QUESTION ONE SECTION ONE a) Briefly explain the meaning of the following terms as used in standard costing: i) Basic standards ii) Current standards iii) Ideal standards iv) Normal standards b) The following data relates to the production department of Wananchi Production Company Limited for the week ended 31 August 2001. Standard output for 40 hour week 14,000 units Standard fixed overhead Sh 140,000 Actual output 12,000 units Actual hours worked 32 hours Actual fixed overhead Sh 150,000 i) The expenditure and volume variances. (4 marks) ii) Analysis of the volume variance between capacity and productivity. (4 marks) iii) Briefly comment on two possible causes of each variance in (i) above. (4 marks) QUESTION TWO Tindo Ltd buys and sells product Q-3. It values sock on the basis of last in first out (LIFO). At 1 June 2001, stock in hand consisted of 4,500 units which were acquired at Sh.50 per unit. The operations for the month were as follows: Date Purchases Sales June1 5,000 @ Sh 48 4 6,000 @ Sh 60 5 5,500 @ Sh 49 7 4,000 @ Sh 50 11 7,000 @ Sh 61 12 5,000 @ Sh 50 13 6,000 @ Sh 47 18 7,000 @ Sh 62 19 8,000 @ Sh 64 20 6,000 @ Sh 49.50 21 5,000 @ Sh 65 22 7,000 @ Sh 50 25 6,000 @ Sh 49 26 2,000 @ Sh 47 28 500 @ Sh 60 29 14,000 @ Sh 64 The company incurred operating costs of Sh 450,000 during the month.
a) Stores ledger card (14 marks) b) Closing stock valuation c) Trading account for the month (4 marks) QUESTION THREE a) (i) Distinguish between the terms waste and spoilage. (ii) Briefly explain three possible methods of accounting for spoilage. (5 marks) b) Gitoro Manufacturing Company, manufactures a single product that is processed sequentially in three departments I, II and III. The following information is obtained in respect of process in departments II for the month of November 2001. Opening work-in progress was 2,600 units valued at Sh 6,500. Degree of completion: Materials 60% Labour 50% Overheads 40% The transfer from department I during the month was 13,000 units valued at Sh 19,500. Units transferred to department III were 10,600. Direct material added in department II amounted to Sh 15,900. Direct labour amounted to Sh 13,100. Overhead amounted to Sh 17,500. Work in progress at 30 November 2001 was 1,500 units which had the following degrees of completion: Materials 70% Labour 40% Overheads 40% During the month, 900 units were scrapped. Normal loss was 10% of production and the units scrapped realized Sh 2 per unit. A statement of production, cost and equivalent units showing: i) Equivalent units of production by clement of cost (4 marks) ii) Valuation of finished goods (3 marks) iii) Valuation of closing work in progress (3 marks) iv) Abnormal gain/loss in units (3 marks) (Total 20 marks) QUESTION FOUR a) State and briefly explain three assumptions underlying the break-even theory. (6 marks) b) Jamii Company Ltd manufactures and sells a single product. The following information regarding the company s operations for the year ended 30 September 2001 was presented to you.
Profit and loss account for the year ended 30 September 2001 Sh 000 Sh 000 Sales 30,000 Less: Production costs Direct material 6,500 Direct labour 5,400 Production overhead variable 7,000 Prime costs 18,900 11,100 Other expenses: Selling Variable 2,600 - Cost 1,997 Administration 2,100 6,697 Net profit 4,403 The following changes are expected to occur during the year ending 30 September 2002: 1. Selling price will be adjusted downward by 3% in order to attract more customers. 2. Material prices will rise by 2% due to inflation. 3. There will be a reduction in labour cost of 4%. 4. Production overheads will increase by 3%. 5. Increase in the efficiency of sales persons will reduce direct selling costs by 5%. All other factors are expected to remain constant. a) Break-even point in sales value (4 marks) b) The margin of safety in sales value c) The sales value at which profit of Sh 4.5 million will be achieved d) A summary operating statement that shows the net profit of Sh 4.5 million in (c) above. (6marks) QUESTION FIVE a) In job order costing system, production overhead absorption could be based on: i) Direct labour rate ii) Percentage of direct materials Explain in which circumstances each of these bases are appropriate. (4 marks) b) Mutindwa Ltd. employs a job order costing system in establishing the prices to charge for different welding orders. Normally, certain employees set up work before the main operation is completed by other employees. The cost of labour engaged in setting up is charged to overhead expenses. During the period ended 30 September 2001, 1,250 hours were spent on setting up at a cost of Sh 30,000. During this period the following costs were incurred on three jobs: Shs. Direct material 66,000 Direct labour 90,000 Overhead expenses (including set up costs) 144,000
300,000 Other information that relates to the jobs include: Job A Job B Job C Direct material costs Sh 36,320 4,200 25,480 Direct labour (hours) excluding set-up time 2,400 300 1,800 Setting-up (hours) 375 250 625 Costing for the jobs is carried out by the use of hourly rates for direct labour and for overheads. However, a new system is being proposed whereby there will be hourly rates for direct labour, for setting labour and for overheads excluding the cost of setting-up time. a) The hourly rate under the existing system. (4 marks) b) The hourly rate under the proposed system (4 marks) c) Cost statement for the three jobs using the existing systems approach to costing. (8 marks) QUESTION SIX SECTION II a) Explain the meaning of the following terms: i) Integrated accounting system. ii) Interlocking accounting system. b) Briefly explain the items of expenditure that are unique to the two systems of accounting in (a) above. (4 marks) c) What factors would influence the selection of accost accounting system? (6 marks) d) State and briefly explain three bases of cost classification. (6 marks) QUESTION SEVEN a) Briefly differentiate the following terminologies used in cost accounting. i) Relevant range and relevant cost. ii) Controllable costs and non-controllable cost. iii) Perpetual inventory system and continuous inventory system. iv) Profit center and cost center. v) Opportunity cost and incremental cost. b) A company prepares the following main budgets: Sales budget. Manufacturing budget. Purchasing budget. Selling and administration overheads budget. Budgeted balance sheet. Describe briefly the relationship between these budgets and the content of each. (10 marks)