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A-level
ACCOUNTING
Paper 2 Accounting for analysis and decision-making

Specimen Time allowed: 3 hours

Materials
For this paper you must have:
• a calculator.

Instructions
• Use black ink or black ball-point pen.
• Fill in the boxes at the top of this page.
• Answer all questions.
• You must answer the questions in the spaces provided. Do not write outside the box around each
page or on blank pages.
• Do all rough work in this answer book. Cross through any work you do not want to be marked.

Advice
• The marks for each question are shown in brackets.
• The maximum marks for this paper is 120.
2

Section A

Answer all questions in this section.

For the multiple-choice questions, completely fill in the circle alongside the appropriate answer.
CORRECT METHOD WRONG METHODS

If you want to change your answer you must cross out your original answer as shown.
If you wish to return to an answer previously crossed out, ring the answer you now wish to select as
shown.

0 1 Which formula is used to calculate the overhead absorption rate?

A Actual overheads / actual activity

B Actual overheads / budgeted activity

C Budgeted overheads / actual activity

D Budgeted overheads / budgeted activity

[1 mark]

0 2 Which one of the following is not an example of a cost driver in activity based costing?

A Number of direct labour hours

B Number of machine set-ups

C Number of production runs

D Number of quality inspections

[1 mark]

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0 3 A business is considering investing in new machinery. The machinery will cost

£850 000. The cash flows are shown below and are assumed to accrue evenly during
the year.

Year Cash inflow Cash outflow

£ £
1 450 000 200 000
2 650 000 200 000
3 650 000 200 000

What is the payback period for the machine?

A 1 year 89 days

B 1 year 324 days

C 2 years 33 days

D 2 years 122 days

[1 mark]

0 4 Which best describes the net present value method of investment appraisal?

A The amount of the discounted return on an investment

B The amount of the discounted value of inflows from an

investment

C The investment required to produce a positive return on an

investment

D The rate to produce a positive return on a proposed

investment
[1 mark]

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0 5 Standard cost is best defined as which of the following?

A The actual unit cost of a product produced in a period of time

B The actual average unit cost of a product produced in a period

of time

C The planned unit cost of a product produced in a period of time

D The planned average cost of a product produced in a period

of time
[1 mark]

0 6 The following information is available for the sale of Product X for June 2016.

Standard selling price per unit £26.00

Budgeted sales 8400 units
Actual sales 8600 units
Actual sales revenue £219 300

What is the sales price variance for June 2016?

A £4300 Adverse

B £4300 Favourable

C £5200 Adverse

D £5200 Favourable

[1 mark]

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0 7 A business operates a system of absorption costing. The business apportions factory

administration overheads to the four departments: Cutting; Welding; Finishing and
Stores based on the number of employees in each department.

Department Cutting Welding Finishing Stores

Number of
25 20 15 10
employees

The factory administration overheads are forecast to be £175 770.

How much of the factory administration overheads will be apportioned to the Finishing
department?

A £12 555

B £37 655

C £43 942

D £58 590

[1 mark]

0 8 The following budgeted information is available for Product Y for August 2016.

Standard material usage per unit 5 kg

Budgeted sales 3000 units
Decrease in raw material inventory 1800 kg
Increase in finished goods inventory 400 units

How many kg of material will be purchased during July 2016?

A 11 200 kg

B 13 000 kg

C 15 200 kg

D 17 000 kg

[1 mark]

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0 9 The following information is available for the single product manufactured by a

business.

Selling price per unit £24.50

Variable costs per unit £13.80
Fixed costs £90 000
Budgeted production 18 000 units

How many units must the business sell to produce an annual profit of £80 000?

A 7 477 units

B 14 036 units

C 15 888 units

D 29 825 units

[1 mark]

1 0 The following information is available for Product Z.

