Exam Question Paper

Exam question paper

AAT Accounting Qualification

NVQ/SVQ

Level 4

Contributing to the Planning and
Control of Resources (PCR)

2003 Standards

Thursday 4 December 2008 (morning)

Time allowed - 3 hours plus 15 minutes’ reading time

Important:

This exam paper is in two sections. You should try to complete all tasks in both sections.

We recommend that you use the 15 minutes’ reading time to study the exam 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.

We strongly recommend that you use a pen rather than a pencil.

You may not use programmable calculators or dictionaries in the exam.

Do NOT open this paper until instructed to do so by the Supervisor.

This exam paper is in TWO sections.

You must show competence in both sections. So, try to complete EVERY task in BOTH sections.

Section 1 contains 4 tasks and Section 2 contains 3 tasks.

You should spend about 100 minutes on Section 1 and about 80 minutes on Section 2. Please use the answer booklet provided.

You should include all your workings and essential calculations in your answers.

Section 1

You should spend about 100 minutes on this section. Against each task is the recommended time for that task, but please note that these times are guidelines only.

Data

Geezer Scientific, a company with two operating divisions, employs you as the budget accountant. The Pipstrelle division manufactures and sells the Pipstrelle. This is a precision measuring instrument for use in chemical laboratories. The other division is Equipment servicing, which maintains and repairs laboratory equipment. The company’s financial year runs from 1 December to 30 November.

The tasks in Section 1 relate to the Pipstrelledivision. You have been asked to prepare an operating budget for this division for the year ending 30 November 2009. You have obtained the operating statement for the year ended 30 November 2008.

Pipstrelle division

Operating statement for the year to 30 November 2008

£

Turnover / 382,000 units / 4,393,000
Costs
Opening stock / 4,000 units / 35,200
Materials / 1,650,600
Basic labour / 117,600 hours / 987,840
Labour overtime / 1,456 hours / 18,344
Variable overhead / 119,056 hours / 190,489
Fixed overhead / 740,000
3,622,473
Less closing finished stock / 15,000 units / 136,919
Total / 3,485,554
Profit / 907,446

Task 1.1 (20 minutes)

Calculate the following from the Operating Statement for the year to 30 November 2008:

(a)average selling price

(b)number of Pipstrelle instruments produced

(c)average material cost of each Pipstrelle

(d)average hourly pay rate for basic hours

(e)average hourly pay rate for overtime

(f)variable overhead cost per hour

(g)profit percentage of turnover.

Note:

Where appropriate, you should round your answers to two decimal places.

Data

You have been given further information about the production of Pipstrelles.

Each Pipstrelle instrument is assembled from materials that are delivered each day by the suppliers. Material stocks are minimal and can be ignored for planning purposes.

There are three stages in the production of the instruments. These are assembly, testing and dismantling rejects:

(i)It takes 12 minutes of labour time to assemble each instrument.

(ii)Testing each instrument takes a further three minutes. The quality standards are high: 15% of all assembled instruments are rejected at the testing stage because of faulty materials.

(iii)It takes three minutes to dismantle each rejected instrument.

The suppliers replace faulty materials free of charge.
Paid absence (sick leave and holidays) is charged to variable overheads. Variable overheads are all labour related.

The Board of Directors has agreed the following planning assumptions for the year to 30 November 2009:

The Pipstrelle selling price will be reduced to £11 with effect from 1 December 2008.
The number of instruments sold will be 25% higher than in the year to 30 November 2008.
The closing stock of finished instruments at 30 November 2008 was higher than normal in anticipation of increased demand after the price cut. It can be reduced to 5,000 units at
30 November 2009.
Material costs will increase by £0.10 per instrument.
The average production staffing will be equivalent to 75 full time employees, each working 1,680 direct hours per year at basic rate.
Any additional production hours required will be worked as overtime.
Average pay rates for both basic hours and overtime will be 5% higher than in the year to
30 November 2008.
The variable overhead rate per labour hour will also increase by 5%.
Fixed overheads for the year will be £750,000.
Strict quality control will be maintained and the level of rejections will not change.

Task 1.2 (45 minutes)

Draft the operating budget for the year ending 30 November 2009 for consideration by the Board of Directors. Present the budget clearly in the following stages:

(a)sales volume

(b)number of saleable instruments to be produced

(c)cost of materials for the year

(d)number of units to be assembled allowing for rejections at the testing stage

(e)labour hours required in the year for:

(i)assembly

(ii)testing

(iii)dismantling rejects

(iv)total

(f)annual cost of labour, including overtime

(g)overhead costs for the year: variable, fixed and total

(h)total cost of production for the year and per instrument (to two decimal places)

(i)profit per instrument and profit percentage to selling price (ignore opening and closing stocks).

Data

After your draft budget is circulated to the Board members, Myra Benjamin, the Quality Control Manager, contacts you. She explains that her department is struggling to cope with current production volumes.

