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Cost

Accounting
Level 3

Model Answers
Series 3 2008 (Code 3017)

1 ASE 3016 2 06 1
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Cost Accounting Level 3
Series 3 2008

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.

© Education Development International plc 2008

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Page 1 of 14
QUESTION 1

A company uses two raw materials (Material A and B) to manufacture its single product. The
customer requirement, for this product, for the next period is 4500 units. The finished product contains
by weight, 40% material A and 60% material B.

The following further information is available:

(i) The product is manufactured in batches of 50 units


(ii) Material A costs £5 per kg
(iii) Material B costs £2 per kg
(iv) Material A wastage rate 20% (by weight)
(v) Material B wastage rate 25% (by weight)
(vi) Product rejection rate 10%
(vii) Finished weight of completed unit 5kg
(viii) Material wastage of products A and B are sold back
to the original supplier at the rate of £4 per kg and
£1 per kg respectively
(ix) Product rejects are sold at £3 per kg
(x) Direct labour £400 per batch
(xi) Variable overheads £100 per batch
(xii) Fixed overheads £32,500 per period
(xiii) Selling price £50 per unit
(xiv) No stocks of finished products or raw materials are kept

REQUIRED

(a) Explain the difference between material wastage and product rejection. (4 marks)

(b) Calculate for the next period:

(i) number of batches to be manufactured


(ii) weight of material A and material B to be used
(iii) income generated from the sale of material waste and product rejects.
(10 marks)

(c) Prepare a manufacturing profit and loss statement, in marginal costing format, for the next period.

(6 marks)

(Total 20 marks)

Page 2 of 14
MODEL ANSWER TO QUESTION 1

(a) Material wastage:


Material wastage:
Unavoidable waste of material due to conversion process.
Product Rejects:
Products, completely or partly completed, rejected as a result of an inspection system.

(b)
(i) Product batches requirement:

Customers requirement 4,500


Manufacturing requirement allowing for 10% rejects (4,500/0.9) 5,000
Batches required (5,000 / 50) 100

(ii) Material requirement

Finished weight of completed product 5 kg


Weight of raw materials, per finished unit, required
Material A (5 x 40%) 2 kg
Material B (5 x 60%) 3 kg
Weight prior to manufacture allowing for wastage
Material A (2/0.8) 2.5 kg
Material B (3/0.75) 4 kg
Total weight of material to be used for next period
Material A (2.5 x 5,000) 12,500 kg
Material B (4 x 5,000) 20,000 kg

(iii) Income generated from material waste and product rejects

Material A wastage (20% x 12,500) 2,500 kg


Material B wastage (25% x 20,000) 5,000 kg
Income from waste (2,500 x £4) + ( (5,000 x £1) £15,000
Product rejects 5kg x (5,000 - 4,500) 2,500 kg
Income from rejects (2,500 x £3) £7,500
Total income generated from waste and rejects £22,500

Page 3 of 14
MODEL ANSWER TO QUESTION 1 CONTINUED

(c)
Manufacturing, Profit and Loss Statement for next period
Sale of good products (4,500 x 50) 225,000
Add income from
Sale of rejects 7,500
Sale of material waste 15,000
247,500
Material A (12,500 x £5) 62,500
Material B (20,000 x £2) 40,000
102,500
Direct labour (£400 x 100) 40,000
Variable overheads (£100 x 100) 10,000
Variable manufacturing cost of sales
152,500
Contribution 95,000
Fixed overheads 32,500
Manufacturing Profit £62,500

Page 4 of 14
QUESTION 2

A company uses a process system to jointly produce its three main products, Product A, B and C.
By-product D is also produced during the process. Each product contains two materials P and Q which
are processed together in the weight ratio of 3:2 respectfully.

Information regarding the joint process for the month of May is as follows:

Input

Direct material P 6,000 kg at £8.00 per kg


Direct material Q 4,000 kg at £5.75 per kg
Direct labour 5,000 hrs at £8.00 per hour
Overheads are absorbed at £12.00 per direct labour hour
A normal loss of 10% is expected.

