Answers
ACCA Certified Accounting Technician Examination – Paper T10
Managing Finances
December 2009 Answers
Section A
1
$
250,000
375,000
125,000
––––––––
750,000
––––––––
Raw materials costs = $2·5m × 10%
Labour = $2·5m × 15%
Overheads = $2·5 × 5%
COS
Finished goods = $750,000 × 2/52
Distracters
B = $250,000 × 2/52
C = $750,000 × 4/52
D = ($250,000 + 375,000) × 2/52
2
A
288,462
D
9,615
57,962
24,038
Receivables = $2·5 × 6/52
Distracters
A = $2·5m × 8/52
B = $750,000 × 6/52
C = $750,000 × 8/52
28,846
384,615
86,538
115,385
3
Only C is the correct answer
C
4
Both of these are assumptions of the model.
A
5
Only C is correct
C
6
ARR = average annual profits (after depreciation)/average investment.
Annual depreciation = cost-residual value/10 = $100,000 per annum.
Profits after depreciation = $250,000 – $100,000 = $150,000 per annum
Average investment = $1,250,000 + 250,000/2 = $750,000
Therefore, ARR = $150,000/$750,000 = 20%.
A
Distracters
B Using average value of investment as $1,250,000 – 250,000 = $1,000,000
150,000/1,000,000 = 15%
C Erroneously ignoring depreciation = $250,000/$750,000 = 33%.
D Making both of those mistakes $250,000/$1,000,000 = 25%.
7
Variable cost of producing X = $12 + $25 + $8 = $45.
Variable cost of producing Y = $13 + $27 + $7 = $47.
Since variable cost of producing both X & Y is less that buying them in, buy neither
D
Distracters – if fixed costs are erroneously included, answer will be different.
8
Relevant cost = cost of best alternative = $500 (use as substitute)
C
(Distracters
A = historic cost
B = proceeds of selling
D = net sale proceeds)
9
Only statement 2 is true
B
10 Both statements are true
D
11
Section B
1
(a)
Cost of current ordering policy
Current order size = 5,000 kg.
Average number of orders per year = demand/order size
= 100,000/5,000
= 20 per year.
Annual ordering cost = 20 × $35 = $700
Average inventory = 5,000/2 = 2,500 kg.
Annual holding cost = 2,500 × $0·20 = $500.
Total annual cost = $700+ $500
= $1200.
(b)
Cost if EOQ is used.
EOQ =
EOQ =
2CO D
CH
2 × 35 × 100, 000
0·2
= 5,916kg per order.
Average number of orders per year = 100,000/5,916 = 16·9
Annual ordering cost = 16·9 × $35 = $591·50
Average inventory held = 5,916/2= 2,958
Annual holding cost = 2,958 × $0·20 = $591·60
Total annual cost using EOQ = $591·50 + $591·60 = $1,183·10
(c)
Costs associated with running out of sugar
–
Sales will be lost, therefore Choc Co would lose any contribution made from each lost sale.
–
If emergency deliveries are required, there will be an additional cost for these.
–
If production ceases altogether and staff and machines sit idle, there will be costs of lost production.
–
Loss of customer goodwill will arise if orders cannot be met. This may lead to loss of sales to this customer in the future.
Note: Only three were required.
(d)
Just-in-time
A just-in-time system works as follows:
–
raw materials are ordered from the supplier at the latest possible time;
–
production commences immediately.
–
once the finished goods are complete, they are despatched to the customer straight away.
The effect of all this is that inventory levels – and therefore costs – are kept to an absolute minimum. The process is demand
driven in that goods are only made when a customer order is received, and the product is pulled through the production
process accordingly.
In order for such a system to work, a company needs to have good relationships with its supplier/s and distributors. Depending
on the complexity of the production process, its staff would need to be multi-skilled. As they may need to work overtime to
complete orders at times, they also need to be flexible.
In Choc Co’s case, it has flexible staff and good relationships with its suppliers of sugar and cocoa; we do not know about its
relationship with the suppliers of its other minor ingredients. Similarly, we do not know about its relationship with its
distributors. More importantly, its inventory costs for its key ingredients are so low, even with the cocoa costs of $10,000,
that it simply would not be worthwhile implementing a system that requires a lot of upfront investment. In addition to this,
because of the differing ordering patterns of Choc Co’s customers, the company could easily find itself trying to fulfil orders
from all three customers at one time. The costs of paying staff overtime pay would definitely exceed any inventory cost
savings, given the low level of the inventory costs.
To conclude, A JIT system of inventory procurement would definitely be unsuitable for this company.
12
(e)
Whether to accept the discount
Annual credit purchases = 100,000 × $0·75 = $75,000.
Current payables = $75,000 × 60/365 = £12,329.
New payables if discount taken = $75,000 × 14/365 = $2,877.
Reduction in payables = $9,452.
Interest cost on $9,452 at 10% = $945.
Discount gained = $75,000 × 2% = $1,500.
Benefit of discount = $555.
Therefore, the discount should be taken.
Note: Calculations based on a new payables figure of $73,500 (98% of $75,000) would also be acceptable.
2
(a)
Contribution
Sales level
400
$
85,000
–––––––
Selling price $34m/400
Selling price $37·5m/500
500
$
75,000
–––––––
Less: Variable costs
Materials $13·6m/400
Materials $17m/500
Labour $8·4m/400
Labour $10·5m/500
Variable overheads
$1·5m/500 – 400
34,000
34,000
21,000
21,000
Total variable costs
15,000
–––––––
70,000
–––––––
15,000
–––––––
70,000
–––––––
$
85,000
70,000
–––––––
15,000
–––––––
$
75,000
70,000
–––––––
5,000
–––––––
400
500
$3,000,000
–––––––––––
$15,000
= 200 units
$3,000,000
–––––––––––
$5,000
= 600 units
Therefore, contribution:
Selling price
Variable cost
Contribution per unit
(b)
Break-even point in units
Fixed costs = $9m – (400 × $15,000) = $3m.
Sales level
Fixed cost
––––––––––––––––––––––
Contribution per unit (w1)
(c)
Margin of safety
At a selling price of $75,000 there is no margin of safety (i.e. if calculated it produces a figure of –20% because, at this
price, budgeted sales are less than break-even sales).
At a selling price of $85,000:
budgeted sales – break-even sales
Margin of safety = ––––––––––––––––––––––––––––– x 100%
budgeted sales
400 – 200
––––––––––
400
x 100%
= 50%
The margin of safety represents the extent to which our budgeted sales are greater than our break-even sales, in percentage
terms. Therefore, it indicates the vulnerability of the business to a fall in demand.
13
(d)
Budgeted profit
Selling price
Total sales in units
Total sales revenue
less variable costs
$75,000
500
37,500,000
(35,000,000)
––––––––––––
2,500,000
(3,000,000)
––––––––––––
(500,000)
––––––––––––
––––––––––––
Total contribution
less fixed costs
Profit/loss
(e)
$85,000
400
34,000,000
(28,000,000)
––––––––––––
6,000,000
(3,000,000)
––––––––––––
3,000,000
––––––––––––
––––––––––––
Break-even chart
Break-Even Chart
$
35,000,000
Total Revenue
Total Cost
30,000,000
25,000,000
20,000,000
Break-Even
Point
15,000,000
10,000,000
Margin of safety
5,000,000
Fixed Cost
0
0
50
100
150
200
250
300
350
400
Activity level (Units)
(f)
Assumptions of break-even analysis
–
–
–
–
–
It
It
It
It
It
assumes
assumes
assumes
assumes
assumes
that
that
that
that
that
all costs can be classified as either fixed or variable
output is the only factor affecting cost
the behaviour of both costs and revenue is linear
costs and revenues can be predicted with certainty
fixed costs remain the same across the range of outcomes
Note: Only four were required.
3
(a)
Institutional investors
Pension funds
Both individuals and companies put billions of dollars into occupational and personal pensions. Fund managers generate a
return from these monies by investing capital in financial and other assets.
Insurance companies
Insurance companies invest premiums paid on insurance policies by policy holders. They aim to make a return on all the
money they hold, just like pension companies.
Investment trusts
Investment trusts, as their name suggests, generate revenue by investing in the stocks and shares of other companies and
the government.
Unit trust companies
A unit trust invests in a diversified portfolio of shares.
The unit trust company creates a large number of smaller units which it then sells to individual investors. These investors
earn income from the investments and benefit (hopefully) from the increase in the value of their investments.
14
Venture capitalists
Venture capitalists are organisations that specialise in the raising of funds for new business ventures, such as management
buy-outs. The organisations provide debt and equity capital. They will usually want to have a representative on the company’s
board of directors.
Note: Only four groups were required.
(b)
Reasons for seeking a stock exchange listing.
Access to wider pool of finance
The level of finance available to a private unlisted company is limited. Therefore, if a company needs more finance than is
currently available to it, it may seek a stock exchange listing. A stock exchange listing may also improve the company’s credit
rating, meaning that more investors are willing to invest in it.
Enhancement of the company image
A company’s image is generally improved anyway when it becomes listed, as it is perceived as being more financially stable.
This may result in increased custom and increased buying power.
Increased marketability of shares
It is not very easy for a shareholder in a private company to sell his/her shares, and this in itself makes the investment more
risky. Once a company is listed on the stock exchange, its shares become far more marketable, thus making them far more
attractive.
Facilitation of growth by acquisition
Should a listed company wish to make an offer to takeover another company, they are in a much better position to do so than
an equivalent unlisted company. This is because the terms of the offer will probably include an exchange of the shares in the
acquiring company for those of the target company.
Transfer of capital by founder owners
A stock exchange listing gives founder members more opportunity to sell their shareholding, or part of it, leaving them free
to invest in other projects.
Note: Only four reasons were required.
(c)
The term ‘gearing’ refers to the extent to which a company is funded by debt as compared to equity. If a company is said to
be highly geared, then it means that there is more prior charge capital (usually long-term loans and preference shares) than
equity.
It is important when a company is trying to raise funds because if a company’s gearing is already high, lenders will be reticent
to provide funding in the form of loans. This is because debt needs to be serviced i.e. interest needs to be paid. Therefore,
the business is particularly susceptible to problems if there is a fall in sales, since there is less profit from which to pay interest.
4
(a)
NPV of the project
Rents received
New machine cost
New machine residual value
Increased rev.s ($8m × 20%)
Increase in running costs (w2)
Net cash flows
Discount factors
Present value
Time
0
$’000
100
(4,000)
1
$’000
100
1,600
(151·2)
––––––– ––––––––––
(3,900)
1,548·8
––––––– ––––––––––
1·000
0·909
––––––– ––––––––––
(3,900) 1,407·859
–––––––
––––––––––
––––––– ––––––––––
2
$’000
100
1,600
(329·616)
––––––––––
1,370·384
––––––––––
0·826
––––––––––
1,131·937
––––––––––
––––––––––
3
$’000
4
$’000
5
$’000
1,600
(540·147)
––––––––––
1,059·853
––––––––––
0·751
––––––––––
795·950
––––––––––
––––––––––
1,600
(788·573)
–––––––––
811·427
–––––––––
0·683
–––––––––
554·204
–––––––––
–––––––––
450
1,600
(1,081·72)
–––––––––
968·28
–––––––––
0·621
–––––––––
601·304
–––––––––
–––––––––
The NPV of the investment is $591,000, to the nearest $’000, therefore the machine should be purchased since the NPV is
positive.
(b)
IRR
0
1
$’000
$’000
Net cash flows
(3,900)
1,548·8
Discount factors at 20%
1·000
0·833
––––––– ––––––––––
Present value
(3,900) 1,290·150
–––––––
––––––– ––––––––––
––––––––––
NPV = $(265,000), to the nearest $’000.
15
2
$’000
1,370·384
0·694
––––––––––
951·046
––––––––––
––––––––––
3
$’000
1,059·853
0·579
––––––––––
613·655
––––––––––
––––––––––
4
$’000
811·427
0·482
–––––––––
391·108
–––––––––
–––––––––
5
$’000
968·28
0·402
–––––––––
389·250
–––––––––
–––––––––
⎛ a
⎞
IRR ≈ A + ⎜
× ⎡⎣ B – A⎤⎦ ⎟ lower rate and b is the NPV at the higher rate.
⎝ a–b
⎠
⎞
⎛
591
IRR ≈ 10 + ⎜
× ⎡⎣20
0 – 10⎤⎦ ⎟
⎠
⎝ 591 + 265
= approximately 17%
Working 1
Options for new machine
(1) Sell now for $250,000.
(2) Rent for three years, income $100,000 per annum, receivable in advance.
PV = ($100,000 × 1) + ($100,000 × 1·736) = $273,600.
Therefore, best use is to rent it out.
1
$’000
Current machine running costs
840
New running costs, increasing 18% year on year: 991·2
–––––
Increase in costs
151·2
–––––
–––––
Working 2
(c)
2
$’000
840
1,169·616
–––––––––
329·616
–––––––––
–––––––––
Time
3
$’000
840
1,380·147
––––––––––
540·147
––––––––––
––––––––––
4
$’000
840
1,628·573
–––––––––
788·573
–––––––––
–––––––––
5
$’000
840
1,921·717
––––––––––
1,081·717
––––––––––
––––––––––
Capital expenditure is expenditure on the purchase or improvement of non-current assets. A non-current asset is an asset
which is bought in order to generate profits rather than be turned into cash. It is normally used over a number of periods.
In a business’s accounts, non-current assets are capitalised in the balance sheet, rather than being expensed in one year
through the income and expenditure account. Instead, a depreciation charge is put through the income and expenditure
account over a period of years, to reflect the wearing out of the asset.
(d)
Control of capital expenditure is important for two reasons. Firstly, because the sums involved are often much larger than for
other types of expenditure. Secondly, a business’s decisions about capital expenditure seriously affect the company’s
profit-earning ability in the future. If the business makes the wrong decisions, it could soon find itself making huge losses.
16
ACCA Certified Accounting Technician Examination – Paper T10
Managing Finances
December 2009 Marking Scheme
Marks
Section A
Per correct answer
2
–––
20
–––
–––
Total marks
Section B
1
(a)
(b)
(c)
Current
Current
Current
Current
Current
cost
no. of orders
ordering cost
holding cost
total cost
0·5
0·5
0·5
0·5
–––
2
–––
Cost under EOQ
EOQ calculation
New no. of orders
New ordering cost
New holding cost
New total cost
1
0·5
0·5
0·5
0·5
–––
3
–––
Shortage costs
Each cost given
1
–––
3
–––
Maximum
(d)
Just-in-time
Each valid point
1
–––
6
–––
Maximum
(e)
Calculation of benefit of discount
Annual credit purchases
Current payables
New payables
Reduction in payables
Interest cost on reduction
Value of discount
Benefit of discount
0·5
1
1
1
1
1
0·5
–––
6
–––
20
–––
–––
Total marks
17
Marks
2
(a)
(b)
(c)
(d)
(e)
(f)
Contribution
Selling prices
Material
Labour
Variable overheads
Contributions
1
0·5
0·5
1
1
–––
4
–––
Break-even point
Fixed costs
BEP at $75,000
BEP at $85,000
1
1
1
–––
3
–––
Margin of safety
Calculation
Explanation
2
1
–––
3
–––
Budgeted profit
Profit at $75,000
Profit at $85,000
1
1
–––
2
–––
Break-even chart
Sales revenue
Fixed cost
Total cost
BEP
Margin of safety
Scaling and presentation
1
1
1
1
1
1
–––
6
–––
Assumptions
Each assumption
0·5
–––
2
–––
20
–––
–––
Maximum marks
Total marks
3
(a)
Institutional investors
Per description
2
–––
8
–––
Maximum marks
(b)
(c)
Reasons for seeking SE listing
Per explanation
2
–––
8
–––
Each valid point
1
–––
4
–––
20
–––
–––
Total marks
18
Marks
4
(a)
(b)
(c)
(d)
NPV
Old machine calculation
New machine cost
Residual value
Increased sales
Increased running costs
Net cash flow
Correct discount factors
Present values
Net present value
Conclusion that follows
Presentation
2
0·5
0·5
1
3
0·5
0·5
0·5
0·5
0·5
0·5
–––
10
–––
IRR
NPV calculation at 20%
Correct IRR formula
Correct IRR calculation
2
1
2
–––
5
–––
Capital expenditure
Definition
Treatment in accounts
2
1
–––
3
–––
Why cap-ex important
2
–––
20
–––
–––
Total marks
19