Group 14 Question 1 ACC 313 Assignment

Process Costing
Source Textbook: ATSWA Cost Accounting Study Pack
Questions 1
Given below relates to the data for process 1 during the month of January 2017 as extracted from the
books of MMM ltd.
2nd Jan 2017: Units
Input 40,000
Opening WIP Nil value
Process costs: ₦
Material 1,140,000
Labor 633,600
Overhead 528,000
31st Jan, 2017: Units
Output 32,000
Closing WIP 8,000
Degree of completion of Closing WIP:
Materials 75%
Labor 40%
Overhead 40%
Determine:
I. Equivalent production units
II. Cost per unit of equivalent production
III. Process 1 account
MMM LIMITED
Calculation of equivalent production units and cost per unit of equivalent production
Cost elements Equivalent unit in Fully completed Total Total cost Cost/unit (₦)
WIP units equivalent (₦)
production
Material 75% *8000=6,000 3200 9200 1140000 124
Labor 40%*8000=3200 3200 6400 633600 99
Overhead 40%*8000=3200 3200 6400 528000 82.5
Total 1301600 305.5
Value of completed units = ₦305.5*3200=₦977600
Value of WIP = total cost –value of completed units = 1301600-977600=324000
Process 1 account
Elements Units ₦ Elements Units ₦
Material 40000 1140000 Goods transferred to the 32000 977600

next stage
Labor 633600 Work in progress 8000 324000
Overhead 528000
40000 1301600 40000 1301600
Question 2
Tamco limited manufactures TACO product. The product passes through two distinct processes before it
is turned out as a finished product. Extracted details are provided below:
I. Input details:
L M TOTAL
Items ₦ ₦ ₦
Direct material 400,000 158,000 558,000
Direct labor 200,000 80,000 280,000
Production overhead 110,000 90,00 200,000
20,000 units @ ₦3 were introduced to process L. the output of process L passes to process M where
finished goods are obtained. The finished goods are then forwarded to the warehouse.
II. Output, normal loss details and total scrap realized in each process
Actual output % of normal loss on Total scrap to realized

input
Units Units ₦
Process L 18,900 5% 10,000
Process M 18,000 5% 6,700
Required to prepare:
a. Process accounts: and
b. Process losses and process gain account
TAMCO LIMITED
Process L account
Elements Units Value (₦) Elements Units Value (₦)
Input 20,000 60,000 Normal loss 1000 10,000
Direct material 400,000 Abnormal loss 100 4,000

Direct wages 200,000 Transfer to process M 18900 756,000
Production overhead 110,000
20,000 777,000 20000 777,000
Process M account
Elements Units Value (₦) Elements Units Value (₦)
Transfer from process L 18,900 756,000 Normal loss 945 6,700
Direct material 158,000 Goods produced 18,000 1,080,000
Direct wages 80,000
Production overhead 90,000
Abnormal gain 45 2700
18,945 1,086,700 18,945 1,086,700
Process loss account
₦ ₦
Process L account 4,000 Normal loss account 1,000
Profit or loss account 3,000
4,000 4,000
Process gain account
₦ ₦
Normal loss account 319 Process M account 2,700
Profit and loss account 2,381
2,700 2,700
Workings
1. Calculation of normal and abnormal loss for process L
Normal loss= input *normal loss %

= 20000 * 5%= 1000
Expected output =20000-1000=19000
Actual output =18900
Abnormal loss =19000-18900=100
Cost per unit = (770000-10000)/ 18900=40
2. Calculation of normal and abnormal loss for process M
Normal loss= 18900*5%=945

Expected output = 18900-945=17955
Actual output= 18000
Abnormal gain =18000-17955= 45
Cost per unit = (1,084,000-6700)/17955 =60
Question 17
BCB Company has the following data for the month of October:
Departments
A B
Beginning inventory in process 2,000 units 2,000 units
Transferred in cost ₦4,600
Cost of material added last month ₦2,000 (100%) ₦3,200 (80%)

Conversion costs added last month ₦900(60%) ₦800 (40%)
Unit put in process this month 30,000 29,000
Cost of materials added this month ₦30,968 ₦56,580
Conversion costs added this month ₦41,800 ₦29,803
Units completed and transferred 29000 30,000
Ending inventory in process: 3,000 units 1,000 units
Material content 90% 50%
Conversion costs 50% 30%
Required:
Using weighted average costing method, prepare a production report for the month of October for each
department. Show the cost of the ending work in progress as well as the cost of goods completed and
transferred.
BCB Company
1. Weighted average method
Production report for the month of October

Department A
Physical flow of units of materials Units

WIP (beginning) 2,000
Material introduced 30,000
Total units to be accounted for 32,000
Units accounted for Equivalent units Material Conversion
Units completed and transferred 29,000 29,000 29,000

out:
WIP (ending): 3,000 2700 (90%) 1500 (50%)
Total units accounted for 32,000
Total equivalent units (TEU) 31,700 30,500
Less WIP (beginning) 2000 1,200
Current equivalent units (CEU) 29,700 29,300
Cost statement
Cost element Cost of Current cost Total cost TEU (₦) Cost/unit
WIP (₦) (beginning ₦) (₦) (₦)
Material 2000 30,968 32,968 31,700 1.04
conversion 900 41,800 42,700 30,500 1.4

2900 72,768 75668 2.44
Cost of units completed and transferred out = 29000*2.44 =70,760

