Cost Accounting Questions

QUESTION ONE

Mwangaza Metals Ltd fabricates steel products for export to the COMESA region. The products go through three processing departments: forming, machining and finishing.

The following information relates to operations for the year ended 31 October 2002:

1. Budgeted manufacturing costs for the year ended 31 October 2002:

2. The actual manufacturing costs incurred for the year ended 31 October 2002 were as follows:

3. While there were no finished goods or work-in progress inventories at the beginning of the year, stocks on 31 October 2002 were made up as follows:

The above balances include actual direct materials, direct labour and absorbed overhead costs.

4. Manufacturing overhead costs are absorbed into products on the basis of direct labour costs, at rates pre-determined at the beginning of the year, using the annual budgeted data.

Two alternatives of absorbing the overheads could be employed:

• Use a single factory wide manufacturing overhead rate.
• Use separate departmental manufacturing overhead rates.

5. The policy of the company is to dispose of over (under) absorbed overheads at the year-end by allocating the amount between ending inventories and cost of goods sold in proportion to their unadjusted cost balances.

Required:

• Using the separate departmental manufacturing overhead rates:
  • Determine the total over (under) absorbed overheads for the year. (6 marks)
  • Allocate the over (under) absorbed overheads to the relevant accounts.(6 marks)
  • Prepare a journal entry to record the disposal of the over (under) absorbed overhead. (4 marks)
• A particular order code named E20, from a customer was worked on and completed during the year. The following costs were incurred in relation to the other.

		Shs.	Shs.
Direct materials			3,000,000
Direct labour:	Forming	400,000
	Machining	380,000
	Finishing	480,000	1,260,000

Required:

Using the factory wide absorption rate, determine total overhead applied to the order (E20).  (4 marks)

(Total: 20 marks)

QUESTION TWO

Nyungu Ltd is a manufacturer of earthenware products produced in two processes. Material is introduced at the beginning of the process in the Moulding department and additional material is added at the end of the process in the Finishing department. Conversion costs are applied uniformly throughout both processes. As the process in the moulding department is competed, goods are immediately transferred to the next department; as goods are completed in the Finishing department, they are transferred to finished goods store.

Data for the month of October 2002 are as follows:

Required:

1. The cost of goods transferred out of each of the two departments during the month of October 2002. (10 marks)
2. The ending inventory costs for goods remaining in each of the two departments on 31 October 2002. (10 marks)

(Total: 20 marks)

QUESTION THREE

1. Name four ways in which a company could finance a cash deficit.

2. On 1 November 2002, Digital Trading Company was in the process of forecasting cash receipts and disbursements for the two months to 31 December 2002. On this latter date, a six month term loan of Shs. 8 million would mature and be payable with the interest at 15% per annum. The trial balance of the company as at 31 October 2002showed, in part, the following:

	Sh ‘000’	Sh ‘000’
Cash	800
Debtors	14,400
Provision for bad debts		1,260
Stock	7,000
Creditors		7,350

Sales terms call for a 2 per cent discount, if paid within ten days of the month after purchase with the balance due by the end of the month after purchase. Experience has shown that 70 per cent of the invoices are paid within the discount period, 20 per cent by the end of the month after purchase and 8 per cent the following month while the rest are uncollectible. All sales are on credit.

The unit sales price of the company’s product is Sh 20. Actual and projected sales quantities are as follows:

Total estimated sales for year ending 20 June 2003 is Sh 120 million.

All purchases are due for payment within fifteen days. Thus approximately 50 per cent of the purchases in a month are due and payable in the next month. Unit cost is Sh 14.

Target ending stocks at the end of each month are 200,000 units plus 25 per cent of the following month’s sales.

Budgeted selling and administrative expenses for the year are Sh 32 million of which Sh 12 million is considered fixed and includes depreciation expenses of Sh 2,400,000. The remainder of selling and administrative expenses varies with sales. Fixed selling and administrative expenses are incurred evenly on a time basis. Both fixed and variable selling and administrative expenses are paid as incurred.

Required:

A statement of budgeted cash receipts, disbursements and balances for each of the months of November and December 2002. (16 marks)

QUESTION FOUR

On 1 November 2001, Jiwe Construction Company Ltd was awarded a contract to construct an office block for the Association of Women Accountants of Kenya (AWAK). The office block is scheduled for completion by 31 March 2003.

The following information extracted from the books of Jiwe Construction Company Ltd relates to the contract for the year ended 31 October 2002:

On 31October 2002, the stock of materials at site amounted to Sh 2,100,300. On the same date thee were amounts outstanding with respect to wages, Sh 350,000 and for subcontract work, Sh 25,000.

Jiwe construction Company Ltd received Sh 36 million from AWAK which represents the amount of certificate issued by their architect s in respect of work completed to 31 October 2002 after deducting 15% retention money. It is estimated that work costing Sh 360,000 is not covered by this certificate.

You are also informed that:

1. The plant and machinery specifically purchased for the project is to be depreciated at 20% straight-line with no residual value.
2. That Jiwe Construction Company Ltd only takes 2/3 of the profit on work certified to its revenue account.

Required:

1. Contract account for the period ended 31 March 2002. (8 marks)
2. Profit to be taken to the credit of the company’s revenue account. (4 marks)
3. Calculate the work-in-progress. (4 marks)
4. Illustrate how the balances on the contract account would appear in the balance sheet of the company. (4 marks)    (Total: 20 marks)

QUESTION FIVE

1. “In practice there is no cost that can be described as, entirely and always variable or fixed.” Comment on the above statement. (4 marks)

2. Kenya Auto Assemblers Ltd assembles cars from imported knocked-down-kits. The company has been operating at 60% capacity, assembling 3,000 cars per year.

The following information relates to the company’s operations at two different levels of capacity.

Required:

(i) Using the high-low method, establish the cost equations of the for y = a +bx for each of the following costs for the company.

1. 1. Direct materials (2 marks)
   2. Direct labour. (2 marks)
   3. Indirect labour. (2 marks)
   4. Factory fuel and power. (2 marks)
   5. Factory repairs. (2 marks)

(ii) Using the results obtained in (i) above, estimate the total costs at 120% level of operation showing clearly the variable and fixed components of mixed costs. (6 marks)(Total: 20 marks)

 QUESTION SIX

1. Distinguish between cost accounting and financial accounting. (6 marks)
2. In a multi-department production situation, explain the following:

• The role of service departments. (3 marks)
• The reasons why it is important to distribute service department costs to production departments. (3 marks)
• Four methods of distributing service department costs in the case where service departments also provide services to each other. (8 marks)   (Total: 20 marks)

QUESTION SEVEN

1. State and explain five assumptions that underlie the cost-volume-profit analysis.   (10 marks)
2. Explain the meaning and significance of the following terms in the context of the cost-volume –profit analysis:
   1. Relevant range. (2 marks)
   2. Margin of safety. (2 marks)
   3. Sensitivity analysis. (2 marks)
   4. Contribution margin per unit. (2 marks)
   5. Contribution sales ratio. (2 marks)             (Total: 20 marks)

1. Explain the meaning and significance of the following terms in the context of the cost-volume –profit analysis:

   1. Relevant range. (2 marks)

   2. Margin of safety. (2 marks)

   3. Sensitivity analysis. (2 marks)

   4. Contribution margin per unit. (2 marks)

   5. Contribution sales ratio. (2 marks)

(Total: 20 marks)