Answers

Part 1 Examination – Paper 1.2

FInancial Information for Management Answers

Section B
1 (a) Earnings
1998 = £150 (given in the question)
1999 = £150 × 1·05 = £157·5
2000 = £157·5 × 1·03 = £162·2
2001 = £162·2 × 1·04 = £168·7

(b)
Year (i) RPI (ii) AEI
150 150
1998 162·2 = × 170·3 172·8 = × 124·4
157·5 108
157·5 157·5
1999 164·7 = × 170·3 172·6 = × 124·4
162·9 113·5
162·2 162·2
2000 167·0 = × 170·3 169·6 = × 124·4
165·4 119
168·7 168·7
2001 168·7 = × 170·3 168·7 = × 124·4
170·3 124·4

(c) Using the RPI it shows that Jim has had a real increase in his wages over the four year period.
Using the AEI shows that Jim has actually seen a reduction in his earnings compared to the average wages earned.

(d) 1995 is the base year for the Average Earnings Index. This means that all figures are compared to the average earnings in
the year.

2 Relevant cost statement

Note £
Material V 1 900
Material I 2 6,500
Material C 3 2,050
Department 1 4 –
Department 2 5 26,000
Overheads 6 –
Minimum contract price 35,450

Notes:
1 The historic cost of £10 is not relevant as it is sunk. The relevant cost is the opportunity cost relating to lost scrap proceeds
= 300 × £3 = £900.
2 Again the historic cost is irrelevant as it is a sunk cost. Since the material is in continuous use in the business the relevant
cost will be the current replacement cost of the material = 1,000 × £6·50 = £6,500.
3 Since there is only 300 kg in stock 250 kg would need to be purchased at the current replacement cost = 250 × £4 =
£1,000. If the stock of 300 kg is not used for the contract it would be used to replace material Y in an alternative production
process.
£7
Therefore the relevant cost for the stock of 300 kg is = 300 × = £1,050 bearing in mind the 2 for 1 substitution.
2
Total relevant cost for material C = £1,000 + £1,050 = £2,050
4 Since there is spare capacity in this department there is no relevant cost.
5 For this department the two alternatives need to be considered:
Cost of working overtime = 2,000 × £10 × 1·5 = £30,000
Cost of diverting labour = 2,000 × (£10 + £3) = £26,000
It would be cheaper to divert the labour from the other production processes so the relevant cost for department 2 is £26,000.
6 Since the overheads are absorbed and there is no mention of the overheads actually increasing as a direct result of the contract
there is no relevant cost for overheads.

11
3 (a) Operational planning This is often referred to as short term budgeting and looks at the resources,
production etc for a financial period, usually a year. It provides a detailed plan of
what the organisation hopes will be achieved within the next financial year.
Strategic planning This is often referred to as the long term plan and looks at where the organisation
is heading over a number of years, for example a five year plan would be a long
term plan. It presents the organisation with an idea of the broad direction that it
hopes to be heading in.
The strategic plan will incorporate the operational plans of the organisation. The operational plan translating the strategic plan
into achievable short term goals.

(b) 1. identify objectives – defines what the organisation hopes to achieve

2. look at alternative courses of action – looks at different ways that the goals might be achieved
3. evaluate the alternatives using relevant data – look at the information that has been obtained
4. select the most appropriate course of action – from information make the best choice to achieve corporate goals
5. implement the long term plan in the form of a budget – prepare detailed budget
6. monitor actual results – collect data regarding what is actually happening with the organisation
7. compare actual to planned results – look at actual versus budget and see whether control action needs to be taken

4 (a) Future value

 1 ⋅ 0110 ×12 – 1
= £50 ×   = £50 × 230·039 = £11,501·95
 1 ⋅ 01 – 1 

Compound forward for 5 years at 15%

= £11,501·95 × (1·15)5 = £11,501·95 × 2·011 = £23,130·421 ≈ £23,130

(if the student keeps the numbers in their calculator the solution is £23,135)

(b) (i) Loan 1 –1

APR = 9·38%, then the monthly rate is 1·0938 12 – 1 = 0·0075%

£2,000 = A1 ×  1  –  1 
 0 ⋅ 0075   0 ⋅ 0075 × 1 ⋅ 007536 

£2,000 = A1 × 31·447

£2,000
∴ A1 = = £63·60
31·447

Loan 2
–1
APR = 12·68%, then the monthly rate is 1·1268 12 – 1 = 0·01%
1   
£2,000 = A2 × 
1
–
 0 ⋅ 001  0 ⋅ 001 × 1 ⋅ 0124 

£2,000 = A2 × 21·243

£2,000
∴ A2 = = £94·15
21·243

(ii) Loan 1 total amount repaid = £63·60 × 36 = £2,289·6 ≈ £2,290

Loan 2 total amount repaid = £94·15 × 24 = £2,259·6 ≈ £2,260
Although loan 2 is more expensive on a monthly basis, slightly less money is paid over the two year period than with loan 1
over the three year period.

