MULUNGUSHI UNIVERSITY
SCHOOL OF BUSINESS
COST AND MANAGEMENT ACCOUNTING II
COST ACCOUNTING II
BAF 222 / BAC 312
PRACTICE QUESTIONS
MARCH 2022
QUESTION ONE
The following information relates to the only product manufactured and sold by
Namwela limited.
K per Unit
Selling price
50
Direct Material cost
14
Direct labour cost
16
Variable production overhead
10
Fixed production overhead
1.80
Variable sales and marketing overhead
1.00
The following level of activity took place over the first two years of the product’s life:
Sales (unit)
Production (unit)
Year 1
13,000
14,000
Year 2
12,500
11,500
ADDITIONAL INFORMATION
1. Budgeted fixed production in units for both Year 1 and Year 2 was 12,000
2. Actual fixed production overhead was K22,000 in both year 1 and year 2.
3. Actual fixed sales and marketing overhead was K10,000 in both periods.
4. There is no opening inventory in year 1 and all variable costs were as per budget
for the two years.
Required
1. On the assumption that Namwela used absorption costing system, calculate the
under/over absorption.
2. Prepare profit statements for each year using each of the following bases:
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(a) Absorption costing
(b) Marginal costing
3. Reconcile the difference in the reported profit under the two (2) bases for each year
QUESTION TWO
(a)
The following was extracted from the standard cost card of Kafue Cement Plc.
Selling price 100kg pocket of cement
K360
Direct material cost per 100kg pocket of cement
K50
Direct labour cost per 100kg pocket of cement
K50
Variable production overhead per 100kg pocket of cement
K29
Other relevant cost information extracted from the budgets:
Fixed production costs
K9,750,000
Fixed selling and distribution costs
K3,456,000
Sales commission
5% of selling price
Sales
90,000 100kg pockets of cement
Required:
1. Calculate the breakeven point both in sales volumes (number of pockets) and sales
value. (2 marks)
2. Calculate the margin of safety both in percentage and in volume. (2marks)
3. Suppose the selling price per pocket of cement was to be increased to K375 and the
sales commission increased to 8% and a further K150,000 on advertising.
Calculate the revised breakeven point sales volume based on suggestion in (3)
above and comment accordingly. (6marks)
(b)
The following information applies to a company operating in Chilanga. It is the
operational results for the year just ended, 2019.
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The company, which manufactures a single product coded ‘zeron’, achieved a sales
value of K8'000'000 for the period under consideration. A unit of ‘zeron’ was being
sold at K20. During the period under review, the company operated at 80%
capacity. Suggestions are being made to increase the operating capacity. Details of
the cost structure are hereby given:
Direct material
K4
Direct labour
K4
Variable production overhead
K80,000
Variable selling overhead
K160,000
Variable distribution overhead
K120,000
Fixed production overhead
K320,000
Fixed selling overhead
K180,000
Fixed distribution overhead
K80,000
Fixed administration overhead
K1,440,000
Further, sales agents are paid a commission of 5% on sales value for selling 'zeron'.
Required
(a) Compute the company's breakeven point in sales value (2 marks)
(b) Prepare income statements, given three scenarios depicted hereunder:
Scenario 1
At the present level of sales
Scenario 2
If the unit selling price is reduced by 5% which should increase sales volume by
12.5%
Scenario 3
If the unit selling price is reduced by 10% which should increase sales volume by
25%
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Comment on scenario three above which will stretch the capacity limit (10 marks)
QUESTION THREE
A cellular phone manufacturer situated in Kalabo district of Western Province
(katondo cellular phones limited) produces three types of cell phones: Basic, Super
and Delux. For the current year the company has a total of 10,000 direct labour
hours and 7,500 machine hours available for production.
Here below, are the sales and production parameters relating to the three types of
cell phones:
Basic
Super
Delux
Direct material @ K24/kg
0.75kgs
0.625kg
1.25kg
Direct labour @K24 per hour
0.125 hours
0.125 hour
0.25 hour
-
-
-
Machine hours required
0.15 hours
0.1 hours
0.125 hours
Sales demand for one year (units)
30,000
18,000
15,000
Selling price per unit
K68
K120
K170
Variable overhead 150% of direct
Labour cost
Budgeted fixed production overhead is estimated to be K182,280 per month and the
company has also budgeted for selling and administration expenses of K378,988 per
quarter.
