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QUESTIONS

KAPLAN PUBLISHING 1
PAPER 4 : ACCOUNTING FOR COSTS

MANAGEMENT INFORMATION
1 Which of the following is data?
A budgeted labour hours
B labour turnover by department
C Employees’ timesheets
D Days sick leave by type of employee

2 All of the following are cost units except:


A a guest–night in an hotel
B the assembly department in a car factory
C a batch of cakes in a bakery
D a litre of paint in a paint factory

3 Which of the following statements is NOT correct?


A Cost accounts should be timely
B Cost accounts can assist in providing estimates for the future
C Cost accounts must comply with accounting standards
D Cost accounts can assist with budgeting

4 In a cost accounting system what would be the correct entries to record the absorption of
factory overheads?
Debit Credit
A Work-in-progress a/c Factory overheads a/c
B Factory overheads a/c Work-in-progress a/c
C Cost of sales a/c Factory overheads a/c
D Factory overheads a/c Cost of sales a/c

5 Cost centres are:


A units of product or service for which costs are ascertained
B amounts of expenditure attributable to various activities
C functions or locations for which costs are ascertained and related to cost units
D a section of an organisation for which budgets are prepared and control exercised

6 CHARACTERISTICS
(a) Briefly describe three characteristics of useful information, giving one example of
how each would apply to cost accounting information. (5 marks)
(b) Discuss the importance of non-financial information within a management information
system. (5 marks)
(Total: 10 marks)

2 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

COST CLASSIFICATION AND COST BEHAVIOUR


7 Which of the following is most likely to be classified as a direct cost?
A factory rent
B supervisor costs
C depreciation
D material

8 Which of the following graphs depicts total variable cost?


(a) (b)

(c) (d)

9 The total cost of a production department was as follows:


January February March
Units of output 525 530 570
Cost $1,406.25 $1,412.50 $1,462.50
The costs can be analysed as:
A Variable cost per unit of $1.35, fixed costs of $697.50
B Variable cost per unit of $6.25, fixed costs of $1,400
C Variable cost per unit of $1.15, fixed costs of $802.50
D Variable cost per unit of $1.25, fixed costs of $750

10 A company is preparing a budget for the distribution department for the next year. For the
previous two years the following is known:
No. of vehicles Total cost
20X2 12 $19,800
20X3 15 $23,625
Total costs for 20X4, for 18 vehicles, is forecast to be:
A $22,950
B $25,750
C $27,450
D $28,350

KAPLAN PUBLISHING 3
PAPER 4 : ACCOUNTING FOR COSTS

11 The table shows the total of Cost Y at different production levels of Product X:
Units of Product X Total Cost Y ($000)
50 60
100 60
150 60
200 90
250 90
What could have been the cause of the increase in cost?
A Increased fuel and maintenance costs for delivery vehicles
B Increased storage requirements
C Loss of discounts on raw materials
D Pay increase for direct labour.

12 Which of the following describes a cost unit?


A cost per unit of output
B direct costs
C unit of product
D production department

13 The following classifications may be applied to costs:


(i) direct
(ii) fixed
(iii) period
(iv) production
Which of the above classifications could be applied to the cost of raw materials used by a
company in the manufacture of its range of products?
A (i) only
B (i) and (iv) only
C (ii) and (iii) only
D (ii), (iii) and (iv) only

14 COST ANALYSIS
(a) ‘The analysis of total cost into its behavioural elements is essential for effective cost
and management accounting.’

Required:
Comment on the statement above, illustrating your answer with examples of cost
behaviour patterns. (5 marks)

4 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

(b) The total costs incurred at various output levels, for a process operation in a factory,
have been measured as follows:
Output Total cost
(units) ($)
11,500 102,476
12,000 104,730
12,500 106,263
13,000 108,021
13,500 110,727
14,000 113,201

Required:
Using the high-low method, analyse the costs of the process operation into fixed and
variable components. (5 marks)

ELEMENTS OF COST - MATERIALS

This information is relevant for questions 15 and 16.


A business buys 60,000 units of an item each year and each order costs $8 to place. The cost of
holding each unit in inventory for a year would be $0.20 per unit.

15 What is the economic order quantity for this item?


EOQ
A 707 units
B 1,549 units
C 2,191 units
D 4,899 units

16 How often should orders be placed?


Frequency
A Every 13 days
B Every 15 days
C Every 21 days
D Every 28 days

KAPLAN PUBLISHING 5
PAPER 4 : ACCOUNTING FOR COSTS

This information is relevant for questions 17 to 22.


A business has inventories of material A of 400 units valued at $2.20 per unit at 1 September.
During the month of September the movements of material A were as follows:

5 September Issue 250 units


10 September Receipt 500 units @ $2.50 per unit
15 September Issue 340 units
18 September Receipt 400 units @ $2.70 per unit
27 September Issue 600 units

17 What is the cost of issues using the FIFO method?


A $2,913
B $2,980
C $2,975
D $2,990

18 What is the value of the closing inventory using the FIFO method?
A $242
B $251
C $286
D $297

19 What is the value of issues using the LIFO method?


A $2,913
B $2,924
C $2,980
D $2,968

20 What is the value of closing inventory using the LIFO method?


A $242
B $251
C $286
D $297

21 What is the cost of issues using the weighted average cost method?
A $2,913
B $2,926
C $2,980
D $2,968

6 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

22 What is the value of closing inventory using the weighted average cost method?
A $242
B $251
C $284
D $297

23 An enterprise uses a raw material T. Movements in T for the month of August are set out below.
Goods received Issued to production
Date kilos price per kilo Date kilos
12 August 4,000 $5.00 15 August 3,900
19 August 1,200 $6.00 21 August 1,100
24 August 2,800 $7.50
There were no inventories of T held at 1 August.
What would be the inventory valuation at 31 August on a FIFO basis, to the nearest $?
A $22,200
B $22,500
C $15,000
D $18,000

