ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

TECHNICIAN LEVEL T2: Cost Accounting June 2010 December 2010 June 2011

QUESTION PAPERS AND SUGGESTED SOLUTIONS

Table of Contents

JUNE 2010

T2: COST ACCOUNTING ...................................................................... 3 SUGGESTED SOLUTIONS .................................................................. 12

DECEMBER 2010

T2: COST ACCOUNTING .................................................................... 23 SUGGESTED SOLUTIONS .................................................................. 37

JUNE 2011

T2: COST ACCOUNTING .................................................................... 51 SUGGESTED SOLUTIONS .................................................................. 62

ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

CHARTERED ACCOUNTANTS EXAMINATIONS TECHNCIAN LEVEL T2: COST ACCOUNTING SERIES: JUNE 2010 TOTAL MARKS 100 TIME ALLOWED: THREE (3) HOURS INSTRUCTIONS TO CANDIDATES
1. 2. 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. This paper is divided into TWO sections: Section A: Section B: 3. 4. 5. 6. 7. 8. Attempt ALL multiple choice questions. Attempt FOUR questions.

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. Do NOT write in pencil (except for graphs and diagrams). 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. All workings must be done in the answer booklet. Present legible and tidy work. Graph paper (if required) is provided at the end of the answer booklet.

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. B. C. D. 1.2 Semi fixed cost Fixed cost Step cost Variable cost 2 marks

The following data relates to an item of raw materials. Unit cost of raw materials Usage per week Cost of ordering material, per order Annual cost of holding inventory, as a % of cost Number of weeks in a year Calculate the economic order quantity, to the nearest unit? A. B. C. D. 316 Units 693 units 1,549 units 2,191 units 2 marks K20,000 250 units K400,000 10% 48

1.3

A company absorbs overheads based on labour hours. Data for the latest period are as follows: Budgeted labour hours Budgeted overheads Actual labour hours Actual overheads 4 8,500 K148,750,000 7,928 K146,200,000

2 marks

Based on the data above, calculate the under or overheads? A. B. C. D. 1.4 (i) (ii) (iii) (iv) A. B. C. D. 1.5 K2,550,00 under absorbed overhead K7,460,000 under absorbed overheads K13,282,000 over-absorbed over heads K7,998,000 over-absorbed Production is carried out in accordance with the wishes of the customer Work is usually of a relatively long duration Costs are averaged over the units produced in the period It establishes the costs of services rendered i, ii and iii ii and iii iii and iv i, iii and iv

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

2 marks

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 When direct materials are issued to production what is the double entry? A. Dr. Material Cr Production department B. C. D. Dr. Production overhead control Cr material stock account Dr. Bank Cr. Working in progress Dr. Work in progress Cr. Material Stock Account

2 marks

1.6

2 marks

1.7

Which of the following would not be used to estimate standard direct material prices? A. B. C. D. The availability of bulk purchase discounts Purchase contracts already agreed The forecast movement of prices in the market Performance standards in operation. 2 marks

1.8

An important feature of a cost centre is that: A. B. C. D. It uses only monetary information. It has clearly defined boundaries. It must be in one specific location only. 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. B. C. D. Profits will be higher if absorption costing is used Profits will be the same if either absorption costing or marginal costing was used. Profits will be higher if marginal costing is used 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 indirect labour K000 K000 Normal Basic pay 71,824 33,937 Overtime: Basic pay Premium Shift allowance Sick pay 15,514 3,879 7,700 3,935 102,852 What is the direct wages cost for department 5 in July 2009? A. B. C D. K71,824,000 K87,338,000 K98,917,000 K102,852,00 2 marks 9,981 2,495 3,879 856 51,148

Section B Attempt any FOUR questions in this Section Question 2 (a) (b) Identify FOUR costs to a business arising from labour turnover. 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) 4 marks

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. 2. 3. There is no work-in-progress at the end of any period There is a normal loss allowance of 20% of input In the period just ended (i) (ii) 30,000 kg of raw material were input Output was 24,500 kg

In Process 2. 1. 2. There are no losses In the period just ended, (i) (ii) 24,500 kg of processed material was input, after transfer from Process 1, at a cost of K308,700,000 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 (b) Prepare Process 2 account showing clearly both weights (kg) and values (k) 5 marks 15 marks Total: 20 marks

Question 4 A company manufactures a single product with the following variable costs per unit. Direct materials Direct labour Manufacturing overheads K 700 550 200 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 General 1 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 9

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% complete in 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 of variances is made every month. The standard cost card for the product, Yoyo is as follows: STANDARD COST CARD YOYO Direct materials 20 kilos at K4,000 per kilo Direct wages 30 hours at K2,000 per hour Variable overheads 30 hours at K300 per hour Fixed overhead 30 hours at K3,700 per hour Standard cost Budgeted (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 10 K000 80 60 9 111 260

Variable overheads amounted to K56 million Fixed overheads amounted to K575 million Required: Calculate the material labour, variable overhead and fixed overhead variances END OF PAPER