Output Quantity Selling Price per kg

Product A 4,000 kg £31


Product B 2,600 kg £50
Product C 2,100 kg £43
By-product D 500 kg £12

Joint processing costs are apportioned on a basis of physical quantity.


All process losses (waste) are disposed of at a cost of £5 per kg.

Prior to sale, Product B requires a finishing operation and Product C is required to be packed into
containers. Products A and D can be sold without any further operations.
Product B requires an additional one direct labour hour per 10kg of output for its finishing operation.
Containers for Product C hold 4kg of the product and cost £16.00 each; 20 containers can be filled in
one direct labour hour.

REQUIRED

Prepare the process account for the month of May. (12 marks)

Assuming that all production was sold, prepare a profit statement for each of the main products, for
the month of May.
(6 marks)

Explain the difference between abnormal loss and abnormal gain. (2 marks)

(Total 20 marks)

Page 5 of 14
MODEL ANSWER TO QUESTION 2

(a)
Process account (Physical basis)
kg £ Product kg £
Material P 6,000 48,000 A 4,000 80,000
Material Q 4,000 23,000 B 2,600 52,000
Direct labour 40,000 C 2,100 42,000
Overheads 60,000 D 500 6,000
Normal loss(waste) 5,000 Normal loss 1,000
Abnormal gain 200 4,000
10,200 180,000 10,200 180,000

Workings

Normal loss (waste) = 1,000 x £5 = £5,000


Apportionment
Products
A (176,000 - 6,000) x 4,000/8,500 = £80,000
B (176,000 - 6,000) x 2,600/8,500 = £52,000
C (176,000 - 6,000) x 2,100/8,500 = £42,000
Abnormal gain (176,000 - 6,000) x 200/8,500 = £4,000

(b)
Profit Statement (£)
Product A B C
Sales 124,000 130,000 90,300
Process costs 80,000 52,000 42,000
Finishing costs 5,200
Packing costs 8,925
80,000 57,200 50,925
Profit 44,000 72,800 39,375

Workings:

Product B finishing cost


Hours required 2,600/10 = 260 hrs
Direct labour at £8 per hour 260 x £8 = £2,080
Overheads at £12 per hour 260 x £12 = £3,120
Finishing cost = £5,200

Product C packing cost


Containers required 2,100/4 = 525
Container cost 525 x £16 = £8,400
Hours required 525/20 = 26.25 hrs
Direct labour at £8 per hour 26.25 x £8 = £210
Overheads at £12 per hour 26.25 x £12 = £315
Packing cost = £8,925

(c) Abnormal loss: Not expected to occur – it is a loss in excess of the normal loss
Abnormal gain: Not expected to occur – it is a loss which is less than the normal loss

Page 6 of 14
QUESTION 3

Dual Products Ltd manufactures and sells two products (Product Tee and Product Pee). The standard
production costs and selling prices, for the two products for Year 9, are as follows:

Product Tee Product Pee


(£ per unit) (£ per unit)
Selling price 40.00 50.00
Direct material (£15 per kg) 6.00 9.00
Direct labour (£12 per hour) 14.40 18.00
Production Overheads (£8 per direct labour hour) 9.60 12.00

Budgeted production output for Year 9 is 15,000 units and 12,000 units for products Tee and Pee
respectively.

Budgeted stock of production units (valued at standard production cost) and stocks of direct materials
(kg) for Year 9 are as follows:

Opening stock Closing stock


Product Tee £45,000 £30,000
Product Pee £23,400 £31,200
Material 1,600 kg 2,000 kg

Direct operatives are on holiday for 4 out of the 52 weeks in the year. The basic normal working week
is 40 hours but overtime is regularly worked by each operative. 20% of the total hours worked are
budgeted as overtime and paid for at a premium of 25% over the basic rate. Holiday pay and overtime
premium costs are included in production overheads.

