Cost Accounting

Level 3

Model Answers
Series 3 2008 (Code 3017)

1 3016/2/06

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Cost Accounting Level 3

Series 3 2008

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QUESTION 1 A company uses two raw materials (Material A and B) to manufacture its single product. The customer requirement, for this product, for the next period is 4500 units. The finished product contains by weight, 40% material A and 60% material B. The following further information is available: (i) The product is manufactured in batches of 50 units (ii) Material A costs 5 per kg (iii) Material B costs 2 per kg (iv) Material A wastage rate 20% (by weight) (v) Material B wastage rate 25% (by weight) (vi) Product rejection rate 10% (vii) Finished weight of completed unit 5kg (viii) Material wastage of products A and B are sold back to the original supplier at the rate of 4 per kg and 1 per kg respectively (ix) Product rejects are sold at 3 per kg (x) Direct labour 400 per batch (xi) Variable overheads 100 per batch (xii) Fixed overheads 32,500 per period (xiii) Selling price 50 per unit (xiv) No stocks of finished products or raw materials are kept REQUIRED (a) Explain the difference between material wastage and product rejection. (b) Calculate for the next period: (i) (ii) number of batches to be manufactured weight of material A and material B to be used (10 marks) (c) Prepare a manufacturing profit and loss statement, in marginal costing format, for the next period. (6 marks) (Total 20 marks) (4 marks)

(iii) income generated from the sale of material waste and product rejects.

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MODEL ANSWER TO QUESTION 1 (a) Material wastage: Material wastage: Unavoidable waste of material due to conversion process. Product Rejects: Products, completely or partly completed, rejected as a result of an inspection system.

(b) (i) Product batches requirement: 4,500 5,000 100

Customers requirement Manufacturing requirement allowing for 10% rejects (4,500/0.9) Batches required (5,000 / 50) (ii) Material requirement

Finished weight of completed product Weight of raw materials, per finished unit, required Material A Material B Weight prior to manufacture allowing for wastage Material A Material B Total weight of material to be used for next period Material A Material B (iii) Income generated from material waste and product rejects Material A wastage (20% x 12,500) Material B wastage (25% x 20,000) Income from waste (2,500 x 4) + ( (5,000 x 1) Product rejects 5kg x (5,000 - 4,500) Income from rejects (2,500 x 3) Total income generated from waste and rejects

5 kg (5 x 40%) (5 x 60%) (2/0.8) (3/0.75) (2.5 x 5,000) (4 x 5,000) 2 kg 3 kg 2.5 kg 4 kg 12,500 kg 20,000 kg

2,500 kg 5,000 kg 15,000 2,500 kg 7,500 22,500

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MODEL ANSWER TO QUESTION 1 CONTINUED (c) Manufacturing, Profit and Loss Statement for next period Sale of good products (4,500 x 50) Add income from Sale of rejects Sale of material waste Material A (12,500 x 5) Material B (20,000 x 2) Direct labour (400 x 100) Variable overheads (100 x 100) Variable manufacturing cost of sales Contribution Fixed overheads Manufacturing Profit 62,500 40,000 102,500 40,000 10,000 152,500 95,000 32,500 62,500 225,000 7,500 15,000 247,500

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QUESTION 2 A company uses a process system to jointly produce its three main products, Product A, B and C. By-product D is also produced during the process. Each product contains two materials P and Q which are processed together in the weight ratio of 3:2 respectfully. Information regarding the joint process for the month of May is as follows: Input Direct material P 6,000 kg at 8.00 per kg Direct material Q 4,000 kg at 5.75 per kg Direct labour 5,000 hrs at 8.00 per hour Overheads are absorbed at 12.00 per direct labour hour A normal loss of 10% is expected. Output Product A Product B Product C By-product D Quantity 4,000 kg 2,600 kg 2,100 kg 500 kg Selling Price per kg 31 50 43 12

Joint processing costs are apportioned on a basis of physical quantity. All process losses (waste) are disposed of at a cost of 5 per kg. Prior to sale, Product B requires a finishing operation and Product C is required to be packed into containers. Products A and D can be sold without any further operations. Product B requires an additional one direct labour hour per 10kg of output for its finishing operation. Containers for Product C hold 4kg of the product and cost 16.00 each; 20 containers can be filled in one direct labour hour. REQUIRED Prepare the process account for the month of May. (12 marks)

Assuming that all production was sold, prepare a profit statement for each of the main products, for the month of May. (6 marks) Explain the difference between abnormal loss and abnormal gain. (2 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 2 (a) kg 6,000 4,000 Process account (Physical basis) Product kg 48,000 A 4,000 23,000 B 2,600 40,000 C 2,100 60,000 D 500 5,000 Normal loss 1,000 4,000 180,000 10,200 80,000 52,000 42,000 6,000