Total: 20 marks

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JUNE 2010 T2: COST ACCOUNTING

SUGGESTED SOLUTIONS

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Section A Question 1 Multiple Choice Questions 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 Workings 1.2
EOQ 2 w d ch

C D B D C D D B B D

= =

2 400,000 12,000 2,000

4,800,000

= 2,191 units 1.3 OAR =

148,750,000 8,500

= 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 13

Question 2 (a) The costs arising from labour turnover are; (i) (ii) (iii) (iv) (b) (i) Leaving costs, including the cost of administering the necessary documentation and possible disruption of work, especially if employees cannot be replaced immediately. Recruitment costs, comprising the cost of advertising, selection and engagement. This may include agency fees and relocation expenses. Learning cost, including the cost of training, and possible reduced productivity during the learning period and poorer quality work. Low morale of remaining staff resulting in greater absenteeism and poorer productivity. 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 Basic pay Overtime K4.50 Total 140 hrs K3 K420 17 hrs K4.50 K76.50 K496.50 B 150 hrs K3 K450 22 hrs K4.50 K99.00 K549.00 C 120 hrs K3 K360 20 hrs K90.00 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: Kg Input Less: normal loss Expected output Less: actual output 2) Abnormal gain (b) Process 2 Account Kg Process 1 costs Added materials Conversion costs 30,500 Workings: 1. Equivalent units (kg): Material Output Closing work-in-progress 25,500 5,000 30,500 2. Costs: Total K K per equivalent unit 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) 16 341,600,000 11,200 68,400,000 2,400 Total = K13,600 Conversion 25,500 (24,500 + 6,000 5,000) 3,000 (5,000 0.6) 28,500 24,500 6,000 K000 308,700 32,900 68,400 410,000 30,500 410,000 Output Work-in-progress Kg 25,500 5,000 K,000 346,800 63,200 30,000 6,000 24,000 24,500 500 (input to process (30,000 20%)

Question 4 (a) Overhead analysis sheet Dept 1 K000 Initial overhead Re-apportion General factory Re-apportion Service 60% on labour Re-apportion Service 40% on machine 38,000 9,200 7,680 5,760 Dept 2 K000 46,500 11,500 9,600 5,760 73,360 120,000 611 K (b) Full Cost - Materials Labour Variable manufacturing overheads Fixed manufacturing overheads 700 550 200 1,116 2,566 Operating Profit Statement Full Absorption Costing Method. K000 Sales 120,000 3,600 Production cost (120,000 2,566) Less closing inventory Gross profit Non-manufacturing overheads Reported profit 307,920 0 307,920 124,080 87,500 36,580 K000 432,000 Service Dept K000 26,500 2,300 28,800 (17,280) (11,520) General Factory K000 23,000 (23,000)

60,640 Budgeted output 120,000 Overhead absorption rate per unit (K) 505

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(c)

Operating profit Statement marginal costing method K000 Sales (120,000 x 3,600) Production cost (120,000 1,450) Contribution Manufacturing overheads Non-manufacturing overheads Reported profit 134,000 87,500 (221,500) 36,500 174,200 174,000 258,000 K000 432,000

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Question 5 (a) (i) Statement of Equivalent units Overheads Units completed Total 5,990 5,990 Total Costs Cost per unit Material Labour & overheads (iii) Statement of valuation Closing W.I.P 1,600 62 960 50 (iv) Materials Labour & overheads 8,250 347,500 826,000 Normal loss Closing W.I.P 660 1,600 8,250 7,920 147,200 826,000 Units 8,250 Amt 478,500 Output 99,200 48,000 147,200 Units 5,990 Amt 670,880 (478,500-7,920) 347,500 C.W..P Equiv. Units Material Labour & overheads (ii) Cost per unit Total E.V. 7,590 6950 62 50 112 1,600 960 E.V 7,590 6,950

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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 93,000 kg should have cost ( K4,000) But did cost Material price variance (ii) Material usage variance 4850 units should have used ( 20) But did use Material usage variance in kgs X standard material price (b) (i) Labour rate variance 200,000 hours should have cost (x K2,000) But did cost Labour rate variance (ii) Labour efficiency variance 4,850 units should have used ( 30) But did use Labour efficiency variance in hours X standard labour rate Labour efficiency variance in K Idle time variance 145,500 hours 185,000 hours 39,500 hours K2,000 K79,000,000 (A) K30,000,000 (A) K 55,500,000 56,000,000 500,000 (A) 145,500 hours 185,000 hours 39,500 hours (A) K300 K11,850,000 (A) 97,000 kgs 93,000 kgs 4,000 kgs (F) K4,000 K16,000,000 (F) K 400,000,000 380,000,000 20,000,000 (F) K 372,000,000 390,000,000 18,000,000 (A)

(iii)

15,000 hours K2,000 (c) (i) Variable overhead expenditure variance 185,000 hours should have cost ( K300) But did cost Variable overhead expenditure variance (ii) Variable overhead efficiency variance 4,850 units should have used ( 30) But did use Variable o/head efficiency variance in hrs X standard variable o/head rate Variable o/head efficiency variance in k 21

(d) (i) Fixed overhead expenditure variance Budgeted fixed o/heads (5,100 K111,000) Actual fixed o/heads Fixed overhead expenditure variance (ii) Fixed overhead volume efficiency variance 4,850 Yoyo should have taken (x 30 hrs) But did take Fixed o/head volume efficiency variance X standard fixed o/head absorption rate per hour (iii) Fixed overhead volume capacity variance Budgeted hours of work (5,100 30 hrs) Actual hours of work X standard fixed o/head absorption rate per hr.