24 Aberdeen Ltd holds inventories of ratchets that it uses in production. Over the last month
receipts and issues were as follows:
Receipts Issues
Opening balance 200 at $5 7 May 400
5 May 300 at $4.50 23 May 400
12 May 100 at $6 30 May 200
22 May 400 at $5.50
29 May 200 at $7
If a LIFO inventory valuation method were used, the cost of ratchets issued to production in
the month would be:
A $5,150
B $5,350
C $5,450
D $,550

25 The following information relates to component ‘XYZ’:


Cost of component $40 each
Annual consumption 13,000 units
Cost of placing an order $250
Annual holding cost % of cost 12%

KAPLAN PUBLISHING 7
PAPER 4 : ACCOUNTING FOR COSTS

From this information, the Economic Order Quantity (EOQ) would be determined as:
A 1,200
B 1,310
C 1,164
D 1,450

26 The following statements relate to raw material pricing:


1 Profit will be lower using FIFO rather than LIFO.
2 Production costs will be higher using weighted average pricing rather than FIFO.
Are the above statements true or false in a situation where raw material prices are rising
consistently over time?
Statement 1 Statement 2
A False False
B False True
C True False
D True True

27 OMEGA
Omega Limited uses the weighted average method of pricing raw material issues. A
weighted average price (to three decimal places of a dollar) is calculated after each purchase
of material.
Receipts and issues of material Alpha for a week were as follows:
Receipts into inventory Issues to production
Day Kg $ Day Kgs
1 2,800 2,184.00 2 3,400
4 3,260 2,536.28 5 2,500
At the beginning of the week, material Alpha inventory was 6,080 kgs at a cost of $0.765 per
kg. Of the issues of material on Day 2, 120 kgs were returned to inventory on Day 3. Of the
receipts of inventory on Day 1 there were 440 kgs returned to the supplier on Day 4.
(a) Calculate the value of net issues to production for the week.. (3 marks)
(b) Calculate the value of the closing inventory. (2 marks)
(c) Calculate the value of issues and closing inventory if the FIFO method had been used.
(5 marks)
(Total: 10 marks)

8 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

28 INVENTORY TRANSACTIONS
Listed below is a record of a series of inventory transactions undertaken by a wholesale
business during the month of March for one of its inventory items.
Inventory Item ABC Units Value $
1 March opening inventory 350 2,800
3 March receipt 500 4,125
8 March issue 650
10 March receipt 500 4,325
18 March issue 425
23 March issue 100
25 March receipt 500 3,950

Required:
(a) Calculate the value of each of the three issues of Inventory Item ABC using the last in,
first out (LIFO) method and the first in, first out (FIFO) method. (12 marks)
(b) Assuming there were no further transactions for Inventory Item ABC calculate the
closing inventory values which would result from the LIFO and from the FIFO
methods. (4 marks)
(Total: 16 marks)

29 COMETAL
Cometal is a small manufacturer and presently maintains inventory records using the
Weighted Average (AVCO) accounting method. Given below are the details of the receipts
and issues to production, for Inventory Item A2199, for the period from 1 January 20X8 to
31 December 20X8.

INVENTORY CARD

Description of inventory Small Steel Bracket Inventory Code No: A2199


Date: 1.1.X8 to 31.12.X8

Date Detail Receipts Issues Balance


Quantity Unit price Value Quantity Unit price Value Quantity Value
$ $ $ $ $

1 Jan X8 Balance
b/fwd 200 5.00 1,000.00
12 Feb X8 Receipt 200 5.10 1,020.00
20 Feb X8 Issue 250
12 Apr X8 Issue 30
2 May X8 Issue 40
13 May X8 Issue 30
12 Oct X8 Receipt 20 5.12 102.40
19 Nov X8 Issue 10
21 Nov X8 Issue 20
12 Dec X8 Receipt 30 5.10 153.00

Required:
(a) Calculate separately the cost of each of the six issues to production shown on the
above inventory card assuming the company had used the Weighted Average basis,
and the value of the closing inventory on 12 December 20X8. (8 marks)

KAPLAN PUBLISHING 9
PAPER 4 : ACCOUNTING FOR COSTS

(b) Write up the ledger account for Material A2199 as it would appear in the cost accounts
assuming the company uses the Weighted Average (AVCO) Method. Your account
should be 'ruled up' as shown below:
Inventory account – Material A2199
Date Details Units $ p Date Details Units $ p
20X8 20X8
Jan 1 Balance 200 1,000 00
b/f

(6 marks)
(c) If a company chooses to use the First In First Out Method (FIFO) when accounting for
inventory at a time when material purchases prices are rising, what effect will this
have on:
(i) production costs; (1 mark)
(ii) closing inventory valuations. (1 mark)
(Total: 16 marks)

30 POPE & KG
(a) Steve Pope runs a small manufacturing business that requires, on average, 40 litres of
Liquid Q each week. Steve reviews the Liquid Q inventory levels every three weeks
and then places an order to replenish the inventory held up to a maximum level of 150
litres. It usually takes two weeks for Liquid Q to arrive from the suppliers. Today he
has reviewed the Liquid Q inventory level to discover that he has 90 litres remaining.

Required:
Calculate how many litres of Liquid Q Steve should order. (4 marks)
(b) KG Holdings has the following data relating to Component 124:
Re-order quantity 6,000 units.
Estimated usage per month
Maximum 4,000
Minimum 1,000
Estimated lead times for supplier's delivery
Maximum 6 days
Minimum 2 days

Required:
Calculate the re-order level. Assume 25 working days per month. (4 marks)
(Total: 8 marks)

10 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

31 BROADVALE
(a) It is difficult for a company to identify the actual price paid for an individual item of
material held in inventory. As a result a company can use a number of different
methods for pricing materials issued to production.