Cost of WIP (end) = total cost- cost of completed units
=75,668-70,760= 4,908
Department B
Physical flow of units of materials: Units

WIP (beginning) 2000
Material introduced 29000
Total units to be accounted for 31000
Units accounted for Equivalent units Material Conversion
Units completed and 30,000 30,000 30,000

transferred out:
WIP (ending): 1,000 500 300
Total units accounted for 31,000
TEU 30,500 30,300
Less WIP (beginning) 2,000 800
CEU 28,500 29,500
COST STATEMENT
Cost Cost of Current cost Total TEU (₦) Cost/unit

element WIP(₦) (beginning) (₦) cost (₦)
Material 2560 59580 62140 30500 2.04
Conversion 320 29803 30123 30300 0.99
2880 89383 92263 3.03
Cost units completed and transferred out =2880*3.03=8726.4

Cost of WIP (end) =total cost-cost of completed units
=92263-8726.4=83536.6
OVERHEAD COSTING
Textbook- Cost Accounting By Mark Lee Inman
Question 1
St. Louis Sounds Inc. manufactures audio equipment. The company estimates the following
costs at normal capacity and other items for the coming period:
Direct materials............................................................................... $300,000
Direct labor..................................................................................... 520,000
Factory overhead (fixed)................................................................. 300,000
Factory overhead (variable)............................................................ 240,000
Normal capacity.............................................................................. 100,000 DLH
Expected production....................................................................... 80,000 DLH
Required: Compute the overhead application rate for fixed, variable, and total overhead per
direct labor hour, using both the normal capacity and the expected actual capacity activity
levels.
SOLUTION 1
Overhead per Direct Labor Hour
Overhead At Expected Actual Capacity At Normal Capacity
$300,000 $300,000
Fixed...................................... ----------------- =$3.75 ------------------ = $3.00
80,000 DLH 100,000 DLH
$240,000 $240,000
Variable................................. ----------------- = 3.00 ------------------ = 2.40
80,000 DLH 100,000 DLH
Total....................................... $6.75 $5.40
2. Overhead Analysis. Data for the past two years for J&J Corp. are:
19A 19B
Units produced........................................................................................ 10,000 11,000
Overhead applied per unit....................................................................... $15 $18
Actual overhead:
Fixed.................................................................................................. 50,000 55,000
Variable............................................................................................. 95,000 150,000
Estimated overhead:
Fixed.................................................................................................. 50,000 56,000
Variable............................................................................................. 130,000 142,000
The company determines overhead rates based on estimated units to be produced.
Required:
(1) Determine the estimated units of production used to obtain the overhead allocation rates
in 19A and 19B.
(2) Determine the over- or underapplied factory overhead for each of the two years.
The company determines overhead rates based on estimated units to be produced.
SOLUTION 2
Estimated overhead
(1) = Overhead per unit
Estimated units of production
$50,000 + $130,000
19 A
x
$15x = $180,000
x = 12,000 Estimated units of production
$56,000 + $142,000
19 B
x
$18x = $198,000
x = 11,000 Estimated units of production
A: Applied Factory Overhead (10,000 x $15)..................................................... $ 150,000
Actual Factory Overhead............................................................................... 145,000
Overapplied Factory Overhead...................................................................... $ 5,000
B: Actual Factory Overhead............................................................................... $ 205,000
Applied Factory Overhead (11,000 x $18)..................................................... 198,000
Underapplied Factory Overhead.................................................................... $ 7,000

Question 3
Blend Rite Inc. assembles and sells electric mixers. All parts are purchased and labor is paid on the
basis of $22 per mixer assembled. The cost of the parts per mixer totals $20. As the company handles
only this one product, the unit cost basis for applying factory overhead is used. Estimated factory
overhead for the coming period, based on a production of 40,000 mixers, is as follows:
Indirect materials....................................................................................................... $ 60,000
Indirect labor.............................................................................................................. $ 180,000
Light and power......................................................................................................... $ 45,000
Depreciation............................................................................................................... $ 35,000
Miscellaneous............................................................................................................ $ 16,000
During the period, 42,000 mixers were assembled and actual factory overhead was $355,000. These
units were completed but not yet transferred to the finished goods storeroom.
Required:
(1) Prepare journal entries to record the above information, including the entry to close the balance
in the applied overhead account to the actual overhead account.
(2) Determine the amount of over- or underapplied factory overhead.
SOLUTION 3
(1) Work in Process......................................................................... 840,000

Materials.................................................................................... 840,000
Work in Process......................................................................... 924,000
Payroll........................................................................................ 924,000
Factory Overhead Control.......................................................... 355,000
Materials, Payroll, Accruals, and Various Credits..................... 355,000
Work in Process......................................................................... 352,800
Factory Overhead Applied......................................................... 352,800
Factory Overhead Applied......................................................... 352,800
Factory Overhead Control.......................................................... 352,800
Estimated factory overhead $336,000

Overhead rate: = = $8 . 40 factory overhead rate per mixer
Estimated production 40,000 (2)
Underapplied factory overhead: $355,000 - $352,800 = $2,200
JOB COSTING
Textbook- Cost Accounting : A Managerial Emphasis
Authors: DATAR , S.M & RAJAN
QUESTION 1
Beauty Company manufactures picture frames of all sizes and shapes and uses a job order costing system. There
is always some spoilage in each production run. The following costs relate to the current run:
Estimated overhead (exclusive of spoilage) ₦160,000

