Cost Accounting Questions
Questions on Valuation of Work in Progress
QUESTION ONE
Explain the reason(s) why construction companies find it prudent to declare profits on uncompleted contracts. (2 marks)
On 4 May 1999, Pendo Construction Company was contracted by Mara Paradise Ltd. to construct a leisure park in Nairobi at a contract price of Sh. 950,000,000. Work commenced on the contract on 28 July 1999. Retention money was agreed at 10% of work certified. At the end of the first year, no profits were declared as the contract was considered to be in its infancy
The following details relate to the contract for the year ended 31 December 2000:
Sh’000 | |
Balances brought forward 1.1.2000 | |
Materials on site | 4,500 |
Accrued wages | 1,250 |
Plant (cost) | 150,000 |
Cost of work done | 158,000 |
Work certified to 31 December 1999 | 160,000 |
Transactions during the year.
Materials delivered to site:
Ex-stores | 14,600 |
By suppliers | 128,400 |
Additional plant (cost) | 120,000 |
Subcontractors fees | 18,450 |
Consultancy fee | 28,000 |
Inspection fee | 500 |
Salaries and wages | 160,000 |
Head office expenses | 1,200 |
Material transfers out | 15,000 |
Materials sales (cost Sh 19,800) | 22 |
Plant hire | 250 |
Direct expenses | 2,600 |
Total cash received from contractee | 580,000 |
Work certified during the year | 660,000 |
Cost of work uncertified | 42,000 |
Balances carried forward: | |
Materials on site | 51,000 |
Wages accrued | 2,800 |
Plants have been purchased for use on this contract. Pendo Construction Company provides for depreciation on plant at 12 1/2% per annum on cost.
Required:
- Contract account for the year to 31 December 2000, clearly showing the profits/(losses) on contract for the year. (10 marks)
- Valuation of work-in-progress. (4 marks)
- Account of Mara Paradise Ltd. (4 marks) (Total 20 marks)
QUESTION TWO
Nyundo Ltd manufactures a product whose standard variable cost is given below:
Direct materials (2 kg @ Sh 3) | 6 |
Direct labour (0.75 hours @ Sh 4) | 3 |
Variable overheads | 1 |
The company treats fixed costs as period costs and therefore they are not charged to products.
The following information relates to the month of March 2001.
1/3/2001 | 31/3/2001 | |
Sh | Sh | |
Stocks (all at standard cost) | ||
Raw materials | 12,000 | 6,000 |
Finished goods | 36,000 | 42,500 |
The following information is available for the month of March 2001:
Sh | |
Sales @ Sh 20 per unit | 200,000 |
Material purchases @ Sh 3.50 per kg | 42,000 |
Direct labour cost (8000 hours) | 30,000 |
Variable overheads | 12,000 |
Material price variance (adverse) | 21,000 |
The management is wondering whether they could have performed better.
Required:
Calculate the following variances in each case stating two possible causes:
- Material usage variance (6 marks)
- Labour rate variance. (4 marks)
- Labour efficiency variance. (4 marks)
- Variable overhead expenditure variance: (3 marks)
- Variable overhead efficiency variance. (3 marks) (Total: 20 marks)
QUESTION THREE
Bando Ltd has been using their own vehicle to transport their employees to and from work. The shift manager imagines that this may be too expensive for the organization and suggests that using hired transport may result in some savings for the organization.
The accountant has assembled the following data for consideration:
Shs. | |
Own transport: | |
Cost of vehicle | 1,500,000 |
Scrap value of the vehicle | 300,000 |
Annual insurance premium | 145,000 |
Annual road licence | 6,000 |
Repairs and maintenance per year | 90,000 |
Drivers monthly salary | 25,000 |
Tyres and tubes per year | 24,000 |
TLB license per year | 2,500 |
Cost of petrol per kilometer | 5 |
Inspection fee | 2,000 |
It is also established that the expected life of the vehicle is 5 years and that the distance coverage is 15,600 Km per year.
If the company opts for hired transport it will be required to pay monthly hire charges of Sh 40,000 and drivers allowance of Sh 10,000 per month.
Required:
Compute the cost per kilometer if the company:
- Uses its own transport; (10 marks)
- Hires transport facilities from outside. (4 marks)
b) Is the difference between a(i) and a(ii) above significant? What other factors should the company take into account in deciding the alternative to be adopted? (6 marks) (Total: 20 marks)
QUESTION FOUR
Samba Ltd. produces three joint products in two processes. All the units pass through process I to process II. At the end of process II, the joint products emerge. The data below relates to the operations for the first quarter of 2001.
Process I | Process II | |
Shs. | Shs. | |
Direct materials (40,000kg @ Sh 2.50) | 100,000 | - |
Direct labour | 60,000 | 92,000 |
Overheads | 40,000 | 118,000 |
Normal loss as a percentage on input | 10% | - |
Scrap value per unit | Sh 2 | |
Output in units: | 35,000 |
No loss is expected in process II.
There were no opening or closing work-in-progress. The output and the selling prices were as follows:
Joint product | Output (Kg) | Selling price (Sh) |
X | 10,000 | 20 |
Y | 16,000 | 15 |
Z | 9,000 | 16 |
Required:
- Process I account. (6 marks)
- Abnormal loss/gain account. (4 marks)
- Determine the profits or losses from each joint product if costs are apportioned using sales value method (6 marks)
- Briefly explain how the physical limits method is different from sales value method in (c) above. (4 marks)(Total: 20 marks)
(Calculations are not required)
QUESTION FIVE
Njoro Ltd. has been manufacturing and selling three products in Nairobi. The market demand for the products on average has been as follows:
Product Annual demand
Units
Coolo 20,000
Besto 25,000
Zedo 48,000
The manufacture of the products requires time on a machine as follows:
Product Time required
Coolo 30 minutes
Besto 45 minutes
Zedo 20 minutes
The following details are available for each of the products:
Coolo | Besto | Zedo | |
Sh | Sh | Sh | |
Direct materials | 15 | 12 | 14 |
Direct labour | 25 | 20 | 23 |
Variable overheads | 5 | 3 | 6 |
Fixed overheads | 7 | 5 | 8 |
Profit per unit | 8 | 8 | 8 |
Selling price | 60 | 48 | 59 |
Due to the prevailing drought and power rationing, the company can only manage to get a maximum of 30,000 hours on the machine per year.
Required:
- Rank the products in order of priority if there is a limitation of the machine hours. (9 marks)
- Advise the management on the most profitable product mix. (3 marks)
- Determine the resultant net profits from the mix in (b) above. (8 marks) (Total: 20 marks)
QUESTION SIX
- Describe the duties of a cost accountant in an organization. (4 marks)
- Differentiate the following terminologies:
- Relevant costs and irrelevant costs (4 marks)
- Cost center and cost unit. (4 marks)
- Semi-fixed and semi variable costs. (4 marks)
- Sunk costs and product costs (4 marks) (Total 20 marks)
QUESTION SEVEN
- State the assumptions that underlie the break-even analysis. (10 marks)
- Explain how you would analyze and classify the marketing costs. What purposes are served by such analysts and classification? (10 marks)