Level 3 Costing & MA Text Update June 2021pdf

U Win Bo Myint Cost and Management Accounting LCCI-Level 3
Chapter – 1
Cost Classification
Total product/ service
The total cost of making a product or providing a service consists of the following.
 Cost of materials
 Cost of the wages and salaries (labour costs)
 Cost of other expenses
(i) Rent and rates
(ii) Electricity and gas bills
(iii) Depreciation
Direct cost and indirect cost

 A direct cost is a cost that can be traced in full to the product, service or department that is being costed.
 An indirect cost (or overhead) is a cost that is incurred in the course of making a product, providing a
service or running a department, but which cannot be traced directly and in full to the product, service or
department.
Functional
Classification by function involves classifying costs as production/manufacturing costs, administration costs or
marketing/selling and distribution costs.
Question
The following expense classified into production cost, administration cost, selling and distribution
1. Cost of oils used to lubricate production machinery
2. Depreciation of factory plant and equipment
3. Commission paid to sales representatives
4. Salary of the secretary to the finance director
5. Holiday pay of machine operatives
6. Salary of security guard in raw material warehouse
7. Fees to advertising agency
8. Rent of finished goods warehouse
9. Insurance of the company‟s premises
10. Salary of supervisor working in the factory
11. Depreciation of office premises
1
Chapter – 2
Cost Behavior
Cost behavior pattern
 A Fixed cost is a cost which is incurred for a particular period of time and which, within certain activity
levels, is unaffected by changes in the level of activity.
 A variable cost is a cost which tends to vary with the level of activity.
 A step cost is a cost which is fixed in nature but only within certain levels of activity.
 A semi-variable/semi-fixed/mixed cost is a cost which contains both fixed and variable components and
so is partly affected by changes in the level of activity.
Example: The high-low method

DG Co has recorded the following total costs during the last five years.
Year Output volume Total cost
Units $
20X0 65,000 145,000
20X1 80,000 162,000
20X2 90,000 170,000
20X3 60,000 140,000
20X4 75,000 160,000
Required
Calculate the total cost that should be expected in 20X5 if output is 85,000 units.
Question – 1
A company has recorded the following data in the two most recent periods.
Total costs of production Volume of production
$ Units
13,500 700
18,300 1,100
What is the best estimate of the company‟s fixed costs per period?
Question – 2 HW
The total cost of production for two levels of activity is as follows:
Level 1 Level 2
Production (units ) 3,000 5,000
Totals cost ($) 6,750 9,250
The variable production cost per unit and the total fixed production cost both remain constant in the range of
activity shown.
What is the level of fixed costs?
2
Question – 3
The following shows the total overheads costs for given levels of a company‟s total output.
Cost ($) Output ( units)
4,000 1,000
7,000 2,000
10,000 3,000
9,500 4,000
A set up in fixed costs of $500 occurs at an output level of 3,500 units.

What would be the variable overheads cost per unit (to the neatest $0.01) using the high-low technique and total
costs 5,000 units and 2,500 units.
Question – 4 HW
The following data relate to the overhead expenditure of contract cleaners (for industrial cleaning) at two activity
levels.
Squared metres cleaned 12,750 15,100
Overheads $73,950 $83585
When more than 14,000 square metres are industrially cleaned, there will be a step up in fixed costs of $4,700.
Required
Calculate the estimated total cost if 14,500 square metres are to be industrially cleaned.
Question – 5 (March 17)

The following information relates to the production costs for a company at three different levels of activity.
 Direct materials and direct labour vary directly with activity.
 The production overhead is a semi-variable cost.
The non-production overheads are semi-variable costs and include a fixed element of $14,460
(a) Complete the following table.
16,800 units 18,900 units 21,000 units
Costs $ $
Direct materials 67,200 ? ?
Direct labour 50,400 ? ?
Production overheads 61,950 ? 70,350
Non-production overheads 53,100 ? ?
Total costs 232,650 ? ?
(b) Calculate the cost per unit for 18,900 and 21,000 units of production using the total costs calculated in part.
16,800 units 18,900 units 21,000 units
$ $ $
Total costs 232,650 ? ?
Cost per unit 13.85 ? ?
(c) Explain why the cost per unit decreases as production increases.
The cost per unit decreases as production increases as only the variable costs increase. The fixed costs
remain the same so the amount is divided by a greater number of units.
3
Theory
Question – 1
Define Semi variable cost and step fixed Cost
A semi variable cost has an element of both a fixed and variable cost.
A utility bill, like heat and light, might have a fixed charge for the equipment and a variable cost for the actual
gas/electricity consumed.
A stepped fixed cost will increase by a specific amount at a certain level of output.
An example could be that an additional supervisor needs to be employed once production exceeds a certain
level of output.
Question – 2
Differentiate between direct and indirect costs
Direct costs are those that can be allocated to a cost unit i.e. specifically identified with the cost of a product,
or a unit of output.
Indirect costs (or overheads) cannot be allocated to a cost unit, specifically identified to a product or a unit
of output, but are a general cost of running the business.
Question – 3
Explain two effects that time has on cost behaviour.
In terms of behaviour, costs (in the short-term) can be thought of as variable, semi-variable or fixed. Cost
behaviour dictates that not all costs change in direct proportion to the increases or decreases in output.
As time progresses, all costs are thought to be variable. An example of this is factory rent, which in the short term
is fixed. However, this cost could change in the long-term .
4
Chapter – 3
Accounting for Overhead
Question – 1
ABC Ltd for year 2011 $
Direct Material Cost 100,000
Direct Labour Cost 80,000
Production OH Cost 120,000
Total Production Cost 300,000
Direct labour hours 20,000 hour
Machine hours 40,000 hour
Production units (Job) 600 units
Required:
(a) Calculated 6 different OAR for year 2011.
(b) Calculated Production Cost for job A & job B made in 2011 using each OAR.
Job details are Job A Job B
Direct Materials $30 $50
Direct Labour $25 $40
Direct labour hours 5hr 8hr
Machine hours 10hr 16hr
Production unit 1 unit 1 unit
Question – 2 HW
Archer Limited makes a range of products in its machine shop.
A budget has been prepared for Year 12 like this:
$
Direct material 70,000
Direct labour at $5 per hour 80,000
Production overhead 112,000
Total Production cost 262,000
Budgeted direct labour hours 16,000
Budgeted machine hours 17,500
Budgeted Production units 675 units
Required:
(a) Calculate 6 different budgeted absorption rates for production overhead for Year 12.
(b) Calculate the production cost of job A & B which will be made in Year 12, using each of the absorption rates.
The job details are: Job A Job B
Materials $105 $200
Direct labour $120 $300
Direct labour hours 24 50
Machine hours 26.25 40
5
Question – 3
Pembridge Co has a budgeted production overhead of $50,000 and a budgeted activity of 25,000 direct labour
hours and therefore a recovery rate of $2 per direct labour hour.
Required
Calculate the under-/ over absorbed overhead, and the reasons for the under-/ over absorption, in the following
circumstances.
(a) Actual overheads cost $47,000 and 25,000 direct labour hours are worked
(b) Actual overheads cost of $50,000 and 21,500 direct labour hours are worked
(c) Actual overheads cost $47,000 and 21,500 direct labour hours are worked
Question – 4
A management consultancy recovers overheads on changeable consulting hours. Budgeted overheads were
$615,000 and actual consulting hours were 32,150. Overheads were under- recovered by $35,000.
If actual overheads were $694,075 what was the budgeted overhead absorption rate per hour?
Question – 5 HW
The budgeted and actual data for River Arrow Products Co for the year to 31 March 20X5
Budgeted Actual
Direct labour hours 9,000 9,900
Direct wages $34,000 $35,500
Machine hours 10,100 9,750
Direct material cost $55,000 $53,900
Units produced 120,000 122,000
Overheads $63,000 $61,500
The cost accounts of River Arrow Products Co have decide that overheads should be absorbed on the basis of
labour hours.
Required:
Calculated the amount of under-or over absorbed overheads for River Arrow Products Co for the year to 31
March 20X5
Question – 6
A company has the following actual and budgeted data for year 4
Budget Actual
Production 8000 units 9000 units
Variable production overhead per unit $3 $3
Fixed production overhead $360,000 $432,000
Sales 6000 units 8000 units
Overhead are absorbed using a rate per unit, based on budgeted output and expenditure.
What was the fixed production overhead absorption amount during year 4?
Question – 7 HW
A company has over-absorbed fixed production overheads for the period by $6000. The fixed production
overhead absorption rate was $8 per unit and is based on the normal level of activity of 5,000 units. Actual
production was 4500 units.
What was the actual fixed production overheads incurred for the period?
6
Question – 8
A company manufactures two products, X and Y, in a factory divided into two production cost centres, Primary
and Finishing. The following budgeted data are available;
Cost centre Primary Finishing
Allocated and apportioned fixed overhead costs $96,000 $82,500
Direct labour minutes per unit:
Product X 36 25
Product Y 48 35
Budgeted production is 6,000 units of product X and 7,500 units of product Y. Fixed overhead cost are to be
absorbed on a direct labour basis.
What is the budgeted fixed overhead cost per unit for product X and Y?
Question – 9
GK ltd is a manufacturer of china ornaments. You are provided the following information:
Production cost centers Forming Firing Glazing
Estimated department manufacturing overhead after(primary and secondary)
Apportionments 320,000 250,000 190,000
Estimated machine hours 1,200 20,000 2,650
Estimated direct labour hours 16,000 2,500 20,000
During the year, the company will produce 17 different types of ornaments, the total output of which will be
148,000 individuals ornaments.
(a) Compute a blanket OAR based on machine hours.
(b) Compute appropriate departmental OARs.
(c) Ornament type CS4 has the following direct cost per units.
Direct materials(0.6 kg x $10 per kg) 6.00
Direct labour; Forming (0.5 hr x $8) 4.00
Firing (0.01hr x $4) 0.04
Glazing (0.6 hr x $8) 4.80
The following machine times per unit are required:

Forming 0.0075 hours
Firing 2 hours
Glazing 0.009 hours
Determine the production cost per unit for ornament types CS4 based on:
(i) The blanket OAR you calculated in 1 above
(ii) The departmental OAR you calculated in 2 above.
7
Question – 10 (Allocation/Apportion/Reapportion)
Sandstorm is a jobbing engineering concern which has three production departments (forming, machines and
assembly) and two service department (maintenance and general).
The following analysis of overhead costs has been made for the year just ended.
$ $
Rent and rates 8,000
Power 750
Light and heat 5,000
Repair and maintenance:
Forming 800
Machines 1,800
Assembly 300
Maintenance 200
General 100 3,200
Department expenses
Forming 1,500
Machines 2,300
Assembly 1,100
Maintenance 900
General 1,500 7,300
Depreciation:
Plant 10,000
Fixtures and fittings 250
Insurance:
Plant 2,000
Buildings 500
Indirect labour:
Forming 3,000
Machines 5,000
Assembly 1,500
Maintenance 4,000
General 2,000 15,500
52,500
Other available data are as follows:
Floor Plant Fixtures& Effective Direct cost Labour Machine
area value ($) fitting($) horse- for year ($) hours hours
(sq.ft) power worked worked
Forming 2,000 25,000 1,000 40 20,500 14,400 12,000
Machines 4,000 60,000 500 90 30,000 20,500 21,600
Assembly 3,000 7,500 2,000 15 24,200 20,200 2,000
Maintenance 500 7,500 1,000 5 - - -
General 500 - 500 - - - -
10,000 100,000 5,000 150 75,000 55,100 35,600
8
Service department costs are apportioned as follows:

Maintenance (%) General (%)
Forming 20 20
Machines 50 60
Assembly 20 10
General 10 -
Maintenance - 10
100 100
Required:
(a) Using the data provided prepare an analysis showing the distribution of overhead costs to departments.
(b) Reapportion service cost center costs using the reciprocal method.
Question – 11 (Actual?)
Ova and Unda Ltd operate 3 production departments, Stamping Machining and Finishing and over service
department which is responsible for maintenance.
The following actual data was recorded for month 7.
Overhead Stamping Machining Finishing Maintenance
Expenses $ $ $ $
Indirect materials 2,700 2,300 2,470 2,100
Indirect wages 3,400 2,500 3,250 3,100
Maintenance wages 3,500 2,100 1,400 1,000
Depreciation 2,100 3,400 1,300 1,400
Rent and rates 1,200 1,100 900 800
Supervision 3,500 2,800 4,000 2,200
Light and heat 600 580 400 480
Actual machine hours 1,450 2,080 1,960
At the end of each month, maintenance department overhead is apportioned to production departments on the
basis of maintenance wages incurred in those departments.
All production cost center overhead is absorbed on a machine hour basis.
The following budgeted data had been prepared for Month 7:
Stamping Machining Finishing
Budgeted overhead $22,500 $18,000 $15,200
Budgeted machine hours 1,500 2,000 1,900
Required
(a) Calculated the budgeted overhead absorption rates for each production department.
(b) Prepare a statement to show the actual overhead incurred by each production department inclusive of the
change for the maintenance department.
(c) Calculate the amount of overhead over or under absorbed by each production department for.
9
Question – 12 (OH to over/(under))

Profile Ltd is a company producing replacement windows for the building trade. The company has three
production departments(A,B and C) and two service departments (Stores and maintenance) in its factory. The
company re-apportions the costs of the service departments to the production departments in order to calculate
budgeted production overhead absorption rates for use in product costing. The budgeted production overhead
costs for a period allocated to the five departments were as follows.
Allocated overhead($) A B C Stores Maintenance
150,000 120,000 96,000 75,000 110,000
The following budgeted costs have yet to be apportioned to the five departments.
Rent and rate $40,000
Heating and lighting $60,000
Depreciation $120,000
Supervision $ 60,000
In addition the following information is available;

A B C Stores Maintenance
Floor space(sq m) 10,000 12,500 5,000 10,000 2,500
Machinery value($) 145,000 85,000 55,000 5,000 10,000
Number of employees 190 150 125 10 25
Usage of stores dept 55% 20% 15% ------- 10%
Usage of maintenance dept 65% 25% 5% 5% ------
Budgeted machine hours for the period were 120,000 for Department A 100,000 for Department B and 80,000 for
Department C.
Actual results for the period were:
A B C
Actual overhead incurred($) 455,000 287,750 164,200
(allocated and apportioned)
Actual machine hours 135,000 115,000 78,000
Required:
For the period:
(a) Produce a budgeted overhead distribution sheet showing the allocated and apportioned costs for the five
departments.
(b) Re –apportioned the budgeted service department costs to the production department using simultaneous
equation. (Full marks will not be awarded if other methods are used)
(c) Calculated a predetermined overhead absorption rate for each of the three production departments (to 3
decimal places of $).
(d) Calculate the over/under absorbed overhead for each of the production departments.
10
Question – 13 (September-2016) HW
Chappel Limited has two production departments (Manufacturing and Packing) and two service departments
(Stores and Administration).
Production overheads for Period 3 were expected to be as follows:
Rent and rates $8 500
Machine depreciation $13 200
Stores salaries $2 500
Administration salaries $4 120
Heat, light and power $6 100
Other overheads $11 180
The following information about each of the departments is available:
Manufacturing Packing Stores Administration
Floor area (sq metres) 300 200 450 50
Machine value ($000) 640 300 20 –
Other overheads ($) 3 925 2 840 1 980 2 435
Electricity usage (%) 45 25 20 10
Direct labour hours 720 1 440 – –
Machine hours 1 200 300 – –
(numbers of)Stores requisitions 240 160 – –
The company policy is to reapportion service department overheads to the production departments, using the
direct method, on the following basis:
Administration – 50% to each department
Stores – number of stores requisitions
Required
(a) Complete the Overhead Distribution Table for Chappel Limited which is on page 15.
(i) Allocate and apportion overheads using the appropriate bases.
(ii) Reapportion the Administration and Stores overheads to the production departments using the bases
provided.
All figures should be rounded to the nearest dollar ($).
(b) Calculate the overhead absorption rates for each of the Manufacturing and Packing departments using an
appropriate basis, giving each answer to two decimal places.
The actual overheads and the number of machine and direct labour hours worked for
Period 3 were as follows:
Manufacturing Packing
Overheads incurred $27 360 $21 240
Labour hours 660 1 380
Machine hours 1 130 275
(c) Calculate the over or under absorption of overheads for Period 3 for each of the Manufacturing and Packing
departments, giving each answer to the nearest dollar ($).
11
Question – 14(Nov-18)
Yewtree had already apportioned and allocated its overheads for November 2018 to its two production and two
service departments.
The following information is available for the four departments.
Cutting Finishing Stores Human Resources
Number of material requisitions 500 300 - -
Number of employees 10 20 3 2
Machine hours 2,400 200 - -
Direct labour hours 1,600 3,200 - -
(a) Complete the table below:
 re-apportion the Human Resources and Stores overheads
 Calculate the Overhead Absorption Rates for the Cutting and Finishing departments using the appropriate
methods of absorption. If necessary, round your answers to the nearest $0.01
The actual overheads and the number of machine and direct labour hours worked during November 2018 were
as follows:
Cutting Finishing
Actual overheads $147, 600 $105,200
Machine hours 2,610 195
Labour hours 1, 645 3,420
(b) Calculate the over or under absorption of overheads for each of the Cutting and Finishing departments.
(Round your answers to the nearest $.)
(c) Explain the following terms:
(i) allocation of overheads
(ii) apportionment of overheads
Yewtree uses a cost-plus approach when setting selling prices.

(d) Evaluate for Yewtree the over or under absorption of overheads that you have calculated in part (b).
12
Theory
Question – 1
Define Allocation and Apportionment
Allocation – is the giving of an overhead cost to one particular cost centre because it is certain which cost centre
that overhead belongs to.
Apportionment – is the division of overhead costs between cost centres using appropriate bases / because it is
not certain how much of that overhead belongs to each cost centre.
Question – 2
State two reasons why Laburnum Transport uses predetermined overhead absorption rates.
- Using a pre-determined overhead absorption rate will ensure that indirect costs are included when setting
prices
- Assuming that budgeted overheads and output are accurately assessed, the indirect costs will be passed
onto the customer
- Including overheads will provide a more accurate cost of producing the product and will help with decision-
making like assessing the viability of an activity
13
Chapter – 4
Absorption and Activity Base Costing
Question – 1 (June 2017)
Hernandez Ltd uses absorption costing, based on a labour hour rate, to establish the production costs for the
three products it manufactures.
The budgeted details for the next period are as follows:
Product Exe Whye Zed
Production (units) 3,000 2,500 2,000
Direct materials ($) 144,000 96,000 57,600
Direct labour ($) 134,400 112,000 67,200
Direct labour hours per unit 4 4 3
Direct materials per unit (kg) 5 4 3
Machine hours per unit 2 4 3
Exe, Whye and Zed all use the same direct material purchased at the same price.
Direct labour is paid at the same hourly rate for working on Exe, Whye and Zed.
Production overheads for the period are $408 800 and are absorbed on a direct labour hour basis.
(a) Calculate the production costs (to two decimal places) for one unit of each product using absorption costing.
The company is now considering using activity based costing (ABC) to calculate the production costs of each
product.
The following overhead information is available for the period:
Activities Costs ($) Cost drivers
Inspection 120,000 Number of production runs
Machining 112,200 Number of machine hours
Packaging 49,500 Number of orders
Material handling 127,100 Quantity of material used
Exe Whye Zed
Number of production runs 150 200 250
Number of orders 150 175 225
(b) Calculate the production costs (to two decimal places) for one unit of each product using activity based
costing.
Question-2
Jenkins & Co produce a range of products using the same raw material. The company currently uses an
absorption costing system to collect total production costs for use in pricing their products.
The management accountant feels that method is not reflecting the true production costs of the product and
wishes to use activity based costing (ABC) to ascertain whether a more accurate figure can be obtained.
Relevant information for these products is given below for a period:
Product Product Product Product
MK1 MK2 MK3 MK4
Output (units) 400 350 200 350
Cost per unit: $ $ $ $
Direct material ($5/kg) 40 50 35 25
Direct labour 28 22 16 18
Machine hours per unit 4 5 3 2
All products are produce in batches of 50 units
Production overheads are currently absorbed using a machine hour rate (to 2 decimal places of $)
14
The total production overheads have been allocated to their various activities as follows:
$
Machine maintenance costs 46,500
Machinery set-up costs 13,000
Quality inspection costs 9,100
Material storage and handling cost 9,850
78,450
It has been decided that the following cost drivers are to be used:
Machine maintenance costs Machine hours
Machinery set-up costs Number of batches
Quality inspection costs Number of batches
Material storage and handling costs Quantity of material
Required:
(a) Calculate both cost per unit and total costs for each product using traditional absorption costing.
(b) Calculate both cost per unit and total cost product using ABC to absorb overheads.
Question – 3(3/2009)
Triple products Ltd manufactures three products Hay Bee and Cee. At present the company uses a traditional
absorption costing system to establish the costs of production.
Budgeted production data for the next period is as follows:
Hay Bee Cee
Production output (units) 1,000 800 400
Material per unit at $5 per kg 5kg 10kg 7.5kg
Labour per unit at $9 hour 2hrs 2hrs 3hrs
Machine time per unit 2hr 1.5hrs 2hrs
Variable production overheads are budgeted to be absorbed at $3.50 per labour hour.
Fixed production overheads for the period are budgeted to be $66,000, absorbed on a machine hour basis.
The company is considering the introduction of an activity based costing system.
Further investigation has revealed the following activities and related overhead costs:
Activities Cost ($)
Product inspection 24,000
Machine set-up 16,000
Machine maintenance 12,000
Packing and dispatch 6,000
Material handling 8,000
66,000
Other information:
(i) Budgeted orders for next period: Hay 10 order; Bee and Cee 5 order each. Each order is expected to require
one machine set up and two inspections.
(ii) Machine maintenance is carried out regularly based on a predetermined number of machine running hours.
(iii) Each product is packed and dispatched in crates containing the following number of products per crate: Hay
50 unit, Bee 25 unit and Cee 50 units. The number of crates used influences product dispatch costs.
(iv) Material handling costs are influence by quantity of material used.
15
Required;
(a) Calculate the production cost of one of each product using:
(i) Traditional absorption costing
(ii) Activity based costing.
(b) Explain the meaning of the term cost driver. Your explanation should include two examples to illustrate your
answer.
Question – 4(Sep-18) HW
Toral Henrikkson Ltd uses absorption costing, based on a direct labour hour rate, to establish the production
costs for the three products it manufactures.
The budgeted details for the next period are as follows:
Product Exe Whye Zed
Production (units) 3,000 2,500 2,000
Direct materials (kg) per unit 5 4 3
Machine hours per unit 2.5 4 3.5
Production overheads for the period are $683,200 and are absorbed on a direct labour hour basis.
(a) Calculate, using absorption costing, the production overhead costs for one unit of each product. Give your
answers to two decimal places.
The company is now considering using activity-based costing (ABC) to calculate the production overhead costs
of each product.
The following overhead information is available for the period:
Activities Costs ($) Cost drivers
Inspection 199,200 Number of production runs
Machining 186,600 Number of machine hours
Packaging 99,000 Number of orders
Material handling 198,400 Quantity of material used
Exe Whye Zed

Number of production runs 150 200 250
Number of orders 150 175 225
(b) Calculate, using activity-based costing, the production overhead costs for one unit of each product. Give your
answers to two decimal places.
(c) Evaluate whether the company should change to activity-based costing.
16

Campbell and Martin Ltd makes three products.
At present, the company uses a traditional absorption costing system to establish the costs of production.
The budget for the three products for Period 10 is shown below.
Alpha Beta Delta
Production units 4,800 4,000 2,000
Per unit
Direct material at $5 per kg 5 kg 10 kg 8 kg
Direct labour hours at $9 per hour 2 hours 2 hours 3 hours
Machine time 2 hours 1.5 hours 2 hours
Production overhead costs for the period were $370 800 and were absorbed on a machine hours basis.
(a) Calculate the production overhead cost (to two decimal places) for one unit of each product, using
absorption costing.
The company is now considering using activity based costing (ABC) to calculate the production overhead costs
of each product.
The following information for the production overhead costs for Period 10 is shown below.
Activity Cost ($)
Machine set up 150,000
Product inspection 80,000
Machine maintenance 58,800
Product packaging 42,000
Material handling 40,000
You are given the following additional information for the period.
- Machine set up costs will be based on the number of orders:
Alpha Beta Delta
12 orders 8 orders 5 orders
- Product inspection costs will be based on the number of production runs:

Alpha Beta Delta
24 16 10
- Machine maintenance will be based on the number of machine hours used.