Spoilage (estimated) ₦ 25,000
Sales value of spoiled frames ₦ 11,500
Labor hours 100,000
The actual cost of a spoiled picture frame is ₦7.00. During the year 170 frames are considered spoiled. Each
spoiled frame can be sold for ₦4. The spoilage is considered a part of all jobs.
a. Labor hours are used to determine the predetermined overhead rate. What is the predetermined
overhead rate per direct labor hour?
b. Prepare the journal entry needed to record the spoilage.
c. Prepare the journal entry if the spoilage relates only to Job #12 rather than being a part of all
production runs.
a. ₦160,000 + ₦25,000 - ₦11,500 = ₦173,500
₦173,500/100,000 = ₦1.735 per DLH
Disposal Value of Spoiled Work 680
Manufacturing Overhead 510
Work in Process Inventory 1,190
Disposal Value of Spoiled Work 680

QUESTION 2
The Luna Manufacturing Company has the following job cost sheets on file. They represent
jobs that have been worked on during September of the current year. This table summarizes
information provided on each sheet:
Number Total Cost Incurred Status of Job

951 $ 4,200 Finished and delivered
952 $ 7,700 Unfinished
953 $ 9,300 Finished and unsold
954 $11,100 Finished and delivered
955 $ 3,000 Finished and unsold
959 $500 Unfinished
960 $22,110 Unfinished
963 $11,200 Finished and unsold
Required:
1. What is the cost of the Work in Process inventory on September 30?

2.What is the cost of the finished goods inventory on September 30?
3. What is the cost of goods sold for the month of September?
SOLUTION
1. Cost of the Work in Process inventory on September 30:
Number Total Cost Incurred(₦) Status of Job

952 7,700 Unfinished
959 500 Unfinished
Total 73,810
2. Cost of the finished goods inventory on September 30:

953 9,300 Finished and unsold
Total 23,500
3. Cost of goods sold for September:

951 4,200 Finished and delivered
Total 31,200
QUESTION 3
Calwell Corp. uses a job order costing system. Four jobs were started during the current year. The
following is a record of the costs incurred:
Job # Material DirectLabor Used(₦) Direct Labor Hours

Used(₦)
1010 45,000 72,000 8,000
1011 59,000 77,000 7,000
1012 35,000 30,000 3,000
1013 26,000 40,000 5,000
Actual overhead costs were #55,800. The predetermined overhead rate is #2.40 per direct labor
hour. During the year, Jobs 1010, 1012, and 1013 were completed. Also, Jobs 1010 and 1013 were
sold for #387,000. Assuming that this is Calwell’s first year of operations:
Required:
(1) Work in Process Inventory
(2) Finished Goods Inventory, and
(3) Cost of Goods Sold after over- or underapplied overhead?
Answer:
Job Direct Direct labor Overhead Total job
No. material applied cost
s *
1010 #45,000 #72,000 #19,200 #136,200
1011 59,000 77,000 16,800 152,800
1012 35,000 30,000 7,200 72,200
1013 26,000 40,000 12,000 78,000
Totals #165,000 #219,000 #55,200 #439,200
Job 1010: 8,000 hours * $2.40/hour =

#19,200 Job 1011: 7,000 hours * $2.40/hour
= #16,800 Job 1012: 3,000 hours *
$2.40/hour = #7,200 Job 1013: 5,000 hours *
$2.40/hour = #12,000
Work in Process Inventory ………………….. 165,000

Raw Materials Inventory 165,000
…………………..

Factory Wages Payable …………………………… 219,000
Factory Overhead ………………………... 55,200
Finished Goods Inventory 286,400

…………………… Work in Process 286,400
Inventory ………………
(#136,200 + #72,200 + #78,000) = #286,400
Cost of Goods Sold …………………………. 214,200
Finished Goods Inventory 214,200
……………….
(#136,200 + #78,000 = #214,200)
Accounts Receivable 387,000
………………………… Sales 387,000
…………………..………………….
Work in Process Inventory: Job
(b) 1011 #152,800
Finished Goods: Job 1012
#72,200 Factory Overhead:
Applied #55,200
Actual 55,800
# 600 debit balance

(underapplied)
(1) 152,800
(2) 72,200
(3) 214,800
QUESTIONS ON STANDARD COSTING
QUESTION 1
Thee following information relates to the Frost Production Company Limited for the year to 31 march
19X4
1. Budgeted direct labour hours: 1000
2. Budgeted units: 100
3. Actual direct labour hours worked: 800
4. Actual units produced: 90
Required:
Calculate the following performance ratios:
a. The efficiency ratio;
b. The capacity ratio: and
c. The productivity volume ratio.
Answer
a. The efficiency ratio:
Standard hours produced x 100 = 900 x 100 = 112.5%
Actual direct labour hours worked 800
Each unit is allowed 10 standard hours (1000hours/ 100 units), and since 90 units were produced, the total
standard hours of production = 900
It would appear that the company has been more efficient in producing the goods than was expected. It
was allowed 900 hours to do so, but it produced them in only 800 hours.
b. The capacity ratio:
Actual direct labour hours worked x 100 = 800 x 100 = 80%
Budgeted hours 1000
In this case, all of the time planned to be available (the capacity) was not utilized, either because it was
not possible to work 100 direct labour hours, or because the company did not undertake as much work as
it could have done.
c. The production volume ratio:

Standard hours produced x 100 = 900 x 100 = 90%
Budgeted hours 1000
It appears that if 90 units had been produced in standard conditions, another 100 hours would have been
available (10 units x 10 hours). In fact, since the 90 units only took 800 hours to produce, at least another
20 units could have been produced in standard conditions.
1000 – 800 = 20 units
10
Comments on the results
The budget allowed for 100 units to be produced and each unit was expected to take 10 direct labor hours
to complete, a total budgeted activity of 1000 direct labour hours. However only 90 units were actually
produced. If these had been produced in standard time, they should have taken 900 hours (90 units x 10
direct labour hours). These are the standard hours produced. Infact 90 units were completed in 800 actual
hours. It appears, therefore, that the units were produced more efficiently that had been expected. The
management will still need, of course to investigate why only 90 units were produced and not the 100
budgeted units.
QUESTION 2
You are presented with the following information for Doe Limited
Budget sales 100 units
Per unit:
Budget selling price €30
Less: Budget variable cost 20
Contribution 10
Annual sales 120 units
Actual selling price per unit €28
Required:
Calculate the sales variances.
Answer
1. Selling price variance:

Actual quantity x (actual selling price – budgeted selling price)
= 120 x (28-30) = €240
2. Sales volume contribution variance:
(Actual quantity – Budgeted units) x Standard contribution)
(120 – 100) x 10 =€200
3. Sales volume = 240 (A) + 200 (F) = €40
QUESTION 3
The following information relates to Osprey limited
Budgeted production. 500 units
Standard hours per unit. 10
Actual production. 600 units
Budgeted fixed overhead: €125,000
Actual fixed overhead: €120,000
Actual hours worked: 4900
Using the data from the above, calculate the following performance measures.
1. Efficiency ratio.
2. Capacity ratio
3. Production/volume ratio
Answer
Performance measures
1. Efficiency ratio:
SHP x 100 = 6000 x 100 = 122.4%
Actual hours 4900
2. Capacity ratio:
Actual hours x 100 = 4900 x 100 = 98%
Budgeted hours 5000
3. production volume ratio:
SHP x 100 = 6000 x 100 = 120%
Budgeted hours 5000
LABOUR COSTING
Textbook name- financial, cost and management accounting
Author- Dr. P. Periasamy
QUESTION 1
A company manufactures three products X, Y and Z. It has thirty direct employees who are paid
under a group bonus scheme. There are three grades of employees who are paid a bonus of the
excess of time allowed over time taken. The bonus is paid on the employee’s base rate less 75
pence, and is shared among the direct workers in proportion to the time spent on the work. The
production details for the period in question were as follows:
Product Units Produced Time Allowed Per Unit

(Minutes)
X 80 63
Y 160 120
Z 300 100
Grade Of Number Of Direct Base Rate Hours Worked Per

Employe Employees Employee
€
e
L 10 2.00 15
M 4 1.80 32
N 16 1.85 25
From the above information you are required to calculate:
a) The percentage of hours saved to hours taken

b) The total bonus payable to the group of direct employees, and
c) The total wages payable to the group of direct employees
SOLUTION
Time Allowed
Product Units Produced Time Allowed Per Unit Total Time Allowed
(Minutes) (Hours)
X 80 63 84
Y 160 120 320
Z 300 100 500
904
Hours worked
Grade Of Number Of Direct Hours Worked Per Total Hours Worked

Employee Employees Employee
L 10 15 150
M 4 32 128
N 16 25 200
678
Percentage Of Hours Saved To Hour Taken
Hours saved =Hours allowed−Hours worked=904−678=226
Hours Saved
Percentage= ×100
Hours worked
226 1
¿ ×100=33 %
678 3
Bonus Payable
Grade Of Hours Worked 1 Rate Bonus
Bonus 33 %
Employee 3
¿)
(h ours )
€ €
L 150 50 1.25 62.50
M 128 2 1.05 44.80

42 %
3
N 400 1 1.10 146.67

133 %
3
678 226 253.97
Total Wages Payable
Grade Of Hours Base Rate Wages Bonus Total

Employee Worked
€ € € €
L 150 2.00 300.00 62.50 362.50
M 128 1.80 230.40 44.80 275.20
N 400 1.85 740.00 146.67 886.67
678 1 270.40 253.97 1 524.37
QUESTION 2
A company manufactures three products P, Q and R. It has forty direct employees who are paid
under a group bonus scheme. There are three grades of employees who are paid a bonus of the
excess of time allowed over time taken. The bonus is paid on the employee’s base rate less 50
pence, and is shared among the direct workers in proportion to the time spent on the work. The
production details for the period in question were as follows:
Product Units Produced Time Allowed Per Unit (Minutes)
P 60 58
Q 120 140
R 400 150
Grade Of Number Of Direct Base Rate Hours Worked Per