Required:
Give the names of three methods of pricing materials issues. (3 marks)
(b) Broadvale has budgeted to use 600 units of Material X during the year ending 31
December 20X2. The material will be used during the year at an even rate. The
material can be purchased in orders of 100,150, 200, 300 and 600 units.
The costs associated with the material are as follows:
Ordering costs = $10 per order
Holding costs = $0.50 per unit per year
Required:
Calculate the values for each of the items in the table below labelled (t) to (z).
(7 marks)
Ordering Holding costs Total cost
Order size No. of orders
costs $ $ $
100 6 60.00 (u) 85.00
150 4 40.00 (v) (z)
200 3 30.00 (w) 80.00
300 2 20.00 (x) 95.00
600 1 (t) (y) 160.00
(c) The economic order quantity (EOQ) formula is given as:
2 Co D
where Co = ordering costs
Ch
D = annual demand
Ch = holding costs per unit per year
Required:
Using the formula, calculate the economic order quantity for Material X for the year
ending 31 December 20X2. (5 marks)
(Total: 15 marks)

KAPLAN PUBLISHING 11
PAPER 4 : ACCOUNTING FOR COSTS

ELEMENTS OF COST - LABOUR


32 Given below is a graph of a labour cost:
$

Activity level

What type of labour cost is this?


A A straight piece rate system.
B A straight time rate system.
C A differential piece rate system.
D A piece rate scheme with a minimum guaranteed amount

33 A company has a budget for two products A and B as follows:


Product A Product B
Sales (units) 2,000 4,500
Production (units) 1,750 5,000

Labour:
Skilled at $10/hour 2 hours/unit 2 hours/unit
Unskilled at $7/hour 3 hours/unit 4 hours/unit

What is the budgeted cost for labour for the period?


A $135,000
B $176,750
C $298,000
D $311,750

34 At the beginning of the year, a company employed 4,600 individuals. During the year, 1,800
individuals were recruited and at the end of the year, the company employed a total of 5,500
individuals.

What was labour turnover during the year, as a percentage of the average employment level?
Give your answer to the nearest 1%.
A 9%
B 17%
C 18%
D 20%

12 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

35 An employee is paid on a piecework basis. The basis of the piecework scheme is as follows:

1 to 100 units – $0.20 per unit

101 to 200 units – $0.30 per unit

201 to 299 units – $0.40 per unit

with only the additional units qualifying for the higher rates. Rejected units do not qualify
for payment.

During a particular day the employee produced 210 units of which 17 were rejected as faulty.

What did the employee earn for their day’s work?


A $47.90
B $53.00
C $57.90
D $63.00

36 TWISTER
Twister Limited operates a factory which employed 80 workers throughout the four week
period just ended. Direct employees were paid at a basic rate of $8.00 per hour for a 38 hour
week. Total hours of the direct workers in the four week period were 13,056. Overtime is
paid at a premium of 35%. During the period 376 hours of direct workers’ time was
registered as idle.
(i) Calculate:
(a) The total wages cost. (3 marks)
(b) The labour overheads. (3 marks)
(ii) Show the entries that would be made in the wages control account for the period.
(4 marks)
(Total: 10 marks)

37 PIECEWORK BONUS
The following information is available:

Normal working day 8 hours


Guaranteed rate of pay (on time basis) $5.50 per hour
Standard time allowed to produce one unit 3 minutes
Piecework price $0.1 per standard minute
Premium bonus 75% of time saved, in addition to hourly pay

Required:
For levels of output of 80 units, 120 units and 210 units produced in one day, calculate
earnings based on:
(a) piecework, where earnings are guaranteed at 80% of time-based pay;
(b) premium bonus system. (8 marks)

KAPLAN PUBLISHING 13
PAPER 4 : ACCOUNTING FOR COSTS

ELEMENTS OF COST – EXPENSES


38 EXPENSE CLASSIFICATION
Within the costing system of a manufacturing company the following types of expense are
incurred:
Reference
number
1 Cost of oils used to lubricate production machinery
2 Motor vehicle licences for lorries
3 Depreciation of factory plant and equipment
4 Cost of chemicals used in the laboratory
5 Commission paid to sales representatives
6 Salary of the secretary to the Finance Director
7 Trade discount given to customers
8 Holiday pay of machine operatives
9 Salary of security guard in raw material warehouse
10 Fees to advertising agency
11 Rent of finished goods warehouse
12 Salary of scientist in laboratory
13 Insurance of the company's premises
14 Salary of supervisor working in the factory
15 Cost of typewriter ribbons in the general office
16 Protective clothing for machine operatives
Required:
(a) Place each expense within the following classifications:
• production overhead;
• selling and distribution overhead;
• administration overhead;
• research and development overhead.
Each type of expense should appear only once in your answer. You may use the
reference numbers in your answer. (8 marks)
(b) Give three reasons why direct production labour cost might be regarded as a fixed cost
rather than as a variable cost. (7 marks)
(Total: 15 marks)

14 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

ABSORPTION COSTING

The following information is to be used for questions 39 and 40 below.


Budgeted labour hours 48,500
Actual labour hours 49,775
Budgeted overheads $691,125
Actual overheads $746,625

39 Based on the data above, what is the labour hour absorption rate (to 2 decimal places) as
conventionally calculated?
A $13.88
B $14.25
C $15.00
D $15.39

40 The amount of under or over absorption is:


A 55,500 over absorbed
B 55,500 under absorbed
C 37,331 under absorbed
D 37,331 over absorbed

The following information is to be used for questions 41 and 42 below.


Actual overheads 225,900
Actual machine hours 7,530
Budgeted overheads 216,000

41 Based on the data above and assuming that the budgeted overhead absorption rate was $32
per machine hour, how many machine hours (to the nearest hour) were budgeted to be
worked?
A 6,750
B 7,059
C 7,200
D 7,530

42 The amount of under or over absorption is:


A $15,060 under absorption
B $15,060 over absorption
C $9,900 under absorption
D $9,900 over absorption

KAPLAN PUBLISHING 15
PAPER 4 : ACCOUNTING FOR COSTS

43 A business absorbs its overheads on the basis of direct labour hours. The budgeted overhead
was $156,000 and during the period there was an over-absorption of overhead of $6,000. The
actual direct labour hours worked in the period were 34,000 and the actual fixed overhead was
$170,800.
What was the budgeted number of direct labour hours (to the nearest 100)?
A 30,000
B 32,100
C 34,000
D 34,200

44 Z Ltd has two production cost centres – A and B. Its budget for 20X1 showed:
Cost centre A B
Production overhead $140,00 $160,000