Overhead absorption rate £5.00 per labour hour

Standard labour hours per unit 6 hours
Finished goods inventory at 1 May 2016 50 units
Finished goods inventory at 31 May 2016 100 units

What would be the difference between the profit for the month using absorption
costing and the profit for the month using marginal costing?

A Absorption costing profit would be £1500 higher

B Absorption costing profit would be £1500 lower

C Absorption costing profit would be £3000 higher

D Absorption costing profit would be £3000 lower

[1 mark]

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1 1 Describe two main differences between management accounting and financial

accounting.
[6 marks]

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1 2 Below is a break-even chart for a firm producing one product.

Costs / revenue Revenue

Total cost

£50 000

£30 000

10 000 units
(Not drawn to scale)

1 2 . 1 Calculate the selling price of the product.

[1 mark]

1 2 . 2 Calculate the variable cost per unit.

[1 mark]

1 2 . 3 State the formula used to calculate contribution per unit.

[1 mark]

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1 2 . 4 Calculate the contribution per unit.

[1 mark]

1 2 . 5 Calculate the forecast profit if 12 000 units are manufactured and sold.
[2 marks]

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1 3 The following information is available for Crosso Ltd a manufacturing company.

Period 1 Period 2
Sales in units 8000 9000
Opening inventory 1400

The production manager wants the closing inventory to be one-fifth of the following
month’s sales.

1 3 . 1 Prepare the production budget for Period 1.

[2 marks]

1 3 . 2 Explain two benefits of preparing a production budget.

[6 marks]

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Section B
Answer all questions in this section

1 4

Alan and Bashar are partners in a firm of solicitors. On 1 July Chun will be admitted as a partner.

The partners agreed:

• Interest on capital will be credited on a monthly basis at the rate of 5% per annum on the
agreed capital figures
• the agreed capital figures are: Alan £30 000; Bashar £30 000 and Chun £15 000. Chun will
pay his capital into the partnership bank account on 1 July.
• to limit their monthly cash drawings to a maximum of 20% of their individual fee income in that
month.
• the partnership will purchase a car for Chun on 1 July. The car will cost £45 000.

The partners are in the process of drawing up a cash budget for July and August to see the effect on
the bank balance of Chun joining the partnership and the purchase of the car.

Additional information
(1) Income
The firm’s income is in the form of fees charged to clients. The actual and forecast fee income is:
Actual Forecast
April May June July August
£ £ £ £ £
Fee income Alan 24 000 22 000 20 000 15 000 12 000
Fee income Bashar 23 000 25 000 18 000 16 500 10 000
Fee income Chun 5 000 6 000
47 000 47 000 38 000 36 500 28 000

The clients are invoiced as soon as the work is completed and 25% will pay immediately; 50% will pay
within 30 days. The remaining clients will pay within 60 days. However, 2% of these will not pay and
should be regarded as bad debts.

(2) Operating expenses

The forecast operating expenses for the partnership are £31 425 per month, payable in the month
they occur.
(3) Drawings
Alan intends to withdraw the maximum amount of cash he is allowed in June, July and August.
Bashar intends to withdraw 15% of his fee income in cash in June and July and none in August.
Chun does not intend to take any cash drawings.
(4) Overdraft
The bank have agreed to provide an overdraft facility of £40 000. The interest rate charged on the
overdraft is variable and is currently 10% per annum. In order to prepare the cash budget the partners
have agreed to calculate the interest charged based on the closing bank balance of the previous
month.
(5) Bank balance
The partners expect the bank balance at 30 June to be £6860.

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1 4 . 1 Prepare the cash budget for the partnership for the months of July and August.
[14 marks]

Cash Budget for Alan, Bashar and Chun for July and August

July August
£ £

Workings:

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1 4 . 2 The partners are considering using a bank loan as an alternative to the bank
overdraft to purchase the car. The bank manager has agreed in principle to a 5 year
loan with a variable rate of interest; initially the interest rate would be 5%.

Advise the partners whether they should finance the purchase of the car using the
bank overdraft or a bank loan.
[6 marks]

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1 5 Pezzolo Ltd manufactures two products: Quixo and Zecal.

