Cost Accounting Questions
Baobab fabricators Ltd has been facing a lean financial spell for the past two years. Profits have been declining steadily and results of the preceding year showed total losses amounting to Sh 2,000,000, the first time the company had not reported profits in its 10-year history.
The chairman and the board of directors have been agonizing on the remedial steps to implement to arrest the situation. Four competing proposals have been suggested by a task force set up some months back aimed at boosting sales and improving efficiency of operations in the current year. You, as a member of the task force, have been invited to attend the next board meeting which will deliberate on the proposals. You know the following facts:
- The target profit for the current year is Sh 4,000,000 regardless of the proposal that will be adopted.
- The company’s fixed costs currently amount to Sh 20,000,000 per year.
- The company can sell up to a maximum of 12,000 units of its product in the local market and unlimited quantities in a neighbouring country. For the sales in the local market, unit variable costs amount to Sh 5,000, while for the sales in the neighbouring country, an extra Sh 500 per unit is incurred in transportation expenses.
- The same selling price normally prevails both in the local market and neighbouring country.
- Sales for the past year amounted to 9,000 units, all in the local market.
The main requirements of the four competing proposals are as follows:
Proposal A: The company should improve the quality of packaging of its products at a cost of Sh 500 a unit.
Proposal B: The company should spend Sh 2,000,000 on an advertising campaign.
Proposal C: The company should cut the selling price by Sh 500 per unit.
Proposal D: The company should buy efficient machinery. This would cut the variable cost per unit by Sh 1,000 at all levels of sales.
- For proposals A, B, and C, determine the number of units to be sold in the neighbouring country in order to achieve the target profit. (12 marks)
- If proposal D is adopted and sales remain constant at 9,000 units, determine the maximum increase in fixed machine cost if the target profit is to be achieved. (4 marks)
Briefly explain four benefits of using break even analysis (4 marks) (Total: 20 marks)
To manufacture one unit of “Bingwa”, a canned food product, Jumbo Processors Limited requires materials costing Sh 2,800 and must employ two hours of direct labour. The company’s overheads are all fixed and amount to Sh 768,000 per month. The product retails at a price of Sh. 7,200 per unit.
Labour, which is paid at Sh 360 per hour is currently very scarce, while demand for “Bingwa” is heavy.
Recently, a special offer was made to the company to take up a contract to manufacture a variant of “Bingwa”. This offer is worth Sh 648,000. The company’s cost accountant has been asked to carry out an analysis to establish whether or not it would be cost effective for the company to undertake the contract.
The following information relates to the special offer.
- It is estimated that the contract would require 20 hours of direct labour.
- The material needed would cost Sh 136,800.
- A specialized component would have to be incorporated into the product. The specialized component could either be purchased from an outside supplier for Sh 36,000 or alternatively, it could be made by Jumbo Processors Ltd itself using material costing Sh 14,400 and an additional labour time of 12 hours.
- The contribution per unit of the key factor in the production of “Bingwa” (5 marks)
- Should Jumbo Processors Ltd make or buy the specialized component (5 marks)
- Decision on whether or not to accept the special offer to make the variant.(5 marks)
- Explain the relevance of the following costs in the decisions in (2) and (3) above.
- Fixed costs (2 marks)
- Total wage bill. (3 marks) (Total: 20 marks)
Asante Sana Ltd. is a manufacturing company which produces and sells a single product “Dawa MOTO”.
|Variable selling and administration||8|
|Fixed selling and administration||30|
Fixed manufacturing costs per unit are based on a predetermined rate established at a normal activity level of 18,000 production units per period. Fixed selling and administration costs are absorbed into the cost of sales at 20% of the selling price. Under/over recovery of overheads are transferred to the profit and loss account at the end of each period.
The following information has been provided for two consecutive periods:
|Period 1||Period 2|
|Value||Sh 2,550,000||Sh 2,700,000|
|Variable manufacturing costs||Sh 720,000||Sh 828,000|
|Variable selling and administration costs||Sh 136,000||Sh 144,000|
|Fixed manufacturing costs||Sh 640,000||Sh 630,000|
|Fixed selling and administration costs||Sh 540,000||Sh 540,000|
- Income statements for each of the periods under the full costing method. (5 marks)
- Income statements for each of the periods under the direct costing method. (5 marks)
- Reconciliation for each period of the profit/loss obtained under the two methods in (1) and (2) above (4 marks)
- Outline three arguments in favour of
- The full costing method (3 marks)
- The direct costing method (3 marks) (Total: 20 marks)
Lamu Ltd produces a popular brand of biscuits which sells under the brand name “Tamu”. The biscuits are sold in packets of 100 grammes at Sh 20 each.
To reduce the distribution costs, the firm is only selling its products through the supermarkets at Sh 12 per packet.
The budgeted standards for the year ended 31 December 2001 are given below:
|Annual fixed manufacturing costs||Sh 560,000|
|Direct materials per packet||Sh 2.50|
|Direct labour cost per hour||Sh200.00|
|Variable factory overheads per hour||Sh275.00|
|Selling costs per unit (variable)||Sh 9.80|
|Output: Number of packets per hour||100|
|Number of working hours per week||40|
At the end of the year, an analysis of the results revealed the following:
- The actual selling price was Sh 12.75 per unit.
- Direct material costs per packet reduced by 5%.
- The actual production rate was 98 packets per hour, although there was no idle time.
- All units produced were sold.
- Actual fixed costs were Sh 480,000.
- There was no change in the selling and distribution cost per unit.
- Actual variable overheads amounted to Sh 550,000.
- The original (static) budgeted income statement for the year (6 marks)
- Actual income statement to the year (6 marks)
- The flexed budgeted income statement for the year (8 marks) (Total: 20 marks)
- List and explain the advantages of standard costing. (5 marks)
- Roasters Limited is a coffee-blending firm. It produces a special blend of coffee known as “Utopia Blend” by mixing two grades of coffee “AB” and “QP” as follows:
Material Standard mix ratio Standard price per Kg AB 40% Sh 120 QP 60% Sh 100
A standard loss of 15% is expected. During the month of March 2002, the company produced 2,500 kg of “Utopia Blend”. The actual quantities blended were as follows:
Quantity used Cost (Sh) AB 1,400kg 175,000 QP 1,600kg 152,000
Calculate the following variances
- Material price variance (2 marks)
- Material usage variance (2 marks)
- Material min variance (4 marks)
- Material yield variance (4 marks)
- Material cost variance (3 marks) (Total: 20 marks)
- Define “Activity- Based Costing” and explain how it operates in practice (10 marks)
- Discuss the advantages and disadvantages of “Activity –Based Costing”. (10 marks) (Total 20 marks)
- State and briefly explain the essential requirements of an effective stock control system. (12 marks)
- State and explain the possible causes of discrepancies revealed by physical stock counts and explain how they can be addressed. (8 marks) (Total: 20 marks)