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Cost Accounting

Level 3
Series 3 2004 (Code 3016)

Model Answers
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Cost Accounting Level 3


Series 3 2004

How to use this booklet Model Answers have been developed by LCCIEB to offer additional information and guidance to Centres, teachers and candidates as they prepare for LCCIEB examinations. The contents of this booklet are divided into 3 elements: (1) (2) Questions Model Answers reproduced from the printed examination paper summary of the main points that the Chief Examiner expected to see in the answers to each question in the examination paper, plus a fully worked example or sample answer (where applicable) where appropriate, additional guidance relating to individual questions or to examination technique

(3)

Helpful Hints

Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success. The London Chamber of Commerce and Industry Examinations Board provides Model Answers to help candidates gain a general understanding of the standard required. The Board accepts that candidates may offer other answers that could be equally valid.

Education Development International plc 2004 All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior written permission of the Publisher. The book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover, other than that in which it is published, without the prior consent of the Publisher.

Cost Accounting Level 3


Series 3 2004
QUESTION 1 A company uses two raw materials (Material A and B) to manufacture its single product. The budgeted output (net of rejects) for the next year is 4,500 units with production uniformly distributed throughout the year. The finished product contains by weight, 20% Material A and 80% Material B. The following further information is available: (1) (2) (3) (4) (5) (6) (7) (8) (9) Material A costs 5 per kg Material B costs 2 per kg Product rejection rate 10% (All rejected products are scrapped) Finished weight of completed unit 5 kg Stock holding costs (both materials) 10% of average stock holding value per year. Ordering costs 200 per order for each of material A and B. Materials A and B are ordered separately. A minimum (safety) stock level, for material A, of 500 kg is to be kept. No minimum stock level is budgeted for Material B. Stock levels at the end of this current year: Material A 500 kg Material B zero kg The supplier of both materials has offered the following quantity discounts off the costs quoted in 1 and 2 above. Order Quantity 0 9,999 kg 10,000 19,999 kg 20,000 and over REQUIRED (a) Calculate the weight of Material A and of Material B to be used next year. (3 marks) (b) Calculate the annual stock holding costs for Material A if the company places two orders per year. (Assume these orders are placed so that deliveries are six months apart with the first delivery taking place on day 1 of each year.) (4 marks) Determine the order quantity of Material A that would minimise the annual costs. (6 marks) The company is considering the options of placing one, two or four orders per year for Material B. (d) Advise the company on the number of orders per year for Material B (one, two or four) that would minimise annual costs. (Assume whatever number of orders you advise the deliveries will be equally spread throughout the year with the first delivery taking place on day 1 of each year.) (7 marks) (Total 20 marks) Discount No discount 2% 5%

(10)

(c)

Model Answer to Question 1 (a) Finished products required Production required allowing for 10% rejects Finished weight of completed product Weight of raw materials, per finished unit, required. Material A Material B Total weight of material used. Material A Material B (b) Stock holding costs for material A Order size (two orders per year) Average stock held (kg) Average stock held (cost) Stock holding costs per annum (5 x 20%) (5 x 80%) (1 x 5,000) (4 x 5,000) 4,500units 5,000units 5 kg

(4500/0.9)

1 kg 4 kg 5,000 kg 20,000 kg

(5,000/2) (2,500/2 + 500) (1,750 x 5) (10% x 8,750)

2500 kg 1750 kg 8,750 875

(c) Order size to minimise cost is the Economic Order Quantity (EOQ)

EOQ

2 Co D Ch
2 x 200 x 5000

5 x 0.1
2000 kg

(d) Material B purchase order options. Number of orders per annum Order size(units) Material cost per unit () Total material cost () per annum Stock holding costs () per annum Ordering costs () per annum Total annual costs () 1 20,000 1.9 38,000 1,900 200 40,100 2 10,000 1.96 39,200 980 400 40,580 4 5,000 2 40,000 500 800 41,300

Advise the company to place one order.

QUESTION 2 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 Raw material Y Direct labour Process stage 2 Raw material Z Direct labour 5,200 kg at 3 per kg 2,150 hrs at 8 per hour 10,000 kg at 4 per kg 12,000 kg at 5 per kg 5,400 hrs at 8 per hour

Factory overheads in each process stage are absorbed at 12.00 per direct labour hour. Output Process stage 1 Product A Material transfer to stage 2 Process stage 2 Product B Product C By-product D Quantity 4,000 kg 16,000 kg Selling price per kg 15

8,000 kg 11,000 kg 1,200 kg

20 18 5.50

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) (ii) (b) (c) Process stage 1 Process stage 2. (12 marks) Assuming that all production was sold prepare a profit statement for the last period. (4 marks) Explain the meaning of: (i) (ii) Joint products By-product. (4 marks) (Total 20 marks)

