Cost Accounting- June 2010 Dec 2010 and June 2011

7/31/2019 Cost Accounting- June 2010 Dec 2010 and June 2011

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ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

TECHNICIAN LEVEL

T2: Cost AccountingJune 2010

December 2010

June 2011

QUESTION PAPERS AND SUGGESTED SOLUTIONS


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JUNE 2010 T2: COST ACCOUNTING ...................................................................... 3

SUGGESTEDSOLUTIONS.................................................................. 12

DECEMBER 2010 T2: COST ACCOUNTING .................................................................... 23

SUGGESTEDSOLUTIONS .................................................................. 37

JUNE 2011 T2: COST ACCOUNTING .................................................................... 51

SUGGESTEDSOLUTIONS .................................................................. 62


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CHARTERED ACCOUNTANTS EXAMINATIONS

TECHNCIAN LEVEL

T2: COST ACCOUNTING

SERIES: JUNE 2010

TOTAL MARKS 100

TIME ALLOWED: THREE (3) HOURS

INSTRUCTIONS TO CANDIDATES

1. You have ten (10) minutes reading time. Use it to study the examination paper carefully so that you

understand what to do in each question. You will be told when to start writing.

2. This paper is divided into TWO sections:

Section A: Attempt ALL multiple choice questions.

Section B: Attempt FOUR questions.

3. Enter your student number and your National Registration Card number on the front of the answer

booklet. Your name must NOT appear anywhere on your answer booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. The marks shown against the requirement(s) for each question should be taken as an indication of

the expected length and depth of the answer.

6. All workings must be done in the answer booklet.

7. Present legible and tidy work.

8. Graph paper (if required) is provided at the end of the answer booklet.


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Section A

(Multiple Choice Question)

Attempt ALL questions in this section.Each of the following questions has only ONE correct answer. Write the LETTER of the correct answer

you have chosen in your answer booklet. Marks allocated are indicated against each question.

Question 1

1.1 The annual costs of supervision in a department are estimated to be K40,000,000 if hours worked

in the department are less than 32,000,000 each year, K65,000,000 if hours worked are between

32,000,000 and 50,000,000 and K80,000,000, if hours worked are over 50,000 in the year. These

costs are an example of:A. Semi fixed cost

B. Fixed cost

C. Step cost

D. Variable cost 2 marks

1.2 The following data relates to an item of raw materials.

Unit cost of raw materials K20,000

Usage per week 250 unitsCost of ordering material, per order K400,000

Annual cost of holding inventory, as a % of cost 10%

Number of weeks in a year 48

Calculate the economic order quantity, to the nearest unit?

A. 316 Units

B. 693 units

C. 1,549 units

D. 2,191 units 2 marks

1.3 A company absorbs overheads based on labour hours. Data for the latest period are as follows:

Budgeted labour hours 8,500

Budgeted overheads K148,750,000

Actual labour hours 7,928

Actual overheads K146,200,000 2 marks


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Based on the data above, calculate the under or overheads?

A. K2,550,00 underabsorbed overhead

B. K7,460,000 underabsorbed overheads

C. K13,282,000 over-absorbed over headsD. K7,998,000 over-absorbed

1.4 Consider the following features and identify which one(s) relates to service Costing.

(i) Production is carried out in accordance with the wishes of the customer

(ii) Work is usually of a relatively long duration

(iii) Costs are averaged over the units produced in the period

(iv) It establishes the costs of services rendered

A. i, ii and iii

B. ii and iii

C. iii and iv

D. i, iii and iv 2 marks

1.5 An abnormal gain in process occurs in which of the following situations?

A. When actual losses are greater than the normal loss level

B. When costs are reduced through increased machine speed

C. When actual losses are less than the normal level

D. When the process output is greater than planned 2 marks

1.6 When direct materials are issued to production what is the double entry?

A. Dr. Material Cr Production department

B. Dr. Production overhead control Cr material stock account

C. Dr. Bank Cr. Working in progress

D. Dr. Work in progress Cr. Material Stock Account 2 marks

1.7 Which of the following would not be used to estimate standard direct material prices?

A. The availability of bulk purchase discounts

B. Purchase contracts already agreed

C. The forecast movement of prices in the market

D. Performance standards in operation. 2 marks


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1.8 An important feature of a cost centre is that:

A. It uses only monetary information.

B. It has clearly defined boundaries.

C. It must be in one specific location only.

D. It must be an area of the business through which products pass. 2 marks

1.9 In marginal and absorption costing, a company doses not hold any opening or closing inventories.

Which of the following statement is true?

A. Profits will be higher if absorption costing is used

B. Profits will be the same if either absorption costing or marginal costing was used.

C. Profits will be higher if marginal costing is used

D. None of the above 2 marks

1.10 Gross wages incurred in department 5 in July 2009 were K154,000,000. The wages analysis

shows the following summary breakdown of the gross pay.

Paid to direct labour Paid to indirectlabour

K000 K000Normal Basic pay 71,824 33,937

Overtime:

Basic pay 15,514 9,981

Premium 3,879 2,495

Shift allowance 7,700 3,879

Sick pay 3,935 856

102,852 51,148

What is the direct wages cost for department 5 in July 2009?

A. K71,824,000B. K87,338,000

C K98,917,000

D. K102,852,00 2 marks


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Section B

Attempt any FOUR questions in this Section

Question 2

(a) Identify FOUR costs to a business arising from labour turnover. 4 marks

(b) MC LTD manufacturers a single product, product X.

Production operatives are paid a basic wage of K3 per hour worked, but an

Additional 50% premium will be paid for any overtime hours. The basic working week is 38 hours.

During the month ended 31 March 2010, there were 4 weeks of production and the company

employed 30 production operatives. No overtime was worked during the month and all 30

operatives worked for full 38 hours for each of the 4 weeks of production. During the month 456

units of product X were made.

Required:

Calculate the labour cost for a single unit of product X made in the month ended 31 March 2010

4 marks

(c) The information below relates to the hours worked by three production operatives during the

month ended 30 April 2008:

Operative A: 140 basic hours and 17 hours overtime

Operative B: 150 basic hours and 22 hours overtime

Operatives C: 120 basic hours and 20 hours overtime

Required:

Calculate separately the total wages earned by each of operatives A, B and C during the month

ended 30 April 2008. 9 marks

(d) Overtime premium could be treated as a direct labour cost or could be treated as part of the

overhead cost.Required:

Explain the circumstances under which overtime premium would be treated as a direct labour cost

and those in which it would be treated as an overhead cost. 3marks

(Total: 20marks)


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Question 3

A chemical processor manufactures a single product using two processes (process 1 and process 2).

The output from process 1 goes directly into process 2.

In Process 1.

1. There is no work-in-progress at the end of any period

2. There is a normal loss allowance of 20% of input

3. In the period just ended

(i) 30,000 kg of raw material were input

(ii) Output was 24,500 kg

In Process 2.

1. There are no losses

2. In the period just ended,

(i) 24,500 kg of processed material was input, after transfer from Process 1, at a cost of

K308,700,000

(ii) 6,000kg of raw material were added, at a cost of K32,900,000 and were mixed with the

material input from Process 1;

(iii) Conversion costs totaled K68,400,000(iv)` There was no opening work-in progress but 5,000 kg remained in the process at the end of

the period, complete for all materials and 60% complete for conversion costs.

Required

For the period just ended:

(a) Calculate the abnormal gain or loss in kg in Process 1 5 marks

(b) Prepare Process 2 account showing clearly both weights (kg) and values (k) 15 marks

Total: 20 marks


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Question 4

A company manufactures a single product with the following variable costs per unit.

