Part A 

Development Ltd. is looking to outsource its finance department and is in discussions with Sums plc, an international facility management company. Development Ltd have reviewed their cost base and have ascertained that the following costs are associated with the running of the finance department:


Administration labour

10,000 hours at £8 per hour

Supervisory Labour

6,000 hours at £12 per hour

Direct materials


Variable overheads

£5 per administration hour

Apportionment of Fixed overheads



Sums plc have offered to provide the service at a cost of £200,000 per annum.





Calculate whether or not Development Ltd should outsource the department to Sums plc. and state maximum that Development Ltd would be willing to pay to outsource its finance department.


6 marks

Part B


Palace Ltd is completing the preparation of its short term financial plan for the three months to 31 March 2017.  To complete the preparation of the cash budget for each of these months the following projections and assumptions have been made:


















1.    Past experience suggests that the firm will collect 40% of its sales revenue in the month of the sale, 50% one month after the sale, and the balance in the second month following the sale.

2.    Sales for October, November and December were £200,000, £220,000 and £170,000 respectively.

3.    Purchases are made in the month of sale but paid for in the following month.

4.    Purchases for December were £90,000.

5.    Labour costs follow the shift patterns worked by the company’s employees and normally represent 5% of that month’s sales, with payment being made in the month that the expense is incurred.

6.    Administration costs of £50,000 are incurred each month. These are paid in the month they are incurred.

7.    A VAT payment of £40,000 is due to be paid in March.

8.    Year-end performance bonuses are paid in January and are estimated to be £20,000.

9.    The company has decided to replace the motor vehicles of three of its board members in February at a cost of £65,000 per vehicle

10. The cash balance at the beginning of January was £20,000.  The directors feel that a minimum cash balance of £20,000 should be maintained at all times.




Prepare a cash budget for the three months of January, February and March 2017.


13 marks



Part C


Smithton Ltd bought machinery for £70,000 on 1 January 2015. The machine was to be used as part of the business for 3 years and was expected to have a residual value of £10,000 at the end of year three.




(a)  Calculate for each of the financial years ended 31 December 2015 and 2016


                      i.        the annual depreciation charge   

                    ii.        the closing net book value of the machine


You should use the straight line method of depreciation.


5 marks



Smithton paid £15,000 for property insurance on 1 January 2016. The policy covered the 15-month period to 31 March 2017.




(b)  Calculate for the year ended 31 December 2016


                      i.        The charge for property insurance in the income statement.

                    ii.        The entries for the above transaction in the balance sheet.


6 marks





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