Accounting 9706/33 October/November 2025: question paper and mark scheme

Mark scheme

1(a) Explain why a manufacturing business might decide to account for factory profit. 2 To assess how successful its manufacturing operations have been (1) by comparing the production cost with the buy-in cost (1). Accept other valid responses. 1(b) Explain the recording of the provision for unrealised profit in the statement of financial position. 2 The closing balance on the account is deducted from inventory of finished goods (1) in the current asset section (1) to bring the value back to cost (1) which avoids profit being recognised before it is earned (1). Accept other valid responses. Max 2 1(c) Calculate the rate of factory profit applied in 2024. 6 $ cost of raw material consumed W1 59 400 (1) direct costs 23 400 (1) factory overheads W2 37 600 (1) increase in work in progress (400) (1) cost of production 120 000 (1)OF rate of factory profit W3 20% (1)OF W1 2 300 + 1 200 + 57 900 – 2 000 = 59 400 W2 13 200 + 18 400 + 6 000 = 37 600 W3 (144 000 – 120 000)/120 000 × 100% = 20% 1(d) Calculate the profit for the year ended 31 December 2024. Start your answer with the gross profit shown in the 8 information item 5. $ gross profit 126 620 factory profit W1 24 000 (1)OF administrative expenses W2 (42 180) (1) distribution costs W3 (26 230) (1) provision for unrealised profit W4 (420) (3) finance costs (6 100) (1) profit for the year 75 690 (1)OF W1 120 000 × 20% = 24 000 W2 30 180 + 12 000 = 42 180 W3 21 830 + 4 400 = 26 230 W4 opening balance = 4 140 × 15/115 = 540 (1) closing balance = 5 760 × 20/120 = 960 (1)OF increase in provision (expense) = 420 (1)OF Accept other presentations 1(e) Discuss the factors Faizan should consider before responding to the new customer. Support your answer by 7 considering two ways in which he could fulfil the order. General comments (Max 3) Faizan should set the selling price such that the order would be profitable. (1) It may increase his profile in the industry. (1) The customer may become a regular customer. (1) The rate of profit on this order may be higher or lower than the rate of factory profit. (1) Max 4 for any two of the following: Increasing production capacity Additional factory space (1) and the employment of more staff (1) should be considered. There will be no need for these resources if this is a one-off order. (1) Buying in instead of manufacturing Faizan must consider the quality / timely delivery of goods if outsourcing. (1) The new customer may be able to buy the goods straight from the supplier. (1) The buy in price should be compared to the manufacturing cost. (1) The contribution per unit may change. (1) Reducing sales to regular customers This may cause a loss of goodwill / bad publicity. (1) The selling price for the bulk order may be lower than the usual selling price hence reducing profit per unit. (1) The customers may not come back once the special order is finished. (1) The bulk order may give rise to a saving in administrative costs compared to multiple small orders. (1) Accept other valid responses