K 566,100,000 575,000,000 8,900,000 (A)

145,500 hours 185,000 hours 39,500 hours (A) K3,700 146,150,000 (A) 153,000 hours 185,000 hours 32,000 hours K3,700 K118,400,000 (F)

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ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

CHARTERED ACCOUNTANTS EXAMINATIONS TECHNCIAN LEVEL T2: COST ACCOUNTING SERIES: DECEMBER 2010 TOTAL MARKS 100 TIME ALLOWED: THREE (3) HOURS INSTRUCTIONS TO CANDIDATES
1. 2. 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. This paper is divided into TWO sections: Section A: Section B: 3. 4. 5. 6. 7. 8. Attempt ALL multiple choice questions. Attempt FOUR questions.

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. Do NOT write in pencil (except for graphs and diagrams). 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. All workings must be done in the answer booklet. Present legible and tidy work. Graph paper (if required) is provided at the end of the answer booklet.

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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 answer you 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. J10 K Opening work in progress Material added in period Labour for period 26,800 17,275 14,500 Job No. J20 K 42,790 3,500 Job No. J30 K 18,500 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 B C D 1.2 K24,600 K65,157 K72,761 K126,000 (2 marks)
1 % 3

Job No J20 was completed and delivered during the period and the firm wishes to earn 33 profit on sales. What is the selling price of Job No J20. A B C D K69,435 75,521 K84,963 K138,870

(2 marks)

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1.3

Which of the following statements about predetermined overhead absorption rates are true? (i) (ii) (iii) A B C D Using a predetermined absorption rate avoids fluctuations in unit costs caused by abnormally high or low overhead expenditure or activity levels. Using a predetermined absorption rate offers the administrative convenience of being able to record full production costs sooner. Using a predetermined absorption rate avoids problems of under/over absorption of overheads because a constant overhead rate is available. (i) and (ii) only. (i) and (iii) only. (ii) and (iii) only All of them. The recording of accounting transactions relating to inventory cost. Ensuring that losses due to poor stores procedures are minimized. Minimizing inventory cost by implementing control from the point at which the inventory is chosen to its issue into the production process. 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) (2 marks)

1.4

Inventory cost control is best defined as: A. B C D

1.5. The following extract is taken from the production costs at two levels for Dust Limited. Level one (1) Production (units) Production costs (K) 4,000 11,100,000 Level two (2) 6,000 12,900,000

The cost allowance for level three (3) when activity level is budgeted at 5,000 Units is: A B C D K4,500,000 K12,000,000 K14,700,000 K16,500,000 (2 marks)

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1.6

Which of the following is a characteristic of an investment centre? A B C D Managers have control over marketing Management has a sales team Management has a sales team and is given a credit control function. 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 A. B. C. D. K2,300,000 (F) K2,300,000 (F) K2,400,000 (F) K2,400,000 (F) Usage K900,000 (A) K300,000 (A) K900,000 (A) 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. B. C. D. An account independent system Reconciled system An integrated system 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 Maximum usage per day Minimum usage per day Lead time Re-order quantity 26 75 Units 95 Units 50 Units 12 18 days 1,750 Units

Based on the data above, calculate the maximum inventory level? A B C D 1,750 units. 2,275 units. 2,860 units. 2,900 units. (2 marks)

1.10 Apportionment of overhead cost may be defined as: A. B C D Charge to a cost centre of an overhead cost item with no estimation. Charge each cost centre with a share of an overhead cost using an appropriate basis to estimate the benefit extracted by each cost centre. Charge to cost units for the use of an overhead cost. 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) (ii) Describe three main ways in which the costing of services differs from the costing of manufactured products. (6 marks) A Soweto businessman operates a fleet of 10 buses. Operating data are as follows: DESCRIPTION Purchase of vehicles (depreciated on a Straight-line basis over 5 years) Vehicle disposal value (after 5 years) Road fund licence and insurance 8 tyres per vehicle replaced after every 40,000 kilometres at Servicing done every 16,000 kilometres at Fuel consumption is 1 litre per 4 kilometres at Vehicle usage is 80,000 kilometres per vehicle per year. Each driver of a vehicle is paid Required: Calculate the total vehicle operating costs per kilometre (to 2 decimal places). (8 marks) (Total: 20 marks) 28 K12 million per year. K0.5 million per tyre. K1.3 million per bus. K1000 per litre COST K920 million (for 10 buses) K8 million (per bus) K4.5 million (per bus per year)

