Unit: Management, Control and Accountability for Financial Resources Assignment title: June Marking Scheme

Transcription

1 Unit: Management, Control and Accountability for Financial Resources Assignment title: June 2015 Marking Scheme Markers are advised that, unless a task specifies that an answer be provided in a particular form, then an answer that is correct (factually or in practical terms) must be given the available marks. If there is doubt as to the correctness of an answer, the relevant NCC Education materials should be the first authority. This marking scheme has been prepared as a guide only to markers and there will frequently be many alternative responses which will provide a valid answer. Each candidate s script must be fully annotated with the marker s comments (where applicable) and the marks allocated for each part of the tasks. Throughout the marking, please credit any valid alternative point. Where markers award half marks in any part of a task, they should ensure that the total mark recorded for the task is rounded up to a whole mark. Marker's comments: Moderator's comments: Mark: Moderated mark: Final mark: Penalties applied for academic malpractice:

2 Task Guide Maximum a General guide: Introduction / definition of Break-even analysis (3 marks) Mentioning formula = Total Costs = VC + FC (1 mark) Definition of Fixed Costs &Variable Costs including examples (6 marks) Definition of Contribution (1 mark) Definition of Breakeven (2 marks) Mentioning Target Profit (2 marks) Break-even analysis is a technique that is part of CVP analysis (Cost, Volume, Profit). According to Gutierrez and Dalsted (2008) breakeven in relationship to investment analysis is a beneficial technique for studying the relationship between fixed costs, variable costs and returns. 15 The breakeven point occurs at that level of sales at which profit is zero which means that total revenue equals to total cost. Total costs are defined as : TC = VARIABLE COSTS + FIXED COSTS. Break even analysis requires the identification of both fixed and variable costs within a business s cost structure. It is clear that a business will incur both fixed and variable costs which are defined as: Fixed Cost This cost is incurred for a period, and tends not to be affected by fluctuations in the levels of activity. For example rent and rates. Variable Cost This cost will vary with the level of activity or production; in the case of Premier Ship purchases. Other important terminology linked to this type of analysis includes: Contribution The value of sales less variable costs Break-Even Page 2 of 12

3 Task Guide Maximum That point at which total contribution is equal to fixed cost and a profit nor loss is made. The total fixed costs in many businesses are usually high in relation to total cost and therefore a business must maintain a level of activity or production that not only contributes to covering fixed costs but provides an acceptable, or target level of profit. b Break even analysis is based on the principle of marginal costing which relies on the way in which cost behaves at varying levels of output or activity. Break even analysis requires the identification of both fixed and variable costs within a business s cost structure. It is clear that a business will incur both fixed and variable costs. 5 c Cost Fixed Variable 1.Cost of Sales 159,300 1 Mark. Pure Fixed cost so 0 marks if 10 2.Wages & Salaries 46,575 (62,100-15,525) 15,525 (62,100 * 0.25) ½ mark each. No marks for incorrect values. 3.Heat and Light 6,450 (12,900-6,450) 6,450 (12,900 * 0.50) ½ mark each. No marks for incorrect values. 4.Maintenance 8,500 1 Mark. Pure Fixed cost so 0 marks if 5.Consumables 2,650 1 Mark. Pure Variable cost so 0 marks if Page 3 of 12

4 Task Guide Maximum 6.Insurance 1,790 1 Mark. Pure Fixed cost so 0 marks if 7.Business Rates 8,670 1 Mark. Pure Fixed cost so 0 marks if 8.Bank Charges 1,250 1 Mark. Pure Fixed cost so 0 marks if 9. Motor Vehicle Costs 720 (2,400-1,680) 1,680 (2,400 * 0.70) ½ mark each. No marks for incorrect values. 10. Depreciation 12,500 1 Mark. Pure Fixed cost so 0 marks if Total 86, , ,060 Check Total Expenditure per Profit & Loss Total Cost of Sales per Profit & Loss 112, , ,060 d In order to consider the level at which the business breaks even we need to determine the contribution. Page 4 of 12

