1(a)

Inflows Products Weeks Price Total

Year 1 130 50 5.4 35 100
Year 2 150 50 5.6 42 000
Year 3 150 50 5.6 42 000
Year 4 160 50 5.8 46 400
Year 5 160 50 5.8 46 400

Purchases Products weeks Price Total

Year 1 5 000 1 2.7 13 500 √
130 49 2.7 17 199 √
Year 2 150 50 2.8 21 000 √
Year 3 150 50 2.8 21 000
Year 4 160 50 2.9 23 200 √
Year 5 160 50 2.9 23 200 4

Running costs Per week weeks Deprectn Total

Year 1 280 50 14 000 4 000 10 000 √
Year 2 280 50 14 000 4 000 10 000
Year 3 300 50 15 000 4 000 11 000 √
Year 4 300 50 15 000 4 000 11 000
Year 5 320 50 16 000 4 000 12 000 √
3
Cash Flow Inflow Outflow NCF
Year 1 35 100 √ 40 699 √ -5 599 √ o/f
Year 2 42 000 √ 31 000 √ 11 000
Year 3 42 000 32 000 √ 10 000 √ o/f both
Year 4 46 400 √ 34 200 √ 12 200
Year 5 46 400 35 200 √ 11 200 √ o/f both
3 5 3 18 marks
1(b)

NCF Cumulative
1 -5 599 -5 599
2 11 000 5 401 √o/f
3 10 000 15 401 √o/f
4 12 200 27 601

Payback period = 20 000 - 15 401 = 4 599 √ o/f

= 3 years (4 599 o/f x 12) √ = 3 years √ o/f 4.52 months √ o/f

12 200 √ o/f

(7)

1(c)
(i)
NPV 17%
Year 0 -20 000 1 -20 000.00 √
Year 1 -5 599 0.855 -4 787.15
Year 2 11 000 0.731 8 041.00
Year 3 10 000 0.624 6 240.00
Year 4 12 200 0.534 6 514.80
Year 5 11 200 0.456 5 107.20 √ all 5
1 115.86 √

(4)
1(c)(ii)
NPV 20%
Year 0 -20 000 1 -20 000.00 √
Year 1 -5 599 0.833 -4 663.97
Year 2 11 000 0.694 7 634.00
Year 3 10 000 0.579 5 790.00
Year 4 12 200 0.482 5 880.40
Year 5 11 200 0.402 4 502.40 √ all 5
-857.17 √

(4)

1(d)
Internal Rate of Return = Lower rate √ + (% difference between rates √ x NPV using lower % rate) √
Difference between NPVs) √

= 17% √ + (3 √ x 1115.86) √
1973.03 √

= 18.7% √ o/f
(10)
1(e) Answers may include:
Payback method –
to repay the cost of the investment
this method measures the period of time it takes the cash flows of a project √ √
Advantages:
Simple to use √ and easy to understand the results. √
with different initial costs.
Can be used to compare different projects √ √
Disadvantages:
Does not take account of the falling value of money √ over time. √
e.g. a project may payback quickly and look attractive,
May not be suitable for projects that have uneven cash flows √ √ but
have little cash inflows after payback √

Internal Rate of Return (IRR) method –

ie the rate at which the net
This method calculates the discounted cash flow that the project is expected to achieve √
present value is zero √
Advantages:
Takes account of the falling value of money √ over time. √
Tells the business the exact discounted cash flow rate of return √ which the project is expected to achieve. √

Disadvantages:
Not simple to use, √ as formula is quite complicated. √
Can be time consuming √ as choosing rates for cost of capital can be hit and miss. √

Maximum for arguing one side only is 8 marks. Conclusion - 2 marks

but IRR gives a better indication of the expected return.
Payback method is good to use as a first screening of a project, √ √

(12)