- The packaging costs will be based on the number of crates per product.
Each product is packed in crates containing the following number of products per crate:
Alpha Beta Delta
40 units 50 units 25 units
- Material handling costs will be based on the total quantity of materials used.
(b) Calculate the production overhead cost (to two decimal places) for one unit of each product, using activity
based costing (ABC).
17
Theory
Question – 1
Cost drivers
A cost driver is any factor which causes a change in the cost of an activity
Examples
- Number of inspections
- Number of machine set-ups
- Number of machine hours
- Number of boxes
- Weight of material moved
Question – 2
Define the advantages and disadvantages of ABC (or) Evaluate whether the company should
change to activity-based costing
Advantages
 More realistic costs.
 Better insight into cost drivers, resulting in better cost control.
 Particularly useful where overhead costs are a significant proportion of total costs.
 If there are complicated manufacturing process, ABC can solve this by using multiple cost drivers.
 ABC can allocate both production and non – production overhead cost.
Disadvantages
 It is difficult to decide which costs are included in each cost pool
 It is difficult to decide which factors are cost drivers.
 It is not sure the relationship between cost pools and cost driver.
 If ABC is used as a fashion, cost of using ABC is exceeding the benefit of using ABC.
 If the user is not skillful, using the ABC is problematic
18
Chapter – 5
Absorption Costing and Marginal Costing
Question – 1 (Jan 2017)
Mercury is a business manufacturing men‟s suits. The information relating to
December‟s production was as follows:
- Direct materials $27.50 per suit.
- Direct labour was paid $7.00 per hour.
- Overheads were $17 100 per month plus $2.50 per suit produced.
Each suit took an average of 2 hours 15 minutes to produce.
Each suit was sold for $95.00
In December, 1 200 suits were produced and 960 were sold.
(a) Calculate the:
(i) marginal cost of producing one suit
(ii) absorption cost of producing one suit.
(b) Prepare a statement of profit or loss, in columnar format, using:
(i) marginal costing
(ii) absorption costing.
(c) Explain the difference between the two net profit or loss figures obtained in (b).
(d) Define the following terms:
(i) Marginal cost
(ii) Absorption cost
Question – 2 HW
X Ltd commenced business on1st March making one product only the standard cost of which is as follows:
$
Direct Labour 5
Variable material 8
Variable production overhead 2
Fixed production overhead 5
20
The fixed production overhead figure has been on be basis of a budgeted normal output 36,000 units per annum.
Selling distribution and administration expense are:
Fixed $120,000 per annum
Variable 15% of the sales value
The selling price per unit is $35 and the number of units produced and sold:
March April
Production 2,000 3,200
Sales 1,500 3,000
Required:
(a) Prepare profit statements for each of the months of March &April using
(i) Marginal costing and
(ii) Absorption costing
(b) Prepare a reconciliation of the profit or loss figure given in your answer to (a) (i) and (a) (ii) is expected
accompanied by a brief explanation.
19
Question – 3 (April-17)
The One Product company, which produces a part for the motor industry, has budgeted to make 6,400 units in a
year. The units sell for $80 each. The standard unit variable production costs are as follows:
Direct material A 3 kg at $2.00 per kg
Direct material B 4 kg at $1.50 per kg
Direct labour 1.5 hours at $12 per hour
Variable overheads Absorbed at $2.00 per unit
The fixed overheads are expected to be $48,000 per year, occurring evenly over the year. These are absorbed at
a predetermined rate based on direct labour hours.
The following actual information is available for the first six months of the year:
Opening inventory 300 units
Sales 3,100 units
Closing inventory 200 units
Fixed overheads for the six months were equal to budget.
Variable costs per unit were as per standard production cost.
Actual direct labour hours per unit were as per budget.
Required
(a) Calculate, for the first six months of the year, the:
(i) actual costs of production
(ii) over/under absorption of fixed production overheads.
(b) Prepare a trading account for the first six months of the year using absorption costing.
Clearly show any over/under absorption of overheads.
(c) Calculate the trading profit for the first six months of the year if the company had used marginal costing.
(d) Describe how absorption costing differs from marginal costing.
Question – 4
ACE Ltd produces a single component for the motor industry and is planning to make 10,000 units of the
component in the forthcoming year. The components will be sold for $16 each. The production process involves
both a machining and an assembly operation.
The standard unit costs associated with production are as follows;
Direct Materials:
Material A 0.3 kilos @ $2.50 per kilo
Material B 0.7 meters @ $3.50 per meter
Material C 5 items @ $ 15 per 100 items
Direct Labour:
Machining Department 0.15 hrs @$6 per hour
Assembly Department 0.10 hrs @$ 5 per hour
Variable Overheads-Absorbed@ $ 6 per direct labour hour in both Machine department and Assembly
department
Fixed factory overheads, absorbed at a rate per unit, are expected to be $50,000 for the year and are expected
to accrue evenly.
Planned production and sales levels for the first three months of the forthcoming year are as follows:
January February March
Production (Units) 800 800 900
Sales (Units) 700 800 800
There is not stock of components at beginning of January.
20
Required:
(a) Produce a detailed budgeted manufacturing and trading account for the period January to March using each
of:
(i) Absorption Costing
(ii) Marginal Costing
(b) Explain the difference between the profits calculated in part (a). Your explanations should be supported with
calculations.
Question – 5
A company manufactures and sells a single product. Product costs are
$per unit
Direct materials 15.2
Direct labour 9.36
Variable production overhead 2.74
Fixed production overhead 17.60
Variable selling and administration overhead 3.70
Fixed selling and administration overhead 10.40
59.00
The company wishes to compare the profits reported by absorption and marginal costing respectively. If
absorption costing was to be applied, fixed overheads would be absorbed at the above rates per unit which are
based on normal production and sales activity of 20,000 units per period.
In the period just ended, 19,700 units of the product were sold at $65.00 per unit and 20,100 units or the product
were manufactured.
Required:
(a) Prepare profit statements for the period using absorption costing.
(b) Prepare profit statements for the period using marginal costing.
(c) Explain why the profit in (a) and (b) differ: NB No calculations are required.
Question – 6
Krystal Ltd, a business which makes a single product, is approaching the end of Year 3 when the closing stock
(i) and (ii) is expected to be 2,500 units. The current actual unit costs are as follows.
$
Direct material 4
Direct labour 2
Production overhead variable 1
Selling overhead variable 3
Production overhead fixed 5
Selling overhead fixed 4
Total unit cost 19
Variable unit costs are budgeted to increase from the first day of Year 4 by the following:
Direct material 8%
Direct labour 7.5 %
Production overhead variable 3%
Selling overhead variable 20%
21
Increase spending on fixed costs budgeted level of production sales will result in an increase of 10% on present
unit cost. During year 4, production is budgeted at 20,000 unit and sales are budgeted at 18,500 units, for selling
at $30 per unit. The opening stock will be treated on a FIFO basis.
Required:
(a) Prepare detailed budgeted Profit & Loss Account for Year 4, using:
(i) Absorption costing
(ii) Marginal costing
(b) Explain the difference in the net profit obtained in (a) (i) and (a) (ii) above, giving supporting calculations.
Question – 7(Nov -18)

Ash owns a business that manufactures dresses. The information relating to production in October 2018 was as
follows.
- Inventory on 1 October 2018 was 1,300 dresses.
- The value of the inventory on 1 October 2018 was $8.00 per dress (marginal cost) or $15.00 per dress
(absorption cost).
- Direct materials were $8.40 per dress.
- There were 24 workers who were contracted to work 175 hours per month.
- The wage rate paid to these workers is $6.00 per hour.
- Bonuses were paid to workers at a rate of $1.25 per dress.
- Production overheads were $42,400
- Dresses were sold for $20.00 each.
- During October 2018, 8,000 dresses were produced and 7,600 were sold.
- The business uses the First in First out (FIFO) method of inventory valuation.
Required
(a) Calculate the cost of producing one dress in October 2018 using
(i) Marginal costing
(ii) Absorption costing
(b) Prepare a statement showing the profit for October 2018, in columnar format, using:
(i) Marginal costing
(ii) Absorption costing.
(c) Explain why there is a difference between the marginal costing and absorption costing profit or loss
calculated in (b).
Question-8 (Nov-17) HW
Parr Ltd had reported the following results for Product P for October 2017.
$ $
Sales 910,000
Material Costs (335,000)
Labour Costs (240,000)
Overhead costs (395,000)
Total Costs (970,000)
Loss (60,000)
22
The following information is available for October 2017.

- 50,000 units were made and sold
- Material costs were variable
- Labour cost contained fixed costs of $140,000
- Overhead costs contained fixed costs of $220,000
- All costs are expected to remain unchanged for the foreseeable future.
Calculate the following for October 2017;
(a) Selling price per unit
(b) Cost per unit using marginal costing
(c) Cost per unit using marginal costing
Question – 9(3-2013)(Revision)
Twin Products Ltd produces two products Tee and Pee. Information regarding the sales and production of these
two products for year 13 is listed below:
Tee Pee
Budgeted production and sales for the year 20,000 units 30,000 units
Selling Price per unit 120 200
Standard direct costs per unit
Direct materials @ $5 per kg 8 kg 10 kg
Direct labour @ $10 per hour 4 hours 6 hours
Production overheads:
Variable overheads are absorbed at a rate of $5 per unit of product produced.
Budgeted fixed production overheads are $650,000 for the year incurred evenly and absorbed at a
predetermined rate based on direct labour hours.
Actual production and sales for the first two quarters of year 13 are as follows:
Product Tee Pee
1st Quarter
Opening stock 500 units 1,000 units
Sales 6,000 units 7,000 units
Production 6,500 units 6,600 units
2nd Quarter
Unit selling prices, direct costs and variable overheads, were as budget.
Actual fixed overheads in each quarter, were also as budget.
Required
(a) Prepare profit statements for the 2nd quarter of year 13 using:
(i) Absorption costing
(ii) Marginal costing.
(b) Briefly explain the reasons why the total profits achieved under each method are different and calculate the
reconciliation of this difference.
23
Question-10 (2/2014-Costing) Revision

Sole Product Ltd manufactures and sells a single product. The product is produced in two departments
(machining and finishing) before being packed into boxes in the dispatch department. The company has provided
the following budgeted information.
Direct material $4.50 per unit

Direct labour
Machining department (per 100 units) at $10.00 per hour 5 hours
Finishing department (per 20 units) at $12.00 per hour 4 hours
Dispatch department labour (per 20 units packed) at $10.00 per hour 1 hour
Packing boxes $0.50 each
Fixed overheads (if absorption costing is applied)
Machining department Absorbed at a rate of $15 per machine hour
(The manufacture of a batch of 100 units takes 5 machine hours.)
Finishing department Absorbed at a rate of $12 per direct labour hour
Dispatch department Absorbed at a rate of $1 per unit packed
The selling price is $20 per unit.
Planned production and sales for the next period are as follows.
Production 2,000 units
Sales 1,500 units
There is no stock of packed or unpacked products, direct material or packing boxes at the beginning of the
period.
At the end of the period it is expected to have no stock of packing boxes and 400 units unpacked in the dispatch
department.
All other production in the period will be packed.
Required
(a) Calculate the number of units completed and packed in the period.
(b) Produce a budgeted Manufacturing and Trading Account for the period using:
(i) absorption costing
(ii) marginal costing.
24
Theory
Question – 1
Explain why the profit using absorption costing is different to the profit using marginal costing.
The difference in profit figures is due to the difference in closing inventory valuations – marginal costing values
the inventory with variable production cost per unit while absorption costing values the inventory with total
production cost per unitThe difference is fixed cost per unit.
Absorption costing gives a higher closing inventory figure than marginal costing which reduces the cost of sales
and increases Net Profit.
Question – 2
Define the following terms:
Marginal cost – the extra / variable cost of producing one additional unit of output.
Absorption cost – the total cost of producing one unit of output including fixed and variable costs.
25
Chapter – 6
Cost Volume Profit Analysis
Question – 1
Budgeted Profit statement for a period $
Sale ($5 x 20,000 units) 100,000
Less: Total variable cost ($3 x 20,000 units) 60,000
Contribution per period 40,000
Less: Total fixed cost (20,000)
Profit 20,000
Required: Calculate
(a) Contribution per unit (CPU)
(b) Contribution to sales ratio (C/S ratio)
(c) Break-even point in
(i) Sale unit
(ii) Sale value
(iii) Selling price (at 20,000 units sold)
(d) To get Target Profit $40,000
(i) Sale unit
(ii) Sale value
(iii) Selling price (at 20,000 units sold)
(e) Margin of safety
(f) Margin of safety %
Question – 2 (3 /2008)
Company D manufactures and sells a single product. The selling price and unit costs of the product are:
$ per unit
Selling price 7.40
Production costs:
Variable 3.60
Fixed 2.10
Non-production costs:
Variable 0.50
Fixed 0.80
The fixed costs per unit listed above are based on sales and production quantities of 6,400 units per period.
Required;
(a) Calculate the:
(i) Net profit per period ($)
(ii) Contribution/sales ratio (%)
(iii) Break-even sales revenue per period (to the nearest $ hundred)
(iv) Margin of safety (%).
(b) State whether the break-even point (in sales units) would increase or decrease if the selling price was raised
with no change in the cost structure. Explain why.
26
Question – 3 (3/2013) HW
Chester Mannone Limited manufactures and sells a single product.
The following information is available for a period:
Budgeted Variable Cost $ per unit
Direct materials 36
Direct labour 21
Variable overheads 9
The company is budgeting to make and sell 8,000 units at a selling price of $120 per unit.
Fixed costs are budgeted at $351,000 for the period.
Required;
(a) Calculate for the period the budgeted:
(i) Break-even point in sales units
(ii) Contribution/sales ratio %
(iii) Margin of safety as a % of budgeted sales.
(b) Assume that due to changes in the variable costs per unit, the budgeted contribution/sales ratio is now 40%,
and that all the other budget details remain unchanged.
Calculate the revised budgeted:
(i) Break-even point in sales revenue
(ii) Margin of safety as a % of budgeted sales.
Question – 4 (4/2012)
Hobson Ltd manufactures and sells a single product at a current selling price of $250.00 per unit. The variable
production costs and variable selling costs of the product are currently $150.00 and $12.50 per unit respectively.
In the next period, fixed costs are budgeted at $927,500 and the budgeted production and sales are 16,000
units.
The current selling price and variable costs are budgeted to remain unchanged in the next period.
Required;
(a) Calculate, for the next period, the:
(i) Budgeted break-even point (in sales revenue)
(ii) Budgeted margin of safety (expressed as a percentage)
(iii) Selling price required to maintain the current contribution/sales ratio if the variable production costs and
the variable selling costs increase by 9.5% and 16% per unit respectively.
Hobson Ltd, which has sufficient unused production capacity, is considering reducing the selling price by 5% in
the next period in order to generate a forecast 12.5% increase in sales units. This would result in the following
cost increases:
Variable production costs 5.5% per unit
Variable selling costs $0.25 per unit
Fixed costs $83,300
Required
(b) Assuming that the selling price is reduced by 5% for the next period, calculate the revised budgeted:
(i) Break-even point (in sales revenue)
(ii) Net profit.
27
A company, which produces a single component for the motor industry, has just completed its first year of
trading. The summary profit and loss account for the year is set out below:
$000 $000
Sales (15,000 units) 1,080
Direct costs
Direct material 315
Direct labour 285
Direct expenses 90
Overheads
Production 195
Administration 60
Selling 168 (1,113)
Net loss (33)
The following information is available:
(1) All of the direct costs are variable with production.
(2) The production overhead figure includes $90,000 fixed costs. The remaining production overheads vary with
production.
(3) All of the administration overheads are fixed.
(4) Variable selling overheads are incurred at the rate of $8 per unit. The remaining selling overheads are fixed.
Required;
Calculate for Year 1:
(a) The Break- even point in units and sales value
(b) The profit that would have been earned from the sale of 20,000 units
(c) The number of units needed to be sold to achieve a profit of $11,000
The company has set a profit objective of $15,000 for year 2. Two suggestions have been made as to how this
profit could be achieved.
Suggestion1:
Reduce the selling price by $3 per unit use a less expensive material that would reduce the direct material cost
by $2 per unit
Suggestion 2:
Increase the selling price by $3 per unit and increase advertising expenditure by $43,000. In addition use a less
expensive material that would reduce the direct material cost by $2 per unit. All other fixed costs and unit variable
costs will remain unchanged for Year 2.
Required:
(d) Calculate for each suggestion how many units need to be sold to achieve the profit objective of $15,000.
28
Question – 6 (3 Graph)
X plc sells a single product direct to the public. The following data are available per unit of product:
Selling price sells $40
Direct labour 4 hours@$ 3 per hour
Direct materials 2kg @ $ 4 per kg
Variable production overheads $2 per direct labour hour
Fixed overheads $ 3.50
Variable administration costs $2.50
Vasriable selling and distribution costs $1.50
Normal production and sales of the product are 50,000 units per period.
Required:
(a) Using a marginal costing format, calculate for a period.
(i) Net profit
(ii) Break- even point (in sales units)
(iii) Break- even point (in sales revenue)
(iv) Margin of safety as a% of sales.
(b) Using the graph paper provided, prepare a break-even charts for the above data, identifying:
(i) Break-even point
(ii) Margin of safety
(iii) Areas of profit and loss
Question – 7 (April-18) HW
Phobos started to produce D44 at the start of February 2018. The production and costs relating to February and
March 2018 were as follows:
February March
Units produced 42,000 55,000
Total production costs ($) 558,070 602,270
The selling price of D44 was $9.95 per unit.

Phobos estimates that by June 2018 sales of D44 will be 80 000 units per month.
Costs and revenues per unit are not expected to change from February to June 2018.
(a) Calculate, for D44, the:
(i) variable costs per unit
(ii) fixed costs per month
(b) Calculate the break-even point in:
(i) Units
(ii) revenue.
(c) Calculate the sales revenue required for the business to make a profit of $131,000 per month.
(d) Calculate, if the business does sell 80 000 units per month in June 2018, the margin of safety:
(i) in units
(ii) as a percentage of sales units.
(e) Prepare a break-even chart for an output of 80 000 units for June 2018 that shows the:
 fixed cost
 total cost
 sales revenue
 break-even point in units
 profit at 80 000 units
 Margin of safety in units.
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Question – 8 (3/2013)
Sole Products Ltd plans to sell 8,000 units of its single product in a period at a selling price of $20 per unit. Fixed
overheads and net profit are expected to be $30,000 and $18,000 respectively for the period using the existing
process.
The company is considering a change to its production process, which would increase the fixed overheads by
$18,000 in the period and reduce the variable costs to $12.00 per unit. The selling price will remain constant
regardless of production process.
(a) Calculate, for the planned output, the break-even points (in units) and the margins of safety (as a percentage
of the sales) for:
(i) The current method
(ii) The proposed changed method. (5 marks)
(b) Advise management, using supporting calculations, whether the changed production process is more
profitable than the existing process at the planned output.
(c) Calculate the number of units that need to be sold, for the profits from both the existing and the changed
processes to be equal.
(d) Draw a single profit/volume chart for the period, showing the profit arising both from the existing and the
changed production processes, for sales up to 10,000 units. Clearly indicate the break-even points and the
margins of safety for both productions processes.
Question – 9 HW
A company which manufactures a single product has prepared the following budgeted information for the next
period,
Production / Sales units 20,000
Selling price per unit $28
Direct material per unit $8
Direct labour per unit $5
Production overheads $ 110,000
Selling and distribution overheads $ 50,000
Administration overheads $ 20,000
The following points have been revealed concerning the budget
1. The budget is based on 80% utilization of maximum capacity.
2. Production overhead are absorbed on a cost per unit basis based on the maximum capacity and a total
cost of $ 120,000 at maximum capacity.
3. Selling and distribution overheads include a fixed element of $30,000.
4. Administration overheads are fixed.
Required;
(a) Calculate for the next period;
(i) The fixed overhead costs
(ii) The break- even pionts( in units )
(iii) The margin of safety as a % of the sales.
(iv) Profit at 80% capacity utilization
The company is considering reducing its selling price to $ 26 per unit. Market research suggests that this price
reduction will generate the additional sales for the company to operate at maximum capacity
30
Required;
(b) Assuming a selling price of $ 26 per unit and maximum capacity production output, calculate for the next
period;
(i) The break-even point ( in units)
(ii) The margin of safety as a % of sales.
(iii) Profit at 100% capacity
(c) Plot on the graph, a single profit – volume chart showing
(i) $ 28 per unit selling price (up to 80% capacity utilization)
(ii) $ 26 per unit selling price (up to 100% capacity utilization)
Clearly show on the chart break – even point for each selling price and margin of safety for each output.
Question – 10 (July-17)
Willow Ltd manufactures the GH33. There are two options for setting the selling price.
The following information is available for the two options.
Option One Option Two
Selling price per unit $12.50 $9.95
Estimated monthly demand (units) 10,000 16,000
Fixed costs per month $50,700 $55,590
Variable cost per unit $4.70 $4.50
Break-even point (units) 6 500 ?
Additional information
1. Option One is the actual performance of the product in June 2017.
2. Option Two will be to increase production/sales to 16 000 units per month.
(a) Calculate the profit that Willow Ltd made in June 2017 by selling 10 000 units of GH33 using Option One.
(b) Calculate the number of units that need to be sold under Option Two for Willow Ltd to make the same
amount of profit that you calculated in (a).
Willow Ltd is considering expanding its production to 16 000 units per month (Option Two).
(c) Calculate the break-even point (in units) for Option Two.
(d) Calculate the margin of safety for both options in units and as a percentage of sales
 Option One:
 Option Two:
(e) Evaluate whether Willow Ltd should choose Option Two. You should consider the assumptions that have
been made by Willow Ltd.
Question – 11(4 /2008)
Details of the three products manufactured and sold by Company B are set out below:
Product
P Q R
Selling price ($ per unit) 12.00 25.00 16.00

Variable costs ($ per unit) 6.00 16.00 10.00
Fixed costs ($ per unit) 4.50 6.50 5.30
Sales (units per period) 4,000 2,000 3,000
Required;
(a) Calculate the contribution to sales ratio of each product.
(b) Calculate for Company B overall and based on the above sales mix:
31
(i) The contribution to sales ratio

(ii) The break-even sales revenue per period (to the nearest $ hundred)
(iii) The sales revenue required per period (to the nearest $ hundred) to achieve a net profit of $20,000.
(c) Draw a profit/volume (P/V) chart for Company B, based on the above sales mix and showing sales up to
$170,000 per period.
Question – 12(Jan-17) HW
Neptune manufactures and sells three products – D, E and F. The forecast details of sales and costs relating to
Period 4 are as follows:
Product D Product E Product F
Units sold 50,000 20,000 30,000
Selling price per unit $6.00 $7.50 $10.00
Material cost per unit $1.20 $1.75 $3.50
Labour cost per unit $1.50 $2.00 $2.50
The fixed costs for Period 4 are $270,000
(a) Calculate the:
(i) forecast contribution / sales ratio for each product and in total
(ii) forecast break-even revenue for Neptune for Period 4
(iii) forecast margin of safety for Neptune in both $ and as a percentage of sales
(iv) forecast profit or loss for Neptune for Period 4.
(b) Explain two limitations of Neptune using break-even analysis to set targets and make decisions
The directors of Neptune are deciding whether to introduce Product G.

