THE PUBLIC ACCOUNTANTS EXAMINATION COUNCIL OF MALAWI 2011 EXAMINATIONS ACCOUNTING TECHNICIAN PROGRAMME PAPER TC9: COSTING AND BUDGETARY CONTROL

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1 EXAMINATION NO. THE PUBLIC ACCOUNTANTS EXAMINATION COUNCIL OF MALAWI 2011 EXAMINATIONS ACCOUNTING TECHNICIAN PROGRAMME PAPER TC9: COSTING AND BUDGETARY CONTROL TUESDAY 7 JUNE 2011 TIME ALLOWED : 3 HOURS 9.00 AM NOON INSTRUCTIONS: 1. You are allowed 15 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make annotations on the question paper. However, you are not allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time. 2. Number of questions on paper FIVE questions ONLY to be answered. 4. Each question carries 20 marks. 5. Show all your workings in order to gain full marks. 6. Marks will be awarded for clarity, correctness and logical presentation. 7. Use of non-programmable calculators is allowed. 8. Begin each answer on a fresh page. 9. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE INVIGILATOR. This question paper contains 8 pages

2 1 1. Chilumba Rice Milling Company has two production departments, Milling and Packing, and two service departments, Maintenance and Stores. The company s weekly overhead costs budget is as follows: Milling 90,000 Packing 75,000 Direct labour hours are budgeted at 5,000 and machine hours at 3,000. Costs for the service departments are allocated as follows: Maintenance Stores 60% to Milling 30% to packing 10% to Stores 30% to Milling 50% to Packing 20% to Maintenance At the end of one week, actual costs were tabulated as follows: Milling 65,000 Packing 45,000 Maintenance 25,000 Stores 20,000 The milling department actually worked 2,900 machine hours and the packing department worked 5,200 direct labour hours. Required (a) Compute the overhead to be charged to the Milling and Packing departments for the week using the repeated distribution method. 7 Marks (b) Calculate the under/over absorption of overhead in the two production departments. 5 Marks (d) State the factors that have caused the under/over absorption of overhead. Make a reconciliation of the under/over absorption in relation to the production departments with reference to the causation. 6 Marks (TOTAL: 20 MARS)

3 2 2. Zatheka Ltd manufactures a single product. The following standards relate to the product: Direct material Direct labour 10 litres at 25 per litre 2 hours at 45 per hour For the most recent accounting period, the following information has been extracted from the accounting records of the company: Production Direct material Direct labour 1,000 units 9,500 litres were bought at a total cost of 247,000 1,900 hours were worked and paid for at a total cost of 94,000 (a) Define each of the following terms, mentioning its advantage and disadvantage in the context of standard costing principles: (i) ideal standard (ii) attainable standard (iii) current standard (iv) basic standard (b) Calculate the following variances: (i) material price (ii) material usage (in quantity and monetary value) (iii) labour rate (iv) labour efficiency (in hours and monetary value) State any relationship between the variances that may be revealed by: (i) (ii) the material price and material usage variances calculated in (b)(i) and (ii) above. the labour rate and labour efficiency variances calculated in (b)(iii) and (iv) above. (TOTAL: 20 MARS)

4 3 3. Njota Fabrics manufactures a single product, Sewo. Production operatives are paid a basic wage of 30 per hour worked, but an additional 50% premium is paid for any overtime hours. The basic working week is 38 hours. During the month ended 31 March 2011, there were 4 weeks of production and the company employed 30 production operatives. No overtime was worked during the month and all 30 operatives worked for the full 38 hours for each of the 4 weeks of production. During the month, 456 units of Sewo were made. (a) Calculate the labour cost for a single unit of Sewo made in the month ended 31 March Marks (b) The information below relates to the hours worked by 3 production operatives during the month ended 30 April 2011: Sharon Steve Verrah : 140 basic hours and 17 hours overtime : 150 basic hours and 22 hours overtime : 120 basic hours and 20 hours overtime Calculate, separately, the total wages earned by each of the operatives Sharon, Steve and Verrah during the month ended 30 April Marks The company is considering introducing a bonus scheme for the next year. The details of the scheme are as follows: In order to calculate the bonus, a standard production time of 10 hours is to be allowed for each good unit of Sewo. Rejected units do not qualify for the bonus. The bonus will be calculated using the following formula: Bonus = time saved x 50% basic rate per hour Assume that the scheme is introduced and that in the month of May 2011, the production staff worked for a total of 4,200 basic hours. During the month, assume that 500 units of Sewo were made, of which 50 units were rejected as faulty. The basic rate of pay will remain at 30 per hour.