Employee Employees Employee
€
S 20 1.50 20
T 8 .00 24
U 12 1.80 30
From the above information you are required to calculate:
a) The percentage of hours saved to hours taken

b) The total bonus payable to the group of direct employees, and
c) The total wages payable to the group of direct employees,
(Any calculation which does not work out exactly is to be taken correct to one decimal place, or
in the case of money correct to the nearest penny.)
SOLUTION
Time allowed 58+ 280+1000=1 338 hours
H ours worked 400+192+ 360=952 hours
Percentage of hours saved ¿ hours taken=40.5 %
Bonuses Payable € 162+ € 116.64+ € 189.54=€ 468.18
Total Wages Payable € 162+ € 500.64+ € 837.54=€ 2 100.18
QUESTION 3
A factory issues a job to employee A to produce 35 articles with a time allowance of 2 standard
hours each, and another job to employee B to produce 60 articles with a standard time allowance
1
of 1 hours each. For every hours saved a bonus is paid at 50 per cent of the base rate, which is
2
€2.00 per hour. The factory works a 40-hour week and overtime is paid at time plus a third. At
the end of the week, A’s clock card shows 49 hours and B’s 46 hours and the work is complete;
three of A’s article failed to pass inspection, however, and the same applied to four of B’s. This
was due to defective materials and in view of this all the units produced were paid for, although
as scrap they have no sales value.
Calculate for A and B:
a) The bonus payable

b) The total gross wage payable, and
c) The wages cost per unit of goods passing inspection
SOLUTION
Wages cost of bonus paid, gross wages and units produced.
Employee A:
Time allowed 70 hours
Time taken 49 hours
Time saved 21 hours
Bonus=21 hours at 50 % of € 2.00 per hour =€ 21.00
Time taken 49 hours
Overtime premium 3 hours
Gross wages=52 hours at € 2.00+bonus € 21.00
¿ € 104.00+ bonus € 21.00=€ 125.00
Wages cost of goods passing inspection:
Gross wages € 125.00

¿ = =€ 3.91
Units passed inspection 32
Employee B:
Time allowed 90 hours
Time taken 46 hours
Time saved 44 hours
Bonus=44 hours at 50 % of € 2.00 per hour =€ 44.00

Time taken 46 hours
Overtime premium 2 hours
Gross wages=48 hours at € 2.00+ bonus € 44.00
¿ € 96.00+bonus € 44.00=€ 140.00
Wages cost of goods passing inspection:
Gross wages € 140.00

¿ = =€ 2.50
Units passed inspection 56
MATERIAL COSTING
QUESTIONS AND ANSWERS
QUESTION 1
ILLUSTRATION ON MATERIAL COSTING USING FIFO & LIFO METHOD
On January 1, Year II. A store has a stock of 10 units of material X bought in December Year I. The units
had cost #200 each. From January Year II until May, the shop bought 20 units of X per month. Each
month the cost per unit rose by #10 on the previous month. During the same period, 75 units of material
X were sold to customers.
Required:
(a) Determine the cost of goods sold during the period using each of the following methods:
(i) FIFO (ii) LIFO (iii) Average Method
(b) Determine the value of closing stock in May Year II using each of the above two methods
Workings;
Opening Stock 10 units at #200 each 2,000

January Purchase: 20 units at #210 each 4,200
February Purchase: 20 units at #220 each 4,400
March Purchase: 20 units at #230 each 4,600
April Purchase: 20 units at #240 each 4,800
May Purchase: 20 units at #250 each 5,000
25000
Solution:
(a) FIFO METHOD #

(i) Cost of Goods Sold
10 units at #200 each 2,000
75 units 16,400
(ii) Closing Stock #

Most recent Purchase (May) 20 units at #250 each 5,000
Next most recent Purchase (left unsold) 15units at #240 3,600
8,600
(b) LIFO METHOD
(i) Cost of Goods Sold #

Most recent purchase (May) 20 units at #250 each 5,000
Next most recent purchase (April) 20 units at #240 each 4,800
March Purchase 20 units at #230 each 4,600
Relevant February Purchase 15units at #220 each 3,300
75 units 17,700
(ii) Closing Stock #
Opening Stock 10units at #200 each 2,000
January Purchase 20units at #210 each 4,200
Unsold February Purchase 5units at #220 each 1,100
7,300
(c) Average Method

Total Goods Available for Sale
110 units valued at #25,000 (previously calculated)
No of units sold =75
(i) Cost of goods sold = 75/110 * #25,000

= 17,045
(ii) Closing Stock = 35/110* #25,000

= 7,955
QUESTION 2
For supply item ABC, Andrews Company has been ordering 125 units based on the recommendation
of the salesperson who calls on the company monthly. A new purchasing agent has been hired by the
company who wants to start using the economic-order-quantity method and its supporting decision
elements. She has gathered the following information:
Annual demand in units 250
Days used per year 250
Lead time, in days 10
Ordering costs $100
Annual unit carrying costs $20