 8 000 units will be sold per month.
 The selling price will be $12.00 per unit.
 Variable costs will be $4.80 per unit.
 Fixed costs will be $39,600 per month.
(c) Prepare, using the graph paper on the next page, a break-even chart for Product G that shows clearly the:
(i) break-even point
(ii) margin of safety.
Question – 13 (2/2012)
Beta Limited manufactures and sells three products. The budgeted data for the next period are:
Product X Product Y Product Z
Sales volume (units) 10,000 6,000 4,000
Selling price per unit $40.00 $30.00 $25.00
Variable costs per unit $31.60 $19.50 $15.00
Fixed costs for the period are budgeted to be $83,160.
Required
(a) Calculate the contribution/sales ratios for each of the three products.
(b) Based upon the above sales mix (units), calculate the:
(i) Overall contribution/sales ratio (to one decimal place of %)
(ii) Break-even point (sales revenue)
(c) Calculate the break-even point (sales revenue) if budgeted fixed costs increase to $94,300 in the period, and
the sales mix is revised as follows:
Product X 30% of total sales revenue
Product Y 30% of total sales revenue
Product Z 40% of total sales revenue
32
Question – 14(3/2013)
Koren Simpson has prepared a budget for the coming period when it plans to make and sell two types of product.
The following details are provided:
Product Exe Product Whye
$ per unit $ per unit
Selling price 40 90
Variable operating costs 30 40
Budgeted fixed costs per period $936,000
The company expects to sell three units of Product Exe for every one unit of Product Whye in the coming period.
Required;
(a) Calculate the number of units of Product Exe and of Product Whye that need to be sold by the company in
order to earn a net profit of $520,000 in the coming period.
(b) Describe two limitations of cost-volume-profit (CVP) analysis.
Question – 15 (April 2017)

Triple Products manufactures and sells three products, Product A, Product B and Product C. All three products
have a selling price of $20 per unit.
Triple Products has provided the following budget information for Year 5.
Product A B C
Sales mix (units) 5,000 4,000 3,000
Direct material cost (per unit) $6.00 $7.00 $5.00
Direct labour cost (per unit) $4.00 $6.00 $5.00
Fixed costs are $54 000 for the year.
Required:
(a) Calculate the:
(i) contribution/sales ratio for each product and for Triple Products overall
(ii) break-even revenue based on the overall budgeted sales mix
(b) Draw, on the graph paper on page 6, a contribution break-even chart for the overall budgeted sales mix
(an additional graph page is included on page 7 if required).
Indicate clearly on the chart the:
 heading and labelled axes
 overall sales line
 total cost line
 variable cost line
 break-even point
 margin of safety
 contribution area (shaded).
Triple Products is considering increasing its advertising expenditure for Product C.
Market research suggests that this would:
 generate a 50% increase in sales of Product C
 have no effect on the sales of Product A
 reduce the sales of Product B by 25%.
The additional advertising would increase the fixed cost to $64 000 for the year.
(c) Calculate the revised overall budgeted contribution/sales ratio if the advertising expenditure is increased.
(d) Evaluate whether Triple Products should proceed with the proposal in (c)
33
Question – 16(3 /2011) HW

A company, which produces three products for the motor industry, has just completed its budget for its first
period of trading. The summary of the budgeted profit and loss account for this period is set out below:
$ $
Sales: Product A 400,000
Product B 300,000
Product C 100,000
800,000
Less: Variable costs 480,000
Fixed costs 200,000 (680000)
Net Profit 120,000
Required;
Assuming that the above sales prices, mix and existing cost structure will remain the same at increased output
levels
(a) Calculate the contribution/sales ratio.
(b) Calculate the break-even sales revenue.
(c) Calculate the sales revenue that will be required to achieve a target profit of $160,000.
(d) Calculate the profit that will result from expected sales revenue of $1,000,000.
34
Theory
Question – 1
Limitations using break-even analysis to set targets and make decisions
- It is assumed that the number of units sold of each product is correct – changes in product-mix will change
the break-even revenue and margins of safety
- It is assumed that selling prices or variable cost per unit will not change as output increases – this would
change the contribution of the products and therefore the break-even point and profitability
- It is assumed that total fixed costs will not change as output increases – this would change the break-even
point and profitability
Question – 2
Assumption in Cost-Volume Profit Analysis
Selling price per unit is constant across the range of activity
Total fixed costs remain constant across the range of activity
Variable cost per unit constant across the range of activity
Cost can be split between fixed and variable
Question – 3
Discuss the usefulness of marginal costing for short-term decision making.
Marginal costing enables the analysis of different market price/volume levels to allow for the selection of optimal
contributions.
It can be used in conjunction with CVP analysis to determine break-even points for profit planning purposes.
The exclusion of fixed production costs on a marginal basis enables the company to be more competitive by only
using those costs that are relevant in decision making in the short term.
Question – 4
Define the following term.
Relevant Cost
Relevant costs: are costs that will change based on decision making - they are future costs that will differ
among alternative decisions. They can be avoided if the decision does not go ahead.
Avoidable Cost
Avoidable costs are defined as "the specific costs of an activity of a business which would be avoided if that
activity did not exist". These are costs that would be affected if a business or activity was 'shut down' or
discontinued
Sunk Cost
Sunk costs: are those costs that have already been incurred / that cannot be recovered/ they are unavoidable
- they are past costs that will have no bearing on any future decision-making.
Differential / incremental cost

Differential / incremental cost is the additional cost of producing an additional quantity of output and can refer to
the cost of producing e.g. an extra 200 units whereas marginal cost refers to producing one extra unit.
Opportunity cost
Opportunity cost is the cost of undertaking a project / course of action in terms of the benefits one could have
had when choosing the option
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Chapter – 7
Limiting Factor
Question – 1 (4/2012)
Jin Yan manufactures and sells four products.
Details of the four products are as follows:
Product Product Product Product
Alpha Beta Delta Gamma
$ per unit $ per unit $ per unit $ per unit
Selling price 214 178 262 186
Less costs:
Direct materials (at $24 per kilo) 72 48 60 36
Direct labour (at $16 per hour) 40 32 64 48
Variable overheads 30 24 48 36
Fixed overheads 50 40 80 60
192 144 252 180
Profit per unit 22 34 10 6
Forcast sales demand in the next period 1,200 units 4,250 units 2,100 units 3,600 units
Fixed overheads are absorbed on the basis of the direct labour hours required to satisfy the sales demand.
The same type of material and grade of labour are used in the manufacture of the four products.
The availability of direct material will be limited to 18,500 kilos and of direct labour to 32,000 hours, for the next
period. No finished goods or direct material stocks are held.
Required;
For the next period:
(a) Determine which of the resources (direct material or direct labour) is the limiting factor, showing clearly your
workings
(b) (i) Prepare a production schedule that will maximise profit
(ii) Calculate the amount of the profit
Question – 2
A company manufactures and sells three products with the following selling prices and costs:
Product X Product Y Product Z
$ per unit $ per unit $ per unit
Selling price 12.00 10.00 8.00
Variable costs 7.30 6.50 5.00
Fixed costs 3.50 3.00 2.50
Availability of direct labour will be limited to 5,000 hours in the next period. Other resources will be available as
required. Output per direct labour hour is as follows:
Product X 10 units
Product Y 12 units
Product Z 15 units
Demand for the three products in the next period is expected to be:
Product X 15,000 units
Product Y 24,000 units
Product Z 30,000 units
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Required;
For the next period:
(a) Demonstrate that direct labour will be the limiting factor
(b) Prepare a statement showing the sales units, and the resulting profit contribution,of each product that would
maximize profit.
Question – 3(Dec-17)
Clucas Diomande Ltd manufactures and sells four products. The company is currently preparing its production
schedule for the next period. The details of the four products are as follows:
Product P Product Q Product R Product S
Per unit $ $ $ $
Direct Material 60 100 92 65
Direct labour ($10 per hour) 50 100 80 60
Variable overheads 40 80 60 50
Total fixed overheads are expected to be $284,000 for the next period.
Sales demand (units) 1,150 1,800 2,500 3,160
The sales figures include the following units, which the company must supply to customers in the next period.
Product P 250 units
Product Q 350 units
Product S 400 units
The availability of direct labour will be limited to 33,150 hours for the next period.
Required
(a) Calculate the order of priority for production in the period with the objective of maximising contribution.
(b) Calculate the optimum production schedule that will enable the company to maximise profit.
(c) Explain the meaning and importance of the term principal budget factor.
Sone Aluko makes three separate components P, Q and R, used in the assembly of its products.
Production capacity is limited to 8,000 machine hours during the next period, which will not be sufficient to meet
the expected demand.
It will be necessary, therefore, to buy in some of the components from an outside supplier to make up the
shortfall.
The following information relates to the three components for the next period:
Component P Q R
Budgeted demand (units) 1,800 2,000 2,200
Direct materials per unit $4 $6 $8
Direct labour rate per hour $8 $8 $8
Machine hours per unit 2 3 3
Variable overheads are absorbed on direct labour hours at $2 per hour.
An outside contractor is willing to supply these components for the following prices:
Component P $48; Component Q $76; and Component R $90 per unit.
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Required
(a) For the coming period:
(i) calculate the shortfall in capacity
(ii) determine the order of priority for production
(iii) state clearly the quantities of each component that should be manufactured by the company and the
quantities bought in from the outside supplier, in order to achieve the budgeted output at minimum cost.
(b) Describe three factors, apart from cost, that the company should take into consideration when buying in
components from an outside supplier.(Delivery time,Quality,Price)
Question – 5(April 2018)

Himalia produces three products: A11, B22 and C33.
Information relating to production in March 2018 was as follows:
A11 B22 C33
Sales / Expected Demand 5,000 units 4,000 units 3,000 units
$ $ $
Revenue 132,500 164,000 166,800
Material cost (variable) 52,500 72,000 72,000
Direct labour cost (fixed) 30,000 24,000 18,000
Fixed overheads 50,000 40,000 30,000
Variable overheads 10,000 8,000 6,000
Profit/(Loss) (10,000) 20,000 40,800
Kg of Plastinox per unit 0.70 1.20 1.60
The material Plastinox is used to produce all three products. Due to shortages in the world markets, only 11,000
kg per month will be available from April 2018.
Required
(a) State two other possible limiting factors, apart from the availability of materials, for a manufacturing business
like Himalia.
(b) Calculate the contribution per kg of materials made by each of the three products.
(c) Calculate the production schedule that will maximise the monthly profit made by Himalia for April 2018
(d) Calculate the total contribution and profit that Himalia would make if the production schedule in (c) was
applied.
(e) Evaluate whether Himalia should apply the product mix recommended in (c).
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Question – 6 (Dec 2018) HW

Lichaj Burke Ltd manufactures and sells four products. The company is currently preparing its production
schedule for the next period.
The details for these four products are as follows:
Product Aye Product Bee Product Cee Product Dee
$ per unit $ per unit $ per unit $ per unit
Direct materials 24 32 60 20
Direct labour ($8 per hour) 20 24 32 16
Variable overhead costs 10 12 16 8
Machine hours per unit 3 6 5 4
Sales demand (units) 1,000 600 400 750
The fixed overhead costs are charged to products on the total direct labour hours required to satisfy the total
demand shown above for each product, per period, at a rate of $2 per hour.
The availability of machine hours will be limited to 10,100 hours for the period.
Required
(a) Calculate the order of priority for production in the period to maximise contribution.
(b) Prepare the optimum product mix (optimum production schedule) that will maximise profit.
(c) Calculate the profit resulting from the product mix (production schedule) identified in (b).
(d) Identify two limiting factors for a business, other than machine hours.
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Theory
Question – 1
Explain the meaning and importance of the term principal budget factor
The principal budget factor is the factor which restricts the activities of an organisation during the budget period.
This budget must be prepared first and all other budgets will be derived from it.
If labour or material is in short supply, it will be the principal budget factor which restricts the activity of the
organisation.
Unless the company can overcome any constraints it will not be able to expand or achieve its target
outcomes.This could limit the amount of profit/contribution made.
Question – 2
State two other possible limiting factors, apart from the availability of materials, for a manufacturing business like
Himalia.
- Direct Labour
- Machine Hour
- Finance
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Chapter – 8
Standard Costing and Variance
Question – 1
Jasper Co has the following budget and actual figures for 20X4.
Budget Actual
Sales units 600 620
Selling price per unit $30 $29
Standard full cost of production = $28 per unit.
Required
Calculate the selling price variance and the sales volume profit variance
Question – 2
Product X has a standard direct material cost as follows.
10 kilograms of material Y at $10 per kilogram = $100 per unit of X.
During period 4, 1,000 units of X were manufactured, using 11,700 kilograms of material Y which cost $98,600.
Required
Calculate the following variances.
(a) The direct material total variance
(b) The direct material price variance
(c) The direct material usage variance
Question – 3
The standard direct labour cost of product X is as follows.
2 hours of grade Z labour at $5 per hour = $10 per unit of product X.
During period 4, 1,000 units of product X were made, and the direct labour cost of grade Z labour was $8,900 for
2,300 hours of work.
Required
(a) The direct labour total variance
(b) The direct labour rate variance
(c) The direct labour efficiency (productivity) variance
Question – 4
Suppose that the variable production overhead cost of product X is as follows.
2 hours at $1.50 = $3 per unit
During period 6, 1,000 units of product X were made. The labour force worked 2,020 hours, of which 60 hours
were recorded as idle time. The variable overhead cost was $3,075.
Required
(a) The variable overhead total variance
(b) The variable production overhead expenditure variance
(c) The variable production overhead efficiency variance
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Question – 5
Suppose that a company plans to produce 1,000 units of product E during August 20X3. The expected time to
produce a unit of E is five hours, and the budgeted fixed overhead is $20,000. The standard fixed overhead cost
per unit of product E will therefore be as follows.
5 hours at $4 per hour = $20 per unit
Actual fixed overhead expenditure in August 20X3 turns out to be $20,450. The labour force manages to produce
1,100 units of product E in 5,400 hours of work.
Required
(a) The fixed overhead total variance
(b) The fixed overhead expenditure variance
(c) The fixed overhead volume variance
(d) The fixed overhead volume efficiency variance
(e) The fixed overhead volume capacity variance

Meyler and Clucas makes a single product.
The following budgeted information was available for a period:
Standard hours per unit 4.5 hours
Fixed overheads $132,300
The actual results for the period were as follows:
Fixed overheads $141,750
Hours worked 11,235 hours
Note: Standard hours are used as the basis for the fixed overhead recovery.
Required
(a) Calculate the fixed overhead recovery rate for the period.
(b) Calculate the following fixed production overhead variances for the period:
(i) Expenditure
(ii) Volume
(iii) Capacity
(iv) efficiency.
(c) Prepare a statement, using the four fixed overhead variances you calculated in (b), to show the total fixed
overhead variance.
(d) Explain Idle Standard and Attainable Standard.
(e) Explain one disadvantage of using an ideal standard.
Question – 7(July-17)
Oak Ltd manufactures a single product using a standard absorption costing system.
The budgeted information for June 2017 was as follows:
Budgeted output 12,000 units
Direct materials 45,000 kg at $3.80 per kg
Direct labour 16,800 hours at $9.00 per hour
Fixed production overheads $6.25 per unit
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The actual results were as follows:

Actual output 10,760 units
Direct materials 41,200 kg costing $150,380
Direct labour 15,600 hours costing $143,520
Fixed production overheads $78,150
Oak Ltd was unable to obtain the usual grade of material because the supplier went out of business in June
2017. Oak Ltd was forced to buy materials from an alternative supplier.
Required
(a) Calculate the following variances for June 2017:
(i) material price
(ii) material usage
(iii) labour rate
(iv) labour efficiency
(v) fixed production overhead expenditure
(vi) fixed production overhead volume.
(b) Suggest one possible reason for each of the following variances, as calculated in (b):
(i) material price
(ii) labour efficiency.
Question – 8(April 2018) HW

Amalthea manufactures the RS88 using a standard absorption costing system.
The budgeted information for March 2018 was:
Fixed production overheads $4.40 per unit
The actual results were:
Required:
Calculate the following variances for the period March 2018.
(a) Material price
(b) Material usage
(c) Labour rate
(d) Labour efficiency
(e) Fixed overhead expenditure
(f) Fixed overhead volume
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Chaldene Ltd had the following information relating to production of the RS 21 for June 2018
Budget Actual
Production (units) 1,080 935
Materials 8,208 kg $65,664 7,300 kg $53,655

Direct labour 2,376 hours $21,384 1,870 hours $17,952
Overheads $58,320 $56,190
Total cost $145,368 $127,797
Material and labour are to be regarded as variable costs.
Overheads should be regarded as a fixed cost.
The following variances have already been calculated:
Material usage $1,552 Adverse
Material price $4,745 Favourable
(a) Calculate the following variances:
(i) labour efficiency
(ii) labour rate
(iii) overhead expenditure
(iv) overhead volume.
(b) Give one possible reason for each of the following variances, stated or calculated in (a):
(i) Material usage.
(ii) Material price.
(iii) Overhead expenditure.
(c) Calculate the budgeted cost of production for the 935 units produced in June 2018
During June, the product was sold at the budgeted selling price of $160 per unit.
(d) Calculate, based on 935 units being produced and sold, the:
(i) budgeted profit
(ii) actual profit.
(e) Prepare a statement to reconcile the budgeted profit and the actual profit based on 935 units being produced
and sold.
Question – 10 (March-18) HW
Deimos had the following information for February 2018 relating to its production of the JV41 product.
Budget Actual
Production (units) 42,000 49,100
Materials (kg) 54,600 $202,020 62,080 $239,008

Direct labour (hours) 14,700 $114,660 17,450 $134,365
Overheads $382,200 $391,400
Total cost $698,880 $764,773
Materials and labour are both to be regarded as variable costs.
Overheads should be regarded as fixed.
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Required
(a) Calculate the following variances:
(i) material usage
(ii) material price
(iii) labour efficiency
(iv) labour rate
(v) overhead expenditure variance
(vi) overhead volume variance.
(b) Calculate the budgeted cost of production for the 49 100 units produced in February 2018.
(c) Prepare the cost reconciliation statement to reconcile the budgeted cost of producing 49 100 units with the
actual cost of producing 49 100 units, using the variances you calculated (a).
Question – 11 (Nov 2017)

Boleyn Ltd produces one product and had the following information relating to October 2017.
Budget Actual
Production Unit 22,000 26,800
Materials 77,000 ks $215,600 87,400 kg $266,570

Direct Labour 17,600 hours $149,600 23,150 hours $217,610
Overhead $275,000 ?
Total Costs $640,200 ?
Material and Labour are to be regarded as variable costs.
Overheads should be regarded as fixed.
The following variance has already been calculated:
Fixed overhead expenditure $11,000 Adverse
Required:
(a) Calculate the following variance:
(i) Material usage
(ii) Material price
(iii) Labour efficiency
(iv) Labour rate
(b) Explain one possible reason for:
(i) An adverse material usage variance
(ii) A favorable labour rate variance
(c) Calculate the budgeted costs of production for the 26,800 units produced in October 2017.
(d) Reconcile the Cost Reconciliation Statement using the variances for October 2017.
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Question – 12 (Jan 2017)

Venus manufactures a single product using a standard absorption costing system.
The budgeted information relating to December 2016 was as follows:
Fixed production overheads $12.00 per labour hour
The actual results were as follows:
The sales of 7 180 units resulted in revenue of $240,530
Some of the variances relating to December 2016 have already been calculated as follows:
Material price $4,470.00 Favourable
Material usage $1,815.60 Favourable
Required
(a) State one possible reason, except for setting an inappropriate standard, for each of the following variances:
(i) material price-favourable
(ii) material usage-favourable
(iii) labour efficiency-favourable.
(b) Calculate the following variances for December:
(i) labour efficiency variance
(ii) labour rate variance
(iii) fixed overhead expenditure variance
(iv) fixed overhead volume variance.
(c) Calculate the standard cost of producing 7,180 units.
During December, the selling price of the product was the same as the budgeted price
(d) Calculate, based on 7 180 units being produced and sold, the:
(i) budgeted profit
(ii) actual profit.
(e) Prepare a statement to reconcile the budgeted profit and the actual profit based on 7,180 units being
produced and sold.
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Question – 13 (Mar 2017)

The elements of the standard production cost for a budgeted output of 3,140 units for Yung Fun‟s single product
are shown below.
$ per unit
Direct labour 43.80
Fixed production overheads 29.70
Actual production in the period was 3 140 units of the product.
Actual production costs incurred in the period were:
$
Direct materials 258,250
Direct labour 147,200
Fixed production overheads 90,250
No material inventory is held.
Required
(a) Prepare a statement for the period that reconciles the actual production costs incurred with the standard
costs of production and shows the total variance for each element of the production cost.
Henrikkson Ltd makes a single product and operates a standard costing system.
The production department‟s budget for period 5 included the following information:
Direct labour per unit 2.5 hours
The actual results for period 5 were as follows:
Direct labour 19,720 hours
(b) Calculate the following production control ratios for period 5 (to two decimal places):
(i) Efficiency
(ii) capacity (usage)
(iii) volume (activity).
(c) Evaluate, giving reasons, each of the production control ratios calculated in (b).
(d) Explain what is meant by the following terms:
(i) standard cost
(ii) the standard hour.
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Question – 14(Jan 2018) HW

