Cost

Accounting
Level 2

Model Answers
Series 4 2006 (Code 2016)

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Cost Accounting Level 2

Series 4 2006

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Cost Accounting Level 2

Series 4 2006
QUESTION 1
Below are the definitions of eight terms used in cost accounting:
1
2
3
4
5
6
7
8

The cost of acquiring, producing or enhancing fixed assets

The cost of a process that results in more than one main product
The total cost of direct materials, direct labour and direct expenses
The comparison of the standard cost of materials used and the standard material cost of output
The issue of materials to production using the most recent price paid
A unit of product or service in relation to which costs are ascertained
Stock on hand or on order which has not been scheduled for use
The level of activity at which there is no profit or loss

REQUIRED
State the name of the cost accounting term for each of the eight definitions, using no more than four
words for each.
(20 marks)

MODEL ANSWER TO QUESTION 1

1
2
3
4
5
6
7
8

Capital expenditure
Joint cost
Prime cost
Direct material usage variance
Last in, First out
Cost unit
Free stock
Break-even point

2016/4/06/MA

QUESTION 2
The production operatives of AB Company are currently paid at an hourly rate of 7.00 for the number
of hours worked. The budget for next year includes an increase of 5% to the hourly rate. In addition,
management are considering the introduction of a productivity deal whereby a bonus of 0.20 would
be paid for each unit manufactured.
It has been estimated that production would increase by 15% if the productivity deal is introduced and
market research indicates that all the output could be sold if the selling price was reduced by 5%.
The budget for next year, without the productivity deal, includes the following:
Production and sales units
Selling price per unit
Variable costs per unit
Fixed costs

25,000
13.00
4.56 (excluding production operatives wages)
123,600

Each unit manufactured requires 24 minutes of production operatives time.

REQUIRED
(a) Calculate the budgeted profit without the introduction of the productivity deal.
(9 marks)
(b) Calculate the budgeted profit if the productivity deal is introduced and advise whether it would be
worthwhile.
(11 marks)
(Total 20 marks)

2016/4/06/MA

MODEL ANSWER TO QUESTION 2

(a) Budgeted profit (without productivity deal)
per unit
Selling price
Variable costs (excl ops wages)
Production operatives wages
Contribution

4.56
2.94*

per unit
13.00
7.50
5.50

25,000 units
= Total contribution
less fixed costs
= Profit

137,500
123,600
13,900

*Working
7.00 1.05 = 7.35 per hour
60/24 minutes = 2.94 per unit

(b) Budgeted profit (with productivity deal)

per unit
Selling price
Variable costs (excl ops wages)
Production operatives wages
Contribution

4.56
3.14*

28,750 units (25,000 1.15)

= Total contribution
less fixed costs
= Profit

133,688
123,600
10,088

The productivity deal is not worthwhile.

* Working
2.94 per unit from Part A + bonus of 0.20

2009/4/06/MA

per unit
12.35 (13.00 0.95)
7.70
4.65

QUESTION 3
A company has two production cost centres (PCC1 and PCC2) and two service cost centres (SCC1
and SCC2) in its factory. Overheads in the two production cost centres are absorbed on the following
bases, using predetermined rates:
PCC1 - machine hours
PCC2 - direct labour hours
Budgeted activity and budgeted overheads of the two production cost centres for a period, including
the reapportionment of the overheads of the two service cost centres, are:

PCC1
PCC2

Budgeted activity
3,950 machine hours
8,200 direct labour hours

Budgeted overheads
63,990
77,900

Actual activity and actual overheads incurred in the two production cost centres in the period, including
the reapportionment of the overheads of the two service cost centres, are:

PCC1
PCC2

Actual activity
4,175 machine hours
8,090 direct labour hours

Actual overheads
65,620
78,530

REQUIRED
(a) Calculate for each production cost centre for the period the:
(i)

overhead absorption rate;

(4 marks)

(ii)

overhead absorbed;

(4 marks)

(iii) over or under absorption of overhead.

(6 marks)

(b) Prepare a single production overhead control account for the period which
includes figures for both production cost centres.

(6 marks)
(Total 20 marks)

2016/4/06/MA

MODEL ANSWER TO QUESTION 3

(a) (i)

Overhead absorption rates

PCC1
63,990 budgeted overhead 3,950 budgeted machine hours
= 16.20 per machine hour
PCC2
77,900 budgeted overhead 8,200 budgeted direct labour hours
= 9.50 per direct labour hour

(ii)

Overhead absorbed
PCC1
4,175 actual machine hours 16.20 per machine hour
= 67,635
PCC2
8,090 actual direct labour hours 9.50 per direct labour hour
= 76,855

(iii) Over or under absorption of overhead

PCC1
67,635 overhead absorbed - 65,620 actual overhead
= 2015 over absorbed
PCC2
76,855 overhead absorbed - 78,530 actual overhead
= 1,675 under absorbed

(b)
Overhead incurred:
PCC1
PCC2

Production overhead control account

Overhead absorbed:
65,620
PCC1
78,530
PCC2
144,150

Over absorption (to P & L):

PCC1

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67,635
76,855
144,490

Under absorption (to P & L):

PCC2

2,015
146,165

1,675
146,165

QUESTION 4
Company A manufactures and sells three products (products X, Y and Z). Budgeted selling prices and
unit costs for the next period are:

Selling price
Costs:
Direct materials
Direct labour
Variable overhead
Fixed overhead

Product X
/unit
48

Product Y
/unit
30

Product Z
/unit
42

10
12
4
16

8
8
2
10

12
8
4
12

Budgeted production and sales of the three products are:

Product X
Product Y
Product Z

11,000 units
15,000 units
8,000 units

REQUIRED
(a) Prepare a budgeted profit statement using the marginal costing method.
(12 marks)

Company B manufactures and sells a single product. Unit costs are:

/unit
34
18
10
12

Variable manufacturing costs

Fixed manufacturing costs
Variable non-manufacturing costs
Fixed non-manufacturing costs

The selling price of the product is 80 per unit and fixed costs per period total 72,000.