The direct costs of each product are as follows.

Quixo Zecal
£ £
Direct materials per unit 8.00 6.00
Direct labour per unit 9.00 14.00

The company’s total factory overheads are £30 100 per month.

Monthly production is

Quixo 1000 units

Zecal 2400 units

Quixo is sold for £17.20 per unit and Zecal for £36.40 per unit.

The company used activity based costing and has established that it has the
following cost pools and cost drivers.

Cost pool Cost driver Overhead Information about

cost per each product
month
Transfers of partly Number of times a product £14 500 Quixo: 5 transfers
finished goods is transferred to another per unit
machine during production Zecal: 10 transfers
per unit
Inspections Number of times a product £15 600 Quixo: 4
is inspected for quality inspections per
during production process unit
Zecal: 7
inspections per
unit

1 5 . 1 Calculate the cost of making each unit of Quixo and each unit of Zecal and the profit
or loss per unit on each product.
[14 marks]

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1 5 . 2 The company faces strong competition from some rival companies and the selling
prices of each product were chosen with this in mind.

Currently the company is able to sell all its production. However, the directors feel
they should review the continued production of these products.

Advise the directors whether the company should continue production of Quixo and
Zecal.

[6 marks]

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Section C

Answer all questions in this section

1 6

Stancost Ltd manufacture high quality wooden furniture for homes and offices. The company
operates a standard costing system.

The managing director is very concerned that the actual profit for the month at £22 770 is significantly
less than the budgeted profit of £90 000.

The cost accountant provides the following information.

Budget Actual
Sales and £650 per £600 per
800 tables 860 tables
production table table
25 metres per £5.50 per 35 metres per £4.50 per
Materials
table metre table metre
15 hours per 19 hours per
Labour £20 per hour £17 per hour
table table

The cost accountant has also calculated the relevant variances.

Variance £
Sales - price 43 000 Adverse
Sales - volume 39 000 Favourable
Materials - price 30 100 Favourable
Materials - usage 47 300 Adverse
Labour - rate 49 020 Favourable
Labour - efficiency 68 800 Adverse

The managers of the relevant departments have seen the figures above and have made some initial
comments.

Manager responsible for sales.

“The price variance was the result of having to lower the price because of increased competition.”

Manager responsible for materials.

“The price variance was the result of negotiating a much better deal with a new supplier.”

Manager responsible for labour

“We have followed other companies in the industry and employed workers on zero hour contracts
and this has reduced our wage bill.”

The Managing Director believes that the managers may be covering for each other and the reasons
given are not the real causes of the variances but have been caused internally.

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1 6 . 1 Assess the significance of the variances on the performance of the business and the
Managing Director’s view that the variances are caused internally.
[25 marks]

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1 7

The directors of Londro plc, a large holding company, are considering two alternative investment
projects. Whichever project is chosen, the company will have to borrow the initial investment at a
variable interest rate of 4% per annum

Project A
This project involves the exploitation of mineral resources in an under-developed country. The
resources would provide cheap raw materials for other companies in the Londro group. It will result
in large numbers of local workers being employed on low skilled jobs, bringing a boost to the
country’s economy.

Project B
This project is to build a shopping and leisure complex on ex-industrial land in the North of England.
The land is available due to the closure of the steel works which was the main employer in the area.
The complex would provide significant job opportunities in the retail and leisure sector.

The Finance Director has carried out investment appraisals on both projects and this is summarised
below

Project A Project B
Initial investment £80 million £50 million
Net present value £950 000 £650 000
Payback period 10 years 15 years
Estimated life of project 15 years 25 years

Net present value was calculated using a discount rate of 9% for both projects. This was based on
the current return on capital employed of 5% plus the interest rate of 4%.

1 7 . 1 Assess the two projects and recommend to the directors the one they should select.

[25 marks]

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22 December 2016

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