Cost Accounting Questions

QUESTION ONE

1. Shirikisho Engineers Ltd produce a standard type of energy conserving Jiko under the brand name “charcoal saver”. The company operates a standard costing system and prepares its operating statements on a monthly basis.

The results for the month of March, 20X3 were as shown below:

	Shs	Shs
Sales		108,000
Manufacturing costs:
Direct materials	28,800
Direct labour	17,100
Overheads (fixed)	25,000
		70,900
Manufacturing profit		37,100
Selling and distribution (variable)		6,300
Administration (fixed)		14,400
Net profit		16,400

Shirikisho management were perplexed as they had expected a profit of sh.27,000 having produced and sold 9,000 jikos out of the budgeted 10,000 jikos for the month.

They decided to consult a management accountant who attributed the shortfall from their expected profit as follows:

	Shs	Shs
Expected profit		27,000
Less explanatory variance:
Material cost	1,800
Labour cost	(900)
Overhead	7,000
Selling and distribution	1,800
Administration	900
		10,600
ACTUAL PROFIT		16,400

You are required to

1. Prepare Shirikisho’s original budget for the month of March based on production and sale of 10,000 jikos
2. Calculate what should have been the correct expected profit by Shirikisho’s management assuming efficient operations for the output achieved in the month of March 20X3.
3. Explain the importance of both the static and flexible budget.

(Total: 20 Marks)

QUESTION TWO

Sam Makengi plans to incorporate a company to be known as Makengi Holdings Ltd. For the distribution of locally made automotive spare parts. He intends to contribute an initial capital of Sh.45,000 in cash. After approaching his bank manager for financial support, he was asked to submit projected statements of the profits and cash flows of he business for the next four months commencing 1 July 1988. After careful analysis, Makengi gathered the following information relating to the business operations for the six months to December 31,20X8:

1. At the begging of July operating furniture and equipment will be acquired for cash at a total cost of sh.88,000. In addition, stocks costing Sh.50,000 will be acquired out of which half will be paid for in cash and the balance in the following month.
2. Stock levels will be maintained at a level that is sufficient to satisfy sales for the next month. The company intends to earn a gross margin of 50% on sales. Credit terms from suppliers require payment after one month form the date of purchase.
3. Sales are expected to average Sh.60,000 per month for the next one year. It is expected that 75 per cent of customers will pay in cash and 25 per cent will take credit. All credit sales are due within 30 days.
4. The following monthly expenses will be incurred:

Rent – Sh.10,000; Salaries – Shs.6,000; Miscellaneous expenses – Sh.2,500; Depreciation – Sh.3,000.

All expenses will be paid for in the month in which they are incurred, except for rent, which is payable quarterly in advance.

5. The proprietor expects to withdraw Shs.5,000 from the business every month for personal use.

Required

Prepare a cash budget for each of the months of July, August, September and October 20X8 for Makengi Holdings Ltd. The budget should be columnar form and all supporting workings should be shown. (Total: 20 Marks)

QUESTION THREE

“Budgetary Control can be operated even without adoption of standard costing system”.

Required:

Explain both budgetary control and standard costing and show how the former is not dependent on the latter.

QUESTION FOUR

1. “Variance Analysis is a useless exercise unless the information obtained from its analysis can be meaningfully translated.” Explain four questions that you would typically ask to achieve the objective of the above statement. (8 marks)
2. Management should put in some serious considerations before investigating variances. Explain six such considerations. (12 marks)

(Total: 20 marks)

QUESTION FIVE

Pee Company, a manufacturer of retread tyres has provided the following information about operations during the financial year ended 30 September 20X0.

The unit selling price for the company’s product is shs.600.

Required

1. Draft the profit and loss statements of Pee Company using both marginal costing and absorption costing approaches.
2. Explain the difference in profits under the two methods.