Total for Question 1 = 55 marks

 Level Mark Descriptor
0 A completely incorrect response.
Level 1 1–3 Isolated elements of knowledge and understanding that is
recall based.
Weak or no relevant application.
Generic assertions may be present.
Level 2 4–6 Elements of knowledge and understanding that are applied to
accounting.
Chains of reasoning are present, but may be incomplete or
invalid.
A generic or superficial assessment is present.
Level 3 7–9 Accurate and thorough understanding, supported throughout
by relevant application, maybe to the scenario.
Some analytical perspectives are present, with developed
chains of reasoning, showing causes and/or effects.
An attempt at an assessment is presented, using financial
information in an appropriate format and communicates
reasoned explanations.
Level 4 10–12 Accurate and thorough knowledge and understanding,
supported maybe by relevant application to the scenario.
A coherent and logical chain of reasoning, showing causes
and effects.
Assessment is balanced, wide ranging and well
contextualised, using financial and perhaps non-financial
information, and makes an informed conclusion.

Question Answer Mark

Number
2 (a) [7 AO1]
AO1: Seven marks for demonstrating knowledge of correct
accounting procedures to calculate purchase price.

Calculation of Purchase Price

Property 454
Plant 189 [1 AO1] – 3 figures
Equipment 38
Intangibles 9 [1 AO1]
Inventories 21
Trade and other receivables 9
Cash and cash equivalents 5 [1 AO1] – 3 figures
Debenture (60)
Bank loan (45) [1 AO1] – 2 figures
Trade and other payables (10)
Current tax payable (4)
Short-term provisions (2) [1 AO1] – 3 figures
Goodwill 396 [1 AO1]
Purchase price 1000 [1of AO1]

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Question Answer Mark
Number
2 (b) [2 AO1], [2 AO2], [4 AO3]
AO1: Up to two marks for correct accounting technique in calculating
total amount of shares.
AO2: Up to two marks for correct accounting technique in calculating
total amount received per share.
AO3: Up to four marks for analysing data to calculate cash received
per share.

Number of shares in
Eastern Engineering plc = (400m × 2) [1 AO1]

= 800m [1 AO1]

£1 000m [1of AO2]

Total amount received per share =
800m [1of AO2]
= £1.25 per share [1of AO3]
(£1 nominal value + 20p
Value of share received =
premium)
= £1.20 [1 AO3]
So, value of cash received = (£1.25 - £1.20) [1of AO3]
= 5p per share [1 AO3]
8

Question Answer Mark

Number
2 (c) [8 AO2]
Eight marks for applying knowledge of accounting procedures
and preparing the account in an appropriate format.

Acquisition Account
1 Jan Property, 1 Jan Debenture 60
plant + 681 [1 AO2]
equipment
Intangibles 9 [1 AO2] Bank loan 45
Inventories 21 Trade payables 10
Trade 9 [1 AO2] Current tax 4 [1 AO2]
receivables payable
Cash 5 Short-term 2
provisions
Goodwill 396 [1 AO2] Purchase price: 40 [1 AO2]
Cash
Shares 800 [1 AO2]
Share premium 160 [1 AO2]
1121 1121
8

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 Question Answer Mark
Number
2 (d) [5 AO1], [11 AO2]
AO1: Five marks for demonstrating correct knowledge of
accounting procedures and techniques.
AO2: Eleven marks for correct application of accounting principles
to produce a statement of financial position after the take-over.
including five marks for correct analysis of cash paid to shareholders.

Statement of financial position atDhaka Industrials plc

ASSETS Working £m £m
Non-current assets
Property, plant and 681 + 2 450 3 131 [1 AO1]
equipment
Intangible assets 9 + 118 + 396 523 [2 AO2]
3 654
Current assets
Inventories 21 + 132 153 [1 AO2]
Trade and other 9 + 84 93 [1 AO1]
receivables
Cash and cash 5 + 289 [1 AO2] 254 [1 AO2]
equivalents –40 [1 AO2]
500
Total assets 4 154
Equity and liabilities £m £m
Equity
Ordinary shares of £1 1 800 + 800 2 600 [1 AO2]
each
Share premium 300 + 160 [1 AO2] 460 [1 AO2]
Retained earnings 683 [1 AO2]
Total capital and 3 743
reserves
Non-current liabilities
5.5% Debenture 2019 60
Bank loan 45 + 210 255
[1 AO1]
315
Current liabilities
Trade and other 10 + 56 66 [1 AO1]
payables
Current tax payable 4 + 24 28 [1 AO2]
Short-term provisions 2 [1 AO1]
96
Total equity and 4 154
liabilities
16

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Question Answer Mark
Number
2 (e) [2 AO1], [2 AO3]
AO1: Two marks for recall of term.
AO3: Two marks for communicating complex understanding of
corporate governance.

