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S5 BAFS Paper: Cost Classification, Marginal and Absorption Costing, Break-even, Relevant Costing and Variances (100 marks)
S5 BAFS paper: 6 questions, 24 parts, 100 marks, 60 minutes on cost classification, marginal and absorption costing, break-even, relevant costing and variances.
Section A: Cost Classification and Cost of Goods Manufactured (16 marks)
Wing Tat Manufacturing produced 8,000 units this month. Costs were: direct materials 320,000 dollars, direct labour 180,000 dollars, factory rent 96,000 dollars, factory machine depreciation 60,000 dollars, indirect materials 40,000 dollars and factory supervisors salaries 84,000 dollars. Rent, depreciation and supervisors salaries are fixed within the month output range.
| # | Question | Answer and marking notes |
|---|---|---|
| 1 | Calculate the prime cost and the conversion cost. | Answer: prime cost = 320,000 + 180,000 = 500,000 dollars; conversion cost = 180,000 + 280,000 = 460,000 dollars. (Marking: 1 mark each for the method and the value.) |
| 2 | Calculate the total manufacturing cost for the month. | Answer: overhead = 96,000 + 60,000 + 40,000 + 84,000 = 280,000 dollars; total manufacturing cost = 500,000 + 280,000 = 780,000 dollars. (Marking: 2 marks for the overhead total, 2 marks for the final total.) |
| 3 | Calculate the manufacturing cost per unit (to two decimal places). | Answer: per unit = 780,000 divided by 8,000 = 97.50 dollars. (Marking: 2 marks for the method, 2 marks for the value with unit.) |
| 4 | Calculate the variable manufacturing cost per unit and the total fixed manufacturing cost, and state how each changes if output rises. | Answer: variable manufacturing cost = 320,000 + 180,000 + 40,000 = 540,000 dollars, or 540,000 divided by 8,000 = 67.50 dollars per unit; total fixed manufacturing cost = 96,000 + 60,000 + 84,000 = 240,000 dollars. If output rises, the variable cost per unit stays the same and total fixed cost stays the same, so fixed cost per unit falls. (Marking: 1 mark each for variable cost, unit value, fixed total and the explanation.) |
Section B: Marginal Costing and Absorption Costing (16 marks)
Next month the company expects to produce 12,000 units and sell 10,000 units at 150 dollars each. Variable manufacturing cost is 68 dollars per unit and variable selling cost is 12 dollars per unit. Fixed manufacturing overhead is 240,000 dollars and fixed administration cost is 150,000 dollars. There is no opening stock.
| # | Question | Answer and marking notes |
|---|---|---|
| 5 | Calculate the contribution per unit and the total contribution. | Answer: contribution per unit = 150 minus 68 minus 12 = 70 dollars; total = 70 x 10,000 = 700,000 dollars. (Marking: 2 marks each.) |
| 6 | Calculate the profit for the month under marginal costing. | Answer: contribution 700,000 minus fixed costs (240,000 + 150,000 = 390,000) = profit of 310,000 dollars. (Marking: 2 marks for the fixed cost total, 2 marks for the profit.) |
| 7 | Calculate the fixed overhead absorption rate per unit and the closing stock value under absorption costing. | Answer: absorption rate = 240,000 divided by 12,000 = 20 dollars; closing stock = 12,000 minus 10,000 = 2,000 units at 68 + 20 = 88 dollars each, so stock value = 2,000 x 88 = 176,000 dollars. (Marking: 1 mark for the rate, 1 mark for the quantity, 2 marks for the value.) |
| 8 | Calculate the profit under absorption costing and explain the cause of the difference between the two methods. | Answer: absorption profit = 310,000 + 2,000 x 20 = 350,000 dollars; the 40,000 dollar difference equals the fixed overhead carried in closing stock. The gap appears only when stock changes, and profit is higher under absorption costing when stock rises. (Marking: 2 marks for the profit, 2 marks for the explanation.) |
Section C: Break-even Point and Margin of Safety (16 marks)
Another product sells for 120 dollars per unit with variable cost of 72 dollars per unit. Fixed costs for the period are 480,000 dollars and maximum capacity is 16,000 units. Budgeted sales are 13,000 units.
| # | Question | Answer and marking notes |
|---|---|---|
| 9 | Calculate the contribution per unit and the break-even quantity. | Answer: contribution = 120 minus 72 = 48 dollars; break-even quantity = 480,000 divided by 48 = 10,000 units. (Marking: 2 marks each.) |
| 10 | Calculate the break-even sales revenue and the break-even quantity as a percentage of maximum capacity. | Answer: revenue = 10,000 x 120 = 1,200,000 dollars; share of capacity = 10,000 divided by 16,000, times 100 = 62.5 per cent. (Marking: 2 marks each.) |
| 11 | Calculate the margin of safety in units, in revenue and as a percentage, using budgeted sales. | Answer: margin of safety = 13,000 minus 10,000 = 3,000 units; in revenue = 3,000 x 120 = 360,000 dollars; as a percentage = 3,000 divided by 13,000, times 100 = 23.1 per cent. (Marking: 1 mark, 2 marks, 1 mark.) |
| 12 | If the company wants a profit of 240,000 dollars, calculate the sales volume required and state whether it is within maximum capacity. | Answer: required volume = (480,000 + 240,000) divided by 48 = 15,000 units, which is below the 16,000 unit capacity, so it is achievable. (Marking: 2 marks for the method, 1 mark for the value, 1 mark for the capacity comment.) |
Section D: Relevant Costing and Short-term Decisions (16 marks)
The company makes part K in house: 20,000 units a year, variable cost 54 dollars per unit, absorbed fixed cost 18 dollars per unit (360,000 dollars a year). A supplier quotes 63 dollars per unit; if the part is bought outside, 40 per cent of that fixed cost can be avoided. A customer also offers 58 dollars per unit for 4,000 units, and there is idle capacity, so fixed costs would not increase.
| # | Question | Answer and marking notes |
|---|---|---|
| 13 | Calculate the relevant cost of making 20,000 units. | Answer: relevant cost = 54 x 20,000 + 360,000 x 40 per cent = 1,080,000 + 144,000 = 1,224,000 dollars. (Marking: 2 marks, 1 mark, 1 mark.) |
| 14 | Calculate the cost of buying outside and recommend make or buy. | Answer: buying cost = 63 x 20,000 = 1,260,000 dollars, which is 36,000 dollars more than making, so the company should keep making the part. (Marking: 2 marks, 1 mark, 1 mark.) |
| 15 | Calculate the extra contribution from the special order and state one risk of accepting it. | Answer: contribution per unit = 58 minus 54 = 4 dollars, total = 4 x 4,000 = 16,000 dollars; risk: existing customers may demand the same low price, which could be hard to reverse. (Marking: 3 marks for the contribution, 1 mark for the risk.) |
| 16 | Identify one cost that is not relevant to this decision and explain why. | Answer: the unavoidable part of the absorbed fixed cost (60 per cent of 360,000 dollars), because it is incurred either way and does not change with the decision. A sunk cost such as the original cost of old machinery is also not relevant. (Marking: 2 marks for identifying, 2 marks for explaining.) |
Section E: Standard Cost Variance Analysis (18 marks)
Each unit has a standard material usage of 3 kg at a standard price of 40 dollars per kg, and a standard time of 2 hours at a standard rate of 55 dollars per hour. Actual output was 5,000 units using 15,600 kg of material costing 639,600 dollars, and 10,200 hours paid 550,800 dollars.
| # | Question | Answer and marking notes |
|---|---|---|
| 17 | Calculate the standard material quantity and standard hours for actual output. | Answer: standard quantity = 5,000 x 3 = 15,000 kg; standard hours = 5,000 x 2 = 10,000 hours. (Marking: 2 marks, 1 mark, with correct units.) |
| 18 | Calculate the material price variance and state whether it is favourable or adverse. | Answer: actual price = 639,600 divided by 15,600 = 41 dollars; price variance = (41 minus 40) x 15,600 = 15,600 dollars adverse. (Marking: 1 mark, 2 marks including the A label.) |
| 19 | Calculate the material usage variance and state whether it is favourable or adverse. | Answer: usage variance = (15,600 minus 15,000) x 40 = 24,000 dollars adverse. With the price variance it totals 39,600 dollars, matching actual cost 639,600 against standard cost 600,000. (Marking: 2 marks, 1 mark for the A label and check.) |
| 20 | Calculate the labour rate variance and state whether it is favourable or adverse. | Answer: actual rate = 550,800 divided by 10,200 = 54 dollars; rate variance = (54 minus 55) x 10,200 = 10,200 dollars favourable. (Marking: 1 mark, 2 marks including the F label.) |
| 21 | Calculate the labour efficiency variance and the total labour variance. | Answer: efficiency variance = (10,200 minus 10,000) x 55 = 11,000 dollars adverse; total labour variance = 550,800 minus 550,000 = 800 dollars adverse. (Marking: 2 marks each.) |
Section F: Cost Behaviour and the High-Low Method (18 marks)
Over the past twelve months the highest output was 18,000 units with total cost of 642,000 dollars, and the lowest was 10,000 units with total cost of 474,000 dollars. Management assumes cost behaviour is linear within this range. The selling price is 35 dollars per unit.
| # | Question | Answer and marking notes |
|---|---|---|
| 22 | Use the high-low method to find the variable cost per unit and total fixed cost. | Answer: variable cost = (642,000 minus 474,000) divided by (18,000 minus 10,000) = 168,000 divided by 8,000 = 21 dollars; fixed cost = 642,000 minus 18,000 x 21 = 264,000 dollars. (Marking: 3 marks each.) |
| 23 | Estimate the total cost at an output of 15,000 units. | Answer: total cost = 264,000 + 15,000 x 21 = 579,000 dollars. (Marking: 3 marks each.) |
| 24 | Calculate the contribution margin ratio and the profit or loss at sales of 16,000 units. | Answer: contribution per unit = 35 minus 21 = 14 dollars, so the ratio = 14 divided by 35, times 100 = 40.0 per cent; profit = 16,000 x 14 minus 264,000 = -40,000 dollars, that is a loss of 40,000 dollars, because the contribution does not cover fixed cost. (Marking: 2 marks, 3 marks, 1 mark.) |
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