K

Direct materials 700

Direct labour 550

Manufacturing overheads 200

1,450

The selling price of the product is K3,600 per unit. Fixed manufacturing costs are expected to be

K134,000,000 for a period. Fixed non manufacturing costs are expected to be K87,500,000. fixed

manufacturing costs can be analysed as follows:

Production Cost centres Service General1 2 Department Factory

K38,000,000 K46,500,000 K26,500,000 K23,000,000

General factory costs represent space costs. Space utilisation is as follows:

Production cost centre 1 40%

Production costs centre 2 50%

Service department 10%

60% of service department costs are labour related and the remaining 40% machine related.

Normal production department activity is as follows:Direct Machine Production

Labour hours Hours Units

Department 1 80,000 2,400 120,000

Department 2 100,000 2,400 120,000

Fixed manufacturing overheads are absorbed at a predetermined rate per unit of production for each

production department, based upon normal activity.

Required:

(a) Calculate departmental overhead absorption rates 7 marks

(b) Prepare a profit statement for a period using the full absorption costing system from the data given

above. 7 marks

(c) Prepare a profit statement for the period using marginal costing principles assuming all units

produced are sold. 6 marks

Total: 20 marks


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Question 5

Ndipo Limited operates a process, (Process A) the following details are available for one period.

There was no opening Work-In-Progress.

During the period, 8,250 units were introduced at a total cost of K478,500.

Labour and overheads incurred were K347,500.

Normal loss is at 8% of input and can be sold at K12 per unit.

At the end of the period, the closing Work-In-Progress was 1,600 units, which were 100% completein respect of materials and 60% complete in respect of labour and overheads.

The balance of units were transferred to Finished Goods Account.Requirements:

(a) (i) Draw up a statement of Equivalent units. (2 marks)

(ii) Calculate the cost per Equipment unit. (2 marks)(iii) Draw up a statement of valuation. (3 marks)

(iv) Prepare Process A Account. (5 marks)

(b) (i) Distinguish between normal loss and abnormal loss

(ii) Briefly explain the difference in accounting treatment between them. (4 marks)

(Total 20 marks)

Question 6

Triple H manufactures one product, and the entire product is sold as soon as it is produced. There is no

opening or closing inventories. The company operates a standard costing system and analysis ofvariances is made every month. The standard cost card for the product, Yoyo is as follows:

STANDARD COST CARD YOYO

K000

Direct materials 20 kilos at K4,000 per kilo 80

Direct wages 30 hours at K2,000 per hour 60

Variable overheads 30 hours at K300 per hour 9

Fixed overhead 30 hours at K3,700 per hour 111

Standard cost 260Budgeted (planned) output for the month of October 2008 was 5,100 units

Actual results for October 2008 were as follows:

Production of 4,850

Materials consumed in production amounted to 93,000 kgs at a total cost of K390 million

Labour hours paid for amounted to 200,000 hours at a cost of K380 million

Actual operating hours amounted to 185,000 hours


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Variable overheads amounted to K56 million

Fixed overheads amounted to K575 million

Required:

Calculate the material labour, variable overhead and fixed overhead variances Total: 20 marksEND OF PAPER


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JUNE 2010

T2: COST ACCOUNTING

SUGGESTED SOLUTIONS


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Section A

Question 1 Multiple Choice Questions

1.1 C

1.2 D

1.3 B

1.4 D

1.5 C

1.6 D

1.7 D

1.8 B

1.9 B

1.10 D

Workings

1.2ch

dw2EOQ

=2,000

12,000400,0002

= 4,800,000

= 2,191 units

1.3 OAR =8,500

0148,750,00

= K17,500 /labour hour

Overhead absorbed

= 17,500 7,928

=138,740,000

Under absorption

Actual K146,200,000

Absorbed K138,740,000

Under Absorption 7,460,000


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Question 2

(a) The costs arising from labour turnover are;(i) Leaving costs, including the cost of administering the necessary documentation and

possible disruption of work, especially if employees cannot be replaced immediately.

(ii) Recruitment costs, comprising the cost of advertising, selection and engagement. This

may include agency fees and relocation expenses.

(iii) Learning cost, including the cost of training, and possible reduced productivity during the

learning period and poorer quality work.

(iv) Low morale of remaining staff resulting in greater absenteeism and poorer productivity.

(b) (i) Wages payable March 2008

30 employees 4 weeks 38 hours/wee

= 4,560 hours K3 per hour

= K13,680

Output in month 456 units

Direct labour cost per unit of X = K123,680/456 = K30 per unit.

(c) Operatives

A B C

Basic pay 140 hrs K3 150 hrs K3 120 hrs K3

K420 K450 K360

Overtime 17 hrs K4.50 22 hrs K4.50 20 hrs K4.50

K76.50 K99.00 K90.00

Total K496.50 K549.00 K450.00


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(d) Accounting treatment of overtime premium

In most industries, overtime is worked for reasons that include additional orders, to offset time lost

through breakdown or staff absence; or simply to achieve the levels of volume for current orders,

supported by current staffing levels.

In such cases, this type of overtime is simply analysed as indirect and treated as part of overhead

cost. However, if overtime was worked as a result of specific request from a customer to him to

finish an urgent order, then it would be treated as direct labour.


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Question 3

(a) Abnormal gain in process 1:

KgInput 30,000

Less: normal loss 6,000 (30,000 20%)

Expected output 24,000

Less: actual output 24,500 (input to process

2)

Abnormal gain 500

(b) Process 2 Account

Kg K000 Kg K,000

Process 1 costs 24,500 308,700 Output 25,500 346,800

Added materials 6,000 32,900 Work-in-progress 5,000 63,200

Conversion costs 68,400

30,500 410,000 30,500 410,000

Workings:

1. Equivalent units (kg):

Material Conversion

Output 25,500 25,500 (24,500 + 6,000 5,000)

Closing work-in-progress 5,000 3,000 (5,000 0.6)

30,500 28,500

2. Costs:

Total K 341,600,000 68,400,000

K per equivalent unit 11,200 2,400 Total = K13,600

3. Valuation:

Output K346,800 (25,500 kg K13,600 per kg)

Closing WIP K63,200,000 (5,000 kg K11,200 per kg) + (3,000 kg K2,400 per kg)


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Question 4

(a) Overhead analysis sheet

Dept 1 Dept 2 Service GeneralDept Factory

K000 K000 K000 K000

Initial overhead 38,000 46,500 26,500 23,000

Re-apportion General factory 9,200 11,500 2,300 (23,000)

28,800

Re-apportion Service 60% on labour 7,680 9,600 (17,280)

Re-apportion Service 40% on machine 5,760 5,760 (11,520)

60,640 73,360

Budgeted output 120,000 120,000

Overhead absorption rate per unit (K) 505 611

K

(b) Full Cost - Materials 700

Labour 550

Variable manufacturing overheads 200

Fixed manufacturing overheads 1,116

2,566

Operating Profit Statement Full Absorption Costing Method.