Direct labour hours 50,000


Machine hours 40,000
It absorbs overheads on the basis of direct labour hours in B and machine hours in A.
For the period ended 30 June 20X1, the actual overhead incurred in cost centre A was
$73,500 and 21,500 machine hours had been worked.
The under or over-recovery of overhead for the period was:
A $1,800 under-recovered
B $1,800 over-recovered
C $1,750 over-recovered
D $1,750 under-recovered

45 Production supervisory salaries are classed as production overhead. Which is the most
appropriate basis of apportioning this cost to cost centres?
A Number of employees (both full-time and part-time)
B Machine hours
C Direct labour hours
D Number of machines

46 A manufacturing company absorbs overheads based on units produced. In one period 110,000
units were produced and the actual overheads were $500,000. Overheads were $50,000 over-
absorbed in the period.
The overhead absorption rate was:
A $4.00 per unit
B $4.50 per unit
C $5.00 per unit
D $5.50 per unit

16 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

47 PRIDE CERAMICS
Pride Ceramics has two production departments A and B and two service departments X and
Y.
Some of the budgeted overheads for the year ending 30 June 20X3 have already been
allocated to the departments as shown below:
Production Production Service Service
Total Dept A Dept B Dept X Dept Y
$ $ $ $ $
Allocated overheads 280,000 141,345 82,655 32,000 24,000
However, the remaining overheads, as detailed below still have to be apportioned to each of
the departments:
Electricity $24,000
Indirect labour $36,000
Rent $64,000
Machine maintenance $12,000
The following information is also available:
Dept A Dept B Dept X Dept Y
Machine operating hours 12,000 10,000 1,500 500
No of indirect employees 2 2 1 1
Floor area (m2) 21,000 19,500 4,500 3,000
The service departments are expected to spend their time as follows:
Dept A Dept B Dept X Dept Y
Department X 40% 60% Nil
Department Y 50% 30% 20%
Required:
(a) Prepare an overhead apportionment schedule. The schedule should include the
overheads already allocated and the overheads that still require apportionment.
(8 marks)
(b) Re-apportion the service department overheads to the other departments. (7 marks)
Note: You are not required to calculate overhead absorption rates. (Total: 15 marks)

48 XJ PRODUCTS
An organisation has two production departments, cutting and assembly, and two products
XJ1 and XJ2.
Information about the departments and products is as follows:
Cutting Assembly
Budgeted overhead $67,000 $42,000
Labour hours for one unit of Product XJ1 2.50 0.75
Labour hours for one unit of Product XJ2 1.00 1.00
Product XJ1 Product XJ2
Budgeted production (units) 20,000 10,000

KAPLAN PUBLISHING 17
PAPER 4 : ACCOUNTING FOR COSTS

Required:
Calculate:
(a) the overhead absorption rate per labour hour for each department; (6 marks)
(b) the total amount of overhead to be included in the cost of each of the two products.
(4 marks)
(Total: 10 marks)

49 REDGATE
Redgate is a manufacturing company. The budgeted factory overheads for next year, ending
on 31 December 20X2, have already been apportioned as shown below:
Production departments Service departments
Total Cutting Assembly Storeroom Maintenance
$ $ $ $ $
Apportioned
340,000 210,000 80,000 22,000 28,000
overheads
The following information is also relevant:
Cutting Assembly
Storeroom Maintenance
department department
Material requisitions 140 60 20
Maintenance hours 210 90
Machine hours 8,750 1,750
Labour hours 7,000 19,000

Required:
(a) Re-apportion the service department’s overheads using an appropriate basis in each
case. (6 marks)
(b) Calculate overhead absorption rates for the production departments based on the
information provided. (4 marks)
(Total: 10 marks)

MARGINAL COSTING AND ABSORPTION COSTING


50 A business reported an absorption costing profit of $26,500 for the latest period where
inventory levels decreased by 200 units during the period. If the fixed overhead absorption rate
is $7.40 per unit what would the profit be under marginal costing principles?
A $25,020
B $26,500
C $27,980
D $28,200

18 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

51 A business has opening inventory levels of 1,270 units. During the period 13,500 units were
sold and 14,200 units were produced. The profit under absorption costing was $84,500 and
under marginal costing was $78,550.
What is the fixed overhead absorption rate per unit (to the nearest penny)?
A $5.95
B $6.26
C $8.50
D $9.23

52 A business made 24,000 units of its product at a total cost of $40. The product was sold at $55
and 55% of its costs were variable. The sales for the period were 20,000 units.
If there were no opening inventories what will be the difference between the profit calculated
using absorption costing principles and marginal costing principles?
A Absorption costing profit will be higher by $72,000.
B Absorption costing profit will be lower by $72,000.
C Absorption costing profit will be higher by $88,000.
D Absorption costing profit will be lower by $88,000.

The following information relates to questions 53 to 57.


RCW Ltd manufactures a single product. Its planned output for 20X1 was 50,000 units. Its unit
product cost comprises:
$
Direct labour 7.50
Direct material 4.50
Variable overhead
1.5 hrs × $10.50/hr 15.75
Fixed overhead
1.5 hrs × $4.00/hr 6.00
–––––
33.75
–––––
Its selling price is $50 per unit.

53 If it uses a marginal costing approach to producing its income statement, what would be the
amount of total contribution shown in the budget statement for 20X1? (Assuming no closing
and opening inventories were held)
A $812,500
B $1,112,500
C $1,900,000
D None of these

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PAPER 4 : ACCOUNTING FOR COSTS

54 If the forecast inventory at 31 December was 4,200 units and it was valued on the basis of
marginal cost, what would be the value of inventory?
A $50,400
B $141,750
C $91,350
D $116,550

55 What is the value of the total budgeted fixed overhead for the year?
A $250,000
B $280,000
C $300,000
D $290,000

56 What would be the budgeted profit for the year based on marginal costing technique?
(Assuming it holds 4,200 in closing inventory)
A $1,019,050
B $719,050
C $1,270,950
D None of these

57 What would be the budgeted profit based on full absorption costing? (Assuming that closing
inventory was 4,200 units)
A $719,050
B $744,250
C $1,545,750
D $750,100

58 BUHNER
Buhner Limited makes and sells a single product called the Royal.
The cost card for one unit of Royal is shown below.
$
Direct materials 3
Direct labour 6
Variable production overhead 2
Fixed production overhead 4
Variable selling cost 5
The sales price of one unit of Royal is $21.
Budgeted fixed overheads are based on budgeted production of 5,000 units.
Inventory of finished goods at the start of the period was 1,000 units. This had risen to 4,000
units by the end of the period.
During the period 3,000 units were sold and actual fixed production overheads were
$25,000.

