Cost Accounting Level 2

Model Answers Series 4 2006 (Code 2016)

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Cost Accounting Level 2 Series 4 2006

How to use this booklet

Model Answers have been developed by Education Development International plc (EDI) to offer additional information and guidance to Centres, teachers and candidates as they prepare for LCCI International Qualifications. The contents of this booklet are divided into 3 elements: (1) Questions – reproduced from the printed examination paper (2) Model Answers – 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)

(3) Helpful Hints – where appropriate, additional guidance relating to individual

questions or to examination technique Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success. EDI provides Model Answers to help candidates gain a general understanding of the standard required. The general standard of model answers is one that would achieve a Distinction grade. EDI accepts that candidates may offer other answers that could be equally valid.

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2016/4/06/MA 1

Cost Accounting Level 2 Series 4 2006 QUESTION 1 Below are the definitions of eight terms used in cost accounting: 1 The cost of acquiring, producing or enhancing fixed assets 2 The cost of a process that results in more than one main product 3 The total cost of direct materials, direct labour and direct expenses 4 The comparison of the standard cost of materials used and the standard material cost of output 5 The issue of materials to production using the most recent price paid 6 A unit of product or service in relation to which costs are ascertained 7 Stock on hand or on order which has not been scheduled for use 8 The level of activity at which there is no profit or loss REQUIRED State the name of the cost accounting term for each of the eight definitions, using no more than four words for each.

(20 marks)

MODEL ANSWER TO QUESTION 1 1 Capital expenditure 2 Joint cost 3 Prime cost 4 Direct material usage variance 5 Last in, First out 6 Cost unit 7 Free stock 8 Break-even point

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QUESTION 2

The production operatives of AB Company are currently paid at an hourly rate of £7.00 for the number of hours worked. The budget for next year includes an increase of 5% to the hourly rate. In addition, management are considering the introduction of a productivity deal whereby a bonus of £0.20 would be paid for each unit manufactured. It has been estimated that production would increase by 15% if the productivity deal is introduced and market research indicates that all the output could be sold if the selling price was reduced by 5%. The budget for next year, without the productivity deal, includes the following: Production and sales units 25,000 Selling price per unit £13.00 Variable costs per unit £4.56 (excluding production operatives’ wages) Fixed costs £123,600 Each unit manufactured requires 24 minutes of production operatives’ time. REQUIRED (a) Calculate the budgeted profit without the introduction of the productivity deal.

(9 marks) (b) Calculate the budgeted profit if the productivity deal is introduced and advise whether it would be worthwhile. (11 marks)

(Total 20 marks)

2009/4/06/MA 3

MODEL ANSWER TO QUESTION 2 (a) Budgeted profit (without productivity deal) £ per unit £ per unit Selling price 13.00 Variable costs (excl ops wages) 4.56 Production operatives wages 2.94* 7.50 Contribution 5.50 × 25,000 units = Total contribution £137,500 less fixed costs £123,600 = Profit £13,900 *Working £7.00 × 1.05 = £7.35 per hour ÷ 60/24 minutes = £2.94 per unit (b) Budgeted profit (with productivity deal) £ per unit £ per unit Selling price 12.35 (13.00 × 0.95) Variable costs (excl ops wages) 4.56 Production operatives wages 3.14* 7.70 Contribution 4.65 × 28,750 units (25,000 × 1.15) = Total contribution £133,688 less fixed costs £123,600 = Profit £10,088 The productivity deal is not worthwhile. * Working £2.94 per unit from Part A + bonus of £0.20