K000 K000

Sales 120,000 3,600 432,000

Production cost (120,000 2,566) 307,920

Less closing inventory 0 307,920

Gross profit 124,080

Non-manufacturing overheads 87,500

Reported profit 36,580


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(c) Operating profit Statement marginal costing method

K000 K000

Sales (120,000 x 3,600) 432,000

Production cost (120,000 1,450) 174,200

174,000

Contribution 258,000

Manufacturing overheads 134,000

Non-manufacturing overheads 87,500

(221,500)

Reported profit 36,500


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Question 5

(a) (i) Statement of Equivalent units

Overheads Units completed C.W..PTotal

Equiv. Units E.V

Material 5,990 1,600 7,590

Labour & overheads 5,990 960 6,950

(ii) Cost per unit

Total Costs Total E.V.Cost per unit

Material (478,500-7,920) 7,590 62

Labour & overheads 347,500 6950 50

112

(iii) Statement of valuation

Closing W.I.P

1,600 62 99,200

960 50 48,000

147,200

(iv) Units Amt Units Amt

Materials 8,250 478,500 Output 5,990 670,880

Labour

& overheads 347,500 Normal loss 660 7,920

Closing W.I.P 1,600 147,200

8,250 826,000 8,250 826,000


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Working

1. Normal loss 8% 8,250 = 660.

Expected output (8,250 660) = 7,590

Closing W.I.P = 1, 600

Account title

Each correct entry

(b) (i) Normal loss is the expected loss in a process. It is the level of loss or waste unit

management would expect to occur under normal operating conditions.

Abnormal loss is the amount by which the actual loss exceeds the expected or normal loss

in a process.

(ii) Normal loss is not given a cost. If normal is sold as scrap the revenue reduces the input

cost of the process. Abnormal loss is given a cost like good units.


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Question 6

(a) (i) Material price variance K

93,000 kg should have cost ( K4,000) 372,000,000

But did cost 390,000,000

Material price variance 18,000,000 (A)

(ii) Material usage variance

4850 units should have used ( 20) 97,000 kgs

But did use 93,000 kgs

Material usage variance in kgs 4,000 kgs (F)

X standard material price K4,000

K16,000,000 (F)

(b) (i) Labour rate variance K200,000 hours should have cost (x K2,000) 400,000,000


Labour rate variance 20,000,000 (F)

(ii) Labour efficiency variance

4,850 units should have used ( 30) 145,500 hours

But did use 185,000 hours

Labour efficiency variance in hours 39,500 hoursX standard labour rate K2,000

Labour efficiency variance in K K79,000,000 (A)

(iii) Idle time variance

15,000 hours K2,000 K30,000,000 (A)

(c) (i) Variable overhead expenditure variance K

185,000 hours should have cost ( K300) 55,500,000


Variable overhead expenditure variance 500,000 (A)(ii) Variable overhead efficiency variance

4,850 units should have used ( 30) 145,500 hours

But did use 185,000 hours

Variable o/head efficiency variance in hrs 39,500 hours (A)

X standard variable o/head rate K300

Variable o/head efficiency variance in k K11,850,000 (A)


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(d) (i) Fixed overhead expenditure variance K

Budgeted fixed o/heads (5,100 K111,000) 566,100,000

Actual fixed o/heads 575,000,000

Fixed overhead expenditure variance 8,900,000 (A)

(ii) Fixed overhead volume efficiency variance

4,850 Yoyo should have taken (x 30 hrs) 145,500 hours

But did take 185,000 hours

Fixed o/head volume efficiency variance 39,500 hours (A)

X standard fixed o/head absorption rate per hour K3,700

146,150,000 (A)(iii) Fixed overhead volume capacity variance

Budgeted hours of work (5,100 30 hrs) 153,000 hours

Actual hours of work 185,000 hours

32,000 hours

X standard fixed o/head absorption rate per hr. K3,700

K118,400,000 (F)


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TECHNCIAN LEVEL

T2: COST ACCOUNTING

SERIES: DECEMBER 2010

TOTAL MARKS 100



1. You have ten (10) minutes reading time. Use it to study the examination paper carefully so that you

understand what to do in each question. You will be told when to start writing.







5. The marks shown against the requirement(s) for each question should be taken as an indication of

the expected length and depth of the answer.





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SECTION A

Attempt ALL multiple choice questions in this section.

Each of the following questions has only ONE correct answer. Write the LETTER of the correct answeryou have chosen in your answer booklet. Marks allocated are indicated against each question.

Data For Questions 1.1 and 1.2

A company makes special assemblies to customers orders and uses job costing. The data for period 1

are:

Job. No. Job No. Job No.

J10 J20 J30

K K K

Opening work in progress 26,800 42,790

Material added in period 17,275 18,500

Labour for period 14,500 3,500 24,600

The budgeted overheads for the period were K126,000.

1.1 What overheads should be added to job number J30 for the period?

A K24,600

B K65,157

C K72,761

D K126,000 (2 marks)

1.2 Job No J20 was completed and delivered during the period and the firm wishes to earn 333

1%

profit on sales. What is the selling price of Job No J20.

A K69,435

B 75,521

C K84,963

D K138,870 (2 marks)


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1.3 Which of the following statements about predetermined overhead absorption rates are true?

(i) Using a predetermined absorption rate avoids fluctuations in unit costs caused by abnormally

high or low overhead expenditure or activity levels.

(ii) Using a predetermined absorption rate offers the administrative convenience of being able to

record full production costs sooner.

(iii) Using a predetermined absorption rate avoids problems of under/over absorption of

overheads because a constant overhead rate is available.

A (i) and (ii) only.

B (i) and (iii) only.

C (ii) and (iii) only

D All of them. (2 marks)

1.4 Inventory cost control is best defined as:

A. The recording of accounting transactions relating to inventory cost.

B Ensuring that losses due to poor stores procedures are minimized.

C Minimizing inventory cost by implementing control from the point at which the inventory is

chosen to its issue into the production process.

D The process of having a management member responsible for each phase of the movement

of inventory from the choice of inventory to its issue into the production process.

(2 marks)

1.5. The following extract is taken from the production costs at two levels for Dust Limited.

Level one (1) Level two (2)

Production (units) 4,000 6,000

Production costs (K) 11,100,000 12,900,000

The cost allowance for level three (3) when activity level is budgeted at 5,000 Units is:

A K4,500,000B K12,000,000

C K14,700,000

D K16,500,000 (2 marks)


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1.6 Which of the following is a characteristic of an investment centre?

A Managers have control over marketing

B Management has a sales team

C Management has a sales team and is given a credit control function.

D Managers can purchase and dispose of capital assets. (2 marks)

1.7 DM Limited manufactures a single product C, for which the standard material cost is as follows:

STANDARD COST

Material 14 Kg at K3,000 K42,000 per unit

During May 2009, 800 units of product C were manufactured, 12,000 Kg of material were

purchased for K33,600,000, of which 11,500 Kg were issued to production.

DM Limited values all stock at standard cost.

The materials prices and usage variances for May 2009 were:

Price Usage

A. K2,300,000 (F) K900,000 (A)

B. K2,300,000 (F) K300,000 (A)

C. K2,400,000 (F) K900,000 (A)

D. K2,400,000 (F) K840,000 (A) (2 marks)

1.8. A System in which both financial accounts and cost accounts are handled together and presented

as one set of account is best described as:

A. An account independent system

B. Reconciled system

C. An integrated system

D. An inter-locking system (2 marks)

1.9. A component manufacturer with multiple outlets stocks a component for which the following

information is available:

Average usage per day 75 Units

Maximum usage per day 95 Units

Minimum usage per day 50 Units

Lead time 12 18 days

Re-order quantity 1,750 Units


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Based on the data above, calculate the maximum inventory level?

A 1,750 units.

B 2,275 units.

C 2,860 units.

D 2,900 units. (2 marks)

1.10 Apportionment of overhead cost may be defined as:

A. Charge to a cost centre of an overhead cost item with no estimation.

B Charge each cost centre with a share of an overhead cost using an appropriate basis to estimate

the benefit extracted by each cost centre.

C Charge to cost units for the use of an overhead cost.

D Classification of overhead cost as fixed or variable. (2 marks)(Total 20 marks)


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SECTION B:

Attempt any FOUR questions in this Section.

