LCCI International Qualifications

Cost Accounting Level 3

Model Answers
Series 4 2008 (3017)

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EDI accepts that candidates may offer other answers that could be equally valid. The general standard of model answers is one that would achieve a Distinction grade. photocopying. resold.Cost Accounting Level 3 Series 4 2008 How to use this booklet Model Answers have been developed by EDI to offer additional information and guidance to Centres. teachers and candidates as they prepare for LCCI International Qualifications. EDI provides Model Answers to help candidates gain a general understanding of the standard required. additional guidance relating to individual questions or to examination technique (3) Helpful Hints Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success. without the prior consent of the Publisher. other than that in which it is published. . recording or otherwise without prior written permission of the Publisher. © EDI 2009 All rights reserved. stored in a retrieval system or transmitted in any form or by any means. mechanical. electronic. no part of this publication may be reproduced. The contents of this booklet are divided into 3 elements: (1) (2) Questions Model Answers – reproduced from the printed examination paper – summary of the main points that the Chief Examiner expected to see in the answers to each question in the examination paper. plus a fully worked example or sample answer (where applicable) – where appropriate. hired out or otherwise disposed of by way of trade in any form of binding or cover. The book may not be lent.

No changes in variable costs are expected. (11 marks) A mail order company has approached Twist and Turn with the following two order options (i) (ii) 500 units at a price of £15 each or 1. whether either of the mail order options should be accepted.500 per month. using supporting calculations.QUESTION 1 Twist and Turn manufactures and sells its single product at £16 per unit. which currently has a monthly production capacity of 5. REQUIRED (a) Calculate for next month the estimated: (i) (ii) (iii) (iv) Contribution sales ratio Break even point (in units and revenue) Margin of safety as a % of sales Net profit.000 units.000 units at a price of £14 each. for production and sales of 4.500 units by hiring additional equipment at a cost of £2.000 units are estimated at £48. The company. Twist and Turn can increase its monthly manufacturing capacity to 5. 4. REQUIRED (b) Advise Twist and Turn.000 respectively.500 units and 5. (3 marks) (Total 20 marks) (c) 3017/4/08/MA Page 1 of 14 .000 and £51.500 units in the next month. has orders for and plans to sell. This is in addition to the sales orders already received by Twist and Turn and must be completed during next month’s production. (6 marks) State three assumptions in cost-volume-profit analysis. The following information is available: Total monthly costs. The company only manufactures to sales orders received and keeps no stock.

£21.000 = Fixed costs + 5.000 £21.3% (iv) Net profit Net profit = = = Total contribution – Fixed costs 4.100 units Fixed costs/Contribution sales ratio £21.000/£10 2.000 Fixed costs/Unit contribution £21.500 – 2.000 – 30.50% (ii) Break even point Break even point = = = Break even point = = = Workings: £51.500 x Variable cost per unit £3.400/4.000 x Variable cost per unit £48.000 = Fixed costs + 4.600 (iii) Margin of safety Margin of safety % of sales = = = = = Budgeted sales – Break even point 4.100 2.000 x £6 51.625 £33.000/500 Variable cost per unit = £6 Contribution £16 .000 £24.500) x 100% 53.000 3017/4/08/MA Page 2 of 14 .000 = 500 x Variable cost per unit Variable cost per unit = £3.000 Fixed costs Fixed costs = = = Fixed costs + 5.£6 = £10 Contribution Sales Ratio = 10/16 x 100% = 62.400 units (2.500 x £10 .MODEL ANSWER TO QUESTION 1 (a) (i) Contribution sales ratio Variable cost per unit Total costs = Fixed costs + Variable costs £51.000/0.

£2. = 1.000 more profit than option (i).500 Order option (ii) Additional contribution Additional fixed costs Additional net profit Advice Advise company to accept option (ii) as this option will generate £1.000 .£6) = £8.500 3017/4/08/MA Page 3 of 14 .000 x (£14 .£6) Additional net profit = £4.500 = £8.MODEL ANSWER TO QUESTION 1 CONTINUED (b) Order option (i) Additional contribution (net profit) = 500 x (£15 .000 = £2.500 = £5. (c) Assumptions in cost-volume-profit analysis Three of the following: Selling price per unit is constant across the range of activity Total fixed costs remain constant across the range of activity Variable costs per unit is constant across the range of activity Costs can be split between fixed and variable.

