Great Zimbabwe University

Munhumutapa School of Commerce

Department of Accounting & Information Systems

Great Zimbabwe University- Cost & Management Accounting HACC215

INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING

QUESTION 1

Last year, James Moody established a gourmet food business and to date has achieved
good sales and a small profit. While attending a recent business networking event,
James was advised to consider employing a management accountant to enhance and
improve his business. James has asked you for advice. He would like to understand
why management accounting has become so important to achieving business success
and how it differs from financial accounting. James is also keen to know how employing
a management accountant could improve his business.

REQUIREMENT:
Prepare a briefing note for James Moody which:
(i) Outlines the changes in the business environment that have contributed to the growth
and importance of management accounting. (6 marks)
(ii) Differentiates between financial accounting and management accounting.
(7 marks)
(iii) Describes how the employment of a management accountant could enhance and
improve a business. (12 marks)
[Total: 25 Marks]
QUESTION 2

The Management Accountant plays an important role in the modern business

environment and his/her activities may be categorized as providing information under
the key headings of planning, control and decision making.

You have just been appointed to a brand-new role as Management Accountant in

Engeeneous Ltd. a large engineering company producing a wide range of parts for the
automobile industry. This new role has been created following a majority decision of the
Board of Directors based on the advice of the company’s auditors. However, the
Managing Director comes from a marketing background and does not understand why
the company needs another accountant as there is already a Financial Accountant
employed on a fulltime basis. She voted against the creation of the new position and
considers the cost of your remuneration to be an unwelcome burden which will only
serve to reduce the company’s reported profits.

You are aware of the strong opinion of the Managing Director and as your first task you
decide to attempt to convince her of the importance of Management Accounting in the
modern business environment and suggest some ways that you can ensure your future
role in Engeeneous Ltd is financially viable.

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YOU ARE REQUIRED TO:

Prepare a Memorandum to the Managing Director in which you address her concerns
using the following guidelines:
(i) Distinguish clearly between Financial Accounting and Management Accounting under
any three different headings. (6 marks)
(ii) For each of the three key headings of planning, control and decision making; outline
one Management Accounting technique which might lead to stronger commercial
success for the company. (6 marks)
(iii) Outline any two qualitative (non-financial) issues that you as Management
Accountant should consider when providing information for decision making in
Engeeneous Ltd. (2 marks)
(1 mark for presentation)
[Total: 15 marks]
QUESTION 3

The accounting practice where you work has been approached by Mr. Dzangaradzimu,
a new client whose business is growing steadily, in relation to the role of the accounting
function in supporting his business.

YOU ARE REQUIRED TO:

Prepare a report for Mr. Dzangaradzimu, in which you:

(i) explain what management accounting is.
(ii) explain the key differences between financial accounting and
management accounting; and discuss how management accounting can
contribute to the effectiveness of an organization.

Please note: Your report should include practical examples to help explain the content
of the report. [Total: 25 Marks]

AN INTRODUCTION TO COST TERMS AND CONCEPTS

QUESTION 4

The managing director of Brandon Limited has asked you to prepare a report suitable
for senior management, to assist in its understanding of management accounting. He
has suggested that senior management need clarification on the topic of cost terms and
their importance and application in management accounting.

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REQUIREMENT:
Draft a report for the managing director which:
(i) Explains the following commonly used cost terms in management accounting:
a) cost object
b) direct and indirect costs
c) variable and fixed costs
d) Product and period costs.
Illustrate your answer with examples. (10 marks)
(ii) Briefly outline areas (tools/techniques) in management accounting where these cost
terms are used. (5 marks)
[Total: 15 Marks]
QUESTION 5

You have been asked by your manager to assist with the induction of a new member of
the finance team. After several days, the new person approached you with a few
queries about the following terms which they have heard being used, but which they
don’t understand:

1. Integrated cost accounting system

2. Limiting factors
3. Flexible budgets
4. Cost codes
5. Sensitivity analysis
6. Sunk costs

Conscious of the importance placed upon clear guidance by your manager, and to
provide documentation for future reference, you decide that the best approach is for you
to provide a written explanation of each term.

YOU ARE REQUIRED TO:

Prepare brief notes which explain each of the above terms. The notes should include
practical examples to fully explain each term. [Total: 25 Marks]

QUESTION 6

Nyakuwanika consulting company is currently undertaking a research project which to

date has cost the company $300 000. This project is being reviewed by management. It
is anticipated that should the project be allowed to proceed, it will be completed in

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approximately one year, when the results are expected to be sold to the ministry of
water and energy which is an arm of the government for $600 000. The following is a
list of additional expenses which the board of directors’ estimate will be necessary to
complete the project.

• Materials -$120 000

This material which has just been delivered is toxic and if not used in the project would
have to be disposed of by a specialized contractor at a cost of $15 000.

• Labour - $80 000

Personnel employed on the project are difficult to recruit and were transferred from a
production department. At a recent directors’ meeting the production department
requested that these members of staff should be returned to the production department
because they could earn the company an additional $300 0000 in the next year. The
management accountant calculates that the prime cost of these sales would be $200
000, and the fixed overheads absorbed would be $40 000

• Research Staff- $120 000

A decision has already been made that this would be the last research project
undertaken by the company, consequently when the work on this project ceases the
specialist research staff employed will be made redundant. Redundancy and other
severance pay is estimated to be $50 000.

• Share of General Business Services – $75 000

The directors are not sure what specifically is included in this cost, but a similar charge
is made each year to each department.

YOU ARE REQUIRED TO:

Assuming the estimates are accurate, advice the board of directors on the course of
action to take. You must explain the reasons for your treatment of each item carefully
and clearly. [25marks]

OVERHEAD COSTING
QUESTION 7

Montrose Ltd manufactures plastic containers for the pharmaceutical industry. The
factory, in which the company undertakes all of its production, has two production
departments – ‘Cutting’ and ‘Shaping’, and two service departments –‘Stores’ and
‘Maintenance’.

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The information provided below has been extracted from the company’s budget for the
next financial year which ends on 31 March 2012:

Allocated Overhead Costs $

Cutting Department 14,000
Shaping Department 16,000
Stores Department 3,500
Maintenance Department 2,800

Other Production Overheads

Factory rent 525,000
Factory building insurance 70,000
Plant & machinery insurance 39,000
Plant & machinery depreciation 58,500
Canteen subsidy 150,000

Direct Costs
Cutting Department 144,000
Shaping Department 210,000

The following additional information is also provided:

Cutting Shaping Stores Maintenance

Dept. Dept. Dept. Dept.
Floor area (square metres) 18,000 12,000 3,000 2,000
Value of Plant & Machinery ($) 300,000 50,000 25,000 15,000
Number of stores requisitions 1,000 500
Maintenance hours required 2,700 2,000 300
Number of employees 34 60 4 2
Machine hours 12,000 2,200
Labour hours 9,000 15,000

YOU ARE REQUIRED TO:

