NVQ/SVQ Level 3 in Accounting Recording and Evaluating Costs and Revenues (ECR) (2003 standards) Monday 14 June 2004 (afternoon) EXAMINATION Time allowed 3 hours plus 15 minutes reading time Please complete the following information in BLOCK CAPITALS. You must give your registration number below. If you do not, your paper may not be marked. AAT Registration Number Approved Assessment Centre Code Desk number... Date... Approved Assessment Centre Name... Important: This examination paper is in two sections. You must show competence in both sections, so you should attempt and aim to complete every task in each section. We recommend that you use the 15 minutes reading time to study the examination paper fully and carefully so that you understand what to do for each task. However, you may begin to write your answers within the reading time, if you wish. You may not use programmable calculators or dictionaries in the examination. Do NOT open this paper until instructed to do so by the Supervisor. For Assessor s use only SECTION 1 TASK 1.1 TASK 1.2 TASK 1.3 TASK 1.4 TASK 1.5 TASK 1.6 TOTAL SECTION 2 TASK 2.1 TASK 2.2 TASK 2.3 TASK 2.4 TASK 2.5 TOTAL AAT 154 Clerkenwell Road, London EC1R 5AD, UK Tel: +44 (0)20 7837 8600 Fax: +44 (0)20 7837 6970 ECR
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This examination paper is in TWO sections. You have to show competence in BOTH sections. You should therefore attempt and aim to complete EVERY task in BOTH sections. Blank space for workings is available on page 11 and 20-21 but all essential workings should be included within your answers, where appropriate. You should spend about 90 minutes on each section. Page 5 is perforated for ease of reference. Both sections are based on Dawson Ltd. SECTION 1 You should spend about 90 minutes on this section. DATA Dawson Ltd manufactures and sells clothing. You work as an accounting technician at Dawson Ltd, reporting to the Finance Director. The company s most popular products are hand stitched cotton shirts. Cotton cloth is first cut to size within the cutting department. It is then hand stitched within the stitching department to produce the finished product. The company operates an integrated absorption costing system. Stocks are valued using weighted average cost. The Finance Director has given you the following tasks: 3
Task 1.1 Complete the following stock card for cotton cloth using the Weighted Average Cost method for valuing issues to production and stocks of materials. Product: Cotton cloth STOCK CARD Receipts Issues Balance Date 2004 Quantity Metres Cost per metre Total Cost Quantity Metres Cost per metre Total Cost Quantity Metres Cost per metre Total Cost B/f at 1 May 2,000 2.20 4,400 2 May 6,000 2.00 12,000 8,000 2.05 16,400 3 May 4,000 19 May 4,000 2.20 20 May 2,000 ADDITIONAL DATA The company employs eight staff for stitching cotton shirts. They are paid 2.50 for each shirt they make. During May, 2,600 shirts were manufactured. Task 1.2 Calculate the total cost of direct labour for May. 4
This page is perforated and may be detached for easy reference. ADDITIONAL DATA Production comprises three departments:! Cutting! Stitching! Maintenance The budgeted fixed production overheads for May were as follows: Machine insurance 600 Rent and other property overheads 4,200 Power costs: Cutting Stitching Maintenance Indirect staff costs: Cutting Stitching Maintenance 1,250 450 200 1,270 1,900 1,530 Total budgeted fixed production overheads 11,400 The following information is also relevant: Department Floor space occupied (square metres) Net book value of fixed assets 000 Cutting 1,500 35 Stitching 3,250 10 Maintenance 250 5 Overheads are allocated and apportioned between departments using the most appropriate method. The total maintenance overheads are then reapportioned to the cutting and stitching departments. The maintenance records show that 90% of time is spent in the cutting department and 10% in the stitching department. 5
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Task 1.3 Complete the following table showing the allocation and apportionment of fixed overheads between the three departments. Fixed overheads for May Basis Total Cutting Stitching Maintenance Machine insurance 600 Rent and other property overheads 4,200 Power costs 1,900 Staff costs 4,700 Maintenance ( ) 11,400
ADDITIONAL DATA Cutting department fixed overheads are absorbed on the basis of budgeted machine hours. Stitching department fixed overheads are absorbed on the basis of budgeted direct labour hours. The following information relates to the cutting and stitching departments for May: Cutting department Stitching department Budgeted fixed overhead absorption rate Actual machine hours worked Actual direct labour hours worked 3 per hour 3.60 per hour 2,200 hours 1,300 hours Actual fixed overheads 6,200 5,150 Task 1.4 a) Calculate the production overhead absorbed for May in: i) the cutting department ii) the stitching department 8