Question 2

(a) Two products (Y and Z) are jointly produced in a single process. Joint costs for a period

amounted to K52,000. Output of the two products in the period was:

Product Y 2,000 units

Product Z 3,500 units

There was no opening or closing work in progress or finished goods inventory. Both products

are currently sold without further processing for:

Product Y K12.00 per unit

Product Z K16.00 per unit

Sales values are used as the basis for apportioning joint costs.Required:

Prepare a Profit statement showing apportioned costs to each product in the period.

(6 marks)

(b) (i) Describe three main ways in which the costing of services differs from the costing of

manufactured products. (6 marks)

(ii) A Soweto businessman operates a fleet of 10 buses. Operating data are as follows:

DESCRIPTION COST

Purchase of vehicles

(depreciated on a Straight-line basis over 5 years) K920 million (for 10 buses)

Vehicle disposal value (after 5 years) K8 million (per bus)

Road fund licence and insurance K4.5 million (per bus per year)

8 tyres per vehicle replaced after every

40,000 kilometres at K0.5 million per tyre.

Servicing done every 16,000 kilometres at K1.3 million per bus.

Fuel consumption is 1 litre per 4 kilometres at K1000 per litre

Vehicle usage is 80,000 kilometres per vehicle per year.

Each driver of a vehicle is paid K12 million per year.

Required:

Calculate the total vehicle operating costs per kilometre (to 2 decimal places). (8 marks)

(Total: 20 marks)


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Question 3

(a) PM LTD maintains a cost ledger for accounting purposes.

From the cost accounts, the following information was available for the period:K

Cost of finished goods produced 1,024,100

Cost of goods sold 986,920

Direct material issued 395,500

Direct wages 170,960

Production overheads (incurred) 416,440

Direct material purchases 433,180

In the cost accounts, additional depreciation of K25,000 per period is charged and production

overheard are absorbed at 250% of wages.

The various cost ledger account balances at the beginning of the period were:

K

Stores account 108,500

Work-in progress account 178,200

Finished goods account 84,150

Required:

Prepare the following accounts in the cost ledger, showing clearly the double entries between the

accounts, and the closing balances:

Stores account

Work-in progress account

Finished goods account

Production overheard account (12 marks)


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(b) ABD Ltd. Manufacturing makes a product with the following standard cost specification.

K

Direct material 45kgs at K8.20 per kilo 369

Direct labour 25hrs at K6.00 per hour 150

Total standard variable cost 519

Fixed production overhead K3.60 per direct labour hour 90

Total production standard cost 609

In period 7 there was a budget of 200 units. Actual production was 220 units with costs as follows.

Period 7 Actual results

K

Direct materials 10,390kgs 82,704

Direct labour hours 5,700hours K5.90 33,630

Fixed overheard 18,912

Total costs 135,246

ABD Ltd. operates a standard absorption costing system.

There were no stocks at the beginning or end of period 7.

Required:

Calculate the following cost variances.

(i) Direct materials price variance and Direct Materials usage variance (4 marks)

(ii) Direct labour rate variance and Direct Labour efficiency variance (4 marks)

(Total: 20 marks)


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Question 4

(a) CAVES Ltd. manufactures a single product using material X. The following information relates to

issues and receipts of material X during the year ended 31 December 2009.

Material X-Inventory Card

Date Details units Receipts Total cost IssuedUnit cost(K) (K) Units

01 Jan 09 Balance b/f 100 4.50 450.00

03 Feb 09 issued 70

04 Mar 09 Received 40 5.20 208.00

06 Jun 09 Issued 20

17 Aug 09 Received 50 4.90 245.00

10 Oct 09 Issued 30

17 Nov 09 Received 20 5.35 107.00

02 Dec 09 Issued 30

Required:

Calculate separately the cost of each issue during 2009 using:

(i) First-in, first-out method of pricing; (5marks)

(ii) Last-in, first-out method of pricing; (5marks)

(iii) Average cost method of pricing, where the average cost is calculated upon each movementin inventory (that is, the weighted average method) (4marks)

(b) A small manufacturing business comprises three production departments undertaking machining,

assembly and finishing operations and support departments for stores and for buildings. A

production period budgeted cost and resource profile for each of the five departments is as follows:

Machining Assembly Finishing Stores Buildings

Overhead costs (K) 350,000 250,000 185,000 125,000 320,000

Space (meters) 500 400 450 650 650

Material (volume) 12,000 35,000 5,000Direct labour hours 6,000 7,500

Direct machine hours 8,000

Required:

(i) Re-apportion stores and buildings costs using a suitable basis. (3marks)

(ii) Calculate absorption rates for each of the three production departments. (3marks)

(Total: 20 marks)


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Question 5

Musalale Ltd manufactures three products, AEE, BEE and CEE. Each product uses the same materials

and the same type of direct labour but in different quantities. The company currently uses a cost plus

basis to determine the selling price of its products. This is based on full cost using an overhead

absorption rate per direct labour hour. However, the Managing Director is concerned that the company

may be losing sales because of its approach to setting prices. He thinks that a marginal costing

approach may be more appropriate, particularly since the workforce is guaranteed a minimum weekly

wage and has a three-month notice period.

Required:

(a) State two advantages and two disadvantages of (i) marginal and (ii) absorption costing

systems. (4 marks)

(b) The direct costs of the three products are shown below:

Product AEE BEE CEE

Budgeted annual production (units) 7,500 12,000 20,000

Cost per unit (Kwacha)

Direct materials 7,000 9,000 6,000

Direct labour (K2,000/hour) 8,000 6,000 10,000

In addition to the above direct costs, Musalale incurs annual indirect production costs of

K20,750,000.

Required:

Calculate the full cost per unit of each product using the absorption costing system. (6 marks)

(c) An analysis of the companys indirect production costs shows the following:

Cost Pool Cost driver

Material ordering costs K4,372,000 Number of orders

Machine setup costs K1,992,000 Number of batches

Machine running costs K7,948,300 Number of machine hours

General facility costs K6,437,700 Number of machine hours


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The following additional data relate to each product:

Product AEE BEE CEE

Machine hours per unit 10 16 14

Batch size (units) 500 400 1,000

Supplier orders per batch 8 6 10

Required:

Calculate the full cost per unit of each product using Activity Based Costing. (10 marks)

(Total: 20 marks)


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Question 6

The following data have been extracted from the budgets of Choma Ltd, a company which manufactures

and sells a single product:

K per unit

Selling price 45.00

Direct material cost 10.00

Direct wages cost 4.00

Variance overhead cost 2.50

Fixed production overheads are budgeted at K400,000 per annum. Normal production levels are thought

to be 320,000 units per annum.

Budgeted selling and distribution costs are as follows:

Variable K1.50 per unit sold

Fixed K80,000 per annum

Budgeted administration costs are K120,000 per annum.

The following pattern of sales and production is expected during the first six months of 2011:

January March April June

Sales (units) 60,000 90,000Production (units) 70,000 100,000


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There is to be no inventory on 1 January 2011.

