2006 LCCI Cost Accounting Level 2 Series 4 Model Answers

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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) (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. 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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Cost Accounting Level 2


Series 4 2006
QUESTION 1 Below are the definitions of eight terms used in cost accounting: 1 2 3 4 5 6 7 8 The cost of acquiring, producing or enhancing fixed assets The cost of a process that results in more than one main product The total cost of direct materials, direct labour and direct expenses The comparison of the standard cost of materials used and the standard material cost of output The issue of materials to production using the most recent price paid A unit of product or service in relation to which costs are ascertained Stock on hand or on order which has not been scheduled for use 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 2 3 4 5 6 7 8 Capital expenditure Joint cost Prime cost Direct material usage variance Last in, First out Cost unit Free stock 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 Selling price per unit Variable costs per unit Fixed costs 25,000 13.00 4.56 (excluding production operatives wages) 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)

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MODEL ANSWER TO QUESTION 2 (a) Budgeted profit (without productivity deal) per unit Selling price Variable costs (excl ops wages) Production operatives wages Contribution 25,000 units = Total contribution less fixed costs = Profit 137,500 123,600 13,900 4.56 2.94* per unit 13.00 7.50 5.50

*Working 7.00 1.05 = 7.35 per hour 60/24 minutes = 2.94 per unit

(b) Budgeted profit (with productivity deal) per unit Selling price Variable costs (excl ops wages) Production operatives wages Contribution 28,750 units (25,000 1.15) = Total contribution less fixed costs = Profit 133,688 123,600 10,088 4.56 3.14* per unit 12.35 (13.00 0.95) 7.70 4.65

The productivity deal is not worthwhile. * Working 2.94 per unit from Part A + bonus of 0.20

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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 3,950 machine hours 8,200 direct labour hours Budgeted overheads 63,990 77,900

PCC1 PCC2

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 4,175 machine hours 8,090 direct labour hours Actual overheads 65,620 78,530

PCC1 PCC2

REQUIRED (a) Calculate for each production cost centre for the period the: (i) (ii) overhead absorption rate; overhead absorbed; (4 marks) (4 marks) (6 marks)

(iii) over or under absorption of overhead.

(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) Overhead incurred: PCC1 PCC2

Production overhead control account Overhead absorbed: 65,620 PCC1 78,530 PCC2 144,150

67,635 76,855 144,490

Over absorption (to P & L): PCC1

2,015 146,165

Under absorption (to P & L): PCC2

1,675 146,165

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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 /unit 48 10 12 4 16 Product Y /unit 30 8 8 2 10 Product Z /unit 42 12 8 4 12

Selling price Costs: Direct materials Direct labour Variable overhead Fixed overhead

Budgeted production and sales of the three products are: Product X Product Y Product Z 11,000 units 15,000 units 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 34 18 10 12

Variable manufacturing costs Fixed manufacturing costs Variable non-manufacturing costs Fixed non-manufacturing costs

The selling price of the product is 80 per unit and fixed costs per period total 72,000.

REQUIRED (b) Calculate the: (i) (ii) contribution/sales (C/S) ratio; break-even sales revenue per period. (4 marks) (4 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 4 (a) Profit statement 000 1,314 748 566 422 144

Less Less

Sales Variable costs Contribution Fixed costs Net profit Workings

Sales

X 11,000 units @ 48 = 528,000 11,000 units @ 26 = 286,000 11,000 units @ 16 = 176,000

Product Y 15,000 units @ 30 = 450,000 15,000 units @ 18 = 270,000 15,000 units @ 10 = 150,000

Z 8,000 units @ 42 = 336,000 8,000 units @ 24 = 192,000 8,000 units @ 12 = 96,000

Variable costs

Fixed costs

(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 800 units per week 1 week Maximum 1,100 units per week 1 weeks

Sales of Product P Lead time for delivery of Material M

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) (ii) reorder level to ensure no stock-out; minimum stock control level; (3 marks) (4 marks) (4 marks)

(iii) maximum stock control level.

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 3 6 10 15 17 25 Purchases (kg) 5,000 Issues (kg) 1,700 2,100 5,000 2,000 2,100 28,220 Purchase cost () 28,000

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) 1 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) 1 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 Kg Op Bal 3 6 10 15 17 25 5,000 Purchases /kg 5.60 Issues /kg Balance /kg 5.00 5.50 5.50 5.50 5.60 5.60 5.60

28,000

kg

1,700 2,100 5,000 5.644 28,220 2,000 2,100

5.50 5.50 5.60 5.60

9,350 11,550 11,200 11,760

kg 1,000 6,000 4,300 2,200 7,200 5,200 3,100

5,000 33,000 23,650 12,100 40,320 29,120 17,360

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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 6,000 15 600 650 P2 4,000 18 400 380

Sales (litres) Selling price (/litre) Opening stock (litres) Closing stock (litres) Raw materials

Material Purchase price (/litre) Usage (litres) per litre of: Product P1 Product P2 Opening stock (litres) Closing stock (litres) M1 7.50 0.2 0.3 180 200 M2 3.50 0.8 0.7 830 750

REQUIRED Prepare the following budgets for the next period: (a) Sales revenue for each product and in total. (b) Production quantity of each product. (c) Materials usage for each type of raw material (litres). (d) Materials purchases for each type of raw material (litres and cost). (3 marks) (4 marks) (6 marks) (7 marks)

(a) cf. 8 Graph:

22

48

82

104

120

Axes, title, labels Horizontal plots Vertical plots Joined

Cumulative Frequency Curve, test times

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MODEL ANSWER TO QUESTION 6 (a) Sales budget () Product P1 Product P2 Total sales 90,000 72,000 162,000 (6,000 units @ 15) (4,000 units @ 18)

(b) Production budget (litres) Product Sales stock increase/(decrease) Production P1 6,000 50 6,050 P2 4,000 (20) 3,980

(c) Materials usage budget (litres) Material M1 M2 6,050 units 0.2 litres/unit 6,050 units 0.8 litres/unit = 1,210 = 4,840 3,980 units 0.3 litres/unit = 1,194 2,404 3,980 units 0.7 litres/unit = 2,786 7,626

Product P1

Product P2

Total usage

(d) Materials purchases budget (litres & ) Material M1 litres 2,404 20 2,424 7.50/litre 18,180 M2 litres 7,626 (80) 7,546 3.50/litre 26,411

Usage stock increase/(decrease) Purchases (litres) purchase price Purchases (cost)

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