b) Calculate the under or over absorbed production overheads for May, indicating clearly whether the overheads are under or over absorbed for: i) the cutting department ii) the stitching department Task 1.5 Use the information from Task 1.4 to prepare the journal entry for the absorption of fixed overheads in the cutting department and finishing department for May. Dr Cr Work in progress - cutting department overheads Work in progress - stitching department overheads Under/over absorbed overheads - cutting department Under/over absorbed overheads - stitching department Fixed overhead control - cutting department Fixed overhead control - stitching department 9
ADDITIONAL DATA During May, 6,000 metres of cotton cloth were issued to the cutting department for the production of 3,000 shirts. At 31 May, there was no work in progress within the cutting department and no losses were incurred in the cutting process. As a result of a shortage of labour hours within the stitching department only 2,600 shirts were produced. No stitching work had started on the remaining 400 shirts and their value at 31 May was 2,580. Task 1.6 (a) Using the information from Tasks 1.1, 1.2 and 1.4 complete the table below. Production costs for May Cutting Department Materials Fixed overheads Stitching Department Direct labour Fixed overheads Total production costs Less: Work in progress Total cost of finished goods production (b) Calculate for May, the unit cost of production of a hand stitched shirt. 10
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SECTION 2 You should spend about 90 minutes on this section. ADDITIONAL DATA The company has been offered the opportunity to manufacture a range of shirts for Sports Ltd. Expected monthly costs and sales information for this new range and the existing hand stitched range is as follows: Sports shirts Hand stitched shirts Sales and production units 2,000 3,000 Labour hours per month 500 1,500 Unit selling price 12.00 20.00 Unit material cost 3.75 4.00 Unit direct labour cost 1.25 2.50 The company expects its monthly fixed costs to be as follows: Production 11,400 Sales 12,100 Administration 10,250 Task 2.1 Complete the table below to calculate the forecast total monthly contribution for the company from the sale and production of both shirt ranges. Product Sports shirts Hand stitched shirts Total Sales revenue Less: Variable costs Direct materials Direct labour Total contribution 12
Task 2.2 a) Complete the table below for both production volumes if the company only manufactures the hand stitched range. Hand stitched shirts Production volume 3,000 shirts 3,300 shirts Monthly variable costs Monthly fixed costs Total costs b) If the company only manufactures the hand stitched range, calculate the number of shirts it would need to sell each month to break even. 13
ADDITIONAL DATA For the next three months, the Production Director estimates that there are a maximum of 1,500 direct labour hours available each month. Task 2.3 a) Use the data from task 2.1 to complete the table below. Product Sports shirts Hand stitched shirts Unit contribution Labour hours per unit Contribution per labour hour b) Calculate the number of shirts the company should make and sell each month to maximize its profits for the next three months. c) Calculate the expected monthly profit for each of the next three months. 14
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ADDITIONAL DATA The contract for the production of shirts for Sports Ltd lasts for four years. The Managing Director has asked you to appraise the long term financial effects of automating the stitching process for this contract. You may assume that fixed costs remain unchanged. The company requires an annual rate of return of 10% on any new project. Using the existing stitching process the cash flows for the contract are as follows: Year 1 000 Year 2 000 Year 3 000 Year 4 000 Sales revenues 288 288 288 288 Variable costs 120 120 120 120 10% Present value factor 0.909 0.826 0.751 0.683 With automation, the cash flows for the contract are as follows: Year 1 000 Year 2 000 Year 3 000 Year 4 000 Sales revenues 288 288 288 288 Variable costs 102 102 102 102 10% Present value factor 0.909 0.826 0.751 0.683 Task 2.4 Before taking account of the cost of automating the stitching process, calculate for the Sports Ltd contract: (a) the net present value without automation Year 1 000 Year 2 000 Year 3 000 Year 4 000 Net cashflows Present value factors 0.909 0.826 0.751 0.683 Present values (to the nearest 000) Net Present Value 16
(b) the net present value with automation Year 1 000 Year 2 000 Year 3 000 Year 4 000 Net cashflows Present value factors 0.909 0.826 0.751 0.683 Present values (to the nearest 000) Net Present Value TURN OVER FOR TASK 2.5 º 17
Task 2.5 Use the data from task 2.4 to prepare a memo to the Managing Director on the automation project. Your memo should include the following: (a) (b) a recommendation for the maximum amount which should be invested in the automation project. the meaning of the term payback and how this investment appraisal method could be used to evaluate the automation project. MEMO To: Managing Director From: Subject: Date: 18
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Association of Accounting Technicians 154 Clerkenwell Road, London EC1R 5AD, UK Tel: +44 (0)20 7837 8600 Fax: +44 (0)20 7837 6970 06.04