EITHER

Mark scheme

Marking points from the official mark scheme (May/June 2024). The mark or mark type is shown in brackets.

1. [1] (a) It allocates only direct costs to cost/profit centres
2. [1] (a) Overhead costs not apportioned at all
3. [1] (a) May provide a misleading picture of profitability
4. [1] (a) It overlooks the impact of fixed costs
5. [1] (a) Not acceptable for external financial reporting
6. [1] (a) Difficult to allocate costs accurately across a full product range
7. [1] (a) Not an appropriate method for price determination
8. [1] (a) Unsuitable for capital intensive operations/multi-product operations
9. [1] (a) Difficult to analyse as not all costs can be easily split into fixed and variable costs.
10. [1] (a) Poor method for setting prices – as prices are based on contribution which does not cover fixed costs.
11. [1] (a) It violates the principle of matching costs with revenues
12. [1] (a) Has limited scope so businesses with high automation have high levels of fixed costs, so not suitable to capital intensive industries.
13. [1] (a) Can lead to unrealistic financial statements as exclusion of fixed overheads in valuation of stock.
14. [1] (a) Firms might find it difficult to cover all costs and earn a fair return on capital employed
15. [2] (a) Not acceptable for stock valuation – if stock is undervalued it could lead to government investigation/fines – affect business image
16. [2] (a) Unrealistic financial statements – could lead to investors withdrawing from the business or government fines.
17. [2] (a) Under-pricing of products – which leads to poor return on capital employed and low profits – shareholder dissatisfaction
18. [2] (a) Costs can be difficult to allocate – which leads to inaccurate pricing decisions – lose customer loyalty
19. [2] (a) Can lead managers to maintain the production of goods just because of positive contribution – perhaps a brand new product should be launched instead which makes a greater contribution.
20. [2] (a) If lower prices are offered to gain customers as contribution can still be earned – may lead to existing customers demanding lower prices – lower profits.
21. [2] (a) If high prices are a key feature that has established brand – then lowering prices could destroy brand image.
22. [1] (b) Working capital is the capital needed to pay for raw materials, day-to-day running costs and credit offered to customers.
23. [1] (b) Working capital = current assets less current liabilities.
24. [1] (b) Source of finance – internal (retained profits, reduce working capital, sale of assets) – external (overdrafts, trade credit, factoring, HP, leasing, loans, equity finance, share, debentures, venture capital)
25. [1] (b) A start up business is a company in the first stages of operations, often being financed by its entrepreneurial founders during the initial starting period.
26. [1] (b) Needs finance to pay suppliers of wood, tools.
27. [1] (b) Need finance to hire craft persons /machines to make furniture
28. [1] (b) Needs finance for rent to hire premises/ warehouses to store furniture pending sale to retailers
29. [1] (b) If wages cannot be paid due to low working capital could lead to employees leaving the business – thus a high labour turnover
30. [1] (b) If unable to meet a customer order due to poor working capital – business may lose important customers.
31. [1] (b) Insufficient working capital to pay suppliers – could lead to loss of trade terms or supplier refusing to do business with them altogether.
32. [1] (b) If don't have enough working capital to purchase materials – may not be able to produce enough goods to satisfy demand - lose sales
33. [1] (b) Adequate working capital enables materials to be bought in advance of busy periods – such as the lead up to Christmas so don't miss out on high sales.
34. [1] (b) Inadequate working capital may prevent the business from raising additional funds so will limit or prevent further growth.
35. [1] (b) Might be possible to arrange an overdraft – though may only be limited initially – high interest and potential charges.
36. [1] (b) As a new starter will not have traded long enough to have retained profits – so would not have “free” source of finance
37. [1] (b) May not have built up trade relationships – so not trustworthy enough yet to get credit
38. [1] (b) HP and leasing would allow the business to obtain assets without a large initial cash payment – thus reducing cash outflow
39. [1] (b) Venture capital might be an option – but may have to give up a share of the business as well as a percentage of future profits
40. [6] (b) A judgement/conclusion is made as to whether working capital is the most important source of finance for a start-up furniture manufacturer.
41. [6] (b) A conclusion about what the new furniture manufacturer hopes to achieve in the long and short term and how much finance may be required
42. [6] (b) A conclusion as to what the business hopes to achieve once established and what elements of its working capital need improving.
43. [6] (b) A judgement that a new business will find it harder to raise finance than a well-established business so it's imperative to effectively manage working capital.
44. [6] (b) A conclusion that working capital is only one source of finance and is unlikely to be sufficient for a start-up furniture manufacturer. However, other options may not be available due to lack of credit history or length of time that the business has been operating