Questions on Profit and Loss Accounts


Tradewinds Company makes a chemical that passes through three production Processes, 1,2, and 3. in the month of October 5,000 litres of the basic raw material priced at sh.120,000 were introduced into process 1. subsequently, the following cost were incurred:

Process 1

Direct labour Shs.80,000
Direct expenses Shs.30,000

At the end of the process 4,800 litres were passed onto process 2.

Process 2

Direct materials (additional) Shs.66,300
Direct labour Shs.60,000
Direct expenses Shs.24,000

At the end of the process, 4,700 litres were passed onto process 3

Process 3

Direct materials (additional) Shs.25,680
Direct labour Shs.20,000
Direct expenses Shs. 4,800

At the end of the process, 4,680 litres were passed onto the finished goods store.

Normal process losses for each of the three process are:

Process 1 – 3%; Process 2 – 2.5%; Process 3 – Nil

The loss in each process resulted from evaporation due to heating or due to spillage and hence nothing of value could be realized from these losses. There were no stocks of materials or Work-in-Progress at the beginning or end of the month. The output of each process passes directly to the next process at cost without any provision for internal profit. Manufacturing overheads are absorbed by each process at 25% of direct labour cost.


  1. Prepare separate process accounts for each of the three processes. (18 marks)
  2. Prepare the abnormal loss and abnormal gain accounts. (4 marks)

(Total: 20 marks)


The following information relates to the unit manufacturing costs of product Wye by the Marino Company.

Selling price    
Cost of sales:   100
Variable costs 65  
Fixed costs 20 85
Gross profit   15
Selling and administrative costs   10
Net profit   5

The company budgets for fixed production costs o Sh.3,600,000 and selling and administrative costs of Sh.750,000 per annum. These costs are incurred evenly during the year. During the latest financial year, the following results were achieved:

  First 6 months Second 6 months
Production (units) 75,000 60,000
Sales (units) 50,000 70,000

There were no opening stocks at the beginning of the year. Fixed production costs and selling and administrative costs incurred during the year were equal to the budget.


Prepare trading, profit and loss statements for each of the two six month periods using each of the following methods:

  1. Absorption Costing (12 marks)
  2. Marginal Costing. (10 marks)

(Total: 22 marks)


Karibu Fabricators Ltd. Uses a job costing system to price its custom-made products. Predetermined overhead rates are used to absorb overheads to each job. Each job passes through two departments – department 1 and department 2. In department 1, overheads are absorbed on basis of prime cost while in department 2, absorption is on the basis of machine hours. Management is in the process of setting overhead absorption rates for the next financial year and the following information is provided:

  Department 1 Department 2
Budgeted direct labour hours 25,000 5,000
Budgeted direct labour rate Shs.30 per hour Shs.12.50 per hour
Budgeted factory overheads 900,000 Shs.630,000
Budgeted direct material    
Usages (units) 60,000 Kg. 90,000 Kg.
Budgeted direct material    
Purchase price Shs.25 per Kg. Shs.7.50 per Kg
Budgeted machine hours 1,000 45,000


Calculate overhead absorption rates for each department. (6 marks)

A customer has submitted a request for a price quotation on a job. This job specifications are as follows:

  Department 1 Department 2
Direct materials required 20 6
Direct labor hours required 5 2
Machine hours required ½ 3

The company provides a mark-up of 50% on factory costs to cover general expenses and profits.

Calculate the price to be charged for this job. (8 marks)

By the end of the year, the following costs had been incurred:

  Department 1 Department 2
Direct materials Shs.1,400,000 Shs.80,000
Direct labour Shs.800,000 Shs.65,000
Factory overheads Shs.875,000 Shs.625,000
Direct labour hours 26,000 5,500
Direct materials used (units) 67,500 Kg. 100,000 Kg.
Machine hours 1,500 50,000


Calculate the amount of factory overhead over/under-applied for each department. (6 marks)

(Total: 20 marks)


You are advised to note the relationship in parts (a), (b) and (c)


Nationwide Shoes Company Ltd. manufactures a sports shoe, which sells for shs.400 a pair. The company’s operating budget for the current year envisages a sales volume of sh.1.6 million.

The following information relates to the costs associated with the company’s production activities:

Direct material cost per unit amounts to shs.100 while direct labour cost per unit amounts to shs.80.

Factory overhead costs are budgeted at shs.1,500,000 per annum at the expected sales volume and out of this amount shs.900,000 is fixed.

Administrative, selling and distribution costs amount to shs.5,500,000 out of which shs.800,000 is variable.

A commission of 2.5% of the sales value is to be paid to local distributors. This amount is not included in the budget for selling and distribution costs.


  1. Calculate the breakeven level of activity in units and shillings. (8 marks)
  2. What profit or loss will the company make at the budgeted sales level (7 marks)
  3. What quantity should the company sell in order to make a profit margin of 17.5% of sales

(7 marks)

(Total: 22 marks)


The following budget relates to the manufacture and sale of product Zed by the ABC Corporation for the financial year ended 31 May 2003:


  Shs ‘000’ s Shs ‘000’s
Sales   5,400
Production Costs    
Direct Materials 1,600  
Direct Labour 1,200  
Factory Overheads 1,520 4,320
Operating Expenses    
Administrative expenses 400  
Selling and distribution 200 600
Net Profit   480

Additional Information

The company budgeted to produce and sell 20,000 units. However actual production was 20,000 units with sales of only 15,000 units.

Factory overheads include shs.40,000 which is variable.

All administrative expenses are fixed. However, selling and distribution expenses include a unit packaging cost of shs.3 per unit while the rest is fixed.


  1. Draft the trading and profit and loss account of ABC Corporation for the year ended 31 May 2003 using both Absorption and Marginal costing approaches. Assume that unit variable costs and total fixed costs incurred during the year were equal to the budget. (16 marks)
  1. Explain the difference between the profits calculated under both methods. Show computations.(6 marks)

(Total: 22 marks)