Required:
Determine the EOQ, average inventory, orders per year, average daily demand, reorder point, annual
ordering costs, and annual carrying costs.
ANSWER
EOQ = The square root of [(2 × 250 × $100) / $20] = 50
Average inventory = 50/2 = 25
Orders per year = 250/50 = 5
Average daily demand = 250/250 = 1 unit
Reorder point = 10/1 = 10 units
Annual ordering costs = 5 × $100 = $500
Annual carrying costs = 25 × $20 = $500
QUESTION 3
If Martin's makes an order (1/12 of annual demand) once per month, what are the relevant total costs?
A) $1,500
B) $652.50
C) $2,152.50
D) $3,000.00
Answer: C
Explanation:
C) Order Quantity = Annual Demand / 12 =12,960 balls/month = 180 cartons per month
RTC = Ordering Costs + Carrying Costs
Carrying Cost per carton = price × invest rate + insurance/handling
Carrying Cost per carton = ($.75 × 72 × 12%) + $0.77 = $7.25
MARGINAL AND ABSORPTION COSTING
TEXTBOOK : Emile Woolf International
The Institute of Chartered Accountants of Pakistan
Cost and management accounting
QUESTION 1
Entity T manufactures a single product, and uses absorption costing. The following
data relates to the performance of the entity during October.
Profit Rs.37,000
Over-absorbed overhead Rs.24,000
Sales (48,000 units) Rs.720,000
Non-production overheads (all fixed costs) Rs.275,000
Opening inventory Rs.144,000
Closing inventory Rs.162,000
Units of inventory are valued at Rs.9 each, consisting of a variable cost (all direct
costs) of Rs.3 and a fixed overhead cost of Rs.6. All overhead costs are fixed costs.
Required
Calculate:
(a) the actual production overhead cost for October
(b) the profit that would have been reported in October if Entity T had used
marginal costing.
SOLUTION
(a)
units
Opening inventory (Rs.144,000/Rs.9) 16,000
Closing inventory (Rs.162,000/Rs.9) 18,000
Increase in inventory in October 2,000
Sales 48,000
Production in October 50,000
Rs.
Absorbed production overhead (50,000 × Rs.6) 300,000
Over-absorbed overheads 24,000
Actual production overhead expenditure 276,000
(b) Inventory increased during October; therefore the reported profit will be higher
with absorption costing than with marginal costing.
Rs.
Absorption cost profit 37,000
Increase inventory × fixed production overhead per unit
(2,000 × Rs.6) 12,000
Marginal costing profit 25,000
Proof:
Rs. Rs.
Sales 720,000
Variable cost of sales (48,000 × Rs.3) 144,000
Contribution 576,000
Fixed production overheads (see above) 276,000
Other fixed overheads 275,000
Total fixed overheads 551,000
Marginal costing profit 25000
QUESTION 2
Zulfiqar Limited makes and sells a single product and has the total production
capacity of 30,000 units per month. The company budgeted the following
information for the month of January 20X4:
Normal capacity (units) 27,000
Variable costs per unit:
Production (Rs.) 110
Selling and administration (Rs.) 25
Fixed overheads:
Production (Rs.) 756,000
Selling and administration (Rs.) 504,000
The actual operating data for January 20X4 is as follows:
Production 24,000 units
Sales @ Rs. 250 per unit 22,000 units
Opening stock of finished goods 2,000 units
During the month of January 20X4, the variable factory overheads exceeded the
budget by Rs. 120,000.
Required
(a) Prepare profit statement for the month of January using:
− marginal costing; and
− absorption costing.
(b) Reconcile the difference in profits under the two methods.
SOLUTION
(a) Profitability Statement under Marginal Costing
Rupees
Sales (22,000 units @ Rs. 250) 5,500,000

Variable Costs:
Production Costs:
Cost of productions (24,000 x Rs.110) 2,640,000
Additional Variable Costs. 120,000
2,760,000
Less: Closing stocks (2,760,000 / 24,000 x 4,000) (460,000)
Add: Opening stocks (2,000 x Rs. 110) 220,000
2,520,000
Selling and administrative expenses (22,000 x 25) 550,000 3,070,000
Contribution Margin 2,430,000
Less: Fixed costs
Production 756,000
Selling and administrative expense 504,000 1,260,000
Net Profit 1,170,000

Profitability Statement under Absorption Costing
Rupees
Sales (22,000 units @ Rs. 250) 5,500,000
Cost of Goods Sold
Cost of production(24,000 x Rs. 138 (W-1) 3,312,000
Additional variable costs. 120,000
3,432,000
Less: Closing stocks (3,432,000 / 24,000 x 4,000) (572,000)
Add: Opening stocks (2,000 x Rs. 138) 276,000
3,136,000
Under applied factory overhead
(3,000 (W-2) x Rs.28 (W-1)) 84,000 (3,220,000)
Gross Profit 2,280,000
Selling expenses
(Rs. 504,000 + 22,000 x Rs.25) 1,054,000
1,226,000
W-1: Rupees
Variable overhead per unit 110
Fixed overhead per unit (Rs. 756,000 / 27,000) 28
138
W-2: Units
Budgeted production - Normal capacity 27,000
Actual production 24,000
Under-utilized capacity 3,000
(b) Reconciliation of profit worked out under marginal and absorption
costing
Rupees
Profit under absorption costing 1,226,000
Less: Closing stock (under-valued in marginal costing)
(Rs. 572,000 - Rs. 460,000) (112,000)
Add: Opening stock (under-valued in marginal costing)
(Rs. 276,000 - Rs. 220,000) 56,000
Profit under marginal costing 1,170,000
QUESTION 3
Silver Limited (SL) produces and markets a single product. Following budgeted
information is available from SL’s records for the month of March 20X4:
Volumes:
Sales 100,000 units
Production 120,000 units
Standard costs:
Direct materials per unit 0.8 kg at Rs. 60 per kg
Labour per unit 27 minutes at Rs. 80 per hour
Variable production overheads Rs. 40 per labour hour
Variable selling expenses Rs. 15 per unit
Fixed selling expenses Rs. 800,000
Fixed production overheads, at a normal output level of 105,000 units per month,
are estimated at Rs. 2,100,000. The estimated selling price is Rs. 180 per unit.
Required
Assuming there are no opening stocks, prepare SL’s budgeted profit and loss
statement for the month of March 20X4 using absorption costing.
SOLUTION
Absorption costing: Rupees
Sales [100,000 x Rs. 180 ] 18,000,000
Less: Cost of sales:
Opening stock -
Add: Direct materials [ 0.8 x 120,000 x 60] 5,760,000
Direct labour [27/60 x 120,000 x 80] 4,320,000
Variable overheads [ 27/60 x 120,000 x 40] 2,160,000

