ACCA
Paper 1.2
Financial information for management
Question 1
Preliminaries -Generating data (unit cost) for your version of the question
-Using a scientific calculator,generate two 3-digit random numbers (hit the random number button twice {shift then Ran # then,possibly,=} and note the 6 digits that appear each time).
-Write these at the top of your answer in a box as follows.
Random Number _ _ _ _ _ _
-Use these to produce three unit costs for a product that costs more than $100 (add two of the six digits at a time after an initial digit,1.
-Write these also at the top of your answer in a box as follows
$1_ _ per unit
Unit costs $1 per unit
$1_ _ per unit
-If ,for instance your two random numbers had been 0.659 and 0.343,you would first show:
Random Number 6 5 9 3 4 3
-Then show;
$165 per unit
Units costs $193 per unit
$143 per unit
Question
Alf is a wine merchant who uses a LIFO system to find his cost of sales and value his stocks.At the start of July he had 10 cases of one particular wine in stock value at 120per case. the following records show the purchses and sales for the third quarter of the year (July to Setember
Month Purchases Sales
- (cases) (cases)
July 30 35
August 30 25
Setember 30 30
Purchases are made at the start of each month. the costs per case of these purchases re the three figure that you have found above.)
Required:
(a) Find the value of stock using the current LIFO system
(b) Find the value of tck if AIf changed to a weighted average system.( Calculate unit costs to the nearest penny and total valuations to the nearest $.)
(c) Explain why the need to decide on a stock valuation system is more important for a builders merchant than,say,a car dealer.Suggest the circumstances under which (types of business for which) each of the two systems above might be appropriate.
Question 2
When deciding what sort of costing system to use,a firm needs to think how it wishes to treat fixed overheadd. It needs to decide whether to use an absorption costing system or a marginal costing system.
Required:
(a) Explain carefully the difference between absorption and marginal costing systems.
(b) Explain how this distinction between two types of costing system differs from other types of costing system.(You shuold think carefully about all the words used to describe types of costing system when answering this part of the question.)
(c) Explain the circumstances under which the two syetems dicussed in (a) will produce differenct reported profite and explain precisely how the two profits can be reconciled.
(d) Explain what is meant by the terms "under-absorption" and over-absorption" of fixed oevrheads, how they arise and how they are calculated. (You answer should include some consideration to how a cost accountant tries to find the overhead cost of actual production and how such costs might be recorded).
To answer Question 1, you need to perform the following steps:
Step 1: Generate two random 3-digit numbers using a scientific calculator. Press the "random number" button twice, which may involve pressing the "shift" key and then the "Ran #" key, followed by "=".
Step 2: Note down the resulting 6 digits that appear on the screen. Write these digits at the top of your answer in a box labeled "Random Number".
Step 3: Use the random numbers obtained in Step 2 to produce three unit costs for a product that costs more than $100. To do this, add two of the six digits together starting from the leftmost digit, after an initial digit of 1. Write these unit costs in a box labeled "$1_ per unit" at the top of your answer.
For example, if the two random numbers obtained were 0.659 and 0.343, you would first write:
Random Number: 6 5 9 3 4 3
Then, you would calculate the unit costs:
$165 per unit
$193 per unit
$143 per unit
Now that you have the preliminary data, you can proceed to answer the questions.
Question 1:
a) Calculate the value of stock using the LIFO (Last In, First Out) system. This involves multiplying the number of cases purchased in each month by their corresponding unit costs obtained from the random numbers. Subtract the total value of sales from the total value of purchases to find the value of stock.
b) Calculate the value of stock if Alf changed to a weighted average system. This requires calculating the weighted average unit cost by considering the total value of purchases and dividing it by the total number of cases purchased. Multiply this weighted average unit cost by the number of cases in stock to find the value of stock.
c) Explain why the need to decide on a stock valuation system is more important for a builders merchant than, say, a car dealer. Also, suggest the circumstances under which each of the two systems (LIFO and weighted average) might be appropriate for different types of businesses.
To answer Question 2, follow these steps:
a) Explain the difference between absorption costing and marginal costing systems. Absorption costing includes all manufacturing costs, both variable and fixed, as part of the cost of each unit produced. Marginal costing, on the other hand, only considers the variable costs associated with producing each unit.
b) Explain how the distinction between absorption and marginal costing systems differs from other types of costing systems (e.g., job costing, process costing, activity-based costing). Consider the specific words used to describe different costing systems and how they differ in their treatment of costs.
c) Explain the circumstances under which absorption and marginal costing systems will produce different reported profits. Also, describe how these two profits can be reconciled or adjusted to align with each other.
d) Explain the terms "under-absorption" and "over-absorption" of fixed overheads, how they arise, and how they are calculated. Include a discussion of how a cost accountant tries to determine the actual overhead cost of production and how such costs may be recorded.