Material P Material Q Direct labour Overheads Normal loss(waste) Abnormal gain

200 10,200

180,000

Workings Normal loss (waste) = 1,000 x 5 = 5,000 Apportionment Products A (176,000 - 6,000) x 4,000/8,500 B (176,000 - 6,000) x 2,600/8,500 C (176,000 - 6,000) x 2,100/8,500 Abnormal gain (176,000 - 6,000) x 200/8,500 (b) Profit Statement () Product Sales Process costs Finishing costs Packing costs Profit A 124,000 80,000 52,000 5,200 80,000 44,000 57,200 72,800 B 130,000 42,000 8,925 50,925 39,375 C 90,300

= 80,000 = 52,000 = 42,000 = 4,000

Workings: Product B finishing cost Hours required Direct labour at 8 per hour Overheads at 12 per hour Finishing cost Product C packing cost Containers required Container cost Hours required Direct labour at 8 per hour Overheads at 12 per hour Packing cost (c) Abnormal loss: Abnormal gain:

2,600/10 260 x 8 260 x 12

= 260 hrs = 2,080 = 3,120 = 5,200

2,100/4 525 x 16 525/20 26.25 x 8 26.25 x 12

= 525 = 8,400 = 26.25 hrs = 210 = 315 = 8,925

Not expected to occur it is a loss in excess of the normal loss Not expected to occur it is a loss which is less than the normal loss

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QUESTION 3 Dual Products Ltd manufactures and sells two products (Product Tee and Product Pee). The standard production costs and selling prices, for the two products for Year 9, are as follows: Product Tee ( per unit) Selling price Direct material (15 per kg) Direct labour (12 per hour) Production Overheads (8 per direct labour hour) 40.00 6.00 14.40 9.60 Product Pee ( per unit) 50.00 9.00 18.00 12.00

Budgeted production output for Year 9 is 15,000 units and 12,000 units for products Tee and Pee respectively. Budgeted stock of production units (valued at standard production cost) and stocks of direct materials (kg) for Year 9 are as follows: Opening stock Product Tee Product Pee Material 45,000 23,400 1,600 kg Closing stock 30,000 31,200 2,000 kg

Direct operatives are on holiday for 4 out of the 52 weeks in the year. The basic normal working week is 40 hours but overtime is regularly worked by each operative. 20% of the total hours worked are budgeted as overtime and paid for at a premium of 25% over the basic rate. Holiday pay and overtime premium costs are included in production overheads. REQUIRED Prepare the following budgets for Year 9: (a) Sales (in units and value) (b) Direct materials purchases (in kg and value) (c) Direct labour (in hours and number of operatives) (d) Holiday pay and overtime premium (relating to direct labour). (6 marks) (6 marks) (4 marks) (4 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 3 (a) Sales budget: Standard production cost Opening stock(units) Closing stock(units) Production (units) add decrease in finished stock less increase in finished stock Sales (units) Sales value () (b) Direct material purchases budget: Direct material per unit(kg) Usage in production(kg) Total direct material usage(kg) add increase in direct stock Direct material purchases(kg) Direct material purchases value() (c) Direct labour budget: Direct labour per unit(hours) Direct labour per annum(hours) Total direct labour budget(hours) Hours budgeted per operative per annum Number of direct labour operatives 15 Tee 1.2 18,000 36,000 (14.4/12) (15,000x1.2) Pee 1.5 18,000 (18/12) (12,000x1.5) Tee 30 1,500 1,000 15,000 500 15,500 620,000 Pee 39 600 800 12,000 200 11,800 590,000

(45,000/30) (30,000/30)

(23,400/39) (31,200/39)

0.4 6,000 13,200 400 13,600 204,000

(6/15) (15,000x0.4) (6,000+7,200) (2,000-1,600)

0.6 7,200

(9/15) (12,000x0.6)

48 weeks x 40 hours/week/0.8 overtime 2,400 hours (36,000/2,400)

(d) Holiday pay and overtime premium budget (direct labour) Holiday pay = 15 operatives x 4 weeks x 40 hours/week x 12 per hour = 28,800 Overtime premium = 36,000 x 0.2 x 25% of 12 = 21,600

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QUESTION 4 Sole Ltd manufactures and distributes a single product. The product sells for 160 per unit and the company expects total sales revenue in this current year of 800,000. The variable costs per unit are as follows: Direct materials Direct labour Variable overheads 60.00 40.00 12.00

Fixed overheads are forecasted at 96,000 for the year.

REQUIRED (a) Calculate for the current year the: (i) (ii) break-even point in units contribution/sales ratio

(iii) margin of safety as a percentage of sales (iv) expected profit. (8 marks) The following changes in cost are expected in the following year: Raw material prices to increase by 8% Direct wage rate to increase by 4% Variable overheads to rise by 5% per unit of product Fixed overheads to increase by 10,600.

