Cost Accounting Level 2
M o d e l A n sw sw e rs Series 4 2006 (Code 2016)
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Cost Accounting Level 2 Series 4 2006
How to use this booklet Model Answers have been developed by Education Development International plc (EDI) to offer additional information and guidance to Centres, teachers and candidates as they prepare for LCCI International Qualifications. The contents of this booklet are divided into 3 elements: (1)
Questions
– reproduced from the printed examination paper
(2)
Model Answers
– summary of the main points that the Chief Examiner expected to see in the answers to each question in the examination paper, plus a fully worked example or sample answer (where applicable)
(3)
Helpful Hints
– where appropriate, additional guidance relating to individual questions or to examination technique
Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success. EDI provides Model Answers to help candidates gain a general understanding of the standard required. The general standard of model answers is one that would achieve a Distinction grade. EDI accepts that candidates may offer other answers that could be equally valid.
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Cost Accounting Level 2 Series 4 2006 QUESTION 1 Below are the definitions of eight terms used in cost accounting: 1
The cost of acquiring, producing or enhancing fixed assets
2
The cost of a process that results in more than one main product
3
The total cost of direct materials, direct labour and direct expenses
4
The comparison of the standard cost of materials used and the standard material cost of output
5 6
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
7
Stock on hand or on order which has not been scheduled for use
8
The level of activity at which there is no profit or loss
REQUIRED State the name of the cost accounting term for each of the eight definitions, using no more than four words for each. (20 marks)
MODEL ANSWER TO QUESTION 1 1 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
4.56 2.94*
£ per unit 13.00 7.50 5.50
× 25,000 units = Total contribution less fixed costs = Profit
£137,500 £123,600 £13,900
*Working £7.00 × 1.05 = £7.35 per hour ÷ 60/24 minutes = £2.94 per unit
(b) Budgeted profit (with productivity deal)
£ per unit Selling price Variable costs (excl ops wages) Production operatives wages Contribution
4.56 3.14*
× 28,750 units (25,000 × 1.15) = Total contribution less fixed costs = Profit
£133,688 £123,600 £10,088
The productivity deal is not worthwhile. * Working £2.94 per unit from Part A + bonus of £0.20
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£ per unit 12.35 (13.00 × 0.95) 7.70 4.65
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:
PCC1 PCC2
Budgeted activity 3,950 machine hours 8,200 direct labour hours
Budgeted overheads £63,990 £77,900
Actual activity and actual overheads incurred in the two production cost centres in the period, including the reapportionment of the overheads of the two service cost centres, are:
PCC1 PCC2
Actual activity 4,175 machine hours 8,090 direct labour hours
Actual overheads £65,620 £78,530
REQUIRED (a) Calculate for each production cost centre for the period the: (i)
overhead absorption rate;
(4 marks)
(ii)
overhead absorbed;
(4 marks)
(iii) over or under absorption of overhead.
(6 marks)
(b) Prepare a single production overhead control account for the period which includes figures for both production cost centres.
(6 marks)
(Total 20 marks)
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MODEL ANSWER TO QUESTION 3 (a) (i)
Overhead absorption rates PCC1 £63,990 budgeted overhead ÷ 3,950 budgeted machine hours = £16.20 per machine hour PCC2 £77,900 budgeted overhead ÷ 8,200 budgeted direct labour hours = £9.50 per direct labour hour
(ii)
Overhead absorbed PCC1 4,175 actual machine hours × £16.20 per machine hour = £67,635 PCC2 8,090 actual direct labour hours × £9.50 per direct labour hour = £76,855
(iii) Over or under absorption of overhead PCC1 £67,635 overhead absorbed - £65,620 actual overhead = £2015 over absorbed PCC2 £76,855 overhead absorbed - £78,530 actual overhead = £1,675 under absorbed
(b) Overhead incurred: PCC1 PCC2
Production overhead control account £ Overhead absorbed: 65,620 PCC1 78,530 PCC2 144,150
Over absorption (to P & L): PCC1
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£ 67,635 76,855 144,490
Under absorption (to P & L): PCC2
2,015 146,165
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1,675 146,165
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:
Selling price Costs: Direct materials Direct labour Variable overhead Fixed overhead
Product X £/unit 48
Product Y £/unit 30
Product Z £/unit 42
10 12 4 16
8 8 2 10
12 8 4 12
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)
contribution/sales (C/S) ratio;
(4 marks)
(ii)
break-even sales revenue per period.
