Accounting 9706/41 October/November 2023: question paper and mark scheme

Mark scheme

1(a) State two purposes of preparing a cash budget. 2 To identify any cash deficit so that funding, i.e. bank loan can be arranged in advance.(1) To identify any cash surplus so that cash can be fully utilized, i.e. investment (1) Max 2 Accept other valid responses. 1(b) Prepare the cash budget for each of the months November, December and January. 12 November December January $ $ $ Cash sales W1 39 000 45 000 37 500 (1) row Two months credit after irrecoverable debt W2 317 520 (1) 370 440 (1) 343 980 (1) 356 520 415 440 381480 Suppliers W3 267 920 271 860 275 800 (6) Operating expenses W4 129 450 129 450 129 450 (1) row 397 370 401 310 405 250 Surplus/deficit for the month (40 850) 14 130 (23 770) Opening cash balance 95 000 54 150 68 280 Closing cash balance 54 150 68 280 44 510 (1)OF row 1(b) W1 $390 000 × 10% = $39 000; $450 000 × 10% = $45 000; $375 000 × 10% = $37 500 W2 $360 000 × 90% × 98% = $317 520 $420 000 × 90% × 98% = $370 440 $390 000 × 90% × 98% = $343 980 W3 Oct Nov Dec Jan $ $ $ $ Sales 420 000 390 000 450 000 375 000 Cost of sales (2/3 of sales) 280 000 260 000 300 000 250 000 (1) row Closing inventory (40% of next month's cost of 104 000 120 000 100 000 sales) Opening inventory (112 000) (104 000) (120 000) (1)both Purchases for the month 272 000 276 000 280 000 (1) row Payment to suppliers with 1.5% cash discount 267 920 271 860 275 800 (1) (1) (1) $272 000 × 98.5% = $267 920 $276 000 × 98.5% = $271 860 $280 000 × 98.5% = $275 800 W4 Monthly depreciation [$124 000 × 15%] ÷ 12 = $1 550 $131 000 –$1 550 = $129 450 1(c) Prepare the budgeted statement of profit or loss for the three-month budgeted period. Start your answer with the 4 gross profit. $ Gross profit W1 405 000 (1) Discount received W2 12 420 (1) 417 420 Operating expenses 393 000 Irrecoverable debt W3 21 060 (1) 414 060 Budgeted profit 3 360 (1)OF W1 Sales for three months ($390 000 + $450 000 + $375 000) = $1 215 000 1 Gross profit $1 215 000 × = $405 000 3 W2 ($272 000 + $276 000 + $280 000) × 1.5% = $12 420 W3 ($360 000 + $420 000 + $390 000) × 90% × 2% = $21 060 1(d) Advise the directors which option, if either, they should choose. Justify your answer. 7 Option 1 (Max 3) Credit customers may not take the cash discount (1) Will cause cash inflow to be higher in the first month but lower thereafter (1) Cash will be received quicker (1) Irrecoverable debts will be reduced (1) Discount allowed will increase expenses / reduce profit (1) Discount allowed may or may not be compensated by the reduction of irrecoverable debts (1) Option 2 (Max 3) Discount received will be lost (1) Profit will be reduced (1) Cash saving will be reduced (1) A change of payment period from one month to two months may hamper the credibility with the suppliers (1) The cash outflow will be lower in the first month and higher thereafter (1) Cash will be held for a further month (1) Accept other valid responses. (1) mark for decision supported by a comment (option 1, option 2 or neither)

Mark scheme

2(a) State two benefits of variance analysis. 2 Planning / control – to achieve the predetermined target (1) Identify areas of strength and weakness (1) Assist in making forward-looking decision (1) Max 2 Accept other valid responses. 2(b)(i) Calculate the following variances: 2 sales price $146 000 / 2 000 = $73 $136 800 – ($73 × 1 800) = $5 400 (1) F (1) 2(b)(ii) sales volume (a measure of change in profit) 2 $14 000 / 2 000 = $7 (2 000 – 1 800) × $7 = $1 400 (1) A (1) 2(b)(iii) direct material total 2 $36 000 / 2 000 = $18 (1 800 × $18) – $33 408 = $1 008 (1) A (1) 2(b)(iv) direct labour total 2 $64 000 / 2 000 = $32 (1 800 × $32) – $58 752 = $1 152 (1) A (1) 2(b)(v) fixed overhead total. 2 $32 000 / 2 000 = $16 (1 800 × $16) – $33 920 = $5 120 (1) A (1) 2(c) Explain the likely reasons for the direct labour total variance calculated in (b)(iv). Support your answer with the 6 calculation of other relevant variances. Standard labour rate ($64 000 / 2 000) ÷ 2 = $16 per hour Actual labour rate $58 752 / 3 456 = $17 per hour Labour rate variance is $58 752 – ($16 × 3 456) = $3 456(1) A(1) Reasons – wages rate increase as demanded by labour union, increase of minimum wages, inflation (1) Labour efficiency variance is [(2 × 1 800) – 3 456] × $16 = $2 304(1) F(1) Reasons – skilled labour, good supervision, less chance of machine breakdowns (1) Accept other valid responses. (4) marks for calculation of the two variances (1) mark for one reason for each of the two variances 2(d) Advise the directors whether or not they should change to the new supplier. Support your answer with relevant 7 calculations. Calculations (Max 2) The standard usage is 5 400 kilos (1 800 units × 3 kilos) (1). Actual usage for July: $33 408 / $6.40 = 5 220 kilos (1) The price increases from a standard price of $6 to $6.40 and further to $6.72 (1). Existing supplier (Max 2) This suggests that the quality is good and lesser amount of direct material has been used. (1) If G Limited does not adjust the selling price, the profit will decrease. (1) Increasing selling price may reduce the demand. (1) New supplier (Max 2) The price is lower than the existing supplier. (1) A minimum of 10000 kilos per order suggests that G Limited must be very careful in inventory control/purchase budgeting (1) Otherwise, it will incur additional cost in the storage of inventory / spoilage costs. (1) The quality of direct material / reliability of supplier is uncertain (1) Accept other valid responses. (1) for decision supported by a comment