20 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

Required:
(a) Prepare an income statement.
(i) Using marginal costing. (4 marks)
(ii) Using absorption costing. (4 marks)
(b) Explain why there is a difference between the two profit/loss figures calculated in part
(a). (2 marks)
(Total: 10 marks)

59 PERIOD 1 AND PERIOD 2


A company manufactures a single product with the following unit costs:
Variable manufacturing $4.50
Fixed manufacturing $3.50
Variable selling and administration $0.80
Fixed selling and administration $3.00
Fixed manufacturing costs per unit are based on a predetermined absorption rate, established
at normal activity of 90,000 production units per period. Fixed selling and administration
costs are absorbed into the cost of sales at 20% of selling price. Under-/over- absorbed
overhead balances are transferred to the income statement at the end of each period.
The following information is available for two consecutive periods:
Period 1 Period 2
Units $ Units $
Sales 85,000 1,275,000 90,000 1,350,000
Production 80,000 92,000
Variable manufacturing costs 360,000 414,000
Fixed manufacturing costs 320,000 315,000
Variable selling and administration costs 68,000 72,000
Fixed selling and administration costs 270,000 270,000
Required:
(a) Prepare the income statement for each of the two periods showing clearly both gross
and net profit and any over-/under- absorbed overheads. (7 marks)
(b) Explain how the profits would differ from those calculated in (a) above if a marginal
costing system were employed. (3 marks)
(Total: 10 marks)

60 DUO
Duo makes and sells two products, Alpha and Beta. The following information is available
for the period just gone:
Production (units)
Alpha 2,500
Beta 1,750
Sales (units)
Alpha 2,300
Beta 1,600

KAPLAN PUBLISHING 21
PAPER 4 : ACCOUNTING FOR COSTS

Financial data:
Alpha Beta
$ $
Unit selling price 90 75
Unit variable costs
Direct materials 15 12
Direct labour ($6/hr) 18 12
Variable production overheads 12 8
Fixed costs for the company in total were $110,000 in the period. Fixed costs are recovered
on direct labour hours.

Requirements:
(a) Prepare an income statement for the period based on marginal cost principles.
(5 marks)
(b) Prepare an income statement for the period based on absorption cost principles.
(6 marks)
(c) Comment on the position shown by your statements. (4 marks)
(Total: 15 marks)

PRODUCT COSTS – JOB AND BATCH COSTING

The following data are to be used for questions 61 to 63 below.


A firm makes special assemblies to customers’ orders and uses job costing. The data for a period
is:
Job number Job number Job number
AA10 BB15 CC20
$ $ $
Opening WIP 26,800 42,790 0
Material added in period 17,275 0 18,500
Labour for period 14,500 3,500 24,600
The budgeted overheads for the period were $126,000.

61 What overhead should be added to job number CC20 for the period?
A $24,600
B $65,157
C $72,761
D $126,000

62 Job number BB15 was completed and delivered during the period and the firm wishes to earn
1
33 3% profit on sales.
What is the selling price of job number BB15?
A $69,435
B $75,521
C $84,963
D $138,870

22 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

63 If jobs AA10 and CC20 are not completed, what was the approximate value of closing work-in-
progress at the end of the period?
A $58,575
B $101,675
C $147,965
D $217,323

64 JOB X
A company has been requested by one of its customers to quote a price to make a particular
product, Product X. The following information has been obtained with respect to the cost of
manufacturing the item:
Direct costs Direct materials Direct labour hours Hourly rate of pay
Department
A $700 210 $6.00
B $800 70 $5.00
C $850 50 $4.00
Factory overhead is added to direct costs to obtain the total factory cost and is calculated
using a pre-determined absorption rate based on labour hours. These rates can be obtained
from the following information:
Department Budgeted factory overheads Budgeted direct labour hours
A $72,000 24,000
B $80,000 20,000
C $60,000 12,000
Administration overhead is added to the total production cost at a rate of 12% of the total
production cost to obtain the total cost of Product X.
It is company policy to earn a profit that is equivalent to 20% of the selling price.

Required:
Prepare a job cost card for Product X, clearly showing sub-totals for direct materials, direct
labour, factory overhead, total production cost, administration overhead, total cost, profit and
selling price. (15 marks)

PRODUCT COSTS – PROCESS COSTING


The following data are relevant for questions 65 to 67.
F Ltd uses process costing. In Process 2 the normal loss is 4% of input and all losses have a scrap
value of $0.20 per kg.
Last period the input from Process 1 was 8,500 kg valued at $2.68 per kg and the following
additional costs were incurred:
Additional material 4,250 kg Total cost $1,615
Labour cost $2,278
Overheads Absorbed at 150% of labour cost
Actual output to finished goods was 12,700 kg.
There was no opening or closing work-in-progress in the period.

KAPLAN PUBLISHING 23
PAPER 4 : ACCOUNTING FOR COSTS

65 The scrap value of normal loss in the period was:


A $0
B $34
C $68
D $102

66 The abnormal gain or loss for the period was:


A Abnormal loss of 50 kg
B Abnormal gain of 120 kg
C Abnormal gain of 290 kg
D Abnormal gain of 460 kg

67 The average cost per kg of output was:


A $2.36
B $2.45
C $2.68
D $5.13

68 An abnormal gain arises in a process when:


A the output from the process is in excess of ‘normal production’ (inputs less normal
loss allowance)
B the output from the process is less than ‘normal production’ (inputs less normal loss
allowance)
C the amount of loss is as expected
D losses have a scrap value

69 When valuing WIP in process costing, partly finished units are converted to:
A cost units
B equivalent units
C unit costs
D waste units

70 A company manufactures Chemical X, in a single process.


At the start of the month there was no work-in-progress. During the month, 300 litres of raw
material were input into the process at a total cost of $6,000. Conversion costs during the
month amounted to $4,500. At the end of the month, 250 litres of Chemical X was
transferred to finished goods inventory. The remaining work-in-progress was 100% complete
with respect to materials and 50% complete with respect to conversion costs. There were no
losses in the process.

