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Cost accounting - Progress Assignments

Cost Accounting (Moi University)

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COST ACCOUNTING CAT 1 &2

QUESTION ONE

(a) A “cost – keeping system”, says a modern writer, “that simply records cost for the purpose
of fixing sales prices has accomplished only a small part of its mission”
Required
(i) Explain FOUR objectives of cost accounting. [2 marks]
I) Determination of Cost: To accumulate, allocate and ascertain cost for each cost object
is the primary objective of the cost accounting.
II) Basis for fixing selling prices: As the prices of the cost object, i.e. the product is
determined by the external factors such as market demand for the product,
competitor’s price, etc. However, the basis for ascertaining the price is the total cost
of production and the cost accounting techniques helps in determining it.
III) Cost Control: Another important objective of the cost accounting system is to control
the costs. It keeps a check on the expenses made by the company, against the set
standards and the deviations are recorded and reported continuously.
IV) Cost Reduction: The management works to further reduce the cost to increase the
profitability of the company. Cost reduction implies the actual and permanent
reduction in the cost of production without compromising with the quality and the
suitability of its desired use.
V) Explain FOUR difficulties in installing cost accounting system. [2marks]
I) Opposition/resistance from existing staff-The existing staff is likely to oppose the
installing of a cost accounting system either through resenting the additional work or
failure to provide the necessary cooperation for the success of the cost accounting
system.
II) Shortage of trained manpower-Installation of a cost accounting system requires
trained manpower to operate and maintain which the organization may not have.
III) Non-cooperation from management-Resistance may also be witnessed from
managerial staff who may not be in support of the top-most management (managing
director) in reducing costs and control activities as these may be viewed as an
interference on their work.
IV) Error in measuring requirements-Organizations, whether big or small, have varying
requirements as to the cost accounting system. Organizations may not know their
specific requirements accurately. As a result, the installation of a cost accounting
system may not meet their needs or may provide unnecessary features.

(b) ABC Ltd manufactures a special product, which requires XYZ materials. The following
particulars were collected for the year 2010 – 2011
(i) Monthly demand of XYZ 7500 units
(ii) Cost of placing on order Ksh.500
(iii) Re-order period 5 – 8 weeks

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(iv) Cost per unit Ksh.60
(v) Carrying cost as percentage of cost per units 10%
(vi) Normal usage 500 units per week
(vii) Minimum usage 250 units per week
(viii) Maximum usage 250 units per week

Required:
(a) Re-order quantity [1
marks]
Re-order quantity= average usage x average lead time=

7500 58 1875 ×6.512187.5 units

×
4 2
Therefore, re-order quantity is approximately 12187.5 units
(b) Re-order level [1 marks]
Re-order level= maximum consumption× maximum order period
250 ×82000units
(c) Minimum stock level [2 marks]
Minimum Stock Level = Re-order Level – (Normal consumption per day/per week,
etc. X Normal delivery time)
Normal delivery time=
maximum order period minimum order period 85 6.5
2 2
Therefore, Minimum Stock Level= 2000500 × 6.51250
(d) Maximum stock level [2 marks]
Maximum limit or level = Re-order level or ordering point – Minimum usage × Minimum
re-order period + Economic order quantity
2× 7500× 500 7500000 1118.03
H 10 %×60 6
Maximum level=2000-250x5+1118=1868
QUESTION TWO

(a) The following information relates to ABC company ltd. The standard cost for
the production of a radio cassette model called stereo ‘moto’ is as follows.

Inputs Standard quantity Standard price.

Direct materials 3kg 4
Direct labour 2.5 ths 14

During the month, 6500 kgs of raw materials were purchased at ksh 3.80 per kilo and all of it
was used to produce 2000 units of finished products. Also 4500 hours of direct labor time were
used at a total cost of ksh 64350.

Required Compute

i. Direct material cost variance. (4 marks)

Direct Material Cost Variance= AQ × AP AQ× SP
6500×3.806500× 42470026000KSH .1300favorable

ii. Direct labor rate variance. (3 marks)

Direct labor rate variance= AH × AR AH × SR
Note: AH × AR64350 and AH × SR4500 ×1463000
Therefore, Direct labor rate variance= 64350630001350unfavorable
iii. Direct labour efficiency variance. (3 marks)
Direct labour efficiency variance= AH × SRSH × SR AHSH SR

4500500014500×14SH .7000 favorable

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QUESTION THREE

a) Explain the methods used in distributing the service departments costs to

production departments. [2
marks]
Direct method
In this method, the total budgeted costs of service departments are apportioned between/among
production departments only, ignoring any services provided the service departments to
each other.
Step method
In events when one service department renders services to another, the step method is preferred
as compared to the direct method. This method takes into consideration the total/true cost of each
service department in assigning them to production departments.
Repeated distribution method
The process of apportioning service departments overhead is continued until the figures of
unapportioned sums of service department (s) become negligible.
Algebraic method (Reciprocal services method)
This method takes into account cost flows in both directions between service departments that
render services to each other.
b) Distinguish between financial accounting and cost accounting. (2 marks)
Cost accounting is an accounting system through which an organization keeps track of
the various costs incurred in the business in production activities. Financial accounting on the
other hand is an accounting system that captures the records of financial information
about the business to show the correct financial position of the company at a particular date.

c) In a period production and cost data were as follows.

Total costs material

5115
Labour 3952
Overheads 3000
12067

Production was 1400 fully complete units and 200 partly units. The degree of completion of the
200 units W-1-P was as follows

Material 75% complete

Labour 60% complete
Overhead 50% complete

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Required

Calculate total equivalent production cost per complete units and the value of W-1-P.
(6 marks)
Cost element Equivalent Add: fully Total Total Cost per unit
units in WIP complete effective costs period
units production
Material 200x75%=15 1400 1550 5115 3.3
0
Labor 200x60%=12 1400 1520 3952 2.6
0
Overheads 200x50%=10 1400 1500 3000 2.00
0
12067 7.90

From the table, cost of a complete unit=sh. 7.90

Therefore, value of completed production=1400x7.90=sh. 11060

And, value of WIP=total costs-value of completed production=12067-11060=sh. 1007