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 Cost of goods sold Direct material issued Direct wages Production overheads (incurred) Direct material purchases 1,024,100 986,920 395,500 170,960 416,440 433,180

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 Work-in progress account Finished goods account 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) 108,500 178,200 84,150

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(b)

ABD Ltd. Manufacturing makes a product with the following standard cost specification. K Direct material Direct labour 45kgs at K8.20 per kilo 25hrs at K6.00 per hour 369 150 519 90 609

Total standard variable cost Fixed production overhead K3.60 per direct labour hour Total production standard cost

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 33,630 18,912 135,246

Direct labour hours 5,700hours K5.90 Fixed overheard Total costs 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) (ii)

Direct materials price variance and Direct Materials usage variance Direct labour rate variance and Direct Labour efficiency variance

(4 marks) (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 01 Jan 09 03 Feb 09 04 Mar 09 06 Jun 09 17 Aug 09 10 Oct 09 17 Nov 09 02 Dec 09 Required: Calculate separately the cost of each issue during 2009 using: (i) (ii) (iii) (b) First-in, first-out method of pricing; (5marks) Last-in, first-out method of pricing; (5marks) Average cost method of pricing, where the average cost is calculated upon each movement in inventory (that is, the weighted average method) (4marks) Details Balance b/f issued Received Issued Received Issued Received Issued units 100 40 50 20 Receipts Unit cost(K) 4.50 5.20 4.90 5.35 Total cost (K) 450.00 208.00 20 245.00 30 107.00 30 Issued Units 70

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 Overhead costs (K) 350,000 Space (meters) 500 Material (volume) 12,000 Direct labour hours Direct machine hours 8,000 Assembly 250,000 400 35,000 6,000 Finishing 185,000 450 5,000 7,500 Stores 125,000 650 Buildings 320,000 650

Required: (i) Re-apportion stores and buildings costs using a suitable basis. (ii) Calculate absorption rates for each of the three production departments.

(3marks) (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) (b) State two advantages and two disadvantages of (i) marginal and (ii) absorption costing systems. (4 marks) The direct costs of the three products are shown below: Product Budgeted annual production (units) AEE 7,500 BEE 12,000 CEE 20,000

Cost per unit (Kwacha) Direct materials Direct labour (K2,000/hour) 7,000 8,000 9,000 6,000 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. (c) An analysis of the companys indirect production costs shows the following: Cost Pool Material ordering costs Machine setup costs Machine running costs General facility costs K4,372,000 K1,992,000 K7,948,300 K6,437,700 Cost driver Number of orders Number of batches Number of machine hours Number of machine hours (6 marks)

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The following additional data relate to each product: Product Machine hours per unit Batch size (units) Supplier orders per batch Required: Calculate the full cost per unit of each product using Activity Based Costing. (10 marks) (Total: 20 marks) AEE 10 500 8 BEE 16 400 6 CEE 14 1,000 10

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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 Direct material cost Direct wages cost Variance overhead cost 45.00 10.00 4.00 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 Fixed K1.50 per unit sold 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 Sales (units) Production (units) 60,000 70,000 April June 90,000 100,000

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There is to be no inventory on 1 January 2011. Absorption Costing Profit Statement January to 31 March 2011 K000 Sales Cost of Sales Opening Inventory Production Closing Inventory Gross profit Over/(Under) absorbed Selling & distribution Costs Variable Fixed Administration Costs Profit for the quarter * Inventory Valuation: 31/3/11 30/6/11 (90) (20) (30) 1,482.5
K1,242,500 10,000 = K177,500 70,000

April to 30th June 2011 K000 K000 4,050 177.50 1775.00 (355.00)

K000 2,700

1242.50 (177.50) (1,065) 1,635 (12.5)

(1,597.50) 2,452.50 25 (135) (20) (30) 2,292.5

K1,775,000 20,000 = K355,000 100,000

35

Required: (a) (b) (c) Prepare a profit statement for each of the two quarters, in a columnar format, using the marginal costing method. (14 marks) Reconcile the marginal costing and absorption costing profits for the quarter January to 31 March 2011. (3 marks) 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

36

DECEMBER 2010 T2 COST ACCOUNTING

SUGGESTED SOLUTIONS

37

SECTION A MULTIPLE CHOICE Solution 1

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 C C A C B D C C C

1.10 B

SECTION B Solution 2
(a) Gross profit statement Product Y K Sales Joint costs apportioned Gross profit (total) 24,000 15,600 8,400 Product Z K 56,000 36,400 19,600

38

Workings
Sales Value: Product Y 2,000 units at K12 /unit Product Z 3,500 units at K16/unit Joint cost apportionment: Product Y K15,600 Product Z K36,400 Total (b) (i) K52,000 Service costing is used when there is no physical product and therefore no inventory can be 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 Depreciation (w1) Road Tax licence and insurance Tyres *8 80,000/40,000 K500,000) Servicing (80,000/16,000 K1,300,000) Fuel (80,000/4 K1,000) Driver Cost per km = K67,800,000/80,000 = K847.50 (to 2 d.p) Working Depreciation cost per vehicle =
K(920m 8m) = K16.8 mSolution 3 5y ears