Absorption Costing Profit Statement

January to 31 March April to 30th June

2011 2011

K000 K000 K000 K000

Sales 2,700 4,050

Cost of Sales

Opening Inventory 177.50

Production 1242.50 1775.00

Closing Inventory (177.50) (355.00)

(1,065) (1,597.50)

Gross profit 1,635 2,452.50

Over/(Under) absorbed (12.5) 25

Selling & distribution Costs

Variable (90) (135)

Fixed (20) (20)

Administration Costs (30) (30)

Profit for the quarter 1,482.5 2,292.5

* Inventory Valuation: 31/3/1170,000

10,000K1,242,500= K177,500

30/6/11100,000

20,000K1,775,000= K355,000


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Required:

(a) Prepare a profit statement for each of the two quarters, in a columnar format, using the marginal

costing method. (14 marks)

(b) Reconcile the marginal costing and absorption costing profits for the quarter January to 31 March

2011. (3 marks)

(c) Write up the fixed production overhead control account for the quarter to 31 March 2011, using

absorption costing principles. Assume that the actual fixed production overhead costs incurred

amounted to K102,400 and the actual production was 74,000 units. (3 marks)

(Total: 20 marks)

END OF PAPER


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DECEMBER 2010

T2 COST ACCOUNTING

SUGGESTED SOLUTIONS


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SECTION A

MULTIPLE CHOICE

Solution 1

1.1 C

1.2 C

1.3 A

1.4 C

1.5 B

1.6 D

1.7 C

1.8 C

1.9 C

1.10 B

SECTION B

Solution 2

(a) Gross profit statement

Product Y Product Z

K K

Sales 24,000 56,000

Joint costs apportioned 15,600 36,400

Gross profit (total) 8,400 19,600


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Workings

Sales Value:

Product Y 2,000 units at K12 /unit = K24,000 (30%)Product Z 3,500 units at K16/unit = K56,000 (70%)

K80,000

Joint cost apportionment:

Product Y K15,600 (K52,000 0.3)

Product Z K36,400 (52,000 0.7)

Total K52,000

(b) (i) Service costing is used when there is no physical product and therefore no inventory canbe held.

Service costs are often averaged over a standard unit of measurement to obtain a cost

per unit of service. This is often a composite unit, such as patient-days in a hospital or

tonne-km in a haulage company.

There is often a very high proportion of fixed costs and the key to high profits is the

efficient use of assets.

(2 marks for each point)

(ii) Cost description Cost per vehicle

(K000)

Depreciation (w1) 16,800

Road Tax licence and insurance 4,500

Tyres *8 80,000/40,000 K500,000) 8,000

Servicing (80,000/16,000 K1,300,000) 6,500

Fuel (80,000/4 K1,000) 20,000

Driver 12,00067,800

Cost per km = K67,800,000/80,000 = K847.50 (to 2 d.p)

Working

Depreciation cost per vehicle =5years

8m)K(920m= K16.8 mSolution 3


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(a) (i) Stores account

K K

Balance b/d (opening inventory) 108,500 work-in-progress 395,500

Purchases (payables/cash) 433,180 Balance c/d (closing inventory) 246,180

641,680 641,680

Balance b/d 246,180

Work-in-progress account

K K

Balance b/d (opening inventory) 178,200 Finished goods account 1,024,100

Stores account 395,500 Balance c/d (closing inventory) 147,960

Direct wages 170,960Production Overhead account 427,400

(250% K85,480) 1,172,060 1,172,060

Balance b/d 147,960

Finished goods account

K K

Balance b/d (opening inventory) 84,150 Cost of goods 986,920

Purchases (payables/cash) 1,024,100 Balance c/d (closing inventory) 121,330

1,108,250 1,108,250

Balance b/d 121,330

Production overhead account

K K

Cash/payables (overheads incurred) 416,440 Work-in-progress 427,400

Depreciation 25,000 Under-absorbed overhead 14,040

441,440 441,440

Overhead incurred in the period consists of K416,440, plus additional depreciation of

K25,000 giving a total of K441,440.

Overheads absorbed amount to only K427,400. The balance of K14,040 is the amount of

under-absorbed overhead which will eventually be charged to the income statement (3 marks)

(b) (i) Direct material price variance


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K

10,390 kgs of material should have cost ( K8.20) 85,198

But did cost 82,704

Direct material price variance 2,494(F)

Direct material usage variance

220 units should have used ( 45 kgs) 9,900 kgs

But did use 10,390 kgs

Usage variance in kgs 490 kgs

X standard cost per kilogram 8.20

Usage variance in Kwacha K4,018 (A)

(ii) Direct Labour rate variance

K

5,700 hours of labour should have cost ( K6.00) 34,200

But did cost 33,630

Direct labour rate variance 570 (F)

Direct Labour efficiency variance

K

220 units should take ( 25 hrs) 5,500 hrs

But did take 5.700 hrs

Labour efficiency variances in hours 200 hrs (A)

X standard rate per hour 6

Labour efficiency variance 1,200 (A)


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Solution 4

(a) (i) FIFO inventory card

Description: Material X Inventory codeDate Detail Receipts Issues Balance

Qty Unitcost

Value Qty Unitcost

Value Quantity Unitcost

Value

K K K K K K

1/01 Bal b/d 100 4.50 450

3/02 70 4.50 315 30 4.5 135

4 /03 40 5.20 208 30 4.5 135

40 5.20 208

6 /06 20 5.20 104 10 45 135

40 5.20 2

17/08 50 4.90 245 30 4.5 135

20 5.20 104

50 4.90 245

10 /10 30 4.90 147 30 4.5 135

20 5.20 104

20 4.90 98

17 /11 20 5.35 107 30 4.5 135

20 5.20 104

2/12 20 5.35 107 30 4.5 135

10 4.90 49.00 20 5.20 104

10 4.90 49.00

60 288


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(ii) LIFO inventory card

Description: Material X Inventory code

Date Detail Receipts Issues Balance

Qty Unit

cost

Value Qty Unit

cost

Value Quantity Unit

cost

Value

K K K K K K

Bal b/f 100 4.5 450.00

3 /02 70 4.50 315.00 30 4.50 135

4 /03 40 5.20 208 30 4.5 135

40 5.20 208

6 /06 20 5.20 104 30 4.5 135

20 5.20 104

17 /07 50 4.90 245 30 4.5 135

20 5.20 104

50 4.90 245

10 /10 30 4.90 147 30 4.5 135

20 5.20 104

20 4.90 98

17/11 20 5.35 107 30 4.5 135

20 5.20 104

20 4.90 98

20 5.35 107

2 /12 20 5.35 107 30 4.5 13510 4.90 49 20 5.20 104

10 4.90 49

60 288


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(iii) AVCO inventory card

Description: Material X Inventory code..

Date Detail Receipts Issues Balance

Qty Unit cost Value Qty Unit cost Value Quantity Unit cost Value

2009 K K K K K K

1 Jan Bal b/d 100 4.50 450.00

3 Feb 70 4.50 315.00 30 4.50 135.00

4 March 40 5.20 208.00 70 4.90 343.00

6 June 20 4.90 98.00 50 4.90 245.00

17 Aug 50 4.90 245.00 100 4.90 490.00

10 Oct 30 4.90 147.00 70 4.90 343.00

17 Nov 20 5.35 107.00 90 5.00 450.00

2 Dec 30 5.00 150.00 60 5.00 300.00

(b) (i) Overhead Apportionment Schedule

Basis Machining Assembly Finishing stores Building

K K K K K

Costs As given 350,000 250,000 185,000 125,000 320,000

Reapp bldgs. Space 80,000 64,000 72,000 104,000 (320,000)

229,000

Reapp. Stores material 52,846 154,135 22,019 (229,000)

482,846 468,135 279,019 (ii)

Direct labour/machine hrs 8,000 6,000 7,500

Absorption rate K 60.36 K78.02 K37.20

Per Machine Hour per labour Hour per labour Hour


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Solution 5

(a) (i) Marginal costing

Advantages Disadvantages

Contribution per unit is constant Closing inventory is valued at

variable cost instead of full cost.

No under or over absorption adjustment required Fixed costs are not shared among

the units but written off in full instead.

Useful for decision making

Simple to operate

(ii) Absorption Costing

Advantages Disadvantages

It includes fixed costs in inventory More complex to operate than marginal

costing.