Answers may include:

Corporate governance is the mechanisms and processes used to
control and direct companies in pursuit of their objectives.
[1 AO1] This will involve the rights and responsibilities of the
board of directors and managers. [1 AO1] Mechanisms may
include monitoring the actions, policies and decisions of
companies and their agents. [1 AO3] Corporate governance
practices will try to align the interests of stakeholders and
minimise conflict [1 AO3].
4

Question Indicative content Mark

Number
2 (f) [1 AO1], [1 AO2], [4 AO3], [6 AO4]

Case for auditor role

• External auditors are independent, scrutinisers of accounts
and records.
• External auditors take an objective view of transactions,
records and events.
• Internal and external auditors carry out audits that may
detect errors, omissions and fraud in the accounts.
• Auditors try to ensure that the accounts show a true and
fair view.
• Auditors may well be used in this scenario, to ensure that
the assets and liabilities of Eastern Engineering plc have
an accurate value. This could be done by inspecting books,
records, and assets etc.
• External auditors produce an Auditors’ Report that states if
the accounts give a true and fair view, and have been
prepared properly.
• Companies must have accounts audited by law, which is a
statement that shows auditors are important.
Case against auditor role
• Auditors may not detect all errors, omissions and fraud.
• External auditors may not be totally independent of the
clients who have hired them. This is why audits must be
put out to tender every 10 years.
• External auditors may be wary of disagreeing with clients
who may offer other well-paid work, e.g. management
consultancy.
Should conclude that auditors have a valuable role to play.
12

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 Level Mark Descriptor
0 A completely incorrect response.
Level 1 1–3 Isolated elements of knowledge and understanding that are
recall based.
Weak or no relevant application to the scenario set.
Generic assertions may be present.
Level 2 4–6 Elements of knowledge and understanding that may be
applied to the scenario.
Chains of reasoning are present, but may be incomplete or
invalid.
A generic or superficial assessment is present.
Level 3 7–9 Accurate and thorough understanding, supported throughout
by relevant application to the scenario.
Some analytical perspectives are present, with developed
chains of reasoning, showing causes and/or effects.
An attempt at an assessment is presented, using financial
and non-financial information, in an appropriate format and
communicates reasoned explanations.
Level 4 10–12 Accurate and thorough knowledge and understanding,
supported throughout by relevant and application to the
scenario.
A coherent and logical chain of reasoning, showing causes
and effects.
Assessment is balanced, wide ranging and well
contextualised, using financial and maybe non-financial
information, and makes an informed decision.

Question Answer Mark

Number
3 (a)(i) [4 AO1]
AO1: Four marks for correctly calculating time cards to calculate
hours worked.

Mira 40 hours [1 AO1] Jared 43 hours [1 AO1]

Aqila 42 hours [1 AO1] Luqman 44.5 hours [1 AO1]
4

Question Answer Mark

Number
3 (a)(ii) [1 AO2]
AO2: One mark for correctly adding up total.

Total hours worked = 169.5 [1of AO2]

1

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Question Answer Mark
Number
3 (b)(i) [2 AO2]
AO2: Two marks for using correct procedure to calculate
standard labour cost.

Standard labour cost = (4 x 40 x £6.80) [1 AO2] = £1 088 [1 AO2]

2

Question Answer Mark

Number
3 (b)(ii) [2 AO2], [1 AO3]
AO2: Two marks for using correct procedure in calculating actual
labour cost.
AO3: One mark for the correct labour cost.

