STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2010 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC9: COSTING AND BUDGETARY CONTROL

(DECEMBER 2010)

TIME ALLOWED: 3 HOURS

SUGGESTED SOLUTIONS
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1. TULINJE LTD
CASH BUDGET FOR THE PERIOD JANUARY TO APRIL 2011

January February March April

K K K K
Opening balance 10 24.35 33.75 62.85
Sales* 60.4 68.4 75.8 72
Sale of van ____ _____ 3__ ____
70.4 92.75 112.55 134.85

Material 7 7.5 9 10
Labour* 17.25 19.5 21.5 22
Tax 14
Purchase of a van 5
Variable overhead 10.8 12 13.2 13.2
Fixed overhead _ 6__ _6__ __6__ __6__
46.05 59__ 49.7_ 51.2

Closing balance 24.35 33.75 62.85 83.65

Presentation

*Workings:
January February March April
K’m K’m K’m K’m
Sales:Cash (5%x400x170) 3.4 (5%x400x190) 3.8 (5%x400x180) 3.6 (5%x400x180) 3.6

Credit (95%x400x180) 57 (95%x400x170) 64.6 (95%x400x190) 72.2 (95%x400x180) 68.4

60.4 68.4 75.8 72.0

Labour (25%x100x150) 3.75 (25%x100x180) 4.5 (25%x100x200) 5 (25%x100x220) 5.5

(75%x100x180) 13.5_ (75%x100x200) 15_ (75%x100x220) 16.5 (75%x100x22) 16.5
17.25 19.5 21.5 22

(b) (i) By ensuring that it can always meet its commitments, the company
will maintain a satisfactory credit rating.
(ii) If a cash shortage is forecast, arrangements can be made in advance
to overcome the problem.

(iii) Arrangements can be made in advance to invest a forecast cash

surplus.

(iv) Advantages can be taken of a cash surplus, e.g. prompt payment to

obtain discounts.

(c) (i) There are non-cash items in the Profit and Loss Account e.g. Depreciation
and Bad Debt provision.
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(ii) Capital Expenditure is included in a cash budget.

(iii) Taxation is included in the cash budget.
(iv) There is a time lag in the settlement of debtors and creditors, not reflected
in the Profit and Loss Account.
(d) (i) Loss of interest if cash were invested.
(ii) Loss of purchasing power in times of high inflation.
(iii) Security and insurance costs.

2. (a) (i) Normal loss is the loss that occurs due to the physical nature of the
product and is unavoidable – hence anticipated in the course of
production.

(ii) Abnormal loss is the loss over and above the normal loss and can be
caused by poor workmanship, or faulty machinery.

(b) (i) Costs K

Material 80,000 x K2 160,000
Labour 3,000 x K6 18,000
Variable overhead 3,000 x K3 9,000
Fixed overhead 9,000
196,000
Scrap 8,000 x K1 8,000
188,000
Cost apportionment based on weight
K
A (5/10x90%x80,000) 36,000 kilos (36/72x188,000) 94,000
B (3/10x90%x80,000) 21,600 kilos (21.6/72x188,000) 56,400
C (2/10x90%x80,000) 14,400 kilos (14.4/72x188,000) 37,600
72,000 kilos 188,000

(ii) Sales Value K

A 36,000 x K15 540,000
B 21,600 x K12 259,200
C 14,400 x K10 144,000
943,200

Cost apportionment
K
A (540/943.2x188,000) 107,634
B (259.2/943.2x188,000) 51,664
C (144/943.2x180,000) 28,702
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188,000
(c) Output
A 36,000 x 90% 32,400
B 21,600 x 90% 19,440
C 14,400 x 90% 12,960

X Y Z
Sales (K18x32,400) 583,200 ( K15x19,440) 291,600 ( K12x12,960) 155,520
Loss of income 540,000 259,200 144,000
Increase in revenue 43,200 32,400 11,520
Further costs (K1x36,000) 36,000 (K1x21,600) 21,600 (K1x14,400) 14,400
Profit/(Loss) 7,200 10,800 (2,880)

Products A and B should further be processed into X and Y respectively as these

will result into additional profits.