REQUIRED

Prepare the following budgets for Year 9:

(a) Sales (in units and value) (6 marks)

(b) Direct materials purchases (in kg and value) (6 marks)

(c) Direct labour (in hours and number of operatives) (4 marks)

(d) Holiday pay and overtime premium (relating to direct labour). (4 marks)

(Total 20 marks)

Page 7 of 14
MODEL ANSWER TO QUESTION 3

(a)
Sales budget:
Tee Pee
Standard production cost £30 £39
Opening stock(units) 1,500 (45,000/30) 600 (23,400/39)
Closing stock(units) 1,000 (30,000/30) 800 (31,200/39)
Production (units) 15,000 12,000
add decrease in finished stock 500
less increase in finished stock 200
Sales (units) 15,500 11,800
Sales value (£) 620,000 590,000

(b)
Direct material purchases budget:
Direct material per unit(kg) 0.4 (6/15) 0.6 (9/15)
Usage in production(kg) 6,000 (15,000x0.4) 7,200 (12,000x0.6)

Total direct material usage(kg) 13,200 (6,000+7,200)


add increase in direct stock 400 (2,000-1,600)
Direct material purchases(kg) 13,600
Direct material purchases value(£) 204,000

(c)
Direct labour budget:
Tee Pee
Direct labour per unit(hours) 1.2 (14.4/12) 1.5 (18/12)
Direct labour per annum(hours) 18,000 (15,000x1.2) 18,000 (12,000x1.5)
Total direct labour budget(hours) 36,000

Hours budgeted per operative per annum 48 weeks x 40 hours/week/0.8 overtime


2,400 hours
Number of direct labour operatives 15 (36,000/2,400)

(d) Holiday pay and overtime premium budget (direct labour)

Holiday pay = 15 operatives x 4 weeks x 40 hours/week x £12 per hour = £28,800

Overtime premium = 36,000 x 0.2 x 25% of £12 = £21,600

Page 8 of 14
QUESTION 4

Sole Ltd manufactures and distributes a single product. The product sells for £160 per unit and the
company expects total sales revenue in this current year of £800,000.

The variable costs per unit are as follows:

Direct materials £60.00


Direct labour £40.00
Variable overheads £12.00

Fixed overheads are forecasted at £96,000 for the year.

REQUIRED

(a) Calculate for the current year the:

(i) break-even point in units


(ii) contribution/sales ratio
(iii) margin of safety as a percentage of sales
(iv) expected profit.
(8 marks)

The following changes in cost are expected in the following year:

Raw material prices to increase by 8%


Direct wage rate to increase by 4%
Variable overheads to rise by 5% per unit of product
Fixed overheads to increase by £10,600.

REQUIRED

(b) Calculate for the following year:

(i) a new selling price that maintains the current year’s contribution/sales ratio
(ii) the sales volume required to maintain the current year’s margin of safety if the selling price
remains at £160
(iii) the sales volume required to maintain the current year’s profit if the selling price remains at
£160.
(12 marks)

(Total 20 marks)

Page 9 of 14
MODEL ANSWER TO QUESTION 4

(a)
£/unit £/unit
Selling price 160.00
Direct materials 60.00
Direct labour 40.00
Variable o/heads 12.00
112.00
Contribution 48.00
(i) Break-even = Fixed overheads / unit contribution
= 96,000/48
= 2,000 units
(ii) Contribution/sales ratio = 48 / 160
= 30%
(iii) Margin of safety [(Sales volume - break-even)/Sales volume] x 100%
= [(5,000 - 2,000) / 5,000] x 100%
= 60%
(iv) Expected profit = Total contribution - fixed overheads
= 30% x 800,000 - 96,000
= £144,000

(b)
Variable costs for following year:
£
Direct material 64.80
Direct
labour 41.60
Variable o/heads 12.60
119.00

(i) Selling price


Contribution / sales ratio = Selling price - unit variable cost
Selling price
0.3 = SP - 119
SP
SP(0.3 -1) = - 119
SP(1 - 0.3) = 119
SP = 119/0.7
Selling price = £170.00

Page 10 of 14
MODEL ANSWER TO QUESTION 4 CONTINUED

(ii) Sales volume (margin of safety)