= =

K24,000 (30%) K56,000 (70%) K80,000 (K52,000 0.3) (52,000 0.7)

Cost per vehicle (K000) 16,800 4,500 8,000 6,500 20,000 12,000 67,800

39

(a)

(i)

Stores account K Balance b/d (opening inventory) Purchases (payables/cash) Balance b/d Work-in-progress account K Balance b/d (opening inventory) Stores account Direct wages Production Overhead account (250% K85,480) Balance b/d Finished goods account K Balance b/d (opening inventory) Purchases (payables/cash) Balance b/d Production overhead account K Cash/payables (overheads incurred) 416,440 Depreciation 25,000 441,440 Work-in-progress Under-absorbed overhead K 427,400 14,040 441,440 84,150 1,024,100 1,108,250 121,330 Cost of goods Balance c/d (closing inventory) K 986,920 121,330 1,108,250 178,200 395,500 170,960 427,400 1,172,060 147,960 1,172,060 Finished goods account Balance c/d (closing inventory) K 1,024,100 147,960 108,500 433,180 641,680 246,180 work-in-progress Balance c/d (closing inventory) K 395,500 246,180 641,680

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) Direct material price variance 40

(b) (i)

K 10,390 kgs of material should have cost ( K8.20) But did cost Direct material price variance Direct material usage variance 220 units should have used ( 45 kgs) But did use Usage variance in kgs X standard cost per kilogram Usage variance in Kwacha (ii) Direct Labour rate variance K 5,700 hours of labour should have cost But did cost Direct labour rate variance Direct Labour efficiency variance K 220 units should take ( 25 hrs) But did take Labour efficiency variances in hours 200 hrs (A) X standard rate per hour Labour efficiency variance 6 1,200 (A) 5,500 hrs 5.700 hrs ( K6.00) 34,200 33,630 570 (F) 9,900 kgs 10,390 kgs 490 kgs 8.20 K4,018 (A) 85,198 82,704 2,494(F)

41

Solution 4 (a) (i) FIFO inventory card

Description: Material X Date Detail Qty Receipts Unit cost K 1/01 3/02 4 /03 40 5.20 208 Bal b/d 70 4.50 315 Value K Issues Qty Unit cost K Value K Quantity Inventory code Balance Unit cost K 100 4.50 30 4.5 30 4.5 40 5.20 6 /06 20 5.20 104 10 45 40 5.20 17/08 50 4.90 245 30 4.5 20 5.20 50 4.90 10 /10 30 4.90 147 30 4.5 20 5.20 20 4.90 17 /11 20 5.35 107 30 4.5 20 5.20 2/12 20 10 5.35 4.90 107 49.00 30 4.5 20 5.20 10 60 4.90 Value K 450 135 135 208 135 2 135 104 245 135 104 98 135 104 135 104 49.00 288

42

(ii)

LIFO inventory card

Inventory code Issues Qty Unit Value cost K K Balance Quantity Unit Value cost K 100 4.5 70 40 5.20 208 4.50 315.00 30 4.50 30 4.5 40 5.20 K 450.00 135 135 208 135 104 135 104 245 135 104 98 135 104 98 107 135 104 49 288

Description: Material X Date Detail Receipts Qty Unit Value cost K Bal b/f 3 /02 4 /03 K

6 /06

20

5.20

104

30 4.5 20 5.20

17 /07

50

4.90

245

30 4.5 20 5.20 50 4.90

10 /10

30

4.90

147

30 4.5 20 5.20 20 4.90

17/11

20

5.35

107

30 4.5 20 5.20 20 4.90 20 5.35

2 /12

20 10

5.35 4.90

107 49

30 4.5 20 5.20 10 4.90 60

43

(iii) AVCO inventory card

Date Description: Material X Detail Receipts Qty 2009 1 Jan 3 Feb 4 March 6 June 17 Aug 10 Oct 17 Nov 2 Dec 20 5.35 107.00 30 5.00 150.00 50 4.90 245.00 30 4.90 147.00 40 5.20 208.00 20 4.90 98.00 Bal b/d 70 4.50 315.00 Unit cost K Inventory code.. Issues Balance Quantity Unit cost Value K 100 4.50 30 4.50 70 4.90 50 4.90 100 4.90 70 4.90 90 5.00 60 5.00 K 450.00 135.00 343.00 245.00 490.00 343.00 450.00 300.00

Value Qty Unit cost Value K K K

(b) (i)

Overhead Apportionment Schedule

Basis Machining K 350,000 80,000 52,846 482,846 Assembly K 250,000 64,000 154,135 468,135 Finishing K 185,000 72,000 22,019 279,019 stores K 125,000 104,000 229,000 (229,000) Building K 320,000 (320,000)

Costs

As given

Reapp bldgs. Space Reapp. Stores material

(ii)
Direct labour/machine hrs Absorption rate 8,000 K 60.36 Per Machine Hour 44 6,000 K78.02 per labour Hour 7,500 K37.20 per labour Hour

Solution 5 (a) (i) Marginal costing

Advantages Contribution per unit is constant No under or over absorption adjustment required Useful for decision making Simple to operate (ii) Absorption Costing Advantages It includes fixed costs in inventory Disadvantages More complex to operate than marginal costing. Disadvantages Closing inventory is valued at variable cost instead of full cost. Fixed costs are not shared among the units but written off in full instead.