Model Answer to Question 2 (a) (i) Process stage 1 account Kg 10,000 40,000 Product A 12,000 60,000 Trans to process 2 43,200 Normal loss 64,800 2,000 22,000 210,000 Kg 4,000 16,000 2,000 42,000 168,000

Material X Material Y Labour Overheads Process loss/disposals

22,000

210,000

Workings Product A 210,000 X 4,000/20,000 Trans to process 2 210,000 x 16,000/20,000 or Cost per kg = 210,000/(22,000 2,000) = 10.50 per kg Product A 10.50 x 4000 Trans to process 2 10.50 x 16000

= 42,000 = 168,000

= 42,000 = 168,000

(ii) Kg 16,000 5,200 Process stage 2 account 168,000 Product B 15,600 Product C 17,200 By-product D 25,800 Abnormal loss 226,600 Kg 8,000 11,000 1,200 1,000 21,200 88,000 121,000 6,600 11,000 226,600

Process 1 Material Z Labour Overheads

21,200

Workings Product B (226,600 6,600) x 8,000/20,000 Product C (226,600 6,600) x 11,000/20,000 Abnormal loss (226,600 6,600) x 1,000/20,000 or Cost per kg = (226,600 6,600)/(21,200 1,200) = 11 Product B 11 x 8,000 Product C 11 x 11,000 Abnormal loss 11 x 1,000

= = =

88,000 121,000 11,000

per kg. = 88,000 = 121,000 = 11,000

(b) Product Sales Process costs Less abnormal loss Process Profit

Profit Statement () A 60,000 42,000 B 160,000 88,000 C 198,000 121,000 Total 418,000 251,000 167,000 11,000 156,000

CONTINUED ON NEXT PAGE

Model Answer to Question 2 continued Alternative answer to part (b) Sales: Product A Product B Product C By-product D Costs: Process 1 Process 2 Process Profit 60,000 160,000 198,000 6,600

424,600

210,000 58,600

268,600 156,000

(c) (i)

Joint products Two or more products separated in processing, each having a sufficiently high saleable value to merit recognition as a main product. By-product A product that has commercial value but is not the product, or products, for which the production process is intended.

(ii)

QUESTION 3 Twist and Turn Ltd, which produces a single product (a wrought iron gate), is planning to make 1,000 gates in the following year. The production process involves a machining, a welding and a painting operation. The company uses a standard costing system and the unit production costs are as follows: Direct Material Wrought iron strips Hinges (two per gate) Latches (one per gate) Paint Direct Labour Machining Department Welding Department Painting Department Variable factory overheads

12.5 metres at 2 per metre 1.00 each 2.00 each 0.1 litres at 25 per litre

2.5 hours @ 7 per hour 1.5 hours @ 9 per hour 0.5 hours @ 8 per hour Absorbed at 6 per direct labour hour in each of the three departments

Fixed factory overheads (if absorption costing is applied): Machining Department Absorbed at a rate of 10 per machine hour (The manufacture of each gate takes 2 hours of machine time) Absorbed at a rate of 8 per direct labour hour Absorbed at a rate of 6 per unit

Welding Department Painting Department

The selling price is 150 per unit. Planned production and sales for the first three months of the following year are as follows: January 80 70 February 80 80 March 90 80

Production (units) Sales (units)

There is no stock at the beginning of January. REQUIRED (a) Produce a single budgeted manufacturing and trading account for the three month period January to March using: (i) (ii) Absorption Costing Marginal Costing. (16 marks) (b) Explain the difference between the profits calculated in part (a). Your explanation should be supported with calculations. (4 marks) (Total 20 marks)

Model Answer to Question 3 (a) Sales for the 3 month period (70+80+80) 230 units Production output for same period (80+80+90) 250 units Stock at end of period 20 units Budgeted Manufacturing and Trading account for the 3 month period (i) Absorption Costing Sales Direct materials Wrought iron Hinges Latches Paint (230 x 150) (250 x12.5 x 2) (250 x 2 x 1) (250 x 2) (250 x 0.1 x 25) 6,250 500 500 625 7,875 Direct labour Machining Department (250 x 2.5 x 7) Welding Department (250 x 1.5 x 9) Painting Department (250 x 0.5 x 8) Variable overheads Machining Department (250 x 2.5 x 6) Welding Department (250 x 1.5 x 6) Painting Department (250 x 0.5 x 6) (or 250 x 4.5 x 6) Fixed overheads Machining Department (250 x 2 x 10) Welding Department (250 x 1.5 x 8) Painting Department (250 x 6) Total cost of production Less Closing stock (32875/250 x 20) Production cost of sales Gross Profit (ii) Marginal Costing Sales Direct materials Direct labour Variable overheads Variable cost of production Less Closing stock (23,375/250 x 20) Variable production cost of sales Factory Contribution Less Fixed overheads Gross Profit 7,875 8,750 6,750 23,375 1,870 21,505 12,995 9,500 3,495 4,375 3,375 1,000 8,750 3,750 2,250 750 6,750 5,000 3,000 1,500 9,500 32,875 2,630 30,245 4,255 34,500 34,500