Required
(a) Compute for Katondo limited the optimal production plan and the expected
profit.
(12 marks)
(b) Discuss any four purposes of a system of standard costing
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(3 marks)
(c) Discuss any three different levels of performance which may be included as part
of system of standard costing and comment on how these may relate to the
purposes set out in (b) above.
(3 marks)
QUESTION FOUR (Assume Today Is 30 December 2020)
The following information rerates to Kamelwa limited a retail grocer engaged in
buying and selling of foodstuffs.
(1) Budgeted sales (2021):
January
K500,000
February
K450,000
March
K625,000
April
K700,000
May
K665,000
June
K781,000
July
K718,750
August
K593,750
September
K812,500
October
K780,000
November
K850,000
December
K1,020,000
January (2022)
K620,000
(2)
Kamelwa limited sells its purchases at cost plus 25% mark-up.
(3)
Kamelwa has a policy to hold inventory at the end of each month which is
sufficient to meet sales demand in the next half month. Sales are budgeted to
occur evenly during each month.
(4)
Purchases are paid for in the following manner: 50% in the month of purchase
and the remainder in the month after purchase.
(5)
Sales are 85% on credit basis and 15% cash basis.
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Credit sales are collected as follows: 60% in the month following the sale.
20% the second month after the sale and 20% the third month after the sale.
(6)
Labour is remunerated at 10% of cost of sales and is paid for in the month that
it is incurred.
(7)
Overheads incurred in the production department are 70% of labour cost.
These overheads are paid 30% in the month they are incurred and the balance
the following month.
(8)
An auction sale conducted on 29 December 2020 resulted into disposal of
property worth K600,000 which amount (cash) will be collected on 29 January
2021.
(9)
The company will pay the last company tax balance for the period 2020 on 30
June 2021amounting to K85,000.
Required
(a) Prepare Kamelwa's limited cash budget for the year 2021.
(14 marks)
(b) Discuss the circumstances under which each of the following budgets might be
used.
-
Rolling budget
-
Zero based budget
(6 marks)
QUESTION FIVE (Assume today is 31st December 2019)
Ricky Mwewa has just negotiated a contract to supply 8,160 desks to all the primary
schools in Muchinga Province. This is the breakthrough he has been waiting for and he
has decided to start the business he has been planning for months now. The Top Desk
Company Limited. The Ministry of General Education, which is responsible of ensuring
good, learning conditions in all schools including primary schools, has agreed to pay
K255 for each desk and wants them all delivered next year which is 2020. Ricky wishes
to supply all the desks within the first six months of 2020 starting January 2020. His
projection is to supply and deliver the desk evenly over the six months period. With no
inventory at the start of January 2020 and at the end of the six month period as these
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desks are specifically for the schools in Muchinga. Ricky has opted to maintain closing
inventory over the period equal to the following monthly supply:
Inventory level
January
February
March
April
May
June
100%
50%
50%
30%
5%
0%
The Ministry has advised that payment will be made the month following delivery as the
procurement officers' at the schools have to thoroughly inspect the desk.
Ricky has sourced a supplier who will supply the materials required to produce the
desks at a price of K15 per kg of material. He is hopeful that the Ministry will ask for
more desks in the near future' As he is a new customer the supplier is unwilling to give
him longer credit and he will be required to pay for the materials when they are
delivered which is the same month production takes place. His buying pattern is to buy
as much materials as is needed for production in that month. He will not keep inventory
of materials at 30% of the following month's production requirement, although in June
2020, he intends to keep it at 20% of that month's production requirement. This is to
allow for production of any desks that might be damaged during transportation. On
average he uses 10 kg of material to make a desk, and this is unlikely to change over
the period.
Ricky will need machinery to allow him to make the desk. He has seen a new machine
at a recent trade show at a cost of K80,000 that he had opted to buy. He will need to
pay for this machine when it is delivered in January 2020.
The business plan shows that the monthly overheads of the new business will be
K20,000 payable in the same month they are incurred. In additional, delivery costs have
been estimated at 9% of revenue payable in the same month revenue is earned.