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: Cost Direct material Direct labour Overheads (w1) AEE K 7,000 8,000 500 15,500 BEE K 9,000 6,000 375 15,375 CEE K 6,000 10,000 625 16,625

45

Working

Overheads
Product: Budget Units Labour hrs/Unit Total Labour hours Overhead rate = AEE 7,500 4 30,000
K20,750,000 166,000 Labour hrs

BEE 12,000 3 36,000

CEE 20,000 5 100,000

Total

166,000

= K125/Labour hr. Product: Labour hrs/Unit OAR (K/hr) AEE 4 125 K500 BEE 3 125 K375 CEE 5 125 K625

(c)

Full Cost per unit using Activity Based costing.

Product: Cost Direct material Direct labour Overheads (w2) AEE K 7,000 8,000 306.39 15,306.39 Working 2 Product: Budget Units Batch Size Number of batches (Budgeted Units/Batch Size) AEE 7,500 500 15 BEE 12,000 400 30 192,000 CEE 20,000 1,000 20 280,000 65 547,000 Total BEE K 9,000 6,000 286.68 15,286.68 CEE K 6,000 10,000 249.59 16,249.59

Total machine hours (Budgeted units hrs/Unit) 75,000

46

Total supplier Orders (Number of batches Order/batch) Cost Driver Rates Material Ordering Costs = Machine Setup costs = Machine running costs = General facility Costs = Cost apportionment: Product AEE

120
K4,372,000 500 orders

180

200

500

= K8,744/order

K1,992,000 = K30,646.15/batch 65 batches

K7,948,300 = K14.53/machine hour 547,000 machine hrs

K6,437,700 = K11.77/machine hour 547,000 machines hrs

Cost per Unit K

K8,744 120 orders 7,500 units

Material Ordering Costs = Machine Setup costs = Machine running costs = General facility Costs =

= 139.90 = 61.29 = 145.30 = 117.70 464.19

K30,644.15 15 7,500 units

K14.53 10 hrs K11.77 10 hrs

47

Product BEE
K8,744 180 orders 12,000 units

Cost per Unit K

Material Ordering Costs = Machine Setup costs = Machine running costs = General facility Costs =

= 131.16 = 76.62 = 232.48 = 188.32 628.58

K30,646.15 30 batches 12,000 units

K14.53 16 hrs K11.77 16 hrs

Product CEE
K8,744 200 orders 20,000 units
K30,646.15 20 batches 20,000 units

Cost per Unit K

Material Ordering Costs = Machine Setup costs = Machine running costs = General facility Costs =

= 87.44 = 30.65 = 203.42 = 164.78 486.29

K14.53 14 hrs K11.77 14 hrs

48

Question 6 (a) Choma Ltd Marginal Costing Profit Statement

January to 31 March 2011 K000 Sales Cost of Sales Opening Inventory Production Closing Inventory Selling & distribution (W1) Contribution Less Fixed Costs Production Selling & Distribution Administration Profit for the quarter 100 20 30 1,470 100 20 30 2,280 (1 mark for each entry except for total and sales) 1,155 (165) 990 90 (1,080) 1,620 165 1,650 (330) 1,485 135 (1,620) 2,430 K000 2,700 K000 April to 30th June 2011 K000 4,050

(b) Reconciliation Statement for January to March 2011

K000 Marginal Costing Profit Add: Change in Inventory (10,000 x K1.25/unit) Absorption Costing profit 1,470.0 12.5 1,482.5

49

(c ) Production Overhead Control Account

K Payables 102,400 WIP (74,000 1.25) Over/under absorption a/c 102,400 END 9,900 102,400 K 92,000

50

ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS CHARTERED ACCOUNTANTS EXAMINATIONS TECHNCIAN LEVEL

T2: COST ACCOUNTING

SERIES: JUNE 2011 TOTAL MARKS 100 TIME ALLOWED: THREE (3) HOURS INSTRUCTIONS TO CANDIDATES 1. 2. 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. This paper is divided into TWO sections: Section A: Attempt ALL multiple choice questions. Section B: 3. 4. 5. 6. 7. 8. Attempt FOUR questions. 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. Do NOT write in pencil (except for graphs and diagrams). 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. All workings must be done in the answer booklet. Present legible and tidy work. Graph paper (if required) is provided at the end of the answer booklet.