700 Actual Manufacturing and Trading Account Sales and production units £ Sales Variable costs Fixed overheads Actual cost Gross profit 3.QUESTION 2 A company produces a single product.400 225 £ 9. Budgeted Manufacturing and Trading Account Sales and production units £ Sales Variable costs Fixed overheads Standard costs Gross profit 3. (6 marks) Reconcile the budgeted gross profit with the actual gross profit using the variances calculated in part (a). REQUIRED (a) Calculate the following variances for the period: (i) (ii) (iii) (b) sales price sales volume (profit) total cost. (8 marks) (d) Explain the difference between an ideal and an attainable standard.800 5.600 200 £ 8.800 2.700 6. Standard direct labour is 2 hours per unit. The company uses standard costing and has produced the following budgeted and actual Manufacturing and Trading accounts for a period.300 2. (3 marks) Calculate the following fixed overhead variances for the period: (i) (ii) (iii) (iv) expenditure volume capacity efficiency. Actual direct labour worked was 470 hours.600 2. (3 marks) (Total 20 marks) (c) 3017/4/08/MA Page 4 of 14 .000 The following information has also been provided: Fixed overheads are absorbed at a predetermined rate based on direct labour hours.000 2.

300/225 = £28 £ 2.700 100A 2.700 – (200 x 2 x 6) (225 x 2 – 470) x £6 (200 x 2 – 470) x £6 100A 300A 120F 420A 400F 300A 200A £9.400 (225 x 12) – (200 x 12) (200 x 28) – 5.000/225 = £40 £2.800 400F 300A 200A Workings: Overhead absorption rate (d) Ideal standard A standard which makes no allowance for normal loss. waste and machine down time and therefore only attainable under most favourable conditions.700 £2. waste and machine down time.600 (200 x £40) . Attainable standard Standards set at a level which assumes efficient levels of operation but includes allowances for normal loss.700/225 = £12 £6. = £2.£2.800 .700/(225 x 2) = £6 per direct labour hour 3017/4/08/MA Page 5 of 14 .MODEL ANSWER TO QUESTION 2 (a) Sales and cost variances (i) Sales price variance (ii) Sales volume (profit) variance (iii) Total cost variance Workings: Budgeted standard price per unit Budgeted standard profit per unit Budgeted standard cost per unit (b) Profit reconciliation Budgeted profit Sales price variance Sales volume (profit variance) Total cost variance Actual profit (c) Fixed overhead variance (i) (ii) (iii) (iv) Expenditure variance Volume variance Volume capacity variance Volume efficiency variance £2.£8.

The company has provided the following budgeted information.50 per product 5 hours 4 hours 1 hour £0.00 per hour Packing boxes Fixed overheads (if absorption costing is applied) Machining department Finishing department Dispatch department The selling price is £20 per unit. The product is produced in two departments (machining and finishing) before being packed into boxes in the dispatch department.000 units 1. (13 marks) (7 marks) (Total 20 marks) 3017/4/08/MA Page 6 of 14 . Marginal Costing. Planned production and sales for the next period are as follows: Production Sales 2.500 units Absorbed at a rate of £15 per machine hour (The manufacture of a batch of 100 units takes 4 machine hours) Absorbed at a rate of £12 per direct labour hour Absorbed at a rate of £1 per product packed £2. All other production in the period will be packed.00 per hour Finishing department (per 20 units) at £10. At the end of the period it is expected to have no stock of packing boxes and 400 units unpacked in the dispatch department. Direct material Direct labour Machining department (per 100 units) at £8.QUESTION 3 Sole Product Ltd manufactures and sells a single product.00 per hour Dispatch department labour (per 20 units packed) at £8.50 each There is no stock of packed or unpacked products. REQUIRED Produce budgeted manufacturing and trading account for the period using: (a) (b) Absorption Costing. direct material or packing boxes at the beginning of the period.