The elements of the standard production cost for a budgeted output of 6280 units for Aina Toral‟s product DCF-
215 are shown below.
$ per unit
Direct labour 43.60
Fixed production overheads 29.50
Actual production in the period was 6280 units of the product.
Actual production costs incurred in the period were:
$
Direct material 516,500
Fixed production overheads 180,500
No direct material inventory is held.
(a) Prepare a statement for the period that reconciles the actual production costs incurred with the standard costs
of production and shows the total variance for each element of the production cost.
(i) Direct material cost
(ii) Direct labour cost
(iii) Fixed Production costs
Aina Toral also makes a product HGV 22305, and operates a standard costing system.
The production department‟s budget for Period 5 included the following information:
Direct labour per unit 6.75 hours
The actual results for Period 5 were:
Produciton 27,800 units
Direct labour 192,384 hours
(b) Calculate the following production control ratios for Period 5 (to two decimal places)
(i) Efficiency
(ii) Capacity (usage)
(iii) Volume (activity)
(c) State what is meant by the term “the standard hour”.
(d) Explain what is meant by the following terms:
(i) Standard cost
(ii) Budgeted cost
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Question – 15(4/2010)
Company A uses a standard costing system to produce its single product Alpha. The following budgeted
information for period 9.
Sales 625 units at $100 each
Gross Profit $20,000
At the end of period 9 the company recorded the following variances:
Sales price $2,950 Favorable
Sales volume profit $1,120 Adverse
Required;
(a) Calculate for period 9
(i) The actual number of product Alpha‟s sold.
(ii) The actual sales price of product Alpha.
Company B has recorded the following variances for material M:
Material price $400 Adverse
Material usage $600 Favourable
Material M is used exclusively in the manufacture of Product Beta. The material price variance is calculated on
purchase. The actual purchase price of Material M, in the period, was $10.50 per kg. The standard cost of
Material M, per unit of product, is $3.00 (0.3kg x $10.00 per kg). 2,800 units of Product Beta were manufactured
in the period.
The standard direct labour cost of Product Beta is $160 per 10 products (20 hours @ $8.00 per direct labour
hour) 5,625 direct labour hours were worked in the period at a cost of $44,800.
The fixed production overhead absorption rate for Product Beta is $12.00 per direct labour hour. 2,600 units of
product Beta were budgeted to be manufactured in the period.
Required;
(b) Calculate for the period:
(i) The quantity of Material M purchased
(ii) The quantity of Material M used
(iii) The direct labour variances relating to Product Beta
(iv) The fixed production overhead volume capacity and efficiency variance relating to Product Beta
Question – 16(2/2011) HW
Solar Limited manufactures and sells a single product. In a recent period, the company budgeted to produce and
sell 6,500 units, based on standard costs, as follows:
$ $
Sales (6,500 units ´ $150.00 per unit) 975,000
Less Cost of sales
Materials (15,600 kilos ´ $20.50 per kilo) 319,800
Labour (19,500 hours ´ $12.60 per hour) 245,700
Fixed production overhead (19,500 hours ´ $9.50 per hour) 185,250
750,750
Budgeted gross profit 224,250
The fixed production overheads are absorbed on the basis of direct labour hours.
Raw materials and finished goods stocks are valued at standard costs.
6,650 units were actually produced and 15,750 kilos of materials were purchased during the period.
The actual sales revenue was $928,080.
49
The following variances were calculated for the period:

$
Sales price 16,080 Favourable
Sales volume profit 14,490 Adverse
Direct material price 12,375 Favourable
Direct material usage 10,455 Favourable
Direct labour rate 8,459 Favourable
Direct labour efficiency 11,214 Adverse
Fixed production overhead expenditure 15,950 Adverse
Fixed production overhead volume 4,275 Favourable
Required;
Calculate the following actual figures for the period:
(a) Sales units
(b) Quantity of direct material used
(c) Cost of direct materials purchased
(d) Direct labour hours worked
(e) Direct labour cost
(f) Fixed production overhead cost
Question – 17(Apr 19) HW

Thalassa Ltd manufactures a single product using a standard absorption costing system.
The budgeted information relating to March 2019 was as follows.
Budget Actual
Materials 68,000 kg $510,000 76,440 kg $554,190
Direct labour 14,400 hours $147,600 18,200 hours $183,820
Fixed overheads $278,400 $285,150
Total cost $936,000 $1,023,160
Additional information.
 Material and direct labour are variable costs.
 Fixed overheads are absorbed on the basis of units of output.
(a) Calculate the budgeted cost of producing 36,400 units.
(b) Calculate the following variances for March.
(i) Material usage
(ii) Material price
(iii) Labour efficiency
(iv) Labour rate
(v) Fixed overhead expenditure
(vi) Fixed overhead volume
One of the directors of Thalassa Ltd has stated:
The secret of good profitability is keeping control of material and labour costs!‟
(c) Evaluate whether the labour costs have been controlled during March, giving possible reasons for the
variances.
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Theory
Question – 1
Define ideal standard and possible impact.
Ideal standards
Ideal standards are only possible under the most efficient operating conditions - they make no allowance for
normal losses, waste or machine downtime.
Possible implication
Ideal standards are unlikely to be used in practice as they are unrealistic and are likely to have an adverse
impact on employee motivation. It is likely that most variances arising from its use will be adverse
Question – 2
Define attainable standard and possible impact.
An attainable standard
An attainable standard assumes realistic levels of operation, making allowances for normal losses, waste or
machine downtime.
Possible implication
Attainable standards are thought to provide the most realistic basis to which actual costs should be compared
and may have a motivating effect on employees
Question – 3
Reason of Variance
Material price (favourable): lower quality of material, surpluses on (world) markets, changes in exchange rates,
bulk discounts
Material price (adverse): higher quality of material, shortage on markets, changes on exchange rates, not
discount
Material usage (favourable): higher quality of materials, higher quality of staff, less wastage, few production
problems
Material usage (adverse): poor quality of materials, lower quality of staff, more wastage, more production
problems
Labour efficiency (favourable): fewer production problems, higher quality of staff, highly motivated staff
Labour efficiency (adverse): more production problems, lower quality of staff, no motivated staff
Labour rate(favourable): Workers may have been of a low quality, standard hours may have been set
incorrectly at the start of the budget period
Labour rate(adverse): Workers may have been of a high quality, standard hours may have been set incorrectly
at the start of the budget period
Overhead expenditure (favourable):
Overheads may not be as fixed as the business thought.
Expected increases included in the budget may not have happened.
Budgeted expenditure e.g. repairs may not have taken place.
Inappropriate standard setting at the start of the process
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Question – 4
Standard cost
A standard cost is a predetermined (target) cost that should be able to be achieved under efficient operating
conditions.
Budgeted cost
A budgeted cost relates to an entire activity or operation .It provides the cost expectation for the total activity.
Standard hour
The standard hour is the quantity of work achievable at standard efficiency levels in an hour. It is a measure of
work performance and not time spent
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Chapter – 9
Cash Budget
Question – 1 (Nov 2017)
Catherine Aragon is planning the cash flow of her business for the three months
January to March 2018 and the following information is available.
 The business will have an opening balance of $1 500 on 1 January 2018.
 Sales and purchases will be as follows:
November December January February March
$ $ $ $ $
Sales 24,000 26,000 28,000 29,000 27,000
Purchases 11,000 11,600 12,100 12,500 11,900
 40% of the sales income will be received in the month following the sale and 57% will be received two months
after the sale. The remainder will be written off as an irrecoverable debt.
 Purchases will be on one month‟s credit.
 Wages and salaries will be $2,450 per month, payable in the month in which they are incurred.
 Drawings of $1 800 will be taken each month.
 Heat, light and power will be $320 per month and paid quarterly in February, May, August and November.
 Other costs will be $2,200 plus 4% of sales per month, payable in the month they are incurred.
 Bank interest of 2% per month will be charged on the closing bank balance of the previous month if it is an
overdraft.
 A delivery van costing $16,400 will be bought and paid for in January.
 The business has other non-current assets that had cost $150,000 in September 2014, which are expected to
have a residual value of $15,000 at the end of their 5-year useful life.
Required
(a) Prepare the Cash Budget for each of the three months January to March 2018. The budget should be in
columnar format and all calculations made to the nearest $.
(b) Explain two ways that Catherine Aragon could deal with a short-term cash deficit, giving the benefits of
each.
Question – 2(Sep 2018)

Larsson Irvine Ltd makes and sells a single product and is in the process of preparing its budgets for the three
months commencing 1 September 2018
The revenue and costs of the product are as follows:
$ per unit
Sales price 140
Variable production costs:
Direct material 60
Direct labour 40
Variable overhead 30
The following budgeted information is also available.
July August September October November
Sales (units) 1,000 1,050 1,100 1,150 950
Production (units) 1,000 1,050 1,150 1,150 950
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The following additional information is available.

 10% of the monthly sales are for cash. The remainder will be sold on credit.
 Trade receivables will pay in the month following the sale.
 Direct materials will be purchased in the month of production and paid for two months later.
 75% of direct labour costs will be paid in the month of production and the remaining 25% in the following
month.
 50% of variable overheads will be paid in the month of production and the remaining 50% in the following
month.
 There is a tax liability of $80 000 to be paid in November.
 The company will purchase a new machine for $60 000 in September, payable in three equal instalments
during September, November and December.
 Fixed overhead costs are $30 000 per month (including depreciation of $4 000).
 The bank balance on 1 September 2018 is expected to be $28 000 overdrawn.
Required
(a) Prepare a cash budget, in columnar format, for each of the three months September, October and
November 2018
Present your budget on this page, and use page 10 for workings
(b) Evaluate Larsson Irvine Ltd‟s cash flow.
- The business appears to be increasing its sales revenue each month
- The majority of the direct costs appear to be stable
- The tax liability (due in November) will have a serious impact on the company‟s liquidity
- The payments for the new non-current assets will have an impact on the company‟s liquidity
- The business has a growing overdraft requirement
- The company‟s cash flow is not good and Overdraft requirement is urgently needed.
Question – 3 (2 /2012)
Sinclair Ltd manufactures and sells a single product. The following information is available;
Sales
The budgeted sales volume for year 2 for the product include the following
Month January February March April May
Sales units 260 270 280 280 270
The standard selling price is $ 40 per unit. The sales volume for December of year 1 is expected to be 240 units
at the standard price.
20% of sales are expected to be cash sales with the remaining customers allowed one month‟s credit. It is
expected that 5% of credit sales will be bad debts.
Production
The company manufactures 60% of budgeted sales during the month before the sale and the remaining 40%
during the month of the sales.
Cost
(i) Direct material will be purchased at $ 10 per unit of finished product, in the month prior to their use in
production, and paid for in the month following purchase.
(ii) Direct labour will be paid at the rate of $ 6 per unit of finished product, payable in the month of production. A
bonus payment of $ 3 per unit will be paid on all monthly production in excess of 250 units paid in the month
following production
(iii) Fixed production overhead of $ 20,000 per year including depreciation of $ 6,800 are budgeted to be the
same each month and are paid in the month they are incurred.
54
(iv) Variable production overheads are expected to be $ 4 per unit payable in the month incurred.
(v) Variable selling expenses are expected to be $ 5 per unit payable in the month of sales.
Cash
The company expects to have a bank overdraft balance of $ 1,966 at the start of year 2
Required;
Prepare the following budgets for each of the months January, February and March;
i. Material budget (unit and $)
ii. Cash
Question – 4 (3 /2010) HW
Solar Products Ltd manufactures and sells a single product. The following information is also available for the
next 6 month period:
Sales:
The budgeted sales, in units, are as follows:
Month July Aug Sept Oct Nov Dec
Sales (units 240 260 270 280 280 270
The standard selling price is $50 per unit. 40% are expected to be cash sales with the remaining customers
allowed one month‟s credit. It is estimated that 5% of credit customers will be bad debts.
Production:
The company manufactures 60% of the budgeted sales during the month before the sale and the remaining 40%
in the month of sale.
Costs:
(i) Direct material will be $20 per unit of the finished product. Material will be purchased in the month prior to
their use in productsion and paid for in the following month.
(ii) Wages will be paid at the rate of $8 per unit of finished product, payable in the month of production. A
bonus payment of $4 per unit will be paid on all additional monthly production in excess of 250 units, paid in
the month following production.
(iii) Fixed production overheads of $18,000, including depreciation of $6,000, are budgeted for the year ahead.
These are budgeted to be the same each month and, apart from depreciation are payable in the month they
are incurred.
(iv) Variable selling expenses are expected to be $3 per unit payable in month they are incurred.
(v) Fixed administration overheads of $6,000 for the year ahead are budgeted to be same per month and
payable in the month they are incurred.
Cash:
The company expects to have a bank overdraft of $3,500 at the start of August.
Required;
Prepare the following budgets for each of the months August to October:
(a) Production (units)
(b) Material purchases ($‟s)
(c) Labour cost
(d) Cash.
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Question – 5 (April 2016) HW

The One Product Company manufactures and sells a single product.
The following information is available for the six-month period ending 30 June.
Sales
Budgeted sales:
Month January February March April May June
Sales (units) 240 260 240 260 250 220
The selling price is $40 per unit. Cash sales are expected to be 40% with the remaining 60% of customers
allowed one month‟s credit.
It is estimated that 5% of credit customers will be bad debts.
Production
The company manufactures 60% of the budgeted sales in the month before sale and the remaining 40% in the
month of sale.
Costs
 Direct material will be $16 per unit. Material will be purchased in the month before use in production and paid
in the month after purchase.
 Wages will be paid at the rate of $12 per unit, payable in the month of production. A bonus payment of $4 per
unit will be paid on all additional monthly production in excess of 200 units. The bonus payment is paid in the
month following production.
 Fixed production overheads of $18 000, including depreciation of $6 000, are budgeted for the year ahead.
Fixed production overheads are budgeted to be the same each month and are payable in the month they are
incurred.
 Variable selling expenses will be $4 per unit, payable in the month following the sale.
 Fixed administration overheads will be $7 200 for the year and are budgeted to be the same per month,
payable in the month that they are incurred.
Cash
The company will have a bank overdraft of $2 000 at the start of February.
Required
(a) Prepare the following budgets for the months of February, March and April:
(i) production (units)
(ii) material purchases ($)
(iii) labour costs ($)
(iv) cash ($).
(b) Evaluate the cash flow situation for the three-month period February, March and April.
56
Question – 6(3 /2009)

Universal Retail Stores Ltd is budgeting for its operations for the coming months. Details are provided as follows:
1. Sales for May 2009 were $80,000 and these are expected to increase by 10% each month from June 2009
onwards. All sales are made on credit terms. Customers are expected to pay for 60% of sales in the month of
sale, 35% in the month following sale and the balance is considered to be bad debts.
2. Gross profit is budgeted at 30% of sales.
3. Since April 2009, it has been the policy with goods for resale to have a stock level at the end of each month
sufficient to cover 25% of the following month‟s sales. This policy will be maintained during the budget period
and purchases will be made as required during each month. All purchases will be made on credit and paid for
in the month following purchase.
4. Administrative expenses are budgeted at $11,000 per month, including $2,500 for depreciation. Payments are
to be made in the month in which the expenses are incurred.
5. Selling and distribution expenses are estimated to be 7½% of monthly sales value. Payments for these
expenses are to be made one month in arrears.
6. The budgeted bank balance on 1 June 2009 is $15,750 overdrawn. Other than the balance in its bank
account, the company does not intend to hold any cash balances on 1 June 2009.
Required;
Prepare a cash budget for the company for each of the three months June 2009, July 2009 and August 2009.
Question – 7 (2/2011) (HW)

A retail company is preparing budgets for the coming months. Details of profit and loss statement items are as
follows:
Month Month Month Month
7 8 9 10
$000 $000 $000 $000
Sales (all on credit) 580 720 960 840
Salaries and wages 58 68 75 62
Selling and administrative expenses 80 102 118 105
The following additional budgeted information is available:
1. Gross profit: 30% of sales.
2. Purchases in any month will be sufficient to cover that month‟s sales, and to provide closing stock to satisfy
25% of the following month‟s sales demand. Payment for purchases is made in the month of purchase.
3. A cash discount of 5% is granted to customers if they pay their invoices within the month
of sale. It is estimated that 25% of customers will pay within the month of sale and the rest of them will pay in
the month following sale.
4. Salaries and wages are paid in the month in which they are earned.
5. Selling and administrative expenses, which include $25,000 depreciation charge per month, sare paid one
month in arrears.
6. The cash balance at the start of Month 8 is expected to be $80,000.
Required;
(a) Prepare, for Month 8 and Month 9, the following:
(i) A single budgeted profit and loss statement
(ii) A cash budget for each month.
(b) Explain, briefly, the differences between the budgeted profit and loss statement and the cash budget
prepared in your answer to part (a).
57
Question – 8 (3 /2009)
James is planning to start a new business, commencing January year 10, by investing $10,000 of his own capital
and obtaining a bank loan of $20,000. His bank manager has asked him to prepare a cash budget as part of his
business plan.
James has used a market research survey to evaluate probable sales and has produced the following budgeted
data:
All sales will be made at $15 per unit. James anticipates 20% cash sales with remaining customers being
allowed one month credit. Sales units are estimated to be as follows:
January 0 July 2,500
February 1,800 August 2,700
March 2,000 September 2,800
April 2,000 October 2,500
May 2,200 November 2,200
June 2,400 December 2,000
January (year 11) 2,200
It is estimated that 2% of credit sales will be bad debts.
James has also provided the following information:
All units will be produced in the month before they are required for sale.
Material used for production will be purchased in the month they are used at a cost of $8 per unit.James
anticipates his first four months‟ purchases will be for cash with the supplier allowing one months credit on
purchases thereafter.
Direct labour will be paid at a rate of $4 per unit of finished product payable in the month of production. A bonus
payment of $1 per unit will be paid for all additional monthly production in excess of 2,000 units. This bonus will
be paid in the month following the production.
Overheads will amount to $4,000 per month and are paid in the month in which they are incurred.
Equipment costing $20,000 will be purchased and paid for in January using the bank loan of $20,000.
The loan will be repaid over 4 years with an annual interest charge of $1,000. Repayments will be made on a
quarterly basis in equal installments commencing in March. The equipment will be depreciated over the term of
the loan. The depreciation charge has been included in the overheads.
Required;
Prepare the cash budget, in tabular format, for submission to the bank for each of the following three month
periods:
January to March
April to June
July to September
October to December
58
Question – 9 (Jan-19)
Larsson Tomori is starting up in business and has asked for your assistance in preparing a forecast cash budget.
You are given the following budgeted information for the first three months of trading:
Sales (units) Material purchases (units) Production (units)
Month One 3,200 4,000 3,800
Month Two 4,000 4,000 4,000
Month Three 4,800 4,800 4,600
You are also provided with the following information.
 50% of the sales value is to be received in the month of sale, 25% in the month after the sale and the
remainder two months after the sale. The selling price is set at $30 per unit.
 It is estimated that only 80% of the amount outstanding for the second month after the sale will be paid, the
remainder will need to be written off as a bad debt.
 40% of material purchases are paid in the month of purchase, with the remaining 60% paid in the following
month. The purchase cost per unit has been set at $15 for both Month One and Month Two; rising to $16 in
Month Three.
 Direct wages will be $8 per unit. 75% of the total is paid in the month of production and 25% in the month
following production.
 Variable overheads will be $5 per unit for both Month One and Month Two. This will rise to $6 per unit for
Month Three. The policy is to pay 60% of the total amount incurred in the month of production, with the
remainder paid in the following month.
 Fixed overheads will be $12,000, paid each month.
 Non-current assets with a total cost of $60,000 will be purchased in Month One when a 20% deposit will be
paid. The balance is to be paid in four equal instalments, commencing two months after purchase.
 The non-current assets will be depreciated on a straight line basis over four years starting immediately. The
depreciation charge has NOT been included in the fixed overheads.
 If the company has a positive cash balance at the end of the month, interest will be receivable at a rate of
6% per annum, paid in the following month (rounded to the nearest $). Any negative balance will result in
interest being charged at a rate of 9% per annum, being charged in the following month (rounded to the
nearest $).
 Any interest is calculated on the balance at the end of each month.
 The company started with a cash balance of $45,000
Required:
(a) Prepare a Cash Budget for each of the first three months of trading, showing your answer in columnar
format.
As a new business, loans or an overdraft are not available to the company.
(b) Advise the owners of the company of two actions that they could take to minimise any short-term cash
deficit.
59
Question – 10 (July 2019)

Gribble Brothers makes and sells a single product.
The actual production and sales for June 2019 were:
Production 4,000 units Sales 4,000 units
The forecasts for the next four months are shown below.
Month July August September October
Production (units) 5,000 6,000 6,000 6,500
Sales (units) 4,000 5,000 6,000 6,500
Further information
 The selling price is currently $40 per unit. This is planned to increase to $42 per unit from 1 September. 20%
of sales are for cash, the remaining 80% being paid by customers one month after the sale.
 Raw material costs are currently $12 per unit, rising to $14 from 1 September. Material is purchased and paid
for one month before being used in production.
 Wages and other variable production costs are currently $16 per unit, rising to $18 per unit from 1 August.
80% of these costs are paid in the month of production, with the remaining 20% paid in the following month.
 A new machine costing $125 000 is to be purchased and paid for on 1 July. This will be financed by a loan,
with total interest of 20% on the original sum. This is repayable monthly, over one year in 12 equal
instalments. Payments will commence in August
 This new machine, which has no residual value, will be depreciated on a straight line basis over three years,
starting immediately. The depreciation charge for the new machine has been included in the fixed costs
below.
 Fixed costs will be $28 972 per month from July. These are paid for in the month in which they are incurred.
 Any negative balance (overdraft) will incur an interest charge of 1.5% per month, charged on the previous
month‟s closing balance (rounded to the nearest $).
 Any positive cash balance will receive an interest of 0.75% per month, on the previous month‟s closing
balance (rounded to the nearest $).
 On 1 July the firm expects to have $25 000 in the bank.
Required
(a) Prepare a Cash Budget for the three months July, August and September 2019.
(b) Explain two reasons why it is important for Gribble Brothers to manage its cash efficiently.
60
Question – 11 (3/2010) (Master Butgeted)