51

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 Minimum usage Maximum usage Lead time Re-order quantity A B C D. 2,240 2,800 3,000 5,740 (2 marks) 140 tyres per day 90 tyres per day 175 tyre per day 10 16 days 3000 tyres

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

1.2 Using the data in 1.1 above, calculate the maximum stock level. A B C D 2,800 3,000 4,900 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 when A B C D the company has idle production capacity. marginal cost accounting system is in use. the order will be lost if a higher price is sought. the use of this pricing basis secured a previous order from the same customer. (2 marks)

52

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 Material used 1,500 units 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 A B C D K1,000,000 (F) K1,000,000 (F) K1,000,000 (A) K1,000,000 (A) Material usage K3,000,000 (F) K3,000,000 (A) K2,500,000 (F) K3,000,000 (F) (2 marks)

1.5 Which of the following would be illustrated by the cost curve shown below? Cost (Kwacha)

Quantity (Q) A B C D Direct material cost Direct labour cost Variable cost per unit Fixed cost per unit (2 marks)

53

1.6.

Which of the following describes a cost unit? A. Cost per unit of output B. Direct cost C. Unit of product D. Production department 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 account D Dr Stores ledger control account Cr work in progress control account

(2 marks)

1.7.

(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 B C D 5,600 kg 4,600 kg 4,490 kg 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 Z The work done by the service cost centres (SCC) can be represented as follows: A B X Percentage of X Percentage of Z 60% 30% 40% 50% 20%

After the re-apportionment of the SCC has been carried out using the direct method; 54

1.9.

What is the total overhead for production cost centre A? A B C D K212,250 K209,600 K240,000 K180,000 (2 marks)

1.10. What is the total overhead for production cost centre B? A B C D K160,000 K210,000 K193,750 K190,400 (2 marks) (Total: 20 marks)

55

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 Direct labour 5 hours at K70 per hour Fixed production overheads 5 hours at K100 per hour 480.00 350.00 500.00 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 Direct materials used 76,000 Kgs at a cost of Direct labour cost incurred for 84,000 hours worked Fixed production overhead incurred Required: (a) (b) Prepare a standard cost card for production achieved. Calculate the following variances: (i) (ii) (iii) (c) Material Price and Material Usage variances. Labour Rate and Labour Efficiency variances. Fixed overhead Expenditure and Fixed overhead volume variances. (4 marks) (4 marks) (4 marks) (5 marks) (Total: 20 marks) (3 marks) 18,000 units K8,360,000 K6,048,000 K10,300,000

Reconcile the Standard Cost to Actual Cost.

56

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 Salaries Power to operate machinery Other utilities Cost centres P1 (K000) 107,000 P2 (K000) 89,000 Material Stores (K000) 68,000 Cost centres P1 Floor area (m2) Number of employees Share of other utilities overhead Machine hours Share of materials Store overheads Required: (i) (ii) Prepare a schedule showing the allocated and apportioned factory overhead costs for each cost centre. (10 marks) Re-apportion the service cost centre overheads, using the direct method. (5 marks) 4,560 18 35% 6,200 40% P2 5,640 24 45% 5,800 60% Material Stores 720 6 10% Employee facilities 1,080 6 10% Total 12,000 54 100% 12,000 100% Employee facilities (K000) 84,000 42,000 27,000 12,600 9,400

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

Further information:

57

(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 account Day 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)

58

Question 4
(a) (i) (ii) Explain the accounting treatment for overtime premium and shift work premium payment. (2 marks) 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 Rate of pay per hour Actual hours worked Production units Production A Production B Production C 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) 59 84 144 184 240 152 100 240 540 K6,000 38 hrs X K4,000 36hrs Y K5,000 40 hrs Z K7,200 34 hrs

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 3,740 Materials 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: Materials on site Plant on site Cost of work done but not yet certified (work in progress) Prepayments Accruals K000 1,240 2,050 3,710 110 370

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) (ii) 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) Calculate the profit taken on the contract. (4 marks) (Total: 20 marks) 60

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 Direct wages incurred Production overhead 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 Direct wages Production overhead 75 50 25 2,766,000 1,311,000 1,494,000

270 litres were scrapped after a quality control check when the litres were at the following degrees of completion: % 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 statement of equivalent units, statement of cost per equivalent units and statement of valuation. Prepare the abnormal gain or Loss account. (7 marks) (4 marks) (2 marks) (4 marks) (3 marks) (Total: 20 marks) 61

(ii)

JUNE 2011 T2 COST ACCOUNTING SUGGESTED SOLUTIONS

62

SECTION A Multiple Choice Solution 1

1 2 3 4 5 6 7 8 9 10 B C B D C C A D B D

SECTION B Solution 2
(a) Standard Cost Card Direct material (K480 18,000) Direct Labour (K350 18,000) Fixed overheads (K500 18,000) Standard cost (b) Variances Direct material price variance Materials usage variance Labour Rate variance Labour Efficiency variance Fixed ohd Expenditure variance 63 = (K120 K110) 76,000 = K760,000 favourable = (72,000 76,000) K120 = K480,000 Adv = (K70 K72) 84,000 = K168,000 Adv = (90,000 84,000) K70 = K420,000 Fav = (K10,000,000 K10,300,000) K000 8,640 6,300 9,000 23,940