000 640 800 1.600 £ £ 30.600 18.000/20 x £12 x 4) Dispatch dept (1.680/1.600/20 x £8) Material – Packing boxes (1.000 + 800 + 4.700 15.800)/2.500 + 100) Number of products 2.000 1.MODEL ANSWER TO QUESTION 3 (a) Production for period Sales for period Closing stock of unpacked products Closing stock of packed products Products completed and packed in period (1.000 800 4.000/20 x £10 x 4) Labour – dispatch dept (1.300 3017/4/08/MA Page 7 of 14 .50) Direct labour – Machine dept (2.50) Fixed overheads Machine dept (2.000/100 x £15 x 4) Finishing dept (2.240 7.600 x £1) Less closing stock of work in progress (unpacked products) Manufacturing cost of products completed Less closing stock of completed products Manufacturing cost of sales Gross profit Workings: Closing stock of work in progress = [(5.680 980 14.800 1.000/100 x £8 x 5) – Finishing dept (2.500 x £20) Direct material (2.000 + 1.000 x £2.200 + 4.160 Closing stock of completed products = (15.500 400 100 1.000 11.600 Budgeted Manufacturing and Trading Account for the period (Absorption Costing) £ Sales (1.000] x 400 = £3.160 15.600) x 100 = £980 5.600 x £0.200 4.840 3.

300 7.MODEL ANSWER TO QUESTION 3 CONTINUED (b) Budgeted Manufacturing and Trading Account for the period (Marginal Costing) £ Sales Direct material Direct labour – Machine dept – Finishing dept Labour – dispatch dept Material – Packing boxes Variable cost of production Less closing stock of work in progress (unpacked products) Less closing stock of completed products Variable production cost of sales Contribution Less Fixed overheads Gross profit Workings: Closing stock of work in progress = [(5.960 9.280/1.600 13.000 + 800 + 4.700 21.280 580 8.000 640 800 11.000)/2.000 800 4.000] x 400 = £1.600) x 100 = £580 5.960 Closing stock of completed products = (9.240 1.700 £ £ 30.000 3017/4/08/MA Page 8 of 14 .

000 180 km 36.600 10.780 15.000 30.000 2.000 Income from customers is generated by charging a rate per km proportional to the contracted distance travelled.400 4.600 14.550 8.400 11.450 4.000 £ 96. (4 marks) (Total 20 marks) 204 km 42.740 9.000 33.000 14.200 12.000 27.860 14.800 3017/4/08/MA Page 9 of 14 . During Month 1 the following actual data was recorded: Number of contracts jobs Vehicle travel (contracted to customers) Vehicle travel (not contracted) Income from customers Fuel costs Driver wages Vehicle maintenance Office costs Other operational costs REQUIRED (a) Prepare a statement for Month 1 showing for each budgeted item the following: (i) (ii) (iii) the flexed budget the actual budget the variance.000 200 km 40.000 2.280 10.000 2.000 220 km 44.QUESTION 4 A haulage company.000 30.800 15.200 13. has prepared the following monthly flexible budget based on the number of contracted jobs.000 £ 90.000 £ 88. (16 marks) (b) Briefly explain the main difference between flexible and fixed budgets.500 2.000 £ 70.000 2.760 10. which operates a fleet of 10 similar heavy goods vehicles and employs 10 drivers.000 15.000 £ 79.000 24. Drivers are paid a fixed wage plus a variable wage proportional to the total vehicle distanced travelled.500 8.110 7. Number of contracts Vehicle travel (contracted to customer) Vehicle travel (not contracted to customer) Income from customers Fuel costs Driver wages Vehicle maintenance Office costs Other operational costs 160 km 32.440 10. Office costs are partly related to the number of contracts completed.400 16.

740 9.MODEL ANSWER TO QUESTION 4 (a) A Haulage company – Budget Report – Month 1 (Based on 204 contracted jobs) Flexed Km 40.110 7.000 30.500 2.200A 600F £ 1.600 £ 89.860 14.000 Actual km 42.800 30.760 14.780 15.280 15.000 £ 90.100F 500A 600F 500F 108A 200F Vehicle travel (contracted to customers) Vehicle travel (not contracted to customers) Income from customers Fuel costs Drivers’ wages Vehicle maintenance Office costs Other operational costs 3017/4/08/MA Page 10 of 14 .000 2.632 10.800 Variance Km 1.710 8.

