GAT COST ACCT & BUDGETING NOV 2006 Question 1 a) i.

Steps in the materials purchasing process: Identify various suppliers of the material and obtain quotation from each of them. minimum of three quotations must be obtained. ii. Analyse the quotations in order to identify the supplier that gives best value for money. Consider the following factors iii. iv. v. prices of materials quantities of material quality and specification of materials terms of payments discounts offered delivery period A

Select the supplier that offers the best mix of the above. Price is not necessarily the overriding factor. Place the order with the selected supplier and take delivery of the items Continuously review the supplier to ascertain whether or not there is need to charge the supplier. Economic order quantity i. The quantity of material to order any time an order is placed. _________ EOQ = 2Doc cc when D = annual demand Oc = order Cost per unit cc = average carrying cost

b)

ii.

Re-order level The level of stock at which a new order should be placed. Re-order level = Maximum x maximum Usage delivery period

iii.

Maximum Stock level The level of stock above which stock should be allowed to move holding stock in excess of this level imply holding excessive stock. It is the largest quantity of stock that could be in store at any point in time. Maximum stock level = Re-order level + Economic order qty (minimum x minimum) Usage lead time Minimum stock level This is the lowest level at which stock may be allowed to fall. It is not prudent to maintain stock below the minimum level. Minimum Stock level = Re-order Stock level (average x delivery) usage period

iv.

a)

Average stock The quantity of stock that on average, is maintained by an entity at any point in time it is calculated as: Average stock = maximum stock + minimum stock 2 Process C Account
Units
Unit Price Value Units Unit Price Value

Balance b/d Process B Materials Cost Conversion Cost Balance b/d

3,200 36,000

39,200 4,000

000 4,800 Abnormal Loss 43,200 Finished goods 20,928 W.I.P. c/d 10,272 79,200 7,440

2,400 32,800 4,000 39,200

000 4,032 67,728 7,440 79,200

b)

Abnormal Loss Account

Units

Unit Price

Value

Units

Unit Price

Value

Process a/d

2,400 39,200

000 4,032 4,032

Bank a/c P & L a/c

2,400 2,400

500

000 1,200 2,832 4,032

c)

Statement of Equivalent Units

Opening WIP % Units 3,200 100 3,200 ____ 3,200 000 4,800 4,800,000 3,200 1,500 000 4,800 29,600 29,600 100 2,400 100 4,000 _____ 36,000 000 43,200 43,200,000 36,000 1,200 000 35,520 2,880 4,800 Materials Cost % Units 20 100 Conversion Cost % Units

Units Completed Units: W.I.P. b/d Started and finished Abnormal loss Closing W.I.P Equivalent Units Cost incurred Cost per equivalent unit

Process B % Units

Total 000

3,200 100 29,600 32,800 2,400 4,000 39,200

640 40 1,280 29,600 100 29,600 30,240 30,880 60 1,440 40 960 80 3,200 60 2,400 _____ _____ 34,880 34,240 000 000 20,928 10,272 20,928,000 10,272 34,880 34,240 600 300 000 18,144 864 1,920 000 9,264 288 720 00 37,72.. 4,03 7,44

Valuation: Finished goods Abnormal loss W.I.P. c/d

Question 3 (i) An ideal standard is a standard based on Perfect conditions. No allowance is made for expected variations. But an attainable standard is based on achievable working conditions after sufficient allowance has been made for expected variations.

(ii)

A current standard is a standard modified to take account of current charges in the operating environment, whilst a basic standard is a standard set as a base for comparison with actual costs over a period of time. Current standards are used to assess current operating performance whilst Basic Standards are use to ascertain the trend f performance.

(i)

Direct materials cost variance Standard materials cost for the actual production 000 6,000 Units @ 90,000 = Actual materials cost 120,000 70,400 49,600 F

(ii)

Direct materials price variance (Standard Actual price) Actual quantity purchased (2,000 2,200) 32,000 kg = 6,400,000 A

(iii)

Direct materials usage variance = = Standard quantity Actual allowed for actual product - qty used (60,000 32,000) 2,000 = 56,000,000 F Standard material Price

(iv)

Direct labour cost variance Standard labour cost - Actual labour cost for actual production = = = (36,000 x 6,000) - 192,000 216,000,000 - 1492,000,000 24,000,000 F

(v)

Direct labour rate variance = = = (Standard rate - Actual rate) Actual Hours (7,200 7,500) 25,600 hrs 7,680,000 A

(vi)

Direct labour efficiency variance = (Standard Hours produced - Actual Hours) Standard rate 4

= =

[ (5 hrs x 6,000) - 25,00] 7,200 31,680,000 F

Question 4 (i) Product Sales value Selling Price Sales Budget-quantity Sales Budget

Babatu Co. Ltd.