24 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

The equivalent units for closing work-in-progress at the end of the month would have been:
Material Conversion costs
A 25 litres 25 litres
B 25 litres 50 litres
C 50 litres 25 litres
D 50 litres 50 litres

71 A company needs to produce 340 litres of Chemical X. There is a normal loss of 10% of the
material input into the process. During a given month the company did produce 340 litres of
good production, although there was an abnormal loss of 5% of the material input into the
process.
How many litres of material were input into the process during the month?
A 357 litres
B 374 litres
C 391 litres
D 400 litres

72 In process costing 'point of separation' is relevant to which of the following?


A Abnormal losses
B Normal losses
C Joint products
D Abnormal gains.

73 INDUSTRIAL SOLVENTS LIMITED


Industrial Solvents Limited mixes together three chemicals – A, B and C – in the ratio 3 : 2 :
1 to produce Allklean, a specialised anti-static fluid. The chemicals cost £8, £6 and £3.90
per litre respectively.
In a period, 12,000 litres in total were input to the mixing process. The normal process loss
is 5% of input and in the period there was an abnormal loss of 100 litres whilst the
completed production was 9,500 litres.
There was no opening work-in-progress (WIP) and the closing WIP was 100% complete for
materials and 40% complete for labour and overheads. Labour and overheads were £41,280
in total for the period. Materials lost in production are scrapped.
Required:
Prepare the mixing process account for the period. (Total: 10 marks)

KAPLAN PUBLISHING 25
PAPER 4 : ACCOUNTING FOR COSTS

74 CHEMICAL COMPOUND
A chemical compound is made by raw material being processed through two processes. The
output of Process A is passed to Process B where further material is added to the mix. The
details of the process costs for the financial period number 10 were as shown below:
Process A
Direct material 2,000 kilograms at $5 per kg
Direct labour $7,200
Process plant time 140 hours at $60 per hour
Process B
Direct material 1,400 kilograms at $12 per kg
Direct labour $4,200
Process plant time 80 hours at $72.50 per hour
The departmental overhead for Period 10 was $6,840 and is absorbed into the costs of each
process on direct labour cost.
Process A Process B
Expected output was 80% of input 90% of input
Actual output was 1,400 kgs 2,620 kgs
Assume no finished inventory at the beginning of the period and no work-in-progress at
either the beginning or the end of the period.
Normal loss is contaminated material which is sold as scrap for $0.50 per kg from Process A
and $1.825 per kg from Process B, for both of which immediate payment is received.

You are required to prepare the accounts for Period 10, for:
(a) Process A;
(b) Process B;
(c) normal loss/scrap;
(d) abnormal loss/gain. (20 marks)

75 PRODUCT XK
A chemical producer manufactures Product XK by means of two successive processes,
Process 1 and Process 2. The information provided below relates to the most recent
accounting period, period 10.
Process 1 Process 2
Opening work-in-progress Nil Nil
Material input during period 2,400 units – cost $5,280 Nil
Added material $9,460
Direct labour $2,260 $10,560
2
Factory overhead 100% of labour cost /3 of labour cost
Transfer to Process 2 2,200 units
Transfer to finished goods 2,200 units
Closing work-in-progress 200 units Nil
100% complete with respect to
materials and 30% complete
with respect to labour and
production overhead.

26 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

Required:
(a) Calculate the value of the goods transferred from Process 1 to Process 2 during period
10 and the value of the closing work-in-progress left in Process 1 at the end of period
10. (12 marks)
(b) Calculate the value of the goods transferred from Process 2, to finished goods, during
period 10, and the value of 1 unit of production. (6 marks)
(Total: 18 marks)

76 JOINT PROCESS
Chemicals X, Y and Z are produced from a single joint process. The information below
relates to the month of November 20X8:
Input into process: Direct materials 3,200 litres, cost $24,000
Direct labour $48,000
Factory overheads are absorbed at 120% of prime cost

Output from process: Scrap normally accounts for 10% of input and can be sold for $16.20
per litre.
Actual scrap in November 20X8 was 10% of input. Proceeds from
the sale of scrap are credited to the process account.
Chemical X – 1,440 litres
Chemical Y – 864 litres
Chemical Z – 576 litres

The selling price of the three chemicals are:


Chemical X – $100 per litre
Chemical Y – $80 per litre
Chemical Z – $60 per litre
Required:
(a) Calculate the total cost of each of Chemicals X, Y and Z using the following methods
for splitting joint costs:
(i) relative sales value;
(ii) volume.
All workings should be to the nearest $. (15 marks)
(b) Chemical Z can be converted to chemical Z2. The costs of converting Chemical Z
into Chemical Z2 are $50 per litre input for direct labour and $40 per litre input for
factory overheads. No additional materials are required but there is a 10% loss in
process. The loss has no saleable value.
Calculate the conversion cost incurred to produce 200 litres of good output of
Chemical Z2. (5 marks)
(Total: 20 marks)

KAPLAN PUBLISHING 27
PAPER 4 : ACCOUNTING FOR COSTS

77 LUDLUM PLC
(a) In a process costing system state what is meant by: (i) normal loss, and (ii) abnormal
loss, and indicate how you would treat these items in the cost accounts. (4 marks)
(b) Ludlum plc makes one product which passes through two processes. From the data
given below which related to period 4, you are required to show the transactions
which would appear in the two process accounts, finished goods account, abnormal
loss account and the abnormal gain account.
Process No 1
Materials: 5,000 kg at $0.5 per kg
Labour: $800
Production overhead 200% on labour
Process No 2
Materials: 4,000 kg at $0.8 per kg
Labour: $1,753
Production overhead 100% on labour
Normal losses are 20% of input in Process 1 and 10% of input in Process 2. Any
losses are able to be sold as scrap for $0.3 per kg from process 1 and $0.7 per kg from
Process 2.
The outputs for Period 4 were:
3,800 kg from Process 1
7,270 kg from Process 2
There was no work-in-process at the beginning or end of Period 4 and no finished
goods held in inventory at the beginning of the period. (11 marks)
(Total: 15 marks)

