Cost Accounting Questions
Auto-Generators Ltd. is a local company that manufactures three types of automotive generators namely: Exe, Wye and Zed. The management is unhappy about the current production mix and is seeking advice on the most optimal arrangement. Current production is 100,000 units of Exe, 50,000 units of Wye and 60,000 units of Zed. The data relating to production costs for each unit of the generators are given below:
Exe Wye Zed. Production costs
Direct materialVariable overhead
- Each type of generator passes through three departments in which a different type of labour is used. The labour requirements in each department are given below:
Department Rate per hour Labour requirement (hours) Sh. Exe Wye Zed 1.
- There is a shortage of labour in department 2 and it is not possible to increase labour input hours beyond the level currently utilized.
- Fixed overheads are budgeted at Sh.500,000,000 per annum and they are expected to remain constant.
- Market prices are currently Sh.12,000 for Exe, Sh. 20,000 for Wye and Sh.22,500 for Zed.
- A recent market survey disclosed that maximum sales potential for the company is 125,000 units of Exe, 75,000 units of Wye and 80,000 units of Zed.
- Determine the profit made on the current production mix. (7 marks)
- Determine the most profitable production mix that should be adopted by the company. (7 marks)
- Calculate the expected profit if the production mix in (b) above is adopted by the company. (3 marks)
- Which other considerations may be necessary before adoption of the change in production mix? (3 marks)
NFP is an industrial lubricant which is prepared by subjecting certain crude chemicals to two successive processes. The output of process I is transferred to process 2 where it is blended with other chemicals. The process costs for the month of October 2004 were as follows:
- General overhead costs were absorbed into process costs on the basis of labour cost. General overhead for the month of October 2004 amounted to Sh. 357,000.
- The normal output of process I was 80% of input, while that of process II was 90% of input.
- Waste material from process I was sold for Sh.2 per kg. whole that from process II was sold for Sh.3 per kg.
- The output for the month of October 2004 was as follows:
Process I: 2,300,000kg
- Process II: 4,000,000kg
- There was no stock or work in progress of either of the products at the beginning or end of the period.
- It was assumed that all available waste material had been sold at the prices indicated above.
Demonstrate how the data above would be recorded in:
- Process accounts for both processes for the month of October 2004.
- Finished stock account.
- Normal loss account.
- Abnormal loss and gain (Total: 20 marks)
(a) Citing relevant examples, distinguish between joint products and by-products. (4 marks)
(b) In a joint product situation, explain the following:
- Reasons why it is important to allocate joint cost to products. (4 marks)
- Any four methods of allocating joint cost to products. (8 marks)
- What factors should be considered in selecting the most appropriate method of allocating joint costs? (4 marks)
(Total: 20 marks)
By way of explanatory notes, briefly state why you agree or do not agree with the following statement:
- Variable costs are always relevant costs while fixed costs are not. (3 Marks)
- The book value of an asset is irrelevant in decision making. (3 Marks)
- Variable costs and differential costs mean the same thing. (3 Marks)
- If a product line generates a loss, that product line should be dismissed.(3 marks)
- The term forecast can be used to mean budget. (2 marks)
- When a graph is plotted to show the effect of activity on the cost, using an economic total cost curve and an account cost curve, the behaviour pattern of both curves are the same. (3 Marks)
- Opportunity cost of a resource and an opportunity cost of an activity mean the same thing. (3 Marks)
(Total: 20 marks)