‘There are only twelve testing machines in my department’, she says, ‘I rotate the staff to cover absence but even with overtime we cannot carry out more than 425,000 tests a year.’ She then explains that she can subcontract some of the testing. She has been quoted a price of £1.40 per test for this work, including transportation to and from the subcontractor’s premises. Orders must be placed in multiples of 10,000 tests. Myra needs your help to make a recommendation for the Board of Directors.

Task 1.3 (15 minutes)

Calculate the additional cost that will be incurred through subcontracting, as follows:

(a)number of tests to be subcontracted

(b)additional cost of subcontracting these tests instead of carrying them out in overtime: per test and in total

(c)revised cost per instrument, profit per instrument and profit percentage of selling price of the total planned production.

Task 1.4 (20 minutes)

Write a brief email to Myra explaining your findings.

(a)Advise her:

(i)how the cost of subcontracting compares with doing the work in-house

(ii)whether the instruments that are subcontracted for testing are profitable.

(b)Suggest one alternative strategy she could consider to overcome the capacity problem and explain whether it is likely to be cheaper than sub-contracting.

Section 2

You should spend about 80 minutes on this section.Against each task is the recommended time for that task, but please note that these times are guidelines only.

The tasks in this section relate to the Equipment servicing division which maintains and repairs laboratory equipment.

Data

The Equipment servicing division has been operating for three years and has grown rapidly. Because sales volumes were difficult to predict, the budget for the year to 30 November 2008 was prepared on the basis of the minimum and maximum likely level of sales. You have been asked to report on the division’s performance for the year.

Equipment servicing division

Budgeted operating statement for the year to 30 November 2008

Minimum

sales level

Maximum sales level

Sales volume – chargeable hours / 200,000 / 250,000
£ / £
Turnover / 4,000,000 / 5,000,000
Costs
Materials / 100,000 / 125,000
Labour (basic hours) / 1,470,000 / 1,470,000
Labour overtime / 315,000 / 945,000
Energy / 195,000 / 215,000
Equipment hire / 250,000 / 275,000
Rent and rates / 225,000 / 300,000
Administration / 380,000 / 385,000
Collection and delivery / 50,000 / 62,500
Depreciation / 410,000 / 410,000
Total / 3,395,000 / 4,187,500
Profit / 605,000 / 812,500
Profit % of turnover / 15.1 / 16.3

Differences between the two budgets are entirely due to the number of chargeable hours of work. The budgets were prepared on the following assumptions:

Customers are charged for the time spent servicing their equipment (chargeable hours).
Material costs and collection and delivery costs are variable.
175,000 of the chargeable hours can be worked in normal time (basic hourly rate). Up to this point no overtime costs will be incurred.
Further hours are worked as overtime at a premium rate.
Rent and rates is a stepped variable cost dependent on the number of workshops rented. The annual cost of each workshop is £75,000. The number of chargeable hours that can be worked in each workshop each year is 70,000.
Depreciation is a fixed cost.
Other costs are semi-variable.

Task 2.1 (20 minutes)

Calculate the following information from the budget:

(a)turnover per chargeable hour

(b)variable cost per chargeable hour of:

(i)materials

(ii)energy

(iii)equipment hire

(iv)administration

(v)collection and delivery

(c)labour cost per chargeable hour of hours worked in overtime

(d)number of workshops required at the maximum sales level

(e)annual fixed cost of:

(i)energy

(ii)equipment hire

(iii)administration.

Note:
Please turn over for tasks 2.2 and 2.3.

Data

The actual results for the year are now available.

Equipment servicing division

Actual operating statement for the year to 30 November 2008

Sales volume – chargeable hours / 240,000
£
Turnover / 4,560,000
Costs
Materials / 123,500
Labour (basic hours) / 1,390,000
Labour overtime / 955,000
Energy / 208,000
Equipment hire / 297,200
Rent and rates / 281,700
Administration / 389,900
Collection and delivery / 71,400
Depreciation / 398,800
Total / 4,115,500
Profit / 444,500
Profit % of turnover / 9.7

Task 2.2 (40 minutes)

Prepare an operating statement for the year to 30 November 2008, based on the layout shown above, that includes:

the actual results
the budget flexed to 240,000 chargeable hours
the resulting variances.

Clearly indicate whether each variance is favourable or adverse.

Task 2.3 (20 minutes)

Write a brief report for the Board of Directors in which you:

(a)summarise the performance of the division, identifying the main variances that have caused profitability to fall to 9.7% of turnover

(b)suggest possible reasons why labour (basic hours), which is a fixed cost, is below budgetand why this might not benefit the overall performance of the division

(c)describe a statistical method of projecting sales that could be used to improve the budgeting process for the year ended 30 November 2009.

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NVQ/SVQ qualification codes

Technician (2003 standards) - 100/2942/4 / G794 24

Unit number (PCR) – L/101/8107

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