MI 2023 Prelim Examination P2 Qns and Ans

2023 Preliminary Examination Pre-University 3 PRINCIPLES OF ACCOUNTING 9593/2 Paper 2 12 September 2023 3 hours READ THESE INSTRUCTIONS FIRST An answer booklet will be provided with this question paper. You should follow the instructions on the front cover of the answer booklet. If you need additional paper, ask the invigilator for a continuation booklet. Section A Answer all questions. Section B Answer all questions. Start each answer on a new page. You may use a calculator. All calculations must be shown adjacent to the answer. The number of marks is given in brackets [ ] at the end of each question or part question. ___________________________________________________________________________ This document consists of 8 printed pages. [Turn over

2 Section A Answer all questions in this section. 1 Magnet Ltd, a relatively young business, plans to sell gaming puzzles at a standard selling price of $16 per unit but to encourage sales, the selling price will be reduced to 20% off the standard selling price for the month of September when the product will be launched. The budgeted unit sales for the first 6 months are as follows: Year 2023 Months SP Sales Forecast (in units) September $12.80 50 000 October $16 30 000 November 25 000 December 28 000 Year 2024 January 32 000 February 30 000 Estimated production costs per unit of product are as follows: Direct materials (2 units @ $1.50) $3.00 Direct labour (3 hours @ $2 per hour) $6.00 Selling expenses $1.00 Additional information 1 90% of sales are on credit and credit customers is expected to pay in full, 1 month after sale. Cash customers are allowed a discount of 10%. 2 Production began in August. Monthly production will be scheduled so that the finished goods inventory at the end of any month is sufficient to meet the forecast sales target for the following one and a half months. 3 The raw materials needed for production will be purchased so that the closing inventory of raw materials at the end of any month are sufficient to meet the production requirements of the next month. 4 If more than 60 000 units of raw materials are purchased in a month, the raw materials supplier has agreed to give a special discount of 20% off the usual price of $1.50 for each additional unit purchased. 5 The supplier of the raw materials has agreed to give half -month credit terms, that is, purchases made in September will be paid in the middle of October.

3 6 All other expenses are paid as incurred. Fixed production expenses for the year including annual depreciation of $48 000, amounted to $480 000. The fixed expenses are incurred uniformly throughout the year. 7 The firm bought non - current assets costing $50 000 in August 2023 , to be paid in November 2024. 8 At the end of August 2023, there is a bank balance of $200 000. REQUIRED (a) A production budget in units, on a monthly basis for the three months ending 30 November 2023. [3] (b) A raw materials purchase cost budget, on a monthly basis, for the three months ending 30 November 2023. [4] (c) A month- by- month cash budget for the three months ending 30 November 2023. [9] (d) Budgets provide a useful function to motivate managers. Discuss. [4] [Total: 20] [Turn over

4 2 Vika Limited has been in operation for many years. It makes a popular type of chair called Saton. The monthly budget for Saton is as follows. Sales are 6 000 units with a selling price of $26 per unit. Each unit requires 2.4 kilos of raw material costing $3 per kilo. Each unit requires 1.5 hours of direct labour time costing $7 an hour. Each unit requires $2 of variable overhead. Fixed overheads is $2 per unit. Early in 2023 a new supplier entered the market, selling the required raw material at $1.80 per kilo. In April, Vika Limited bought all its raw material from this new supplier. Each unit of S aton required 2.6 kilos. Labour took 40% longer than usual to produce each unit. Average wage rate rose to $7.80 an hour. Variable overheads increased by 10% per unit. Vika Limited managed to produce and sell 5 000 units. The selling price rose by $0.50 per unit. Actual fixed overheads incurred was $9 000. REQUIRED (a) Prepare a flexible budgeted income statement for the month of April 2023. [4] (b) Explain two possible reasons why the actual fixed overheads are different to the budgeted fixed overheads. [4] (c) Calculate the following variances for April 2023: (i) Sales price (ii) Direct materials usage (iii) Direct materials price (iv) Direct labour efficiency (iii) Direct labour rate [5] (d) Suggest how the direct material price variance could be linked to the direct material usage variance. [1] (e) Discuss two components of the flexible budgeted income statement that Vika Ltd should focus on to improve future net profit. [6] [Total: 20]

5 3 TriStar Limited is a traditional company that has a loyal workforce. It is currently considering installing a machine to automate part of the process. The new machine will cost $300 000. The company will pay $150 000 upfront and the balance will be paid in in equal instalments at the end of each year for the first three years. The machine will have a useful life of six years and then it will be sold for $30 000. The company intends to depreciate the machine using the straight line method. To partially finance the upfront payment, the company will arrange for a loan of $100 000. The loan carries an interest of 10% a year, payable at the end of each year. The loan would be repaid at the end of year 6. If the machine is installed, salary savings of $75 000 per year will result. Annual maintenance will cost $6 000 a year. These savings and cost may be assumed to arise at the end of each year. For investment appraisal decisions, the company uses a weighted average cost of capital of 12%. REQUIRED (a) Calculate the net present value for the new machine. The discount factors at 12% are: [7] (b) Advise the firm whether or not it should buy the machine. Discuss the non-financial factors that should be taken into consideration. [ 7] (c) A director has heard of the payback method of appraising capital projects. State one advantage and one disadvantage of the payback method compared to the net present value method. [2] (d) Explain two limitations of relying on the quantitative information prepared for the purchase of the new machine. [4] [Total: 20] [Turn over Year Present value of $1 ($) 1 0.893 2 0.797 3 0.712 4 0.636 5 0.567 6 0.507

6 Section B Case study: Answer all questions. 4 Sri En Limited is a manufacturer with a reputation for producing quality toys. Its best selling products are Hero, Friend and Dream. The budgeted financial data for January 2023 is as follows: Product Hero Friend Dream Sales (units) 2 000 4 000 1 000 Per unit $ $ $ Selling price 44 24 20 Direct material – material X 18 6 12 Direct labour 10 4 6 Allocated fixed overheads 6 4 4 All products use the same material – material X which is bought from a supplier at $3 per metre. Sri En Limited currently holds 16 200 metres of material X. The supplier has informed Sri En Limited that due to production problems, it can only supply 2 000 metres of material X to Sri En Limit