Pev Dec 2004

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Lizy
Lizy Registered Posts: 24 New contributor 🐸
in AAT Level 4 (Level 8 in Scotland)
Can someone help me, Returned on Capital employed ratios for Factory A and B why is the calculated figure changed ? Any reason for this?

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  • definite.studies
    definite.studies Registered Posts: 88 Regular contributor ⭐
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    Hi! If you could give details of the calculations that you did then people might be able to spot a mistake.
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034 mod
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    Return on Capital Employed...................Factory A.................................Factory B
    Operating Profit....................................£150................10%................£308................4%
    ......Net Assets...................................£1500.....................................£7700
    Sandy
    sandy@sandyhood.com
    www.sandyhood.com
  • definite.studies
    definite.studies Registered Posts: 88 Regular contributor ⭐
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    Is it just me, or does anyone else think the calculation of Labour Capacity Ratio is a bit odd in this paper? With the figures we are given, it is only possible to divide the budgeted labour hours by the "capacity" figures for each factory.

    Osborne books tutorial (on page 215) defines:

    capacity ratio = 100% x actual hours worked / budgeted hours.

    The completely different calculation done in the paper is:

    capacity ratio = 100% x budgeted hours / factory capacity

    The Osborne definition has a direct relation to the capacity variance, which the other definition does not have, so it seems a more useful definition than the one in the exam paper.
  • mehmet
    mehmet Registered Posts: 113 Dedicated contributor 🦉
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    They're looking at two related, but slightly different, types of capacity.

    The capacity ratio examines the amount of available resources being used, expressed in a formula this would be:

    used resourcesaaaaa x 100
    available resources

    In the Osborne book, the ratio shows what proportion of the planned resources are actually being used, so the formula would be:

    actual hoursaaaaa x 100
    budgeted hours

    The question in the AAT exam is asking you to calculate what proportion of the capacity of the factory you are actually using, so the formula would be

    budgeted hoursaaaaa x 100
    factory capacity
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034 mod
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    I agree with mehmet

    This is one of those questions that you MUST READ before you answer.
    It is not a control ratio produced after the accounting period has ended.
    It relates to a budget.

    This sort of feedforward ratio affects everyone, even accountancy practices.

    If the clients are bringing in the tax returns at the beginning of January, the practice manager may well realise that the work that has come in equates to more than the hours available before they are sent to the tax office, then there is a problem and we have a capacity ratio of over 100%.

    No doubt the work will be done by sub-contracting. But it is only by realising that there is more work than hours available, that the practice manager can know it is necessary to contact the sub-contractors.
    Sandy
    sandy@sandyhood.com
    www.sandyhood.com
  • Lizy
    Lizy Registered Posts: 24 New contributor 🐸
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    Thank you all, Just did the working again on a new calculator and got the right answer.

    Lizy

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