Cost Accounting Questions
Nguvu Company Limited specializes in the manufacture of industrial adhesives. The adhesive is made from a solution of chemical powder X and liquid chemical Y. After manufacturing the adhesive, the company packs in into plastic tubes before distributing it to the customers.
The standard prime cost of a tube of the adhesive is as follows:
|Sh. per tube||Sh. per tube|
|Materials: Powder XLiquid chemical YPlastic tube Direct labour: Mixing and pouringTotal standard prime cost||1563||241842|
The standard material allowance for each tube of the adhesive is 2kg of chemical powder X, ¼ litre of liquid chemical Y and one piece of plastic tube. The standard wage rate of mixing and pouring the chemicals is Sh. 45 per hour.
During the month ended 31 March 2003. 45,000 tubes of the adhesive were made. There was no work in progress at the beginning or end of the month and the receipts and issues of materials during the month were as shown below:
|Chemical X||Chemical Y||tube|
|Opening StockPurchases Issues||15,000kg100,000kg@ Sh. 7 per kg 98,000 kg||2,000 litres6,000 litres@ Sh. 23 per litre6,000 litre@ Sh. 25 per litre10,500 litres||1,000 tubes2,000 tubes@ Sh. 4 each50,000 tubes@ Sh. 3 each45,200 tubes|
Employees working on the mixing and pouring of the chemicals worked a total of 2,050 hours during the month ended 31 March 2003. They were paid gross wages amounting to Sh. 8,910,000.
It is the policy of the company to analyze variances from the standard prime costs.
(a) Materials price variance (6 marks)
(b) Materials usage variance (6 marks)
(c) Direct labour efficiency variance (2 marks)
(d) Direct wages rate variance (2 marks)
(e) (i) Two possible causes of direct labour efficiency variance (2 marks)
(ii) Two possible causes of direct material usage variance (2 marks) (Total: 20 marks)
Maxim Company Limited started its operations on 1 January 2001. It manufactures a single product which it sells at Sh. 25 per unit. The following absorption costing income statements are for the years ended 31 December 2001 and 31 December 2002 respectively.
|SalesCost of goods sold:Opening stockCost of goods manufacturedCost of goods available for saleLess: Closing stockCost of goods soldGross marginMarketing and administrative costsOperating income before tax||150,000 130,000130,00052,00078,00072,00039,50032,500||350,000 52,000130,000182,000______182,000168,00049,500118,500|
The cost of goods manufactured per unit is computed as follows:
|Direct MaterialsDirect labourVariable manufacturing overheadFixed manufacturing overheadTotal cost per unit||5,0003,0002,000 3,00013,000|
Production and sales data for the two years are as follows:
|Units producedUnits sold||10,0006,000||10,00014,000|
Marketing and administrative costs:
|Sh. ‘000’||Sh. ‘000’|
|Variable marketing costsFixed marketing costsFixed administrative costs||7,50015,00017,00039,500||17,50015,00017,00049,500|
There was no work in progress at either the beginning or end of the respective years.
- Income statements for Maxim Company Limited for each of the years using the variable – costing method. (10 marks)
- Reconcile the absorption-costing and variable-costing operation incomes for each of the two years. (6 marks)
- Which income statement format is more suitable for managerial decision making? (4 marks) (Total: 20 marks)
Mali Yote Limited is a company engaged in the manufacture of specialist marine engines. It operates a job costing accounting system which is not integrated with financial accounts.
At the beginning of the month of May 2002, the operating balances in the cost ledger were as follows:
|Stores ledger control accountWork in progress control accountFinished goods control accountCost ledger control account||85,000167,00049,000302,000|
During the month, the following transactions took place.
|Materials:Issues to: Factory wages:||PurchasesProductionGeneral maintenanceAssembling of manufacturing equipmentTotal wages paid||42,70063,4001,4007,600124,000|
Of the total wages paid. Sh. 12,500,000 was incurred in the assembly of manufacturing equipment. Sh. 35,700,000 was indirect wages and the balance was direct wages.
Other production overhead costs incurred amounted to Sh. 152,000,000. Sh. 30,000,000 of which was absorbed by the manufacturing equipment under assembly while Sh. 7,500,000 was under absorbed overhead costs written off.
One of the engines manufactured by the company is produced under licence. During the month of May 2002. Sh. 2,100,000 was paid as royalty for that particular engine.
Selling overheads and distribution overhead costs were as follows:
|Selling overheadsDistribution overheads||22,000410,000|
The company’s gross profit margin is 25% on factory cost.
At the end of May 2002, the stock of work in progress had increased by Sh. 12,000,000. The manufacturing equipment under assembly was completed within the month and transferred out of the cost ledger at the end of the month.
(i) Cost ledger control account (8 marks)
(ii) Stores ledger control account (3 marks)
(iii) Work in progress control account (3 marks)
(iv) Finished goods control account (3 marks)
(v) Costing profit and loss account (3 marks) (Total: 20 marks)
- Although stocks of materials may be planned to maximize profitability, when stock record cards are compared to actual physical stocks, differences often arise.
Explain possible reasons for these differences. (4 marks)
- Using a diagram to illustrate your answer, explain the rationale underlying the economic order quantity model. (The mathematical derivation is not required) (4 marks)
- Explain briefly the limitations of economic order quantity. (4 marks)
- Bidii Enterprises is located at Kariobangi Light Industries area in Nairobi. The company manufactures a product ‘Comex’ which is used in the building industry. The main raw material used in the manufacture of ‘Comex’ is material B42000.
The following information relates to material B42000.
Annual requirements:Ordering costs:Annual holding costs:Purchase price per unit:Safety stock requirement: 144,000 unitsSh. 12,500 per order20% of the purchase priceSh. 500None
(i) The economic order quantity. (2 marks)
(ii) The number of orders needed per year. (2 marks)
(iii) Total cost of ordering and holding material B42000 per year. (4 marks) (Total: 20 marks)
Distinguish between continuous stock-taking and annual stocktaking and explain the advantages and disadvantages of each of them. (20 marks)
Write explanatory notes on each of the following:
(a) Just-In-Time (JIT) production. (4 marks)
(b) Equivalent units in process costing (3 marks)
(c) Activity based costing (4 marks)
(d) Learning curve theory. (3 marks)
(e) Set-up time (3 marks)
(f) Product costing (3 marks) (Total: 20 marks)