State two features of a sole trader.

Using information in Table 1, for JJ, prepare a profit and loss account for the budgeted figures and the actual figures
(show all your working).

Using information in Table 1, for JJ, prepare a variance analysis (show all your working).

Explain one possible economy of scale from which JJ has benefitted.

Features include:

• Easy to set up – no legal formalities
• Owner has complete control – not answerable to anyone else
• Owner keeps all profits
• Able to choose times and patterns of working
• Able to establish close personal relationships with staff (if any are employed) and customers
• The business can be based on the interests or skills of the owner – rather than working as an employee for a larger firm
• Unlimited liability – all of owner’s assets are potentially at risk
• Often faces intense competition from bigger firms, e.g. food retailing
• Owner is unable to specialise in areas of the business that are most interesting – is responsible for all aspects of management
• Difficult to raise additional capital
• Long hours often necessary to make business pay
• Lack of continuity – as the business does not have separate legal status, when the owner dies the business ends too

Accept any other relevant feature. However, do not credit ‘unincorporated’ and ‘unlimited liability’ as two features. They are the same thing.

Award [1] for each relevant characteristic stated to a maximum of [2].

Application to the organization is not required

If the profit and loss account is constructed following a generally accepted format and is correct in all respects, award [3].

Award [2] if the candidate produces a correct net profit but does not follow a generally accepted format. Award [1] if the candidate shows some understanding of what a profit and loss account is, but the actual account constructed is not in a generally accepted format and has numerous errors.

We need to be consistent with previous years where the format required is consistent with the guide – as 3 of the headings already given, then marks are for 2 headings and 4 calculations.

For a perfect understanding of variances award [3]. There must be calculations and explicit reference to variances that are favourable or adverse.

For variance analysis that has 1 calculation error and/or makes no reference to variances as favourable or adverse award [2].

For a vague understanding of variances award or more than one calculation error and no reference to favourable/adverse [1].

• Purchasing economies of scale. Bulk buying of her raw materials such as the material for jeans, stitching and sowing needles. Unit costs may fall.
• Technical economies of scale through the purchase of machines to help her produce jeans in larger quantities. Over the long run, unit costs will fall as the scale of production increases.
• Given rising demand, marketing economies of scale are possible for JJ as unit costs per jean falls as advertising costs may be constant over a larger range of output.

Accept any other relevant answer.

Mark 1 + 1.

Award [1] for a relevant economy of scale explained and [1] for appropriate application to JJ to a maximum of [2].

N.B As there is limited stimulus information application must necessarily be in the form of reference to jeans, tailoring machinery or tailoring supplies. Do not reward generic references simply to ‘machinery or supplies’.

Generally, well answered as this type of question has been quite common over recent sessions.

Required two very simple profit and loss accounts to be produced. Many candidates achieved three marks but there were some common errors such as only producing a statement for budget or actual. Also, some candidates incorrectly labelling the final profit as retained profit rather than as net profit before tax and interest. Some candidates failed to show full workings.

Responses to this question were disappointing and overall showed a limited knowledge of Variance. Most candidates achieved 2 marks for correctly identifying the three variances for Cost of goods sold, Expenses and Sales. To those who had no grasp of variance analysis there were a significant number of incorrect answers.

Many candidates failed to come up with a recognised economy of scale and to relate it to the business in question. Also, many candidates mistakenly classified the business as a retailer rather than a manufacturer.