Absorption overheads into the costs of products Does not provide useful information for

is the best way of estimating job costs and decision making

profits on jobs

Any two(2) for each ( mark each)

(b) Full cost per unit using Absorption Costing:

Product: AEE BEE CEE

Cost K K K

Direct material 7,000 9,000 6,000

Direct labour 8,000 6,000 10,000

Overheads (w1) 500 375 625

15,500 15,375 16,625


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Working

1 Overheads

Product: AEE BEE CEE Total

Budget Units 7,500 12,000 20,000

Labour hrs/Unit 4 3 5

Total Labour hours 30,000 36,000 100,000 166,000

Overhead rate =hrsLabour166,000

0K20,750,00

= K125/Labour hr.


Labour hrs/Unit 4 3 5

OAR (K/hr) 125 125 125

K500 K375 K625

(c) Full Cost per unit using Activity Based costing.


Cost K K K

Direct material 7,000 9,000 6,000

Direct labour 8,000 6,000 10,000

Overheads (w2) 306.39 286.68 249.59

15,306.39 15,286.68 16,249.59

Working 2

Product: AEE BEE CEE Total

Budget Units 7,500 12,000 20,000

Batch Size 500 400 1,000

Number of batches

(Budgeted Units/Batch Size) 15 30 20 65

Total machine hours

(Budgeted units hrs/Unit) 75,000 192,000 280,000 547,000


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Total supplier Orders

(Number of batches

Order/batch) 120 180 200 500

Cost Driver Rates

Material Ordering Costs =orders500

K4,372,000= K8,744/order

Machine Setup costs =batches65

K1,992,000= K30,646.15/batch

Machine running costs =hrsmachine547,000

K7,948,300= K14.53/machine hour

General facility Costs =hrsmachines547,000

K6,437,700 = K11.77/machine hour

Cost apportionment:

Product AEE Cost per Unit

K

Material Ordering Costs =nitsu7,500

orders120K8,744= 139.90

Machine Setup costs =units7,500

15K30,644.15 = 61.29

Machine running costs = K14.53 10 hrs = 145.30

General facility Costs = K11.77 10 hrs = 117.70

464.19


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Product BEE Cost per Unit

K

Material Ordering Costs =units12,000

orders180K8,744

= 131.16


batches30K30,646.15= 76.62


General facility Costs = K11.77 16 hrs = 188.32

628.58

Product CEE Cost per Unit

K

Material Ordering Costs =units20,000

orders200K8,744= 87.44


batches20K30,646.15= 30.65


General facility Costs = K11.77 14 hrs = 164.78486.29


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Question 6

(a) Choma Ltd

Marginal Costing Profit Statement

January to 31 March April to 30th June

2011 2011

K000 K000 K000 K000

Sales 2,700 4,050

Cost of Sales

Opening Inventory 165

Production 1,155 1,650

Closing Inventory (165) (330)

990 1,485

Selling & distribution (W1) 90 135

(1,080) (1,620)

Contribution 1,620 2,430

Less Fixed Costs

Production 100 100Selling & Distribution 20 20

Administration 30 30

Profit for the quarter 1,470 2,280

(1 mark for each entry except for total and sales)

(b) Reconciliation Statement for January to March 2011

K000

Marginal Costing Profit 1,470.0

Add: Change in Inventory (10,000 x K1.25/unit) 12.5

Absorption Costing profit 1,482.5


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(c ) Production Overhead Control Account

K K

Payables 102,400 WIP 92,000

(74,000 1.25)

Over/under absorption a/c 9,900

102,400 102,400

END


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TECHNCIAN LEVEL

T2: COST ACCOUNTING

SERIES: JUNE 2011

TOTAL MARKS 100



1. You have ten (10) minutes reading time. Use it to study the examination paper carefully so thatyou understand what to do in each question. You will be told when to start writing.







5. The marks shown against the requirement(s) for each question should be taken as an indication ofthe expected length and depth of the answer.





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SECTION A

Attempt ALL multiple choice questions in this section.

Question 1

Each of the following questions has only ONE correct answer. Write the LETTER of the correct answer

you have chosen in your answer booklet. Marks allocated are indicated against each question.

1.1 Chundu Ltd, a tyre fitter, stocks a popular tyre for which the following information is available.

Average usage 140 tyres per day

Minimum usage 90 tyres per day

Maximum usage 175 tyre per dayLead time 10 16 days

Re-order quantity 3000 tyres

Based on the data above, what is the reorder level?

A 2,240

B 2,800

C 3,000

D. 5,740 (2 marks)

1.2 Using the data in 1.1 above, calculate the maximum stock level.

A 2,800

B 3,000

C 4,900

D 5,800 (2 marks)

1.3. The use of variable cost as the minimum price to be considered when negotiating for a job order

may be acceptable whenA the company has idle production capacity.

B marginal cost accounting system is in use.

C the order will be lost if a higher price is sought.

D the use of this pricing basis secured a previous order from the same customer. (2 marks)


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1.4. The standard cost information for Jumbos single product shows the standard direct material

content to be 4 litres at K3,000 per litre.

Actual results for April were:

Production 1,500 units

Material used 5,000 litres at a cost K16,000,000

All of the materials were purchased and used during the period. The direct material Price and

usage variances for April are:

Material price Material usage

A K1,000,000 (F) K3,000,000 (F)

B K1,000,000 (F) K3,000,000 (A)

C K1,000,000 (A) K2,500,000 (F)D K1,000,000 (A) K3,000,000 (F) (2 marks)

1.5 Which of the following would be illustrated by the cost curve shown below?

A Direct material cost

B Direct labour cost

C Variable cost per unit

D Fixed cost per unit (2 marks)

Cost

(Kwacha)

Quantity (Q)


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1.6. Which of the following describes a cost unit?

A. Cost per unit of output

B. Direct cost

C. Unit of productD. Production department (2 marks)

1.7. When materials are issued to production, what is the double entry?

A Dr work in progress control account

Cr Stores ledger control account

B Dr work in progress control account

Cr purchases ledger control account

C Dr production overhead control account

Cr stores ledge control accountD Dr Stores ledger control account

Cr work in progress control account (2 marks)

1.8 A food manufacturing process has a normal wastage of 10% of input. In a period, 5,000 kg of

material was input and there was an abnormal loss of 100 kg. No inventories are held at the

beginning or end of the process.

What is the quantity of good production achieved?

A 5,600 kgB 4,600 kg

C 4,490 kg

D 4,400 kg (2 marks)

DATA FOR QUESTIONS 1.9 AND 1.10

A factory consists of two production cost centres A and B and two service cost centres X and Z.

The total overheads allocated and apportioned to each cost centre are as follows:

A B X Z

K140,000 K120,000 K60,000 K80,000

The work done by the service cost centres (SCC) can be represented as follows:

A B X Z

Percentage of X 60% 40%

Percentage of Z 30% 50% 20%

After the re-apportionment of the SCC has been carried out using the direct method;


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1.9. What is the total overhead for production cost centre A?

A K212,250

B K209,600

C K240,000

D K180,000

(2 marks)

1.10. What is the total overhead for production cost centre B?

A K160,000

B K210,000

C K193,750D K190,400 (2 marks)

(Total: 20 marks)


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SECTION B

Attempt any FOUR questions in this Section

Question 2

DC Limited makes a single product MY for which the standard cost is as follows:

K

Direct materials 4 Kg at K120 per Kg 480.00

Direct labour 5 hours at K70 per hour 350.00

Fixed production overheads 5 hours at K100 per hour 500.00

1,330.00

Overhead is absorbed into production on the basis of standard hours of production and the normal

volume of production for the period just ended was 20,000 units (100,000 standard hours of production).