(d) Net sales value of production basis, i.e. sales value minus any further processing
costs.

3. Tawewa Ltd
Material K60,000 = K3 per unit
20,000 units
Labour K100,000 = K5 per unit
20,000 units

Production overhead High 22,000 units K166,000

Low 20,000 units K160,000
2,000 6,000
Variable cost 6,000 = K3 per unit
2,000
Fixed cost=K160,000–(20,000 x 3) = K100,000

Sales overhead: High 21,000 units K113,000

Low 20,000 units K110,000
1,000 3,000
Variable cost 3,000
1,000 = K3 per minute
Fixed cost K110,000 – (20,000 x 3) = K50,000
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Costs Variable Fixed Total

(K’000)
Material 21,900 x 3 65.7 65.7
Labour 21,900 x 5 109.5 109.5

Overheads:
Production 21,900 x 3 65.7 100 165.7
Depreciation 50 50
Sales 20,500 x 3 61.5 50_ 111.5
302.4 200 502.4

(b) (K’000) Budget Actual Variance

Material 65.7 68 2.3 A
Labour 109.5 103 6.5 F

Overheads:
Production 165.7 170 4.3 A
Depreciation 50 50 nil
Sales 111.5 115 3.5 A

(c) (i) To take advantage of favourable situations or correct adverse ones.

(ii) Can ascertain whether a variance is caused by seasonal factors, also whether a
variance is within acceptable tolerance limits.

(iii) Can help to pinpoint responsibility for the variance.

(iv) Variances can be segregated into those which are controllable and those which are
uncontrollable.

4. (a) (i) Budgeted fixed overhead = K56,000 = 8,000 hours

Fixed overhead per hour 7

(ii) Budgeted hours = 8,000 = 2 hours per unit

Budgeted units 4,000

(iii) Capacity ratio = Actual hours = 90%

Budgeted hours

Therefore actual hours = 8,000 x 90% = 7,200 hours

(iv) Fixed overhead absorbed = Actual hours x Rate per hour

= 7,200 hours x K7 per hour = K50,400
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(v) Actual fixed overhead = Fixed overhead absorbed + overhead under absorbed
= 50,400 + 5,000 = 55,400

(vi) Efficiency ratio = Standard hours produced = 7,600 = 105.5%

Actual hours worked 7,200

(b) (i) Budgeted fixed overhead = 48,000 = K6

Budgeted hours 8,000

(ii) Budgeted hours = 8,000 = 2,000 units

Hours per unit 4

(iii) Fixed overhead absorbed = K45,000

Actual fixed overhead K46,000
Under absorbed fixed overhead K1,000

(iv) Volume ratio = Standard hours = 7,200 = 90%

Budgeted hours 8,000

(c) (i) Percentage on direct materials

(ii) Percentage on direct labour
(iii) Percentage on prime cost

(d) (i) Rate per unit of output.

(ii) There is a general acceptance that hourly rates are more likely to reflect
the load on a cost centre and hence the incidence of overheads.

5. (a) (i) Relevant cost is the extra cost, lost revenue or cost saved relevant to the
decision that is made.

(ii) Sunk cost is a cost that has already been incurred and is not used for
decision making.

(iii) Fixed cost is a cost that does not change with the level of activity/output.
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(b) K
Material A (1,000,000 – 400,000) 600,000
Material B 200,000
Material C 350,000
Labour: Operator [50 x (6,000-5,000)] 50,000
Labourer 150,000
Supervisor (500,000 – 450,000) 50,000
Machinery (800,000 – 400,000) 400,000
Variable overhead 200,000
2,000,000
Contract Price 2,280,000

Profit 280,000

On the above figures Fortune Ltd should accept the offer since it gives a profit of
K280,000.

(c) (i) Future costs and revenues should be considered.