Fixed overheads
[ 2,100,000 / 105,000 x 120,000] 2,400,000
14,640,000
Less: Closing stock
[14,640,000 / 120,000 x 20,000] (2,440,000)
Cost of sales (12,200,000)
5,800,000
Add: Over-absorbed overheads
[ 2,100,000 / 105,000 x 15,000] 300,000
Gross profit 6,100,000
Less: Selling expenses:
Variable [ 100,000 x 15] (1,500,000)
Fixed (800,000)
(2,300,000)
Net profit 3,800,000
BREAK EVEN ANALYSIS
TEXTBOOK NAME: Cost Accounting Foundations and Evolutions by Kinnie Raiborn
1. LO.1–LO.3 (CVP) Casper Karts manufactures a three-wheeled shopping cart that sells
for $60. Variable manufacturing and variable selling cost are, respectively, $35 and $10 per unit.
Annual fixed cost is $975,000.
a. What is the contribution margin per unit and the contribution margin ratio?
b. What is the break-even point in units?
c. How many units must the company sell to earn a pre-tax income of $900,000?
d. If the company’s tax rate is 40 percent, how many units must be sold to earn an after-tax
profit of $750,000?
e. If labor costs are 60 percent of the variable manufacturing cost and 40 percent of the fixed
cost, how would a 10 percent decrease in both variable and fixed labor costs affect the break-
even point?
f. Assume that the total market for three-wheeled shopping carts is 600,000 units per year
and that Casper Karts currently has 18 percent of the market. The company wants to obtain a 25
percent market share and also wants to earn a pre-tax profit of
$1,350,000. By how much must variable cost be reduced? Provide some suggestions for variable
cost reductions.
2. LO.1–LO.3 & LO.5 (CVP single product; comprehensive) Beantown Baseball Company
makes baseballs that sell for $13.00 per two-pack. Current annual production and sales are
960,000 baseballs. Costs for each baseball are as follows:
Direct material $2.00
Direct labor 1.25
Variable overhead 0.50
Variable selling expenses 0.25
Total variable cost $4.00
Total fixed overhead $1,250,000
a. Calculate the unit contribution margin in dollars and the contribution margin ratio for the
company.
b. Determine the break-even point in number of baseballs.
c. Calculate the dollar break-even point using the contribution margin ratio.
d. Determine the company’s margin of safety in number of baseballs, in sales dollars, and as
a percentage.
e. Compute the company’s degree of operating leverage. If sales increase by 30 percent, by
what percentage would pre-tax income increase?
f. How many baseballs must the company sell if it desires to earn $1,096,000 in pre- tax
profit?
g. If the company wants to earn $750,000 after tax and is subject to a 40 percent tax rate,
how many baseballs must be sold?
h. How many baseballs would the company need to sell to break even if its fixed cost
increased by $50,000? (Use original data.)
i. Beantown Baseball Company has received an offer to provide a one-time sale of 20,000
baseballs at $8.80 per two-pack to the Lowell Spinners. This sale would not affect other sales,
nor would the cost of those sales change. However, the variable cost of the additional units
would increase by $0.20 for shipping, and fixed cost would increase by $6,000. Based solely on
financial information, should the company accept this offer? Show your calculations. What other
factors should the company consider in accepting or rejecting this offer?
3. LO.1–LO.3 (CVP) Aqua Gear, in business since 2008, makes swimwear for profes-
sional athletes. Analysis of the firm’s financial records for the current year reveals the following:
Average swimsuit selling price $70
Variable swimsuit expenses
Direct material 28
Direct labor 12
Variable overhead 8
Annual fixed cost
Selling $10,000
Administrative 24,000
The company’s tax rate is 40 percent. Samantha Waters, company president, has asked you to
help her answer the following questions.
a. What is the break-even point in number of swimsuits and in dollars?
b. How much revenue must be generated to produce $40,000 of pre-tax earnings? How
many swimsuits would this level of revenue represent?
c. How much revenue must be generated to produce $40,000 of after-tax earnings? How
many swimsuits would this represent?
d. What amount of revenue would be necessary to yield an after-tax profit equal to 20

percent of revenue?
e. Aqua Gear is considering purchasing a faster sewing machine that will save $6 per
swimsuit in cost but will raise annual fixed cost by $40,000. If the equipment is purchased, the
company expects to make and sell an additional 5,000 swimsuits. Should the company make this
investment?
f. A marketing consultant told Aqua Gear managers that they could increase the number of
swimsuits sold by 30 percent if the selling price was reduced by 10 percent and the company
spent $10,000 on advertising. The company has been selling 3,000 swimsuits. Should the
company make the changes advised by the consultant?
Solution
SOLUTION 1
a. 60 – 45 = 15
15/60 = 0.25
b. 975,000 / 15 = 65,000 units

c. 975,000 + 900,000 / 15 = 125,000 units
d. 975,000 + 750,000/ (1-0.4) / 15 = 148,333 units
e. 10% decrease in variable cost: 90% x 45 = 40.5
10% decrease in Fixed cost: 90% x 975,000 = 877,500
Contribution: 877500 / 19.5 = 45,000

f. Market share available 25% x 600,000 = 150,000
975,000 + 1,350,000 / X = 150,000
X = 15.5. Variable cost must reduce by 0.5 per unit or by 1%.
It can be reduced by buying cheaper raw materials from another seller or