REQUIRED
(b) Calculate the:
(i)

contribution/sales (C/S) ratio;

(4 marks)

(ii)

break-even sales revenue per period.

(4 marks)
(Total 20 marks)

2016/4/06/MA

MODEL ANSWER TO QUESTION 4

(a) Profit statement
000
1,314
748
566
422
144

Sales
Variable costs
Contribution
Fixed costs
Net profit

Less
Less

Workings
X
11,000 units @ 48
= 528,000

Product
Y
15,000 units @ 30
= 450,000

Z
8,000 units @ 42
= 336,000

Variable costs

11,000 units @ 26
= 286,000

15,000 units @ 18
= 270,000

8,000 units @ 24
= 192,000

Fixed costs

11,000 units @ 16
= 176,000

15,000 units @ 10
= 150,000

8,000 units @ 12
= 96,000

Sales

(b) (i)

Contribution sales (C/S) ratio

{[80 (34 + 10)] 80} 100 = 45%

(ii)

Break-even sales revenue

Fixed cost C/S ratio
72,000 0.45 = 160,000

2016/4/06/MA

QUESTION 5
A company sets stock control levels for Material M which is used in the manufacture of Product P. The
data used to set the stock control levels is:
Minimum
800 units per week
1 week

Sales of Product P
Lead time for delivery of Material M

Maximum
1,100 units per week
1 weeks

2 kilograms (kg) of Material M are used per unit of Product P and the reorder quantity of the material is
5,000 kg.

REQUIRED
(a) Calculate for Material M the:
(i)

reorder level to ensure no stock-out;

(3 marks)

(ii)

minimum stock control level;

(4 marks)

(iii) maximum stock control level.

(4 marks)

At the beginning of a month 1,000 kg of Material M were in stock at a cost of 5,000. Purchases and
issues of the material for the month were as follows:
Date
3
6
10
15
17
25

Purchases (kg)
5,000

Issues (kg)

Purchase cost ()
28,000

1,700
2,100
5,000

28,220
2,000
2,100

The company uses the weighted average method for pricing issues of materials from stock.

REQUIRED
(b) Show the entries in the stores ledger record (quantity, price and value) for the month.
(9 marks)
(Total 20 marks)

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MODEL ANSWER TO QUESTION 5

(a) (i)

Reorder level
maximum usage maximum lead time
(1,100 units 2 kg per unit) 1 weeks = 3,300 kg

(ii)

Minimum stock control level

reorder level (average usage average lead time)
3,300 kg [(950 units 2 kg per unit) 1 weeks] = 925 kg

(iii) Maximum stock control level

reorder level + reorder quantity (minimum usage minimum lead time)
3,300 kg + 5,000 kg [(800 units 2 kg per unit) 1 week] = 6,700 kg

(b) Stores ledger record

Date
Kg
Op Bal
3
6
10
15
17
25

5,000

5,000

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Purchases
/kg
5.60

5.644

kg

Issues
/kg

28,000
1,700
2,100

5.50
5.50

9,350
11,550

2,000
2,100

5.60
5.60

11,200
11,760

28,220

kg
1,000
6,000
4,300
2,200
7,200
5,200
3,100

Balance
/kg
5.00
5.50
5.50
5.50
5.60
5.60
5.60

5,000
33,000
23,650
12,100
40,320
29,120
17,360

QUESTION 6
A company manufactures two products (P1 and P2). Two types of raw material (M1 and M2) are used
in the manufacture of each product. Budgets are being prepared for the next period and the following
budgeted information is available:
Products
Product
P1
6,000
15
600
650

Sales (litres)
Selling price (/litre)
Opening stock (litres)
Closing stock (litres)

P2
4,000
18
400
380

Raw materials
Material
Purchase price (/litre)
Usage (litres) per litre of:
Product P1
Product P2
Opening stock (litres)
Closing stock (litres)

M1
7.50

M2
3.50

0.2
0.3
180
200

0.8
0.7
830
750

REQUIRED
Prepare the following budgets for the next period:
(a) Sales revenue for each product and in total.

(3 marks)

(b) Production quantity of each product.

(4 marks)

(c) Materials usage for each type of raw material (litres).

(6 marks)

(d) Materials purchases for each type of raw material (litres and cost).

(7 marks)

(a) cf. 8

22

Graph:

48

82

104

120

Axes, title, labels

Horizontal plots
Vertical plots
Joined

Cumulative Frequency Curve, test times

2016/4/06/MA

10

MODEL ANSWER TO QUESTION 6

(a) Sales budget ()
Product P1
Product P2
Total sales

90,000
72,000
162,000

(6,000 units @ 15)

(4,000 units @ 18)

(b) Production budget (litres)

Product
Sales
stock increase/(decrease)
Production

P1
6,000
50
6,050

P2
4,000
(20)
3,980

(c) Materials usage budget (litres)

Product P1

Material
M1
M2
6,050 units 0.2 litres/unit
6,050 units 0.8 litres/unit
= 1,210
= 4,840

Product P2

3,980 units 0.3 litres/unit

= 1,194

3,980 units 0.7 litres/unit

= 2,786

Total usage

2,404

7,626

(d) Materials purchases budget (litres & )

Material

Usage
stock increase/(decrease)
Purchases (litres)

M1
litres
2,404
20
2,424

M2
litres
7,626
(80)
7,546

purchase price

7.50/litre

3.50/litre

Purchases (cost)

18,180

26,411

2016/4/06/MA

11

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