SERVICE COSTING
78 MR G AND MRS H
Mr G and Mrs H have recently formed a consultancy business, and have sought your advice
concerning costs and fees. Mr G and Mrs H each wishes to receive a salary of $20,000 in the
first year of trading. They have purchased two cars at a cost of $13,000 each and expect to
use them for three years. At the end of this time each of the cars has an expected resale value
of $4,000. Straight-line depreciation is to be applied.
Mr G and Mrs H have estimated that they will be able to charge clients for 1,575 hours of
work and will have to travel 18,000 km in the year.
They have agreed that their fee structure should comprise:
• An hourly rate for productive client work, calculated by taking all business costs
except vehicle costs and dividing by the number of chargeable hours;
• A rate per km travelled to/from clients, calculated by taking total vehicle costs and
dividing by the number of km travelled.

28 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

Mr G and Mrs H have estimated their other costs for the first 12 months are as follows:
$
Electricity 1,200
Fuel for vehicles 1,800
Insurance – professional liability and office 600
Insurance – vehicles 800
Mobile telephones 1,200
Office rent and rates 8,400
Office telephone/facsimile 1,800
Postage and stationery 500
Secretarial costs 8,400
Servicing and repairs of vehicles 1,200
Vehicle road tax 280
Required:
(a) Classify costs into two categories – vehicle costs and other business costs. (8 marks)
(b) Calculate:
• an hourly rate for productive work;
• a rate per km travelled to/from clients. (4 marks)
(c) Explain the method of cost accounting which should be used by Mr G and Mrs H in
order to ensure that each of their clients is charged correctly for the services provided.
(3 marks)
(Total: 15 marks)

ESTIMATING COSTS AND REVENUES - CVP ANALYSIS


The following information relates to questions 79 and 80.
A business sells a single product at a selling price of $40 with a contribution to sales ratio of 30%.
The fixed costs for the period are $210,000.

79 How many units must be sold to break even?


A 15,750 units
B 17,500 units
C 63,000 units
D 700,000 units

80 If the business wishes to make a profit of $60,000 how many units must be sold?
A 9,643 units
B 22,500 units
C 81,000 units
D 900,000 units

KAPLAN PUBLISHING 29
PAPER 4 : ACCOUNTING FOR COSTS

81 Tindall Ltd sells a single product for $40 per unit. Fixed costs are $48,000 and variable costs
80% of revenue. If fixed costs increase by $8,000 the break-even number of units will increase
by:
A 10,000 units
B 5,000 units
C 1,000 units
D 200 units

82 A company manufactures and sells a single product. The following data have been extracted
from the current year’s budget
Sales and production (units) 5,000
Variable production and distribution cost per unit $50
Fixed cost per unit $70
P/V (contribution margin) ratio 75%
The selling price per unit for next year is budgeted to increase by 8%, whereas both the
variable production and distribution cost per unit and the total fixed costs are expected to
increase by 12%.
The objective for next year is that the total budgeted profit should remain the same as that
budgeted for the current year.
What is the minimum number of units which should be produced and sold next year in order
to achieve the objective?
A 4,688
B 4,950
C 5,209
D 5,280

83 A company which makes a single product has a contribution to sales ratio of 30%. Each unit is
sold at $8. In a period when fixed costs were $30,000 the net profit was $56,400. What was the
total of direct wages for the period if direct wages were 20% of variable costs?
A $17,280
B $26,400
C $40,320
D $57,600.

84 Hill Ltd sells a single product. In the coming month, it is budgeted that this product will
generate a total revenue of $300,000 with a contribution of $125,000. Fixed costs are budgeted
at $100,000 for the month.
What is the margin of safety?
A 0%
B 10%
C 20%
D 25%

30 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

85 Profit/volume
A company has the following summary results for two trading periods:
Period 1 Period 2
$000 $000
Sales 742.7 794.1
Variable costs 408.3 409.0
Contribution 334.4 385.1
Fixed costs 297.8 312.7
Net profit 36.6 72.4
Required:
(a) Draw a profit/volume chart, with a line for each period, based on both periods,
covering sales up to $1m per period. (8 marks)
(b) Calculate (to the nearest $000) the sales required in Period 2 to achieve the same net
profit as Period 1. (3 marks)
(c) Define the following terms (which are used in the context of CVP analysis):
(i) C/S ratio;
(ii) Margin of safety. (4 marks)
(Total: 15 marks)

ESTIMATING COSTS AND REVENUES – DECISION


MAKING
86 J Ltd are considering undertaking a special contract.
This contract requires 250 kg of Material X.
There is 150 kg in stock which was bought a year ago for $10 per kg. As the material is no
longer used it has been written down to its scrap value of $6 per kg. The replacement cost
would be $12 per kg.
A $2,100
B $2,500
C $2,700
D $3,000

87 The following details relate to products made by K Limited:


L M N
$ $ $
Selling price per unit 60 85 88
__ __ __
Direct materials per unit 15 20 30
Direct labour per unit 10 15 10
Variable overhead per unit 5 8 10
Fixed overhead per unit 10 16 20
__ __ __
40 59 70
__ __ __
Profit per unit 20 26 18

KAPLAN PUBLISHING 31
PAPER 4 : ACCOUNTING FOR COSTS

All three products use the same direct labour and direct materials, but in different quantities.
In a period when the material used on these products is in short supply, the most and least
profitable use of the material is:
Most profitable Least profitable
A N L
B N M
C L M
D M N