by reducing the amount paid to employees as wages.
SOLUTION 2
a. 13 – 4 = 9
9/13 = 0.69:1
b. 1,250,000 / 9 = 138,888 units
c. 1,250,000 / 0.6923 = 1,805,575
d. Current sales = 960,000 / 2 (per two-pack) =480,000 units
Normal sales: 480,000 x 13 = 6,240,000
Break-even sales: 138,888 x 13 = 1,805,544
Margin of safety in units: 341,112 units
Margin of safety in Sales: 4,434,456
As a percentage of the normal sales: 71%
e. If sales increase by 30%, then:
Profit would be contribution times number of units sold minus fixed cost.
9 x 480,000 = 4,320,000 – 1,250,000 = 3,070,000
Increase by 30% = 130% of 480,000 x 9 = 5,616,000
5,616,000 – 1,250,000 = 4,366,000

Percentage increase = 1,296,000/3,070,000 x 100 = 42.2%
f. 1,250,000 + 1,096,000 / 9 = 260,667 units
g. 1,250,000 + 750,000 /(1 – 0.4) / 9 = 277,777 units
h. 1,250,000 + 50,000 / 9 = 144,444 units
i. Contribution per unit = 8.8 – (4 + 0.2) = 4.6
4.6 x (20,000 / 2) = 46,000 – 6,000 = 40,000

It should be accepted because it adds an operating profit of 40,000.
The other factors that will be considered include:
1. The ethical issues of accepting the offer.
2. The effect of extra hours spent for employees.
3. The capacity of the production facility in producing the additional
units.
SOLUTION 3
a. Contribution per unit: 70 – (28 + 12 + 8) = 22
Fixed costs = 10,000 + 24,000 = 34,000
Break – even point: 34,000 / 22 =1,545 units
Break – even point in sales: 1,545 x 70 = $108,150
b. 34,000 + 40,000 / 22 = 3,364 units
c. 34,000 + 40,000 / (1 – 0.4) / 22 = 4,576 units
Revenue 4,576 x 70 = $320,320
d. Firstly, 20% of revenue is (20% x 108,150) = 21,630
21,630/ (1 – 0.4) = 36,050

34,000 + 36,050 / 22 = 3,184
3,184 x 70 = $222,886
e. increase in contribution by $6 x 5,000 units = $30,000
$30,000 - $40,000 = -$10,000
The machine should not be bought because it reduces profit by $10,000.
f. Current sales is 3,000 x (70 x .90) = $189,000
increase in number of swimsuits sold: (1.30 x 3,000) = 3,900
3,900 x (70 x .90) = $245,700
$ (245,700 – 144,000 – 34,000 – 10,000) = $57,700
There will be an increase in profit by $57,700 if the estimates by the

marketing consultants are accurate.

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Process Costing

Source Textbook: ATSWA Cost Accounting Study Pack

2nd Jan 2017: Units

Opening WIP Nil value

31st Jan, 2017: Units

Closing WIP 8,000

Degree of completion of Closing WIP:

I. Equivalent production units

II. Cost per unit of equivalent production

III. Process 1 account

Material 75% *8000=6,000 3200 9200 1140000 124

Labor 40%*8000=3200 3200 6400 633600 99

Overhead 40%*8000=3200 3200 6400 528000 82.5

Total 1301600 305.5

Value of completed units = ₦305.5*3200=₦977600

Value of WIP = total cost –value of completed units = 1301600-977600=324000

Elements Units ₦ Elements Units ₦

Material 40000 1140000 Goods transferred to the 32000 977600

Labor 633600 Work in progress 8000 324000

40000 1301600 40000 1301600

Direct material 400,000 158,000 558,000

Direct labor 200,000 80,000 280,000

Production overhead 110,000 90,00 200,000

Actual output % of normal loss on Total scrap to realized

Process L 18,900 5% 10,000

Process M 18,000 5% 6,700

a. Process accounts: and

b. Process losses and process gain account

Elements Units Value (₦) Elements Units Value (₦)

Input 20,000 60,000 Normal loss 1000 10,000

Direct material 400,000 Abnormal loss 100 4,000

Production overhead 110,000

20,000 777,000 20000 777,000

Elements Units Value (₦) Elements Units Value (₦)

Transfer from process L 18,900 756,000 Normal loss 945 6,700

Direct material 158,000 Goods produced 18,000 1,080,000

Direct wages 80,000

Production overhead 90,000

Abnormal gain 45 2700

18,945 1,086,700 18,945 1,086,700

Process loss account

Process L account 4,000 Normal loss account 1,000

Profit or loss account 3,000

Process gain account

Normal loss account 319 Process M account 2,700

Profit and loss account 2,381

1. Calculation of normal and abnormal loss for process L

Normal loss= input *normal loss %

2. Calculation of normal and abnormal loss for process M

Normal loss= 18900*5%=945

Beginning inventory in process 2,000 units 2,000 units

Transferred in cost ₦4,600

Cost of material added last month ₦2,000 (100%) ₦3,200 (80%)

Unit put in process this month 30,000 29,000

Cost of materials added this month ₦30,968 ₦56,580

Conversion costs added this month ₦41,800 ₦29,803

Units completed and transferred 29000 30,000

Ending inventory in process: 3,000 units 1,000 units

Material content 90% 50%

Conversion costs 50% 30%

1. Weighted average method

Production report for the month of October

Physical flow of units of materials Units