Cost Accounting Questions
Questions on Contract Costing
QUESTION ONE
Mkulima Engineering Ltd. undertakes repair and reconditioning work on agricultural machinery. It is the company practice to charge out each job at a profit of 15% of the invoice value.
Cost card relating to completed jobs for the year ended 31 may 1996 have been summarized as follows:
| Sh. | Sh. | |
| Materials issued | 232,000 | |
| Direct labour | 170,000 | |
| Overhead: | ||
| 20% on material | 46,400 | |
| 100% on direct labour | 170,000 | 216,400 |
| Carriage | 6,350 | |
| Profit | 110,250 | |
| Sales | 735,000 |
The firm’s accountants have summarized the financial accounts for the year as follows:
| Sh. | ||
| Sales | 735,000 | |
| Less: | ||
| Stocks and work-in-progress | Sh. | |
| 1 June 1995 | 90,000 | |
| Purchases of materials | 256,500 | |
| 346,500 | ||
| Less: | ||
| Stocks and work-in-progress 31 May 1996 | 100,500 | |
| 246,000 | ||
| Factory wages | 255,000 | |
| Factory expenses | 100,000 | 601,000 |
| Gross profit | 134,000 | |
| Less: | ||
| General Office expenses | 42,000 | |
| Selling expenses | 18,000 | |
| Carriage on completed jobs | 6,000 | 66,000 |
| Net Profit | 68,000 | |
Additional Information
1. The composition of the stocks and work-in-progress figures is as follows:
| 1 June 1995 | 31 May 1996 | |
| Sh. | Sh. | |
| Stocks of materials | 30,000 | 31,000 |
| Work-in-progress: | ||
| Materials | 45,000 | 45,500 |
| Labour | 15,000 | 24,000 |
2. Factory wages consist of Sh.194,000 for direct labour and Sh.61,000 for indirect labour.
3. Included in the purchases of materials figure is Sh.10,500 in respect of consumable stores all of which were used during the year.
Required
a) A statement reconciling the two profit figures for the completed jobs summary and the annual accounts (14 marks)
b) Outline the possible reasons for the discrepancies, which your reconciliation reveals.
(6 marks) (Total: 20 marks)
QUESTION TWO
The following data relates to Optimal Company, a manufacturer of a toothpaste product.
Financial extracts for the month of May 1996
Fixed costs Sh.200,000
Variable cost Sh.12 per unit
Selling price Sh.28 per unit
The current production is at 75% capacity and the number of units produced and sold is 37,500 units.
Required
a) The break even point in units and in shillings (5 marks)
b) The percentage capacity at break even point (3 marks)
c) The profit or loss at current production capacity (4 marks)
d) A new break even point in units assuming that a new machine is bought, in order to increase production. The new machine will increase the fixed costs by Sh.70,000 but the variable costs will reduce to Sh.7 per unit. (4 marks)
e) State four assumptions that you have taken into account in answering the sub-questions a, b, c and d above. (4marks)
(Total: 20 marks)
QUESTION THREE
L M N Ltd is a small company that makes a single standard product. Their planned budget for the quarter ending 31 May 1996 was 5000 units at a selling of Sh.30 per unit.
The actual financial data for the quarter was 4,800 units which were all sold during the quarter. The actual financial data for the quarter are shown below:-
| Sh. | |
| Direct materials | 19,800 |
| Direct wages | 29,800 |
| Variable overheads | 48,500 |
| Fixed overheads | 26,000 |
| Profit | 24,400 |
| Sales | 148,500 |
The standard direct wage rate is Sh.15 per hour and standard variable overhead rate is Sh.25 per hour. Cost variances during the period are as follows:
| Gains | Losses | |
| Sh. | Sh. | |
| Material price | - | 200 |
| Material usage | - | 400 |
| Wages rate | 500 | - |
| Labour efficiency | - | 1,500 |
| Variable overhead price | 2,000 | - |
| Variable overhead efficiency | - | 2,500 |
| Fixed overhead cost | - | 1,000 |
| Sales price | 4,500 | - |
Required
From the information provided, prepare for the period the original budget and budgeted cost of actual sales, and prepare a statement showing all standards (variances) in respect of the product. (Total: 20 marks)
QUESTION FOUR
a) Distinguish between job and contract costing. (5 marks)
b) Jengo construction company was awarded a small contract on 1 July 1995 at an agreed price of Sh.4,000,000. The contract was expected to be completed by 31 March 1996.
The following expenditure was incurred during the year ended 31 December 1995.
| Sh. | |
| Materials delivered to site | 1,200,000 |
| Materials sold (Cost Sh.21,000) | 13,000 |
| Variable overheads | 48,500 |
| Plant delivered to site | 400,000 |
| Payment to Sub-contractors | 100,000 |
| Wages paid | 506,000 |
| Proportion of Head Office costs | 60,000 |
On 31 December 1995 the value of plant was 265,000 and materials remaining at the site was Sh.20,000. The cash received form the client was Sh.2,100,000.
In order to complete the contract on time the following estimates of expenditure were budgeted by the contractor:
| Sh. | |
| Additional materials | 600,000 |
| Additional wages | 380,000 |
| Additional plant | 120,000 |
| Head office expenses | 15,000 |
The value of the plant at the end of the contract will be Sh.195,000. a contingency of Sh.55,000 was provided for.
Required
A contract account for the year ended 31 December 1995 showing the amount to be transferred to the profit and loss account (15 marks)
(Total: 20 marks)
QUESTION FIVE
The information given below is in respect of the proposed budget for K.K. Ltd for the six months ending 31 December 1996.
| Month | SalesSh ‘000’ | Material Purchases | WagesSh. ‘000’ | Production OverheadsSh. ‘000’ | Administrative OverheadsSh. ‘000 |
| July | 72,000 | 25,000 | 10,000 | 6,000 | 5,500 |
| August | 97,000 | 31,000 | 12,100 | 6,300 | 6,700 |
| September | 86,000 | 25,500 | 10,600 | 6,000 | 7,500 |
| October | 88,600 | 30,600 | 25,000 | 6,500 | 8,900 |
| November | 102,500 | 37,000 | 22,000 | 8,000 | 11,000 |
| December | 108,700 | 38,800 | 23,000 | 8,200 | 11,500 |
Additional information
- A depreciation expense is expected to be 0.5% of sales.
- Expected cash balance in hand on 1 July 1996 is Sh. 72,500,000.
- 50% of total sales are cash sales/
- Assets are to be acquired in the months of August and October at Sh.8,000,000 and Sh.25,000,000 respectively.
- An application has been made to the bank for the grant of a loan of Sh.30,000,000 and it is hoped that it will be received in the month of November
- It is anticipated that a dividend of Sh.35,000,000 will be paid in December
- Debtors are allowed one month’s credit
- Creditors for materials purchases and overheads grant one months credit
- Sales commission at 3% on sales is paid to the salesmen each month.
Required
A cash budget for the six months ending 31 December 1996. (Total 20 marks)
QUESTION SIX
State and explain the factors you will take into account when preparing:
a) A sales budget. (10 marks)
b) A purchases budget (10 marks) (Total: 20 marks)
QUESTION SEVEN
Discuss the main purposes of advertising by a company with reference to:
a) An existing product (10 marks)
b) A new product (10 marks) (Total: 20 marks)