760 32.600 = Fixed cost = Total cost = 204 contracts = £0.000 = £0.000 £1. changes in response to changes in activity by recognising different cost behaviour patterns.000 + 71.000/160 = 200km per contract 24.000 11.550 – 11.000 + 204 x 8 = £2.MODEL ANSWER TO QUESTION 4 CONTINUED Workings: Vehicle travel (contracted to customers) (Variable) 32.600 .20 = £89.000 budgeted km for 160 contracts = 204 contracts = 204 x 150 = 30.000 + 0.800 + 30. used for control purposes.550 = £5.400/32.400)/(63.1.000 + £8 per contract 1.400 x £0.450 – 13.280 Drivers wages (Semi-variable cost) Variable wage cost Over contract range 160:180 = Total wage = (14.000) Fixed wage = 16.000 – 56.600 = £1.400km Fuel cost = 71.000km travel = 204 contracts = 204 x 200 x £2.200/56.20 per km Vehicle travel for 204 contracts = 40.15 x 77.600 = 71.20 = £14.550 = Fixed wage + (0.280)/(180 – 160) Fixed cost + (Total variable wage per contract) Fixed cost + (8 x 200) 2.710 Office costs (Semi-variable cost) Variable cost Over contract range 160:180 = Total cost = Using 200 contracted jobs per month 2. It is based on one level of activity.000/160 = 150km per contract 70.15 x vehicle travel 204 contracts = 5.400 budgeted for 32.400 x 0.000 Total wage = £5.600km Income from customers (Variable) £70. A flexible budget.140 – 1.000 budgeted km for 160 contracts = 204 contracts = 204 x 200 = 40.000) = Fixed wage + (Total variable wage per km travelled) Using 220 contracted jobs per month 16.000 = 56.000 = £2.15 per km (1.20 per km Fuel costs (Variable cost) Contracts Total distance traveled (km) Cost per km (£) 160 32.000 + 24.800km Vehicle travel (not contracted to customers) (Variable) 24. 3017/4/08/MA Page 11 of 14 .632 = £8 per contract (b) A fixed budget is normally set prior to the start of an accounting period and used for planning purposes.15 = £15.

the following transactions took place: £000 110 100 75 400 £000 Raw material Account Finished Goods Control Account Work in Progress Control Account Production Overhead Control Account (over absorbed) Financial Ledger Control Account 5 215 220 Raw material purchases Total factory wages Indirect production expenses Sales At the end of Month 2. valued at cost. the following stocks. Distinguish between integrated and non-integrated accounting systems.QUESTION 5 Makeit Ltd maintains a cost ledger which is kept separate to the financial ledger. £60.000 £110. were recorded: Raw materials Work in progress Finished goods Notes (i) (ii) (iii) 10% of raw material issues from stores are indirect 90% of factory wages are direct labour Factory overheads are absorbed at the rate of 110% of the direct labour wages.000 £57.000 REQUIRED (a) (b) Record the above transactions in the cost ledger accounts for month 2. £000 70 90 60 220 During Month 2. (16 marks) (4 marks) (Total 20 marks) 3017/4/08/MA Page 12 of 14 . At the beginning of month 2 the following balances remained in the cost ledger.

110) = 280 £000 90 300 390 Prod Cost of Sales Closing Balance £000 280 110 390 3017/4/08/MA Page 13 of 14 .MODEL ANSWER TO QUESTION 5 (a) Raw Material Control Account £000 Opening Balance Fin Led Control 70 110 W in P Control Prod Overhead Cont Closing Balance £000 108 12 60 180 180 Workings: Material issued (180 . 10% indirect = 12 and 90% direct = 108 Wages Control Account £000 Fin Led Control 100 100 Production Overhead Control Account £000 Raw Mat Control Wages Control Fin Led Control Closing Balance 12 10 75 7 104 Opening Balance W in P Control W in P Control Prod Overhead Cont £000 90 10 100 £000 5 99 104 Work in Progress Control Account Opening Balance Raw Mat Control Wages Control Prod Overhead Control Workings: Work completed at cost (357 .57) = 300 £000 60 108 90 99 357 Fin Goods Control Closing Balance £000 300 57 357 Finished Goods Control Account Opening Balance W in P Control Workings: Production cost of sales (390 .60) = 120.

280) = 120 (b) Integrated accounts – a set of accounting records which provide both financial and cost accounts using common data. Non-integrated accounts – a system in which the cost accounts are distinct from the financial accounts. the two sets of accounts being kept in agreement by use of control accounts or reconciled by other means.MODEL ANSWER TO QUESTION 5 CONTINUED Production Cost of Sales Account Fin Goods Control £000 280 280 Profit/Loss £000 280 280 Sales Account £000 Profit/Loss 400 400 Fin Led Control £000 400 400 Financial Ledger Control Account Sales Closing Balance 400 220 Opening Balance Raw Mat Control Wages Control Prod Overhead Control Profit 215 110 100 75 120 620 620 Workings Profit (400 . 3017/4/08/MA Page 14 of 14 © Education Development International plc 2009 .

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