Cost Accounting Questions

QUESTION ONE

1. BCD Ltd manufactures office and household furniture to customers specifications. Because of the specialized nature of the manufacturing process, each job is treated separately for costing purposes. There are two stages in the manufacture of each item namely, assembly and finishing. In the assembly department, overheads are absorbed on the basis of prime cost incurred in that department. In the finishing department, overheads are applied on the basis of total accumulated cost on the job in both stages inclusive of overhead absorbed in assembly.

The selling price of the item is then determined by applying the usual 40% profit margin.

The following information is provided about budgeted data for the next financial period:

	Assembly	Finishing
Materials	Sh.480,000	Sh.300,000
Overheads	Sh.594,000	Sh.418,500
Labour cost	Sh.180,000	Sh.120,000
Labour hours	3000	1500

Required

Calculate the overhead absorption rates for each production process. (6 marks)

b) Job No.148 shows the following data concerning its production:

	Assembly	Finishing
Materials	Sh. 5,000	Sh. 3,500
Labour cost	Sh. 2,700	Sh.1,600
Labour hours	12	4

Required

Prepare the cost statement for this job and indicate the proposed final selling price  (6 marks)

c) The following data relates to actual manufacturing operations as accumulated for the whole financial period.

	Assembly	Finishing
Overhead incurred	Sh.660,000	Sh.450,000
Materials	Sh. 530,000	Sh.288,000
Labour cost	Sh.200,000	Sh.135,000

QUESTION TWO

a) Explain the concept of equivalent units and its significance in process costing.   (5 marks)

b) XYZ Ltd. manufactures an alcoholic beverage that passes through two processes – A and B. In the latest production period, 12,000 units were transferred from process A to process B at a total cost of Sh.450,000.

During the period, additional processing costs were incurred consisting of:

Direct materials -	Sh.345,600
Direct Labour -	Sh.158,400
Manufacturing overheads -	Sh.75,600

During the same period 8,640 units were completed and transferred to the finished goods warehouse. A stock take at the end of the period showed that 2,400 units were in stock and were 60% complete in respect of all inputs.

The normal processing loss is estimated at 5% and since this arises mainly through evaporation, there are no salvage proceeds.

Required

i) Work-in-progress (Process B) account (9 marks)

ii) Finished goods account assuming 5,000 units were sold during the period

(3 marks)

iii) Profit and loss account (relevant items only) (3 marks)

NB Show all supporting calculations. (Total: 20 marks)

QUESTION THREE

Your Managing Director has received a performance analysis statement from the cost accountant which he is unable to comprehend. He has therefore approached you with a view to reconciling the two statements and providing a more comprehensive analysis.

The data available is as follows:

The following additional information is relevant:

1. Budgeted gross margin per unit is Sh.120 computed as follows:

Prime Costs Sh.

Direct materials – 6 units @Sh.7.50 45

Direct labour – 2 hours @Sh.30 60

Factory overheads:

Variable – on direct labour hour basis @Sh.15 30

Fixed – on direct labour hour basis @7.50 15

150

Gross Margin 120

Budgeted unit selling price 270

2. The company’s static provided for a production and sales level of 3,300 units at a price of Sh.285 per unit.

3. Actual inputs usage was as follows:

Direct material – 18,900 units

Direct labour - 6,000 hours

Required

a) Compute the following:

1. Sales price variance;
2. Material price and efficiency variances;
3. Labour rate and efficiency variances;
4. Variable overhead spending and efficiency variances;
5. Fixed overhead under applied and efficiency variance (15 marks)

b) A reconciliation statement that explains the difference in the profit figure of Sh.261,900 and Sh.324,000 (5 marks)

(Total: 20 marks)

QUESTION FOUR

Millani General Manufacturers produces three products, namely A,B and C. Given below are the details of raw materials and labour which were used during the year ended 31 December 1996.

The production overhead which was Sh.500,000 was absorbed on the basis of direct labour hours.

Non-production overheads were absorbed on the basis on 20% of production cost.

Profit is calculated as 25% of the total cost.

The following information is also available for the year:

Required

a) The standard selling price per unit of each product (8 marks)

b) The production budget in units (6 marks)

c) The direct materials purchase budget (6 marks)

(Total: 20 marks)

QUESTION FIVE

You have been approached by the directors of PQR Ltd. a merchandising company about

the control of the company’s stocks. The company’s average sales amount to Sh.5million per month and holds inventories of about Sh.2million at any one time. Most of the company’s items are low-value fast moving components used in the motor industry. At the present time no policies or records exist concerning stocks and this has resulted in inappropriate managerial decisions.

Required

Enumerate the major considerations that the directors need to address in order to achieve an effective stock control policy. (Total: 20 marks)

QUESTION SIX

Understanding cost behaviour is crucial in the appreciation of cost accounting practices.

Required

With reference to specific examples develop an argument in support of this contention.

(Total: 20 marks)

QUESTION SEVEN

An external consultant has advised your Managing Director about the need to implement a budgetary control system. From the feedback you have obtained, it is apparent that the consultant only disclosed the positive aspects.

Required

Draft a memorandum to the Managing Director explaining the meaning of budgetary control and the limitations one needs to consider in implementing the process. (Total: 20 marks)