(b) Reconciliation of profits Marginal Profit Add fixed element to marginal closing stock(9500/250 x 20) Absorption Profit

3,495 760 4,255

Profit difference due to value of closing stock. Under absorption method the fixed overhead is carried forward in the value of the closing stock whereas in the marginal method it is not.

QUESTION 4 A company, which manufactures two products Tee and Pee, uses a standard absorption costing system. The production department budgets for year 5 include the following: Products Tee Pee 720 840 5 10

Production output (units) Direct labour per unit (hrs)

Fixed production overheads of 136,800 are budgeted for the year and are to be absorbed on the basis of standard direct labour hours. Production output is evenly distributed over the 12 months of the year and fixed production overheads are incurred evenly. Actual results for month 1 year 5 were as follows: Production output Direct labour Fixed overheads REQUIRED Calculate for month 1 year 5 for the Production Department as a whole: (a) The following variances: (i) (ii) Fixed production overhead expenditure Fixed production overhead volume 51 units of Tee and 60 units of Pee 900 hours 11,000

(iii) Fixed production overhead efficiency (iv) Fixed production overhead capacity. (14 marks) (b) The following control ratios: (i) (ii) Production volume Production efficiency

(iii) Production capacity. (6 marks) (Total 20 marks)

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Model Answer to Question 4 (a) Budgeted direct labour hours for year 5 Tee Pee 3,600 8,400 12,000 = 1000hrs per month Fixed production overhead absorption rate = 136,800/12,000 = 11.4 per direct labour hour. Standard direct labour hours of actual production(month 1 year 5) Tee Pee (51 x 5) (60 x 10) 255 600 855 (720 x 5) (840 x 10)

(i)

Fixed production overhead expenditure variance 136800 /12 11,000 400F

(ii)

Fixed production overhead volume variance (855 x 11.4) (136,800/12) 1653A

(iii) Fixed production overhead efficiency variance (855 900) x 11.4 513A

(iv) Fixed production overhead capacity variance (1000 900) x 11.4 1140A

(b) (i)

Production volume control ratio (%) Std direct labour hours of actual production Budgeted direct labour hours = 855 x 100% = 1,000 x 100% 85.5%

(ii)

Production efficiency control ratio(%) Std direct labour hours of actual production Actual direct labour hours worked = 855 x 100% = 900 x 100% 95%

(iii) Production capacity control ratio (%) Actual direct labour hours worked Budgeted direct labour hours = 900 x 100% 1,000

x 100% = 90%

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QUESTION 5 A company, which manufactures and sells a single product, is preparing budgets. The following information has been provided by the business: Sales Budgeted sales for the next five months are as follows: Month Month Month Month Month 1 2 3 4 5 1,800 2,000 2,200 1,800 2,400 units units units units units

Raw Materials Two raw materials (Materials P and Q) are used in the manufacture of the product. Each finished unit of the product requires 1 kg and 4 kg of Materials P and Q respectively. During manufacture Material Q is subject to a material input loss of 20%. No other losses occur during manufacture. The budgeted purchase prices are 12 per kg for Material P and 3 per kg for Material Q. Purchases are planned so that an order placed in any one month will be delivered at the start of the next month. Stock Holding Finished Product A stock level of finished product will be maintained at the end of each month equivalent to half the estimated sales for the following month. Stock level at the beginning of Month 1 is expected to be 900 units. Material P This material is subject to a suppliers order quantity of 3,000 kg. The company policy is to only place orders for the material when requirements for the next month's production cannot be met from stock. Stock level, at the start of Month 1 is expected to be 500 kg. A delivery of 3,000 kg, ordered the previous month, is expected at the start of Month 1. Material Q A stock level of 2,000 kg to be maintained at the end of each month. No minimum order quantity applies to this material. Stock level before delivery at the start of Month 1 is expected to be 2,000 kg. REQUIRED (a) Prepare the production budget (units) for each of Months 1 to 4. (4 marks) (b) Prepare the material purchases budgets (kg) for both Material P and Material Q for each of Months 1 to 3. (5 marks) (c) Calculate the total value () of the budgeted material purchases in Months 1 to 3. (2 marks) (d) Calculate the value of the closing stock for each of Materials P and Q at the end of Month 4. (3 marks) (e) Name two other budgets that may be prepared relating to the production function. (2 marks) (f) Describe two benefits that a business would expect to derive from the budget setting process. (4 marks) (Total 20 marks)