Actual labour cost = (160 x £6.80) [1 AO2] + (9.5 x £10.20)

[1of AO2]
= £1 088 + £96.90 = £1 184.90 [1of AO3]
3

Question Answer Mark

Number
3(b)(iii) [2 AO2], [1 AO3]
AO2: Two marks for using correct procedure in calculating the
efficiency variance.
AO3: One mark for the correct variance, including the correct
orientation of the variance.

Labour efficiency variance

= (169.5 of – 160) [1 AO2] x 6.80 [1 AO2] = £64.60 Adv [1of AO3]
3

Question Answer Mark

Number
3(b)(iv) [4 AO2], [1 AO3]
AO2: Four marks for using the correct technique to calculate
labour rate variance.
AO3: One mark for the correct variance, including the correct
orientation of the variance.

Labour rate variance

(1184.90 [1 AO2] - £6.80 [1 AO2])

x 160 [1 AO2]
169.5 [1 AO2]
= (£6.99 - £6.80) x 169.5 = £32.30 Adv [1of AO3]

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 Question Answer Mark
Number
3(b)(v) [1 AO2], [1 AO3]
AO2: One mark for using the correct technique to calculate total
labour variance.
AO3: One mark for the correct variance, including the correct
orientation of the variance.

= (£1 184.90 - £1 088) [1 AO2] = £96.90 Adv [1of AO3]

2

Question Indicative content Mark

Number
3(c) [6 AO4]

Case for the present system

Having a target production of 640 speakers may motivate
workers.
Motivated workers will be productive.
Case against present system
Having a production target of 640 that is difficult to reach may
demotivate workers.
Demotivated workers will not be productive.
Good workers, e.g. Mira, may receive only the basic pay rate.
Poor workers, e.g. Luqman, receive the benefit of overtime pay.
Conclusion is that the present system is poor.
6

Level Mark Descriptor

0 A completely incorrect response.
Level 1 1–2 Isolated elements of knowledge and understanding that is
recall based.
Weak or no relevant application to the scenario set.
Generic assertions may be present.
Level 2 3–4 Elements of knowledge and understanding that are applied to
the scenario.
Some analytical perspectives are present, with developed
chains of reasoning, showing causes and/or effects related to
the scenario, although these may be incomplete or
sometimes invalid.
An attempt at an assessment is presented, using financial
and maybe non-financial information, in an appropriate
format and communicates reasoned explanations.
Level 3 5–6 Accurate and thorough knowledge and understanding,
supported throughout by relevant application to the scenario.
A coherent and logical chain of reasoning, showing causes
and effects.
Assessment is balanced, wide ranging and well
contextualised, using financial and maybe non-financial
information, and makes informed conclusion.

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Question Answer Mark
Number
3(d) [1 AO1], [3 AO3]
AO1: One mark for stating alternative payment system.
AO3: Three marks for explaining why this new system is better
than the existing system.

A better system to introduce is to pay workers according to

output produced, i.e. piecework. [1 AO1]
This is better than the present system of payment by time
worked. [1 AO3]
The new system will mean the better, more productive workers,
will receive a higher pay [1 AO3] than the less-productive
workers. [1 AO3]

Allow three AO3 marks for single, suitable well-developed

response.
4

Question Answer Mark

Number
4(a) [2 AO1] and [10 AO2]
AO1 : Two marks for calculating revenue
AO2: Ten marks for calculating expenses, inventory and net
profit for the year.

Sales (45 000 – 5000) x £16.00 [1 AO1] = 640 000

[1 AO1]
Direct (112 500) [1 AO2]
Direct labour (292 500) [1 AO2]
Semi-variable costs (199 500) [1 AO2]
Fixed factory (48 000) [1 AO2]
overheads
Subtotal 652 500

Less
Closing stock 72 500 (5 see below)
Cost of sales (580 000)
Net profit for the year 60 000 [1 AO2]

Calculation of stock, i.e. (5) shown above

Valuation of closing
stock 652 500 [1of AO2] = £14.50 per unit
45 000 [1 AO2] [1of AO2]

(£14.5 of x 5 000) [1 AO2] = £72 500

[1of AO2]

12

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 Question Answer Mark
Number
4(b)(i) [2 AO2]
AO2: One mark for items to include in marginal cost.
One mark for marginal cost total.