= K300,000 Adv Fixed ohd Volume variance = (20,000 18,000) K500 = K1,000,000 Adv (c) Reconciliation of Standard Cost to Actual Cost Standard Cost (see (a) K000 Adverse Material price Material usage Labour Rate Labour Efficiency Overhead Expenditure Overhead volume Actual cost 300 1,000 1,948 1,180 768 Adv 24,708 480 168 420 K000 Favourable 760 K000 23,940

64

Solution 3
(a) (i) Bases P1 Allocated Apportioned; Building depreciation & insurance (On the basis of floor space occupied) (On basis of number of employees) Power to operate machinery (On the basis of machine hours) Other futilities (On the basis of % share given) (ii) Re-apportionment Employee Facilities Apportioned Costs (On the basis of No. of employees) Material Stores (on the basis of % share given) (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)] = K344,900,000 141,760 34,395 34,370 210,525 131,060 45,860 51,555 228,475 74,460 11,465 (85,925) NIL 91,720 (91,720) NIL K000 107,000 P2 Material Employee stores facilities K000 K000 K000 89,000 68,000 84,000 Total K000 348,000

15,960 9,000 6,510 3,290 141,760

19,740 12,000 6,090 4,230 131,060

2,520 3,000 940 74,460

3,780 3,000 -

42,000 27,000 12,600

940 9,400 91,720 439,000

65

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) 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. The opportunity to earn higher wages may encourage efficient workers to join the company. = 10 hours

(ii)

(iii) Morale may be improved if extra effort is rewarded. Disadvantages: (i) (ii) Incentive schemes can be complex and difficult to administer. Establishing performance level leads to frequent and continuing disputes. 66

(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 (ii) Employee Z: 34 K7,200 = K244,800 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 Time Taken Time saved Bonus Hours (Hours) (K000) 152 hrs 93.6 hrs 50 hrs 210 38 36 40 34 114 57.6 10 176 456 154 33 845 Guaranteed Pay (K000) 228 144 200 245 Total Wages (K000) 684 298 233 1,090

67

Workings (i) Time Allowed Employee W: X: Y: Z: (ii) Bonus W: W: Y: Z:

84 x 12 144 x 18 184 x 30 152 hrs 60 60 60 240 x 12 152 x 18 60 60 100x 30 60 240 x 12 540 x 18 60 60 93 .6 hrs 50 hrs 210 hrs

2
3

114 K6,000 = K456,000 57.6 K4,000 = K154,000 10 K5,000 = K33,000 176 K7,200 = K845,000

2
3

2
3

2
3

68

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. K000 44,210 3,740 14,400 1,950 4,800 2,000 6,800 1,800 370 80,070 K000 860 1,300 110 1,240 2,050 70,800 3,710

(b) (i) Materials purchased Materials in store Site wages Site direct expenses Plant sent to site Architects fees Sub-contract work Head-office o/heads (12.5% K14,400) Accruals c/d 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 = 3 of notional profit x Cashpay mentfrom progress
4
Value of w orkcertified

Materials returned Plant returned Prepayment c/d Stock at site c/d Plant at site c/d Cost of work certified (w1) c/d Work in progress c/d

80,070

Where Notional profit = value of work certified cost of work certified. NP Profit Taken = K81,000,000 K70,800,000 = 10,200,000 =

3 K10,200,000 4
69

K72,900,000 = K6,885,000 81,000,000

Solution 6 DR Litres Material Material Added Labour Overheads 5,000 DR Litres Process Account 120 K 162,480 Scrap Account Income statement 120 Workings Litres Input Normal Loss 3% Expected Output Abnormal Loss (270 150) Closing WIP Good output (120) 4,730 (800) 3,930 5,000 (150) 4,850 162,480 120 5,000 K 3,880,900 2,766,000 1,311,000 1,494,000 9,451,900 Good Output Normal loss Abnormal Loss Closing WIP Process Account Litres 3,930 150 120 800 5,000 Abnormal Gain & Loss Account Litres 120 CR K 8,072,220 30,000 162,480 1,187,200 9,451,900 CR K 24,000 138,480 162,480

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Statement of Equivalent Units. Output units Good output Normal Loss Abnorm al Loss Closing WIP 3,930 150 120 800 5000 % 100 100 100 Material 3,930 120 800 4,850 % 100 66 75 Material % added 3,930 80 600 4,610 100 33 50 Labour 3,930 40 400 4,370 % 100 16 25 Overhead 3,930 20 200 4,150

Input units 5000

5000 2.

Cost of Equivalent Units Material =

K3,880,900 - (150 K 200) = K794/unit 4,850 units

Material Added = Labour Overhead

K2,766,000 = K600/unit 4,610 units

= K300/unit = 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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