(ii) Expenditure that has already been spent is irrelevant and should be
disregarded.

(iii) Only incremental or differential costs i.e. those which will be changed by
the decision should be considered.

(iv) Costs which are common to all alternatives should be disregarded.

6. (a) Stores Card

In Out
Date Purchases Cost of sales Stock Balance
Qty @ K Qty @ K Qty @ K
Dec 09 1,000 30 30,000 - - - 1,000 30 30,000
Jan 10 800 30 24,000 200 30 6,000
Feb 10 1,400 35 49,000 200 30 6,000
1,400 35 49,000
1,600 55,000

Mar 10 200 30 6,000

400 35 14,000 1,000 35 35,000

Sept 10 900 35 31,500 100 35 3,500

Nov 10 1,100 40 44,000 100 35 3,500
1,100 40 44,000
1,200 47,500
(Totals 3,500 123,000 2,300 75,500)
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(b) Stock at 30 November 2010

In good condition 100 units @ K35 3,500
850 units @ K40 34,000
Stock at cost 950 units 37,500

Stock at net realizable value 150 units @ (K20 – K3) 2,550

Missing stock 100 units @ K0 0______
K40,050
Stock per Balance Sheet

(c) K
Sales (800 x 50) + (600 x 56) + (900 x 60) 127,600
Less cost of sales* 75,500
52,100
Gross profit (before writing off stock damaged/lost) 7,450
Less: stock written off** 44,650
Profit on Product A for year

*Cost of sales = Total purchases – stock per stock card

= 123,000 – 47,500 = K75,500
**Stock written off = (150 x K23[K40-K17]=3,450)+(100 x K40 = 4,000) = K7,450
Or stock per Store card less stock per balance sheet
=K47,500-40,050 = K7,450.00
(d) (i) Last in first out (LIFO)
(ii) Average cost
(iii) Replacement cost
(iv) Net realizable value
(v) Standard cost

7. (a) (i) Fixed budgets remain the same at all levels of activity. They are used as a
planning technique..

Flexible budgets change in accordance with the actual level of activity

achieved, in order to facilitate comparison. They are used as a control
technique.

With flexible budgets, semi- fixed/semi- variable costs must be broken

down into their respective elements.

(ii) The principal budget factor is the factor that will limit the activities of a
company for a given period. This will have a constraining effect on all
plans and budgets, and must be identified at the start of the budgeting
process. Its effect on the budget must be carefully considered.
Frequently, the principal budget factor is customer demand, but could also
include the supply of skilled labour, supply of materials or machine
capacity.
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(b) (i) All costs can be separated into fixed and variable elements but in reality
most costs are of semi- fixed/semi- variable nature.

(ii) Fixed costs will remain constant and variable costs will vary according to
each specific activity, but fixed costs may be incremental, and some
variable costs may vary with sales rather than production

(iii) Technology and efficiency remain constant, although in practice

efficiency may vary from period to period.

(iv) Production and sales are the same, although in reality there may be
production specifically made for stock e.g. in seasonal trades.

(v) Selling prices remain the same at all levels, although in practice discounts
may be given to increase sales.

(vi) Material costs remain constant whereas bulk buying may give rise to
cheaper material costs.

(vii) Labour costs remain the same at all levels of activity but bonuses may be
paid to increase production.

(c) (i) Cost allocation is the charging of discrete identifiable items of cost to cost
centres or cost units.
(ii) Cost apportionment is the division of costs amongst two or more cost
centres in proportion to the estimated benefit received, using a proxy, e.g.
square feet.
(iii) Cost absorption is the charging of overhead to cost units by means of rates
separately calculated for each cost centre.

(d) Overtime premium is the extra payment per hour, made to employees for working
any hours above their contractual obligation.

(i) If worked at the request of a customer the overtime premium amount

should be added to the cost of the direct labour for the job concerned.
(ii) If worked as a matter of company policy it should be excluded from the
direct labour cost and included in the costs as production overhead and
thus absorbed across the whole of the production units.

END