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To make sure he and his family have enough to live on, Ricky will pay himself a
monthly salary of K9,000 in January 2020, increasing by 10% in February, March and
April. He will then maintain the April level for the rest of the period.
He has K50,000 saved up that he will pay into the business bank account in January
2020 to get the business started.
Ricky has heard that you are studying for your Bachelors Degree in Accounting and has
asked for some help in budgeting for the business.
Required:
(a) Prepare the following functional budgets for the six months to 30 June 2020.
(i)
Sales budget in units and value
(2 marks)
(ii)
Production budget in units
(4 marks)
(iii)
Materials purchases budget in kg and value
(6 marks)
(iv)
Cash budget
(8 marks)
(b) Management accounting is normally said to help in planning and decision making.
with the help of the budgets prepared above, explain three (3) decisions that Ricky
could consider for his business to do well.
(5 marks)
QUESTION SIX
The following details relates to a shop which currently sells 25,000 pairs of shoes
annually.
K’000
Selling price per pair of shoes
40
Purchase cost per pair of shoes
25
Total annual fixed costs
K’000
Salaries
100,000
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Advertising
Other fixed expenses
40,000
100,000
You are required:
Answer each part independently of data contained in other parts of the requirement.
(a) Calculate the break-even point and margin of safety in number of pairs of shoes
sold.
(b) Assume that 20,000 pairs of shoes were sold in a year. Calculate the shop’s net
income (or loss).
(c) If a selling commission of K2,000 per pair of shoes sold was to be introduced, how
many pairs of shoes would need to be sold in a year in order to earn a net income
of K10m?
(d) Assume that for next year an additional advertising campaign costing K20m is
proposed, whilst at the same time selling prices are to be increased by 12%.
(e) What would be the break-even point in number of pairs of shoes?
(25 marks)
QUESTION SEVEN
Lusambo Ltd produces and sells chemical XYZ. The standard cost per unit of XYZ as
follows;
Direct material
7.5 Ltr @ K4.5 per litre
Director labour
2.5 hours @ K6 per hour
Variable overheads
2.4 hours @ K1.5 per house
The monthly budgeted fixed overhead were K1,500 for 2,000 budgeted production
hours. Lusambo Ltd is expected to produce and sell 10,000 units.
The actual results for the month were as follows:
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Production and sales volume
9,200 units
Material 72,000 Litres costing
K270,000
Labour hours 27,500 hours costing
K137,550
Variable overheads
K45,000
Fixed overheads
K25,300
Required
a) Calculate the following variances:
(i) Material price
(ii) Material usage
(iii) Labour rate
(iv) Labour efficiency
(v) Variable overhead expenditure
(vi) Variable overhead efficiency
(vii) Fixed overhead expenditure
(viii) Fixed overhead volume
(12 marks)
b) Pick any four (4) variances above and explain the causes
(8 marks)
c) Explain four (4) types of standards that can be used in organizations.
(5 marks)
QUESTION EIGHT
TATA Ltd manufactures and sells a motor bicycLe called Papa. TATA Ltd produces Papa
as the only product.
The following information relates to the company's activities for the last two quarters
for the year ended 3l't December 2018.
Quarter Ended
30 Sept. 2018
31 Dec. 2018
Bicycles manufactured
3,600
3,000
Bicycles sold
3,000
3,600
There was no opening inventory on July 1, 2018
The selling price of each bicycle was K500
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The following costs relate to the production of one bicycle:
K
Direct materials
150
Direct labour
130
Variable production overheads
20
300
Budgeted production for the year is 14.400 bicycles. Budgeted fixed production
overhead for the year is K432,000, absorbed using a predetermined percentage of the
total variable cost.
Quarter
30 Sept. 2018
31 Dec. 2018
K
K
Selling overheads
16,000
14,000
Distribution overheads
10,500
11,000
8,000
9,000
Administration overhead
Required:
(a) Prepare separate profit statements clearly showing the results for each quarter
using:
(i)
Marginal costing
(ii)
Absorption costing
(15 marks)
(b) Reconcile the profits found by each method calculated in (a) above for the two
periods separately.
(10 marks)
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