For the period under consideration, the actual results were:

Production of MY 18,000 units

Direct materials used 76,000 Kgs at a cost of K8,360,000

Direct labour cost incurred for 84,000 hours worked K6,048,000

Fixed production overhead incurred K10,300,000

Required:

(a) Prepare a standard cost card for production achieved. (3 marks)

(b) Calculate the following variances:

(i) Material Price and Material Usage variances. (4 marks)

(ii) Labour Rate and Labour Efficiency variances. (4 marks)

(iii) Fixed overhead Expenditure and Fixed overhead volume variances. (4 marks)

(c) Reconcile the Standard Cost to Actual Cost. (5 marks)

(Total: 20 marks)


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Question 3

(a) There are two production cost centres (P1 and P2) and two service cost centres (Material Stores

and Employee Facilities) in a factory. Estimated overhead costs for the factory for a period,

requiring apportionment to cost centres, are:

K000

Building depreciation and insurance 42,000

Salaries 27,000

Power to operate machinery 12,600

Other utilities 9,400

In addition the following overheads have been allocated to cost centres.

Cost centresP1 P2 Material Stores Employee facilities

(K000) (K000) (K000) (K000)

107,000 89,000 68,000 84,000

Further information:

Cost centres

P1 P2 Material Stores Employee

facilities

Total

Floor area (m2) 4,560 5,640 720 1,080 12,000

Number of employees 18 24 6 6 54

Share of other utilities

overhead

35% 45% 10% 10% 100%

Machine hours 6,200 5,800 12,000

Share of materials Store

overheads

40% 60% 100%

Required:(i) Prepare a schedule showing the allocated and apportioned factory overhead costs for each

cost centre. (10 marks)

(ii) Re-apportion the service cost centre overheads, using the direct method. (5 marks)


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(b) At the beginning of Month 2, the balance in the inventories ledger for material M27 was 2,400 kg

at K36,000 per kg. The movements of the material in month 2 and the prices per kg were as

follows:

Inventories ledger accountDay Receipts Issues

Quantity Price Quantity price

Kg k/kg Kg k/kg

4 5,000 36,500

6 4000 36,500

17 6,000 37,000

Required:

Calculate the closing inventory value at the end of month 2 by completing the inventories ledger.

(5 marks)

(Total: 20 marks)


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Question 4

(a) (i) Explain the accounting treatment for overtime premium and shift work premium payment.

(2 marks)

(ii) Mr Simcard Banda, a machine operator, is paid K5,000 per hour and has a normal working

week of 35 hours. Overtime is paid at the basic rate plus 50%. If in week 3, he worked 45

hours, calculate the overtime premium paid to him. (2 marks)

(b) Sambro Spinning Mills of Ndola is proposing to introduce an incentive scheme into its factory.

Required:

Describe three advantages and three disadvantages of individual incentive schemes. (6 marks)

(c) Sambro Spinning Mills of Ndola is undecided what kind of scheme to introduce in its factory. The

table below shows labour details relating to four individual employees, W, X, Y and Z.W X Y Z

Rate of pay per hour K6,000 K4,000 K5,000 K7,200

Actual hours worked 38 hrs 36hrs 40 hrs 34 hrs

Production units

Production A 84 240 - 240

Production B 144 152 - 540

Production C 184 - 100

Standard time allowed (per unit) is:

Product A 12 minutes per unit

Product B 18 minutes per unit

Product C 30 minutes per unit

Each minute is valued at K100 for piecework calculation purposes.

Required:

From the information above calculate earnings for each employee using:

(i) Guaranteed hourly rates only (basic pay)

(ii) Piecework, with earnings guaranteed at 80% of basic pay where an employee fails to earn

this amount.

(iii) Premium bonus, in which the employee receives two-thirds () of time saved in addition to

hourly pay. (Round off to the nearest thousand Kwacha) (10 marks)

(Total: 20 marks)


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Question 5

(a) IAS 11 accounting for long term contracts allows the contractor to take credit for part of the

attributable profit to the contract in each years contract.

Required:

Explain three specific matters to be considered when deciding the extent of profit to be taken on

uncompleted contracts. (6 marks)

(b) Chuchu contractors Ltd begun constructing a Radio station for Mwelesa Christians in Lusaka and

details of the contract no. RS158 during the year ended 30th September 2010 were as follows:

ITEM K000

Materials purchased and delivered to site 44,210

Materials issued from store 3,740Materials returned to store 860

Site wages 14,400

Site direct expenses 1,950

Plant sent to site 4,800

Plant returned from site 1,300

Architects fees 2,000

Sub-contract work 6,800

Head office overheads charged (12% of site wages)

At the year end, valuations were:

K000

Materials on site 1,240

Plant on site 2,050

Cost of work done but not yet certified (work in progress) 3,710

Prepayments 110

Accruals 370

During the year architects certificates to the value of K81,000,000 were issued, and Mwelesa

Christians made progress payments to this extent less 10% retention monies.Required:

(i) Prepare the contract account for No. RS158 showing clearly the figure of cost of work

certified carried down and work in progress carried down. (10 marks)

(ii) Calculate the profit taken on the contract. (4 marks)

(Total: 20 marks)


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Question 6

Chikunichisiasia Ltd manufactures a range of products and the data below refer to one product which

goes through one process only. The company operates a reporting system for process and product

costs and the data given below relate to Period 3.

There was no opening work-in-progress inventory.

5,000 units of material at K776.18 per litre were input at the start of the process.

K

Materials added 2,766,000

Direct wages incurred 1,311,000

Production overhead 1,494,000

Normal loss is 3% of input.

Closing work-in-progress was 800 litres but these were incomplete, having reached the following

percentages of completion for each of the elements of cost as follows:

%

Materials 75

Direct wages 50

Production overhead 25

270 litres were scrapped after a quality control check when the litres were at the following degrees ofcompletion:

%

Materials added 66

Direct wages 33

Production overhead 16

Litres scrapped, regardless of the degree of completion, are sold for K200 per litre.

Required:

(i) Prepare the following: Process account (7 marks)

statement of equivalent units, (4 marks)

statement of cost per equivalent units and (2 marks)

statement of valuation. (4 marks)

(ii) Prepare the abnormal gain or Loss account. (3 marks)

(Total: 20 marks)


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JUNE 2011

T2 COST ACCOUNTING

SUGGESTED SOLUTIONS


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SECTION A

Multiple Choice

Solution 1

1 B

2 C

3 B

4 D

5 C

6 C

7 A

8 D

9 B

10 D

SECTION B

Solution 2

(a) Standard Cost Card

K000

Direct material (K480

18,000) 8,640Direct Labour (K350 18,000) 6,300

Fixed overheads (K500 18,000) 9,000

Standard cost 23,940

(b) Variances

Direct material price variance = (K120 K110) 76,000

= K760,000 favourable

Materials usage variance = (72,000 76,000) K120

= K480,000 Adv

Labour Rate variance = (K70 K72) 84,000

= K168,000 Adv

Labour Efficiency variance = (90,000 84,000) K70

= K420,000 Fav

Fixed ohd Expenditure variance = (K10,000,000 K10,300,000)


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= K300,000 Adv

Fixed ohd Volume variance = (20,000 18,000) K500

= K1,000,000 Adv

(c) Reconciliation of Standard Cost to Actual Cost

K000Standard Cost (see (a) 23,940

K000 K000

Adverse Favourable

Material price 760

Material usage 480

Labour Rate 168

Labour Efficiency 420

Overhead Expenditure 300

Overhead volume 1,000

1,948 1,180 768 Adv

Actual cost 24,708


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Solution 3

(a) (i)