Break-even = Fixed overheads / unit contribution
= (96,000 + 10,600)
160 - 119
= 2,600 units
Margin of safety = Sales volume - break-even
Sales volume
0.60 = SV - 2,600
SV
SV(1- 0.60) = 2,600
Sales volume = 6,500 units

(iii) Sales volume (profit)


Total contribution Current years profit + increased
required = fixed overheads
= 144,000 + (96,000 +10,600)
= £250,600
Sales volume required = 250,600 / (160 - 119)
6,112 units

Page 11 of 14
QUESTION 5

The standard variable production costs of a company’s single product in a period were as follows:

Direct materials £
RM01 5 kg at £2 per kg 10.00
RM02 2 metres at £6 per metre 12.00

Direct labour
Grade 1 4 hours at £8 per hour 32.00
Grade 2 2 hours at £10 per hour 20.00

Budgeted production for this period was 600 units.

Actual production and costs relating to this period were as follows:

Production 650 units

Direct materials:
Purchases
RM01 3,200 kg purchased at a total cost of £6,200
RM02 1,350 metres purchased at a total cost of £8,200

Issues to production:
RM01 3,000 kg
RM02 1,250 metres

Direct labour:
Grade 1 2500 hours worked at a total cost of £19,600
(includes 200 hours idle time caused by machine breakdown)

Grade 2 1,250 hours worked at a total cost of £12,750


(includes 50 hours idle time caused by machine breakdown)

At the beginning of the period the following quantities of raw material were in stock:
RM01 200 kg
RM02 120 metres

There were no stocks of work in progress at the beginning or end of the period.
The company’s policy is to calculate material price variance at the time of purchase.

REQUIRED

Calculate the following variances for this period:

Direct material price (for each type of raw material)


Direct material usage (for each type of raw material)
Direct labour rate (for each grade of labour)
Idle time (for each grade of labour)
Labour efficiency (for each grade of labour)
(12 marks)

Prepare the Raw Materials Stock Account for each type of direct material (include in your accounts the
price variance).
(8 marks)

(Total 20 marks)

Page 12 of 14
MODEL ANSWER TO QUESTION 5

(a)
(i) RM01 RM02
Material Price Variance
Standard price £2 per kg £6 per metre
Purchases Quantity 3,200 kg 1,350 metres
£6,400 £8,100
Actual cost of purchases £6,200 £8,200
Material price variance £200F £100A

(ii)
Material Usage Variance
Production 650 units 650 units
Standard use per unit 5 kg 2 metres
Standard use 3,250 kg 1,300 metres
Actual Usage 3,000 kg 1,250 metres
250 kg 50 metres
Standard price £2 per kg £6 per metre
Material usage variance £500F £300F

(iii)
Grade 1 Grade 2
Labour Rate Variance
Actual hours 2,500 1,250
Standard rate per hour £8 £10
£20,000 £12,500
Actual cost of labour £19,600 £12,750
Labour rate variance £400F £250A

(iv)
Idle Time Variance
Ideal time hours 200 50
Standard rate per hour £8 £10
Idle Time Variance 1,600A 500A
(v)
Labour Efficiency
Variance
Production 650 units 650 units
Standard hours per unit 4 2
2,600 hours 1,300 hours
Actual hours 2,500 hours 1,250 hours
Ideal time hours 200 hours 50 hours
Actual productive hours 2,300 hours 1,200 hours
Standard - Actual productive hours 300 hours 100 hours
Standard rate per hour £8 £10
Labour efficiency variance £2,400F £1000F

Page 13 of 14
MODEL ANSWER TO QUESTION 5 CONTINUED

(c)
Raw Material Stock Account (RM01)
Bal b/d 400 Work in progress 6,000
Purchases 6,200 Bal c/d 800
Price variance 200
6,800 6,800

Raw Material Stock Account (RM02)


Bal b/d 720 Price variance 100
Purchases 8,200 Work in progress 7,500
Bal c/d 1,320
8,920 8,920

Page 14 of 14

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