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Model Answer to Question 5 (a) Production budget (Units) Month 1 (900) 1,800 1,000 1,900 Month 2 (1,000) 2,000 1,100 2,100 Month 3 (1,100) 2,200 900 2,000 Month 4 (900) 1,800 1,200 2,100

Opening stock Sales Closing stock Production

(b) Material purchases budget (kg) Material P 1kg of material input required per unit Month 1 Month 2 Usage (1,900) (2,100) Less opening stock 500 1,600 (Shortfall)/Surplus (1,400) (500) Receipts 3,000 3,000 Closing stock 1,600 2,500 Therefore purchases (orders placed) 3000kg

Month 3 (2,000) 2,500 500 500

Month 4 (2,100) 500 (1,600) 3,000 1,400

3000kg

Material Q 5kg of material input required per unit after allowing for 20% during manufacture. Month 1 9,500 Month 2 10,500 Month 3 10,000 Month 4 10,500

Receipts (kg) (Production units x 5)

Therefore purchases (orders placed) 10,500kg 10,000kg (c) Material purchases budget () Material P Material Q (3,000 + 3,000) x 12 (10,500 + 10,000 + 10,500) x 3

10,500kg

72,000 93,000 165,000

(d) Closing stock () Material P Material Q (1,400 x 12) (2,000 x 3 16,800 6,000 $22,800

(e) Other budgets Direct labour Direct expenses Production overheads Fixed asset

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CONTINUED ON NEXT PAGE

Model Answer to Question 5 continued

(f)

Budget benefits (i) (ii) Provides an acceptable plan for the business to work to. Provides a basis of control. Progress can be measured against plan

(iii) Provides motivation for managers and workforce. (Provided managers have participated in the initial budgeting process for their department.) (iv) Provides co-ordination and co-operation between departments (Each department is part of the overall budget jigsaw.)

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QUESTION 6 A company, which manufactures a single product, has prepared the following budgeted information for the next period: Production/sales units Selling price per unit Direct material per unit Direct labour per unit Production overheads Selling and distribution overheads Administration overheads 16,000 20 5 3 108,000 42,000 10,000

The following points have been revealed concerning the budget: (1) The budget is based on 80% utilisation of maximum capacity. (2) Production overheads 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 26,000. (4) Administration overheads are fixed. REQUIRED (a) Calculate for the next period: (i) (ii) The fixed overhead costs The breakeven point (in units)

(iii) The margin of safety as a % of the sales. (9 marks) The company is considering reducing its selling price to 18 per unit. Market research suggests that this price reduction will generate the additional sales for the company to operate at maximum capacity. REQUIRED (b) Assuming a selling price of 18 per unit and maximum capacity production output, calculate for the next period: (i) (ii) The breakeven point (in units) The margin of safety as a % of sales. (3 marks) (c) Plot on the graph paper provided, a single breakeven chart showing: (i) (ii) Total costs Total revenue at each selling price

(iii) Break-even point and margin of safety at each selling price. (8 marks) (Total 20 marks)

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Model Answer to Question 6 (a) (i) Fixed overhead costs Overhead Production Selling and distribution Administration Total cost() 108,000 42,000 1,000 160,000 Fixed cost() 60,000 26,000 10,000 96,000 Variable cost() 48,000 16,000 64,000

Workings Production overheads 80% Capacity 100% Capacity

108,000 = 120,000 =

Fixed F+ F+

Variable 16,000 x V 20,000 x V

Variable cost V = (120,000 108,000) / (20,000 16,000) = 3 per unit Fixed cost = 108,000 - (3 x 16,000) = 60,000

(ii)

Breakeven point Variable cost per unit() Direct material Direct labour Overheads (64,000/16,000) Unit contribution () Breakeven point

5 3 4 12 20 -12 = 8 96000 / 8 = 12,000 units

(iii) Margin of safety = 16,000 12,000 x 100% 16,000 25%

(b) (i)

Breakeven point Unit contribution () Breakeven

18 - 12 = 6 96,000 / 6

=16,000 units

(ii)

Margin of safety = 20,000 16,000 20,000 20%

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CONTINUED ON NEXT PAGE

QUESTION 6 CONTINUED (c) (i) (ii) (iii) Breakeven Chart

400,000

Sales at 18 per unit 350,000 Total costs Sales at 20 per unit BE Point 300,000 MofS

BE Point 250,000 COSTS AND REVENUE () MofS

200,000

150,000

100,000

50,000

0 4,000 8,000 12,000 16,000 20,000 OUTPUT (UNITS)

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