2016/4/06/MA 4

QUESTION 3

A company has two production cost centres (PCC1 and PCC2) and two service cost centres (SCC1 and SCC2) in its factory. Overheads in the two production cost centres are absorbed on the following bases, using predetermined rates: PCC1 - machine hours PCC2 - direct labour hours Budgeted activity and budgeted overheads of the two production cost centres for a period, including the reapportionment of the overheads of the two service cost centres, are: Budgeted activity Budgeted overheads PCC1 3,950 machine hours £63,990 PCC2 8,200 direct labour hours £77,900 Actual activity and actual overheads incurred in the two production cost centres in the period, including the reapportionment of the overheads of the two service cost centres, are: Actual activity Actual overheads PCC1 4,175 machine hours £65,620 PCC2 8,090 direct labour hours £78,530 REQUIRED (a) Calculate for each production cost centre for the period the:

(i) overhead absorption rate; (4 marks)

(ii) overhead absorbed; (4 marks)

(iii) over or under absorption of overhead. (6 marks) (b) Prepare a single production overhead control account for the period which includes figures for both production cost centres. (6 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 3 (a) (i) Overhead absorption rates

PCC1

£63,990 budgeted overhead ÷ 3,950 budgeted machine hours = £16.20 per machine hour PCC2 £77,900 budgeted overhead ÷ 8,200 budgeted direct labour hours = £9.50 per direct labour hour

(ii) Overhead absorbed

PCC1

4,175 actual machine hours × £16.20 per machine hour = £67,635 PCC2 8,090 actual direct labour hours × £9.50 per direct labour hour = £76,855

(iii) Over or under absorption of overhead

PCC1

£67,635 overhead absorbed - £65,620 actual overhead = £2015 over absorbed PCC2 £76,855 overhead absorbed - £78,530 actual overhead = £1,675 under absorbed (b) Production overhead control account £ £ Overhead incurred: Overhead absorbed: PCC1 65,620 PCC1 67,635 PCC2 78,530 PCC2 76,855 144,150 144,490 Over absorption (to P & L): Under absorption (to P & L): PCC1 2,015 PCC2 1,675 146,165 146,165

2016/4/06/MA 6

QUESTION 4 Company A manufactures and sells three products (products X, Y and Z). Budgeted selling prices and unit costs for the next period are: Product X Product Y Product Z £/unit £/unit £/unit Selling price 48 30 42 Costs: Direct materials 10 8 12 Direct labour 12 8 8 Variable overhead 4 2 4 Fixed overhead 16 10 12 Budgeted production and sales of the three products are: Product X 11,000 units Product Y 15,000 units Product Z 8,000 units REQUIRED (a) Prepare a budgeted profit statement using the marginal costing method.

(12 marks) Company B manufactures and sells a single product. Unit costs are: £/unit Variable manufacturing costs 34 Fixed manufacturing costs 18 Variable non-manufacturing costs 10 Fixed non-manufacturing costs 12 The selling price of the product is £80 per unit and fixed costs per period total £72,000. REQUIRED (b) Calculate the:

(i) contribution/sales (C/S) ratio; (4 marks)

(ii) break-even sales revenue per period. (4 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 4 (a) Profit statement £000 Sales 1,314 Less Variable costs 748 Contribution 566 Less Fixed costs 422 Net profit 144 Workings Product X Y Z Sales 11,000 units @ £48 15,000 units @ £30 8,000 units @ £42 = £528,000 = £450,000 = £336,000 Variable costs 11,000 units @ £26 15,000 units @ £18 8,000 units @ £24 = £286,000 = £270,000 = £192,000 Fixed costs 11,000 units @ £16 15,000 units @ £10 8,000 units @ £12 = £176,000 = £150,000 = £96,000 (b) (i) Contribution ÷ sales (C/S) ratio {[80 – (34 + 10)] ÷ 80} × 100 = 45%

(ii) Break-even sales revenue Fixed cost ÷ C/S ratio £72,000 ÷ 0.45 = £160,000

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QUESTION 5 A company sets stock control levels for Material M which is used in the manufacture of Product P. The data used to set the stock control levels is: Minimum Maximum Sales of Product P 800 units per week 1,100 units per week Lead time for delivery of Material M 1 week 1½ weeks 2 kilograms (kg) of Material M are used per unit of Product P and the reorder quantity of the material is 5,000 kg. REQUIRED (a) Calculate for Material M the:

(i) reorder level to ensure no stock-out; (3 marks)

(ii) minimum stock control level; (4 marks)

(iii) maximum stock control level. (4 marks) At the beginning of a month 1,000 kg of Material M were in stock at a cost of £5,000. Purchases and issues of the material for the month were as follows: Date Purchases (kg) Issues (kg) Purchase cost (£) 3 5,000 28,000 6 1,700 10 2,100 15 5,000 28,220 17 2,000 25 2,100 The company uses the weighted average method for pricing issues of materials from stock. REQUIRED (b) Show the entries in the stores ledger record (quantity, price and value) for the month.

(9 marks)

(Total 20 marks)

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MODEL ANSWER TO QUESTION 5 (a) (i) Reorder level maximum usage × maximum lead time (1,100 units × 2 kg per unit) × 1½ weeks = 3,300 kg

(ii) Minimum stock control level reorder level – (average usage × average lead time) 3,300 kg – [(950 units × 2 kg per unit) × 1¼ weeks] = 925 kg

(iii) Maximum stock control level reorder level + reorder quantity – (minimum usage × minimum lead time) 3,300 kg + 5,000 kg – [(800 units × 2 kg per unit) × 1 week] = 6,700 kg (b) Stores ledger record Date Purchases Issues Balance

Kg £/kg £ kg £/kg £ kg £/kg £ Op Bal 1,000 5.00 5,000 3 5,000 5.60 28,000 6,000 5.50 33,000 6 1,700 5.50 9,350 4,300 5.50 23,650 10 2,100 5.50 11,550 2,200 5.50 12,100 15 5,000 5.644 28,220 7,200 5.60 40,320 17 2,000 5.60 11,200 5,200 5.60 29,120 25 2,100 5.60 11,760 3,100 5.60 17,360

2016/4/06/MA 10

QUESTION 6 A company manufactures two products (P1 and P2). Two types of raw material (M1 and M2) are used in the manufacture of each product. Budgets are being prepared for the next period and the following budgeted information is available: Products Product P1 P2 Sales (litres) 6,000 4,000 Selling price (£/litre) 15 18 Opening stock (litres) 600 400 Closing stock (litres) 650 380 Raw materials Material M1 M2 Purchase price (£/litre) 7.50 3.50 Usage (litres) per litre of: Product P1 0.2 0.8 Product P2 0.3 0.7 Opening stock (litres) 180 830 Closing stock (litres) 200 750 REQUIRED Prepare the following budgets for the next period: (a) Sales revenue for each product and in total. (3 marks) (b) Production quantity of each product. (4 marks) (c) Materials usage for each type of raw material (litres). (6 marks) (d) Materials purchases for each type of raw material (litres and cost). (7 marks) (a) cf. 8 22 48 82 104 120 Graph: Axes, title, labels Horizontal plots Vertical plots Joined Cumulative Frequency Curve, test times

2016/4/06/MA 11 © Education Development International plc

MODEL ANSWER TO QUESTION 6 (a) Sales budget (£) Product P1 £90,000 (6,000 units @ £15) Product P2 £72,000 (4,000 units @ £18) Total sales £162,000 (b) Production budget (litres) Product P1 P2 Sales 6,000 4,000 ± stock increase/(decrease) 50 (20) Production 6,050 3,980 (c) Materials usage budget (litres) Material M1 M2 Product P1 6,050 units × 0.2 litres/unit 6,050 units × 0.8 litres/unit = 1,210 = 4,840 Product P2 3,980 units × 0.3 litres/unit 3,980 units × 0.7 litres/unit = 1,194 = 2,786 Total usage 2,404 7,626 (d) Materials purchases budget (litres & £) Material M1 M2 litres litres Usage 2,404 7,626 ± stock increase/(decrease) 20 (80) Purchases (litres) 2,424 7,546 × purchase price £7.50/litre £3.50/litre Purchases (cost) £18,180 £26,411