Model answers
NVQ/SVQ in Accounting
Level 4
Contributing to the Planning
and Control of Resources (PCR)
2003 Standards
June 2008
Note:
The model answers may, in parts, be longer than would be expected of candidates in the exam. The fuller version is given for teaching purposes.
Section 1
Task 1.1
(a)Forecast sales (units)
UnitsQuarter / Q1 / Q2 / Q3 / Q4
Sales 2007/2008 / 15,000 / 5,000 / 5,000 / 20,000
x 102%
Sales 2008/2009 / 15,300 / 5,100 / 5,100 / 20,400
(b)Production budget (units)
UnitsYear 2008/2009 / Q1 / Q2 / Q3
Sales units / 15,300 / 5,100 / 5,100
Add Closing stock / 102 / 102 / 408
Less Opening stock / (306) / (102) / (102)
Net production / 15,096 / 5,100 / 5,406
Faulty units rejected / 76 / 26 / 28
Gross production / 15,172 / 5,126 / 5,434
Closing stocks:
Q1 & Q2 5,100 x 0.02 = 102
Q3 20,400 (Q4) x 0.02 = 408
Faulty units: 1 in 200 = 1/200 x 100% = 0.5% (0.005)
Q1 15,096 x 0.5/99.5 = 76; Q2 5,100 x 0.5/99.5 = 26; Q3 5,406 x 0.5/99.5 = 28
(c)Cost of materials budget
QuartersQ1 / Q2 / Q3
Gross production / 15,172 / 5,126 / 5,434
Cost per unit* / £575 / £575 / £575
Cost of production / £8,723,900 / £2,947,450 / £3,124,550
*Unit cost of components: A £180 + B £255 + C £140 = £575
Alternative answer:
Material / Q1 / Q2 / Q3A / 2,730,960 / 922,680 / 978,120
B / 3,868,860 / 1,307,130 / 1,385,670
C / 2,124,080 / 717,640 / 760,760
8,723,900 / 2,947,450 / 3,124,550
(d)Labour hours budget
Q1 / Q2 / Q3Gross production / 15,172 / 5,126 / 5,434
Labour hours required per unit / 1.5 / 1.5 / 1.5
Total hours required / 22,758 / 7,689 / 8,151
Standard hours (480 x 25) / 12,000 / 12,000 / 12,000
Standard hours for temps (480 x 15) / 7,200 / - / -
Overtime hours/(excess hours) / 3,558 / (4,311) / (3,849)
Tutorial note:
The task asks for labour budget by Q: this is for two reasons: (i) overtime is required in Q1 and therefore cannot be used from subsequent quarters; and (ii) you need to compare this budget with task 1.2(b) to see how much idle time can be used. Using totals does not give the correct answer.
(e)Cost of labour budget
Q1 / Q2 / Q3£ / £ / £
Staff standard hours 12,000 x £12 / 144,000 / 144,000 / 144,000
Agency standard hours 7,200 x £20 / 144,000 / - / -
Overtime worked 3,558 x £18 / 64,044
Total cost of labour / 352,044 / 144,000 / 144,000
Overtime rate £12 x 150% = £18
(If included idle time in Production overheads:
Q2 Direct labour £92,268 : overheads plus £51,732
Q3 Direct labour £97,812 : overheads plus £46,188)
(f)Total cost of production budget
Q1 / Q2 / Q3£ / £ / £
Cost of material / £8,723,900 / £2,947,450 / £3,124,550
Cost of labour / 352,044 / 144,000 / 144,000
Production overheads / 293,790 / 240,000 / 240,000
9,369,734 / 3,331,450 / 3,508,550
Production o/h: Q1 22,758 x £5 + £180,000 = £293,790 Q2 & Q3 12,000 x £5 + £180,000 = 240,000
Tutorial Note:
If actual hours used in Q2 and Q3 in 1.1(e), the cost of labour here should still be £144,000 as labour still has to be paid even when idle. (Also see Tutorial note above for a possible alternative.)
Task 1.2
(a)Calculation of maximum number of units
Per QStandard hours available (480 x 25) / 12,000
Maximum overtime available (120 x 25) / 3,000
Maximum time available / 15,000
Maximum of units (/1.5 hrs) / 10,000
(b)Revised production budget (in units)
UnitsQ1 / Q2 / Q3 / Q4
Revised gross production / 10,000 / 10,000 / 10,000 / 10,000
Rejects (x 0.005) / 50 / 50 / 50 / 50
Total available for sale / 9,950 / 9,950 / 9,950 / 9,950
Sales requirement / 15,300 / 5,100 / 5,100 / 20,400
Shortfall/(excess) / 5,350 / (4,850) / (4,850) / 10,450
Carry forward excess / - / 4,850 / 4,850 / (9,700)
Shortfall / 5,350 / - / - / 750
Less Opening stock / (306) / -
Net shortfall of units / 5,044 / 750
Grossed up (x 0.5/99.5) / 26 / 4
Gross production shortage / 5,070 / 754
Hours required (gross production shortage x 1.5) / 7,605 / 1,131
Agency staff required to produce shortfall (divide by 480hours) / 16 / 3
Tutorial note:
It is suggested that candidates start with the limiting factor (gross production limited by available hours) as this helps to define what the shortfall is when compared to required sales. However, maximum production will include rejects and this needs to be adjusted. The reverse applies when the net shortfall of sales is found as these then need to be grossed up to show required production. It is acceptable to start with the net production. Using idle time and maximum overtime in Q2 & Q3 allows a carry forward of stock to be used in Q4.