Axis Limited is preparing the financial budgets of its retail business for the next financial year (year6).The
company`s summarized Balance Sheet at the end of Year 5 is as follows:
$000 $000
Fixed assets (at cost) 2,200
Accumulated depreciation 1,220 980
Current assets
Stock 445
Trade debtors 360 805
1,785
Current liabilities
Trade creditors 230
Bank overdraft 15 245
1,540
Capital and reserves
Share capital 800
Reserves 340 1,140
Long- term liability
12% Loan stock 400
1,540
The following information on the budgeted activities of the company for Year 6 is available:
1. Sales (all on credit) are estimated at $2,400,000 on which a gross profit of 40% will be earned. The average
collection period for customers is two months.
2. Purchases will be made on credit 20% of purchases are budgeted to be unpaid at the end of year. The value
of unsold stock at the end of year is expected to be $565,000 at cost price.
3. Fixed assets costing $300,000 are expected to be purchased for cash, but none will be sold during the year.
It is company policy to charge depreciation at the rate 15% on the net book value of fixed assets(including
those purchased during the year).
4. Fixed overhead expenses(excluding depreciation charges) are estimated to be $240,000. All fixed overhead
expenses are expected to be paid as they are incurred.
5. Variable overhead expenses are estimated to be 12 ½ % of the total sales value , $45,000 of the variable
overhead expenses will be paid at the end of the year.
6. The interest charges on the loan stock are to be paid in the last month of the year.
7. The company does not intend to declare or pay any dividends for year 6.
Required;
Prepare the following for the company:
(a) Budgeted profit statement for year 6.
(b) Budgeted balance sheet at the end of year 6
61
Theory
Question – 1
Advantages of having a cash budget
- Cash shortages revealed early and arrangements can be made for overdraft on best terms
- Cash surpluses revealed and can be planned to be invested
- Required when applying for loan/overdraft
- It introduced new capital
- Offering discounts to customers-to speed up the payments
- Reduce drawing
Question – 2
Explain two additional costs if the company were trading with insufficient cash in the short
term.
The costs that might result from an inability to pay bills as they fall due such as interest charged or the loss of
discounts receivable.
If a loan or overdraft has to be taken out interest payments will need to be made.
Question – 3
Advise the owners of the company of two actions that they could take to minimise any short-term cash deficit
- Offer discounts to customers to speed up payments.
- The company should have been advised NOT to purchase a new non-current asset if possible.
- With so many companies offering assets for lease or hire, they should have taken this option.
Question – 4
Explain two reasons why it is important for Gribble Brothers to manage its cash efficiently.
- The business will be able to identify potential cash flow problems – and be able to arrange the necessary
loans / overdrafts etc
- If the business is unable to pay its trade payables then it may not receive any more supplies / may face
liquidation
- The company might be able to identify a surplus which they might be able to invest in the short term
62
Chapter – 10
Functional Budget
Question – 1 (4/2007)
A company manufactures and sells two products (Product P1 and Product P2). Budgeted costs for the next
period are:
Product P1 Product P2
$ per unit $ per unit
Raw materials
Material X 3.00 3.00 (at $ 6.00 per kg)
Material Y 2.72 4.76 (at $ 13.60 per kg)
Direct labour
Grade 1 1.05 1.05 (at $ 10.50 per hour)
Grade 2 1.64 2.05 (at $ 8.20 per hour)
Production overheads 4.49 5.94
Total production cost 12.90 16.80
The sales and stock budgets for the next period have been agreed as follows:
Product P1 Product P2
Finished goods stock:
Start of budget period $27,090 $105,000
End of budget period $32,508 $80,640
Raw material stock: Material X Material Y
Start of budget period $5,160 $6,936
End of budget period $4,440 $7,616
Stock valuations are at budgeted cost.
Required;
Prepare the following budgets for the next period:
(a) Production (units of each product)
(b) Direct labour (hours and cost of each grade)
(c) Raw material usage (kgs of each material)
(d) Raw material purchases (kgs and cost of each material)
63
A company manufactures two products, X and Y, which it sells for $218 and $236 per unit, respectively.
The company‟s budget data for the next period are as follows:
Product X Product Y
Sales (units) 5,800 8,400
Material A (kilos per unit) 3 4
Material B (kilos per unit) 2.5 1.75
Direct labour (hours per unit) 1.5 2
The standard direct material prices and the standard direct labour rate are:
Material A $20.62 per kilo
Material B $13.84 per kilo
Direct labour $18.76 per hour
Production overheads are budgeted at $430,500 and are absorbed into products on the basis of direct labour
hours.
The stocks of finished goods and raw materials are budgeted to be:
Start of period End of periods
Product X 650 units 930 units
Product Y 1,680 units 1,020 units
Material A 9,500 kilos 6,750 kilos
Material B 3,360 kilos 4,640 kilos
Required;
(a) production (units of each product)
(b) purchases (quantity in kilos and cost for Material B)
(c) direct labour (total hours and cost)
Question – 3
A company is preparing a budget for the single product which it manufactures and sells for $280 per unit. The
standard costs data for each unit of the product are as follows:
Direct material 4 kilos at $27.50 per kilo
Direct labour 5 hours at $14.80 per hour
Fixed production overhead 5 hours at $8.60 per hour
Non-production overhead costs are budgeted at $12,000 per period.

The budgeted sales figures for the next four periods are:
Period 6 450 units
Period 7 350 units
Period 8 500 units
Period 9 400 units
Stocks of raw materials and finished goods at the beginning of Period 6 are:
Raw materials 1,950 kilos
Finished goods 420 units
64
The company has an end of period stocking policy of holding 90% of the following period‟s budgeted sales units
and 110% of the following period‟s raw materials required for production. There are no stocks of work-in-progress
at the end of any period.
Required;
(a) Prepare the following budgets for each of Period 6 and Period 7:
(i) Sales ($)
(ii) Production (units)
(iii) Materials purchases (kilos and $)
(iv) Directlabour (hours and $)
(b) Prepare a combined profit budget for Periods 6 and 7.
Question - 4 (3 /2008)
Dual Products Ltd manufactures and sells two products (Product Tee and Product Pee). The standard production
costs and selling prices, for the two products for Year 9, are as follows:
Product Product
Tee Pee
($ per unit) ($ per unit)
Selling price 40.00 50.00
Direct material ($15 per kg) 6.00 9.00
Direct labour ($12 per hour) 14.40 18.00
Production Overheads ($8 per direct labour hour) 9.60 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 material (kg) for
Year 9 are as follows:
Opening stock Closing stock
Product Tee $45,000 $30,000
Product Pee $23,400 $31,200
Material 1,600 kg 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).
65
Question - 5 (4 /2009)
Dual Products Ltd manufactures and sells two products (Product Tee and Pee). The sales budget for the next
period is as follows:
Tee Pee
10,000 units 24,000 units
Stocks of finished goods, for both products, at the beginning of the budgeted period are expected to be 25% of
the budgeted sales. Production is to be budgeted to increase the finished products stock by 10% over the period.
Three raw materials (Material X, Y and Z) are used by the company in the manufacture of the two products, in
the following combinations:
Tee Pee
(per unit) (per unit)
Material X 0.20 kg 0.12 kg
Material Y 0.16 kg 0.18 kg
Material Z 0.24 kg 0.25 kg
A 20% weight loss of Material Y is expected during the manufacturing process. No weight loss is expected with
Material X or Z.
Stocks of raw materials at the beginning of the period are expected to be:
Material X 1,022 kg
Material Y 585 kg
Material Z 610 kg
Purchases of Material X are budgeted so that the stock at the end of the period is expected to be sufficient to
manufacture 2,500 units of Product Tee and 6,000 units of Product Pee. No changes in the level of stocks of
Material Y or Z are to be budgeted.
Standard product costs are budgeted to be:
Raw material:
Material X $4 kg
Material Y $3 kg
Material Z $2 kg
Direct labour:
Product Tee 0.50 hrs per unit at $8.00 per hour
Product Pee 0.25 hrs per unit at $8.00 per hour
Variable production overheads $2 per direct labour hour
Fixed production overheads for the period $25,000
Required;
(a) Production (units of each product)
(b) Material purchases of each material (kg)
(c) Production cost by cost element and in total.
66
Question – 6(April 2017)

Twin Products manufactures and sells two products, Product A and Product B. Each product is manufactured
from two raw materials, RM001 and RM002.
Twin Products has prepared the following budget information for Year 4.
Product A Product B
Sales (units) 8 000 15 000
Raw material RM001 per finished unit 4 kg 2 kg
Raw material RM002 per finished unit 2 kg 1 kg
Wastage rate of RM001 and RM002 introduced 20% 20%
Production reject rate 10% 5%
Inventory of finished goods at start of year (units) 400 800
Production is spread evenly throughout the year. All rejects occur after inspection at the end of production. It is
company policy to purchase sufficient raw material at the beginning of each month to meet that month‟s
production requirements.
Closing inventories at the end of the year for both products are planned to be 25% above those at the start of the
year.
Required
(a) Calculate, for Year 4, the number of good units that need to be produced for Product A and Product B.
(b) Prepare, for Year 4, the material budget, in kilograms, for RM001 and RM002.
Question-7(Nov-18)
Eucalyptus manufactures a product called the CR3. The owners of Eucalyptus are currently preparing the
budgets for the three months ending 28 February 2019.
 Sales are expected to be:
December 2018 January 2019 February 2019 March 2019
Units (CR3s) 9,120 7,220 7,980 9,500
 One CR3 requires 6.8 kg of material Q, costing $9.50 per kg.

 Management have made the following decisions concerning inventory.
Inventory1 December 2018 Inventory Decision
Finished CR3s 2,280units Closing inventory in any month should represent 25% of
the next month‟s expected sales.
Material Q 25,200 kg This is to be reduced to 19,200 kg by 28 February 2019 at
a constant rate.
 5% of CR3s produced are found to be defective and are scrapped as they have no value and cannot be
reused.
 15% of material Q is wasted in production.
67
Required:
(a) Prepare the Production Budget for CR3s, for each of the three months December 2018, January 2019 and
February 2019. Your answer should be in columnar format.
(b) Prepare the Materials Purchases Budget for material Q for each of the three months December 2018,
January 2019 and February 2019.
Your answer should be in columnar format and show the amount of material Q that needs to be purchased
each month in kgs.
(c) Calculate the cost of purchases of material Q, in $, for each of the 3 months December 2018, January 2019
and February 2019.
(d) Explain two benefits of effective inventory management and control.
Question-8(March-19) HW
Hyperion Ltd manufactures a product called the XR27. The directors of Hyperion Ltd are preparing the budgets
for the three months April to June 2019. The following information is available.
 Sales are expected to be:
April May June July
Units (XR27s) 31,200 28,125 26,725 33,080
 There will be 12 480 units of XR27s in the inventory at 1 April 2019.
 Closing inventory in any month should represent 40% of the next month‟s expected sales.
 7.5% of XR27s produced are found to be defective and are scrapped as they have no value and cannot be
reused.
Required
Prepare, for each of the months April to June, the Production Budget for XR27s showing the total number of units
to be produced, allowing for the defective units. Your answer should be in columnar format.
68
Theory
Question – 1
Reasons for preparing budgets
- Provides a means of communicating management‟s plans/targets so that levels of the workforce are aware of
the company's intentions.
- Forces managers to think/plan for the future. Without the necessity to prepare a budget, they might spend
time dealing with daily issues.
- Define goals and objectives that can serve as benchmarks for evaluating subsequent performance.
Question – 2
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
Question – 3
Define the principal budget factor and example.
Principal budget factor
The principal budget factor is the factor which restricts the activities of an organisation during the budget period.
This budget must be prepared first and all other budgets will be derived from it.
Examples of principal budget factors include:
- Sales
- Skilled labour
- Production/machine capacity
- Working capital
Question – 4
Give two possible benefits of effective inventory management and control
- Reduction / elimination of the risk of running out of inventory
- Reduction of holding / ordering costs
- Reduction of risk of theft
- Reduction of risk of wastage
- Reduction of capital needlessly tied up in inventory
69
Chapter – 11
Flexible Budget
Question – 1 (2/2013)
Bosingwa Limited manufactures a single product, and has prepared the following budget for the next period:
Production and sales in units 9,450
Costs ($) $
Production overheads 33,075
Selling, distribution and admin costs 28,965
Total costs 128,190
Cost per unit 13.56
The following information should also be taken into account:
(1) The above budget is based on a 90% utilization of the maximum operating capacity
(2) The direct costs are proportionally variable with activity
(3) The production overhead is a semi variable cost. At the maximum capacity (10,500 units) the budgeted
overhead would be $35,175
(4) The selling, distribution and administration costs are semi variable costs and include a fixed element of
$7,230
Required;
(a) Prepare budgets (similar to the above) using the high low method if appropriate based on:
(i) 80% utilization of operating capacity – 8,400 units
(ii) 100% utilization of operating capacity – 10,500 units
(b) Differentiate between direct and indirect costs
Question – 2(Jan-19)
Mazuch Odubaju Ltd manufactures a single product.
The production and sales for Month 6 will be between 2,500 and 3,500 units.
The following cost budgets for Month 6 have been prepared at these two levels of activity:
Units 2,500 3,500
Cost element $ $
Direct materials 117,000 162,045
Direct labour 81,000 116,316
Production overheads 109,125 122,175
Administration overheads 71,325 71,325
Selling overheads 56,025 66,225
The following budgeted information is also provided.
 Each unit requires 6 kg of raw material.
 Any orders over 18,750 kg will receive a 10% cash discount on the quantity over 18,750 kg.
 The direct labour cost increases by 20% per unit on the units of production over 3,050 units per month.
 Production overheads consist of a variable element plus a fixed monthly element. In addition, there is a
stepped increase of $6 750 in the fixed monthly element when production reaches 2 875 units.
 Selling overheads include a variable cost element of $10.20 per unit.
 No inventory of finished goods or raw materials is held.
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During Month 6, there were 3,400 units manufactured and sold.

The following costs were incurred in Month 6:
$
Production overheads 123,485
Administration overheads 70,025
Selling overheads 66,700
(a) Complete the table for Month 6, showing the flexed cost budget for an output of 3 400 units, the actual costs
and the variances.
Budget Actual Variance
$ $ $
Direct materials
Direct labour
Production overheads
Administration overheads
Selling overheads
The budget-setting process has produced variances.
(b) Advise the company of how effective its budget setting has been, taking into account the variances you have
calculated in part (a).
Effective budget setting would mean the company has small variances. As the company variances are quite
small Mazuch Odubaju Ltd‟s budget setting is realistic.
Favourable variances might imply that the budgets set are too easy to achieve. Adverse variances might
suggest that the budgets set are too difficult to achieve.
Question – 3(June 2019)

Irvine Mazuch Ltd manufactures a single product.
The company produced an original budget for a period based on sales and production being 7 500 units.
The original budget was revised as the company expected to increase the sales volume by lowering the selling
price.
The supplier of direct material agreed to offer a discount based on increased purchase volumes.
The original budget, the revised budget and the actual results for the period were as follows.
Original budget Revised budget Actual results
Sales and production (units) 7,500 8,250 8,700
$ $ $
Sales revenue 712,500 763,125 780,825
Cost elements
Direct material 234,000 251,550 272,000
Direct labour 97,500 107,250 115,900
Production overheads 83,000 86,750 89,950
Administration overheads 80,500 87,250 89,450
Selling overheads 58,710 63,135 63,590
Total costs 553,710 595,935 630,890
 Each unit requires 10 kg of direct material.
 A 25% quantity discount was received on purchases of direct material over 75,000 kg for the period.
 The direct labour cost per unit increased by 40% for each unit over 8,500 units for the period.
 The production overhead is a semi-variable cost, which at the maximum capacity of 9,000 units is $90,500
 Administration overheads include a variable element of $9 per unit.
 Selling overheads include a fixed element of $14,460 for the period.
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Required
(a) Prepare the flexed budget for the actual output of 8 700 units, and the relevant variances. You must state if
the variance is favourable or adverse.
(b) Explain the main difference between a fixed budget and a flexible budget.
(c) Give two of the bases for flexing a budget.
Question – 4 (4/2013)
Flexit Ltd has prepared the following monthly production overhead budget for its cost centre M15.
Units produced 2,500 3,000 3,500 4,000
$ $ $ $
Indirect materials 12,500 14,700 17,150 19,600
Indirect labour 7,500 9,000 11,025 12,600
Maintenance 7,750 9,000 10,250 11,500
Depreciation 3,440 3,440 3,440 3,440
Supervision 4,000 5,000 5,000 6,000
The variable indirect material cost per unit reduces by 2% for production of 3,000 units and over.
The variable indirect labour cost per unit increases by 5% for production of 3,500 units and over.
Maintenance overheads consist of a proportionately variable cost plus a fixed amount.
Supervision is a stepped cost.
During Month1 - 3,200 units were produced, and the following costs were incurred.
$
Indirect materials 16,680
Indirect labour 9,100
Maintenance 9,800
Depreciation 3,540
Supervision 4,800
Required
(a) Prepare a statement for Month 1 for cost centre M15, showing for each item of cost, the:
(i) Flexed budget
(ii) Actual cost
(iii) Expenditure variance.
(b) Briefly explain the main difference between flexible and fixed budgets.
(c) State the main objective for preparing flexible budgets.
Question – 5 (Sep-18) HW
Mazuch Kingsley Ltd manufactures a single product in its Rangoon factory.
It is expected that the monthly production will be between 5,000 and 7,000 units.
The following monthly budgets have been prepared for two levels of activity.
Units per month 5,000 7,000
Cost element $ $
 Each unit of the product requires 3 kg of raw material.
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 The direct labour cost per unit increases by 40% on the excess production over 6,250 units per month, due to
overtime payments.
 Production overheads consist of a variable element plus a fixed monthly amount. In addition, there is a
stepped increase of $13,500 in the fixed monthly amount when production exceeds 5,750 units.
During August 6,600 units were manufactured.
(a) Calculate the following based on the 6,600 units produced.
(i) The total direct materials cost
(ii) The total direct labour cost
(iii) The total variable production overhead cost
(iv) The total fixed production overhead cost
At the company‟s Mandalay factory the budget is to sell 12,000 units of its product in October.
The following budgeted information has been prepared for October.
 Selling price $40 per unit
 Direct labour $12 per unit
 Direct materials $8 per unit
 Total fixed overheads for October $175,000
(b) Calculate, for October, the budgeted margin of safety as a percentage of sales (to two decimal places).

Juniper Ltd produces the ST19. Two flexed budgets had been prepared for June 2017 and were as follows:
Budget 1 Budget 2
Units made and sold 100,000 150,000
$ $
Revenue 595,000 892,500
Costs:
Raw materials 180,000 270,000
Labour (note 1) 65,000 67,500
Heat, light and power (note 2) 22,600 27,600
Machine hire (note 3) 35,000 56,000
Production overheads (note 4) 147,000 154,000
Non-production overheads 123,000 123,000
Total costs 572,600 698,100
Net profit 22,400 194,400
1. Labour is a semi-variable cost. Basic salaries are fixed at $60 000 for June 2017 and the remainder is an
output-related bonus.
2. Heat, light and power is a semi-variable cost where the variable element is $0.10 per unit.
3. The company hires machines, each of which has a capacity of 20 000 units per month.
4. Production overhead is a semi-variable cost.
Required
(a) Calculate the:
(i) selling price per unit
(ii) labour output-related bonus per unit
(iii) heat, light and power fixed cost for June 2017
(iv) cost of hiring one machine
(v) production overheads variable element per unit and the fixed element total.
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(b) Explain one implication of using flexible budgets in terms of setting targets and judging performance.
The number of units actually produced and sold was 162 000
(c) Calculate the flexed budget and variance columns for June 2017. You must show whether the variances are
adverse (A) or favourable (F).
Actual Cost
Units made and sold 162,000
$
Revenue 955,800
Costs
Material 286,740
Labour 69,450
Heat, Light and Power 29,120
Machine Hired 63,800
Production overhead 153,750
Non Production overhead 123,500
Total Costs 726,360
Profit 229,440
Question – 7 (April 2017) HW

The Blackbox Company, which manufactures a single product, has prepared the following budgeted and actual
costs for period 8.
Budget Actual
Production/sales in units 3,600 3,800
$ $ $ $
Sales revenue 81,000 84,000
Administration overheads 10,000 10,100
Total costs 54,200 56,500
Profit 26,800 27,500
The following additional information is available:
 The production overheads are absorbed on a per unit basis, based on a maximum capacity of 4 000 units
with a total cost of $20 000
 The budgeted administration overheads include a fixed cost of $4 600
 Actual quantity of material used was as expected for the actual output
 Actual labour hours were as expected for the actual output.
Required
Prepare, in columnar format, a statement to show revenue, costs and profit for period 8.
The columns must show figures for:
(a) actual output of 3 800 units
(b) flexed budgeted output of 3 800 units
(c) variance.
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Theory
Question – 1
Define the following term. (Or) Explain the main difference between a fixed budget and a flexible budget
Fixed budget
A fixed budget is normally set prior to the start of an accounting period and used for planning purposes. It is
based on one level of activity.
Flexible Budget
A flexible budget, used for control purposes, changes in response to changes in activity by recognising different
cost behavior patterns
Question – 2
Difference between a forecast and a budget
A forecast is an estimate for a future income or expense
A budget is a plan of action expressed in financial terms relating to a future period. Ideally, it should encompass
all of the activities of the business and should involve personnel throughout the organisation in its preparation
Question – 3
Give two of the bases for flexing a budget.
The budget could be flexed on a planned production level, i.e. output
The budget could be flexed on a planned level of service e.g. hotel rooms
Question – 4
State the main objective for preparing flexible budgets
The main objective of preparing flexible budgets is to enable costs to be predicted for the actual level of activity
which occurs.
This allows the meaningful comparison of actual costs with budgets using variance analysis.
Question – 5
Evaluate whether it is more suitable for Lysithea Ltd to use a fixed budget, rather than a flexible budget.
Flexed budgets are more likely to enable more appropriate targets to be set which will give more meaningful
variances that can be investigated
Fixed budgets will not reflect some costs are variable and that increases in output require more input / cost and
so if output varies less appropriate targets are set which will result in less meaningful variances being calculated
Fixed budgets are easier to produce and therefore take less time and cost less
Question – 6
Explain one implication of using flexible budgets in terms of setting targets and judging performance.
Flexed budgets will result in more appropriate variances resulting in more appropriate action being taken
Question – 7
Identify one factor influencing the length of a budget period.
The complexity of the company - many departments/offices/factories
The requirement of external agencies, like a bank
Government requirements - tax rules
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Chapter – 12
Long term Decision; Investment Appraisal
Question – 1 (4/2013)
Yoshida Achmed is considering two alternative investment projects, both of which require the purchase of new
equipment.
The following information relates to the two projects.
Project Aye Project Bee
Duration 4 years 3 years
Purchase cost of equipment – Year 0 $500,000 $330,000
Estimated annual net cash inflows:
Year 1 $160,000 $140,000
Year 2 $160,000 $140,000
Year 3 $160,000 $140,000
Year 4 $140,000 NIL
Estimated disposal value of equipment $60,000 $40,000
Cost of capital is 10% per annum.
Discount factors:
Year 10% 20%
1 0.909 0.833
2 0.826 0.694
3 0.751 0.579
4 0.683 0.482
Required:
(a) The payback period
(b) Accounting rate of return
(c) Net present value
(d) Internal rate of return
Question 2(June 2019)

Bromley Outdoor Adventures Ltd is planning to invest in new climbing equipment costing $825 000
This new climbing equipment is expected to have a useful life of five years with a residual value of $150 000 and
would be depreciated on a straight line basis.
Estimates of cost savings (net of depreciation) are as follows:
Year $000
1 40
2 60
3 75
4 90
5 80
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The company‟s cost of capital is 15% per annum.