The marginal cost of producing the units is :

= (£1.50 + £2.50 + £6.50) [1 AO2]
= £10.50 [1 AO2]
2

Question Answer Mark

Number
4(b)(ii) [4 AO3]
AO3: Three marks for comparing marginal costs with the selling
price, calculating contribution per unit and in total and deciding
to sell.

The selling price is greater than the marginal cost for one unit, so
there is a positive contribution [1 AO3] of £1.50 per heater.
[1 AO3] so the 5 000 heaters should be sold. [1 AO3] There will
be a total contribution of £7 500 if the inventory is sold. [1 AO3]
2

Question Answer Mark

Number
4(c) [6 AO4]
AO4: Six marks for evaluating the options and accepting Option
2 and rejecting the other possibilities.

Option 1
The marginal cost of producing another 4 000 is
(£1.50 + £2.50 + £13) = £17 [1of AO4]

Therefore the units should not be produced. [1 AO4] as there is a

negative contribution of £5 per heater. [1 AO4]

Option 2
Offer to supply from the other firm should be accepted. [1 AO4] as a
profit of £1 per heater can be made. [1 AO4]

Reject the order

The order should not be rejected because this would reduce potential
profit. [1 AO4]
6

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Question Answer Mark
Number
4(d) [3 AO1], [3 AO3]
AO1: One mark for identifying each factor, up to three marks.
AO3: One mark for developing each factor, up to three marks.

Example:
Contract with Wilson Brothers Department Stores could lead to
further business in the future [1 AO1] and this could be at
higher price with a greater profit margin. [1 AO3]

Enables the heaters to be sold in a different market [1 AO1]

which should raise profile of company. [1 AO3]

Selling at the lower price may upset Double E plc [1 AO1] who
may demand a lower price or find a different supplier. [1 AO3]
6

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 Question Answer Mark
Number
5(a) [5 AO1], [12 AO2], [7 AO3]
AO1: Five marks for demonstrating knowledge of accounting
procedures, using figures from statement of financial position
and additional information.
AO2: Twelve marks for application of knowledge of accounting
techniques, making calculations from figures on the statement of
financial position.
AO3: Seven marks for analysis of figures to produce statement
of cash flow.

Statement of Cash Flow for y/e 31 December 2014

Cash flows from operating activities
Profit from operations ( 25 800 + 8 750) 34550 [1 AO3]
Add depreciation 49000 [2 AO3]
Add loss on sale of fixed asset 8000 [1 AO3]
Operating cash flow before working capital changes 91550 [1 AO2]
Increase in inventories -21000 [1 AO2]
Decrease in trade receivables 11000 [1 AO2]
Increase in trade payables 13000 [1 AO2]
Cash generated from operations 94550 [1 AO2]
Less interest paid: Debenture -8750 [1 AO3]
Less tax paid -38000 [1 AO2]
Net cash from operating activities 47800 [1 AO2]
Cash flow from investing activities
Payments to acquire tangible fixed assets -140000 [1 AO1]
Proceeds from sale of tangible fixed assets 6000 [1 AO1]
Net cash used in investing activities -134000 [1 AO2]
Cash flow from financing activities
Redemption of ordinary shares -80000 [1 AO2]
Redemption of shares premium -40000 [1 AO2]
Issue of debenture 250000 [1 AO1]
Dividends paid: Final 2013 -28800 [1 AO3]
Interim 2014 -8000 [1 AO3]
Net cash used in financing activities 93200 [1 AO2]
Net decrease in cash and cash equivalents 7000 [1 AO2]
Cash and cash equivalents at the beginning of the
year 12000 [1 AO1]
Cash and cash equivalents at the end of the year 19000 [1 AO1]
Net increase in cash and cash equivalents 7000

Depreciation calculation
(325 000 - 28 000) = 297 000
(346 000 - 297 000) = 49 000
24