Mark scheme

2(a) Complete the following table to calculate the profit for each six-month period and the profit for the year ended 31 10 December 2024. Jan-Jun Jul-Dec Full year $ $ $ Revenue W1 150 000 (1) 216 000 (1) 366 000 Cost of sales W2 100 000 144 000 244 000 (1)OF row Gross profit 50 000 72 000 122 000 Wages and salaries W3 16 100 (1) 17 400 (1) 33 500 Rent 6 200 6 600 12 800 (1) row Depreciation W4 4 200 (1) 4 600 (1) 8 800 Other expenses W5 15 000 15 000 30 000 (1)OF row Profit 8 500 28 400 36 900 (1)OF row W1 revenue is split in the ratio 75: (90 × 1.2) = 75:108 366 000 × 75/183 = 150 000 366 000 × 108/183 = 216 000 W2 150 000 × 2/3 = 100 000 216 000 × 2/3 = 144 000 W3 16 600 + 400 – 900 = 16 100 17 100 + 700 – 400 = 17 400 W4 84 000 × 0.10 × 6/12 = 4 200 ((84 000 – 13 800 – 4 200) + 26 000) × 0.10 × 6/12 = 4 600 W5 85 100 – 33 500 – 12 800 – 8 800 = 30 000 30 000 × 6/12 = 15 000 2(b) Discuss whether the decision to admit Sami into the partnership has benefited Aimee and Benny. 5 Profit has been much higher since Sami was admitted/ Aimee and Benny’s total share of profit is higher in the second six months (1). Their capital/interest on capital has increased considerably (1). A large proportion of the increase in profit is due to the increase in the selling price (1), which it seems would have occurred whether Sami was admitted or not (1). Another reason for the increase in profit is the increase in units sold (1) which may be due to the involvement of Sami or may be due to seasonal effects (1). The partnership has more funds available for investment (1). Aimee and Benny will find it easier to run the business in cases of sickness or holidays/there may be difficulties in decisio n making (1). Accept other valid responses. Max 5 2(c) Calculate the total income for Sami for the six-month period ended 31 December 2024. 5 $ Profit for the period 28 400 (1)OF Interest on capital Aimee 10% × 6/12 × 76000 (3 800) Benny 10% × 6/12 × 56000 (2 800) Sami 10% × 6/12 × 44000 (2 200) (1) 8 800 Residual profit 19 600 (1)OF Shares of profit Aimee 40% 7 840 Benny 40% 7 840 Sami 20% 3 920 (1)OF 19 600 Total for Sami 6 120 (1)OF 2(d) Evaluate whether or not Sami’s decision to join the partnership has benefited him. Justify your answer. 5 Advantages (Max 2) His total share of profit is greater than the interest payable (1). He may have been able to make drawings more than the interest to enable him to pay it (1). He will benefit from future increases in value of non-current assets / increases in profit. (1). Disadvantages (Max 2) The interest on his loan for the six months is $2000 (1). If the partnership does not prosper Sami would lose his investment and the family home (1). His share of profit may not reward him adequately for the hours he may have put into the business / he may have had to forego a salary elsewhere (1). Decision supported with a comment (1) Accept other valid responses

Mark scheme

3(a)(i) Calculate, to two decimal places, the following ratios. 1 dividend per share 12 000/200 000 = $0.06 (1) 3(a)(ii) Calculate, to two decimal places, the following ratios. 1 dividend cover 60 000/12 000 = 5 times (1) 3(a)(iii) Calculate, to two decimal places, the following ratios. 2 gearing ratio 300 000 / (300 000 + 335 200) (1) × 100 = 47.23% (1)OF 3(b) Calculate the expected annual profit from operations if the investment in new non -current assets takes place. 2 $ 2024 profit for the year 60 000 Debenture interest (300 000 × 0.08) 24 000 2024 profit from operations 84 000 (1) Increase (15%) 12 600 Expected profit from operations 96 600 (1)OF 3(c) Calculate, to two decimal places, the dividend cover in 2025 and the gearing ratio at 31 December 2025 for each 14 option. Option 1 Option 2 Dividend cover 3.61 times (3)OF 3.36 times (3)OF Gearing ratio 58.31% (4)OF 33.11% (4)OF Workings Option 1 Option 2 Dividend Profit for the year = 96 600 (OF) – 24 000 – Profit for the year = 96 600 (OF) – 24 000 cover 22 000 = 50 600 = 72 600 Dividend = 12 000 × 7/6 = 14 000 Dividend = 360 000 × 0.06 = 21 600 50 600 (1)OF ÷ 14 000 (1) 72 600 (1)OF ÷ 21 600 (1) = 3.61 times (1)OF = 3.36 times (1)OF Gearing ratio (300 000 + 220 000) (1) ÷ 300 000 (1) ÷ (300 000 + 220 000) + 335 200 + 50 600 300 000 + 335 200+ 220 000 +72 600 (1)OF – (1)OF – 14 000 (1)OF × 100 21 600 (1)OF × 100 (520 000 ÷ 891 800) × 100 = 58.31% (1)OF =(300 000 ÷ 906 200) × 100 = 33.11% (1)OF 3(d) Assess whether or not the directors made the right decision in choosing Option 1. Justify your answer. 5 Advantages of option 1 (Max 2) There was no dilution of control (1). The loan can be paid back/no permanent capital is involved (1). The loan could be negotiated with certainty but there was no assurance that all the shares would be sold (1). Dividend cover is better/reduces less than under option 2 which may be more reassuring to shareholders (1). Minimal increase in dividends (1). Disadvantages of option 1 (Max 2) The increase in interest is greater than the increase in profit from operations/profit reduces (1). The company becomes highly geared (1). Option 2 would have reduced gearing / have a lower gearing ratio than option 1 (1). Interest has to be paid whether or not profit is made (1). Loan may require security (1). Business has become riskier (1). Dividends have had to be increased to compensate shareholders for the extra risk (1). Decision supported with a comment (1) Accept other valid responses