88 A company’s existing production plan is as follows:


Product A Product B
Units 750 1,000
$ $
Unit selling price 13.00 21.00
Unit variable costs
Direct material 1.00 1.00
Direct labour at $2 per hour 5.00 12.00
Overhead 0.50 1.20
6.50 14.20
This represents the maximum demand for each product. The company is limited to 7,000
labour hours availability. A contract to produce 200 units of product C is under review.
These are required by a customer who will provide his own materials. Net proceeds from the
contract after deducting labour and overhead costs amount to $3,000 and will utilise 1,500
labour hours.
Assuming that the company wishes to maximise profit, which is the optimum production
plan?
A B C
A 400 750 200
B 1,000 750 0
C 1,000 500 200
D 0 750 200

89 A company makes three products as follows:


Kilts Skirts Dresses
$ $ $
Material at $5 per square metre 5.0 2.50 10.0
Labour at $2 per hour 6.0 2.00 2.0
Fixed costs absorbed 6.0 2.00 2.0
Profit 6.0 3.50 5.0
Sales price 23.0 10.00 19.0
Maximum demand is 1,000 for each product, but supplies of material are limited to 4,000
square metres while the labour force will only work 1,000 hours.

32 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

To maximise its profits the company should produce:


A 1,000 kilts
B 1,000 skirts
C 1,000 dresses
D 333 kilts

90 EXE plc
You have received a request from EXE plc to provide a quotation for the manufacture of a
specialised piece of equipment. This would be a one-off order, in excess of normal budgeted
production. The following cost estimate has already been prepared:
Note $
Direct materials:
Steel 10 square metres at $5 per square metre (1) 50
Brass fittings (2) 20
Direct labour:
Skilled 25 hours at $8.00 per hour (3) 200
Semi-skilled 10 hours at $5.00 per hour (4) 50

Overhead 35 hours are $10.00 per hour (5) 350

Estimating time (6) 100


____
770
Administration overhead at 20% of production cost 154
____
924
Profit at 25% of total cost 231
____
Selling price 1,155
____

Notes:
(1) The steel is regularly used, and has a current inventory value of $5.00 per square
metre. There are currently 100 square metres held in inventory. The steel is readily
available at a price of $5.50 per square metre.
(2) The brass fittings would have to be bought specifically for this job: a supplier has
quoted the price of $20 for the fittings required.
(3) The skilled labour is currently employed by your company and paid at a rate of $8.00
per hour. If this job were undertaken it would be necessary either to work 25 hours
overtime which would be paid at time plus one half OR reduce production of another
product which earns a contribution of $13.00 per hour.
(4) The semi-skilled labour currently has sufficient paid idle time to be able to complete
this work.
(5) The overhead absorption rate includes power costs which are directly related to
machine usage. If this job were undertaken, it is estimated that the machine time
required would be ten hours. The machines incur power costs of $0.75 per hour.
There are no other overhead costs which can be specifically identified with this job.
(6) The cost of the estimating time is that attributed to the four hours taken by the
engineers to analyse the drawings and determine the cost estimate given above.

KAPLAN PUBLISHING 33
PAPER 4 : ACCOUNTING FOR COSTS

(7) It is company policy to add 20% on to the production cost as an allowance against
administration costs associated with the jobs accepted.
(8) This is the standard profit added by your company as part of its pricing policy.

Required:
Prepare, on a relevant cost basis, the lowest cost estimate that could be used as the basis for a
quotation.
Explain briefly your reasons for using EACH of the values in your estimate. (15 marks)

ESTIMATING COSTS AND REVENUES – DCF TECHNIQUES


The following data relates to questions 91 to 93
A project is expected to have the following cash flows:
Year Cash flow ($000)
0 (750)
1 100
2 250
3 600
4 375

91 What is the payback period?


A 3 years 8 months
B 3 years
C 2 years 8 months
D 2 years 6.6months

92 Assuming a cost of capital of 12%, what is the net present value?


A $959,650
B $575,000
C $472,350
D $204.25

93 If the company’s cost of capital fell to 9% the net present value would:
A Increase
B Decrease
C Stay the same
D Cannot tell from this data

34 KAPLAN PUBLISHING
LECTURER RESOURCE PACK : QUESTIONS

94 SG
SG is currently considering investing in new research equipment which would cost $65,000
now. The equipment is expected to generate the following cash flows:
End of year $000
1 15
2 18
3 30
4 15
5 8
The research equipment can be sold for $4,000 at the end of five years.

Required:
(a) Calculate the net present value of the new research equipment, using 10% and 15%
discount rates. (6 marks)
(b) Calculate the internal rate of return (IRR) for this investment (to 1 decimal place).
(3 marks)
(c) Comment upon the benefits of using NPV as an investment appraisal technique.
(3 marks)
(Total: 12 marks)

95 THE TRUFLY BALL


(a) Explain what is meant by the time value of money and how this is taken into account
in some methods of capital expenditure appraisal. (4 marks)
(b) J Wilkinson makes sports equipment, and is considering whether to launch a new
product, the Trufly ball, having already spent $2,500 on initial market and technical
research. The necessary manufacturing equipment would cost $145,000, payable
immediately. The Trufly would have a unit cash contribution of $5.20 and expected
levels of demand over the next four years are as follows:
Demand (units)
Year 1 10,000
Year 2 13,000
Year 3 22,000
Year 4 20,000
After four years, the company considers market and competition conditions to be too
uncertain to incorporate results into the evaluation. The equipment would have a scrap value
of approximately $25,000 at that time.
Fixed costs associated with the project are expected to be $66,000 per annum, including
straight line depreciation on the equipment.
The company uses a cost of capital of 16% for investment appraisal purposes.

KAPLAN PUBLISHING 35
PAPER 4 : ACCOUNTING FOR COSTS

Required:
Calculate:
(i) the net present value (NPV);
(ii) the internal rate of return (IRR)
of the Trufly project, and interpret your results. Use the following information as
appropriate:
Year 1 2 3 4
16% discount factor 0.862 0.743 0.641 0.552
20% discount factor 0.833 0.694 0.579 0.482
12% discount factor 0.893 0.797 0.712 0.636
(11 marks)
(Total: 15 marks)

36 KAPLAN PUBLISHING

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