Discount factors: Year 10% 15% 20%
1 0.909 0.870 0.833
2 0.826 0.756 0.694
3 0.751 0.658 0.579
4 0.683 0.572 0.482
5 0.621 0.497 0.402
(a) Calculate, for the new climbing equipment, the:
(i) net present value
(ii) internal rate of return.
(b) Advise whether the company should invest in the new climbing equipment based on your calculations.
The company is considering an alternative capital investment project for new sailing equipment.
It has been calculated that the net present value of the sailing equipment over the same five-year period would
be $88 760 positive.
(c) Advise the minimum that the initial purchase price of the climbing equipment would need to be adjusted to
make it a better proposition than the sailing equipment.
Assume there are no changes in cost savings or residual value of the climbing equipment.
(d) Advise why it is necessary to use a discounted cash flow method when determining whether an investment
project should be undertaken.
Question – 3 HW
Investment of $1.2 million in new machinery to expand production capacity is being considered by a company. A
residual value for the machinery of $60,000 would be expected at the end of its 6-year life. Estimates of the
increment profit/(loss) from the investment (net of depreciation of the new machinery on a straight-line basis) are:
$000
Year 1 (80)
Year 2 110
Year 3 160
Yare 4 250
Year 5 220
Year 6 180
Discount factors at the cost of capital of 10% & 20% per annum are:
10% 20%
Year 1 0.909 0.833
Yare 2 0.826 0.694
Year 3 0.751 0.579
Year 4 0.683 0.482
Year 5 0.621 0.402
Year 6 0.564 0.335
Calculate:
(a) Payback Period
(b) Accounting Rate of Return
(c) Net Present Value
(d) Internal Rate of Return
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Question – 4 (3/2013)
Fryatt McShane is considering two alternative investment projects both of which require the purchase of new
equipment with a lifespan of four years.
The following information relates to the two projects:
$000 $000
Purchase cost of equipment - Year 0 600 720
Estimated accounting profits:
Year 1 50 60
Year 2 125 150
Year 3 90 108
Year 4 30 36
Estimated disposal value of equipment 80 96
The company‟s depreciation policy is to write off the cost of equipment using the straight-line method.
Cost of capital is 15% per annum.
Discount factors: Year 15% 20%
1 0.870 0.833
2 0.756 0.694
3 0.658 0.579
4 0.572 0.482
Required;
(a) Calculate for both Project Aye and Project Bee:
(i) The payback period
(ii) The net present value
(iii) The internal rate of return.
(b) Recommend which project should be undertaken, giving reasons for your decision.
Question – 5 (2/2012) HW
A company is considering an investment project requiring an expenditure of $1,450,000 on new equipment. The
equipment is expected to have a useful life of five years, with a residual value of $150,000, and would be
depreciated on a straight-line basis.
Estimates of cost savings (net of depreciation of the new equipment) arising from the investment are as follows:
Year $000
1 80
2 100
3 to 5 180per annum
Discount factors: Year 5% 10% 15% 20%
1 0.952 0.909 0.870 0.833
2 0.907 0.826 0.756 0.694
3 0.864 0.751 0.658 0.579
4 0.823 0.683 0.572 0.482
5 0.784 0.621 0.497 0.402
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Required;
(a) In relation to the investment in new equipment, calculate the:
(i) Accounting rate of return (using the average investment value)
(ii) Net present value.
(iii) Internal rate of return
(b) Advise the company on whether the investment in the new equipment is worthwhile,on the basis the net
present value and internal rate of return calculated in part (a).
(c) State the limitations of the accounting rate of return as a method of evaluating investment projects.
Question – 6(4 /2009)

A company is considering two alternative investment projects both of which require the purchase of new
equipment. The following information relates to the two projects:
Project A Project B
Duration 4 years 3 years
Purchase cost of equipment $500,000 $330,000
Years 1 – 3 $30,000 $140,000
Year 4 $630,000 –
Estimated disposal value of equipment $50,000 $40,000

Assume that net cash inflows occur at the end of the years to which they relate.
The company‟s depreciation policy is to write off the cost of equipment using the straight-line method. Cost of
capital is 10% per annum.
Discount factors:
Year 5% 10% 15% 20% 25%
1 0.952 0.909 0.870 0.833 0.800
2 0.907 0.826 0.756 0.694 0.640
3 0.864 0.751 0.658 0.579 0.512
2.723 2.486 2.284 2.106 1.952
4 0.823 0.683 0.572 0.482 0.410
Required;
(a) Calculate for each of Project A and Project B, the
(i) Net present value.
(ii) Internal rate of return.
(b) Recommend which project should be undertaken giving reasons for your decision.
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Question-7(Apil-2016)
The Makitlast Company is considering the purchase of a new machine.
Two alternative machines (A and B) are being considered.
Machine A Machine B
Initial cost $800,000 $900,000
Useful life 5 years 5 years
Residual value (at end of 5 years) $120,000 $250,000
Annual profits(net of straight line depreciation) $100,000 $110,000
The company has a cost of capital of 12% per annum.

The 12% discount cash flow factors are:
12%
Year 1 0.893
Year 2 0.797
Year 3 0.712
Year 4 0.636
Year 5 0.567
Required
(a) Calculate the annual cash flow income for:
(i) Machine A
(ii) Machine B.
(b) Calculate the net present value (NPV) for both machines.
(c) Advice management, giving one reason, which machine to purchase based on the NPV values calculated in
(b).
Question-8(June-16)
Bosingwa is considering acquiring new machinery to expand its production capacity.
Two alternative machines have been identified, Machine A and Machine B.
The expected cash flows of Machine A are as follows:
Machine A
$000
Purchase cost of machine 500
Working capital requirement at Year 0 60
Year 1 120
Year 2 260
Year 3 200
Year 4 130
Estimated disposal value of machine 30
Additional information:
 The working capital required at Year 0 will be released at the end of Year 4.
 The machines are to be depreciated on a straight line basis.
 Both machines have a lifespan of four years.
 The company‟s cost of capital is 10% per annum.
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The relevant discount factors are as follows:

10% 15%
Year 1 0.909 0.870
Year 2 0.826 0.756
Year 3 0.751 0.658
Year 4 0.683 0.572
Required
(a) Calculate, for Machine A, the
(ii) internal rate of return
(iii) discounted payback period, giving your answer in years to two decimal places.
The following figures have been calculated for Machine B:
Net present value $86 010
Internal rate of return 14.08%
Discounted payback period 3.71 years
(b) Evaluate each of the two machines as an investment opportunity, and recommend which machine should be
purchased.
Question – 9(June-17) HW
Davies and Dawson has the possibility of investing in one of two projects, each costing $600 000. Both projects
would have a life of four years, with no residual value.
The following are the estimated net cash flows for the two projects:
$000 $000
Year 1 260 140
Year 2 290 160
Year 3 150 220
Year 4 90 225
Discount factors:
Year 12% 15%
1 0.893 0.870
2 0.797 0.756
3 0.712 0.658
4 0.636 0.572
Required
(a) Calculate the net present value for each of Project Aye and Project Bee.
(b) Evaluate, based on your calculations in (a), which of the two projects the company should invest in
(c) Calculate, for Project Aye, the:
(i) internal rate of return
(ii) discounted payback period (in years and months).
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Question-10(June-18)
Forrest Ltd is considering investing in new machinery which, if purchased, would increase the production of an
existing product.
The new machinery under consideration would cost $510 000 and have a residual value of $60 000 after five
years.
The increased production would have an additional sales value of $375 000 for each of the Years 1, 2 and 3,
and $200 000 for each of the Years 4 and 5.
A 40% contribution to sales (C/S) ratio will be constant over all the five years.
There will be no additional fixed costs other than depreciation of the new machinery, calculated on a straight-line
basis.
The company has a cost of capital of 12% per annum.
Discount factors: Year 10% 12% 15%
1 0.909 0.893 0.870
2 0.826 0.797 0.756
3 0.751 0.712 0.658
4 0.683 0.636 0.572
5 0.621 0.567 0.497
Required
(a) Calculate, for the possible investment in the new machinery, the:
(iii) discounted payback.
(b) Advise whether Forrest Ltd should invest in the new machinery, based on all of your calculations in part (a).
(c) Evaluate why it is more appropriate to calculate the discounted payback, rather than calculating the
traditional (non-discounted) payback, when determining whether an investment project should be
undertaken.
Question – 11(December-17) HW
Jakupovic Ltd is considering investing in new equipment with an estimated lifespan of 5 years.
The new equipment will cost cost$740,000 with a residual value of $100,000 at the end of 5years.
The forecast contribution for this new equipment is as follows;
Year $000
1 180
2 252
3 288
4 324
5 288
The company is also budgeting for additional annual fixed costs of $64,000 (excluding straight line depreciation
of the new equipment)
Assume that net cash inflows occur at the end of the years to which they relate.
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The discount factors for 12% and 15% are shown below.
Year 12% 15%
1 0.893 0.870
2 0.797 0.756
3 0.712 0.658
4 0.636 0.572
5 0.567 0.497
Required
(a) Calculate, for the new equipment the:
(iii) Advise the company if the new equipment should be introduced.
(b) Explain why internal Rate of Return (IRR) and Net Present Value do not necessarily rank projects in the
same order.
Question – 12 (Dec-18) HW
Evandro Henrikson is considering investing in a new machine to reduce operating costs over the next five years.
Two machines are currently being considered, the details of which are as follows:
Machine Aye Machine Bee
Capital cost $800 000 $900 000
Residual value NIL NIL
Annual cost savings $100 000 $100 000
The above cost savings have been calculated after the deduction of depreciation on a straight line basis.

Discount factors 12% 15% 20%
Year 1 0.893 0.870 0.833
Year 2 0.797 0.756 0.694
Year 3 0.712 0.658 0.579
Year 4 0.636 0.572 0.482
Year 5 0.567 0.497 0.404
3.605 3.353 2.992
(a) Calculate, for the proposed investment in each machine, the:

(ii) internal rate of return.
(b) Advise the company which machine to purchase, giving one reason for your answer.
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Theory
Question – 1
Advantages and disadvantages of the net present value investment appraisal technique
Advantages
- It takes into account all future cash flows.
- It takes into account the „time value‟ of money.
Disadvantages
- It assumes that the interest rate/cost of capital remains constant through the life of the investment.
- It is difficult to accurately predict future costs and revenues.
Question – 2
Net present value
An investment appraisal technique that converts future cash flows into present-day values and states if there is a
discounted net cash inflow or outflow
Internal rate of return

An investment appraisal technique that estimates the interest rate (cost of capital) at which there is no inflow or
outflow of cash
Question – 3
Differences between long-term decision making and short-term decision making
Example of a Short-term decision:
An example of a short-term decision might be "increasing production over the next three months in order to meet
an unexpected increase in demand"
Costing technique(s) applied to a short-term decision:
Techniques that are used include: break-even analysis; limiting factors; and marginal costing.
Example of a long-term decision:

An example of a long-term decision might be the need to build a new production line, buy a new machine or
introduce a new (or improved) product
Costing technique(s) applied to a long-term decision:
The techniques that are used come under the heading of 'capital investment appraisal': payback; discounted
cash flow; average rate of return; internal rate of return; and absorption costing.
Question – 4
Advise why it is necessary to use a discounted cash flow method when determining whether an
investment project should be undertaken. 4 marks
Using the discounted method takes into account the time value of money, which overcomes any weakness of a
more traditional method. In this example the discounted method shows that the project does not make a positive
return on the investment
84
Question – 5
Evaluate why it is more appropriate to calculate the discounted payback, rather than calculating the
traditional (non-discounted) payback, when determining whether an investment project should be
undertaken. 4 marks
- Using a discounted payback approach takes into account the time value of money. This overcomes the
weakness of the traditional payback method as a means of appraising an investment.
- In this instance the discounted payback shows that the project does NOT make a positive return within the
estimated five-year life.
- Had the traditional method been used it would have shown that the investment made a payback sometime
within the fourth year
Question – 6
State the limitations of the accounting rate of return as a method of evaluating investment projects.
- Time value of money is not taken into account
- Use of different accounting policy may distort profit figure
Question – 7
Explain why internal Rate of Return (IRR) and Net Present Value do not necessarily rank projects in the
same order.
- The NPV method recognises that money has a time value. This method calculates the present values of
future cash flows and selects projects that have a positive net cash flow.
- The IRR method calculates the interest rate at which the NPV is zero. This method chooses projects that
have a rate of return which is higher than the cost of capital
- The IRR uses two discount rates and therefore two net present values used in a formula to arrive at
a rate of return which is compared to the cost of capital
- The IRR does not rely on any external data (i.e. a discount rate), it is purely a function of the inflows and
outflows of that project. The IRR does not assess the financial impact on a firm; it only requires meeting a
minimum return rate
- The NPV and IRR methods can rank two projects differently, depending on the size of the investment.
- The NPV and IRR methods can rank two projects differently, depending on the size of the investment. The
IRR method is not reliable when dealing with two mutually exclusive investments
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Chapter – 13
Process costing
Question-1
During March the following costs were incurred in a process;
Material (1000 kg) $9,000
Labour $18,000
Overheads $13,500
A normal loss of 10 % was expected.
The actual output was 850 Kg.
Losses have a scrap value of $9 per unit.
Required
Calculate the cost per kg and prepare a process account and loss account.
Question – 2 (2/2013)
True Flow Ltd manufactures a product where by the initial raw materials passes through two processes (Process
One and Process Two).
The output of process One is passed to process Two where further raw materials is added.
Direct costs and outputs for the month just ended were:
Process One
Initial raw material 1900kgs costing $40,000
Direct labour $76,800
Expected output 85% of input
Transfer to Process Two 1575kgs
Process Two
Raw materials added 1425kgs costing $60,000
Expected output 90% of input and materials added
Actuals output 2760kgs
There was no work in progress at either the beginning or the end of the month.
Overheads for the month, totaling $84,000, are apportioned between the two process as follows:
Process One 60%
Process Two 40%
Losses that arise from the processes are sold for scrap
Process One losses are sold for $20 per kg
Process Two losses are sold for $18 per kg
Required:
Prepare for the month just ended:
(a) Process One account
(b) Process Two account
(c) Normal loss/gain account
(d) Abnormal loss/gain account
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Question – 3 HW
A limited manufactures a product whereby the initial raw material passes through two processes One and
Process Two).
The output of Process One is passed to Process Two, where further raw material is added.
Direct costs for the month just ended were:
Process One
Initial raw material 3,800 kgs costing $200,000
Expected output 85% of input
Transfer to Process Two 3,150 kgs
Process Two
Transfer from Process One 3,150 kgs
Raw materials added 2,850 kgs costing $287,500
Expected output 90% of total input
Actual output 5,520 kgs
There was no work in progress at either the beginning or end of the month.
Overheads for the month totaled $420,800. The overheads are apportioned between the two processes as
follows:
Process One 55%
Process Two 45%
Losses that arise from the processes are sold for scrap. Losses that from Process One are sold for $20 per kg,
whilst the losses that occur from Process Two are sold for $18 per kg
Required:
Prepare for the month just ended:
a. Process One Account
b. Process Two Account
c. Normal Loss Account
d. Abnormal loss/gain account
Question – 4
JJ has a factory which operates two production processes, cutting and pasting. Normal loss in each process is
10%. Scrapped units out of the cutting process sell for $3 per unit whereas scrapped units out of the pasting
process sell for $5. Output from the cutting process is transferred to the pasting process: output from the pasting
process is finished output ready for sale.
Relevant information about costs for control period 7 are as follows
Cutting process Pasting process
Units $ Units $
Input materials 18,000 54,000
Transferred to pasting process 16,000
Materials from cutting process 16,000
Added materials 14,000 70,000
Labour and overheads 32,400 135,000
Output to finished goods 28,000
Required
Prepare accounts for the cutting process , the pasting process, abnormal loss, abnormal gain and scrap.
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Sinope Ltd manufactures the UXB 99 and uses process costing.
Information relating to the inputs used in June 2018 is as follows:
Material Aye 4,800 litres costing $6.50 per litre
Material Bee 3,500 litres costing $9.70 per litre
Material Cee 1,700 litres costing $3.90 per litre
Direct labour 600 hours costing $8.40 per hour
Overheads Absorbed at a rate of $23.00 per direct labour hour.
The expected output is 92% of inputs.
Any scrap can be sold at a value of $1.15 per litre.
During June 2018, the amount of good output obtained was 9,360 litres.
Required
(a) Calculate the expected cost per unit of the good output of UXB 99.
(b) Prepare the Process Account for June 2018
(c) Prepare the entries in the following ledger accounts:
(i) normal loss account
(ii) abnormal loss/gain account.
Question – 6 (Nov-18) HW
Larch manufactures chemicals and uses process costing. Information relating to the inputs used in October 2018
was as follows:
Material A 1,300 litres costing $8.00 per litre
Material B 700 litres costing $6.40 per litre
Material C 1,000 litres costing $7.50 per litre
Direct labour 400 hours costing $9.30 per hour
Overheads Absorbed at a rate of $15.00 per direct labour hour
The expected output is 90% of material inputs.
Any losses can be sold at a value of $3.50 per litre.
During October 2018, the amount of good output obtained was 2,820 litres.
Required
(a) Calculate the cost per litre of the good output of chemicals.
(b) Prepare the Chemical Process Account for October 2018.
(c) Complete the entries in the following ledger accounts:
(i) Normal Loss Account
(ii) Abnormal Loss Account or Abnormal Gain Account.
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Question –7
Suppose that Columbine Co is a manufacturer of processed goods, and that results in process 2 for April
20X3 were as follows.
Opening inventory Nil
Material input from process 1 4,000 units
Costs of input:
$
Material from process 1 6,000
Added materials in process 2 1,080
Conversion costs 1,720
Output is transferred into the next process, process 3.
Closing work in process amounted to 800 units, complete as to:
Process 1 material 100%
Added materials 50%
Conversion costs 30%
Required
Prepare the account for process 2 for April 20X3.
Question –8
The following information relates to process 3 of a three- stage production process for the month of January
20X4.
Opening inventory 300 units complete as to: % $
Materials from process 2 100 4,400
Added materials 90 1,150
Labour 80 540
Production overhead 80 810
6,900
In January 20X4, a further 1,800 units were transferred from process 2 at a valuation of $27,000. Added
materials amounted to $6,600 and direct labour to $3,270. Production overhead is absorbed at the rate of 150%
of direct labour cost.
Closing inventory at 31 January 20X4 amounted to 450 units, complete as to:
Process 2 materials 100%
Added materials 60%
Labour and overhead 50%
Required
Prepare the process 3 Account for January 20X4 using FIFO and WAC valuation principles.
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Question – 9 HW
Magpie produces an item which is manufactured in two consecutive processes. Information relating to process 2
during September 20X3 is as follows.
Open inventory 800 units
Degree of completion: % $
Process 1 materials 100 4,700
Added materials 40 600
Conversion costs 30 1,000
6,300
During September 20X3, 3,000 units were transferred from process 1 at a valuation of $18,100. Added materials
cost $9,600 and conversion costs were $11,800.
Closing inventory at 30 September 20X3 amounted to 1,000 units which were 100% complete with respect to
process 1 materials and 60% complete with respect to added materials. Conversion cost work was 40%
complete.
Required
Prepare the process 2 account for September 20X3 using FIFO and WAC method.
Question-10
Sole Products Ltd manufactures its product in a single process. All materials are introduced at the start of the
process and any losses that occur have no scrap value.
The company uses the first-in-first-out (FIFO) method of valuation.
Production overheads are absorbed at the rate of $12 per direct labour hour.
Direct labour is paid at the rate of $10 per hour.
The following information is available for the month of Oct Year 9.
Opening stock of work-in-progress 500kg $12,000
(60% complete with respect to labour and overheads)
Material introduced 10,000kg $63,000
Direct labour utilized $26,400
Transfer to finished goods 8,000kg
Closing stock of work-in-progress 800kg
A normal loss of 1,000kg was expected.

Required;
(a) For the month of Oct Year 9:
(i) Calculate equivalent units and cost per unit for each element of cost
(ii) Calculate the value of the transfer to the finished goods and of the closing stock of work-in-progress
(iii) Prepare the process account showing both quantities and values
(b) Contrast briefly the cost accounting treatment of normal loss and abnormal loss.
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Question-11
Sinclair Ltd manufactures a product in a single process. All materials are introduced at the start of the process
and any losses that occur have no scrap value. The company uses the first-in –first out method or valuation.
Additional Information
Production overheads are absorbed at the rate of $10 per direct labour hour.
Direct labour is paid at the rate of $12 per hour.
The following information is available for the last period:
Opening stock of work-in-progress 500kg $4,150
(60% completed with respect to labour and overheads)
Materials introduced 8,000kg $35,000
Transfer to finished goods 7,000kg
Closing stock of work-in –progress) 600kg
A normal loss of 1,000kg was expected.
All losses are detected at the end of the process.
Required:
(a) For the last period calculate:
(i) The equivalent units and the cost per unit for each element of cost
(ii) The value of the transfer to finished goods and of the closing stock of work-in-progress
(b) Prepare the process account for the last period
(c) Define normal loss, abnormal loss, abnormal gain and contrast their cost accounting treatment.
Question – 12(April 2017) HW