5 Task Guide Maximum This is expressed as sales less variable costs: 425, ,605 = 239,495 Total 2 Break-even point (in value of turnover / sales) Fixed Costs / (Contribution / sales) 86,455 / (239,495 / 425,100) = 153,456 Total 3 As a percentage of turnover / sales: ( 153,456 / 425,100) * 100 = 36.1% Total 1 Mark Award half the stated marks if the method is correct but the answer is numerically inaccurate. Award full marks if figures are different due to a previous error that the candidate has already been penalised for. e Limitations (1 Mark each up to a Maximum of 7- consider other sensible answers from candidates): There are other types of costs such as stepped fixed costs and semi-variable costs that are ignored. It is assumed that variable costs fluctuate indirect proportion to the volume It is assumed that fixed costs remain constant even in the long run The selling price per unit is constant over the entire product or service range It is assumed that a company only sells one product and the mix of products tends to remain constant. Increase in quantity or volume is the only factor affecting costs. The efficiency in the use of resources will remain constant over the period When to use (1 Mark each up to a Maximum of 7- consider other sensible answers from candidates) Before starting a new business When making changes To measure the impact on future profits and losses 6 Page 5 of 12

6 Task Guide Maximum To analyse cost or revenue structure changes To answer what if questions? To calculate margin of safety Examine the viability of a limited product mix such as a range of hot drinks. 14 Section B Point Guide Maximum 1 Can the Hole in One sustain a 35% reduction in sales and remain profitable? 5 Total Revenue ( 425,100 * 0.65) 1 Mark 276,315 Less: Variable Costs 1 Mark 185,605 Less: Fixed Costs 1 Mark 86,455 1 Mark 4,255 Yes it can sustain a 35% reduction in sales 1 Mark Award half marks for use of correct method but numerically incorrect response. Award full marks if response differs from the above due to errors that the candidate has already been penalised for. 2 If Jack wants to achieve 50,000 in drawings how much must sales increase by. Breakeven Sales Value = (Fixed Costs + Target Income) / (Contribution / sales) F.C = 86, Mark Target Income = 250,000 ( 50, ) Contribution = 239, marks Sales = 425,100 2 (86, ,000 / (239,495 / 425,100) = 597,203 1 Mark The Premier Ship will need to generate 597,203 or an extra 172,103 (597, ,100) if Jack wants to achieve drawings Page 6 of 12

7 Point Guide Maximum of 50,000 in Mark Award half marks for use of correct method but numerically incorrect response. Award full marks if response differs from the above due to errors that the candidate has already been penalised for. 3 If there is a 5% increase in Cost of Sales what is the new break even sales position. This is expressed as sales less Revised variable costs: Cost of Sales 159,300 *1.05 = 167, , , , , ,680 = 193,570 2 (Simply increasing variable costs by 5% overall is wrong and 0 185,605 * 1.05 = 194,885) Revised Contribution: (sales less variable costs) 425, ,570 = 231,530 1 Mark Break-even point (in value of turnover / sales) Fixed Costs / (Contribution / sales) 86,455 / (231,530 / 425,100) = 158,736 1 Mark This makes sense as the Cost of sales have risen so the break even sales value has risen i.e The Premier Ship must achieve sales of 158,736 to breakeven and sustain the 5% increase in cost of sales. 1 Mark Award half marks for use of correct method but numerically incorrect response. Award full marks if response differs from the above due to errors that the candidate has already been penalised for. 4 Margin of Safety / MOS Margin of safety is how much output sales level can decrease before a business reaches its breakeven point. As a rule of thumb the MOS as percentage of sales greater should ideally be greater than 50%. 3 MOS for Premier Ship: Sales Breakeven in sales value 425, ,456 = 271,644 As percentage of sales 271, 644 / 425,100 * 100 = 64% Page 7 of 12

8 Point Guide Maximum 2 Award half marks for use of correct method but numerically incorrect response. Award full marks if response differs from the above due to errors that the candidate has already been penalised for. 5 Break even across range of hot drinks Hot Drink Price Proportion of Total Revenue Weighted Average Coffee % Espresso % (30/2) Tea % (30/2) Hot % Chocolate Total Hot Drink Variable Cost per unit Proportion of Total Revenue Weighted Average Coffee % Espresso % (30/2) Tea % (30/2) Hot Chocolate % Total Fixed Costs - 86,455 Contribution per unit - Selling Price Variable cost per unit = = Break even in quantity / units / hot drinks Fixed Costs / Contribution per unit: 86,455 / = 42,959 1 Mark Award half marks for use of correct method but numerically Page 8 of 12