5 4 (i) (ii) (iii) Calculate the total basic wages that would be payable to the production operatives for May Calculate the total bonus that would be payable to the production staff for May Marks Why does a company have to increase the inspection of finished goods, if a bonus scheme is introduced? (TOTAL : 20 MARS)

6 5 4. Obrigado plc manufactures a single product in two successive processes, Process 1 and Process 2. The following information relates to the month of March 2011: Opening work-in-progress Materials input during the month Additional materials Labour Production overhead Normal loss Transferred to Process 2 Transferred to finished goods stock Closing work-in-progress Process 1 Nil 500 units at a cost of 10,250-33,000 18,040 Nil 400 units units Process 2 Nil 400 units from Process 1 11,300 14,280 8, units units Nil The closing work-in-progress for process 1 was 100% complete as to materials and 40% complete as to conversion costs. The normal loss in Process 2 was detected at the end of the process and was sold as scrap for 16 per unit which was credited to Process 2 accordingly. There was no abnormal loss in either process. (a) In the context of process costing, define the following terms: (i) Equivalent units (ii) Joint products (iii) By products (b) Calculate for the month of March 2011: (i) the production cost per equivalent unit of the product 4 Marks (ii) the value of the units transferred to Process 2 account 1 Mark (iii) the value of the closing work-in-progress Produce the following ledger accounts for the month of March 2011, clearly showing the values and units of goods transferred between processes and to finished goods as well as work in progress: (i) Process 1 account 3 Marks (ii) Process 2 account 4 Marks (TOTAL: 20 MARS)

7 6 5. Zabweka Ltd produces three products: X, Y and Z. Management is considering moving from a costing approach, for the three products, based on a labour hour absorption rate, to an Activity Based Costing (ABC) system. The following information relates to last week s production of the three products: Product Direct material Direct labour Labour hours Units produced X 8,840 46,040 6,520 1,320 Y 7,550 16,670 2, Z 11,780 37,220 5,480 1,180 Production overhead is currently absorbed using labour hours, based on the following weekly budget: Cost item Machine set-up Machine processing costs Purchasing and inventory costs Maintenance 9,890 20,060 12,840 11,520 54,310 In preparation for moving to the ABC system, Zabweka Ltd has identified the following cost drivers for the three products, over the week s production: Product X Y Z Activity Machine set-up Machine processing Purchasing inventory Maintenance Cost Driver Number of set-ups Machine hours Number of requisitions Maintenance hours (a) Identify any two of the main steps in developing an ABC system. (b) State any two advantages of using the ABC system. (d) Calculate the total unit cost for each of the three products, using an overhead absorption rate per labour hour. 7 Marks Calculate the unit costs for each of the three products using the ABC system. 9 Marks (TOTAL : 20 MARS)

8 7 6. olwe Engineering produces three products X, Y and Z. Product costs per unit for Quarter 1 are as follows: Direct material X 16 Y 18 Z 24 Labour rate per hour Department 1 6 Department 2 6 Department 3 5 Hours Hours Hours Variable overhead per unit Selling price per unit Fixed overhead for Quarter 1, 500,000 Current budgeted sales for Quarter 1 (units) were as follows: X : 10,000 Y:5,000 Z:6,000 (a) (b) Prepare a statement showing the expected profit on the budgeted production and sales for Quarter 1. 9 Marks The sales director suggests that sales of each product will rise by 20% in Quarter 2. However, the production director states that labour in Department 1 cannot be increased above the current level. All other production costs will remain unchanged, and labour is freely available in the other two departments. Calculate the profit that would result if the most profitable mix of products was produced in Quarter 2. 9 Marks State any two disadvantages that may arise if the mix established in (b) above is produced. (TOTAL: 20 MARS)

9 8 7. (a) In accounting for the costs of an organization, there is need to put in place a system of cost bookkeeping. The overall bookkeeping routine will vary from one organization to another but either an integrated or an interlocking system will be used. Cost accounting systems keep information on the value of individual stock items, the costs of individual products or jobs and total costs, which were recorded in control accounts. (i) Describe each of the following systems of cost bookkeeping: (1) An interlocking system. (2) An integrated system.. (ii) (1) Mention any two features of an integrated cost bookkeeping system. 4 Marks (2) Mention one advantage and one disadvantage of an integrated cost bookkeeping system. 4 Marks (b) Mention two similarities and two differences between budgets and standards. 4 Marks (d) State two advantages and two disadvantages of marginal costing. 4 Marks (TOTAL : 20 MARS) E N D