(a) Prepare an overhead analysis sheet based on the above information. You must
clearly state the basis used for any apportionments. (8 marks)
(b) Re-apportion the service department costs and calculate the most appropriate
overhead rate for each department.
(Rate should be calculated to two decimal places). (4 marks)

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(c) Using the rates calculated in part (b) calculate the full production costs of the
following job and the selling price if the company requires a margin of 20%:

JOB NUMBER A1234

Direct Materials $100
Direct Labour
Cutting Department 10 hours at $16 per hour
Shaping Department 15 hours at $14 per hour
Machine hours required
Cutting Department 20 hours
Shaping Department 12 hours (4 marks)

(d) During the year ended 31 March 2012, the following hours were worked, and the
following actual costs actually incurred:

Department Labour Hours Machine Hours Overhead costs incurred

Cutting 8,000 14,000 $531,500
Shaping 16,000 3,000 $405,500

Calculate the over/under absorbed overhead for each of the two departments for the
year ended 31 March 2012.
(Your answer must clearly indicate whether the company has over/under absorbed in
each instance). (3 marks)
(e) Explain what is meant by the term “blanket overhead rate”. (3 marks)
(f) State three reasons why companies calculate pre-determined overhead absorption
rates. (3 marks)
[Total: 25 marks]
QUESTION 8

An organization has budgeted for the following production overheads for its production
and service centers for the coming year:

Cost Centre $
Machinery 180 000
Assembly 160 000
Paint shop 130 000
Engineering shop 84 000
Stores 52 000
Canteen 75 000

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The product passes through the machining, assembly and paint shop cost centers and
the following data relates to the cost centers:

Machining Assembly Paint shop engineering Stores

No of employees 81 51 39 30 24
Eng shop-service 18 000 12 000 10 000
Stores (Orders) 180 135 90 45

The following budgeted data relates to the production cost centers:

Machining Assembly Paint shop

Machine hours 9 200 8 100 6 600
Labours hours 8 300 11 250 9 000
Labour cost $40 000 $88 000 $45 000

YOU ARE REQUIRED TO:

(a) Apportion the production overhead costs of the service cost centers to the
production of cost centers and determine predetermined overhead absorption
rates for the three production centers on the following basis:
Machining – machine hours
Assembly – labour hours
Paint shop – Labour costs (15 marks)

(b) Actual results for the production costs centers were:

Machining Assembly Paint shop

Machine hours 10 000 8 200 6 600
Labour hours 4 500 7 800 6 900
Labour cost $25 000 $42 000 $35 000
Actual Overheads $290 000 $167 000 $155 000

Prepare a statement showing the under/over absorption per cost center for the
period under review. (5 marks)
(c) Explain why overheads need to be absorbed upon pre-determined bases such as
the above. Consider whether these bases for absorption are appropriate in the
light of changing technology suggesting any alternative basis that you consider
appropriate. (5 marks)
[Total: 25 marks]

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QUESTION 9

A company reapportions the costs incurred by two service cost centres, materials
handling, and inspection, to the three production cost centres of machining, finishing
and assembly. The following are the overhead costs which have been allocated and
apportioned to the five cost centres:
($000)
Machining 400
Finishing 200
Assembly 100
Materials handling 100
Inspection 50
Estimates of the benefits received by each cost centre are as follows:
Materials
Machining Finishing Assembly handling Inspection
% % % % %
Materials handling 30 25 35 — 10
Inspection 20 30 45 5 —

YOU ARE REQUIRED TO:

(a) Calculate the charge for overhead to each of the three production cost centres,
including the amounts reapportioned from the two service centres, using:
(i) The continuous allotment (or repeated distribution) method.
(ii) An algebraic method; (16 marks)
(b) Comment on whether reapportioning service cost centre costs is generally
worthwhile and suggest an alternative treatment for such costs; (4 marks)
(c) Discuss the following statement: ‘Some writers advocate that an under- or over-
absorption of overhead should be apportioned between the cost of goods sold in the
period to which it relates and to closing stocks. However, the Zimbabwean practice is to
treat under- or over-absorption of overhead as a period cost.’ (5 marks)
[Total: 25 marks]
QUESTION 10

MAMBOKADZI Ltd. manufactures a variety of products. It operates three production

departments: Cutting, Assembly and Finishing. The work performed in Cutting is labour
intensive, while the work performed in both Assembly and Finishing is machine
intensive. The three production departments are supported by two service departments:
Maintenance and Materials Handling.

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The following overhead costs are budgeted to be incurred specifically in relation to each
of MAMBOKADZI Ltd.’s departments in the forthcoming financial year.

Cutting $26,810
Assembly $24,881
Finishing $18,709
Maintenance $11,200
Materials Handling $10,400

A few other costs are also expected to be incurred in respect of these departments.
These are as follows:

Machine depreciation $16,000

Power for machines $32,000
Rent and rates $28,800

The following budgeted information regarding MAMBOKADZI Ltd.’s operations is also

available

Cutting Assembly Finishing Maintenance Materials

Handling
Machine value $60,000 $42,000 $24,000 $13,500 $10,500
Floor area (m2) 9,000 5,400 1,800 1,200 1,800
Estimated power usage 22% 40% 26% 6% 6%
Machine hours 2,000 6,000 2,000
Direct labour hours 4,000 3,000 1,000
Maintenance hours 500 250 250
Direct labour hour rate $10 $9 $11
Materials requisitions 1,000 700 300

YOU ARE REQUIRED TO:

(a) On the basis of the information provided above, prepare a schedule which presents
figures for total budgeted overheads for each of the five departments. You should
clearly indicate the bases of apportionment adopted. (15 marks)
(b) Calculate the total budgeted overheads for each of the three production departments
after the service department overheads have been re-apportioned to them. (3 marks)
(c) Calculate predetermined overhead absorption rates for each of the production
departments. (3 marks)
(d) Calculate the absorption cost for the following job:

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Job C
Direct materials $280
Direct labour hours:
Cutting 3 hrs
Assembly 2 hrs
Finishing 1 hr
Machine hours:
Cutting 1 hr
Assembly 5 hrs
Finishing 2 hrs (4 marks)
[Total: 25 Marks]
QUESTION 11

Appliance Machining Ltd. manufactures and distributes a wide range of household

appliances. The company is organised into various cost centres and management
calculate product cost based on the number of cost centres that a typical product
passes through during its production cycle. The company produces one basic
dishwasher using five different cost centres for accounting purposes. There are three
production departments (Machining, Assembling and Finishing) and two service
departments (Materials Handling and Production Control).
Costs for last year, when 2,000 machines were produced, were as follows:
Materials $
Machining 240,000
Assembly 160,000
Finishing 40,000
Materials handling 4,000
Wages
Machining 10,000 hours at $3.72 each
Assembly 5,000 hours at $2.88 each
Finishing 3,000 hours at $3.60 each
Materials handling $8,000
Production control $11,200
Other costs $
Machine shop 41,920
Assembly 12,960
Finishing 7,920
Materials handling 8,000
Production control 2,400
It is estimated that the benefit derived from the service departments are as follows:

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Materials handling Production control