Alternative answer 1:
Sales / 15,300 / 5,100 / 5,100 / 20,400Less Opening stock / (306)
Net production required / 14,994 / 5,100 / 5,100 / 20,400
Wastage / 76 / 26 / 26 / 103
Gross production required / 15,070 / 5,126 / 5,126 / 20,503
Maximum production - part (a) / (10,000) / (10,000) / (10,000) / (10,000)
Excess (Closing stock) / (4,874) / (4,874)
Excess c/f / 4,874 / 4,874 / (9,748)
Shortage* / 5,070 / 755
Hours required (x1.5) / 7,605 / 1,133
No. of agency staff required (/480) / 15.8
rounded to 16 / 2.36
rounded to 3
* equates to net shortfall of 5,044 grossed up to 5,077
Alternative answer 2:
Sales requirement / 15,300 / 5,100 / 5,100 / 20,400Rejects / 77 / 26 / 26 / 103
Gross requirement / 15,377 / 5,126 / 5,126 / 20,503
Opening stock / 306 / 4,874 / 9,748
Maximum staff production / 10,000 / 10,000 / 10,000 / 10,000
Agency staff production / 5,071 / - / - / 755
Total gross production / 10,571 / 10,000 / 10,000 / 10,755
Closing stock gross / 4,874 / 9,748
net / 4,850 / 9,700
Agency hours (x 1.5) / 7,607 / 1,133
Agency staff (/480) / 16 / 3
Alternate answer 3:
Sales / 15,300 / 5,100 / 5,100 / 20,400Less Opening stock / (306) / - / - / -
Net production required / 14,994 / 5,100 / 5,100 / 20,400
Rejects / 76 / 26 / 26 / 102
Gross production / 15,070 / 5,126 / 5,126 / 20,502
Hours needed (x 1.5) / 22,605 / 7,689 / 7,689 / 30,753
Basic hours available / 15,000 / 15,000 / 15,000 / 15,000
Excess hours c/f as stock / (7,311) / (7,311) / 14,622
Agency hours required / 7,605 / - / - / 1,131
Agency staff (/480) / 16 / 3
(c)Revised labour budget
Q1 / Q2 / Q3 / Q4Units / Units / Units / Units
Gross production / 15,070 / 10,000 / 10,000 / 10,754
Labour hours required per unit x1.5 / 22,605 / 15,000 / 15,000 / 16,131
Staff standard hours / 12,000 / 12,000 / 12,000 / 12,000
Staff maximum overtime / 3,000 / 3,000 / 3,000 / 3,000
Excess hours required / 7,605 / - / - / 1,131
Cost of direct labour budget / £ / £ / £ / £
Staff standard hours 12,000 x £12 / 144,000 / 144,000 / 144,000 / 144,000
Overtime worked 3,000 x £18 / 54,000 / 54,000 / 54,000 / 54,000
Cost of agency staff Q1 16 x 480 x £20: Q4 3 x 480x £20 / 153,600 / - / - / 28,800
Total cost of labour / 351,600 / 198,000 / 198,000 / 226,800
Task 1.3
Report
To:Board of Directors
From:Accounting Technician
Subject:Reduction in numbers of agency staff
Date:19 June 2007
This report sets out the implications of trying to restrict the use of agency staff.
(a)Because of the seasonal nature of our sales, we have been using agency staff to even out the highs and lows in production. This means that we have to employ agency staff for two out of the four quarters in the year.
I have prepared the attached schedule to show the revised production if we were to attempt to eliminate the use of agency staff. As you can see, the difference between the two high and two low quarters is such that it is not possible to eliminate the use of agency staff completely.Even by making full use of our own staff and the maximum overtime available, we are unable to meet the full production requirements. This is because of the restriction on overtime as well as the limit on number of permanent employees.
As part of the use of overtime and maximum hours for production, we are incurring more costs. For the first three quarters we will incur a cost of £747,600 compared to the original budget of £640,044. There should be a saving in the fourth quarter as only three agency staff are to be used instead of 15 in the original budget.
(b)Other ways* we might overcome these restrictions are as follows.
Outsource the additional production. If there are other companies that are capable of producing the units, we can consider sub-contracting the extra production. There is a danger of the quality not being as good as our own and the timescales may be longer as they need to set up their own machinery.
Offer discounts on sales in ‘off peak’ periods. This would be an attempt to even out sales during the course of the year.
Increase the selling price. This may reduce sales overall and thus reduce the need for the additional production, but the increase in price should be aimed at getting the same level of profit.
