MARCH 2013

COST & MANAGEMENT ACCOUNTING

(COST ACCOUNTING)

Instructions to candidates:
a) Time allowed: Three hours (plus an extra ten minutes’ reading time at the start – do not write anything during this
time)
b) Answer any FIVE questions
c) All questions carry equal marks. Marks for each question are shown in [ ]
d) Non-programmable calculators are permitted in this examination

1. Neon Products plc. record the following stock movements of stock item AMP1:
Receipts Issues
(units) (units)
1 May 2,000 @ £10.00 each
5 May 3,000 @ £11.00 each
12 May 3,000 @ £11.50 each
15 May 2,500
24 May 2,000 @ £12.00 each
27 May 6,500

There was no opening stock.

TASKS
a) Prepare stock cards for stock item AMP1 showing the value of each of the two issues and the value of the closing
stock using EACH of the following pricing methods:
i FIFO
ii LIFO
iii AVCO [15]
b) Explain the terms premium bonus system and overtime premium. [5]

2. Moses Manufacturing uses a standard costing system and records the following:
The standard cost of making one unit:
Direct material 5 kilos at £7 per kilo
Direct wages 7 hours at £10 per hour
The actual cost of a batch of 100 units was:
Direct material £3,740 (570 kilos)
Direct wages £7,450 (820 hours)
TASKS
a) Calculate the following:
i The material price variance [2]
ii The material usage variance [2]
iii The total material cost variance [1]
iv The labour rate variance [2]
v The labour efficiency variance [2]
vi The total labour cost variance [1]
vii The total cost variance [2]
b) Suggest possible causes of the labour efficiency variance. [4]
c) What factors would determine how standard material price is determined? [4]

continued overleaf
3. Kigu Manufacturing Ltd has three production cost centres A, B and C, and one service cost centre D, which is the
maintenance department. The budgeted overhead expenditure for the year ended 31 March 2013 is as follows:
£000
Depreciation of production and maintenance equipment 500
Employer’s liability insurance 175
Heating and lighting 200
Indirect labour* 1,000
Rent and business rates 800
Staff welfare and safety expenses 200
2,875
=====
* Apportion on the basis of the number of employees per cost centre.
Other data/information is as follows:
Value of production equipment:
Cost centre A £1,000,000
Cost centre B £800,000
Cost centre C £500,000
Cost centre D £200,000
Floor area:
Cost centre A 80,000 sq.m
Cost centre B 60,000 sq.m
Cost centre C 50,000 sq.m
Cost centre D 10,000 sq.m
Number of employees:
Cost centre A 200
Cost centre B 100
Cost centre C 80
Cost centre D 20
Overheads to be allocated to cost centre D amount to £55,000.
Cost centre D is to be apportioned 50% to A, 35% to B and 15% to C.
Budgeted direct labour hours:
Cost centre A 350,000
Cost centre B 180,000
Cost centre C 140,000
TASKS
a) Prepare an overhead analysis sheet. [12]
b) Calculate the overhead absorption rates for EACH of the three production cost centres using direct labour hours,
rounding to 2 decimal places. [3]
c) Prepare a cost statement for a product that has a prime cost of £620, and takes 6 hours in cost centre A, followed
by 5 hours in cost centre B, and 2 hours in cost centre C. [5]

4. Argon Developments has a limited capital budget available for investment in suitable projects this year, and has short-
listed two possible choices. Details are as follows:
Project: Aden Project: Baden
Capital cost £1,750,000 £1,800,000
Expected life 5 years 5 years
Residual value nil nil
Budgeted cash inflows: £000 £000
Year 1 500 600
Year 2 950 1,200
Year 3 1,300 1,500
Year 4 800 600
Year 5 300 300
The cost of capital to Argon is 9%.
Extracts from NPV tables are as follows:
Year 8% 9% 10%
1 .926 .917 .909
2 .857 .842 .826
3 .794 .772 .751
4 .735 .708 .683
5 .630 .650 .621
TASKS
a) Calculate the payback period for each project. [2]
b) Calculate the accounting rate of return for each project. [4]
c) Calculate the NPV for each project. [6]
d) Which project you would recommend and why? [3]
e) Explain the term net present value. [5]

continued overleaf
5. As Deputy Cost Accountant you have been asked to advise on the performance of a product which your company
manufactures, and investigate a number of alternative proposals.
The budgeted data for the product in the coming year is:
Variable cost per unit £
Direct material 50
Direct wages 60
Overheads 80
----
190
----
Fixed costs allocated to the product £2,200,000
Budgeted production and sales 100,000 units
Maximum possible production 130,000 units
Draft budgeted selling price £250 per unit
TASKS
a) Calculate the following:
i The draft budgeted profit [3]
ii The draft breakeven point (in units) [2]
iii The total absorption cost per unit [2]
b) The company can arrange to buy in this product at a cost of £200 each. In the short term the company would
have no use for the equipment and resources they use to make this product. Would you advise them to make
or buy? [4]
c) Alternatively, if £8 extra per unit was spent on improving the quality and packaging of the product, and £250,000
more spent on advertising, the marketing department predict that they could sell 120,000 units at the existing
budgeted selling price. Calculate the profit or loss if this was carried out. [4]
d) Alternatively, the purchasing department have advised you that by negotiating a long-term contract with the
suppliers of direct material a 10% saving on purchase costs can be obtained. Furthermore you believe that by
introducing an incentive system the company can save £6 per unit on direct wages, AND £8 per unit on variable
overheads. Calculate the resultant profit or loss. [5]

6. a) Draw up a plan for setting a master budget for a medium-sized manufacturing company. [12]
b) What are the principal benefits of maintaining a budgetary control system? [8]

7. Write notes on FOUR of the following:

a) Contract costing
b) The purposes of a GRN (Goods Received Note)
c) Cost coding system
d) Process costing
e) Joint products
f) Activity based costing
g) A cash budget [5 each]

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