Machine shop 60% 40%
Assembly 30% 30%
Finishing 1 0% 20%
Materials handling n/a 10%

YOU ARE REQUIRED TO:

a) Explain and clearly distinguish between overhead allocation and overhead

apportionment in the treatment of production overheads. Support your
explanation with a suitable example (non-numeric) in each case. (5 marks)
b) Prepare a schedule showing the overhead only which should be incurred by each
of the five departments. (4 marks)
c) Prepare a schedule showing the overhead re-apportioned from the service
departments to the production departments. (4 marks)
d) Calculate an overhead absorption rate for each of the three production
departments using a rate per unit basis (to two decimal places of $). (3 marks)
e) Prepare a schedule showing the components of total production cost for one
dishwasher. (7 marks)
f) (f) Assuming that Appliance Machining Ltd. use “production cost plus” as a
pricing mechanism, estimate the selling price (to the nearest $) using both a
margin of 20% and a mark-up of 25%. (2 marks)

[Total: 25 Marks]

INVENTORY MANAGEMENT

QUESTION 12

One of your clients is concerned that the management and control of stocks is not
receiving sufficient attention within her organisation and is keen to learn more about it.

REQUIREMENT:

Draft a report which:

(a) Describes the costs associated with holding stock. (7 marks)
(b) Outlines the advantages and disadvantages of the following methods of valuing
stock:
(i) FIFO method;
(ii) LIFO method. (10 marks)
(c) Describes the key features of a Just-in-Time system. (8 marks)

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[Total: 25 Marks]
QUESTION 13

The following information relates to the inventory of raw material C and work-in-
progress of the only product manufactured by Rice plc.

Raw Material C

01 August Received 1,000 kg @ $9.50 per kg

15 August Received 900 kg @ $11.00 per kg
19 August Issued to production 800 kg
20 August Received 600 kg @ $ 10.50 per kg
26 August Issued to production 1,200 kg

Work-in-Progress at 31 August

600 units which are 40% complete

400 units which are 60% complete
300 units which are 80% complete

There is no opening stock of raw material C or work-in-progress at 1 August.

Completed finished goods are valued at $30.50 per unit.

YOU ARE REQUIRED TO:

(a) Prepare a statement showing the amount charged to production and the total value
of the inventory of raw materials held after each inventory transaction (rounding to two
decimal places), using each of the following methods of inventory costing:
1. First In, First Out (FIFO)
2. Last In, First Out (LIFO)
3. Weighted Average (AVG) (16 Marks)
(b) Outline the advantages and disadvantages of each of the above three methods of
inventory costing and suggest the circumstances in which each of them would be
suitable. (7 Marks)
(c) Calculate the value of the company’s inventory of work-in-progress at 31 August.
(3 Marks)
[Total 25 Marks]
QUESTION 14

The following information relates to inventory of Raw material X and Work-in-progress

of the only product manufactured by Rasta plc.

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Raw Material X

01 May Material X received 800 kg @ $ 6.50per kg

12 May Material Xreceived 700 kg @ $ 8.00per kg
15 May Material Xissued to production 600 kg
20 May Material Xreceived 700 kg @ $ 7.50per kg
22 May Material Xissued to production 1,000 kg

Work-in-Progress at 31 May

400 units which are 40% complete

200 units which are 60% complete
100 units which are 80% complete

Completed finished goods are valued at $ 25.80 per unit.

YOU ARE REQUIRED TO:

a) Prepare a statement showing the amount charged to production and the cost of the
inventory of raw materials held after each inventory transaction using each of the
following methods of inventory costing:
(i) First In, First Out (FIFO)
(ii) Last In, First Out (LIFO)
(iii) Weighted Average (AVG) (15 Marks)
b) Outline the advantages and disadvantages of each of the above 3 methods of
inventory costing and suggest the circumstances when each of them would be suitable.
(7 Marks)
c) Calculate the value of the company’s inventory of work-in-progress at 31 May.
(3 Marks)
[Total:25 Marks]

MARGINAL VS ABSORPTION COSTING

QUESTION 15

Clontarf Ltd commenced business on 1st January 2011 making one product only, which
sells for $160 per item. The production and sales data for each of the first three months
of 2011 was as follows:

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January February March

Sales in units 2,400 2,500 3,800
Production in units 2,700 2,400 4,000

Actual/budget information for each month was as follows:

Direct materials 3 kilograms at $5 per kilogram

Direct labour 4 hours at $10 per hour
Variable production overheads 150% of direct labour
Sales commission 10% of sales value
Fixed production overheads $10,000
Fixed selling overheads $35,000

There was no opening inventory at the start of January. Fixed production overheads are
budgeted at $120,000 per annum and are absorbed into products based on a budgeted
normal output of 30,000 units per annum.

YOU ARE REQUIRED TO:

(a) Prepare a profit statement for each of the three months using absorption costing
principles. (7 marks)
(b) Prepare a profit statement for each of the three months using marginal costing
principles. (9 marks)
(c) Present a reconciliation of the profit or loss figures given in your answer to (a)
and (b) together with an explanation of the reason for the difference. (5 marks)
(d) The Managing Director of Clontarf Ltd stated at a recent board meeting that “the
company should consider using marginal costing principles for the
preparation of financial statements as this would provide better information
for shareholders”.
Discuss the above statement. (4 marks)
[Total: 25 marks]
QUESTION 16

Ludo Limited manufactures a specialised storage accessory for automobiles called ‘the
Storax’, which is a type of pocket which can be easily fixed in the boot of any vehicle.
The company has been in operation for two years and, now that the production process
has been established and refined, the directors have decided to focus on the income
and costs arising from activities. The managing director has recently read an article

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about product costing and, in particular, absorption and variable costing and is keen to
understand how this would affect company profits.
The following information is available for the months of July and August:

July August
Production (units) 13,000 15,000
Sales (units) 12,000 16,000
Direct materials $29,250 $33,750
Direct labour $19,500 $22,500
Variable production overheads $7,800 $9,000
Total selling and administrative expenses $45,200 $57,600

Additional information:
1. For Ludo Limited normal production capacity is 15,000 units per month.
2. Fixed production overheads are $29,400 per month.
3. The company sells ‘the Storax’ for $20 each.
4. Total selling and administrative expenses includes a fixed and variable element. The
variable portion is incurred based on units sold.
5. At 30 June the company had no ‘Storax’ accessories in its warehouse.

YOU ARE REQUIRED TO:

(a) Prepare profit statements for Ludo Limited for the months of July and August using:
(i) Absorption costing
(ii) Variable costing (20 marks)
(b) Reconcile the profit calculated using Absorption costing to that calculated using
Variable costing. (3 marks)
(c) Provide a brief explanation of the effect on profit of using each of the methods at (a)
above. (2 marks)
[Total: 25 Marks]
QUESTION 17

MVURA Ltd manufactures beds for students in tertiary colleges and private schools in
Masvingo Province. The following information relates to the activities of MVURA Ltd
from January to June 2021.
$
Selling price per unit of product 240
Variable cost per unit of product 76
Fixed manufacturing costs per month 120 000
Non-manufacturing costs per month 66 000

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Normal production in MVURA Ltd was expected to be 1500 beds per month and
production and sales for the period ending June 2021 is presented below:
January February March April May June
Units sold 1500 1200 2100 1600 1500 1000
Units produced 1500 1500 2000 1800 1300 1100

There were no opening inventories at the start of January, and the actual manufacturing
fixed overhead incurred was $120 000 per period. Non-manufacturing overheads were
$66 000 per month.