Trueflow manufactures its product in a single process.
The following information relates to the process:
 All materials are introduced at the start of the process
 Any losses that occur have no scrap value
 The company uses the first-in-first-out method of valuation
 Production overheads are absorbed at the rate of $12 per direct labour hour
 Direct labour is paid at the rate of $10 per hour.
The following were the actual results for month 4.
Opening inventory of work in progress 800 kg $12,000
Material introduced 8,000 kg $35,500
Direct labour utilized $14,600
Transfer to finished goods 7,000 kg
Closing inventory of work in progress 500 kg
A normal loss of 900 kg was expected.
Calculate, for month 4, the:
(a) equivalent units and cost per unit for each element of cost
(b) value of opening and closing work in progress inventory
(c) value of the transfer to the finished goods.
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Theory
Question – 1
Define the following term and their accounting treatment.
Normal loss: A loss that is expected in production under normal operating conditions.
Abnormal loss: A loss that exceeds the normal loss.
Abnormal gain: A gain over the expected finished goods output.
Accounting Treatment
Normal losses are built into the cost of good units. Any scrap value arising is normally deducted from the cost of
material input. Abnormal losses/gains do not affect unit costs as they are separately valued as if they were
completed production and are charged as a separate cost item.
Question – 2
Explain the term process costing
Process costing is a costing method used where it is not possible to identify separate units of production, or jobs
because of the continuous nature of the production process involved
Question – 3
Explain two circumstances in which a business would use process costing. (or) 4 marks
Explain the characteristics of a business that may use process costing, giving reasons for your answer.
- Process costing is suitable where production takes time / there is likely to be work-in-progress at the period
end - the use of "equivalent units" enables the value of finished product and work-in-progress can be
calculated
- Process costing is suitable when there are several stages to production / goods are transferred from one
stage to another – this will enable costs of each stage to be identified
- Process costing is suitable where there are joint and or by-products – this will enable the common-costs to
be attributed to the relevant products
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Chapter – 14
Joint Product / By Product
Question – 1
Three joint products are manufactured in a common process, which consists of two consecutive stage. Output
from process 1 is transferred to process 2, and output from process 2 consists of the three joint products, Hans,
Nils and Bumpsydaidies. All joint product are sold as soon as they are produced.
Data for period 2 of 20X6 are as follows:
Process 1 Process 2
Opening and closing inventory None None
Direct materials (30,000 units at $2 per unit) $60,000
Conversion costs $76,500 $226,200
Normal loss 10% of input 10% input
Scrap value of normal loss $0.50 per unit $2 per unit
Output 26,000 unit 10,000 unit of Han
7,000 unit of Nil
6,000 unit of Bumpsydaisy
Selling prices are $18 per unit of Han, $20 per unit of Nil and $30 per unit of Bumpsydaisy .
Required
(a) Prepare the process 1 account
(b) Prepare the process 2 account using the sales value method of apportionment
(c) Prepare a profit statement for the joint products.
Question - 2 (3 /2008)
A company uses a two stage processing system to jointly produce its three main products, Products A,B and C.
By-product D is also produced during the process.
Product A is complete at the end of stage 1 and Products B, C and By-product D emerge at the end of stage 2.
Information regarding the joint process for the last period is as follows:
Input
Process stage 1
Raw material X 360 kg at $6 per kg
Raw material Y 400 kg at $5 per kg
Direct labour 510 hrs at $8 per hr
Process stage 2
Raw material Z 800kg at $4 per kg
Direct labour 200hrs at $8 per hr
Factory overheads in each process stage are absorbed at $12.00 per direct labour hour.
Output
Process stage 1
Quantity Selling price per kg
Product A 120 kg $30
Material transfer to stage 2 600 kg -
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Process stage 2
Product B 650 kg $20
Product C 550 kg $25
By-product D 150 kg $8
Process losses from stage 1 are disposed of at a cost of $1 per kg. The losses that occurred in stage 1, in the
last period, were normal.
No losses are expected in stage 2.
There was no work in progress at the beginning or at the end of the period in either process stage.
Joint processing costs are apportioned on the basis of relative weight of output.
Required;
(a) For the last period prepare the process accounts for:
(i) Process stage 1
(ii) Process stage 2
(b) Assuming that all production was sold prepare a profit statement for the last period.
(c) Explain the meaning of:
(i) Joint products
(ii) By-Product
Question-3(4-2015)
Dual Products Ltd uses a process system to jointly produce its two main products, A and B. By-product C is also
produced during the process.
All three products require further processing before sale.
The following information is available for the month of November:
(a) 10,000 kg of raw material, at a cost of $50 per kg, was introduced into the process.
(b) There is a normal loss allowance of 2% of input. Process losses are expected to be disposed of at a rate of
$6 per kg.
(c) Conversion costs were;
Variable $8 per kg of raw material introduced
Fixed $120,000 per month
(d) Output for the month was:
A 6,000 kg
B 3,000 kg
C 800 kg
(e) Further output processing costs per kg were:
A $10
B $12
C $2
(f) Final selling prices per kg of the products were:
A $100
B $112
C $35
(g) 400 kg of C were used, without any further processing, in another department as a substitute for material
which otherwise would have cost $40 per kg to purchase.
(h) All production is sold during the month.
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Required
(a) Prepare a process account, for the month of November, using the net salesmethod of joint cost
apportionment.
(b) Prepare a profit statement showing the profit for both of the main products.
Question – 4 (Nov-17)
Howard manufactures three products P, Q and R using a process-costing system.
A by-product S is also produced by this process.
The inputs used in production in October 2017 were as follows:
Material A 2,500 kg at $4.20 per kg
Material B 1,600 kg at $5.50 per kg
Direct labour 800 hours at $9.00 per hour
Overheads are absorbed at a rate of $22.00 per labour hour.
The outputs arising from production in October 2017 were as follows:
Quantity kg Selling price per kg
Product P 1 800 $30
Product Q 700 $40
Product R 1100 $50
Product S 200 $8
All waste is a normal loss and has no value. However, it does need to be disposed of at a cost of $3.60 per kg.
Joint costs are apportioned between the main products on the basis of sales value.
Required
(a) Prepare the Process Account for October 2017
(b) Explain one reason why Howard‟s method of apportioning joint costs on the basis of sales value might be
better than using kilograms (kg) of output.
Howard has just started to manufacture Product T during October 2017, using aseparate process. The results
for October 2017 were as follows:
Completed output 5 000 units
Work-in-progress 3 500 units
The work-in-progress was assessed as being 80% complete in terms of material inputs and 50% complete in
terms of labour and overheads.
The costs for October 2017 were $34 710 for materials and $21 600 for labour and overheads.
(c) Calculate the cost of:
(i) completed output for October 2017
(ii) work-in-progress at the end of October 2017.
95
Theory
Question – 1
Joint product
Joint-products are two or more products that are produced by a single manufacturing process that share
common costs and are separately unidentifiable until they reach a particular split-off point
By-product
By-products are secondary products arising from a manufacturing process whose main purpose is to produce a
main product – they usually have minor value when compared to the main product / they are not usually
apportioned a share of any joint costs
Joint Cost
The point at which joint products and by-products become separately identifiable is known as the split off point or
separation point. Costs incurred up to this point are called common costs or joint costs.
Question – 2
Explain one reason why Howard’s method of apportioning joint costs on the basis of sales value might
be better than using kilograms (kg) of output. 2 marks
- It is fair application of the prudence concept that the products making a greater contribution to Howard‟s
profitability should bear a higher share of the costs.
- The amount of costs incurred in making a kg of the more expensive products might be greater than that
incurred in making a kg of the cheaper products and the amount of costs apportioned should reflect this.
Question – 3
Explain one reason why Thebe Ltd’s method of apportioning joint costs on the basis of kg of output
might not be the most suitable method. 2 marks
- Why apportioning joint costs on the basis of kg/output might not be the best approach
- Products do not sell for the same price so products making a greater contribution are not currently bearing a
higher share of the costs.
- The amount of costs incurred in making a kg of the more expensive products might be greater than that
incurred in making a kg of the cheaper products and the amount of costs apportioned does not, currently,
reflect this.
Question – 4
Suggest two alternative bases for apportioning joint costs between the three main products. 2 marks
- Physical size
- Sales value
- Net sales value
96
Chapter – 15
Accounting for Material
Question-1
Makit ltd purchases a number of different components from an outside supplier. The following information relates
to three of these components.
Components X
Drily usage varies between 100 and 120 units
Lead time for delivery varies between 7 and 13 days
Order quantity is 2,500 units
Component Y
Annual usage is 2,500 units (evenly distributed through the year)
Cost of component is $8 per unit
Ordering costs are $48 per order
Stock holding costs are 12% of the component cost per annum
No safety stock is held.
Component Z
Balance in stores is currently 2,500 units.
Stock on order is 4,000 units.
Allocated stock is 1,100 units.
Required
(a) For component X calculate:
(i) The reorder level.
(ii) The minimum and maximum stock control levels
(b) For componet Y Calculate:
(i) The economic order quantity
(ii) The total annual cost (if orders are placed in this quantity)
(d) For component Z, calculate the free stock currently available.
Raw material RM3
Order quantity 1,000kg
Purchase price $2 per kg
Monthly usage 1,500kg
Safety (buffer) stock 1,000kg
Ordering costs $250 per order
Stock holding costs are 20% of the average stockholding per annum.
The supplier has offered a discount off the purchase price if the order quantity is increased
Details are as follows
Order quantity discount
1,000 kg -
1,500kg 5%
3,000kg 7.5%
Required;
For raw material RM3 determine the order quantity that would minimize the total annual costs.
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Question - 3
A company has budgeted to use 2,400 units of component C10 in its production department during the forth the
coming year. Production will be distributed uniformly throughout the year.
The following information is available regarding component C10:
Cost of component $25 each (before discount)
Stock holding costs 12% of the component cost per annum
The component can be purchased in order sizes of 200, 400, 800, 1,200 or 2,400 and it can be assumed that the
company carries no buffer (safety) stock.
Required;
(a) Produce a table showing the total annual ordering costs and the total annual stock holding costs of the
component for each order size assuming no discount is received from the basic price. Identify the optimum
order size.
(b) Use the EOQ formula to verify your answer.
Assume that the supplier has offered the following quantity discounts:
Order size Discount from the basic $25 unit price
0 – 799 No discount
800 - 2,399 5% discount
2,400 and over 7% discount
Required;
(c) Advise the company on the order size that minimizes the total annual cost if the quantity discounts are
available. Support your advice with calculations.

Pine Ltd uses material in its production.
The following information is available for Material Z.
Monthly Current Order Current Minimum
Usage Quantity price inventory
Material Z 6 000 kg 8 000 kg $9.00 kg 2 000 kg
 The holding costs are estimated to be $0.75 per kg per year.
 The ordering costs are estimated to be $200 per order.
Required
(a) Explain two limiting factors when a business determines its maximum inventory level.
(b) Calculate the current ordering costs for Material Z for one year.
(c) Calculate the current holding costs for Material Z for one year.
The current supplier of Material Z has offered a 3% discount if Pine Ltd increases the size of its orders to 24 000
kg, instead of the current order quantity of 8 000 kg.
(d) Complete the table below to show the total costs for the two possible quantities of Material Z for one year
(e) Analyse which order quantity would be the best for Pine Ltd, giving a reason for your answer.
(f) Explain two benefits to Pine Ltd of maintaining an effective inventory management system.
(g) Explain two example of holding cost.
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Question – 5 (June 2017) HW

Marshall Ltd manufactures a product using Material X40, which it obtains from a supplier.
Each delivery of Material X40 consists of 3 000 kg at a cost of $50 per kg.
The lead time for delivery varies between 12 days and 18 days.
The rate of usage of Material X40 varies between 32 kg and 48 kg per day.
(a) Calculate, for Material X40, the:
(i) reorder level in kg
(ii) minimum inventory control level in kg
(iii) maximum inventory control level in kg
(iv) average inventory in kg.
Marshall Ltd uses Material A60 in a separate production process.
The following information relates to Material A60:
Order quantity 2 000 kg
Purchase price $28 per kg
Monthly usage 4 500 kg
Minimum inventory 1 800 kg
Inventory holding costs are 20% of the average inventory holding per annum.
(b) Calculate, for Material A60, the:
(i) annual ordering cost
(ii) inventory holding cost.
Question – 6(Jan 2017)

Saturn is a manufacturing company. The following information is available about J66, one of the raw materials
used in manufacturing.
Purchase price $9.60 per kg
Usage per day High: 90 kg Average: 60 kg Low: 30 kg
Delivery lead time (days) High: 6 days Average: 4 days Low: 2 days
Maximum inventory level 4 000 kg
In addition to a reorder level, Saturn has a minimum inventory level that acts as a buffer inventory.
(a) Calculate the following:
(i) reorder level (kg)
(ii) minimum inventory level (kg)
(iii) reorder quantity (kg)
(iv) average inventory (kg)
(v) average inventory ($).
(b) State the formula used to calculate the economic order quantity.
(c) Explain the two types of cost, apart from the purchase price of the inventory, associated with keeping
inventory, giving an example of each.
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Question-7(April-2018) HW
Metis uses Material GX10 in its production processes.
The following information is available.
Monthly Current Order Current Minimum
Usage Quantity Price Inventory
Material GX10 10,000 kg 20,000 kg $7.00 kg 5,000 kg
The holding costs are estimated to be $0.70 per kg.
The ordering costs are estimated to be $500 per order.
(a) Calculate the current ordering costs for Material GX10 for one year.
(b) Calculate the current holding costs for Material GX10 for one year.
The current supplier of Material GX10 has offered a 2.5% discount if Metis increases the size of its orders to
60,000 kg.
(c) Complete the table to show the costs if Metis were to order in quantities of 20 000 kg and 60 000 kg.
Costs 20,000 kg 60,000 kg
Purchasing
Ordering
Holding
Total
(d) Advise Metis as to which order size it should use. Give one reason for your answer.
(e) Calculate the Economic Order Quantity, showing clearly the formula used.
The accountant is concerned that if inventory is ordered in quantities of 60 000 kg, the insurance policy (which
only covers an average inventory holding of $250 000) might not provide enough cover.
(f) Calculate the average inventory values if orders are in quantities of:
(i) 20 000 kg
(ii) 60 000 kg.
(g) Advise Metis if the insurance policy covers both order quantities.
(h) Explain two benefits for Metis of having an effective inventory management system.
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Question – 8(June-2018)
Evandro and Silva Ltd uses two different raw materials, XYZ 145 and EDG 2204, in its production process.
The following information relates to raw material XYZ 145:
Budgeted annual use 6 000 kg (evenly distributed throughout the year)
Material costs $10 per kg
Inventory holding costs 9% of the average inventory holding value per year
Order size options 500kg, 1 000 kg, 1,500 kg, 2,000 kg and 3,000 kg
Minimum inventory (safety) 1 000 kg
Required
(a) (i) Complete the following table for the different order size options for a total purchase of 6 000 kg of raw
material XYZ 145 in a year. Space is available on the opposite page for workings.
Order No of Order Average Holding Total
size orders costs inventory costs costs
(kg) ($) (kg) ($) ($)
500
1,000
1,500
2,000
3,000
(ii) Advise, giving a reason, which of the order sizes should be selected.
The following information relates to raw material EDG 2204
Usage varies between 220 kg and 280 kg per day.
Lead time for delivery varies between 15 and 21 days.
Order quantity size is 8 000 kg.
Required
(b) Calculate, for raw material EDG 2204, the:
(i) reorder level
(ii) minimum inventory control level
(iii) maximum inventory control level.
(c) Explain two reasons why it is important to operate an effective system of inventory management and
control.
101
Theory
Question – 1
Reorder quantity
This is the quantity of inventory which is to be ordered when inventory reaches the reorder level. If it is set so as
to minimise the total costs associated with holding and ordering inventory, then it is known as the economic order
quantity.
Re-order level
The stock level at which the business re-orders more stock.
Allocated stock
Stock that has been scheduled for use
Free Stock
Stock that is available for reservation or allocation
Economic order quantity (EOQ)

The economic order quantity (EOQ) is the order quantity which minimizes inventory costs. The EOQ can be
calculated using a table, graph or formula.
Question – 2
Explain the two types of cost, apart from the purchase price of the inventory, associated with keeping
inventory, giving an example of each.
Holding Cost
These are the costs associated with the storage of inventory - examples might include: Rental of space, heat &
light, staff, depreciation of equipment, security staff, security equipment, financial costs (interest, money tied up),
wastage, and theft.
Ordering costs
These are the costs associated with placing an order for inventory - examples might include: Time of person
placing the order, telephone costs, postage, and delivery costs.
Question – 3
Explain two limiting factor when a business determines its maximum inventory level (4 marks)
Physical space – the company may not have enough room to store the inventory and may not wish to spend
money on renting space
Life-span of product – to avoid wastage/ if too much inventory is held then some of it may perish and have to be
thrown away
Financial constraints – inventory is money tied up in the stockroom which could be better used elsewhere
Holding Costs – for example heating, security cost which the company may have to keep to a minimum
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Question – 4
Explain three benefit of maintaining an effective inventory management system (6 marks)
- Business would hold enough inventories – this would ensure that it never lost production/sales/customers as
a result of running out.
- Business would hold the right type of inventory – this would help the business to maximize sales/reduce
wastage.
- The business would not hold too much stock – ensuring that holding / ordering costs are minimized/less
money is tied up/less wastage is suffered
Question – 5
Explain two disadvantages of an ineffective inventory management system. (4 marks)
- Business might not hold enough inventory– this could result in lost production/sales/customers as a result
of running out.
- Business might not hold the right type of inventory – this might mean that the business lost sales or had to
dispose of obsolete inventory.
- The business might hold too much inventory – this could mean that holding costs are excessive/more
money is tied up/more wastage is suffered.
Question – 6
Explain two reasons why it is important to operate an effective system of inventory management and
control. (4 marks)
- Having too little inventory could lead to a „stock-out‟ resulting in lost production, lost sales, lack of customer
confidence. If you want repeat custom, you need to meet customer demand quickly
- Having too much inventory might tie up working capital and lead to expensive handling and storage costs.
There is also the risk that the inventory might become obsolete or damaged
Question – 7
Identify two possible holding costs that Hyperion Ltd may incur. (2 marks)
- Material handling costs
- Rental of warehouse space
- Heat & light
- Warehouse staff wages
- Depreciation of equipment
- Financial costs (interest, money tied up)
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Chapter – 16
Cost Accounting System
Integrated Cost Accounting System
Revenue 1.
Cash/Bank Dr
Revenue Cr
Material Purchase
Material Account Dr
Cash/Bank(or) Trade Payable Cr
Direct Material Issue

WIP Account Dr
Material Account Cr
Indirect Material Issue

Production overhead Control Account Dr
Material Account Cr
Material written off

Profit /Loss Dr
Material Account Cr
Wages & Salaried Paid

Wages Account Dr
Cash/Bank Cr
Direct Wages Issue

WIP Account Dr
Wages Account Cr
Indirect Wages Issue

Wages Account Cr
Production Overhead (Absorbed)

WIP Account Dr
Production Overhead Control Account Cr
Production Overhead(Actual)
Production Overhead Control Account Dr
Cash/Bank Cr
Other Overhead
Relevant Overhead Account Dr
Payable Account Cr
Depreciation Expense
Relevant Overhead Dr
Accumulated Depreciation Cr
104
Over Absorbed
Profit/ Loss Cr
Under Absorbed
Profit/ Loss Dr
Note
1. Stock Account Opening balance Closing balance ၎
Account Raw Material Account
Raw Material Account
WIP Account Dr
Raw Material Account Cr
WIP Account
Finished good Account Dr
WIP Account Cr
Finished goods Accoount
Cost of Sale/Cost of good sold Dr
Finished good Account Cr
2. Stock Account Account
3. Overhead Account
over/under absorbed Profit and Loss ႔

4. Slae Account Cost of Sale Account Profit and Loss ႔ ႔
105
Question – 1
The trial balance taken form the integrated ledger of Hillerest limited on 1 April Year 7 showed.
$000 $000
Fixed assets at cost 240
Accumulated depreciation 54
Raw material stocks 58
Work –in progress stocks 17
Finished stocks 19
Debtors and creditors 130 65
Bank 8
Called up share capital 300
Profit and loss account - 53
472 475
The following transactions occurred in the month of April Year 7
$000
1 Sales on credit 65
2 Payments made by customers 47
3 Purchases of raw material on credit 26
4 Purchases of production overhead on credit 11
5 Purchases of Admin S&D overhead on credit 6
6 Payments made to suppliers 38
7 Materials issued to production 19
8 Gross wages and salaries analysis 18
9 Gross wages and salaries analysis
Production direct 12
Production indirect 4
Administration selling and distribution indirect 2
10 Production overhead absorbed 15
At the end of the month $000
1 Depreciation of fixed assets should be provided 2
(50%production,50% administration, selling and distribution)
2 Stocks, value at cost were
Work-in-progress 13
Finished stocks 16
Required:
Open the accounts listed in the trial balance of Hillcrest Limited at 1 April Year 7, insert the balance at the date,
post the transactions for the month of April and take out take out a trail balance at 30 April.
106
Question-2(Dec-16)
The Maloney Company operates an integrated accounting system.
The following information is available for period 8:
Opening inventory:
$
Raw materials 61,800
Work-in-progress 36,390
Finished goods 45,960
During period 8, the following transactions took place:
$
Purchases of raw materials 183,900
Production overheads absorbed 43,250
Direct wages incurred 37,365
Materials written off 1,875
Indirect production expenses incurred 6,450
Indirect wages and salaries incurred 13,850
Indirect materials issued to production overheads 9,750
Depreciation on production machinery 12,780
Closing inventory:
$
Raw material 108,645
Work in progress 9,935
Required
Prepare the following cost ledger accounts for Period 8 using the information provided, balancing off all accounts.
(a) Raw Materials Control Account
(b) Work-in-Progress Control Account
(c) Finished Goods Control Account
(d) Production Overhead Control Account
107
Question-3(June-17) HW
Bruce and Son Manufacturing Ltd operate an integrated accounting system and the following information is
available for the year ended May 2017.
Opening balances of inventories:
$
Raw materials 57,500
Work in progress 34,680
$
Purchases of raw materials (on credit) 367,800
Materials transferred to production 333,400
Indirect materials issued to production overheads 19,800
Indirect wages and salaries incurred 27,400
Factory cost of goods completed 488,290
Other production overheads incurred 16,250
Materials written off 7,500
Cost of goods sold 508,230
Administration overheads incurred 54,200
Selling and distribution overheads incurred 32,600
Depreciation on production machinery 22,480
Revenue 694,500
Required
Prepare the following accounts for the year ended May 2017.
(b) Work-in-Progress Control Account
(c) Finished Goods Control Account
(d) Production Overhead Control Account
(e) Profit and loss.
108
Non Integrated Cost Accounting System

Revenue 1.
Financial Ledger Control Account Dr
Revenue Cr
Material Purchase
Material Account Dr
Financial Ledger Control Account Cr
Direct Material Issue

WIP Account Dr
Material Account Cr
Indirect Material Issue

Material Account Cr
Wages & Salaried Paid

Wages Account Dr
Direct Wages Issue

WIP Account Dr
Wages Account Cr
Indirect Wages Issue

Wages Account Cr
Production Overhead (Absorbed)

WIP Account Dr
Production Overhead(Actual)
Cash/Bank Cr
Other Overhead
Relevant Overhead Account Dr
Over Absorbed
Profit/ Loss Cr
Under Absorbed
Profit/ Loss Dr
109
Note
1. Stock Account Opening balance Closing balance ၎
Account Raw Material Account
Raw Material Account
WIP Account Dr
Raw Material Account Cr
WIP Account
Finished good Account Dr
WIP Account Cr
Finished goods Accoount
Cost of Sale/Cost of good sold Dr
Finished good Account Cr
2. Stock Account Account
3. Overhead Account
op
over/under absorbed Profit and Loss ႔
4. Slae Account Cost of Sale Account Profit and Loss ႔ ႔
5. Profit and Loss Financial Ledger Control ႔ ႔
110
Makit Ltd maintains a cost ledger which is kept separate to the financial ledger.
At the beginning of Month 10, the following balances remained in the cost ledger.
$000 $000
Raw Material Control Account 60
Finished Goods Control Account 80
Work in Progress Control Account 50
Production Overhead Control Account (over absorbed) 5
Financial Ledger Control Account 185
190 190
During Month 10 the following transactions took place
$000
Raw material purchases 110
Total factor wages 100
Indirect production expenses 75
Sales 400
At the end of Month 10 the following stocks, valued at cost, were recorded.
Raw materials $50,000
Work in progress $47,000
Finished goods $100,000
Notes:
(1) 10% of raw material issues from stores are indirect
(2) 90% of factory wages are direct labour
(3) Factory overheads are absorbed at the rate of 110% of the direct labour wages.
Required:
Record the above transactions in the cost accounts for Month 2
Akpom Limited operates a system where the cost accounts are kept separate from the financial accounts.
The following balances were in the Cost Ledger at the beginning of Month 5:
$
Raw materials control 76,550
Work-in-progress control 40,550
Finished goods control 58,850
Production overhead control (under absorbed) 4,860
Financial ledger control 180,810
The following transactions took place during Month 5:
$
Purchases of raw materials 535,600
Indirect materials issued 39,100
Indirect factory wages and salaries incurred 75,420
Other indirect manufacturing expenses 50,850
Sales 946,250
111
At the end of Month 5, the following balances remained:

$
Raw materials control 90,700
Work-in-progress control 22,215
Finished goods control 48,235
Required
Prepare the following cost ledger accounts for Month 5 using the information provided, balancing off all accounts.
(b) Wages Control Account
(c) Production Overhead Control Account
(d) Work-in-Progress Control Account
(e) Finished Goods Control Account
(f) Financial Ledger Control Account
Question - 6 (July 2019)

Grosicki operates a non-integrated accounting system.
At the end of Period 2 the profit shown in the cost accounts was $383,545
Examination of the two sets of accounts for Period 2 revealed the following inventory valuations.
Cost accounts Financial accounts