(4 marks)
(Total 20 marks)
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MODEL ANSWER TO QUESTION 4 (a) Profit statement
Less Less
£000 1,314 748 566 422 144
Sales Variable costs Contribution Fixed costs Net profit Workings
X 11,000 units @ £48 = £528,000
Product Y 15,000 units @ £30 = £450,000
Z 8,000 units @ £42 = £336,000
Variable costs
11,000 units @ £26 = £286,000
15,000 units @ £18 = £270,000
8,000 units @ £24 = £192,000
Fixed costs
11,000 units @ £16 = £176,000
15,000 units @ £10 = £150,000
8,000 units @ £12 = £96,000
Sales
(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
Sales of Product P Lead time for delivery of Material M
Maximum 1,100 units per week 1½ weeks
2 kilograms (kg) of Material M are used per unit of Product P and the reorder quantity of the material is 5,000 kg.
REQUIRED (a) Calculate for Material M the: (i)
reorder level to ensure no stock-out;
(3 marks)
(ii)
minimum stock control level;
(4 marks)
(iii) maximum stock control level.
(4 marks)
At the beginning of a month 1,000 kg of Material M were in stock at a cost of £5,000. Purchases and issues of the material for the month were as follows:
Date 3 6 10 15 17 25
Purchases (kg) 5,000
Issues (kg)
Purchase cost (£) 28,000
1,700 2,100 5,000
28,220 2,000 2,100
The company uses the weighted average method for pricing issues of materials from stock.
REQUIRED (b) Show the entries in the stores ledger record (quantity, price and value) for the month. (9 marks)
(Total 20 marks)
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MODEL ANSWER TO QUESTION 5 (a) (i)
Reorder level maximum usage × maximum lead time (1,100 units × 2 kg per unit) × 1½ weeks = 3,300 kg
(ii)
Minimum stock control level reorder level – (average usage × average lead time) 3,300 kg – [(950 units × 2 kg per unit) × 1¼ weeks] = 925 kg
(iii) Maximum stock control level reorder level + reorder quantity – (minimum usage × minimum lead time) 3,300 kg + 5,000 kg – [(800 units × 2 kg per unit) × 1 week] = 6,700 kg
(b) Stores ledger record
Date Kg Op Bal 3 6 10 15 17 25
5,000
5,000
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Purchases £/kg 5.60
5.644
£
kg
Issues £/kg
£
28,000 1,700 2,100
5.50 5.50
9,350 11,550
2,000 2,100
5.60 5.60
11,200 11,760
28,220
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kg 1,000 6,000 4,300 2,200 7,200 5,200 3,100
Balance £/kg 5.00 5.50 5.50 5.50 5.60 5.60 5.60
£ 5,000 33,000 23,650 12,100 40,320 29,120 17,360
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
Sales (litres) Selling price (£/litre) Opening stock (litres) Closing stock (litres)
P2 4,000 18 400 380
Raw materials Material Purchase price (£/litre) Usage (litres) per litre of: Product P1 Product P2 Opening stock (litres) Closing stock (litres)
M1 7.50
M2 3.50
0.2 0.3 180 200
0.8 0.7 830 750
REQUIRED Prepare the following budgets for the next period: (a) Sales revenue for each product and in total.
(3 marks)
(b) Production quantity of each product.
(4 marks)
(c) Materials usage for each type of raw material (litres).
(6 marks)
(d) Materials purchases for each type of raw material (litres and cost).
(7 marks)
(a) cf. 8
22
Graph:
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 6,050 units × 0.2 litres/unit = 1,210
M2 6,050 units × 0.8 litres/unit = 4,840
Product P2
3,980 units × 0.3 litres/unit = 1,194
3,980 units × 0.7 litres/unit = 2,786
Total usage
2,404
7,626
Product P1
(d) Materials purchases budget (litres & £)
Material
Usage ± stock increase/(decrease) Purchases (litres)
M1 litres 2,404 20 2,424
M2 litres 7,626 (80) 7,546
× purchase price
£7.50/litre
£3.50/litre
Purchases (cost)
£18,180
£26,411
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