YOU ARE REQUIRED TO:

(a) Prepare an income statement for MVURA Ltd for each of the month based on
i. Marginal Costing System. (11 marks)
ii. Absorption Costing System. (12 marks)
(b) Explain the difference in profits for the two methods. (2 marks)
(c) Reconcile the difference between the marginal and absorption profits from
February to June which you have calculated in your answer to (a) above.

(5 marks)

[TOTAL MARKS: 30]

QUESTION 18

The following information relates to the only product manufactured and sold by Wood
PVT.
$ per unit
Selling price 180
Direct material cost 55
Direct labor cost 45
Variable production overhead 10
Variable sales & marketing overhead 8

The following levels of activity took place over the first three months of the product’s life:
Sales Production
Units Units
January 5,800 7,000
February 6,500 8,000
March 7,800 8,500

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Additional information is as follows:

1. Budgeted fixed production overhead was $500,000 per annum.

2. Actual fixed production overhead for the period was $45,000 per month.
3. Sales and marketing overhead of $35,000 per month and administration overhead of
$20,150 per month were in line with the budget for that period.
4. All fixed overhead costs are budgeted based on a projected volume of 80,000 units
per year and all costs are expected to be incurred at a constant rate throughout the
year.
5. The business does not expect to have any inventory on 1 January.

REQUIRED:

(a) On the assumption that Wood plc. operates an absorption costing system, calculate
the (under)/over absorbed fixed production overhead for each month. (5 Marks)
(b) Prepare a profit statement for each month using each of the following bases:
i. Absorption costing
ii. Marginal costing (15 Marks)
(c) Explain the reason for any difference in the reported profit under the two bases for
each month. (5 Marks)
[Total 25 Marks]
QUESTION 19

Weaver Ltd manufactures and sells a single product called Product W. The company
operates an absorption costing system for product costing purposes and values closing
stock at normal absorption cost. Fixed production overheads are applied to units of
output using a predetermined overhead absorption rate based on an expected normal
annual activity level of 258,000 units per annum. Fixed production overheads for the
most recent financial year were budgeted to be $5,160,000.

There was no opening stock at the start of the most recent financial year. Sales and
production levels for the first three months of that year were as follows:

Month 1 Month 2 Month 3

Sales units 21,000 18,000 23,000
Production units 21,000 22,500 20,000

The actual selling price per unit achieved throughout the most recent financial year was
$180, while the actual variable cost incurred per unit remained at $80 during that year.
Fixed production overheads actually incurred were as follows: Month 1: $410,000;

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Month 2: $432,000 and Month 3: $418,000. In addition, fixed selling and administration
costs of $405,000 were incurred during each of the three months.

REQUIREMENT:

(a) Prepare operating profit statements for month 1, month 2 and month 3:
(i) In accordance with the absorption costing approach currently used by Weaver Ltd.
(ii) In accordance with a marginal costing approach. (15 marks)
(b) In respect of each of the three months, explain any difference between the profits
reported using absorption costing in (a)(i) above and those reported using marginal
costing in (a)(ii) above. (5 marks)
(c) Outline the arguments put forward in favour of the use of absorption costing for
internal reporting. (5 marks)
[Total: 25 Marks]
QUESTION 20

Absentia Ltd. commenced production for the first time on 1st January 2007 making and
selling one single product. The following information has been extracted by the
Management Accountant from the original budgeted data prepared for the first financial
quarter as part of the company’s forecast plans for this product:

Direct material per unit 5 kg @ $2 per kg

Direct labour per unit 2 hrs @ $10 per hr
Variable production overhead $12,000 per month
Fixed production overhead $18,000 per month

Each unit is sold at a fixed price of $60.

All overheads are absorbed to the products on a per unit basis and are calculated by
the Management Accountant using the budgeted production level of 1,500 units per
month.

For the months of January, February and March, the following data has been gathered:
January February March
Units produced 1,200 1,480 1,530
Units sold 1,000 1,400 1,670

You may assume that the fixed production overheads are incurred evenly over the year
and that there was no difference between budgeted and actual costs during the quarter
under review.

Because the company has only commenced trading, the Management Accountant is
unsure which method of costing the company should adopt for internal quarterly

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reporting to the directors. She has asked you to prepare the following information for the
forthcoming Board meeting.

YOU ARE REQUIRED TO:

(a) Calculate the unit cost of the product using both an absorption costing and a
marginal costing approach. (4 marks)
(b) Prepare operating statements for the months of January, February and March using
absorption costing and marginal costing. (Totals for the quarter are not required.) Any
under / over absorption should be clearly shown. (16 marks)
(c) Briefly explain why the monthly profits reported under each costing method differ
from each other and what the implications are in the long term. (5 Marks)
[Total: 25 marks]

MARGINAL COSTING
QUESTION 21

(a) ‘Over time or over a specific range of activity, some costs tend to be unaffected by
the level of output, whereas others will change as output changes’.

YOU ARE REQUIRED TO:

Briefly explain, with the aid of a relevant example, each of the following three cost
classifications:
(i) Variable cost;
(ii) Fixed cost;
(iii) Mixed cost (Semi variable/semi fixed cost). (6 Marks)

(b) The following information has been supplied for Croom Ltd. a manufacturing
company based in Limerick;
Activity Units Units
Production 100,000 120,000
Sales 50,000 85,000

Costs $ $
Direct Material 350,000 420,000
Administration 88,000 88,000
Factory Overhead 590,000 650,000
Production Labor 380,000 430,000
Selling and Distribution 200,000 340,000

YOU ARE REQUIRED TO:

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i. Prepare a table summarizing the variable cost per unit and total fixed cost for each of
the five cost headings above. (10 Marks)
ii. Using your answer to part (i) calculate the total estimated cost for an activity level of
production of 110,000 units and sales of 105,000 units (9 Marks)
[Total: 25 Marks]

Question 22

Mazvikadei Ltd is a manufacturer of a household cleaning product. It employs the

services of a specialist sales company called Sellit Ltd to undertake its sales and
marketing activities. Sellit Ltd receives a commission of 9% on Mazvikadei Ltd’s sales
for providing this service. The following budgeted income statement has been prepared
in respect of the forthcoming financial year.

Mazvikadei Ltd - Budgeted Income Statement

$ $
Sales 850,000
Cost of goods sold
Direct materials 170,000
Direct labour 51,000
Fixed manufacturing costs 127,500 348,500
Gross profit 501,500
Selling and Distribution Costs
Commission - Sellit Ltd 76,500
Variable distribution costs 34,000
Fixed distribution costs 92,000 202,500
Fixed administration costs 130,000
Budgeted profit 169,000

Management at Mazvikadei Ltd are currently considering discontinuing the arrangement

with Sellit Ltd and employing an in-house sales and marketing team instead. The
management accountant has identified the costs associated with this option. It would be
necessary to employ two sales representatives, each of whom would receive a basic
salary of $22,000.These sales representatives would also require a commission of 2%
on sales achieved. Mazvikadei Ltd would also have to spend an additional $10,000 per
annum on advertising if it employs its own in-house sales and marketing team.

YOU ARE REQUIRED TO:

(a) Discuss the assumptions which underpin the Cost-Volume-Profit Mode (6 marks)

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(b) Calculate the breakeven point in sales revenue for the forthcoming financial year if
Mazvikadei Ltd continues to avail of Sellit Ltd’s services. (5 marks)
(c) Calculate the level of sales revenue that Mazvikadei Ltd would need to earn to
achieve the budgeted profit of $169,000 for the forthcoming financial year if the
company employs its own in-house sales and marketing team. (7 marks)
(d) Calculate the level of sales revenue at which profits would be the same whether
Mazvikadei Ltd continues to avail of Sellit Ltd’s service or employs its own in-house
sales and marketing team. (7 marks)
(You may round your calculations to the nearest $ where necessary) [Total: 25 Marks]

QUESTION 23

Builders Boy Ltd. manufactures a single multi-purpose tool (known as ‘The Builder’s
Boy’) used extensively by those involved in the construction industry. Given the current
economic climate for this industry the company are examining its projections and plans
for the next financial period: the year ending 31st August 2017.

The Directors are concerned about ensuring profitability and survival and have a few
questions and proposals about which they require advice.

The following information has been provided for ‘The Builder’s Boy’ for the year ending
31st August 2017:
1. 36,000 units of the product are expected to be sold at a uniform selling price of
$15 per unit.
2. Production costs are budgeted at $345,000 of which $30,000 are regarded as
fixed costs.
3. Selling and distribution costs are budgeted at $114,000 of which $39,000 are
regarded as variable costs.
4. Administration costs are budgeted at $36,000 fixed cost plus $ 6,000 variable
giving a total of $42,000.

YOU ARE REQUIRED TO:

(a) Calculate the break-even point in units and the margin of safety based on the
original budgeted data noted above. (5 marks)
(b) Provide a brief explanation of the term “Margin of Safety”. (2 mark)
(c) Calculate the expected impact on profitability of a reduction in sales demand of 25%.
(4 marks)
(d) Builders Boy Ltd. is considering a new marketing campaign to introduce the tool to
the home DIY market and reduce reliance on the construction industry in general. The
relevant cost of the new campaign is estimated at $30,000. Calculate the revised

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breakeven point and the number of additional unit sales required to cover the additional
outlay. (4 marks)
(e) Alternatively the company is considering two options which may allow it to
concentrate solely on the construction industry:
Option A: Offering a sales commission of $1 per unit to staff.
Option B: Reduce the current selling price by $1 per unit.
Option A is expected to increase sales by 20% whereas Option B will achieve an
increase of 30%. However, Option B will also require an additional fixed cost for
advertising of $5,000.
Advise the company which option would provide the higher profit and support your
answer with appropriate calculations. (10 marks)
[Total: 25 marks]

QUESTION 24

Bruska Limited manufactures high quality coffee biscuits that are sold to hotels and
restaurants in Masvingo. Two months ago it had prepared a budget for the forthcoming
financial year. Details of this are presented below:
$
Sales 6,000,000
Less: Direct materials 2,080,000
Direct labour 1,160,000
Variable overheads 840,000
Fixed overheads 972,600
Total costs 5,052,600
Profit 947,400

The budget above has been prepared on the assumption that unit sales will be 800,000
packets of biscuits. However, due to changing economic conditions, the sales forecast
for the year is now 720,000 packets of biscuits. It is expected that selling price per unit,
direct costs per unit and variable overhead cost per unit will not change from those
budgeted. It is also expected that fixed overheads will be the same as those budgeted.
Management are now considering a number of options so as to improve profitability for
the forthcoming financial year:

Option 1: Decrease the selling price by 20%. It is anticipated that this would increase
sales volume by 25% on the forecast sales for the current year.

Option 2: Decrease all variable costs by 10% and decrease fixed costs by 10%. This is
not expected to have any impact on the sales level.

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Option 3: Decrease the selling price by 10% and decrease fixed costs by 5%. This is
expected to increase sales volume by 25% on the forecast sales for the current year.

YOU ARE REQUIRED TO:

a) Calculate the expected profit for the current year. (5 marks)
b) Based on the forecast activity for the year, calculate:
(i) The breakeven point in packets of biscuits.
(ii) The margin of safety in percentage terms.
(iii) The sales revenue required to earn a profit of $1,440,000. (10 marks)
c) For each of the three options above calculate:
(i) Profit.
(ii) Breakeven point in packets of biscuits.

Recommend which option, if any, the company should adopt giving reasons for your
answer. (10 marks)
[Total: 25 Marks]
QUESTION 25

(a) ‘Over time or over a specific range of activity, some costs tend to be unaffected by
the level of output, whereas others will change as output changes’.

YOU ARE REQUIRED TO:

Briefly explain, with the aid of a relevant example, each of the following three cost
classifications:
(iv) Variable cost;
(v) Fixed cost;
(vi) Mixed cost (Semi variable / semi fixed cost). (6 Marks)

(b) The following information has been supplied for Croom Ltd. a manufacturing
company based in Limerick;

Activity Units Units

Production 100,000 120,000
Sales 50,000 85,000

Costs $ $
Direct Material 350,000 420,000
Administration 88,000 88,000
Factory Overhead 590,000 650,000
Production Labour 380,000 430,000

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Selling and Distribution 200,000 340,000

YOU ARE REQUIRED TO:

i. Prepare a table summarizing the variable cost per unit and total fixed cost for each of
the five cost headings above. (10 Marks)
ii. Using your answer to part (i) calculate the total estimated cost for an activity level of
production of 110,000 units and sales of 105,000 units (9 Marks)
[Total: 25 Marks]

JOB COSTING

QUESTION 26

Top Glass Ltd provides toughened glass panels to customer order. The panels are used
for both internal and external purposes to add a decorative effect as well as fulfilling a
practical purpose. A new customer GREAT ZIMBABWE UNIVERSITY has placed an
order to provide glass panels for a new library building in Mashava. The accountant at
Top Glass Ltd has coded this order as Job A134 and provided the following production
information:

Direct Materials:
Top Glass Ltd uses a weighted average system for pricing issues to production.

Opening stock at 1st April:

20 size L glass panels @ $40 each
80 type B chrome fittings @ $2 each

Purchases:
1st April: 50 size L glass panels @ $37.76 each
15th April: 90 type B chrome fittings @ $2.17 each

Issues to production (Job A134):

17th April: 15 size L glass panels
19th April: 90 type B chrome fittings

Direct Labour:
Assembly: 42 hours @ $18 per hour
Finishing: 16 hours @ $16 per hour

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As the customer specifically requested that the Job was finished by 20th April to meet
construction deadlines for the library, six of the hours worked in the assembly
department were worked as overtime. The company pays overtime at a rate of one and
a half times the normal hourly rate.

Overheads:

The company absorbs overheads using a traditional approach based on labour hours.

Assembly Finishing Total

Production overheads $336,105 $421,215 $757,320
Direct labour hours 64,000 102,000 166,000
Machine hours 500 100 600

Pricing policy:
It is company policy to price all orders based on achieving a profit margin of 25% on
sales price.

YOU ARE REQUIRED TO:

(a) Calculate the total cost of Job A134. (17 marks)
(b) Calculate the price charged by Top Glass Ltd to the customer. (3 marks)
(c) Briefly explain the main differences between job costing and process costing.
(5 marks)
[Total: 25 Marks]

PROCESS COSTING

QUESTION 27

Mamutse Ltd manufactures a product that passes through two processes. The following
information relates to the two processes:

Process A Process B
Opening work in progress ------------- --------------
Units introduced into the process 25 000 19 500
Units completed and transferred to the next
Process or finished goods inventory 19 500 17 000
Closing work in progress 5 500 2 500
Material costs added $340 000 $200 000

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Conversion costs $240 000 $150 000

Materials are added at the start of process A and at the end of process B and
conversion costs are added uniformly throughout both processes. The closing work in
progress is estimated to be 62% complete for both processes.

YOU ARE REQUIRED TO:

(a) Explain the difference between a normal loss and an abnormal loss. (4 marks)
(b) For Mamutse Ltd prepare process A and process B accounts. (18 marks)
(c) Explain why Mamutse Ltd. uses process costing as opposed to job costing in the
calculation of their unit costs for the period (3 marks)
[Total: 25 Marks]
QUESTION 28

The Vapfumi Company has two process, mixing and purifying. Material is introduced at
the start of the mixing process and additional material is added to purifying process
when the process is 70% complete. Conversion costs are applied uniformly throughout
both processes. The completed units of mixing process are immediately transferred to
purifying process and the completed production of purifying process is transferred to
finished goods inventory. Data for the period include the following:

Mixing Process Purifying Process

Opening work in 6000 units, 75% converted, 2000 units, 80%
Progress consisting of materials $240 converted, consisting of
000 and conversion costs previous process cost
$360 000. of $240 000, material
cost $150 000 and
conversion costs $90
000
Units started during 16 000 units 18 000 units
the period
Closing work in 4 000 units ¾ complete 8 000 units ½ complete
progress
Material added $470 000 $360 000
during the period
Conversion costs $320 000 $410 000
added during the
period

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YOU ARE REQUIRED TO:

(a) Briefly outline the circumstances where process costing may be suitable as a
method of valuing production. (3 marks)
(b) For Vapfumi Company prepare the mixing and purifying process accounts using the
weighted average method of valuing inventory. (18 marks)
(c) How would the accounts have differed if the FIFO method of valuing inventory was
used? (4 marks)
[Total: 25 Marks]

QUESTION 29

The manufacture of one of the products of A Ltd requires three separate processes. In
the last of the three processes, costs, production, and stock for the month just ended
were:
1. Transfers from Process 2: 380 000 units at a cost of $494 000.
2. Process 3 costs: materials $310 000, conversion costs $176 000.
3. Work in process at the beginning of the month: 20 000 units at a cost of
$155 000 (based on FIFO pricing method). Units were 70% complete for
materials, and 65% complete for conversion costs.
4. Work in process at the end of the month: 18 000 units which were 90%
complete for materials, and 70% complete for conversion costs.
5. Product is inspected when it is complete. No losses are expected during
the month.

YOU ARE REQUIRED TO:

(a) Prepare the Process 3 account for the month just ended. (16 Marks)

(b) Explain how your calculations would be affected by the use of weighted average
pricing instead of FIFO. (9 Marks)
(Total: 25 marks)

QUESTION 30

Sheridan Ltd. manufactures chemical solutions for the automotive industry. The
manufacturing takes place in a number of processes involving dangerous chemical
reactions and the company uses a FIFO process costing system to value work-in-
process and finished goods. At the end of the last month, one of the chemical reactions
became unstable and resulted in a fire in the factory. As well as damaging the premises,

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the fire also destroyed some of the paper files containing records of the process
operations for the month.

You are the Management Accountant in Sheridan Ltd. and you now have to attempt to
prepare the process accounts for the month during which the fire occurred. You have
been able to gather some information about the month’s operating activities but some of
the information could not be retrieved due to the damage. The following information was
salvaged:

❖ Opening work-in-process at the beginning of the month was 500 litres,

80% complete for labour and 60% complete for overheads. Opening work-
in-process was valued at $13,900.
❖ Closing work-in-process at the end of the month was 100 litres, 20%
complete for labour and 10% complete for overheads.
❖ Normal loss is 10% of input and total losses during the month were 2,000
litres partly due to the fire damage.
❖ Output sent to finished goods warehouse was 3,400 litres.
❖ Losses have a scrap value of $2 per litre.
❖ All raw materials are added at the commencement of the process.
❖ The cost per equivalent unit is $33 for the month made up as follows:

$
Raw Material 15
Labour 10
Overheads 8
33

YOU ARE REQUIRED TO:

(a) Calculate the quantity (in litres) of raw material inputs during the month.
(4 marks)
(b) Calculate the quantity (in litres) of normal loss expected from the process and the
quantity (in litres) of abnormal loss / gain experienced in the month. (3 marks)
(c) Calculate the values of raw material, labour and overheads added to the process
during the month. (12 marks)
(d) Prepare the process account for the month. (3 marks)
(e) Explain why Sheridan Ltd. uses process costing as opposed to job costing in the
calculation of their unit costs for the period. (3 marks)
[Total: 25 marks]

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QUESTION 31

Pet Food Delights Limited, based in Cork, produces cat food for the retail market. The
production process involves two stages, mixing and baking. Manufacturing cost
comprises materials, which are added at the start of the process, and conversion costs
(labour and overheads), which are incurred evenly throughout production. The following
details relate to the mixing process for the month of March:

Degree of completion $
Opening WIP (39,000 kgs)
- Materials 100% 67,350
- Conversion costs 60% 12,045

Materials input and Costs incurred

- Materials (630,000 kgs) 837,900
- Conversion costs 396,240

Normal loss 5% of materials input

Output 615,000 kgs

Closing WIP (22,500 kgs)

- Materials 100%
- Conversion costs 80%

REQUIREMENT:
(a) Briefly outline the circumstances where process costing may be suitable as a
method of valuing production. (3 marks)
(b) For the month of March prepare the mixing process account using:
(i) The first in first out (FIFO) method of valuing inventory.
(ii) The weighted average method of valuing inventory. (20 marks)
(c) In relation to process costing, give TWO reasons why the weighted average method
of valuing inventory may be preferable to the FIFO method. (2 marks)
[Total: 25 Marks]
QUESTION 32

Dundalk Ltd. manufactures paint by means of two processes, Mixing and Finishing.
Raw materials are introduced at the start of the Mixing Process and the completed
output of the Mixing Process is transferred to the Finishing Process where additional
raw materials are added at the start of this process. Conversion costs are incurred

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evenly throughout both processes. Dundalk Ltd. uses the First In First Out (FIFO)
method for inventory valuation purposes.
You are provided with the following information for the most recent financial period for
both the Mixing Process and the Finishing Process:
Mixing Process
Materials input 2,000 kg at $5 per kg
Direct labour cost $41,940
Production overheads $20,760
Normal loss 5% of input
Scrap value $5 per unit
Actual loss in period 200 kg
There was no work-in-progress at either the beginning or end of the period.
Finishing Process
Opening work-in-progress
There were 1,200 kgs in opening work-in-progress, which were 60% complete, and
these units had the following costs attached to them; Mixing Process costs $44,400,
added materials in Finishing Process $2,280 and conversion costs in Finishing Process
$2,740.
Inputs in period
Materials added in period $39,600 Conversion costs $75,200 Closing work-in-progress
There were 800 kgs of closing work-in-progress, which were 50% complete.
No losses occurred in Process 2.
YOU ARE REQUIRED TO:
Prepare the following completed accounts for the most recent financial period:
I. Mixing Process Account
II. Normal Loss Account
III. Abnormal Loss / Abnormal Gain Account
IV. Finishing Process Account (21 marks)
V. Explain the difference between a normal loss and an abnormal loss.
(4 marks)
[Total: 25 Marks]
QUESTION 33

Nutty Fresh LTD, based in Gweru, commenced operations five years ago and produces
a range of healthy muesli snack bars for the retail market. The company uses a process
costing system based on the weighted average method to value production and
inventory. Manufacturing comprises two simple processes: mixing and finishing. In the
mixing process, the various ingredients are combined thoroughly and then transferred to
the finishing process. In the finishing process the mixed ingredients are molded into

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bars and cooked to create the finished product. All ingredients are added at the start of
the mixing process and no additional ingredients are added in the finishing process.
Labor and production overheads, also called conversion costs, are incurred evenly
throughout both processes. Details relating to the company’s most popular product, the
Nut Crunch bar, for the most recent financial period are shown below:

Mixing Finishing
Opening inventory 60,000 Kgs 25,000 Kgs
Degree of completion 40% 30%
Previous process costs - $11,500
Materials $15,000 -
Conversion costs $10,625 $2,750

Input during the period to the process 160,000 Kgs

Materials $38,400 -
Conversion costs $30,220 $20,650

Completed and transferred 175,000 Kgs 185,000 Kgs

Closing inventory 35,000 Kgs 10,000 Kgs

Degree of completion 50% 50%

Note:
A normal loss of 5% of the materials input (during the period) to the mixing process is
expected. Any waste material from the mixing process can be sold to a local farmer for
$0.05 per Kg.

YOU ARE REQUIRED TO:

Prepare the following accounts, where applicable, for the most recent financial period.
You should ensure that all workings are shown clearly:

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a) Mixing process account

b) Finishing process account
c) Normal loss account
d) Abnormal loss/Abnormal gain account. [Total: 25 Marks]

QUESTION 34

Procession Ltd operates a process costing system and manufactures one single
product (the Procixs) using raw material X. The process involves continuous chemical
reactions and hence cannot be halted to facilitate period end stock takes. The following
information relates to March 2007.

✓ Opening work-in-progress at 28th February - 15,000 units.

100% complete for materials $51,700
60% complete for labor $31,740
60% complete for overheads $13,380
All overheads are variable

✓ During the month 40,000 units of Procixs were started.

✓ 100,000 kg of material X costing $106,400 were input to the process.
✓ 60,000 labor hours were worked at a cost of $93,000.
✓ The variable overhead incurred was $74,400.
✓ Normal loss is 10% of units started.
✓ Loss has a scrap value of $0.50 cent per unit and is not identified until the end of
the process.
✓ 36,000 units were output to finished goods.
✓ Closing stock of work-in-progress was 12,000 units.
100% complete for materials.
60% complete for labor and overhead.

YOU ARE REQUIRED TO:

(a) Prepare the process account for the month of March 2007. You may assume that
Procession Ltd operates a FIFO stock management system. (15 marks)
(b) Prepare the Abnormal Loss / Gain Account for the month of March 2007. (3 marks)
(c) Prepare the Scrap Account for the month of March 2007. (3 marks)
(d) Explain how abnormal gains and losses are treated in the calculation of equivalent
units of production. (4 Marks)
[Total: 25 marks]

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QUESTION 35

A company operates several production processes involving the mixing of ingredients to

produce bulk animal feedstuffs. One such product is mixed in two separate process
operations. The information below is of the costs incurred in, and output from, Process 2
during the period just completed.

Costs incurred: $
Transfers from Process 1 187 704
Raw materials costs 47 972
Conversion costs 63 176
Opening work in process 3 009

Production: Units
Opening work in process 1 200
(100% complete, apart from Process 2 conversion costs which were 50% complete)

Transfers from Process 1 112 000

Completed output 105 400

Closing work in process 1 600

(100% complete, apart from Process 2 conversion costs which were 75% complete)

Normal wastage of materials (including product transferred from Process 1), which
occurs in the early stages of Process 2 (after all materials have been added), is
expected to be 5% of input. Process 2 conversion costs are all apportioned to units of
good output. Wastage materials have no saleable value.

YOU ARE REQUIRED TO:

(a) Prepare the Process 2 account for the period, using FIFO principles. (18 marks)
(b) Explain how, and why, your calculations would have been different if weighted
average method had been used and if wastage occurred at the end of the process.
(7 marks)
[Total 25 marks]
QUESTION 36

One of your clients has recently acquired a new subsidiary called KWAKUSERI Ltd, a
textile manufacturer which employs process costing for cost accumulation. This client’s

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other subsidiaries all use job costing, so you have been asked to provide some
information regarding process costing.

REQUIREMENT:
Using figures from your imagination draft a memorandum for your client which:
(a) Describes a process costing system; (8 marks)
(b) Distinguishes between process costing and job costing; (6 marks)
(c) Provides two examples of industries for which job costing is appropriate and two
examples (other than the textile industry) of industries for which process costing is
appropriate. (3 marks)
(d) Explains what is meant by the following terms:
(i) Equivalent units;
(ii) Normal loss;
(iii) Abnormal loss. (8 marks)
(Total: 25 marks)
QUESTION 37

Preston Limited manufactures liquid plant food and uses a process costing system
based on the weighted average method to value production and inventory. There are
two main processes used in the production of the plant food. Firstly, mixing, where
various compounds are combined, and then blending where the mixed materials are
heated and blended. All raw materials are introduced at the start of the mixing process
and the completed output is transferred to the blending department. No additional
materials are input during the blending process. Labour and production overheads, also
called conversion costs, are incurred evenly throughout both mixing and blending
processes. Information relating to the most recent financial period is shown below:

Mixing Blending
Opening WIP Nil 20,000 litres
Inputs in period 150,000 litres
Completed and transferred 103,000 litres 106,700 litres
Closing WIP 44,000 litres 15,000 litres

Other information:
1. The company expects a normal loss of 2% of materials input to the mixing process.
No loss is expected to occur in the blending process. Any losses arising can be sold for
a scrap value of $0.10 per litre.
2. Costs relating to the process are as follows:
Mixing Blending
$ $

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Opening WIP
- Prior process costs (from mixing process) 12,476
- Conversion costs Nil 1,920
Input to process
- Materials 34,845 Nil
- Conversion costs 40,761 40,815

3. Opening work in progress in the blending department was fully complete in terms of
prior process costs and 40% complete in terms of conversion costs.
4. Closing work in progress in the mixing department was fully complete in terms of
materials and 60% complete in terms of conversion costs. Closing work in progress in
the blending department was fully complete in terms of prior process costs and 50%
complete in terms of conversion costs.

YOU ARE REQUIRED TO:

(a) Prepare the following completed accounts for the most recent financial period. You
must show all workings clearly.
i. Mixing process account
ii. Blending process account
iii. Normal loss account
iv. Abnormal loss/Abnormal gain account (23 marks)
(b) Explain the difference between a normal loss and an abnormal loss. (2 marks)
[Total: 25 Marks]

JOINT & BY-PRODUCT COSTING

QUESTION 38

C Ltd operates a process which produces three joint products. In the period just ended
costs of production totalled $509 640. Output from the process during the period was:
Product W 276 000 kilos
Product X 334 000 kilos
Product Y 134 000 kilos

There were no opening stocks of the three products. Products W and X are sold in this
state. Product Y is subjected to further processing. Sales of Products W and X during
the period were:
Product W 255 000 kilos at $0.945 per kilo
Product X 312 000 kilos at $0.890 per kilo

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128 000 kilos of Product Y were further processed during the period. The balance of the
period production of the three products W, X and Y remained in stock at the end of the
period. The value of closing stock of individual products is calculated by apportioning
costs according to weight of output. The additional costs in the period of further
processing Product Y, which is converted into Product Z, were:
Direct labour $10 850
Production overhead $7 070

96 000 kilos of Product Z were produced from the 128 000 kilos of Product Y. A by-
product BP is also produced which can be sold for $0.12 per kilo. 8000 kilos of BP were
produced and sold in the period.

Sales of Product Z during the period were 94 000 kilos, with a total revenue of $100
110. Opening stock of Product Z was 8000 kilos, valued at $8640. The FIFO method is
used for pricing transfers of Product Z to cost of sales.
Selling and administration costs are charged to all main products when sold, at 10% of
revenue.

REQUIRED:
(a) Prepare a profit and loss account for the period, identifying separately the
profitability of each of the three main products. (14 marks)
(b) C Ltd has now received an offer from another company to purchase the total output
of Product Y (i.e., before further processing) for $0.62 per kilo. Calculate the viability of
this alternative. (5 marks)
(c) Briefly discuss the methods of, and rationale for, joint cost apportionment. (6 marks)
(Total 25 marks)
LABOUR COSTING

QUESTION 39

The following information relates to Wheat plc. a manufacturing business that is

considering the introduction of a piece-work incentive scheme in one of its departments,
which has 6 employees.

Current Payroll
Basic working week 38 hours
Over-time premium 20% of normal pay grade.
Normal grade A pay rate is $22 per hour.
Normal grade B pay rate is $18 per hour.

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Employee Normal Normal Normal

Worked Hours Pay Grade Units Produced
1 41 A 170
2 44 A 170
3 40 B 150
4 38 B 150
5 38 B 160
6 45 A 180

Piecework Incentive Scheme Proposal

Under the proposed incentive scheme, the standard time allowance would be 20
minutes per unit. The piecework rate would be based on grade A labor rates, with a
standard piecework enhancement of 6%. All employees would receive the same
piecework rate.

YOU ARE REQUIRED TO:

(a) Outline the purpose of an incentive scheme. (5 Marks)

(b) Calculate the normal pay due to each employee based on the current payroll terms.
(7 Marks)
(c) Calculate the standard piecework rate based on the proposed incentive scheme.
(7 Marks)
(d) Calculate the normal pay due to each employee under the terms of the proposed
incentive scheme. (6 Marks)
[Total 25 Marks]
QUESTION 40

The following information relates to Muchadei plc. a manufacturing business, which is

considering the introduction of a piece-work incentive scheme in one of its departments,
which has 5 employees.

Current Payroll
Basic working week 35 hours
Over-time premium 25% of normal pay grade.
Normal grade A pay rate is $18 per hour.
Normal grade B pay rate is $20 per hour.

Employee Normal Normal Normal

Hours Worked Pay Grade Units Produced
1 38 A 160

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Great Zimbabwe University- Cost & Management Accounting HACC215

2 40 A 160
3 36 B 140
4 35 B 140
5 35 B 150

Piecework Incentive Scheme Proposal

Under the proposed incentive scheme, the standard time allowance would be 15
minutes per unit. The piecework rate would be based on grade A labor rates, with a
standard piecework enhancement of 6%. All employees would receive the same
piecework rate.

YOU ARE REQUIRED TO:

a) Outline the purpose of an incentive scheme. (5 Marks)
b) Calculate the normal pay due to each employee on current payroll terms. (5 Marks)
c) Calculate a standard piecework rate based on the proposed incentive scheme.
(5 Marks)
d) Calculate the normal pay due to each employee under the terms of the proposed
incentive scheme. (5 Marks)
e) The company has a target production of 800 units per week for this department.
(i) Calculate the total weekly cost of meeting this target using current payroll terms.
(Assuming all employees produce equal amounts at current rates of production).
(ii) Calculate the total weekly cost of meeting this target under the proposed
incentive scheme.
(iii) Advise the company which is the more cost-effective option. (5 Marks)
[Total: 25 Marks]
QUESTION 41

Makeit Manufacturing Ltd. has used a time-based remuneration scheme in its

production department for many years. However, management are currently reviewing
how they remunerate production staff and are keen to explore the possibility of
introducing a bonus or incentive scheme.

REQUIREMENT:

Prepare a report for the management of Makeit Manufacturing Ltd. in which you:
(a) Outline the advantages and disadvantages of time-based remuneration
schemes; (4 marks)
(b) Describe the characteristics of bonus or incentive schemes; (4 marks)
(c) Outline the conditions associated with the successful operation of bonus or
incentive schemes. (7 marks)

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Great Zimbabwe University- Cost & Management Accounting HACC215

(d) Commentators have argued that the major objective of management accounting
is customer satisfaction. In view of this how should the remuneration scheme be
aligned to the major objective of management accounting? Discuss. (10 marks)
[Total: 25 Marks]

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