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:

  1. Contract account for the year to 31 December 2000, clearly showing the profits/(losses) on contract for the year. (10 marks)
  2. Valuation of work-in-progress. (4 marks)
  3. 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:

  1. Material usage variance (6 marks)
  2. Labour rate variance. (4 marks)
  3. Labour efficiency variance. (4 marks)
  4. Variable overhead expenditure variance: (3 marks)
  5. 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:

    1. Uses its own transport; (10 marks)
    2. 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:

  1. Process I account. (6 marks)
  2. Abnormal loss/gain account. (4 marks)
  3. Determine the profits or losses from each joint product if costs are apportioned using sales value method (6 marks)
  4. 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:

  1. Rank the products in order of priority if there is a limitation of the machine hours.  (9 marks)
  1. Advise the management on the most profitable product mix. (3 marks)
  2. Determine the resultant net profits from the mix in (b) above. (8 marks)     (Total: 20 marks)

QUESTION SIX

  1. Describe the duties of a cost accountant in an organization. (4 marks)
  2. 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

  1. State the assumptions that underlie the break-even analysis. (10 marks)
  2. Explain how you would analyze and classify the marketing costs. What purposes are served by such analysts and classification? (10 marks)