9 Point Guide Maximum incorrect response. Award full marks if response differs from the above due to errors that the candidate has already been penalised for. This computation suggests that the Premier Ship will have to sell 42,959 hot drinks in a year or approximately 826 a week to just breakeven on this new sales opportunity. 1 Mark for this or any sensible explanation based on the candidate s figures. The 42,959 hot drinks can be split as follows: Product Proportion Annually / weekly Coffee 42,959 * 0.50 = 21, per week Espresso 42,959 * 0.15 = 6, per week Tea 42,959 * 0.15 = 6, per week Hot Chocolate 42,959 * 0.20 = 8, per week 1 mark 1 mark 1 mark 1 mark Total 42, 959 per annum / 826 Award full marks if response differs from the above due to errors that the candidate has already been penalised for. 4 marks for the following discussion or any other salient points made by the candidate: This appears to challenging sales opportunity as a lot of hot drinks will have to be sold on a weekly, 826, and annual basis; 42, 959 just to break even. However the Premier Ship is an established business and the inclusion of hot drinks will probably attract families and customers who just want a hot drink. However the coffee market is highly crowded and unless Premier Ship can differentiate its hot drinks say by using only organic coffee or offering additional products such as flavoured syrups Page 9 of 12

10 Point Guide Maximum or a fast efficient service it may be risky. This will lead to an increase in variable costs and thus the breakeven point will be even higher. Perhaps the venture maybe viable if Jack attempts to reduce his fixed costs and work with the supplier to reduce variable costs so that the breakeven position improves. Page 10 of 12

11 Learning Outcomes matrix Task Learning Outcomes assessed 1 1, 3, 5 Yes 2 1, 5, 6 Yes Marker can differentiate between varying levels of achievement Page 11 of 12

12 Grade descriptors Learning Outcome Critically evaluate the role of accounting in an organisation Critically assess the different ways in which an organisation can be funded Evaluate the methods used to report and assess financial performance Assess the role of management in the control of financial resources Examine the methods used in calculating costs Evaluate the use of accounting in organisational decision-making and budgeting Pass Merit Distinction Provide a reasonable assessment of the subject; Ideas are generally coherent and demonstrate some sound critical skills Demonstrate an adequate awareness of issues associated with the subject and make some appropriate judgements; Demonstrate some sound critical skills Provide a reasonable assessment of the subject; Ideas are generally coherent Demonstrate an adequate awareness of issues associated with the subject and make some appropriate judgements Provide examination of the subject with some suitable examples and references Provide a reasonable assessment of the subject; Ideas are generally coherent Provide a generally strong assessment with some wellreasoned assumptions; Ideas are consistently coherent; Demonstrate consistently sound critical skills Demonstrate a sound awareness of issues associated with the subject and make consistently appropriate judgements; Demonstrate consistently sound critical skills Provide a generally strong assessment with some wellreasoned assumptions; Ideas are consistently coherent Demonstrate a sound awareness of issues associated with the subject and make consistently appropriate judgements Provide detailed examination of the subject with adequate use of appropriate references and examples Provide a generally strong assessment with some wellreasoned assumptions; Ideas are consistently coherent Provide a consistently strong assessment with well-reasoned and original assumptions; All ideas are highly coherent; Demonstrate highly developed critical skills Demonstrate a detailed awareness of the complexity of issues associated with the subject and make highly appropriate judgements; Demonstrate highly developed critical skills Provide a consistently strong assessment with well-reasoned and original assumptions; All ideas are highly coherent Demonstrate a detailed awareness of the complexity of issues associated with the subject and make highly appropriate judgements Provide consistently critical and detailed examination of the subject with innovative use of highly appropriate references Provide a consistently strong assessment with well-reasoned and original assumptions; All ideas are highly coherent Page 12 of 12