Bases P1 P2 Materialstores Employeefacilities Total

K000 K000 K000 K000 K000

Allocated 107,000 89,000 68,000 84,000 348,000

Apportioned;

Building depreciation & insurance

(On the basis of floor spaceoccupied)

15,960 19,740 2,520 3,780 42,000

(On basis of number of employees) 9,000 12,000 3,000 3,000 27,000

Power to operate machinery

(On the basis of machine hours) 6,510 6,090 - - 12,600

Other futilities

(On the basis of % share given) 3,290 4,230 940 940 9,400

141,760 131,060 74,460 91,720 439,000

(ii) Re-apportionment

Employee Facilities

Apportioned Costs 141,760 131,060 74,460 91,720

(On the basis of No. of employees) 34,395 45,860 11,465 (91,720)

Material Stores

(on the basis of % share given) 34,370 51,555 (85,925) NIL

210,525 228,475 NIL

(b) Material pricing method

Last-in First-out (LIFO) - because the issue on day 6 is at the latest price (i.e. the price of the

receipt on Day 4 rather the price of the opening inventory.)

End Month 2 closing inventory value Material M27

[(2,400 kg at K36,000) + (1,000 kg at K36,500) + (6,000 kg at K37,000)] = K344,900,000


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Solution 4

(a) (i) Overtime premium and shift-work premium are included as part of overheads. If overtime

premiums are charged directly to products/services or customers orders undertaken during

the overtime or night-shift period, they will bear higher costs than those produced during a

regular working week.

Overtime and night-shift work is usually necessitated by a generally high level of activity, not

by specific products or customers.

It is therefore inappropriagte to record activities undertaken during overtime or night hours as

being more costly than their counterparts undertaken during, say, a regular eight-hour day.

If, however, the overtime or shift premium are a direct result of a customers urgent request

for the completion of the order and not due to the general pressure of work, then the

overtime or shift premiums should be charged directly to the customer. It is important that

overtime and shift premiums are also analysed by departments for cost control purposes.

(ii) Overtime premium per hour = 50% K5,000

= K2,500

Overtime hours: (45 35) = 10 hours

Therefore, overtime premium pay = K2,500

10 hrs

= K25,000

(b) Advantages

(i) Both the firm and the employee should benefit from the introduction of an incentive scheme.

Employees should receive an increase in wages arising from the increased production. The

firm should benefit from a reduction in the fixed overhead cost per unit and an increase in

sales volume.

(ii) The opportunity to earn higher wages may encourage efficient workers to join the company.

(iii) Morale may be improved if extra effort is rewarded.

Disadvantages:

(i) Incentive schemes can be complex and difficult to administer.

(ii) Establishing performance level leads to frequent and continuing disputes.


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(iii) The quality of the output may decline.

(c) (i) Hourly Rate

Employee W:38 K6,000 = K228,000

Employee X: 36 K4,000 = K144,000

Employee Y: 40 K5,000 = K200,000

Employee Z: 34 K7,200 = K244,800

(ii) Piecework

Working: standard cost per unit for the standard time allowed.

Product A 12 minutes per unit K100 = K1,200

Product B 18 minutes per unit K100 = K1,800

Product c 30 minutes per unit K100 = K3,000

Employee W: (84 K1,200) + (114 x K1,800) + (184 K3,000) = K858,000

Employee X: (240 K1,200) + (152 K1,800) = K561,600

Employee Y: (100 K1,200) = K120,000

Employee Z: (240 K1,200) + (K540 K1,800) = K1,260,000

Only employee Y earns less than 80% of basic pay. Therefore, employee Y will receive a

gross wage of K160,000. ( mark)

(iii)Time Allowed

Hours

Time Taken Time saved

(Hours)

Bonus

(K000)

Guaranteed

Pay

(K000)

Total

Wages

(K000)

152 hrs 38 114 456 228 684

93.6 hrs 36 57.6 154 144 298

50 hrs 40 10 33 200 233

210 34 176 845 245 1,090


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Workings

(i) Time Allowed

Employee

W: shr15260

30x184

60

18x144

60

12x84

X: hrs.69360

18x152

60

12x240

Y: hrs5060

30100x

Z: hrs210

60

18x540

60

12x240

(ii) Bonus

W:3

2 114 K6,000 = K456,000

W:3

2 57.6 K4,000 = K154,000

Y:3

2 10 K5,000 = K33,000

Z:3

2 176 K7,200 = K845,000


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Solution 5

(a) The following should be considered when deciding the extent of profit to be taken on uncompleted

contracts:

(i) The successful outcome of the contract should be certain before any interim profit is taken.(ii) Any profits should only be taken in proportion to the work completed to date on the contract.

(iii) Any anticipated overall loss on the contract should be provided for as soon as it is

recognized.

(b) (i)

K000 K000

Materials purchased 44,210 Materials returned 860

Materials in store 3,740 Plant returned 1,300

Site wages 14,400 Prepayment c/d 110Site direct expenses 1,950 Stock at site c/d 1,240

Plant sent to site 4,800 Plant at site c/d 2,050

Architects fees 2,000 Cost of work certified (w1) c/d 70,800

Sub-contract work 6,800 Work in progress c/d 3,710

Head-office o/heads

(12.5% K14,400)

1,800

Accruals c/d 370

80,070 80,070

Workings

(w1)

Total cost of work done = K74,510,000

(Debit total minus credit total)

Cost of work done and not certified is = K3,710,000

Cost of work certified is

K74,510,000 K3,710,000 = K70,800,000

(b) (ii) Profit taken =43 of notional profit x

certifiedworkofValueprogressfrompaymentCash

Where Notional profit = value of work certified cost of work certified.

NP = K81,000,000 K70,800,000

= 10,200,000

Profit Taken =4

3 K10,200,000

81,000,000

0K72,900,00 = K6,885,000


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Solution 6

DR Process Account CR

Litres K Litres K

Material 5,000 3,880,900 Good Output 3,930 8,072,220

Material Added 2,766,000 Normal loss 150 30,000

Labour 1,311,000 Abnormal

Loss

120 162,480

Overheads 1,494,000 Closing WIP 800 1,187,200

5,000 9,451,900 5,000 9,451,900

DR Abnormal Gain & Loss Account CR

Litres K Litres K

Process Account 120 162,480 Scrap Account 120 24,000

Income

statement

138,480

120 162,480 120 162,480

Workings

LitresInput 5,000

Normal Loss 3% (150)

Expected Output 4,850

Abnormal Loss

(270 150) (120)

4,730

Closing WIP (800)

Good output 3,930


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1 Statement of Equivalent Units.

Inputunits

Outputunits

% Material % Materialadded

% Labour % Overhead

5000 Goodoutput

3,930 100 3,930 100 3,930 100 3,930 100 3,930

NormalLoss

150

Abnormal Loss

120 100 120 66 80 33 40 16 20

ClosingWIP

800 100 800 75 600 50 400 25 200

5000 5000 4,850 4,610 4,370 4,150

2. Cost of Equivalent Units

Material =units4,850

200)(150-K3,880,900 K= K794/unit

Material Added =units4,610

K2,766,000= K600/unit

Labour = K300/unit

Overhead = K360/unit

Total cost/Unit = K2,054/Unit

3. Valuation

Good Output = 3,930 units K2,054/unit = K8,072,220

Normal Loss = 150 units K200 / unit = K30,000

Abnormal Loss = (120 794) + (80 x 600) + (40 x 300) + (20 x 360) = K162,480

Closing WIP = (800 794) + ( 600 600) + (400 300) + (200 360) = K1,187,200

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