Consider increasing permanent staff levels and introducing new products. If we can make use of any additional staff to produce additional products in the low demand periods, we can then switch them to increased production of the air conditioning units at peak activity.
* Only two were required in the exam
Tutorial note:
The task asked for alternative ways to overcome the restrictions and a number of candidates merely repeated what was in the data supplied. This is an opportunity to be creative and sensible alternative answers are allowed, for example employing part-time staff to cover peak periods.
Section 2
Task 2.1
(a)Calculation of budgeted prices and costs
(i)Selling price per litre
£10,000,000/2,000,000 =£5
(ii)Cost of material per litre
£1,600,000/2,000,000 =£0.80
(iii)Cost of labour per litre
£1,800,000/2,000,000 =£0.90
(iv)Variable cost of storage
Incremental cost £1,030,000 – £870,000=£160,000
Incremental volume 3,000,000 – 2,000,000 =1,000,000
Variable cost per litre 160,000/1,000,000 =£0.16
(v)Fixed cost of storage
Total budgeted cost £870,000
Variable cost 2,000,000 x £0.16 =£320,000
Fixed cost £550,000
(b)Flexed budgeted and actual operating statement for the last 12 months
Flexed budget / Actual / VarianceVolume / 2,600,000 / 2,600,000
£000 / £000 / £000
Turnover (2,600,000 x £5) / 13,000 / 14,300 / 1,300 F
Expenses:
Material (2,600,000 x 80p) / 2,080 / 1,950 / 130 F
Labour (2,600,000 x 90p) / 2,340 / 2,392 / 52 A
Power (2,600,000 x £0.65) / 1,690 / 1,768 / 78 A
Storage* / 966 / 992 / 26 A
Transport** / 1,430 / 1,410 / 20 F
Maintenance / 770 / 790 / 20 A
Depreciation / 970 / 960 / 10 F
Admin expenses / 650 / 658 / 8 A
Total expenses / 10,896 / 10,920 / -
Operating profit / 2,104 / 3,380 / 1,276 F
* 2,600,000 x £0.16 + £550,000
**2,600,000/250,000 =11 (10.4) x £130,000
(c)Explanation of variances
(i)The favourable turnover variance is due to an increased selling price which could have arisen due to increased demand for the product.
(ii)The favourable material variance is due to a lower price being paid for materials.This could be because of an overall reduction in prices due to fall in demand for the material or other economic factors or to better buying techniques.
(iii) The adverse labour variance could have arisen because of using less (or more) skilled staff or incurring higher overtime than expected.
(iv)The adverse power variance is due to the increase in price per unit. This could reflect the increase in demand for this resource.
(v)The adverse storage variance is due to the increased variable cost per unit and could have been caused by rises in underlying costs such as business rates.
(vi)The favourable transport variance arises because the budgeted stepped cost rises by fixed amounts whereas actual costs can vary because of differences in costs for such things as fuel maintenance or improved usage.
Tutorial note:
The sub-task asked for an explanation of the variance. A number of candidates only described what the variance was, for example ‘Budgeted unit sales price £5: Actual £5.50’. Also, candidates need to make sure that their suggestions are not contradictory, for example favourable variance on transport caused by increased fuel prices. Any sensible explanations were allowed.
Task 2.2
From:To:
Sent:19 June 2007
Subject:Better budgeting
In response to yourrequest for further information on improving our budgeting procedures, I explain below the suggested alternatives. I have also included some possible ways to ensure a wider participation by managers in the preparation of the budgets at departmental level.
(a)Our current budgeting process is carried out by the accounts department. It is done in isolation focusing on financial outputs and excludes other performance measures that may be relevant to individual departments. The following techniques can be used to improve the budgeting process.
Departmental budgets should be prepared in line with company strategy and goals and these are then consolidated by the accounts department to form the overall budget. This is known as the bottom-up approach. These will include sales budgets, production budgets and overhead budgets. This approach requires direct input from each department thus giving a closer approximation of market conditions.
We have based our current budgets on the results of the previous two years. This technique, historical extrapolation, has the disadvantage of focusing on our own performance and ignores competitors and the pace of change in the business environment. Rolling budgets that are updated on a regular monthly basis and rely on forecasting future events will enable the company to be more flexible and to ensure that adequate resources are available. Departments will need to be directly involved in this process to ensure that these budgets reflect actual needs.
Computer generated models can be used to prepare non-financial data that can then be evaluated to provide the costed budgets. This can help to speed up the overall budget process and provide flexibility to respond to changes in markets.
(b)The above techniques should result in a better participation from the departmental managers. In addition, the following approaches can be used.
Bonuses and awards can be given to managers if they meet or beat their budgeted targets. In order to make this effective the budgets and targets set need to be realistic and not subject to manipulation.
The accounts staff can give advice and support to the department or cost centre managers and in the process can ensure consistency in approach whilst not reducing their responsibility for the preparation of the budgets.
Strategic plans and goals must be made clear by senior management and then communicated to the departmental managers both before the budgets are prepared and as part of the feedback process after the budgets have been co-ordinated and reviewed.
Tutorial note:
Sensible alternatives were allowed.
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