MI 2020 Prelim Paper 2 QP

2020 Preliminary Exams Pre-University 3 PRINCIPLES OF ACCOUNTING 9593/02 Paper 2 21 September 2020 3 hours Additional Materials: Answer Booklet READ THESE INSTRUCTIONS FIRST If you have been given an Answer Booklet, follow the instructions on the front cover of the Booklet. Write your name and class on all the work you hand in. Write in dark blue or black pen on both sides of the paper. Do not use staples, paper clip, glue or correction fluid. You may use a calculator. DO NOT WRITE ON ANY BARCODES Section A and Section B Answer all questions. All calculations must be shown adjacent to the answer. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question. This document consists of 7 printed pages and 1 blank page [Turn over

2 Section A Answer all questions in this section. 1 Samuel runs a small manufacturing business, making three different products: Jen, Kit and Mat. He provides the following budgeted information for next month: Jen Kit Mat Maximum production and sales (units) 6 000 7 000 8 000 Unit costs: Selling price Raw material at $10 per kilo Direct labour $ 72 30 6 $ 90 40 8 $ 136 60 10 Total fixed costs during the period are $750 000. REQUIRED (a) State two disadvantages of using contribution margin for making business decisions. [2] Additional information Samuel has been advised that, as a result of an industrial action, only 74 000 kilos of raw material will be available next month. He has confirme d orders for next month for 5 000 units of each product. He is considering two options: Option 1 Make as many units of each product such that he can maximise the profit for the month. Option 2 Make a minimum of 5 000 units of each product and use the remaining raw material in the most profitable way. REQUIRED (b) Calculate the maximum profit Samuel can make from each option. (Note: products are to be produced in quantities of thousands). [13] (c) Advise Samuel which option he should choose. Justify your answer by considering both financial and non-financial factors. [5] [Total: 20]

3 2 Cahaya Pte Ltd is a small manufacturing business. The firm has two production cost centres: machining and assembly; and two service cost centres: maintenance and canteen. The company accounts clerk provides you with the following budgeted data for the next financial year: Details Machining Assembly Maintenance Canteen Allocated costs $120 100 $80 050 $40 000 $15 000 Number of employees 10 30 10 Number of maintenance hours 8 000 2 000 Direct labour hours 5 000 15 500 Machine hours 45 000 3 875 REQUIRED (a) Reapportion the budgeted service cost centre overheads to the production cost centres. [4] (b) Calculate a suitable budgeted overhead absorption rate for each production cost centre.[4] Additional information At the end of the financial year the following actual data is available: Machining Assembly Actual machine hours 44 300 Actual direct labour hours 16 200 Actual overheads $150 000 $105 000 REQUIRED (c) Calculate the under or over absorbed overheads for each department. [4] (d) Based on your computation in (c ) above, s uggest possible reasons for under or over absorbed overheads, supporting your answers with other relevant facts provided in the question. [4] (e) Analyse the e ffects of under or over applied overheads on the current assets and shareholder’s equity. [4] [Total: 20]

4 3 Lex is preparing budgets for her business for first three months of 2021. She provides the following information. 1 Statement of financial position at the end of 2020 includes the following: $ Inventory (50 units) 500 Trade receivables 8 000 Trade payables 3 000 Bank overdraft 5 000 2 The budgeted purchases of inventory and the month end inventory for the first three months of 2021 are: Month Purchases of inventory Month end inventory (units) (units) January 450 40 February 490 60 March 460 30 3 All Lex’s products are sold at $15 per unit. 4 Lex’s customers pay her in full in the month following the sale. 5 Lex pays her suppliers of inventory in the month following purchase. The price she pays her suppliers will remain unchanged. 6 Monthly expenses are $2 000. These are paid in full in the month. 7 Lex pays $5 000 each month as dividends. REQUIRED (a) State two advantages to the business of preparing budgets. [2] (b) Calculate the budgeted sales of Lex’s business for January, February and March 2021 in both units and value. [4] (c) Prepare the cash budget of Lex’s business for January, February and March 2021. [5] (d) Prepare the budgeted income statement of Lex’s business for the three months ending March 2021. [4]

5 Additional information Lex is unable to understand why, despite the business budgeting a profit in the first three months, the bank overdraft for the business is continuing to increase. REQUIRED (e) (i) Explain to Lex why her bank overdraft is increasing despite making a budgeted profit. [1] (ii) Discuss two actions Lex could take to reduce her budgeted bank overdraft. [4] [Total: 20]

6 Section B Case Study: Answer all questions 4 AI Pte Limited has been in operations for many years, relying on a small, loyal team of workers. The directors are planning to purchase a new equipment to replace an old one which is coming to the end of its useful life. The old equipment originally cost $50 000. The new equipment will cost $100 000 and will improve the production process, saving time on manufacturing the product and reducing material wastage. There is also the possibility that labour costs could be saved, as workers could be made redundant or redeployed in other areas of the factory. However, the new equipment will only have a maximum useful life of 5 years. After 5 years it will have no residual value and will have to be replaced. As the accountant, you have been asked to evaluate whether or not the new equipment should be purchased. You have made the following calculations for annual savings if the equipment is purchased. Year Savings $000 1 20 2 40 3 75 4 80 5 (10) For investment appraisal decisions, AI Pte Limited uses a weighted average cost of capital of 12%. This is calculated on the present capital structure of the company which is 80% equity and 20% long -term loans. If the new equipment is purchased, the comp any will issue an additional 50 000 shares of $1 each. The balance will be raised by obtaining an additional loan. The discount factors at 12% are: Year Discount Factor 1 0.893 2 0.797 3 0.712 4 0.636 5 0.567 As the accountant, you have also been evaluating other equipment which may be suitable. You