12
5 (a)
Process account
Units £ Units £
Opening WIP 100 Normal loss 15
Input 1,500β Output 1,250
Closing WIP 200
1,600 1,600

150 units
Or from the normal loss figure = = 1,500 units
0·1

(b)
Statement of equivalent Total Material Conversion
units costs
Opening WIP (to complete) 100 – 70
= 100 × 70% = 100 × 70%
Units started and finished β 1,150 1,150 1,150
Output 1,250
Normal loss 150 – –
Closing WIP 200 200 80
= 200 × 10% = 200 × 10%
1,350 1,300

(c)
Costs incurred in period Materials Conversion
costs
£ £
3,510 1,950
= 1,350 × 2·60 = 1,300 × £1·50
Add scrap proceeds from 300
normal loss = 150 × £2
3,810 1,950

13
Part 1 examination – Part 1.2
Financial Information for Management Marking Scheme

Marks
1 (a) Noting Jim’s wages for 1998 1/
2
Calculating the figure for 1999 1/
2
Calculating the figure for 2000 1/
2
Calculating the figure for 2001 1/
2
— 2
(b) Calculating the wage figures adjusted for the RPI for:
1998 1/
2
1999 1/
2
2000 1/
2
2001 1/
2

Calculating the wage figure adjusted for the AEI for:

1998 1/
2
1999 1/
2
2000 1/
2
2001 1/
2
— 4

(c) Comment on Jim’s wages compared to the:

RPI 1
AEI 1
— 2

(d) Mentioning the words ‘base period’ 1

Explaining what this means 1
— 2
—
10
—

15
 Marks
2 Calculation of relevant cost for material V 1/
2
Explanation of historic cost as sunk 1/
2
Explanation of relevant cost being opportunity cost relating
to lost scrap proceeds 1/
2

Calculation of relevant cost for material I 1/

2
Explanation of relevant costs being current purchase cost
as in continuous use in business 1/
2

Calculation of relevant cost for material C 1

Explanation of need to buy extra units and relevant cost 1/
2
Explanation of the relevant cost of the alternative use for material C 1/
2
Calculation of relevant cost of labour in dept 1 1/
2
Explanation of there being spare capacity so no relevant
cost 1/
2

Calculation of relevant cost of labour in dept 2 1

Explanation including the need to compare overtime
costs with cost of diverting labour 1
Calculation of relevant cost of overheads 1/
2
Explanation of there being no incremental costs 1/
2

Presentation of statement and notes 1

Stating minimum price being the total of the relevant costs 1/
2
— 10
–—

3 (a) Definition of short term plan to include the word ‘budget’

and to mention a time period 1
Definition of a long term plan to include the word
‘strategy’and to mention a time period 1
Explanation to include short term plan included within
the long term plan 1
— 3

(b) 1/ for each stage in the planning process 31/2

2
1/ for a brief explanation of each stage 31/2
2
––— 7
–—
10
–—

16
 Marks
4 (a) Using the correct formula 1/
2
Using an interest rate of 1% 1/
2
Using n = 120 time periods 1/
2
Putting numbers into formula and generating a solution 1/
2
Compounding forward for an extra 5 years 1/
2
Using correct rate of 15% 1/
2
––– 3

(b) (i) Loan 1

Calculating the correct monthly rate 1/
2
Using the correct formula 1/
2
Using the correct time period 1/
2
Calculating the correct discount factor 1/
2
Calculating the correct annuity figure 1/
2
Loan 2
Calculating the correct monthly rate 1/
2
Using the correct formula 1/
2
Using the correct time period 1/
2
Calculating the correct discount factor 1/
2
Calculating the correct annuity figure 1/
2
––– 5
(ii) Calculation of total repaid amount for loan 1 1/
2
Calculation of total repaid amount for loan 2 1/
2
Explanation regarding which one Doug should
choose based on these figures 1
––– 2
–––
10
–––

5 (a) Calculation of input units 1

Stating the input units 1
––– 2

(b) Equivalent units for opening WIP 1

Calculation of units started and finished 1/
2
Equivalent units for started and finished units 1/
2
Equivalent units for normal loss 1
Equivalent units for closing WIP 1
––– 4

(c) Calculation of costs for materials 1

Adjusting for scrap proceeds 1
Calculation of costs for conversion costs 1
Stating the input costs 1
––– 4
–––
10
–––

17