REQUIRED (b) Calculate for the following year: (i) (ii) a new selling price that maintains the current years contribution/sales ratio the sales volume required to maintain the current years margin of safety if the selling price remains at 160 (iii) the sales volume required to maintain the current years profit if the selling price remains at 160. (12 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 4 (a) /unit Selling price Direct materials Direct labour Variable o/heads Contribution (i) 60.00 40.00 12.00 112.00 48.00 = Fixed overheads / unit contribution = 96,000/48 = 2,000 units = 48 / 160 = 30% [(Sales volume - break-even)/Sales volume] x 100% = [(5,000 - 2,000) / 5,000] x 100% = 60% = Total contribution - fixed overheads = 30% x 800,000 - 96,000 = 144,000 /unit 160.00

Break-even

(ii) (iii)

Contribution/sales ratio Margin of safety

(iv)

Expected profit

(b) Variable costs for following year: Direct material 64.80 Direct labour 41.60 Variable o/heads 12.60 119.00 (i) Selling price Contribution / sales ratio 0.3 SP(0.3 -1) SP(1 - 0.3) SP Selling price

= = = = = =

Selling price - unit variable cost Selling price SP - 119 SP - 119 119 119/0.7 170.00

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MODEL ANSWER TO QUESTION 4 CONTINUED (ii) Sales volume (margin of safety) = Fixed overheads / unit contribution Break-even = (96,000 + 10,600) 160 - 119 = 2,600 units = Sales volume - break-even Margin of safety Sales volume = SV - 2,600 0.60 SV = 2,600 SV(1- 0.60) = 6,500 units Sales volume (iii) Sales volume (profit) Total contribution required = = = Sales volume required =

Current years profit + increased fixed overheads 144,000 + (96,000 +10,600) 250,600 250,600 / (160 - 119) 6,112 units

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QUESTION 5 The standard variable production costs of a companys single product in a period were as follows: Direct materials RM01 5 kg at 2 per kg RM02 2 metres at 6 per metre Direct labour Grade 1 Grade 2 10.00 12.00

4 hours at 8 per hour 2 hours at 10 per hour

32.00 20.00

Budgeted production for this period was 600 units. Actual production and costs relating to this period were as follows: Production 650 units

Direct materials: Purchases RM01 3,200 kg purchased at a total cost of 6,200 RM02 1,350 metres purchased at a total cost of 8,200 Issues to production: RM01 3,000 kg RM02 1,250 metres Direct labour: Grade 1 2500 hours worked at a total cost of 19,600 (includes 200 hours idle time caused by machine breakdown) Grade 2 1,250 hours worked at a total cost of 12,750 (includes 50 hours idle time caused by machine breakdown) At the beginning of the period the following quantities of raw material were in stock: RM01 200 kg RM02 120 metres There were no stocks of work in progress at the beginning or end of the period. The companys policy is to calculate material price variance at the time of purchase. REQUIRED Calculate the following variances for this period: Direct material price (for each type of raw material) Direct material usage (for each type of raw material) Direct labour rate (for each grade of labour) Idle time (for each grade of labour) Labour efficiency (for each grade of labour) (12 marks) Prepare the Raw Materials Stock Account for each type of direct material (include in your accounts the price variance). (8 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 5 (a) (i) Material Price Variance Standard price Purchases Quantity Actual cost of purchases Material price variance (ii) Material Usage Variance Production Standard use per unit Standard use Actual Usage Standard price Material usage variance (iii) Grade 1 Labour Rate Variance Actual hours Standard rate per hour Actual cost of labour Labour rate variance (iv) Idle Time Variance Ideal time hours Standard rate per hour Idle Time Variance (v) Labour Efficiency Variance Production Standard hours per unit Actual hours Ideal time hours Actual productive hours Standard - Actual productive hours Standard rate per hour Labour efficiency variance 2,500 8 20,000 19,600 400F Grade 2 1,250 10 12,500 12,750 250A

RM01 2 per kg 3,200 kg 6,400 6,200 200F

RM02 6 per metre 1,350 metres 8,100 8,200 100A

650 units 5 kg 3,250 kg 3,000 kg 250 kg 2 per kg 500F

650 units 2 metres 1,300 metres 1,250 metres 50 metres 6 per metre 300F

200 8 1,600A

50 10 500A

650 units 4 2,600 hours 2,500 hours 200 hours 2,300 hours 300 hours 8 2,400F

650 units 2 1,300 hours 1,250 hours 50 hours 1,200 hours 100 hours 10 1000F

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MODEL ANSWER TO QUESTION 5 CONTINUED (c) Bal b/d Purchases Price variance Raw Material Stock Account (RM01) 400 Work in progress 6,200 Bal c/d 200 6,800 Raw Material Stock Account (RM02) 720 Price variance 8,200 Work in progress Bal c/d 8,920 6,000 800 6,800

Bal b/d Purchases

100 7,500 1,320 8,920

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