$ $
Opening inventory valuations:
Work-in-progress 74,180 70,960
Finished goods 99,410 89,450
Closing inventory valuations:
The following items had been recorded in the financial accounts only:
 a loss on the sale of assets totalling $10,700
 discounts allowed to customers totalling $16,350
 discounts received from suppliers totalling $12,320
 sundry investment income of $19,000
 interest charges for a bank loan amounting to $9,750
The following items had been recorded in the cost accounts only:
 a notional rent charge of $15,300
 under absorbed production overheads totalling $8,980 had been carried forward to the next accounting
period.
Further investigations revealed that:

 depreciation in the cost accounts was recorded as $64,600, whilst in the financial accounts it was recorded as
$58,350
Required
(a) Prepare a Profit Reconciliation Statement for Period 2 to show the profit in the financial accounts.
(b) Explain two reasons why a business needs to undertake a profit reconciliation in a non-integrated accounting
system.
112
Question-7(Dec-18)
Kingsley de Wijs Ltd operates a non-integrated accounting system.
At the end of the accounting period the profit shown in the financial accounts was $260,940.
Examination of the two sets of accounts revealed the following differences:
$ $
Opening inventory valuations
Closing inventory valuations
Other items
Depreciation 29,180 31,155
Profit on sale of a non-current asset 4,500
Dividends received 7,550
Discount allowed to customers 5,080
Sundry investment income 8,250
Notional rent charge 22,500
Interest charges paid 6,450
Over absorbed overheads carried forward 4,600
Required
Calculate the profit for the period as shown in the cost accounts using a profit reconciliation statement.
Question – 8 (Jan-18) HW
Stewart Hector operates a non-integrated accounting system.
At the end of an accounting period the profit shown in the financial accounts was $178,280
Examination of the two sets of accounts revealed the following:
$ $
Opening Inventory valuations:
Closing Inventory valuations:
Depreciation 21,800 23,300
Profit on the sale of an asset 13,500
Dividends received 11,250
Discount allowed to customers 7,600
Sundry investment income 8,250
Notional rent charge 21,250
Interest charges 6,450
Over absorbed overheads carried forward 4,600
113
Required
Calculate the profit that would be shown in the cost accounts for the period by preparing a profit reconciliation
statement.
Question-9(Dec-17)
Ranocchia operates a non-integrated accounting system.
Examination of the two sets of accounts revealed the following differences in the inventory valuations.
$ $
Opening inventory valuations:
Closing inventory valuations:
Further investigations revealed the following:
1. Depreciation in the cost accounts was recorded as $48 450, whilst in the financial accounts it was recorded
as $45,325
2. Discounts allowed to customers totaling $9 650 and discounts received from suppliers totaling $8,160 had
only been recorded in the financial accounts.
3. Sundry investment income of $7,250 had only been recorded in the financial accounts.
4. Dividends received totaling $8,250 had only been recorded in the financial accounts.
5. Interest charges for a bank loan amounting to $6 500 had only been recorded in the financial accounts.
6. A notional rent charge of $7,650 had only been recorded in the cost accounts.
7. Over absorbed production overheads totaling $9,300 had been carried forward in the costs accounts.
8. At the end of the accounting period the profit shown in the financial accounts was $406,650.
Required
Prepare a profit reconciliation statement to determine the profit shown in the cost accounts.
114
Theory
Question – 1
Distinguish between integrated and non-integrate accounts systems.
Integrated accounts are a set of accounting records which provides both financial and cost accounts using
common data.
Non- integrated accounts are 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.
Question – 2
Explain two features of a non-integrated accounting system.
- The non-integrated system has a set of cost accounts, which are kept separate from the financial accounts
- The non-integrated system uses control accounts (to check the accuracy of the ledgers
- The non-integrated system uses a financial ledger control account, to maintain a set of balances, and
which also calculates a profit according to the cost accounts
Question – 3
Explain one possible reason why the depreciation charges are different in the two sets of accounts.
They may have used different methods to calculate the depreciation charge.
Different methods are likely to made higher/lower charges to each set of accounts.
Question – 4
Notional Cost
A notional cost represents the charge of using a resource which has no actual cost.
Question – 5
Explain the importance of using control accounts when operating a non-integrated system. 4 marks
- In a non-integrated system the cost accounts are kept separate from the financial accounts and it will be
necessary for the two sets of accounts to be reconciled with the use of control accounts
- Using control accounts will enable the company to frequently check the accuracy of the accounts and
highlight any errors
- Any over or under absorbed production overhead can be carried forward as a balance into the next period's
accounts
- The financial ledger control account will keep a record of all the individual control account balances, as a
further means of checking on the accuracy of the control accounts
Question – 6
Explain two reasons why a business needs to undertake profit reconciliation in a non-integrated
accounting system. (4 marks) or
Explain why it is necessary to undertake a profit reconciliation statement in a non-integrated accounting
system.
- A non-integrated system has two distinct sets of accounts - cost accounts and financial accounts - which
need to be kept in agreement by reconciliation (or the use of control accounts)/ they could also check the
accuracy and spot any potential errors.
- Both sets of accounts may have used different accounting policies such as different valuations for
inventory OR different methods to calculate any depreciation charges
- There are some items that are only entered into one set of accounts, such as discounts allowed or
discounts received, which are only recorded in the financial accounts OR notional rent, which is only
recorded in the cost accounts
115
Chapter – 17
Working Capital Management
Question – 1 (3 /2011)
The following information is extracted from a recent year‟s financial records of a company which makes single
product:
$
Sales 486,500
Production cost of sales 328,450
Purchase of raw materials 256,250
Stocks: Raw materials 49,150
Work-in-progress 23.400
Trade debtors 106,640
Trade creditors 35,120
Bank overdraft 21,960
All sales and purchases were made on credit. Assume that 1 year = 365 days.
Required;
(a) Calculate for the year, the:
(i) Current and acid-test (quick) ratios (each rounded to 1 decimal place)
(ii) Working capital cycle (rounded to whole days).
(b) Advise the company on what steps may be taken to reduce its working capital cycle.
Question – 2 (Jan-18) HW
The following information has been extracted from the financial records of Irvine Dawson Ltd for 2017.
Start of year End of year
$ 000 $ 000
Inventory 168 208
Trade receivables 164 276
Trade payables 134 156
 Cost of sales during the year was $1 260 000 and a gross profit of 40% was earned on all sales.
 35% of all sales were for cash and the remainder were credit sales.
 Assume all purchases were on credit.
 Assume 1 year = 365 days.
(a) Calculate the company‟s working capital cycle (rounded to whole days), using the average of the opening
and closing balances for inventory, trade receivables and trade payables.
(b) Evaluate the liquidity of the company with reference to each element of the working capital cycle. Consider
how the company might be able to make improvements to its working capital cycle.
116
Question – 3(4-2012)
Coren Evens manufactures a single product, is budgeting to make and sell 150,000 units of the product at
$24.00 per unit in the coming year.
The product‟s unit production costs as a percentage of its selling price are as follows:
%
Direct materials 33
Direct labour 18
Production overheads 24
The following information is also available:
(1) Production and sales are expected to occur evenly throughout the year.
(2) Production is expected to take place with an average cycle of 8 days.
(3) Direct materials are expected to be held in stock for an average of 5 days before being issued to
production.
(4) Work – in – progress is expected to be 100% complete in terms of direct materials input and 60% complete
in terms of direct labour and production overheads.
(5) Finished products are expected to be in stock for an average of 7 days before their sale.
(6) The company plans to grant its customers an average credit period of 60 days while it expects to take an
average of 50 days to pay its suppliers of direct materials.
Required:
Calculate the company‟s total working capital requirements for the coming year (to the nearest $1,000)
Question – 4(3 /2008)

A new wholesale business is planning its working capital requirements. Sales will all be on credit with customers,
on average, expected to settle their debts 30 days after sale. Suppliers of goods are offering 45-day settlement
terms and expense creditors will, on average, be settled after 10 days.
The summary forecast trading and profit and loss account for Year 1 is:
$000 $000
Sales 300
Cost of goods:
Opening stock Nil
Purchases 200
Closing stock (20) (180)
Gross Profit 120
Expense (100)
Net Profit 20
Sales and expenses are expected to occur evenly over the year. The stock will be established at the start of
business and will then be held at the same level throughout the year.
Required;
Calculate the:
(a) Working capital requirements, by calculating the relevant balance sheet items (each to one decimal place of
$ thousand) as at the end of the year. (Assume that thereare365 days in the year).
(b) Stock turnover ratio expressed both as number of times and number of days.
(c) Working capital cycle (number of days).
117
Question – 5 (Sep-17)
The following information has been extracted from a retail company‟s financial records for Year 3.
$000
Trade receivables 320
Closing inventory 312
Trade payables 242
Cost of sales during the year was $2 520 000 and a gross profit of 30% was earned on sales (gross profit margin
30%).
40% of all sales were for cash and the remainder were on credit.
All purchases were on credit.
The opening inventory was $240 000
Assume 1 year = 365 days.
(a) Calculate the company‟s working capital cycle for Year 3 (rounded to whole days).
The company is considering allowing the collection period for trade receivables to increase by 12 days for Year
4. This would result in:
 a 20% increase in total revenue and a 20% increase in the cost of sales
 the value of inventory increasing by 15% to cope with the new demand
 the payment period for trade payables increasing by 18 days to finance the increase in inventory and trade
receivables.
(b) Calculate the expected change, indicating whether this is an increase or decrease, in the working capital
cycle for Year 4 (rounded to whole days).
(c) Calculate the change in value of the working capital investment for Year 4, showing the changes in
inventory, trade receivables and trade payables.
(d) Evaluate whether the company should proceed with the proposal for Year 4, commenting on all three
elements/aspects of the working capital cycle.
Question – 6(Nov-16)
The following information has been extracted from the financial statements of Clucas Davies for the year ended
2015.
$‟000
Revenue 760
Opening inventory of Finished goods 48
Ordinary goods purchased 340
Closing inventory of Finished goods 60
Trade receivables 74
Bank overdraft 46
Trade payables 48
Further information
- All of sales and purchases were on credit.
- Assume 1year=365days.
Required
(a) Calculate the following working capital ratios(to two decimal places);
(i) Rate of inventory(finished goods) turnover(number of times)
(ii) Trade receivables collection period(days)
(iii) Trade payables payment period(days)
(iv) Current ratio
(v) Acid test(quick) ratio
118
The following figures are available for the industry average;

Ratio Industry average
Inventory turnover 10 times per year
Trade receivable collection period(days) 32 days
Trade Payable Payment period(days) 38 days
Current ratio 1:50:1
Acid test(quick) ratio 1:1
(b) Evaluate the liquidity of the company using the ratios calculate in (a). the company‟s financial information
and industry average.
Question – 7(March-17)
You have been given the task of assessing the financial performance of two separate companies operating in the
retail industry.
The financial information for these two companies, for the year 2016, is presented as follows:
Company Bright Stansted
$000 $000
Sales revenue 650 760
Cost of sales 380 410
Current assets
Inventory (closing) 70 85
Trade receivables 55 95
Bank 25 -
Current liabilities
Trade payables 45 65
Bank overdraft - 40
Note
Inventory as at 1 Jan 2016 60 65
All sales and purchases are on credit. Assume 1 year = 365 days.
Required
(a) Calculate for each company, stating the formula used, the following working capital ratios (to two decimal
places):
(i) rate of inventory turnover (days)
(ii) trade receivables collection period (days)
(iii) trade payables payment (days)
(iv) current ratio
(v) acid test (quick) ratio.
(b) Evaluate the liquidity of each company, suggesting which company has the best liquidity position.
You should refer to the ratios calculated in part (a) and the financial information
119
The following information has been extracted from the accounts of Hernandez Supplies:
2016 2017
$ $
Revenue 788,000 876,000
Ordinary goods purchased 485,000 490,000
Cost of sales 468,000 458,000
Average inventory 78,000 96,000
Average trade receivables 51,000 88,000
Bank account 38,000 NIL
Average trade payables 48,000 67,000
Bank overdraft NIL 24,000
The following information is also available:
• all sales and purchases are made on credit
• all transactions occur at an even rate throughout the year
• assume a 365 day year.
Required
(a) Calculate, for 2016 and 2017, the:
(i) rate of inventory turnover in days (rounded to the nearest day)
(ii) trade receivables collection period in days (rounded to the nearest day)
(iii) trade payables payment period in days (rounded to the nearest day)
(iv) current ratio (to two decimal places)
(v) acid test ratio (to two decimal places).
(b) Evaluate the liquidity of the company, making use of your calculations in part (a) and the financial
information provided in the question.
120
Theory
Question – 1
Current Ratio
The number of times that current liabilities are covered by the current assets. It is the initial indicator of the firm
ability to repay it short term liabilities.
Acid Test Ratio

The acid test ratio (Quick) ratio compares the (current assets minus inventory) to(current liabilities). Inventory is
excluded because it is least liquid of the current assets.
Question – 2
Importance of Working Capital
The aim of working capital management is minimizing the risk of insolvency and maximizing the return asset.
Efficient working capital management will ensure that a company has sufficient cash to meet its day operation
needs.
Question – 3
Describe how the firm might improve its working capital cycle
- The company could reduce the amount of cash/credit tied up in inventory
- Reducing purchases/closing inventory to more appropriate levels
- Aim to reduce the time taken to collect money owed by Trade Receivable
- Increase the time taken to pay Trade Payable (without risking losing suppliers)
- Reduced any other Trade Payable and bank overdraft. Increase bank balance
- Actively pursue customers who are overdue with payments.
121
Chapter – 18
Source of Data
Question-1(April-19)
The managers at Trinculo Ltd have developed the following controls to protect the security and confidentiality of
its management information.
- All work carried out on any computer should be saved at least once per hour and all files should be backed up
at the end of the day.
- Computers should be logged out or locked when users are not at their desks.
- Employees are given a password based on their initials and date of birth, and are prompted to change it once
every six months.
- Employees are able to access all parts of the management information system by using their username and
password.
- Employees are not allowed to bring in their own „memory sticks‟ (USB drives).
- Employees are not allowed to access websites that are not related to work.
(a) Evaluate how effective these controls might be in ensuring that the security and confidentiality of
management information is maintained.
- The rule about saving work hourly and backing up files daily will ensure that little work or time is lost in
the event of systems crashing or other physical disaster.
- The rule about logging out or locking computers will reduce the risk of unauthorised or malicious access
when user is not at their desk.
- Passwords based on initials and dates of birth are easy to decode, and this could enable someone to log
on to the system and not be identified.
- The infrequent changes to a password may enable unauthorised users having access the system for a
long period.
- Employees having access to all parts of the management information system using their username and
password means that anyone could cause damage or steal information.
- Not allowing use of own „memory sticks‟ (USB-drives) will reduce the risk of viruses that might corrupt or
steal data.
- Not allowing access to non-work-related websites will reduce the risk of viruses that might corrupt or
steal data.
Conclusion:
The rules and procedures, if followed, do / do not safeguard the security and confidentiality of the company‟s
management information.
(b) Explain two actions that could be introduced to encourage the employees to follow the controls.
- Induction / refresher training – this would ensure employees were aware of the rules and why they were
important.
- Issue Code of Conduct / Staff Handbook – when in doubt, employees could look up the policies / a
procedure to see what was expected.
122
Question – 2 (March 2018)

The managers at Thebe Ltd have been examining the controls in place to ensure confidentiality and security of
information.
The main findings were as follows:
- There is a policy that all work carried out on office computers is saved at least once per hour and files are
backed up at the end of the day. When checked, there was 97% compliance with this policy.
- There is a policy that office computers should be logged out or “locked” when the user is not at their desk.
When checked, there was a 62% compliance with this policy.
- Computers automatically “lock” if there is no activity within a 15-minute period.
- Employees can have access to all parts of the management information system by using their username and
password.
Evaluate how effective the current controls are in ensuring that the security and confidentiality of
management information is being maintained.
- There is a very high (97%) compliance with back-up and saving rules which suggests the risk of work
being lost in the event of a system crash is low.
- Low compliance (62%) with logging out and locking rules which gives someone 15 minutes to interfere
(possibly maliciously) with a colleague‟s machine.
- Computers automatically lock after 15 minutes which might not reduce the likelihood of someone accessing
or tampering with a colleague‟s work.
- Employees have access to all parts of the system with their own password – this means that highly
sensitive information is freely available to everyone.
Question – 3 (April 2018)

Pasiphae does not have an integrated accounting system. Instead, many of the various parts of the accounting
function operate on different systems using different software.
The directors of Pasiphae have stated that it is essential that the management information produced is accurate
and up-to-date and as a result most of this specialist software is the latest version.
Employees in the accounting department carry out their own work and, when they have finished a task, the data
is copied across onto the general ledger.
The accounting packages are installed on 15 computers in various offices. Some of the computers are
networked, but most are stand-alone machines. The general ledger is only installed on one open-access
machine in the accounts office.
Evaluate whether the current system is likely to produce information that is accurate and up-to-date.
- The business has the newest accounting packages - this should increase the speed and accuracy of
information.
- Data has to be copied across to the general ledger – this is time consuming and increases the chances of
errors.
- Employees work independently on their own work – there is therefore no verification which means that
inaccurate data may be copied onto the general ledger
- Many of the computers are standalone which means that there may be several versions of the same
information on different machines / it may not be the latest information being transferred to the general ledger.
- The system is not integrated – so there are no inbuilt checks that would warn of potential errors in data being
input.
123
Question – 4
Jupiter does not have an integrated accounting system. Instead, the various parts of the accounting function
operate on different accounting systems and there is different specialist software.
The systems are accessed using the company password, which is known by every employee in the finance
department and has been used for the past 12 months.
The directors of Jupiter have indicated that having access to management information that is accurate and up to
date is absolutely essential. They have also suggested that keeping the information secure and confidential
needs to be a top priority.
(a) Explain two measures that the business could introduce to improve the security and confidentiality of
its management information.
(OR)
Trueflow is concerned with the security and confidentiality of the management information it holds on its files.
Explain two controls Trueflow’s management can put in place to ensure that security and confidentiality
are maintained when dealing with management information. (4)
- Restrict access to parts of the system – this will ensure that only management have access to the most
sensitive parts of the system
- Change passwords regularly – this will ensure that passwords are less usable by non-authorised staff or
those no longer needing access
- Password protect information – so that it cannot be accidentally written over or changed
- Back up information – to reduce the likelihood of it being deleted or corrupted
- Introduce log-in / log-out procedures – this will reduce likelihood of computers displaying sensitive information
when unattended
(b) Evaluate, ignoring security or confidentiality issues, whether the current system is likely to produce
information that is accurate and up to date. (6)
Positive factors:
The various parts of the system use specialist software which may produce information in the form that it is
required or may produce information quickly
Negative factors:
Information may need to be copied from one part of the system to another and this will slow down the
production of reports and introduce errors
Different versions of the same information may be stored in different parts of the systems and this may lead to
confusion or errors that causes poor decisions to be made
Conclusion: system will or will not produce information that is accurate and up-to date
Question – 5
Explain two methods that could be used to keep management information confidential. (4 marks)
Password to restrict access to files and folders
Mechanical security devices (keypads) to restrict access to offices/buildings/rooms
Encryption to restrict external hacking
Training to raise awareness of the need to maintain security procedures
124
Question – 6 (Sept 2019)

The directors of Hyperion Ltd are considering the introduction of an integrated accounting software system.
(a) Explain two benefits that Hyperion Ltd would get from introducing an integrated accounting system.
(4)
- Information will no longer need to be copied from one part of the system to another / only one set of
accounts – this will reduce errors / save time / reduce compatibility problems.
- When data is entered onto the system, all relevant parts of the system will be updated – this means that
information is up-to-date / there is only one figure stored for any given item.
- Integrated systems usually have a reports menu where formats can be adapted – this means that
Hyperion can produce reports quickly / in the required format.
- Integrated systems usually have inbuilt protections / audit tools – so it less likely that impossible data can
be entered onto the system / this will highlight irregular and possibility fraudulent behavior
(b) Explain one action that Hyperion Ltd could take to improve the security of information kept on
computers. (2)
- Strong or unique / frequently changing passwords – this will make it more difficult for people accessing
systems / data that they are not authorised to see.
- Restriction on use of „memory sticks‟ (USB-drives) – this will reduce the risk of viruses that might corrupt
or steal data, being introduced to the system / this will make it more difficult for staff to download and steal
data.
- Restricted access – only allowing people access to the parts of the system related to their job will prevent
unauthorised access to really sensitive information.
- Regular backing up – this will reduce the likelihood of data being lost or corrupted by unexpected
problems like power cuts
Question – 7
Explain two consequences of a business having inadequate data security procedures. (4 marks)
Loss of reputation- which could lead to loss of clients
Sensitive information is leaked - competitors could exploit this leak
Legal proceedings - damaged parties take action to recover losses
Increase costs - increased liability insurance
To protect copyright/patents/designs to prevent a loss of competitive edge
125

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U Win Bo Myint Cost and Management Accounting LCCI-Level 3

Direct cost and indirect cost

Example: The high-low method

A set up in fixed costs of $500 occurs at an output level of 3,500 units.

Question – 5 (March 17)

The following machine times per unit are required:

Service department costs are apportioned as follows:

Question – 12 (OH to over/(under))

In addition the following information is available;

Yewtree uses a cost-plus approach when setting selling prices.

Exe Whye Zed

Question – 5 (June 2019)

- Product inspection costs will be based on the number of production runs:

- Machine maintenance will be based on the number of machine hours used.

Question – 7(Nov -18)

The following information is available for October 2017.

Question-10 (2/2014-Costing) Revision

Direct material $4.50 per unit

The selling price of D44 was $9.95 per unit.

Selling price ($ per unit) 12.00 25.00 16.00

(i) The contribution to sales ratio

The directors of Neptune are deciding whether to introduce Product G.

Question – 15 (April 2017)

Question – 16(3 /2011) HW

Differential / incremental cost

Question – 5(April 2018)

Question – 6 (Dec 2018) HW

Question – 6 (June 2017)

The actual results were as follows:

Question – 8(April 2018) HW

Materials 8,208 kg $65,664 7,300 kg $53,655

Materials (kg) 54,600 $202,020 62,080 $239,008

Question – 11 (Nov 2017)

Materials 77,000 ks $215,600 87,400 kg $266,570

Question – 12 (Jan 2017)

Question – 13 (Mar 2017)

Question – 14(Jan 2018) HW

The following variances were calculated for the period:

Question – 17(Apr 19) HW

Question – 2(Sep 2018)

The following additional information is available.

Question – 5 (April 2016) HW

Question – 6(3 /2009)

Question – 7 (2/2011) (HW)

Question – 10 (July 2019)

Question – 11 (3/2010) (Master Butgeted)

Non-production overhead costs are budgeted at $12,000 per period.

Question – 6(April 2017)

 One CR3 requires 6.8 kg of material Q, costing $9.50 per kg.

During Month 6, there were 3,400 units manufactured and sold.

Question – 3(June 2019)

Question – 6 (July 2017)

Question – 7 (April 2017) HW

Question 2(June 2019)

The company‟s cost of capital is 15% per annum.

Question – 6(4 /2009)

Estimated disposal value of equipment $50,000 $40,000

The company has a cost of capital of 12% per annum.

The relevant discount factors are as follows:

The company‟s cost of capital is 15% per annum.

(a) Calculate, for the proposed investment in each machine, the:

Internal rate of return

Example of a long-term decision: