1 is true. For example the non-financial measure of poor customer

satisfaction indicates that the financial measure of future sales may change.

Statement 2 is true. Financial performance measures used alone may provide

managers with shorter term incentives which could be detrimental to the business in the
long term. For example price increases applied in the short term may meet financial
targets but damage customer relations in the longer term.

10. Correct Answer

$30,000

The difference between profits calculated under absorption costing and marginal costing
principles is due to the treatment of fixed costs.

In absorption costing fixed costs are allocated to units produced. Therefore fixed costs
will move from one financial period to another where not all units are sold, but are
carried forward as inventory.
In marginal costing all fixed costs are set off against revenue in the period they are
incurred. No fixed costs are carried forward.

Fixed cost per unit of production = $2.5 (300,000 / 120,000)

Closing inventory = 20,000 (120,000 - 100,0000)
Fixed cost held in closing inventory = $50,000 (2.5 x 20,000)

As the $50,000 of fixed cost would have been written off in the period under marginal
costing, but carried forward under absorption costing, the absorption costing profit will
be higher than under marginal costing principles by $50,000.

Therefore the profit using marginal costing principles is $30,000 (80,000 - 50,000).

11. Correct Answer

Cluster sampling

Selecting a definable subsection of a population (such as a location in a country) is

used in cluster sampling.

12. Correct Answer

1 and 2 only

Good information should be clear, unambiguous and relevant to the needs of the
recipient.

It only needs to be as accurate as necessary to achieve its purpose. However it should

not go into pointless detail for accuracy especially if this affects timeliness.

13. Correct Answer

$485,000

$000
Actual profit 500
Sales volume profit variance 10
Fixed production overhead volume variance 10
Fixed production overhead expenditure (50)
Direct labour efficiency variance 15
Budgeted profit 485

The efficiency and capacity variances for fixed overheads are not included in the
reconciliation as they are the sub-variances of the fixed overhead volume variance
which has been accounted for.

14. Correct Answer

$28,292

Using the high low method:

$ %
28,445 85
28,241 73
204 12

The variable cost = $204 / 12% = $17 per 1%

Fixed element = $28,445 - (85 x $17) = $27,000

Costs at 76% occupancy = $27,000 + ($17 x 76) = $28,292

Note: In this case it was not necessary to indicate that cleaning costs have both fixed
and variable elements. If it was only variable the cost values would have been different
from the ones specified in the question at the given different levels of activity.

15. Correct Answer

19.650

Using the least squares method the value of a equals:

(Zy / Number of pairs of data) - (b x (Zx / Number of pairs of data))

In the question there are six pairs of data and b = 0.69

Therefore:
a = 19.650 (180 / 6) - (0.69 x (90 / 6))
16. Correct Answer
Both situations would cause the overheads to be under absorbed

Overheads will be under absorbed if the actual activity is less than what was budgeted
because there is not enough activity when multiplied by the absorption rate to cover the
overheads.

Actual overheads will also be under absorbed if they exceed budgeted levels. This is
because the absorption rate is not high enough to cover the increased overhead.

17. Correct Answer

Statement 1 is false and statement 2 is true

Statement 1 is false. The point at which the line crosses the y-axis is the intercept.
Statement 2 is true. On a graph of a semi-variable cost the intercept shows the fixed
element and the gradient gives the variable cost per unit.

18. Correct Answer

$72,000

Total employees at profit centres T and V = 80 (50 + 30)

Profit centre T's proportion of employees = 62.5% (50 / 80)
Profit centre W's overheads allocated to profit centre T = $50,000 (80,000 x 0.625)

Profit centre T's total overhead = $72,000 (22,000 + 50,000)

19. Correct Answer

$360,000

Sales value of product T = $360,000 (18,000 x 20)

Sales value of product V = $540,000 (9,000 x 60)
Total sales = $900,000 (360,000 + 540,000)

Product V proportion of sales = 60% (540,000 / 900,000)

Product V proportion of joint costs = $360,000 (600,000 x 60%)
20. Correct Answer
2 and 3 only

The purpose of these objectives is to ensure that all areas of the business are working
towards the same goals (goal congruence). The goals arise as a result of the mission
statement.

21. Correct Answer

Statement 2 only

Not all employees are motivated by money. Many are motivated by spending time with
their families or a desire to do a good job.

It is important that goals for all employees are aligned with the organisation's overall
mission. Employers must motivate employees to achieve these goals. This is vital for
the future success of the business.

22. Correct Answer

Flexible budgets can be used at the planning stage of the budget period True
The main purpose of a fixed budget is at the planning stage of the budget period True

Flexible budgets can be used both at the planning stage and retrospectively. For
example at the planning stage a business may expect sales units to be 20,000 but
suggest that they may be as low as 17,000 or as high as 22,000. Preparing flexible
budgets for 17,000 and 22,000 units helps management plan for a sales shortfall or a
boost in sales.

The fixed budget is prepared at the planning stage when it seeks to define the
objectives of the organisation. There is little benefit in comparing a fixed budget with
actual sales for a different level of activity.

23. Correct Answer

The variable cost per unit

When analysing the relationship between total cost and activity level the gradient of the
regression line represents variable cost per unit. This is because variable cost is the
main relationship between total cost and activity level.
24. Correct Answer
44.6%

Gearing = Prior charge capital (long-term debt)

Prior charge capital + Shareholders equity

Gearing = 324,000 = 44.6%

324,000 + 402,000
Note that capital gearing can also be given by the formula Prior charge capital
which is 80.6%, but this is not one of the options here Shareholders' equity

25. Correct Answer

$819,000

The value of a unit of output from a process is calculated as:

(Cost of process - Scrap value of normal loss) / Expected output.

Number of units input = 150,000

Normal loss = 30,000 (20% x 150,000)
Expected output = 120,000 (150,000 - 30,000)

Scrap value of normal loss = $168,000 (30,000 x 5.6)

Cost per expected unit = $6.3 ((924,000 - 168,000) / 120,000)

Value of output = $819,000 (130,000 x 6.3)

26. Correct Answer

A budget manual is a set of instructions governing aspects of the preparation of True
budgets
One of the responsibilities of the budget committee is to prepare the annual False
budgets

A budget manual is a set of instructions governing the preparation of budgets.

Whilst a budget committee is involved co-ordinating and administering the budget

process it is not involved in the preparation of the actual budgets. This function would
usually be undertaken by management accountants or the finance department.
27. Correct Answer
Group A

Total number of bedrooms cleaned per hour:

(1) Group A: 1.55 (198 / 128)

(2) Group B: 1.48 (207 / 140)
(3) Group C: 1.50 (186 / 124)
(4) Group D: 1.53 (165 / 108)

Group A cleaned more bedrooms per hour than the other groups and is therefore the
most efficient.

28. Correct Answer

$48,940

The FIFO method uses the price of the oldest batches first. The issues of 9,000 units
will be valued as follows:

$
3,600 x $5 = 18,000
5,000 x $5.70 = 28,500
400 x $6.10 = 2,440
9,000 48,940

29. Correct Answer

2.4

Quick ratio = Current assets less inventories / Current liabilities

= (Receivables + Cash at bank) / Payables
= (22 + 14) / 15
= 2.4

30. Correct Answer

Cost control is concerned with regulating the costs of operating a business
Cost reduction is a planned approach to reducing expenditure
It is easy to confuse cost control and cost reduction but the statements about regulating
costs and a planned approach to reducing expenditure are true.

The assumption that current cost levels are too high refers to cost reduction, not cost
control. Reducing costs to budget level refers to cost control, not cost reduction.

31. Correct Answer

$84,000 under absorbed

Total overhead absorbed = $2,016,000 (24 x 84,000)

Actual total overhead = $2,100,000

Under absorbed overhead = $84,000 (2,016,000 - 2,100,000)

32. Correct Answer

A footwear manufacturer
A bakery

Batch costing would be used in industries that produce similar, separately identifiable
products (such as in footwear manufacturing and baking).

It would not be used where the products are not similar (such as in film making) or
where process costing is more appropriate (such as in oil refining).

33. Correct Answer

Price variance Favourable
Usage variance Adverse

The direct material price variance is the difference between what the materials should
have cost and what they actually cost. Due to the discount provided by the supplier the
materials cost less than what they were expected to and therefore this variance is
favourable.

The direct materials usage variance is the difference between how much material
should have been used and how much was actually used. As more material was used
than what was expected this variance is adverse.
34. Correct Answer
$2.90

Variable cost per unit = Total cost per unit - Fixed cost per unit

Total cost per unit = $6.50 (29,250 / 4,500)

Fixed cost per unit = $3.60 ((34,000 - 25,000) / (4,500 - 2,000))

Variable production cost per unit = $2.90 (6.50 - 3.60)

35. Correct Answer

54%

Finished units are 100% complete in terms of cost. Work-in-progress is incomplete in

terms of cost. Therefore the degree of completion can be calculated by comparing the
cost per unit of work-in-progress with cost per unit of the finished output.

Cost per completed unit of output = $23 (335,800 / 14,600)

Cost per unit of closing work-in-progress = $12.42 (99,360 / 8,000)

Degree of completion work-in-progress = 54% ((12.42 / 23) x 100)

SECTION B

36.

TASK 1

Notes
What is the net present value (NPV) of Machine A (to the $ 2,425 (1)
nearest $)?
What is the non-discounted payback period of Machine A (to 2.1 Years (2)
the nearest one decimal place)?
What value should be entered in cell C10? $ 1,000 (3)
What value should be entered in cell B11? $ 1,200 (4)

Notes:
(1) NPV of Machine A:
Using the cumulative present value (annuity) table and selecting the Period 3 factor at
10% (the cost of capital):
$12,000 – ($5,800 × 2.487) = $2,425
Or:
Using the present value table and selecting each of the discount factors for Periods 1, 2
and 3 at 10% (the cost of capital):
$12,000 – [$5,800 × (0.909 + 0.826 + 0.751)] = $2,418
NB: There is, at times, a slight difference between the cumulative discount factor in the
annuity table and the sum of the factors from the present value table. This is allowed for
in the answers that are acceptable in such questions.

(2) Non-discounted payback period of Machine A:

Assuming that cash inflows occur evenly during each year:
$12,000 ÷ $5,800 = 2.1 years
Or:
Assuming that cash inflows occur at each year end (which is assumed for convenience
in the calculation of NPV) the payback period of Machine A will be 3.0 years
NB These alternative answers are both acceptable unless clear instructions, as to which
approach should be taken, are given in the question.

(3) Value in cell C10:

Production overheads of Machine B in Year 1 (cell C10):
$3,000 - $2,000 [depreciation of Machine B ($10,000 - $4,000)/3 years = 2000]
= $1,000
(4) Value in cell B11:
Maintenance costs of Machine B in Year 0 (cell B11) are $1,200 because they are
payable in advance.
Machine B will look like this after filling in the above costs:

TASK 2
Correct Answer
NPV Non- Both Neither
discounted methods method
payback
It takes into account the time value of money x
It is cash flow based x
It considers the effect on reported profits x
It selects projects that quickly recoup their x
initial investment

Only NPV takes the time value of money into account.

Only non-discounted payback ranks projects according to how quickly they recoup their
initial investment.
Both NPV and non-discounted payback are cash flow based.
Neither NPV nor non-discounted payback consider the effect on reported profits.
37.

TASK 1
Correct Answer
Notes
What was the standard total variable production cost per unit $ 10.90 (1)
of Product A (to two decimal places)?
What was the standard fixed production overhead cost per unit $ 4.80 (2)
of Product A (to two decimal places)?
What was the labour efficiency variance? $ 475 Adverse (3)

Notes:
(1) Standard variable production costs per unit of Product A:
$ per batch
Materials:
X: 10 kg × $17.50 per kg 175
Y: 5 litres × $9.20 per litre 46
Labour:
20 hours × $12.50 per hour 250
Overhead:
20 hours × $3.70 per hour 74
Total 545

Cost per unit of Product A = $10.90 ($545 per batch / 50 units per batch)

(2) Standard fixed production overhead cost per unit of Product A:

Standard fixed production overhead absorption rate = $51,000 / 1,700 machine hours =
$30 per machine hour
× 8 machine hours per batch = $240 per batch
/ 50 units = $4.80 per unit

(3) Labour efficiency variance = (actual labour hours – standard labour hours for the
actual output) × standard labour rate per hour.
[838 hours – (40 batches × 20 hours per batch)] × $12.50 per hour = $475
Or:
Labour efficiency variance = [actual batches – (standard batches from actual labour
hours)] × standard labour cost per batch.
[40 batches – (838 hours / 20 hours per batch)] × $250 per batch = $475
The labour efficiency variance is ADVERSE because actual hours worked were greater
than standard (or batches produced were less than standard).

TASK 2
Correct Answer
Yes No
Capacity x
Volume x
Expenditure x
Efficiency x
The only fixed production overhead variance that occurs in a marginal costing system is
the expenditure variance. All of the other fixed production overhead variances (volume,
capacity and efficiency) result from the absorption of fixed production overheads into
product costs which is only a feature of absorption costing.

TASK 3
Correct Answer
3 only
The standard profit on actual sales differs from the budgeted profit due only to a
variance in the volume of activity. The two (budgeted and standard profit) are reconciled
via the sales volume profit variance. NB the sales volume revenue variance reconciles
the budgeted sales revenue with the standard sales revenue.
38.
TASK1
Correct Answer
Notes
Return on capital employed (ROCE) 53.3 % (1)
Asset turnover ratio (based upon capital employed) 2.0 times (2)
Receivables days 85.2 days (3)
Capital gearing (debt to equity) 66.7 % (4)
Interest cover ratio 3.3 times (5)

Notes:
(1) Return on capital employed = (operating profit / capital employed) × 100%
($40,000 / $75,000) × 100% = 53.3%

(2) Asset turnover = revenue / capital employed

$150,000 / $75,000 = 2.0 times

(3) Receivables days = (receivables / revenue) × 365

($35,000 / $150,000) × 365 = 85.2 days

(4) Capital gearing (debt to equity) = [long term liabilities / (ordinary share capital +
reserves)] × 100%
($30,000 / $45,000) × 100% = 66.7%

(5) Interest cover = operating profit / interest

$40,000 / $12,000 = 3.3 times
TASK 2
Correct Answer
True False
Its capital gearing is riskier than the industry average x
It has a smaller operating profit margin than the industry average x
Its liquidity position is worse than the industry average x
If its operating profit were 30% lower it would make a net loss x

The capital gearing of Competitor A is higher than the industry average so this would be
regarded as riskier, so this statement is TRUE; because fixed interest commitments
from profit are higher.

The current ratio of Competitor A is lower than the industry average so its liquidity
position would be judged to be worse, so this statement is TRUE.

The operating profit margin (%) can be calculated as ROCE / asset turnover. Thus:
Competitor A 35.0% / 2.0 times = 17.5% operating profit margin
Industry average 40.0% / 3.0 times = 13.3% operating profit margin
Competitor A thus has a larger (not smaller) operating profit margin than the industry
average, so this statement is FALSE.

Competitor A would not make a net loss after interest if its operating profit was 30%
lower. With interest cover of 2.0 times the operating profit would have to reduce by over
50% for it to make a net loss after interest and so this statement is FALSE.