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Question Indicative content Mark
Number
5(b) [6 AO4]

Managed liquidity well

Cash and cash equivalents have risen by £7 000 in the year.
Proceeds from debenture issue exceed money spent on
redemption of shares, and an inflow of funds from financing
activities.
An operating profit was made so cash is generated through
operating activities.
Managed liquidity poorly
Large sum spent on acquiring property, means outflow of funds
from investing activities.
About one-third of the operating profit for 2014 has already been
paid out as an interim dividend.
Long-term effect of issue of debenture may be negative.
Conclusion is that handling of liquidity has been reasonable.
Apply same box as question 3.
6

Level Mark Descriptor

0 A completely incorrect response.
Level 1 1–2 Isolated elements of knowledge and understanding that are
recall based.
Weak or no relevant application to the scenario set.
Generic assertions may be present.
Level 2 3–4 Elements of knowledge and understanding that are applied to
the scenario.
Some analytical perspectives are present, with developed
chains of reasoning, showing causes and/or effects related to
the scenario, although these may be incomplete or
sometimes invalid.
An attempt at an assessment is presented, using financial
information, in an appropriate format and communicates
reasoned explanations.
Level 3 5–6 Accurate and thorough knowledge and understanding,
supported throughout by relevant application to the scenario.
A coherent and logical chain of reasoning, showing causes
and effects.
Assessment is balanced, wide ranging and well
contextualised, using financial information, and makes
informed conclusion.

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Q6.
(a)
Fixed Costs - per year Variable costs per unit
(0.25 + 0.02 + 0.16 + 0.40) √
Rent £9 300 Total £0.83 per unit √
Depreciation £2 800 √ both
Electricity £3 740
Insurance £1 420 √ both Contribution per unit
Manager £12 000
Loan £2 700 √ both (£1.30 - £0.83 o/f) √ = £0.47 √ o/f
Total FC £31 960 √ o/f

Break Even Point = £31 960 o/f √ = 68 000 ice creams o/f √
£0.47 o/f √ 11 marks

(b) Margin of safety = 184 800 √ - 68 000 √ o/f = 116 800 units √ o/f 3 marks

(c) Profit for 2014

Sales = 1400 x 12 x 11 = 184 800 units √
Sales revenue = 184 800 x 1.30 = £240 240 √
Less VC = 184 800 x 0.83 o/f = £153 384√o/f
Less FC = £31 960 √o/f
Profit = £54 896 √o/f
5 marks

(d) New profit = £54 896 x 1.05 = £57 640.80 o/f √

Increase in profit = £2 744.80 o/f √

Increase in rent = £25 x 12 = £300 √

So managers pay must fall by £3 044.80 o/f √

So new pay must be £12 000 - £3 044.80 = £8 955.20 o/f √ 5 marks

(e)
If moved to the variable rate
For
Business has profit target √ and has to take action to achieve these targets. √
May not possible to decrease other costs, √ especially if fixed eg loan repayment, rent etc √
May not be possible to increase selling price to increase profit, √ as will result in reduced sales √
Manager may be motivated and improve performance / increase output √ eg train staff better to
increase sales √ which may result in increased market share √ also in higher profits for business √
and higher pay for the manager √

Against
Manager is concerned only with output so quality may suffer √ and there may be more accidents √
and manager may put workers under more pressure which demotivates √
Budgeting for the managers salary maybe more difficult √ due to fluctuations in sales and output √
A rise in variable costs may raise the break even point√ (but remember fixed costs will rise √)

If stays on the fixed rate.

For
Managers are professionals and are usually paid a salary √ and changing to payment by linking to
production may demotivate √

Against
Manager will be de-motivated √ if forced to take pay cut √
This is likely to effect running of the business√ in a negative way√
Could try to reduce other costs instead √ eg shop around for lower insurance. √
A reduction in fixed costs may lower the break even point√ (but remember variable costs will rise√)

Maximum of 4 ticks for arguing one side – for or against variable rate/fixed rate.

Conclusion - Two √√
It is a good/bad idea to move to variable rate. 6 marks
Total 30 marks