Pano 600,000,000 50,000 600,000,000 50,000 = 12,000 Units Pano Units 12,000 9,000 21,000 7,00 0 14,00 0

Brodo 1,200,000,000 80,000 1,200,000,000 80,000 = 15,000,Units Brodo Units 15,000 10,000 25,000 8,000 14,000

Dupain 1,500,000,000 150,000 1,500,000,000 150,000 = 10,000 Units Dupain Units 10,000 4,000 14,000 6,000 8,000

(ii)

Product Budget

Sales Closing stock Opening stock Budgeted production units

(iii)

Materials Usage Budget Units of Product (14,000) (17,000) (8,000) Sugar Kg 28,000 17,000 24,000 69,000 600 41,400,000 Magerine Kg 42,000 68,000 16,000 126,000 800 100,800,000 Flour Kg 140,000 153,000 96,000 389,000 1,000 309,000,000 Total

Materials Required for Pano Required for Brodo Required for Dupain Price per kg. Budgeted cost of materials (iv)

000 531,200

Materials purchases budget 5

Materials Required for production Closing materials Opening materials Materials to be purchased Cost per kg Cost of purchases Question 5 a) i. Okokroko Ltd

Sugar Kg 69,000 22,000 19,000 15,000 76,000 600 45,600,000

Magerine Kg 126,000 25,000 151,000 20,000 131,000 800 104,800,000

Flour Kg 389,000 50,000 439,000 35,000 404,000 1,000 404,000,000

Total

000 554,400

Marginal Costing Profit Statement 000 Sales 12,500 @ 1,000 Marginal cost of Sales: Direct materials 15,000 @ 250 Direct wages 15,000 @ 375 Royalties 15,000 @ 125 Closing stock 2500 x 11,250 15,000 Variable production cost Variable selling cost Variable administrative cost Contribution Less Fixed Cost: Depreciation Factory rent and rates Factory lightly & heating Other factory overheads Fixed selling expenses Fixed administrative and general exp Net Profit ii. 000 12,000 3,750 5,625 1,875 11,250 (1,875) 9,375 100 125 300 325 350 150 75 175

9,600 2,900

1,375 1,525

Okokroko Ltd Absorption Costing Profit Statement 000 000 000

Sales (12,500 @ 1,000 Cost of sales: Direct materials Direct wages Royalties Prime Cost Factory overheads: Depreciation Factory rent and rates Factory lighting & heating Other factory overheads Total production cost Less closing stock (2500 x 12375) 15,000 Gross profit Less selling expenses Cost: Variable selling expenses Fixed selling expenses Variable administrative exp. Fixed admin cost Net profit b)

12,500 3,750 5,625 1,875 11,250 300 325 350 150

1,125 12,375 2,062.5

10,312.5 2,187.5

100 75 125 175

175 300 475.0 1,712.5

For purposes of financial reporting, the accounting standards recommend the use of Absorption Costing the accounting standards do not allow the use of marginal costing approach for reporting purposes. This is because stocks should be valued at full cost including fixed cost.

Question 6 a) 1) Advantages of individual incentive schemes i. ii. iii. i. ii. iii. 2) it promotes competition among employees and may thus enhance productivity hardwork and the individuals effort is rewarded. Relatively cheaper to be operated by on organization it may bread unhealthy rivalry and competition quality of output may be compromised it does not promote corporate cohesiveness and unity

Disadvantages of individual incentive schemes:

Advantages of group incentive schemes 7

i. ii. iii. i. ii. iii.

it promotes good team spirit and corporate unity it avoids unhealthy competition and rivalry among employees it does not compromise on quality of output it is not a fair method of remuneration since hard working group members and lazy group members will be equally rewarded it does not encourage competitions and extra effort from individuals it is relatively more expensive to operate a group incentive scheme than to operate individual incentive schemes.

Disadvantages of group incentive schemes:

b)

Labour turnover refers to the rate at which employees leave an organisation A number of factors may account for a high labour turnover. These include: i) ii) iii) iv) v) vi) poor wages and salaries unattractive conditions of service lack of for career progression and development conflict between supervisor and employee or autocratic and domineering supervisors ilhealth marriage and relocation

c)

Labour turnover cost may be classified under the following headings: i) removal costs the cost of sending off employees who have resigned. ii) iii) iv) v) transport expenses termination benefits

recruitment and training cost of new employees cost of dissatisfaction and low morale among the remaining employees high wastage, spoilage and low productivity of newly engaged employees low productivity of employees when they have decided to leave

Question 7 a) i. Contribution to sales ratio = Contribution x 100 8

Sales Abindada Profit Add fixed cost Contribution Add variable cost Sales ii. c/s ratio 11,250 11,250 22,500 90,000 112,500 Otoolege 11,750 26,250 38,000 75,000 113,000

22,500 x 100 38,000 x 100 112,500 = 20% 113,000 = 33.6% 26,250 0.336 = 78,125,000

iii.

Break even point revenue = Fixed cost 11,250 c/s ratio 0.2 = 56,250,000

iv.

Margin of safely = Budget sales Break even sales: 000 Budget sales 112,500 Less Break even sales 56,250 Margin of safety 56,250

000 113,000 78,125 34,875

b) i. when there is high demand for the product Otoolege Ltd will earn greater profits because it has a higher contribution for each cedi f sale made. when there is low demand, Abindada Ltd stands to make move profit than Otoolege Ltd because its break even level is low at 56,250,000 as compared to that of Otoolege of 78,125,000 d) The following are the assumption that underlie breakeven analysis: i. ii. Total fixed cost is constant for the relevant range of activity. Variable cost per unit is constant for every unit produced. Therefore total variable cost vary linearly with production 9

ii.

iii. iv. v. vi. vii.

If the company produces more than one unit, then the production is at a constant mix Profits are calculated on a marginal costing basis Cost and revenue are linear functions of output The analysis applies only to the relevant range Cost can be accurately separated into fixed and variable.

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